Financial Standard Volume 18 Number 10

www.financialstandard.com.au

25 May 2020 | Volume 18 Number 10

09

14

26

Garth Rossler Maple-Brown Abbott

ETFs

Powerwrap, Pendal

10 News:

22

Featurette:

32

ERS, ASX

Mental health

Michelle Lopez Aberdeen Standard

Opinion:

Feature:

Between the Lines:

Profile:

www.financialstandard.com.au

09

14

26

Garth Rossler Maple-Brown Abbott

ETFs

Powerwrap, Pendal

10 News:

22

Featurette:

32

ERS, ASX

Mental health

Michelle Lopez Aberdeen Standard

Opinion:

SMSFs hold firm during crisis Eliza Bavin

hile hundreds of thousands of AustralW ians remove tens of millions from their superannuation accounts, SMSFs are holding their own.

Verante Financial Planning director and SMSF specialist adviser Liam Shorte says most of his clients are in a very manageable position despite the global pandemic.

“Most SMSFs are well diversified and they’ve held on to a decent amount of cash,” Shorte says.

“Some of them have been hit hard by the fact that they have lost rent and dividends on Bluechip shares, but most of my clients can ride through it.”

The issue, Shorte says, is the potential for a second wave of the COVID-19 outbreak leading to further social distancing measures.

“That’s the biggest fear for most SMSF trustees,” he says.

“That would trigger losses in retirement savings and would force many to sell down some shares to fund the next year’s income.”

However, the amalgamation of the loss of previously reliable income streams, coupled with super-low interest rates, has put some retirees in a more difficult position.

Heffron SMSF Solutions chief executive Meg Heffron says some self-funded retirees are carrying the weight of the economic effects of the pandemic for the rest of the nation.

“Nobody wants to feel sorry for this group, of course, because they’re wealthy,” Heffron says.

“Generally self-funded retirees live on rent, which isn’t coming anymore, and dividends which have been reduced.

“They are also the group that have always implicitly or explicitly been leaned on for financial support from their children.”

Heffron says the combination of a lack of regular income streams, as well as perhaps the added stress of having adult children who have lost their jobs as a result of the pandemic means this segment is shouldering a lot of the burden.

“I’m very conscious that this is a first world problem, and nobody is going to be drumming up a lot of sympathy for the self-funded retiree,” Heffron says.

“But if we are talking about sharing the burden, I think there has been a dispropor-

tionate amount of pain put on the self-funded retiree because we think they can afford it.”

Despite the pain being felt, the vast majority of SMSF trustees she has spoken to, Heffron says they are happy to lend the support.

“A lot of them are the first to say they can afford it, they’ve had a great ride on the tax system, and this is their time to give back,” Heffron says.

While some are prepared to bear the brunt, the ATO has said its focus is on those who instead attempt to rort the system.

One potential loophole the ERS scheme exposed was allowing a person to withdraw $10,000 only to put the money back in and claim a tax deduction on the amount.

Franco Morelli, policy manager at the SMSF Association, says the taxation office has made it abundantly clear that will not be tolerated.

“Anyone who applies for the ERS scheme needs to have been affected by COVID-19. So, if you’re taking money out and putting it straight back in there is a strong argument to say you have not been financially affected,” Morelli says.

“The ATO has released documentation explicitly saying that is against the law and it is looking for that.”

Morelli says the association has been as clear as possible in its communications that trustees should not attempt to use the ERS in this way.

“When we first saw the legislation, it seemed pretty clear that sort of act wouldn’t meet the legislation because it’s pretty hard to satisfy the eligibility criteria to access the ERS scheme,” Morelli says.

“We were pleased that the law restricted that activity from happening, the ATO followed a week later with its guidance to say, ‘don’t do it’ because there were a few murmurs here and there saying that this could potentially be used as a loophole.”

Generally speaking, the SMSF sector has so far not been impacted too heavily by the current situation, and some may have even benefitted.

“It will be fascinating to see. I think the inflows will tank in the April to June quarter because so many businesses were shut down and so the flow of compulsory super would have stopped,” Heffron says.

“But it will be really interesting to see if SMSFs have disproportionately been contributing more because it is such a good time to invest.” fs

25 May 2020 | Volume 18 Number 10 www.financialstandard.com.au 20 January 2020 | Volume 18 Number 01

Feature:

Between the Lines:

Profile:

Practice valuations avoid COVID-19 hit Harrison Worley

Meg Heffron

chief executive Heffron SMSF Solutions

Financial advisers looking to sell their business in the midst of COVID-19 would be wise not to accept discounted offers, with experts saying the pandemic has barely touched the market.

Speaking with Financial Standard, Radar Results founder John Birt said COVID-19 is not impacting practice valuations or the market more broadly, though said some buyers are trying to use the pandemic as leverage.

“I think some of the buyers are probably using it as an excuse, to try and get a little bit more leverage or discount in the negotiations,” Birt said.

“But really, a quality financial planning business today is probably selling for a very similar price to what it was six months ago.”

Connect Financial Service Brokers chief executive Paul Tynan agreed, and said the majority of the impact on valuations at the moment still comes back to “overregulation”, the age of advisers and the FASEA requirements.

Continued on page 4

March volatility worse than GFC Kanika Sood

The Australian stock market showed greater intraday volatility in March than it did during the peaks of the Global Financial Crisis, according to new research from Allan Gray.

Nine trading days in March showed volatility above 10% for S&P/ASX 200, with seven of them being consecutive days.

During the GFC (between 2007 and 2009), there were only four trading days with greater than 10% intraday volatility and none of them were consecutive.

“Despite having fallen from its peaks, the COVID-19 volatility remains about twice the average,” Allan Gray chief investment officer Simon Mawhinney said.

“Sharemarkets are the most volatile they’ve been in the past 20 years. Increased uncertainty, fear, forced and panic selling, as well as reduced liquidity, are all contributing factors and all measures show a recent spike in, and currently elevated levels of, volatility.”

Continued on page 4

2

News

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

Industry funds pulled back to the pack

Editorial

Harrison Worley

Jamie Williamson

N

Editor

Looking at the financial services sector since the onslaught of COVID-19, it is fair to say – although not everyone will be sympathetic - that the pandemic has been most unkind to our industry superannuation funds.

First came the hit to their funds under management, with Rainmaker analysis estimating about $290 billion was wiped from Australians’ retirement savings in the first few weeks of the economic downturn.

This then led to several major funds – AustralianSuper, Hostplus and UniSuper included – revaluing their unlisted assets, which in turn reignited the long-held debate over whether super funds are too reliant on these kinds of investments.

Reading between the lines (in the few instances where names weren’t actually named) and it’s clear the criticism was being levelled squarely at the industry fund sector.

Then came the government’s announcement of its Early Release of Superannuation scheme.

Mountains of commentary ensued as to the potential for liquidity issues, particularly for the funds representing industries hit hardest by social distancing and lockdown measures. This too further fuelled the debate around unlisted assets.

And then years of work put in by the super industry and financial services sector at large to communicate the importance of a healthy retirement balance unravelled in a matter of days when close to one million Aussies registered their interest in the scheme before it actually opened.

The most recent estimates at time of going to print suggest closer to 1.4 billion applications have been made with about $12 billion paid out.

And naturally, given their size, it’s the industry funds that have bore the brunt of the scheme. Rainmaker analysis shows just 28% of the total funds released as of May 10 came from retail funds. At that date, six of the 10 funds to pay out the most were industry funds and three of those have now paid out more than $1 billion each.

It has really thrown a spanner in the works; that is, if the works were a conscious objective held by all industry funds to officially declare their dominance of the super sector.

Prior to COVID-19, industry funds were on track to surpass self-managed super funds as the leading cohort in super.

Given the estimates of how many member accounts will close as a result of the scheme, the fact experts are now predicting 2020 to be the first year since 2009 that super funds see negative returns and the reputational damage key industry funds have suffered throughout (and will continue to with the surely now inevitable fee hikes to come), one can only imagine how long it will take them to claw their way to the top now. fs

The quote

Some funds that were valued at sub-$50 billion pre-COVID-19 may come out of COVID-19 as sub-$30 billion funds and some may decide to leave the field altogether.

ew research reveals industry funds are no longer set to dominate the superannuation industry, as COVID-19 changes the race to the top.

KPMG’s latest Super Insights report shows industry super funds are no longer on track to takeover SMSFs as the biggest sector in Australia’s superannuation market, with COVID-19 to blame.

According to KPMG head of asset and wealth management Linda Elkins, COVID-19 has put enough pressure on industry funds to see them fall well behind SMSFs. “The arrival of the COVID-19 era has thrown everything into the air in the super sector,” Elkins said.

“For example, at the end of the 2019 financial year, we believed industry funds would overtake SMSFs as the biggest grouping, just as they had moved ahead of retail funds in the first three years of this study.

“But given the particular challenges now facing the industry funds – in particular resulting from allocations to illiquid assets and the expected increase in benefit payments under the early release scheme – we now predict that SMSFs will again move significantly ahead of the other sectors.”

Elkins said the industry would return to a shaken economy when Australia emerges from the pandemic, and she fears some funds may suffer significant value downgrades as a result.

“Funds’ balances have fallen on the back of market shocks on listed and unlisted assets rivalling those of the GFC. Further, they are facing unprecedented calls on benefits and will suffer reduced contribution flows through increased unemployment,” Elkins said.

“Some funds that were valued at sub$50 billion pre-COVID-19 may come out

of COVID-19 as sub $30 billion funds and some may decide to leave the field altogether.”

Elkins said regulators would need to identify a means of compelling funds to merge, should they or the government decide more consolidation is required. However, while most have feared smaller funds would be first on the chopping block, KPMG pointed out that according to APRA’s controversial heat map, some small funds are performing strongly.

“We predict increased regulatory pressure on funds to meet the needs of their members and increasing mergers at the larger end of the market, with a small number of ‘mega funds’ competing for the capabilities to deliver to these needs,” Elkins said.

“Receiving funds will need to act carefully and consider the cost and complexity, potentially making it difficult to satisfy the current requirements of acting in members’ best interests and achieving equivalent rights.”

KPMG Superannuation Advisory partner David Bardsley said super fund liquidity has already been strained at a portfolio level. Coupled with a bear market, the longer term impact of the government’s Early Release Scheme - which may yet result in fund outflows of around $27 billion - is that many super fund members will be further behind their savings objective than first thought.

“Portfolio managers [are] finding it hard to sell their fixed interest assets to any buyer other than the RBA,” Barnsley said.

He said the RBA’s quantitative easing is not “creating the volumes that institutional fund managers need” to de-risk and rebalance exposures and raise cash.

“As a result we have seen a significant increase in buy/sell spreads, making it much more costly to rebalance portfolios,” he said. fs

ASIC issues stark warning to retail investors Elizabeth McArthur

ASIC has issued a strongly worded warning to those trying to profit from the COVID-19 induced market volatility who are not investment professionals.

The regulator released a 14 page paper on how investors are trading in securities and contracts for difference (CFDs) during the COVID-19 volatility.

ASIC found that the average daily securities market turnover by retail brokers increased from $1.6 billion in the benchmark period to $3.3 billion during the period of COVID-19 volatility.

“Retail trading as a proportion of total trading increased marginally, from 10.62% to 11.88%, when benchmarked against the backdrop of total average daily securities market turnover— which increased from $15 billion to $28 billion (counting both sides of each trade, consistent with retail numbers),” ASIC said.

“Retail brokers were net buyers of securities over the focus period, buying $53.4 billion and selling $48.4 billion.”

The regulator is particularly concerned about new or dormant buyers suddenly jumping into the market at a time of volatility.

ASIC observed an average of 4675 new identifiers (signifying a new retail trader) per day in the period of volatility.

A total of 140,241 identifiers ASIC had previously not observed were trading. Prior to this volatility, ASIC said an average of 34,502 new identifiers appeared in a period of the same length.

On top of that, 142,022 dormant retail broking clients which had not traded in the period before this volatility suddenly started trading.

“Retail investors have been trading more frequently. For client identifiers that were active during the focus and benchmark periods, there has been a substantial decline in the average time between trades by the same investor in a particular stock,” ASIC said.

“This may indicate either investors building up positions more frequently over time or attempting to profit from buying and selling around short-term price movements.”

ETFs have seen a big boost from the volatility, with ASIC observing daily turnover in ETFs increasing from $703 million in the benchmark period to $1.88 billion in the focus period.

ASIC was clear in saying these numbers are not a sign of retail investors winning in the sharemarket.

“The average retail investor was not proficient at predicting short-term market movements over the focus period,” the regulator said.

Rather, ASIC’s work found that for more than two thirds of the days on which retail investors were net buyers, their share prices declined over the next day. For more than half of the days on which retail investors were net sellers, their share prices increased over the next day.

“Retail investors should be wary of trying to ‘play the market’ for short-term price movements by day trading,” ASIC said. fs

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4

News

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

01: Gary Wilson

Practice valuations avoid COVID-19 hit

senior consultant JANA

Continued from page 1 “It’s so much red tape it’s not funny,” Tynan told Financial Standard.

He added that with the majority of advisers still under a corporate structure, the additional tier of regulation they faced is also impacting valuations.

“We’re very busy at the moment in Perth, we’ve got about five or six transactions in play there right now,” Birt told Financial Standard.

Birt said this is a record, with Radar Results typically only taking part in one or two transactions a year in Perth.

“Tasmania is a bit busy, which is good. In Launceston and Hobart quite a few businesses down there have come to us to sell,” he said.

Birt said Melbourne and Adelaide are both quiet at the moment, though Sydney continues to provide plenty of opportunities.

Birt said that “for a change”, the Central Coast and Newcastle are busy, with five businesses available in the area.

He said buyers are chasing practices with middleaged clients paying good fees, with professionals piquing buyers’ interests, and tend to be larger boutique planning firms with all-employed financial planners, who either have pre-approved lines of liquidity or directly hold enough cash to pick up practices.

AZ Next Generation Advisory chief executive Paul Barrett said his firm is taking note of practices which stand-out despite the many competing distractions brought about by COVID-19.

“What I find in times like this is the real guns, the really good operators, they rise to the top. They make themselves very obvious,” Barrett said.

Barrett told Financial Standard the firms which have been proactive in dealing with the pandemic for their clients have actually made the decision easier for buyers mulling the acquisition of a practice. fs

Asset allocation in a postpandemic world Eliza Bavin

I The quote

We don’t think that portfolio construction, investment strategy or risk management actually changes because of COVID-19.

March volatility worse than GFC Continued from page 1 To calculate intraday volatility, Allan Gray measured the daily trading range for each of the shares in the S&P/ASX 200 Index and expressed it as a percentage of their opening price.

“A simple average across all 200 index constituents gives an equal-weighted average of the intraday volatility, expressed as a percentage,” it said of the methodology.

According to the manager, the nine days of above 10% volatility in March exceed other extreme world events including the 9/11 terrorist attacks, the collapse of Lehman Brothers, Black Monday on 8 August 2011 which followed the credit rating downgrade of US sovereign debt, the US and Chinese flash market crashes of 24 August 2015 and news on Donald Trump’s likely election victory on 9 November 2015.

“Volatility is your friend when investing for the long term; extreme fluctuations in price present excellent long-term buying opportunities,” Mawhinney said.

“While the causes of the current bout of volatility are certainly different, in each of the previous bouts of market volatility, significant opportunities were presented to long–term, patient investors.

It’s hard to believe this recent period of extreme volatility is any different.” fs

n times of extreme volatility, it’s more important than ever to ensure proper diversification, but the decisions made now will affect performance once we return to the status quo.

Within the allocation to growth and defensive assets, it’s crucial to diversify – across asset classes and geographies – to protect your portfolio from seismic volatility shocks.

Tim Sparks, head of distribution and marketing at Bell Direct said typically, when returns for one asset class are low, returns for another may be high, decreasing volatility across the overall portfolio.

“Markets go up over the long-term and it is normal to have periods of negative returns.

A portfolio with 70% in growth assets, like stocks, and 30% in defensive assets, i.e. income securities – bonds, will typically have one negative year in every five,” Sparks said.

“While the impacts of COVID-19 have been unprecedented, and are yet to fully become known, it’s crucial for investors to remain steadfast during these periods and recall previous times of uncertainty in recent history.

“It may sound overly simplistic, but economies and markets do bounce back over time.”

Sparks said even in the current climate, many investors with a long investment timeframe and clear goal are unlikely to change their strategic asset allocation in a significant way.

At a stock and sector level, since the COVID-19 outbreak, investors have been increasing their exposure to more defensive sectors; main-

ly utilities, healthcare and consumer staples.

“The reason for this is, a lot of these companies have strong, repeatable-free cash flows, solid balance sheets and focussed management,” Sparks explained.

“However, in a post-COVID-19 world, once we are out of lockdown and business returns to the ‘old normal’, expect cyclical stocks to come in favour.”

Gary Wilson 01, senior consultant and member of JANA’s portfolio construction research team and capital markets group, said building diversified portfolios is always the ideal.

“However, maintaining adequate risk diversification via headline asset allocation alone will be more difficult with developed world bond yields at extremely low levels and cash rates anchored close to zero in the near term,” Wilson said.

“The latent diversification potential available to Australian investors from holding overseas currency exposure is also now reduced.”

Wilson said ensuring sufficient portfolio diversification will rely more than ever on top down asset allocation and bottom up portfolio construction skills working together.

“A post-COVID-19 backdrop will be an uncertain one for investors as it will take time for the after-effects of the deep COVID-19 recession on businesses, households and policy to become visible,” he said.

“Ensuring the flexibility to respond to further shifts in market conditions will be a critical element of post COVID-19 investment strategy.” fs

Adviser salaries in 2020 revealed Jamie Williamson

Despite current uncertainty, latest insights show a senior financial adviser with more than 10 years’ experience can still expect to take home up to $160,000 per year.

Riva Recruitment’s Financial Adviser Salary Guide 2020 shows a senior adviser in Sydney or Melbourne who has been in the role for at least five years and has a minimum of 10 years’ total experience can expect annual remuneration of $120,000-$160,000.

That is inclusive of superannuation, but does not take into account any possible bonuses.

For a financial adviser with up to five years’ experience, a salary in the range of $90,000 to $120,000 is the benchmark, while associate advisers with up to three years in the role can take home between $75,000 and $90,000.

For paraplanners, those in a senior role – or more than three years’ experience can expect between $85,000 and $100,000, while the benchmark salary for those with less than three years’ experience is between $55,000 and $85,000.

Finally, those working as client services managers could expect a salary of up to $90,000 while client services officers

are generally paid between $50,000 and $70,000.

Riva Recruitment said with all big four banks’ having now signalled their intention to exit financial planning, there will be an influx of candidates for advice roles, many of which will need to adjust their expectations.

“Majority of bank financial advisers have been earning over $130,000 packages plus bonus, with some advisers earning north of $145,000 package plus bonus… Given the current environment, financial advisers need to reset their salary expectations to be aligned with the current market,” the research said.

Further, Riva said recruitment has slowed due to business uncertainty and the difficulty in onboarding while most in the industry work remotely.

“Businesses that charge a percentage-based fee have been most effected during COVID-19. These businesses are either putting recruitment on hold, forcing employees to take a pay cut, or in a few cases, have made redundancies in support/operations staff,” the research reads.

In contrast, businesses operating with a flat-dollar fee-forservice model have largely retained staff, Riva said. fs

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6

News

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

NZ to access ERS scheme

01: Jane Eccleston

superannuation senior executive ASIC

Eliza Bavin

The Australian Taxation Office is allowing New Zealanders with KiwiSaver accounts to access the Early Release of Superannuation scheme through a loophole.

In an update to its Design and Implementation document, the ATO said those with a KiwiSaver account are able to access the ERS scheme if they transfer their funds to an Australian super fund.

“New Zealand KiwiSaver accounts are not eligible. However, KiwiSaver amounts transferred to an Australian super fund are eligible to be withdrawn,” the ATO said.

Previously, the ATO had not allowed those with a KiwiSaver account to gain access to the scheme.

In another update, the ATO said it will allow funds to cancel payments if a member decides they no longer want it.

“If an individual contacts their fund and says they don’t want the payment anymore, the fund can act on the member’s direction,” the ATO said.

“Funds should confirm the member understands they will not be able to apply again in this financial year (or at all if they applied on a temporary resident category).”

The ATO said funds do not have to confirm that outcome with the ATO. This is also a change from previous directions in which the ATO said members will not have their application revoked for a ‘change of mind’.

Interestingly, the ATO has not updated the document to remove the previous guidelines on the ‘change of mind’ rule. fs

Advice firm taken to court Kanika Sood

A woman has dragged an advice firm to court, claiming they took control of her bank accounts and misappropriated about $1.4 million of her money.

Danusia Giam is seeking compensation from Melinda and Robert Patterson and three related companies. Their company 8888 Group provided accounting, wealth advice and financial planning to her between 2013 and 2015.

Despite shuttering, Spectrum Wealth is still listed as the firm’s licensee on its website, however the ASIC Financial Adviser Register shows Robert Patterson as a representative of Life Plan FP. Giam claims the duo won her trust by posing as her friends, pretending to involve her in the business (including as an employee) and making her feel part of a luxurious lifestyle.

However, they took control of her bank accounts and fraudulently misappropriated about $1.4 million, and caused her about $1.3 million in losses from certain property transactions, Giam claimed in court documents.

The relationship between the two parties lasted from mid-2013 to August 2015, when Giam and her son claim to have discovered some of the fraud and broke off the relationship.

The proceedings commenced in November 2016. Last October, they were set for 10 days of hearings to start on 25 May 2020.

The Pattersons contend Giam’s claims and say they gave her no advice and that she entered all the transactions willingly. fs

Advisers involved in ERS scams: ASIC Elizabeth McArthur

A The quote

In some cases, the whole of the lost superannuation recovered ends up paid out in fees.

SIC superannuation senior executive leader Jane Eccleston01 has written an article pointing to financial advisers as part of the problem in scams targeting people’s super amid COVID-19.

Eccleston said: “ASIC is concerned that some advisers may use the current uncertainty from COVID-19 as part of their pitch to consumers to carry out broader superannuation activities, such as the possibility of early release of superannuation, searching for lost super and consolidating their accounts.”

The regulator has observed some ‘lost super search providers’ re-brand as ‘COVID-19 access providers’, however Eccleston did not clarify whether registered financial advisers were part of such schemes.

“This is an area we will be monitoring closely for misconduct,” Eccleston said.

She encouraged super trustees to have proper oversight practices over third party use of SuperMatch2 authorisation.

“They should do this to curb advisers and other parties from engaging in the concerning behaviours we’ve identified,” she said.

Eccleston did not specify whether action has been taken against any registered financial advisers in relation to these matters.

“In the course of our work, and in cooperation with the ATO, we identified entities (financial advisers, trustees and fund promoters) who were marketing ‘free’ lost super and consolida-

tion services’ searches, these schemes are far from free,” she said.

“They typically erode a member’s superannuation balance by $500 to $1000 in advice fees that are deducted directly from their account. We have also seen advisers charge a 4% fee based on the consolidation amount.”

Consumers can use the ATO’s search and consolidation service for free.

“In some cases, the whole of the lost superannuation recovered ends up paid out in fees,” Eccleston said.

Poor quality general and personal financial advice was sighted by the regulator as concerning conduct it has identified.

Issues with fees for no service when advice providers offer an upfront consolidation of super service, then charge an ongoing asset-based fee with no further service was also mentioned by Eccleston.

She added that the regulator is concerned about financial advisers falsifying reasons for fees.

“For example, by falsely advising the trustee that they had given personal advice to a member in order to receive advice fees from the trustee,” Eccleston said - without clarifying whether this had happened.

ASIC is also concerned that advisers may be inappropriately encouraging members to apply for early release of super and targeting funds that appear to be “more lenient” in granting the release of funds. It is not clear which funds are in question. fs

Fund pulls mandate, alters pandemic definition QSuper will take the management of its social responsible investment option in house and has changed the definition of pandemic illness.

AMP Capital will no longer manage QSuper’s socially responsible investment option as of 1 July 2020.

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

QSuper said investment fees in the option will reduce from 0.72% to 0.24% after the transition and the indirect cost ratio will reduce from 0.18% to 0.05%.

The fund said it will also be able to publish a report annually about the positive impacts achieved by the socially responsible option.

It also indicated a jump in allocation to real estate. As at 31 March 2020, the AMP Capital managed option had a 4.8% allocation to real estate with the majority of the portfolio in equities (62.8%) and fixed interest (24.9%).

QSuper indicated a higher range of allocation to real estate at between 0% and 30% (AMP Capital’s range was 0% to 10%).

Green building was listed as one of the environmental and social issues important to QSuper members.

It committed to a minimal exposure to fossil fuels, gambling and adult entertainment in the option. The fund already screens out tobacco and controversial weapons across all its options.

Further, QSuper’s pandemic illness exclusion will no longer apply to members with default cover as a result of working with the Queensland government or a default employer who have applied within the first 120 days of starting work with the Queensland government or a default employer.

Prior to that date, the fund could not pay out a claim relating to pandemic illness within 30 days of cover starting or recommencing.

QSuper also changed the definition of pandemic illness.

Previously, the fund defined pandemic illness as: An illness for which a pandemic alert, advisory, notification, declaration or other similar publication is issued by the Australian government or World Health Organisation (WHO).

Now it defines pandemic illness as: An illness in respect of which QInsure, after consultation with the QSuper Board, is satisfied that a pandemic alert, advisory, notification, declaration or other similar publication has been issued by the Australian government or WHO and notifies the QSuper board that the definition has been met. fs

News

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

Oil to make strong recovery Oil is on track to make a quick and strong recovery despite expectations that a broader recovery is not on the cards for some time, according to State Street Global Markets.

Ben Jones, multi-asset class strategist at State Street, said he expects to see a stronger rebound in oil markets as more people around the world use their cars more over public transport.

“Whilst West Texas Intermediate (WTI) crude oil prices turned negative last month, the oil market appears much calmer as the June contract approaches,” Jones said.

“Supply has been cut by OPEC+ since April and US oil production has fallen. As oil demand starts to recover, there are signs of a quick and strong demand recovery, despite the broader economic recovery remaining weak.

Jones said much of this rebound is likely to come from the US, as the country pushes to reopen businesses and the economy.

“As the US begins to open, individuals are getting back in their cars and avoiding public transport,” he said.

“The latest Apple mobility data show that the number of requests for driving directions has moved above the January 13 baseline, but public transit direction requests are still only around 30% of the baseline.

“Despite the risk of a second wave of infections and repeat lockdowns, the low price for oil seems to be in for now.” fs

Companies kicked off ESG index Elizabeth McArthur

The S&P 500 ESG Index has completed its second annual rebalancing since it launched last year.

Twitter and Walmart were dropped from the ESG index for failing to meet certain ESG standards while Facebook, which was removed last year due to several controversies, made a re-entry.

Twitter was ineligible for the index this year due to a low United Nations Global Compact Score. The nonbinding UN score encourages businesses to adopt more sustainable and socially responsible practices.

Facebook’s re-entry, meanwhile, came after the company managed to make improvements to its governance that resulted in a better ESG score.

“Last year, the rebalance resulted in some changes that hit the headlines—most notably, the removal of Facebook from the sustainable version of the iconic S&P 500,” said S&P head of ESG product strategy, North America Mona Naqvi.

“With markets currently in turmoil due to the outbreak of COVID-19, interest in ESG is at an all-time high. Thus, the big question, ‘Who made the cut?’ is perhaps more relevant now than ever before.”

In financials, Wells Fargo re-entered the index after being kicked out last year. It’s overall ESG score actually fell, but its ranking within its industry group improved indicating other US banks may have put in poorer ESG performances.

The S&P 500 ESG Index aims to retain as many companies from the S&P 500 as possible (and thus closely replicate the risk/ return), after removing certain companies based on ESG principles.

Berkshire Hathaway, Netflix, PayPal, Phillip Morris and Lockheed Martin all remain excluded. fs

7

01: Phillip Middleton

director Midsec Financial Advisors

Retirees hurt by APRA dividend pressure Eliza Bavin

S

The quote

Slashing dividend payments might be the easy option for banks, but it shows lack of respect for investors.

elf-funded retirees have seen their nest-egg investment assets plunge due to COVID-19 and pressure from APRA on companies to cut dividends has made matters worse, according to Midsec Financial Advice.

Midsec director Phillip Middleton01 said APRA’s pressure on the banks to cut or at least reduce their dividends to protect capital ratios was a poorly considered approach because it impacts shareholders who rely on dividend payments for day to day living.

“Slashing dividend payments might be the easy option for banks, but it shows lack of respect for investors,” Middleton said.

“Banks can achieve the same capital ratio position and still pay dividends by having a pro-rata capital raising for an equivalent amount, which would throw many investors a lifeline when they need it the most.”

Middleton said self-funded retirees have been “set adrift” during the pandemic because they have not received any cash handouts and seen asset values drop around 20% to 30%.

“Adding to their pain, interest rates on term deposits have dropped, investment dividends have been reduced by companies struggling to stay sustainable, and now the salt in the wound is having APRA pressure

banks to reduce their dividends too,” he said.

Middleton said the reality is that some investors, including plenty of self-funded retirees, may never get back to where they once were.

“While the bank’s capital position is unaltered by having a rights issue to effectively fund the dividend, the shareholders are better off because they get some cash now, plus a franking credit refund later in the year,” Middleton said.

“Additionally, bank share prices tend to recover quite quickly after going ex-dividend, so the shares don’t suffer the full cost of the dividend payment.”

Middleton said this compares pretty poorly with the alternative of selling shares in a depressed market to get enough cash for living expenses.

“Rights issues do reduce share price growth in the future because there are more shares on issue. However, if you ask a retiree if they prefer income now or growth in the future you will get very few who go for the growth,” he said.

“As it stands right now, APRA’s poorly considered approach brings together two interesting bed fellows who ultimately benefit - the government because it doesn’t have to refund franking credits and management teams of banks, whose bonuses are based on rises in the share price.” fs

New investment solution to shine light on structured products Harrison Worley

An investment platform is promising to shine light on the opaque structured product market, helping advisers and their clients understand more about the traditionally exclusive offerings.

Local fintech Stropro has launched a new reporting solution designed to uncover more information about the estimated $4 billion worth of structured products owned by Australians.

The platform - launched by ex-Citi bankers provides advisers, family offices, wholesale and sophisticated clients with access to structured products, which have typically been limited to high net-worth investors.

Thanks to a new update, Stropro can now provide “comprehensive” reporting on all structured products, including those not bought on the platform.

“Investors have been left in the dark for far too long when it comes to structured products,” Joseph said.

“We are excited to announce that Stropro can now offer comprehensive reporting on all structured products, even if they been purchased elsewhere.”

According to chief product officer Ben Streater, the firm’s new technology allows for daily active tracking of underlying assets, with price feeds from stock exchange’s around the world, overcoming the challenge of structured products tracking one or more underlying assets “with respect to a barrier or protection level”.

“This is the type of transparency that structured product investors have been looking for,” Streater said.

“To our knowledge, Stropro is the first to offer this kind of solution in Australia.”

The firm’s solution - which it plans to plug into major wrap platforms to further improve structured product transparency - has impressed technology giant Microsoft to such an extent that the ex-Citi team have been accepted into its flagship startups program.

“We are impressed with this innovative solution, delivered in a short amount of time,” Fiona Simms, ISV director at Microsoft Australia said.

“It demonstrates a deep understanding of the market and has real potential to scale. We look forward to supporting the team at Stropro as part of our partnership.” fs

8

News

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

New distribution lead at manager

01: Jamie McPhee

chief executive ME Bank

Eliza Bavin

T. Rowe Price has announced a new head of distribution to succeed Murray Brewer who will retire at the end of 2020 after 14 years with the firm.

Darren Hall has been appointed the new head of distribution for Australia and New Zealand, effective 28 August 2020.

Hall is currently head of intermediary for Australia, and in his new role will be responsible for the institutional and financial intermediary businesses in Australia and New Zealand (A/NZ).

Based in Sydney, Hall has more than 20 years of investment experience, 13 of which have been with T. Rowe Price.

“Over the past decade, he has worked closely with Brewer to deliver the firm’s investment solutions and products to AN/Z clients and has played an integral role in building out the firm’s local team of distribution professionals,” the company said.

Prior to joining T. Rowe Price in 2007, Hall held business development and national account positions with Schroder Investments Australia and Credit Suisse Asset Management.

Nick Trueman, head of distribution for Asia Pacific, said he is pleased someone with a long history at the company is set to take the reins.

“His extensive experience and expertise in relationship management, understanding of the local market and demonstrated investment knowledge make him the ideal leader for our A/NZ operations,” Trueman said.

“We are well-placed to continue our success under Darren’s leadership.”

Hall said over the years, the company has worked to put in place a strategy to diversify its business by covering more segments and clients and providing a broader range of investment strategies to clients in the Australia. fs

ME Bank pays industry funds no dividends Elizabeth McArthur

S The quote

If you’ve got a sole purpose test that money is supposed to be invested on behalf of members to make a profit and huge volumes of capital is invested in a bank that doesn’t pay any dividends, that seems like a contradiction.

Currency-hedged ETFs gather pace Kanika Sood

Currency-hedged funds took four of the top 10 spots in ETF inflow league tables for April, in what may suggest local investors’ conviction to a stronger US dollar.

April saw net inflows of about $1 billion into ASX-listed ETFs, taking the local ETF market to $61.3 billion in funds under management.

Investors were most attracted by equities and cash ETFs during the month.

Of the 10 ETFs that attracted the most new money, currency-hedged ETFs took four spots.

This may suggest that many local investors are of the view that the US dollar’s strength may be turning, according to BetaShares.

“The merits of hedging were again demonstrated over April, with the AUD appreciating from US61.4c to US65.7c over the month,” BetaShares said.

“For example, investors who turned to gold in response to sharemarket volatility benefitted from the metal’s strong rally – with the currency-hedged BetaShares Gold ETF (ASX: QAU) returning 6.5% for the month.”

“By comparison, an unhedged gold exposure over the month would have seen the benefit of the entire gold rally eroded by the rise in the AUD, with the unhedged gold bullion price actually declining by ~1% over April,” it said. fs

enator Tim Wilson has argued industry super funds’ ownership of ME Bank is at odds with the sole purpose test as the bank has yet to pay a dividend to shareholders.

Following ME Bank’s controversial decision to slash redraw balances on some legacy home loans, and subsequent backtrack, the bank’s relationship with the 26 industry funds that own it has come under fire.

At an urgent hearing of the House of Representatives economics standing committee Tim Wilson questioned ME Bank chief executive Jamie McPhee01.

At issue was whether the bank has ever paid dividends to the 26 industry superannuation funds that own the bank (including AustralianSuper, Hostplus and UniSuper).

“If you’ve got a sole purpose test that money is supposed to be invested on behalf of members to make a profit and huge volumes of capital is invested in a bank that doesn’t pay any dividends, that seems like a contradiction,” Wilson said.

McPhee said the funds’ investments in the bank allowed the bank to grow, with the possibility of future profits.

Asked whether ME Bank was considered a member service or an investment by the 26 funds that own it, McPhee said that was a question for the funds.

“Has there been any discussion around providing dividends?” Wilson asked.

McPhee said the internal capital ME Bank is generating through profits is sufficient, so

a dividend payment may be on the horizon.

In 2017, he said, the industry funds that own the bank did provide a capital injection.

Wilson then moved on to questioning McPhee about ME Bank’s relationship with a program run by the Australian Council of Trade Unions.

ACTU chair Tony Beck, who ME Bank employs as a consultant, was brought up by Wilson as a possible connection.

During the previous hearing of the committee, Wilson had also asked Industry Super Australia chief executive Bernie Dean whether ISA employs Beck.

“Tony works very closely with the Australian Banking Association,” McPhee said.

“I represent ME Bank to the ABA but Tony was a previous employee of the bank and we’ve kept him on to manage the relationship.”

McPhee said Beck assists with various tasks required of ME Bank by the ABA, such as preparing material for committees.

Beck has been contacted for comment by Financial Standard.

Beck also chairs the ACTU Member Connect Program. ME Bank pays ACTU Member Connect for distribution of home loan products and promoting the bank on work sites.

Asked how much ME Bank pays ACTU Member Connect, McPhee at first did not name an amount but he said the relationship was arms-length and purely commercial.

Questioned again, he said $525,000 was the annual fee for the agreement.

McPhee said 13% of ME Bank’s home loans were referred through the program. fs

Performance analyst jobs hold steady in COVID-19 Kanika Sood

Performance analysts and more broadly, investment data professionals have been in strong demand throughout the COVID-19 pandemic, according to Kaizen Recruitment.

The role – with responsibilities including calculating, attributing and benchmarking and reporting fund performance at security and portfolio levels – remains a great gateway to other investment roles.

“Working as a performance analyst continues to be one of the best entry-level analytical positions which can provide a pathway to a strong career within investments,” Kaizen said in its 2020 salary guide and career options report for performance analysts.

“Because of the wide exposure to complex financial market data and the expertise to evaluate a fund’s performance, being a performance analyst with a custodian can allow for career transitions into multiple front-office roles at superannuation funds, fund managers and investment consulting.”

According to Kaizen, an entry-level performance analysts can expect to be paid $70,000 to $90,000 a year, including superannuation but excluding bonuses.

However, the salaries go up significantly as performance analysts pack on more responsibilities, such as managing a large team and working closely with front-office teams on investment-decision making.

As a result, a senior performance analyst can expect $90,000 to $140,000 a year, while a director of performance or manager can expect $130,000 to $200,000 and a head of performance or senior manager $160,000 to $240,000.

The figures are based on recent client engagement, Kaizen said.

“Salaries remained fairly consistent at entry to management level, however differed significantly from management level and above,” the report reads.

“For the Sydney market, we also typically observe a 10 to 15% premium to account for the higher cost of living for similar positions across Australia. However, this can vary depending on the role and the size of the fund.”

Kaizen noted that in Melbourne, NAB Asset Services continues to produce the vast majority of performance analysts, who have progressed into senior roles to date. fs

Opinion

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

9

01: Garth Rossler

chief investment officer Maple-Brown Abbott

Finding value in unprecedented markets nprecedented is a word that we have probU ably heard more in the past few months than we would have ever wanted. And yet what other word would you choose to describe the changed circumstances that have confronted economies and investment markets over the past few months, to say nothing of personal life?

There is little doubt that we are facing a set of circumstances that few, if any, of us have encountered. For investors, the challenge is to decide whether the worst is still to come, or whether it is now behind us – and act accordingly.

A key question is whether the “greed” element has been replaced with an unnecessary degree of “fear” - have investors become overly cautious, as they generally do when faced with great uncertainty?

In our view, this is very much the case in respect of the exceptional valuations currently being placed on stocks that are perceived to offer “certainty”; particularly but not limited to the healthcare names. As to the market itself, there is a need for balance – a 30% decline is substantial and this is probably not the time to be ultra-bearish.

However, we are of the view that this is not your typical downturn and with capital raising pressures becoming evident, a degree of caution is warranted.

As value managers, we have long held the view that markets were extended and long overdue a pullback. At the same time, experience has shown us that catalysts are near-impossible to pick. In these two respects our views have, unfortunately, proven correct.

In other aspects, however, events have devel-

oped differently to our predictions. Firstly, given the extreme valuations accorded to leading industrial stocks, we believed that any correction would be driven by the underperformance of this group of stocks, which have played such a big role in buoying markets to ever higher levels over many years.

But since the bear market commenced, there has been little sign of a change in market leadership. In fact the exact opposite has been the case with long running trends largely continuing to hold through to the end of the quarter – seeing further outperformance from this select group of industrial stocks as investors look into extremely uncertain times. We are seeing a flight to quality - at any price.

The lack of change in market leadership over this period has meant that most value mangers have struggled in a sharply negative returning market. This is clearly disappointing given the struggles that value has had over recent years.

Of course, it is very early days in the market cycle and there is some way still to go. We need to see how this cycle plays through. Furthermore, the concentration of approximately 16% of the S&P/ASX 300 (total returns) index in only two stocks, CSL and CBA, both of which enjoy premium valuations, means that index and thus performance outcomes are very dependent on the trading in these two stocks.

Another consideration for investors is that, whilst the value style in general outperforms in down markets (outcomes in the 60-70% range seem typical) it is clearly not in every down market and is dependent on the drivers of the

A history of more recent Australian equities market corrections Period

Peak to Trough* (%)

Duration (months) P/E on peak date

P/E on trough date

14 Feb 80 -28 Mar 80

-20

2

12.4

11.8

17 Nov 80 – 8 Jul 82

-41

20

13.2

9.5

21 Sep 87 -11 Nov 87

-46

2

19.3

10.6

29 Aug 89 - 16 Jan 91

-32

17

9.8

8.9

3 Feb 94 – 8 Feb 95

-22

12

19.1

13.6

7 Mar 02 -13 Mar 03

-22

12

19.5

15.0

1 Nov 07 – 6 Mar 09

-54

16

16.0

13.5

14.9

11 Apr 11 – 26 Sep 11

-22

6

Average

-32

11 15.5

20 Feb 20 – 31 Mar 20

-37

1

19.1

10.8 11.7 11.9**

Past performance is not a reliable indicator of future performance.

Source: MBA, UBS, FactSet *All Ordinaries Price Index ** As at 23 March 2020 based on FY21 earnings estimates at that date. The earnings underlying the PE multiple have been significantly downgraded subsequently.

The quote

This is not your typical downturn and with capital raising pressures becoming evident, a degree of caution is warranted.

bull market and the underlying causes of the bear market.

As we look at markets today, we are only too aware of the extended period over which the value style has struggled, which reflects an ever-widening differential between the multiples paid for high growth names and the rest of the market. This has not yet changed in the bear market but we remain confident that this must normalise. As we have seen in recent weeks, excesses do – eventually – get addressed.

The second expectation we had was that this was likely to be a relatively shallow bear market, but this now seems unlikely.

The table below highlights that the average bear market in Australia sees a decline of some 30% and lasts around a year before bottoming.

In recent times the largest bear market decline was 54% during the GFC, whilst at its lowest point in March during the current phase the market had declined 36%, before rallying into the quarter end. The pace of the decline has also been the fastest that we can identify in recent decades, surpassing even 1987. This reflects both the overvaluation that was evident but more particularly the considerable uncertainty around the impact of COVID-19 on corporate earnings.

Accepting that this correction is unlikely to fall into the category of a “shallow” bear market, the question then becomes how long might it last. There was some market commentary initially that we might see a short, sharp correction but those types of corrections have not usually been associated with earnings declines of the magnitude that we are likely to see.

Thus we are of the view that we are looking at a longer market downturn whilst investors seek clarity on the trajectory of corporate earnings. We are also beginning to see what is likely to be a wave of capital raisings flow through and this is expected to keep the market under additional pressure.

For investors, it is important to remember that this is still very early days in a bear market that we believe is likely to last for some time. There has been no change in market leadership thus far but as investors ourselves, we expect this severe dislocation to create opportunities for our contrarian value-based approach to outperform as the cycle develops further.

Warren Buffet’s reminder that “price is what you pay, value is what you get” hardly seems more apt than at this time! fs

10

News

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

01: Alex Dunnin

02: Jun Bei Liu

director of research Rainmaker Information

portfolio manager Tribeca Investment Partners

How early release impacts the ASX Ally Selby

W

ith more than one million people applying for the government’s early release scheme, questions surrounding super fund ownership in equity markets have come to the fore.

The government’s scheme will so far put at least a $9 billion strain on Australia’s super sector, as members, coming to terms with lost wages and livelihoods, draw down on their retirement savings to weather the economic crisis.

And with super funds needing to generate cash, and fast, questions remain on how this will impact equities markets.

According to research house Rainmaker Information, at the end of 2019, Australia’s superannuation funds owned approximately 38% of the ASX (across not for profit, retail and SMSFs), up from 26% a decade ago. Industry funds hold just 8% of the ASX, the research house said.

Rainmaker Information director of research Alex Dunnin 01 believes this is likely still the case following the coronavirus crash.

“Regarding how this may be impacting the situation at the end of March, my view is that given the average super funds’ Australian equities option went down 21% in the March quarter compared to the -21% ASX fall (the difference largely due fees), I’d say the equilibrium has been maintained,” he said.

According to ASFA, equity market capitalisation on the ASX was $2,118,340 million at the end of December 2019. By the end of March, this had dropped to $1,594,791 million.

For the month of April, the daily number of trades was up 27% on the ASX when compared to the previous quarter, with investors trading $6.8 billion on average every day. In the last four months daily trading has lifted 34%.

It was a volatile month, up 175% compared to April last year.

Tribeca Investment Partners portfolio manager Jun Bei Liu 02 believes super funds added to the selling pressure in March, raising their cash levels prior to the commencement of the government’s early release scheme.

“Since the ERS was first announced in late March, we have certainly seen significant selling pressure across the liquid assets such equities,” she said.

“While much of the volume pick up could be panic selling, super funds certainly have added to the pressure.

“We continued to see elevated trading volume in the beginning of April before it tapered off in the following weeks. I believe most of the super funds have raised cash levels post

the announcement of ERS in anticipation of the outflow.”

Similarly, Willis Towers Watson head of equity research and co-portfolio manager Leslie Mao said Australia’s super funds, which traditionally have a much larger proportion of their portfolios in equities compared to their global counterparts, had already started selling.

“Our investment managers have told us they have already seen impacts of super funds selling down equities in the market, and they have used that to buy up those positions,” he said.

“But this selling was dwarfed by the strong performance in markets in April.”

Over the short term, the government’s ERS could impact ASX stock prices, as super funds rush to offload parts of their portfolios to fund redemptions, he said.

“The impact wouldn’t be the same across the board, given different super funds would have varying exposures across the market, for example, not every super fund would have significant exposures to small caps,” Mao said.

“Some individual stocks may see more impact than others, but it also depends upon how quickly and the volume that you hit the market.”

State Street Global Advisors Australian head of investments Jon Shead said any need to raise liquidity would put pressure on asset prices.

“This is a truism that applies regardless of the market - equities, bonds, property and so on - or the management style (active or passive),” he said.

Funds with passive strategies are likely better placed than those with active ones, as they automatically sell a higher dollar value of large, liquid companies, and a lower dollar value of small, less liquid companies, when they raise cash, Shead explained.

Passive or active, Mao argues any sell-off regardless of strategy would create a downward pressure on stock markets. However, markets also rely on other factors to guide performance.

“The market is not influenced by just one factor at one time; you also have to take other factors like economic data, fundamental development and sentiment into consideration,” he said.

Super funds typically have a 20-30% exposure to Aussie equities, Liu said, however their allocation to equities in total (inclusive of global equities) would likely sit at 50-60%.

“Super funds invest in many asset classes and many of them have very limited liquidity,” Liu said.

“Many of those unlisted assets will take months if not years to unwind and be converted to cash.”

The quote

As you creep outside the top 20, and certainly outside the top 50, you could see some of those companies really having a tough time in finding people to buy the stock that funds are selling.

The critical focus of super funds is to assess the liquidity needs of its members and plan for such when making asset allocation decisions, she said.

But who could have planned for a global pandemic?

“The unexpected COVID-19 crisis plus the government’s announcement of ERS have severely affected this liquidity planning process and caused many smaller funds to sell their most liquid asset class, which is equity, to raise cash levels quickly,” Liu said.

“Unfortunate timing of such liquidation in equities has exacerbated the extent of the market fall, as there were very few buyers present at the time which then triggered more panic selling.”

Collins St Value Fund founder, managing director and portfolio manager Michael Goldberg said super funds would be feeling the heat.

“When there is net inflows and you have a little bit of redemption, that’s not a problem because you can fund the redemptions from the inflows,” he said.

“But if you have enough outflows like we have now with the government’s early release scheme where people can draw on their super funds – all of a sudden those super funds will actually go to market and sell stock to fund those redemptions, which will push those prices lower, potentially considerably lower.”

Australia’s biggest listed companies would be fine, he said, as they are very liquid, however, smaller companies in the index could suffer.

“As you creep outside the top 20, and certainly outside the top 50, you could see some of those companies really having a tough time in finding people to buy the stock that funds are selling,” Goldberg said.

“There will be some companies in the ASX 200 that can’t handle the volume that’s being pushed through due to redemptions, and that could cause some seriously uncomfortable positions for some of these businesses and their management.

“There’s so much money in there right now that if you get any kind of unwinding, it could get very ugly, very quickly.”

But not everyone agrees, with Dunnin arguing there is no need for panic.

“It appears – so far at least – that the amount of payments super funds are being asked to redeem are lower than anticipated. So maybe the amount of liquidity will be less than first thought,” he said.

“But let’s wait and see. What the COVID-19 Financial Crisis has taught us in superannuation is that jumping at shadows is not a smart thing to do.” fs

News

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

11

Products 01: Russel Pillemer

State Street fund purges tobacco, weapons State Street’s international equities trust, which tracks MSCI World ex Australia, is set to exclude tobacco and controversial weapons.

It will make the changes from July 1, for both the hedged and unhedged versions of the State Street International Equities Trust.

As at April end, the trusts had six tobacco securities and five controversial weapons securities, accounting for 0.88% and 0.69% of the index.

“Over recent years, we have witnessed a number of very large asset owners in Australia exclude companies associated with tobacco and controversial weapons,” State Street said in its reasoning for the changes in a letter sent to investors.

“We believe that this trend reflects at least three factors; the strong commitment of the Australian government in both areas, increasing media and investor interest in ethical issues, and investor concerns over longer term legal and other liabilities companies engaged in these industries may face.”

Returns of the MSCI World Ex Australia after excluding the above securities were 0.38% higher than the broader index on a one-year basis to April end.

The performance differential holds even if the returns timeline is extended: ex tobacco and controversial weapons beats the broader MSCI World Ex Australia by 0.27% p.a. over two years, by 0.28% p.a. over three years and by 0.20% p.a. over four-year basis.

“While these index results provide an initial guide, they do not provide a complete picture,” State Street said.

“We expect a small reduction in active risk from the optimisation process already described. Even without any exclusions, each fund already has some tracking error against its benchmark due to practical considerations like withholding tax, transaction costs and small cash balances.

“On balance, we expect the realised tracking error for each fund against its index to increase by around 0.15% pa to approximately 0.25% p.a. We expect out-performance or underperformance of the MSCI World ex Australia Index for the unhedged fund to reach or exceed 0.50% in some 12 month periods.”

Pengana eyes fully franked dividend Pengana is trying to draw investors into one of its international equities vehicles by amending its investment mandate with an objective to fully frank future dividends.

Pengana International Equities (ASX:PIA) said it has implemented a change in the investment mandate so that it will be managed with the “specific additional aim” to deliver fully franked dividends.

It said this should result in a slightly higher turnover in the portfolio to realise investment profits and deliver franking credits that will arrive from the tax paid on profits.

AMP Capital cuts fees on equities fund AMP Capital has dropped the management fees on its ESG-focused equities fund by 15bps, while also updating its screening thresholds.

The AMP Capital Sustainable Shares Fund will shift from charging 70 bps per year to 55 bps per year.

It has tightened its screening for thermal coal producing stocks from 10% of coal-production-related revenue to 1%.

“A 1% threshold screens out companies actively producing thermal coal used for energy. The threshold however allows for companies that may produce thermal coal as an unavoidable by-product of metallurgical coal extraction, which is currently still considered to be essential for sustainable development,” AMP Capital said in a letter sent to investors.

The fund will also go from targeting 30% lower carbon footprint than its benchmark to targeting 50% lower carbon footprint.

AMP Capital said implementing the above two changes may incur some buy/ sell costs but they will be low.

In an announcement to the ASX, PIA chair Frank Gooch said the fund is positioned to meet its dividend objective of paying at least five cents pers share in the medium to long term.

“The company has total assets of $320 million, no debt, investments in highly liquid global companies and a disciplined investment management team that has demonstrated its ability to deliver throughout the cycle,” Gooch said.

In the 10 months to April 30, the investment portfolio returned 8.2% compared to the benchmark 2.4%.

PIA chief executive Russel Pillemer01 said it is pleasing the investment team has been able to realise gains on investments even in a period in which global markets have been severely disrupted by COVID-19.

“This should enable the final dividend to be fully franked,” Pillemer said.

“An increase in the level of franking via the change in the investment mandate is viewed by the PIA board as a logical next step in increasing the attractiveness of PIA shares.”

Pillemer added, with many Australian companies flagging deferrals or reductions in their full franked dividends, PIA provides an opportunity to investors who are seeking more certainty.

“I believe PIA is an ideal vehicle for investors who are seeking an investment with the ability to generate good long term returns which comprise capital appreciation and reliable dividends,” he said.

BetaShares launches new ETF BetaShares has announced the launch of a new ETF that gives investors access to long-dated sovereign bonds issues by some of the world’s largest developed economies.

The BetaShares Global Government Bond 20+ Year ETF - Currency Hedged (GGOV) aims to track an index that provides exposure to a portfolio of long-maturity, income-producing bonds issued by governments of G7 nations, hedged into AUD. BetaShares said global government bonds have historically provided significant diversification and defensive benefits to portfolios during periods of market decline.

The bonds which GGOV invests in are typically of very high credit quality, with 40% of the bonds in the portfolio rated AAA and an average portfolio credit rating of AA as at April 30 this year.

The fund’s index methodology selects only G7 government bonds with relatively long maturities.

BetaShares said to be eligible, bonds must have a remaining term to maturity of more than 20 years.

BetaShares chief executive Alex Vynokur said in previous share market downturns, government bonds historically have tended to rise in value “We are excited to be able to give Australian investors the chance to invest in a diversified portfolio of high-quality global sovereign bonds,” he said.

02: Angela Murphy

BetaShares said GGOV’s focus on long-maturity bonds enhances the fund’s diversification and defensive benefits.

“Given that yields on many short-maturity sovereign bonds are currently close to zero, it is primarily bonds with a longer term to maturity that are more sensitive to interest rate movements,” BetaShares said.

“GGOV intends to pay quarterly income, and has management costs of just 0.22% p.a.”

Challenger launches new retirement tool Challenger has launched a new tool to help retirees and pre-retirees better understand the financial realities of retirement.

The annuity provider has today launched Retire with Confidence, a tool designed to help retirees understand how long their superannuation will actually last in retirement.

The tool, available on the firm’s website, has been co-designed with retirees and pre-retirees, and aims to overcome the longevity disconnect which impacts Australians’ ability to understand the reality of their finances later in life.

Challenger’s behavioural research shows Australians hold various misconceptions about their retirement income, and still harbour barriers in speaking with advisers.

According to Challenger chief executive distribution, product and marketing Angela Murphy02 , the firm decided to “do more of the heavy lifting”, to help time-poor advisers explain the risks retirees face, including educating Australians about the benefits of annuities.

“They [advisers] are under so much pressure.

The sources of revenue are changing underneath them, their costs in terms of licenses and services have increased dramatically,” Murphy told Financial Standard.

“So everything within their practice needs to be focused on how they can be efficient and drive the cost of advice down, and explaining a really different product is actually a big ask.”

With so much content already focused on advisers, the tool sees Challenger pivot some of its expertise towards a more consumer friendly means of educating people about the risks of retirement.

“We thought ‘Well can we take that, customise it and make it suitable for a consumer audience?’, so that we can do more of the work in terms of helping retirees think about the risks they face, trying to tackle perhaps some of those behavioural biases that we were seeing, and do some of the work so that they were more ready for an advice conversations,” Murphy said.

The tool - which has been in development for much of the last year - uses gamification to test retirees’ perceived confidence, with users asked to guess when their super will run out. It then educates retirees on the different sources of retirement income, and demonstrates how annuities can complement their super and the age pension. fs

12

News

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

Clime courts Madison FG

01: Damien McIntyre

chief executive GSFM

Kanika Sood

Sydney’s Clime Investment Management has emerged as a bidder for Madison Financial Group, which is currently in the process of being sold by OneVue. Madison, which is home to about 100 advisers, was previously owned by Sargon Capital but fell into OneVue’s hands in February as the latter looked to recoup money owed to it by Sargon Capital when it went into external administration.

It is understood that Clime has completed due diligence on Madison.

OneVue has previously indicated a May completion for Madison’s sale.

In an interview with Financial Standard last year, Clime chief executive Rob Bristow said the firm was interested in acquiring other funds management businesses and advice practices.

Clime already has a private wealth business which focuses on sophisticated or wholesale clients.

However, it was keen to add retail advice clients.

The 24-year-old business dipped into advice in 2018. As of last July, it had $10 million on its balance sheet and was willing to acquire advice businesses that come up for sale.

However, entering retail advice was not one of its plans – perhaps, until Madison came up for sale.

“In terms of acquisitions, so far we have built our private wealth business organically. We wouldn’t rule out an acquisition if the heritage of the business is built around wholesale clients.

We are not licensed to provide retail advice and hence are not interested in acquiring retail advice businesses,” Bristow said at the time. fs

New income fund launched Ally Selby

A credit and alternative investment manager has launched its first Australian product; a global credit income fund set to provide investors with 3-4% in yield per annum.

The strategic joint venture between global credit investment manager Ares Management Corporate and multi-boutique asset manager Fidante Partners, Ares Australia Management (AAM), has launched the Ares Global Credit Income Fund.

The fund has a target distribution of three to four percent per annum, set to be paid monthly. The fund will use an active, dynamic strategy to invest in a highly diversified portfolio of credit issuers.

It’s the first of what the fund manager says will be several products set to launch in the Australian market over the next two years.

The fund was developed to meet investor demand for high levels of income with a focus on capital preservation and reduced risk, AAM head Teiki Benveniste said.

“In this volatile, uncertain and low interest rate environment, investors are focused on finding reliable sources of higher income without risking severe capital losses and with better risk diversification than traditional investments in their portfolios,” he said.

“In Australia, a lot of investors looking for higher levels of income have historically invested in Australian bank equity or hybrid securities.” fs

Death of dividends greatly exaggerated: Epoch Eliza Bavin

I The quote

Dividends are much more stable in the tech sector. And healthcare tends to be virtually recession proof with very modest declines in earnings per share and dividends per share.

n the midst of Australian companies cutting dividends due to the effects of COVID-19, Epoch Investment Partners says investors can still generate dividend income from offshore.

Damien McIntyre 01, chief executive of GSFM, the distributor of Epoch’s retail funds in Australia, said record low interest rates were already impacting Australian investors in their search for income before COVID-19.

“Australian investors are already well versed in receiving dividends for income but they are typically overweight domestic equities,” McIntyre said.

“Many local investors, perhaps focused too much on the benefits of franked dividends, are unaware of the diversification benefit and potential of comparable dividend income gained by investing globally.”

McIntyre said investors should look to companies with solid balance sheets and resilient earnings and cash flows, pointing to tech, healthcare, and utilities.

He said a “greater universe” of companies fitting this profile is found outside of the Australian market.

“Globally, it is these three sectors where we have seen resilience in earnings profile and in dividend profile in previous recessions,” McIntyre said.

“The expectation is that these sectors will hold up reasonably well this time around as well.”

McIntyre said investors should be careful about interpreting the high level commentary about the negative impact of COVID-19 on dividends, as it can vary greatly by geography and by sector.

“Two sectors that are typically hit hard during recessions are financials, as we have already seen in Australia, they are always at the centre of the storm, as well as consumer discretionary stocks,” McIntyre said.

“Conversely, two sectors that have typically held up well in recessions are tech and healthcare. Dividends are much more stable in the tech sector. And healthcare tends to be virtually recession proof with very modest declines in earnings per share and dividends per share.”

McIntyre warned that while looking for companies with attractive yields, it is important not to buy stocks with the highest dividend yields.

“A high yield could be the product of a onetime windfall or a collapsing stock price which may not be sustainable,” McIntyre said.

“To identify dividend streams that are sustainable and growing it is important to understand what drives free cash flow at individual companies, and then look for companies that can grow their operating cash flow by at least 3% annually.” fs

CountPlus acquires firm Elizabeth McArthur

CountPlus member firm CountPlus One has made a new acquisition, acquiring the advice services of Centenary Financial.

CountPlus One and Centenary are Count Financial member firms, now clients and key employees of Centenary will transfer to CountPlus One as part of an agreed succession plan.

CountPlus referred to the acquisition as a tuck-in acquisition.

In an announcement to the ASX, CountPlus put consideration for the acquisition at $200,000 with 60% to be paid on completion and the balance over two deferred payments.

CountPlus One will fund the acquisition with cash and the transaction is expected to be earnings accretive within the first year.

CountPlus chief executive Matthew Rowe said the Centenary acquisition highlights one of the new opportunities presenting Count Financial following its acquisition by CountPlus, as the network continues to grow.

“The CountPlus model works on identifying and investing in quality people and businesses, and

this acquisition by CountPlus One reflects that model and the opportunities coming from Count Financial,” Rowe said.

Commenting on the acquisition, CountPlus One managing principal Ian George said: “Our due diligence revealed Centenary has a quality client base, which will bolster the financial planning practice offering of CountPlus One.” Just over a month ago, Count Financial became the licensee of Affinitas, an accounting-led financial advice firm in Queensland.

Count Financial chief advice officer Andrew Kennedy said at the time that the Affinities announcement was a sign that Count’s plan to grow its network of firms is well and truly in effect.

“Count Financial has transformed as a business, and while we’re proud of what we’ve achieved in the past six months, we have a busy agenda of new initiatives to continue to roll out,” Kennedy said at the time.

“We not only enable our advisers to focus on providing more valuable services to clients, but we are a quality licensee and partner for firms in these times of unprecedented change.” fs

News

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

13

Executive appointments 01: Peter Burgess

ASX appoints compliance chief The ASX’s deputy general counsel Janine Ryan will take over from Kevin Lewis as he shifts into an advisory role ahead of his retirement in mid-2022.

ASX Corporate Governance Council chair Elizabeth Johnstone thanked Lewis for his decade of service to the stock exchange.

“I wish to acknowledge the enormous contribution Kevin has made to the Council and to corporate governance standards in Australia in his decade as the ASX representative on the Council,” she said.

Lewis had a major role in the third and fourth editions of the Council’s corporate governance principles and recommendations, she said, and managed public consultations for both prior and post-national roadshow events for the editions.

These recommendations had been a major milestone in the development of corporate governance standards in Australia, Johnstone said.

“Over and above the work he has done on the Council, Kevin has strengthened Australia’s continuous disclosure regime through a major rewrite of ASX Listing Rules Guidance Note 8; introduced major reforms to the Listing Rules; [and] substantially improved the quantity and quality of ASX guidance to listed entities,” she said.

Most recently, Lewis initiated and implemented the ASX’s emergency capital raising relief to support listed companies during the COVID-19 crisis, Johnstone added.

Lewis will take up a newly created position as ASX special counsel of regulatory policy, where he will focus on initiatives to enhance ASX rules and guidance framework.

Ryan joined the ASX legal team in 2013 from Gilbert + Tobin Lawyers, where she was a partner.

Prior to this she worked as a special counsel at commercial law firm Freehills.

The changes will come into effect from July 1.

An internal and external search for a new deputy general counsel is underway, the ASX said.

SMSF Association appoints deputy CEO SuperConcepts general manager of technical services and administration Peter Burgess01 has been appointed deputy chief executive of the SMSF Association, returning to the self-managed super advocacy body after seven years at AMP. Burgess left the association in 2013 for AMP, having served as national technical director for four years from March 2009.

In addition to his role as deputy chief executive of the association, Burgess has also been appointed director of policy and education.

SMSF Association chair Andrew Hamilton said the board was “delighted” to bring Burgess back into the fold, while chief executive John Maroney said the move would be a “boost” for both members and the wider-sector.

Burgess said he was excited to re-join the association, especially as the superannuation industry continues to undergo significant change.

“At such an important and pivotal time for the

Former licensee head in new role The former managing director of a now-defunct dealer group has taken on a new leadership role at MLC. MLC has confirmed the appointment of Mark Fisher as general manager of Godfrey Pembroke and MLC Connect.

Fisher wrapped up as general manager of Securitor in May 2019 when Westpac shuttered the dealer group, along with Magnitude, as part of its decision to exit personal financial advice.

Fisher brings more than 20 years’ experience in financial planning, a decade of which was spent working across Westpac and BT Financial Group.

He has also previously held roles with Macquarie, AMP, AXA and NAB Financial Planning.

MLC also confirmed the appointment of Cristian Zanetti as head of advice experience centre, Sydney and central advice.

He joins from AMP where he spent close to 15 years, most recently as head of AMP Advice – NSW/ACT. He was previously head of financial planning, AMP Horizons.

SMSF sector, I am looking forward to bringing the experience and technical knowledge I have accumulated over many years to the table and making a positive contribution to the growth of the association and the sector,” Burgess said.

SuperConcepts chief executive Lara Bourguignon said Burgess played an “instrumental” role at the SMSF service provider, and thanked him for his service.

“He [Burgess] has focused on building our brand and developing processes and offerings tailored to client needs,” Bourguignon said.

“We wish Peter all the best in his new role and look forward to continuing our close relationship with him and the association in the future.

“Having established our business in the market over the past few years we are now looking to the next chapter to continue the great work of our technical team in training and industry advocacy, strengthening our relationships with industry partners and continuing to lead in industry opportunities.”

Morningstar appoints adviser solutions head HUB24 senior business development manager Doug Hope has joined Morningstar, with the former Macquarie Wrap key account manager set to take care of business development for advisers and asset managers at the research house.

Morningstar confirmed Hope’s appointment to Financial Standard.

“Doug has joined Morningstar as head of adviser and asset management solutions,” a Morningstar spokesperson told Financial Standard.

“His focus is on business development and representing our solutions across data, research, and software for advisers and asset managers.”

Hope’s arrival comes less than six months after he took on the role of senior business development manager at HUB24.

At the time of his appointment at the platform operator in December, HUB24 said the addition of Hope would be beneficial for advisers wishing to transition to managed portfolios to better meet client requirements.

Hope joined the firm amid a slew of other appointments designed to ensure HUB24 could offer advisers significant levels of support.

“The contestable market for HUB24 is expanding. We want to ensure we are in the best position to support advisers across the various market segments in which they operate with our innovative platform and managed portfolio solutions,” HUB24 managing director Andrew Alcock said at the time.

Challenger hires retail distribution lead Challenger has appointed a general manager of retail distribution, hiring from AMP’s wealth management leadership ranks.

Luke Cheetham has commenced in the new

02: Charlotte Henry

role at Challenger, after serving more than two years as head of distribution, wealth management at AMP. In all, Cheetham spent more than 10 years at AMP, having also served as head of sales for NSW/ACT and in other regional and state distribution roles.

Confirming Cheetham’s departure, a spokesperson for AMP said a replacement for the lead wealth management distribution role had not yet been appointed.

Challenger’s general manager of national accounts, research and platforms Rommel Hacopian recently departed, joining Yarra Capital Management.

His departure followed that of Vito D’Introno who served as Challenger’s head of retail and spent more than 13 years with the company. He also joined Yarra Capital.

Law firm bolsters financial services team Herbert Smith Freehills has appointed a new partner to its financial services regulatory practice.

Charlotte Henry 02 joined the firm May 18 and will focus on advising clients in regards to Australian banking regulatory matters alongside partners Michael Vrisakis and Fiona Smedley, and consultant Tony Coburn.

She will also work with other partners across the firm’s global network to assist clients based in Asia, the UK and Europe.

Henry joins Herbert Smith Freehills from Norton Rose Fulbright, where she was a financial services regulatory lawyer and partner in the firm’s London office before relocating to Australia and has worked in the Sydney office since mid-2019.

Prior to that, Henry was a regulator at the UK’s Financial Conduct Authority, focussing on conduct in retail banks, and was seconded in-house at a UK retail bank.

Henry’s focus will be on the financial services sector locally and internationally, helping firms in that sector with their market entrance, development of new products/services and cross border sales, their strategic direction, good governance, managing risks, implementing regulatory change, their relationships with regulators, and remediation programmes.

In addition, Henry will assist those who invest into that sector by project managing due diligence, conducting regulatory reviews, and obtaining regulator consents.

Most recently, she has advised clients in relation to the impact of Brexit, focussing in particular on corporate governance, and has also helped clients in relation to various individual accountability regimes, including Hong Kong’s manager-in-charge regime, Singapore’s senior manager liability, and Australia’s BEAR regime.

In addition to her legal practice, Charlotte is an advocate for the development of fintech and regtech, and the exploration of the use of blockchain in retail banking distribution channels. fs

14

Feature | ETFs

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

IT’S SHOWTIME

Trillions have flown into ETFs in just a few short years and even a global pandemic hasn’t stopped the money. For the people behind the product, now is the time to prove their worth.

Elizabeth McArthur writes.

ETFs | Feature

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

M

ay you live in interesting times.

Some say that phrase is an ancient curse, others say it’s a blessing.

Market analysts will tell you it’s both.

For investors who have just cruised through the longest bull market in history, the interesting times have arrived.

S&P Dow Jones global head of exchange traded products John Davies 01 experienced a career first barely a quarter of the way into 2020 - actually, he had a couple.

As London went into a strict lockdown to manage the pandemic and Davies and much of his team were forced to work from home, volatility was so extreme that exchanges around the world were suspending trading on various days as circuit breakers kicked in.

If those exchange circuit breakers caused trading to be suspended on the day of an S&P rebalance, Davies explains, it could cause even more volatility and uncertainty.

So for the first time Davies can remember, and certainly for the first time in his career, S&P postponed rebalances on all its indices.

“It wasn’t a decision taken lightly by any stretch of the imagination,” he says.

“People had enough on their plates trying to manage the volatility in the world and, based on the feedback we got from clients and exchanges, I think we did the right thing.”

The word “unprecedented” has become a cliché amid the COVID-19 pandemic, with politicians accused of an unprecedented preference for that particular adjective.

The market crashes that COVID-19 has ushered in are not typical or cyclical economic events though.

They are linked to a health crisis and to a public grappling with overnight industry-wide shutdowns and greater government control than it’s ever known.

But curiously, the anxiety being felt around the world has not stopped investors looking to take advantage of the volatility.

Fear of missing out on buying while the market is down seems to be the driving force behind

01: John Davies

02: Alex Vynokur

03: Christian Obrist

head of exchange traded products S&P Dow Jones global

chief executive BetaShares

head of iShares Australasia BlackRock

im-pressive flows in February and March 2020.

And investors are turning to what has become the most accessible, affordable way to get in on the action - ETFs. Rainmaker analysis shows the Australian exchange traded product market lost $6.7 billion in market value in March, ending the month at around $57 billion from $64 billion at the end of February.

Despite losing about 10% in market value, investors still wanted in. There were net inflows into the ETP market in March of $360 million.

February saw even stronger net inflows of $1.5 billion.

“What has been particularly noticeable has been a significant increase in trading volumes.

In February we saw a record trading volume of around $7 billion, a figure that was promptly surpassed in March when there was $18 billion of trade in ETFs,” BetaShares chief executive Alex Vynokur02 says.

“Investor usage of ETFs has evolved in recent years to include both strategic, long-term asset allocation, and the adoption of satellite, or tactical, investment strategies.”

As for the kinds of ETFs investors are piling into amid the pandemic, there are definitely some winners and losers.

Head of iShares Australasia Christian Obrist 03 has seen BlackRock’s iShares AUD hedged equity ETFs enjoy a significant uptick in popularity during the volatility.

“As the AUD fell to a 19-year low against the USD, local investors piled in to IHVV (hedged S&P500) for US equities exposure and IHOO (hedged global 100) for broad global equities expo-sure,” Obrist says.

And, following the initial sell-off in fixed income he says investors have again gravitated to bond ETFs for multiple reasons: equity diversification, income and capital preservation.

BetaShares Australian Equities Strong Bear ETF and BetaShares US Equities Strong Bear ETF both came out of March winners in the field.

While traded value is usually a function of the size of the product, the bear ETFs proved exceptions to this rule.

The BetaShares Australian Equities Strong Bear ETF makes money when the Austral-

Clients need some hand holding in a crisis and it’s when real decision making happens. And I think if you cut your teeth at a time like that it’s the best learning environment.

Antoinette Mullins

15

ian shares index falls at a ratio of around 2:1.

It experienced strong inflows in March and had the highest traded value of any product during the period, at just under $2 billion.

This, for a fund that had just over $200 million at the beginning of the month.

“We’ve seen a growing level of interest in our Bear funds from financial advisers,” Vynokur says.

“They are predominantly used as a tactical risk management tool in investor portfolios, especially for clients that are sensitive to the risk of significant portfolio drawdowns.”

The BetaShares Geared Australian Equities Fund and BetaShares US Equities Strong Bear Fund also had high trading ratios of 8.8 and 4.7 respectively.

Rainmaker analysis indicates these products were not only being used in March to hedge portfolios, but to trade volatility for short term gain.

Vanguard Australian Shares Index, SPDR 200 and BetaShares Australia 200 ETF had the largest net flows for Australian equities ETPs during the period overall.

In international equities, BetaShares US Equities Strong Bear Fund was ranked first for flows, followed by iShares Core S&P 500 and Vanguard MSCI Index International.

Beyond Today FP certified financial planner Antoinette Mullins 04 has seen the undying enthusiasm for ETFs in the current environment first hand.

The market havoc COVID-19 has wreaked has not put Mullins off indexed strategies or ETFs, nor has it put off her clients.

She thinks it’s during times like this that clients’ financial literacy and understanding of risk goes up a notch.

Mullins says the main sentiment she’s seeing from clients is that they wish they were in a position to buy more - they seem to broadly think it’s a great time to get into the market.

“I think I fell in love with financial planning during the Global Financial Crisis,” Mullins says.

“Clients need some hand holding in a crisis and it’s when real decision making happens.

And I think if you cut your teeth at a time like that it’s the best learning environment.”

BetaShares ETFs

INVESTMENT SOLUTIONS FOR ALL MARKET CONDITIONS LEARN MORE AT WWW.BETASHARES.COM.AU BetaShares Capital Ltd (ABN 78 139 566 868 AFSL 341181). Investors should read the relevant PDS at www.betashares.com.au and consider whether the product is right for their circumstances. Investing involves risk.

16

Feature | ETFs

Mullins’ knowledge when it comes to what ETFs are available and how they can be used to benefit clients might be taken for granted in the financial advice industry now, but not so long ago cost-efficient indexing strategies were not so commonly spoken of.

Bell Direct head of distribution and marketing Tim Sparks 05 started his career with ETFs at BlackRock’s iShares where he found that most financial advisers didn’t really understand what ETFs were or how they could use them.

“Back in 2008 almost all ETF conversations we were having were educational in nature,” Sparks says.

“Discussing ETF benefits – tax, cost, diversification, liquidity, transparency and instant diversification – and trying to explain (sometimes very poorly, as we were all a little green) how the ETF creation or redemption mechanism works.”

As far as Davies is concerned the reality of what turned the tide on ETF popularity wasn’t just education and smart distribution teams - it was also commissions.

Davies says after the Future of Financial Advice reforms saw trail commissions phased out, advisers were left with a dilemma. Some of the managed funds they had been recommending suddenly looked a lot less attractive.

Right now, financial advisers are wading through the next wave of industry reforms under the new FASEA education and Code of Ethics regime.

With the Royal Commission recently pushing vertical integration well and truly out of favour at the same time, in 2020 again there is a whole cohort of financial advisers reconsidering what they value when it comes to investment recommendations.

This year kicked off with a consultation into stamping fees paid by fund managers to advisers and brokers for exchange-listed funds, as public scrutiny into the practice mounted.

The outcome of that work is still up in the air but it seems likely these fees too will be turned off.

“In other markets where advisers moved from commissions to fees the economics changed and they had to look for the most cost-effective tools to implement investment strategies,” Davies says.

“When you consider the fee levels attached to the average active mutual funds and then take away trial commissions there is almost no incentive to look at those, especially when you compare the performance of those funds to a passive product like an ETF.” S&P compares active and passive funds across the globe and, Davies points out, in general terms three out of five active managers fail to beat their benchmark.

“As investors become more aware of this the ETF will only become more attractive. Why invest through a high-fee, low performing active fund?” he says.

Who makes the market?

COVID-19 and the market havoc it brought with it has struck at would could be a delicate time for active ETFs in Australia.

Last year, the regulator “paused” listing of active ETFs as it mulled whether the holdings of these vehicles should be allowed to remain opaque and whether internal market makers, currently favoured by active ETF managers in Australia, should be permitted.

On 16 April 2020, ASIC provided guidance on these non-transparent ETFs. ASIC asked ETF issuers only rely on publicly

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

available information or a reference price as the input for market making quotes and to establish information barriers so people who know the current portfolio holdings don’t submit the bid and offers.

The regulator was clear that it wanted “information asymmetry” in the world of active ETFs to be addressed but it did not go so far as to ban internal market making.

UNSW professor of economics Richard Holden06 sees the intellectual property concern as the driving force behind the internal market maker versus external market maker debate.

“Precisely because it’s internal there is less visibility around how those prices are determined and therefore less visibility into whether that’s a completely accurate reflection of the market value of the underlying assets,” he says.

“Funds have expressed a concern about protecting their intellectual property and from what I can see ASIC has been somewhat responsive to those concerns.”

However, Holden points out that doesn’t change the fact that visibility into true prices and market participants understanding the true net asset value is very important.

“The more one has a regulatory regime that protects the so-called intellectual property of exchange traded funds, the more concerned one could be about how accurate those signals about underlying asset value are,” he says.

Overseas, in the UK and the US, regulators have demanded active ETF managers use third party market makers.

And, Holden doesn’t really see why Australia would go another way.

“If I were making the decision, based on what I know, I would be inclined to operate the way overseas jurisdictions do,” he says.

“I haven’t seen a particularly strong argument made in a public forum by ASIC on why Australia’s strategy should be different from the

While BetaShares’ core business is in traditional indexing ETFs, it has partnered with some active managers to launch a number of active ETFs. “We very much support ASIC’s regulatory framework on active ETFs including the policy on market making,” Vynokur says.

Chi-X chief executive Vic Jokovic says the most important thing in any ETF is that it trades at a fair price.

“Generally, portfolio holding transparency is the best way to ensure that happens,” Jokovic says.

“Having said that, there are fund managers where full portfolio disclosure just isn’t an option because of the intellectual property tied up in their basket information.”

He says ASIC’s recent regulatory guidance for non-transparent ETFs was an important step and set out some controls to manage that information asymmetry risk.

“ASICs engagement with industry was very extensive, detailed and I think commendable,” Jokovic says.

“They met with overseas regulators and undertook significant work comparing non-transparent fund frameworks from other countries.”

He believes the outcome of all of that work is that the regulator has prescribed standards for non-transparent ETFs and internal market makers which are “world class”.

Fidante Partners ActiveX senior investment partner Sam Morris 07 explains the model that has been adopted in overseas markets where active ETFs have external market makers relies on selective disclosure of portfolio composition under strict non-disclosure arrangements from the product issuers to those market markers.

“ASIC has obviously considered this in its review, and through its updated guidance, has made it clear that it is not comfortable with some market participants having access to

rest of the world. I don’t see anything peculiar about Australia that would mean we would balance the two sides of that trade off very differently than other jurisdictions.”

Davies also sees the internal market maker issue as peculiar to Australia.

He points out that it took quite a while for the Securities and Exchange Commission in the US to get comfortable with semi-transparent actively managed ETFs. Recently American Century Investments became the first asset manager to launch two actively managed, semi-transparent exchange traded funds in US with the products going live on 2 April 2020.

The ETFs are American Century Focused Dynamic Growth (FDG) and American Century Focused Large Cap Value (FLV) and will publish their holdings quarterly rather than daily in an effort to protect the proprietary methodology of the manager.

Quarterly disclosures, Davies points out, is not so different to what was permissible for traditional mutual funds in the US.

information that the broader market does not have,” Morris says.

ASIC guidelines for non-transparent ETFs that employ an internal market maker say the manager must appoint a trading participant to act as execution agent to enter bids and offers in the ETP units throughout the day on behalf of the ETP (they should be independent from the asset manager themselves), he explains.

There were 27 active ETFs trading in Australia in March 2020 that do not disclose their portfolio holdings daily and 15 transparent active ETFs that do.

“Non-transparent equity ETFs have good reasons to want to protect the composition of their portfolios as a key source of intellectual property as well as to protect their investors from being front run,” Morris says.

Bell Direct’s Sparks, on the other hand, sees things a little differently “It is a setback for the ETF industry when an active manager comes to the table and says they are pricing the entry and exit point for investors into and out of their products and will

ETFs | Feature

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

not disclose how they are arriving at the price,” he says.

“That creates risk for investors, as it gives active managers the opportunity to potentially generate outperformance through their own pricing gymnastics.”

He thinks the solution is for active managers to ask their primary market makers to sign nondisclosure agreements.

“From inside these businesses what they may be doing is black and white, however to investors looking in it seems grey,” he says.

Sparks points to another, possibly bigger, issue too.

Last year, Deutsche Bank shut down its ETF market making desk in Australia as part of a global axing of equities trading services at the banking giant.

“That team was about 80% of trading on some of the most widely used ETFs in the Australian market,” Sparks says.

“ETF issuers were appearing at conferences discussing the ‘two layers of ETF liquidity’ and why investors should have confidence in ETFs, whilst not telling the market their primary market maker (whom investors need to buy the ETFs from) was shutting up shop.”

If the void left by the Deutsche team is not filled, spreads on some ETFs in Australia could widen and Sparks thinks some less pop-

ular ETFs could even cease to be functional.

“ETF issuers need to do a much better job at utilising their global market maker relationships to ensure adequate competition exists in the Australian market,” he says.

“Market makers have access to information that investors don’t. Without other market makers present they can use this information to misprice the ETF for their own benefit.”

The bubble question With about $1.5 trillion tracking S&P indices in ETFs, it’s the largest index provider in the ETF space.

Davies has seen the popularity of ETFs explode over his career.

He notes that it took 20 years for the first trillion to be invested globally through ETFs, the next trillion took about three and a half years and the third trillion took just a couple of years to add up.

Some people see risk in those numbers.

Michael Burry, the investor who famously predicted the global financial crisis and was

17

04: Antoinette Mullins

05: Tim Sparks

06: Richard Holden

certified financial planner Beyond Today FP

head of distribution and marketing Bell Direct

professor of economics UNSW

ETF issuers need to do a much better job at utilising their global market maker relationships to ensure adequate competition exists in the Australian market.

Tim Sparks

immortalised in the book and movie The Big Short, is currently shorting ETFs believing there is a bubble in passive investing that’s sure to burst.

Davies is very familiar with the argument.

“When the late [Vanguard founder] Jack Bogle, who created the first indexed funds, was at an investor day a few years ago he was interviewed in an auditorium surrounded by investors and journalist,” Davies says.

“He was asked how big indexing could get and what the impact would be and, to paraphrase, he said indexing could get bigger and bigger and it would be a catastrophe.

“At that point, a load of journalists who were listening ran off to file copy or speak to their editors and say, ‘the great Jack Bogle said indexing could be a catastrophe’.

“If they had waited another 30 seconds, he went on to say indexing could be as much as 70% or 75% of the market and it wouldn’t be a problem.”

And that “catastrophe” Bogle was talking about might not actually align with everyone’s definition of the term.

“The impact would be on active managers, mediocre active managers would go out of business and you’d be left with true high conviction active managers that could actually deliver out-performance,” Davies says.

Davies estimates that passive investing as a whole globally only represents about 15% of the total market.

In some regions where indexing has proved popular it may be as high as 25%. And, ETFs on their own, only represent 10% of the assets invested in global mutual funds so there’s still plenty of room to grow.

Bogle’s vision of a world where only the worthy active managers survive is still a while away.

Holden too doesn’t buy Burry’s theory.

While Burry’s spectacular foresight into the sub-prime loans that sparked the GFC will go down in history, his new big short is up against some serious intellectual heft.

Holden points to two Nobel Prize winners Eugene Fama and Richard Thaler - as staring down Burry from the pro-passive corner.

Fama is best known for his efficient-markets hypothesis and is sometimes referred to as the “father of modern finance”.

Thaler won the Nobel Prize for his contribution to behavioural economics and is a proponent of the idea that humans do not behave rationally.

“So from the rational view and the behavioural economics view, both agree that if you’re an investor and you’re investing in stocks the best thing you can do is buy the index,” Holden says.

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LEARN MORE AT WWW.BETASHARES.COM.AU BetaShares Capital Ltd (ABN 78 139 566 868 AFSL 341181). Investors should read the relevant PDS at www.betashares.com.au and consider whether the product is right for their circumstances. Investing involves risk.

18

Feature | ETFs

“Once you get into picking individual stocks, why are you any better than anybody else?

Whatever end of the spectrum you come from, you’re going to do worse.”

And as for the theory that a bubble is being created as people are swayed to the passive way of doing things, Holden points out an increase in indexing only creates an opportunity for active managers to make money.

“The suggestion from Burry and others is that it creates lazy money, which doesn’t hold companies to account,” he says.

“You don’t need the entire market to be active in order to get pricing discipline. You can have a big chunk of the market buying the index but there will always be some active investors out there.”

Holden agrees with Bogle’s theory, that when indexing becomes the overwhelmingly popular strategy it will be showtime for the active investors with real conviction.

That opportunity to make money as an active manager would in itself guarantee that active managers would continue to exist, no matter how big indexing through products like ETFs became.

Holden refers to this as a kind of self-correcting mechanism that he thinks would make it impossible for a bubble to form.

And, Pinnacle head of listed product Chris Meyer points out the $60 billion in ETFs in Australia represents around 7% of the retail managed fund industry’s funds under management, compared to ETFs representing approximately 10% of managed funds FUM in Canada and 21% in the US. “The question is more whether the size of the assets in ETFs is now causing a bubble in certain asset classes and stocks as these ETFs blindly follow share and bond prices higher and lower as markets rally and fall without any recognition of valuation or fundamentals,” Meyer says.

“I disagree with this. Actively managed FUM in the US, which has the largest passive market, is still greater than 50% of total FUM. In other markets like Australia, this figure is much higher than 50%. I don’t think the tail is wagging the dog.”

That doesn’t mean assets haven’t reached something like bubble levels, he says.

“What’s caused asset prices to reach ‘bubble’ levels is low interest rates, QE and general complacency about risk, not ETFs buying those assets,” he says.

“All of this clearly changed in March with the reappraisal of risk off the back of COVID which saw asset prices fall, not as a result of ETFs selling.”

Sparksagrees with Meyers that proponents of Burry’s theory are accusing the tail of wagging the dog.

He points out the total market cap of the Australian stock market is about $1.7 trillion

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

07: Sam Morris

08: Jonathan Shead

09: Andrew Moore

senior investment partner Fidante

head of investments Australia State Street Global Advisors

chief executive Spaceship

but ETF assets in Australia only make up about $60 billion.

“There is no bubble with ETFs. Historical bubbles invariably involve leverage. Leveraged ETFs make up a very small percentage of total ETF assets – about 1.5%,” Sparks says.

“If you couple this with the fact that the early adopters of ETFs were SMSF investors who are long-term, buy-and-hold investors, then active management’s argument for an ETF bubble is a very weak one.”

Beyond 2020 SPDR launched some of the largest ETFs in the world in 1993; they’ve weathered the tech wreck, the GFC, the smaller sell off in 2018 and now the COVID-19 chaos.

State Street Global Advisors head of investments, Australia Jonathan Shead 08 knows ETFs will weather these interesting times just as they have others.

“It’s not unusual to see ETFs increase in popularity in times of market volatility,” Shead says.

“ETFs were around in 2008 and they weathered the financial crisis extremely well.”

As for what is next for ETFs, Shead says State Street is seeing a clear theme from its institutionall clients such as super funds - ESG. “I think we may see growth in ETFs with an ESG flavour or filter. We are a manager for large institutions and that’s based on the trends we’ve been seeing in the institutional market,” he says.

BetaShares is observing a similar effect.

“Our Global Sustainability Leaders ETF, and the Australian Sustainability ETF have both seen a significant level of interest from Australian investors,” Vynokur says.

“In 2019, we saw around $150 million in inflows into ETHI, and around $180 million into FAIR. Combined, our ethical ETF suite now exceeds $1 billion in AUM.” These ESG ETF offerings are transparent and have a clear set of ESG screens in place.

And it’s likely ETF providers will have to continue to cater to the needs of super funds, at least according to Spaceship chief executive Andrew Moore 09 .

Spaceship offers two investment options that invest across a number of asset classes largely through ETFs, but also through managed funds.

Its investment strategy is part of the startup super funds’ sell to young potential members.

“Much of Spaceship Super’s funds under management has come from millennials, who have responded positively to Spaceship’s simple and engaging way of investing,” Moore says.

“We believe younger Australians have traditionally been disconnected from investing and there is untapped demand for simple and engaging investment products that are different to those designed for our parents and grandparents.”

What’s caused asset prices to reach ‘bubble’ levels is low interest rates, QE and general complacency about risk, not ETFs buying those assets.

Chris Meyer

Spaceship only launched in 2017 and has already captured $250 million in funds under management.

For Davies, a natural progression for ETFs exists already.

More active strategies, he says, are bound to be bundled up into an ETF wrapper.

“I think that if everything pans out as active managers want it to then more and more active funds will become ETFs but the true passive ETFs will still grow as well,” he says.

As far as BetaShares is concerned, Vynokur says: “Looking forward to the next decade, we believe that asset allocation, liquidity, transparency and risk management will remain key areas of focus for Australian advisers and end investors. In that context, ETFs have a bright future.”

Mullins sees how COVID-19 has impacted her clients, not necessarily financially but in terms of how they see the world.

“I think Australia will come out much better than any other countries because of the massive stimulus package,” she says.

“But I think this will change how a lot of people think about risk. And ETFs might just be at the forefront of one way to diversify and to reduce that investment risk.”

Meyers agrees risk will be the thing investors appreciate differently as the longest bull market in history ends its run.

But, we must also remember that ETFs have weathered many storms before.

“Bond ETFs trading below NAV and Oil ETFs trading negative have been widely publicised and have copped a bit of a black eye in the last few weeks but both have come through the ‘crisis’ well and the ETFs have actually shown price leadership ahead of the assets underlying those ETFs,” Meyers says.

“Much like the GFC, while ETFs were ‘blamed’ for some of the fast price action during the selloff, ETFs actually provided liquidity and transparency to investors, more so than in the unlisted man-aged fund world, where some funds gated investors or widened their spreads to penalise redemptions.

Holden agrees that the future is bright for ETFs. Buying the index cheaply and re-investing dividends has been proven to be an investing technique that works, he says.

“Holding equities and waiting has always been a pretty good strategy and I think it will continue to be through this time,” Holden says.

“People probably just don’t want to look at how much they’re down right now.”

Through the pandemic, Mullins has connected with her clients in a different way and is glad to see her clients getting a whole new financial education.

One of the things she’s found herself discussing at length is a healthcare ETF that her clients are particularly delighted to learn about.

A healthcare ETF doing well at the moment; a positive for everyone. fs

BetaShares ETFs

INVESTMENT SOLUTIONS FOR ALL MARKET CONDITIONS For over a decade BetaShares has been committed to providing cost-effective, liquid and transparent investment solutions. With more than $10 billion under management across the broadest range of ETFs in the market, we’re currently helping hundreds of thousands of Australian investors and their advisers meet their financial objectives.

Now more than ever, a long-term investment strategy is required BetaShares ETFs can help your clients achieve their goals.

Invest in BetaShares ETFs just like any share on the ASX.

LEARN MORE AT WWW.BETASHARES.COM.AU

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

20

News

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

ESG investing to remain strong Having destroyed the best laid plans of investors the world over, investment managers are asking how the COVID-19 pandemic will impact ESG investing, which continues to grow in popularity.

According to BNP Paribas head of stewardship Gabriel Wilson-Otto, ESG investing can be at the core of asset managers’ response to the pandemic.

Wilson-Otto highlighted the strong relationship between business resilience and sustainability, and sustainable funds’ continued strong inflows, pointing to Morningstar’s finding that ESG assets in Asia Ex-Japan grew by 21% in the first quarter despite the recent decline of equity markets.

“Sustainable investment practices can help companies identify and mitigate a wider range of risk, while also seizing on a broader opportunity set to help drive growth,” Wilson-Otto said.

“For investors, ESG integration can supplement traditional analysis, help identify risks, and increase the odds of finding tomorrow’s industry leaders.”

He said social expectations and consumer demand were continuing to shift toward sustainable practices, meaning sustainability makes “good business sense”.

Wilson-Otto noted 40% of millennials in the US have chosen a job because of the employers’ sustainability performance, as opposed to 17% of baby boomers, and added that COVID-19 had “put a spotlight” on corporate culture, behaviour, the treatment of employees and the resilience of prior operational strategies.

With billions of dollars set to be spent on stimulating economies in the wake of the pandemic, Wilson-Otto also said there was a “unique opportunity to turbo charge initiative to combat climate change”.

“This isn’t the first time the world has been rocked by a crisis, however the salience of climate change, shifting social expectations, broad availability of sustainable investment products and increasingly competitive economics of renewable energy systems all help increase the odds of a sustainable recovery,” Wilson-Otto said. fs

Wealth firms merge Kanika Sood

An Adelaide wealth advisory and accounting practice has acquired a private wealth firm that was named the Financial Planning Association of Australia’s Professional Practice of the Year in 2018.

Perks is expanding its Perks Private Wealth business after acquiring Wotherspoon Wealth, which was founded by a father and son duo in 2010 and won the FPA’s Professional Practice of the Year award in 2018.

“Despite the current extraordinary conditions, at Perks we are optimistic about the future for South Australia,” Perks managing director Mark Roderick said.

“We are focused on building a strongly resourced business with highly skilled people to advise our growing client based in what is a challenging business and investment environment. Our acquisition of Wotherspoon Wealth is a great example of this.” fs

01: Martin Fahy

chief executive ASFA

Merging super funds guaranteed tax relief Harrison Worley

S The quote

With many merger and consolidation programs underway across the superannuation industry, it is vital that superannuation funds have certainty that existing policy settings will continue.

uperannuation funds are set to permanently avoid negative tax outcomes upon merging, after an amendment bill sailed through parliament on May 14.

While the FASEA extension stalled, the parliament successfully shepherded the government’s Treasury Laws Amendment (2020 Measures No.1) bill through both the House of Representatives and the Senate, ensuring the tax relief granted to merging super funds is now permanent, rather than a temporary measure.

Previously, fund members may have faced a Capital Gains Tax liability when their fund merged. CGT rollover relief designed to reduce that liability was previously a temporary measure, which was extended several times. The most recent extension was due to expire on July 1.

However as a result of the bill’s passage, Financial Services Council chief executive Sally Loane said the parliament had removed a significant barrier to fund mergers.

“With many merger and consolidation programs underway across the superannuation industry, it is vital that superannuation funds have certainty that existing policy settings will continue,” Loane said.

“This relief has been extended several times, and we are pleased to see the government delivering on its Budget announcement to make this a permanent policy.”

Association of Super Funds of Australia chief executive Martin Fahy01 said the association “strongly supported” a super industry which is competitive and continuously improving, both in terms of productivity and efficiencies. Mergers, he said, were at the heart of improving both.

Fahy welcomed the permanent tax relief, and said it had been in the association’s sights for some time.

“ASFA has, over a long period, highlighted the absence of ongoing tax relief for mergers as a barrier to fund consolidation, and welcomed the government’s 2019 Budget announcement that it would make the tax relief permanent,” Fahy said.

However Loane warned that the bill’s change to the definition of Significant Global Entities, which now include managed investments, will impose an “unnecessary tax compliance burden on Australia’s managed funds”.

“A recent survey by Morningstar shows Australia ranks equal last for tax and regulation of managed funds and the SGE change will not help improve our ranking,” Loane said. fs

Life insurance industry will survive: Dealer group head Synchron director Don Trapnell is confident the life insurance sector will make it through COVID-19, after life insurers adopted his call for leadership in protecting policyholders.

In April Trapnell wrote to the chief executives of Australia’s largest life insurers, urging compassion with policyholders facing financial hardship as a result of the pandemic.

“I was very concerned that the coronavirus could spell the end of the life insurance industry unless appropriate action was taken immediately,” Trapnell said.

“I therefore called on insurers to share the measures they were putting in place to protect policyholders.”

Each of the insurers approached by the Synchron director responded to his call, revealing the actions they had taken to help policyholders through the tough times many now face.

Among the 12 responses from life insurers, AIA revealed it was offering policy holders premium and cover suspension for three months, which could be reinstated without medical evidence.

Clients still suffering from financial hardship after three months will be given “sympathetic

consideration” to extending the premium and cover suspension for a further three months.

Meanwhile, Integrity Life said customers could take advantage of a one month premium waiver if their cover was in force for less than 12 months.

For those with more than 12 months tenure, a three month premium waiver is available, with full cover during the waiver period.

Additionally, policyholders with more than 12 months with the insurer have access to six and 12 month premium and cover suspensions, with no fresh underwriting to occur on reinstatement.

“I am very pleased to have received headline responses from each company we approached,” Trapnell said.

“I am also heartened by the fact that while some are more generous than others, and all indicated that the circumstances of each case will be considered on its merits, each life office appears to be viewing policyholders sympathetically.

“Clients will be far more likely to be able to hold on to their life insurance policies, which means advisers will be more likely to be able to remain in business and therefore the industry as a whole will be able to remain viable.” fs

News

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

Clearing house pleads guilty Pershing Securities Australia Pty Ltd (PSAL) pleaded guilty at the Downing Centre Local Court in Sydney to mishandling client monies after ASIC laid charges following an investigation.

Pershing now faces a sentencing on June 27.

“PSAL is the first company in Australia to face criminal prosecution for breaching client money provisions, which are designed to protect the interests of AFS licensee clients by ensuring that client money is kept separate from licensee money,” ASIC said in a statement.

PSAL pled guilty to three beaches, starting with breaching s993B(1) between 25 January 2016 and 31 December 2018 by receiving money in connection with financial services, and then failing to pay that money into an account that satisfied the client money requirements within s981B of the Corporations Act 2001.

It also admitted it breaching s993C(1) between 30 June 2016 and 16 December 2017 through making payments out of a client money account that were not permitted by reg 7.8.02 of the Corporations Regulations.

Each offence carries a maximum penalty of 250 penalty units (approximately $45,000).

“PSAL also admitted guilt to a third s993B(1) breach that took place on 21 August 2017. As part of the plea, PSAL will not be sentenced on this breach but it will be taken into account during sentencing for the above charges,” ASIC said, “Client money is money paid to a financial services licensee in connection with a financial service that has been provided, or will or may be provided, or in connection with a financial product.

Client money must be paid into a client money account and AFS licence holders can only make payments out of a client money account as specified by the Corporations Regulations,” ASIC said. fs

21

01: David Murray

chair AMP

AMP defends hefty remuneration bill Elizabeth McArthur

D The quote

We need to retain executives who are capable with corporate memory if we are to get this change done.

Retirement tools miss the mark

uring the AMP annual general meeting chair David Murray01 has defended the pay packet chief executive Francesco De Ferrari and the board continue to take home despite the company’s woes.

“Shareholders have questioned the rationale of our remuneration approach given the challenges experienced by the company,” Murray said.

De Ferrari’s salary and bonuses had been the subject of “many” shareholder questions but Murray said this was down to a misunderstanding.

Murray said the $13.4 million figure published in the annual report is the statutory disclosure of De Ferrari’s remuneration and is not what he was actually paid in 2019. Last year De Ferrari received $4 million in fixed remuneration and short term incentives, he said.

The remainder of the $13.4 million disclosed included awards received when he joined the company and potential future earning subject to improvements in share price and the board’s approval.

“The chief executive’s pay arrangements were designed to take into account his experience as a change agent and the significant task in leading the business through a transformation,” Murray said.

“The rewards are substantial but the hurdles are challenging.”

He defended executive incentive awards too, saying these would only be paid if results were achieved for shareholders.

Murray also confirmed the board does not engage a remuneration consultant.

AMP non-executive director Deborah Hazeleton said that Murray himself repeatedly lobbied for his own remuneration to decrease, but the board decided on several occasions not to lower it.

Murray’s pay was reduced from $850,000 to $650,000 on 1 March 2020, taking it back to the level the AMP chair at the time was paid in 2015.

“The decrease reflects the reduction in scale of the business,” Hazelton said.

A shareholder asked whether remuneration for the board and executives would be cut following the sale of AMP Life.

Murray said the board would be cut from nine to seven following the sale and that the number of executives reporting to the chief executive had already reduced from 11 to eight and would reduce further to seven following the sale.

“We need to retain executives who are capable with corporate memory if we are to get this change done,” Murray said.

Murray also had to defend the board’s decision not to declare a dividend in 2019, which he said would be reviewed after the AMP Life sale. fs

Ally Selby

Digital financial advice provider Fiduciary Financial Services has called out other retirement planning tools for leading on consumers, giving them a false sense of security that their savings are on track.

Fiduciary co-founder Andrew Crawford said the concept of building a big nest egg is flawed.

“The problem with most of these planning tools is that they focus solely on superannuation when they should be looking at retirement in its totality – health, savings, income and, most importantly, what will make people happy in their retirement years,” he said.

“It means that instead of simply aiming to accumulate a big nest egg, broader questions need to be asked about retirement goals that go beyond a dollar amount.

“Retirement involves being healthy and doing the activities people enjoy, of finding fulfilling ways to replace the time once spent at work while having the peace of mind of being able to afford it.”

Instead, he argues, people want to know how much income they need each fortnight to live the lifestyle they want.

“These planning tools also can ignore the fact people get their retirement income from multiple sources,” Crawford said. fs

QSuper not to appeal AFCA win Kanika Sood

The $110 billion superannuation fund has decided to not appeal a Federal Court order upholding an AFCA decision but says it creates further obligations for superannuation trustees.

In April, QSuper’s board appealed unsuccessfully to the Federal Court about an AFCA decision asking the fund to refund a member extra premiums, Financial Standard first reported. As a part of its appeal, QSuper had challenged AFCA’s jurisdiction over the matter.

The fund yesterday said it had decided not to appeal to High Court after considering the best interests of its membership.

However, it said it is concerned of extra obligations for superannuation trustees arising from the case.

“QSuper is concerned that the decision creates further obligations on superannuation trustees already compliant with laws regulated by the Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA),” the fund said.

“With this issue now resolved, QSuper is looking forward to working constructively with AFCA to ensure that member issues are fairly and equitably resolved as quickly as possible,” QSuper chief executive Mike Pennisi said.

The matter relates to QSuper member Tommy Lam, who last year successfully complained to the Australian Financial Complaints Authority (AFCA) that he was entitled to a refund on overpaid premiums from QSuper for about two and a half years because he had been eligible for lower “professional” occupational rates that the fund introduced on 1 July 2016.

QSuper refused to refund Lam, saying on 27 May 2016, it sent Lam sufficient information to allow him to apply for changes to his insurance cover and qualify for a reduced premium. On 1 August 2019, AFCA decided the complaint in favour of Lam. QSuper appealed against the AFCA decision in Federal Court on the grounds that: AFCA in the case had impermissibly exercised the judicial power of the Commonwealth, and that AFCA’s decision had involved an error of law if it was authorised to make the decision.

The court, in April, dismissed QSuper’s appeal and ordered it to pay costs.

However, it gave it leave to come back with additional grounds (against which the fund decided today), and also said the fund had not breached its disclosure obligations. fs

22

Roundtable| Adviser mental health Featurette

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

A line in the sand With FoFA, FASEA and now COVID-19, financial advisers have been battling upheaval and uncertainty for years now and it’s taken its toll. But there is hope yet. Harrison Worley writes.

It’s fair to say 2020 has been a very different year, and we’re not even halfway through.

But that doesn’t mean that some good won’t come from it.

Early in the year, the AFA United Roadshow took several of the advice sector’s best and brightest on tour, in an effort to bring battle-weary planners in all corners of the nation “the very latest in policy, education and professionalism”.

The most profound - and perhaps professional and educational - presentation was delivered by Master Your Money founder and planner Chris Carlin.

After a purposefully nondescript beginning which saw him take attendees through the clean, LinkedIn-friendly story of an advice star on the rise, Carlin paused.

Seemingly out of nowhere Carlin changed tact, and launched into a real, raw and powerful monologue detailing the realities of a “constant little voice” he has dealt with in his head since the age of nine.

A victim of childhood bullying, Carlin began to tell the story of a young person struggling to deal with mental illness.

He recalled the worst of his mental health journey came as a teenager, shocking the AFA crowd with a graphic retelling of suicidal thoughts he eventually overcame.

“I was carrying a lot of pain and anger for reasons I won’t go into today,” Carlin told the crowd.

“But I used to think to myself for hours upon hours upon hours on end about how stupid I was.

How useless I was. How pathetic I was. That small voice inside my head going ‘You’re a freak. You’re so useless. You have no friends. No one will care if you die’”.

As Carlin demonstrated to planners, business development managers and other advice sector folk before him, mental health journeys are life long, and they impact more than most people realise.

Lifeline, Australia’s 24-hour crisis support and suicide prevention service provider, takes a call every 32 seconds, receiving more than one million contacts each year from people in need.

As advisers struggle with a regulatory burden which has mounted for decades and the realisation that all they might have known is no longer true, remarkably they still manage to keep their eyes on the main task: the wellbeing of their clients and their portfolios.

Herein lies the problem. There’s only so much that on person can cope with before it becomes too much.

Anecdotally, the industry has heard of numerous tragic instances in which financial advisers have taken their own lives in recent

I feel responsible for the health and wellbeing certainly of our membership. I couldn’t live with myself if there were that many suicides including our members and we weren’t doing more.

Phil Kewin

years. However, there are currently no solid figures available to draw on.

According to Association of Financial Advisers chief executive Phil Kewin, at least two AFA members have taken their lives in the last two years.

“What I can’t say categorically is that that’s related to only what is going on in the industry,” he says, given the deeply personal nature of suicide.

Referencing speculation the number of financial advisers to have recently committed suicide was above 15, Kewin says he couldn’t live with himself if it were the case. Not able to verify the numbers, Kewin says he tried to address the number with AFA members during the United roadshow.

“We started the roadshow in Tasmania and I tried to address this and by the time we got to Western Australia I stopped talking about it,” Kewin tells Financial Standard.

“I tried to explain to people that the numbers are not proven. But it was coming across as I was discounting it. So in the end it wasn’t worth trying to explain to people.”

If the numbers are as high as have been suggested, Kewin says he feels responsible.

“If people say that there are that many suicides… I feel responsible for the health and wellbeing certainly of our membership. I couldn’t live with myself if there were that many suicides

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

including our members and we weren’t doing more,” he says.

“That’s the message I was trying to get across, but it doesn’t resonate so it’s not worth trying to argue with.

“Any suicide is one too many and all I can do is try to offer what services we can to ensure the members have the best support available to avoid that.”

By next year, the Financial Services Council and KPMG expect their world leading life insurance data project to drill into which occupations are responsible for the most claims. So far, the program has already revealed mental health is the top cause for total and permanent disability claims in the nation, accounting for almost 25% of all TPD claims made during 2018.

But while the statistics remain opaque for the moment, stories like Carlin’s provide clarity, and the AFA Rising Star’s openness and honesty about his mental health ensures he is able to lend a hand - and an ear - to those who need it.

Fellow advisers often come to him to share their stories of struggle, he says.

In one case, an adviser told Carlin that his kids “literally run away” from him in fear upon his return home from work. In another case, one adviser spoke of finding themselves at the bottom of two bottles of scotch very early one Wednesday morning.

Connect Financial Service Brokers chief executive Paul Tynan told Financial Standard he has heard similar tales over a career spanning more than 30 years, almost 25 of which were spent at AMP. According to Tynan, who in recent years turned his attention to helping advisers sell their practices and client books, counselling planners with anxiety and depression is a regular part of his job.

“It’s dire. I know the whole of society is dire at the moment but this industry’s been going through it for years and years,” Tynan said.

“I’ve dealt with mental illness for a long time, so I do know this area.”

Tynan says mental illness is still “one of those things” that people just don’t talk about.

“If they trust you, they talk to you about it.

But they’re not going to be running around the marketplace,” he says.

Tynan says advisers may not speak to their dealer group about the issues they’re facing, noting the personal nature of mental health.

“They’re battling to talk to their spouse for Christ’s sake,” he says.

Playing their part, the two biggest associations representing financial advisers - the Financial Planning Association of Australia and the Association of Financial Advisers - both offer members access to support, through their programs AFACare and FPA Wellbeing.

Launched in 2017, AFACare provides members with access to the Best By You program delivered by leading Employee Assistance Program provider Benestar. According to the AFA, the program provides “support and coaching to help people navigate through life”.

“It’s for times when you need support as well as when you are looking to be better than you already are,” the AFACare website says.

The FPA’s offering is also a Benestar program, and provides “personal, confidential support sessions with qualified counsellors or psychologists” over the phone, through Live Chat or face-to-face.

Life insurer TAL offers resources and tools through its risk academy to help improve advisers’ mental health, and the company’s head of mental health, Glenn Baird, has run face-to-face and

Adviser mental health | Featurette webinar sessions encouraging planners to take positive steps towards improving both their mental health and resilience.

Major dealer group IOOF offers a Benestar Employee Assistance Program to its staff, which is also available 24 hours a day, 365 days of the year.

In a September 2019 post to its website, IOOF said addressing the mental health issues of financial advisers and clients is “vitally important” to it.

“We will continue to monitor and enhance the ways we support advisers and their clients. It is core to our purpose; understand me, look after me, secure my future,” IOOF says.

The firm said it will introduce a “a more comprehensive program of mental wellbeing support” in 2020, including practical tools and resources.

“This program will be accessible to all advisers who are part of our licensed advice groups,” IOOF said.

However, usage of these programs among advisers is not always clear. The FPA did not respond to Financial Standard’s requests for figures detailing members’ use of its wellbeing program.

In a statement, FPA chief executive Dante De Gori acknowledged the pressure on financial planners.

“Like many Australians, financial planners have been adapting to the new normal of remote working. For some this will be a big change while others may have been operating digitally enabled practices for some time,” De Gori said.

“Based on the recent discussions we have had with our members, it is clear that they have been inundated with enquiries from new and existing clients in recent months. Financial planners have been extremely busy supporting not only their long-term clients but also providing assistance to the broader community, as many Australians find themselves in a financial situation they have never experienced before.”

De Gori pointed to the ongoing uncertainty around the FASEA education requirements - a result of the parliament’s failure to pass legislation which would have provided advisers with more time to pass the FASEA exam - as a key factor in the pressure on the sector.

“Given this increase in activity, financial planners are naturally under pressure at the moment. There is also fatigue around constant legislative and regulatory changes, particularly the FASEA extension bill, which is a critical piece of legislation that will relieve much of the pressure for financial planning professionals,” De Gori said.

“Financial planners must pass the FASEA exam by the end of this year or they will not be able to practice. Almost 7500 financial planners have already sat the exam. This leaves nearly 16,000 planners to fill just three more exam sittings before the deadline.

“We’re encouraging members to prioritise their wellbeing and reach out if they need more support to navigate the changes affecting all of us in different ways. Our FPA Wellbeing support program is one way to do that.”

Kewin said AFACare usage is “in the tens”, over the last 12 months including advisers, their staff and family members.

“They’re not in the hundreds,” Kewin says.

“We seem to get seasonality. We seem to get spikes in the beginning of the year.”

While the numbers are small, Kewin says the association saw usage spike around the end of the Royal Commission.

He says the program receives good feedback from advisers, and now sees Benestar’s counsellors and support agents more

The self-stigma remains strong.

If we can tackle that in the financial advice sector, then that is only going to benefit more people who are in need of support.

Glenn Baird

23

understanding of the advice sector’s specific circumstances, following adviser feedback.

“When we introduced AFACare in 2017, we didn’t have a budget for it,” Kewin says.

“I had experience in previous occupations with employee assistance programs, and I remember before I even joined the AFA being the angst and the anger and the desperation in comments around the life insurance debate.

“You could see this was impacting advisers, and having been in my own practice and knowing that at times it can be very, very lonely, you need to be able to provide your members at least something.

“Even though we didn’t have the budget for it, it was something we said we definitely needed to do.”

According to Kewin, part of the problem with the program’s relatively low use is awareness.

“That’s still part of the challenge, that a lot of our members are not aware of the service,” he says.

Still, Carlin is full of praise for the association.

“The AFA is doing great things, particularly with the AFACare program,” Carlin says.

But despite this, he is adamant the problem is that those within the sector still need to find their way past the barrier to discussing their mental health.

“And again, particularly for guys, we’re not good at that,” he points out.

“Financial advice being a male-dominated industry, I think that societal construct that we’ve got in the industry means that this conversation is more important than ever.

“I don’t think it is so much about where people can get help, it’s just about encouraging people to say it’s okay to get professional help.”

For Carlin, the issue of mental health in financial advice is less about licensees, associations, the media and others acting as a counsellor, but rather helping to broach the subject in the first place.

“I do believe that as this world gets more complex, it is the simple things that screw us up. So keep it simple. Start the conversations,” he says.

“If someone does need more support, they should seek that professional help. But they’re not going to get to professional help unless we start the conversation.”

TAL’s Baird agrees.

“While many financial advisers may be reluctant to reach out for help, it can be really helpful to connect with a counselling service and talk through some of the pressures and challenges financial advisers face,” he says.

“While the counsellors can’t change the stressors, they certainly can assist in giving advisers some guidance on how they can cope with the stressors.

“What many people would find is that seeking mental health support is more widely accepted and prevalent than we often think, but the selfstigma remains strong. If we can tackle that in the financial advice sector, then that is only going to benefit more people who are in need of support.”

During his roadshow presentation, Carlin outlined why mental health experiences should be shared more freely.

“When I hear the stories of the mental health, the breakdowns and the suicides in our industry, I firmly and passionately believe that we need to drop this facade, this professionalism bullshit that we put on, and start having real, raw, honest to god conversations about who we are, where we’re at, and what we’re going through,” he told the crowd.

“Can we all agree on that?”

To do so would mark a line in the sand; 2020 might not just be remembered for COVID-19, but as a moment in time where advisers began to finally look after themselves. fs

24

Between the lines

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

Pendal awards registry mandate

01: Will Davidson

chief executive Powerwrap

Kanika Sood

ASX-listed Pendal Group has picked a new unit registry provider for its $19 billion in funds under administration across its Australian funds.

Mainstream Group Holdings’ Australian business has entered a five-plus-five-year agreement with Pendal to provide the latter’s outsourced registry services following a tender process.

The mandate includes $19 billion in funds under administration as at March end and over 2800 investors, Mainstream said in company filings.

The agreement requires one years’notice of termination and will be renewed automatically after five years.

For Mainstream, the annual contracted fees from Pendal will be roughly 6% of its Australian revenue and 3% of group revenue.

Mainstream’s services to Pendal will include deploying automated workflow for email and paper transactions, online transacting, XPLAN reporting, Calastone network, banking automation and the newly-created quoted funds functionality.

The transition commences this month, with an expected completion date of March 2021.

“We are proud to support a client of the size and calibre of Pendal with our scale and experience in registry serviced,” Mainstream chief executive Martin Smith said.

“We have made significant investments in our registry services over the last three years and look forward to partnering with Pendal to drive automation and the investor experience.” fs

Powerwrap inks strategic partnership Harrison Worley

The quote

Alternative assets could be the solution for advisers searching for investment choices which will deliver their sophisticated clients higher returns despite the current environment.

P

owerwrap is now the global administration partner of a New York based alternative investments platform provider. The Australian platform provider has inked a deal to be administration partner of Qualis Capital.

The firm is new on the scene, and plans to roll out a menu of 50 real estate, private equity, private credit and hedge funds to investors. A further 50 funds are slated for inclusion on the platform within the next 12 months.

The deal sees Powerwrap locked in as the firm’s administration partner for a minimum of five years, and the platform said it expects to become the local distributor of Qualis’ funds.

Powerwrap chief executive Will Davidson01 lauded the deal, and said the insights and lessons learned would be applied to the platform, which currently manages around $1 billion in alternative assets.

Davidson said alternative assets could be the solution for advisers searching for investment choices which will deliver their sophisticated clients higher returns despite the current environment.

“Alternative assets can fit this brief, and Powerwrap, with more than $1 billion of investments in the class, is the leading Australian platform in the alternatives segment,” Davidson said.

The Powerwrap boss called the deal a natural fit for the platform, and said that by developing the Qualis Capital platform, the value of Powerwrap’s technology strategy was confirmed.

Separately, Powerwrap recently confirmed the hire of former Colonial First State head of wrap Sue Wallace as special projects lead.

Wallace joined the platform on a contract basis, after more than 15 years linked with CFS including as national account manager of Avanteos, and senior manager of custom products. fs

Rainmaker Mandate Top 20

Note: Latest investment mandate appointments

Appointed by

Asset consultant

Investment manager

Mandate type

AvSuper Fund

Frontier Advisors

WaveStone Capital Pty Ltd

Australian Equities

Care Super

JANA Investment Advisers

Coolabah Capital Institional Investments Pty Limited

Alternative Investments

Care Super

JANA Investment Advisers

Siguler Guff & Company, LP

Private Equity

Construction & Building Unions Superannuation

Frontier Advisors

GQG Partners (Australia) Pty Ltd

Emerging Markets Equities

312

Construction & Building Unions Superannuation

Frontier Advisors

Wellington Management Australia Pty Ltd

Other

208

Construction & Building Unions Superannuation

Frontier Advisors

Other

Global Equities

Hostplus Superannuation Fund

JANA Investment Advisers

Other

Australian Equities

158

Hostplus Superannuation Fund

JANA Investment Advisers

Other

International Equities

147

Hostplus Superannuation Fund

JANA Investment Advisers

Other

Alternative Investments

113

Hostplus Superannuation Fund

JANA Investment Advisers

Other

International Equities

60

Hostplus Superannuation Fund

JANA Investment Advisers

Kayne Anderson Capital Advisors, L.P.

Alternative Investments

25

Hostplus Superannuation Fund

JANA Investment Advisers

Other

International Private Equity

10

Hostplus Superannuation Fund

JANA Investment Advisers

Other

Australian Private Equity

9

Hostplus Superannuation Fund

JANA Investment Advisers

ROC Capital Pty Limited

International Private Equity

7

Maritime Super

JANA Investment Advisers; Quentin Ayers

Ardea Investment Management Pty Limited

Alternative Investments

Maritime Super

JANA Investment Advisers; Quentin Ayers

Other

Australian Equities

86

Mirae Asset Global Investments (Australia) Pty Ltd

Other

Australian Equities

446

MTAA Superannuation Fund

Whitehelm Capital

State Street Global Markets

Australian Equities

198

MTAA Superannuation Fund

Whitehelm Capital

State Street Global Markets

Currency Overlay

90

WA Local Government Superannuation Plan

Willis Towers Watson

Putnam Investments Australia Pty Limited

Fixed Interest

Amount ($m) 86 152 6

2

129

26 Source: Rainmaker Information

International

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

Trump blocks pension fund The Trump Administration has ordered a US federal employee retirement fund to scrap plans to invest in Chinese stocks.

In November 2017 the Federal Retirement Thrift Investment Board announced it would transition to a new benchmark index to invest a portion of its funds in emerging market equities, including China.

The index in question is the MSCI All Country World ex-US Investable Market index.

The Thrift Savings Plan was reportedly ordered to keep money out of Chinese equities in a letter sent

by National Economic Council chair Larry Kudlow and the president’s national security adviser Robert O’Brien to Labor Secretary Eugene Scalia.

On May 14, President Donald Trump confirmed to Fox Business News he had ordered the fund to pull back.

The administration claims such investments present national security and humanitarian concerns, strengthening China’s military operations and oppressing religious minorities in the region.

However, the board declined to reverse its decision and is expected to invest about US$4.5 billion in Chinese equities. It has already set up custodial accounts to channel the investments, according to the New York Times.

The board is comprised of five representatives, appointed by the president. After the board declined, Scalia reportedly reminded them they serve on expiring terms and the president has already nominated three replacements to the board.

Attempts to halt the plan have been ongoing since it was first announced, with lawmakers and former officials having previously spoken in opposition of the investment change. fs

01: ~ Daniel Grana

portfolio manager Janus Henderson

Emerging markets face varied COVID-19 outcomes Ally Selby

A The quote

Several countries with large domestic markets have achieved a level of wealth where consumption is becoming a greater contributor to growth.

Fidante adds to London office Kanika Sood

Challenger’s multi-boutique business has added to its London office’s institutional sales team.

Fidante Partners appointed Kerry Duffain to its institutional client solutions team in the London office.

Duffain was most recently the head of European distribution at East Lodge Capital Partners covering sales to European and Australian institutional investors.

In her new role, she will be tasked with Fidante’s European distribution and identifying new product opportunities for the market.

Her hire comes after Fidante promoted David Cubbin as the London-based head of distribution in January, from senior institutional business development manager. Duffain reports to Cubbin.

“Kerry will be an invaluable addition to the Fidante team. She has an extensive network within the UK and European institutional market and a reputation for creating long-lasting client relations and confidence,” Cubbin said.

“Her energy and drive will be a very welcome addition to our team as we grow our distribution footprint and seek to partner with talented investment managers looking for greater independence and alignment, in order to focus on what they do best – investing,” Cubbin said.

Fidante Partners FUM fell 11% to $56 billion according to its March quarter update. fs

25

lthough the COVID-19 pandemic has not discriminated in its destruction of both developed and emerging economies, Janus Henderson has warned investors to prepare for a dispersion of outcomes in the post-pandemic world.

The more advanced emerging economies are likely better equipped to weather the COVID-19 storm, while others may face near-term headwinds, portfolio manager Daniel Graña01 and assistant portfolio manager Matthew Culley said.

“Countries already on a tenuous economic footing are most vulnerable to the threats posed

by COVID-19,” they said.

“Brazil had been emerging from recession when confronted by this crisis. With demand for its commodities exports – chief among them, oil – slashed, efforts to maintain economic growth have been overwhelmed.”

Similarly, neither Indonesia nor India are well equipped to manage a surge in COVID-19 cases, Graña and Culley argued.

Vulnerable countries were also likely to experience poor currency performance, they said, with investors shunning risk assets during the COVID-19 crisis to short local currencies and hedge their holdings.

“This has placed acute pressure on EM countries dependent upon capital inflows to fund current account deficits as the risk of capital flight increased,” Graña and Culley said.

“This dynamic has aggravated the challenging environment brought on by the rare occurrence of simultaneous supply and demand shocks.”

In the post-pandemic world, emerging economies previously reliant on the benefits of glo-

balisation, must rely on new innovative sources to expand gross domestic product.

Initiatives to diversify supply chains will be accelerated on the other side of COVID-19, they argued, with companies establishing additional production inputs and outputs in varied suppliers and countries.

Asian countries have fared significantly better than their emerging market counterparts, they said, as they were on a faster track to recovering from the coronavirus.

“Several countries with large domestic markets have achieved a level of wealth where consumption is becoming a greater contributor to growth,” Graña and Culley said.

“Complementing this – and on display during the virus outbreak – is the growing role that technology plays in economic activity.

“China has been a leader in e-commerce and social media engagement, but we expect future innovation will emerge from more value-added intellectual property as the country further adopts cloud computing and artificial intelligence.”

The pandemic will be a catalyst for countries to invest in digital infrastructure in finance, industry and other sectors.

While countries struggle to battle the coronavirus, the portfolio managers warned debt could end up working in opposition to minority shareholders.

“Countries with large current account deficits and foreign-denominated debt may continue to be at risk of capital flight, especially as they reach the limits of monetary and fiscal policy aimed at supporting their economies during this unprecedented demand shock,” they said. fs

Trading platform glitch costs millions Jamie Williamson

A trading platform in the US has incurred millions in losses after its software was unable to cope with oil prices heading into negative territory.

Interactive Brokers was effectively broken on April 20 when oil pricing turned negative. The platform failed to display a subzero price throughout the day, which ended with oil at minus US$36.63 a barrel.

One particular day trader, Bloomberg reported, started the day with US$77,000 in his account. Trading in oil for the first time, he spent US$2400 on crude oil, paying US$3.30 a barrel and then US$0.50 a barrel.

When the price slipped further, he bought 212 futures contracts on West Texas Intermediate for a penny each, or US$0.01. What Interactive Brokers didn’t show was that crude was actually trading at minus US$3.70 a barrel at that time.

At midnight, the trader was informed he owed Interactive Traders US$9 million.

To make matters worse, it also exposed an issue Interactive Brokers had in regards to the margin required to ensure traders don’t lose more than they can afford.

For the 212 contracts the trader in questions purchased for one cent each, he was only required to have US$30 of margin in his account per contract.

While all investors were left hurting, no matter the platform they traded on, Interactive Brokers’ inability to display negative pricing meant that investors were also never blocked from trading.

In an interview with Bloomberg, Interactive Brokers chair and founder Thomas Peterffy said the fall in oil prices has exposed “bugs” in the firm’s software. The mistake is estimated to have cost the company US$113 million, he said.

The company later adjusted this to US$109 million, up from its first estimate of US$88 million.

Interactive Brokers will reimburse all customers who were locked in with a long position during the time the price was negative and resulted in losses below zero, he said. fs

26

Managed funds

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10 PERIOD ENDING – 31 MARCH 2020

Size 1 year 3 years 5 years

Size 1 year 3 years 5 years

Fund name

Fund name

Managed Funds

$m

% p.a. Rank

% p.a. Rank

% p.a. Rank

AUSTRALIAN EQUITIES

$m

% p.a. Rank

% p.a. Rank

% p.a. Rank

COMBINED PROPERTY

Australian Unity Platypus Aust Equities Hyperion Australian Growth Companies Fund

119

-2.4

3

9.4

1

7.9

2

Investa Commercial Property Fund

1,033

5.5

1

7.7

2

6.9

4

Australian Unity Diversified Property Fund

6,043

13.2

1

14.8

1

14.7

2

292

10.7

3

14.6

2

16.6

1

AB Managed Volatility Equities Fund

823

-2.4

4

6.1

3

6.9

5

Lend Lease Aust Prime Property Commercial

5,188

9.6

4

13.0

3

13.6

3

Bennelong Concentrated Aust Equities

692

-5.5

5

5.9

4

9.8

1

Lend Lease Aust Prime Property Industrial

1,094

13.1

2

12.6

4

11.9

5

Bennelong Australian Equities Fund

457

-7.9

8

5.9

5

5.9

6

DEXUS Property Fund

10,790

7.2

5

11.0

5

12.7

4

Alphinity Sustainable Share Fund

101

-10.3

18

4.7

6

4.6

11

Resolution Capital Global Prop Securities Fund (Unh)

315

-0.1

8

9.1

6

6.2

11

Greencape Broadcap Fund

562

-7.9

9

4.1

7

5.4

7

Quay Global Real Estate Fund

157

-4.9

10

8.5

7

6.8

9

Greencape High Conviction Fund

503

-8.4

12

4.0

8

4.5

12

Cromwell Direct Property Fund

368

6.7

6

8.0

8

9.0

7

Cooper Investors Endowment Fund

122

-10.2

15

3.6

9

3.9

21

ISPT Core Fund

15,682

0.9

7

7.4

9

9.9

6

42

-6.6

7

3.4

10

4.3

14

Dimensional Global Real Estate Trust

472

-8.7

11

5.0

10

4.3

12

-15.1

-0.8

1.9

Sector average

1,245

-20.0

-0.7

2.5

-14.4

-0.6

1.4

S&P ASX200 A-REIT Index

-31.7

-5.1

0.2

Aberdeen Standard Australian Equities Fund Sector average

430

S&P ASX 200 Accum Index

INTERNATIONAL EQUITIES

FIXED INTEREST

Zurich Concentrated Global Growth

22

Loftus Peak Global Disruption Fund

13.7

7

19.9

1

Ardea Australian Inflation Linked Bond Fund

587

11.8

2

6.9

1

4.0

34

83

16.4

3

19.6

2

Macquarie True Index Sovereign Bond Fund

332

10.1

9

6.8

2

4.7

12

571

18.8

1

18.4

3

Pendal Government Bond Fund

903

9.9

10

6.6

3

4.6

17

3,095

6.6

22

16.7

4

11.9

4

913

14.3

6

16.5

5

10.5

11

11,560

14.8

5

16.1

6

11.7

5

84

8.6

15

16.0

7

11.7

6

Intermede Global Equities Fund

116

16.8

2

15.6

8

11.5

7

AMP Capital Wholesale Australian Bond Fund

C WorldWide Global Equity Trust

343

14.8

4

15.5

9

10.9

8

CC JCB Active Bond Fund

22

12.5

9

15.4

BetaShares Global Sustainability Leaders ETF T. Rowe Price Global Equity Fund Apostle Dundas Global Equity Fund Magellan Global Fund Nikko AM Global Share Fund

Alphinity Global Equity Fund Sector average

10

Macquarie Inflation Linked Bond Fund

32

10.4

6

6.5

4

3.8

37

226

15.0

1

6.5

5

5.3

1

Nikko AM Australian Bond Fund

144

9.2

18

6.5

6

4.9

6

Macquarie Australian Fixed Interest Fund

203

9.3

16

6.4

7

5.0

3

1,075

9.5

14

6.4

8

4.9

7

634

10.3

7

6.3

1,692

9.3

17

6.3

Macquarie Enhanced Global Bond Fund

QIC Australian Fixed Interest Fund

9 10

4.7

666

3.3

10.0

8.0

Sector average

889

7.7

5.0

4.1

MSCI AC World ex AU Index

3.9

10.1

8.2

Bloomberg Ausbond Composite

9.1

5.7

4.3

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

9

Source: Rainmaker Information

Puppy scams, online gambling and day trading he Australian Consumer and CompetiT tion Commission has been hard at work warning Australians about puppy scams under

Dial tones

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

COVID-19.

Apparently $300,000 has been lost in puppy scams so far in 2020 as Australians seek little, cuddly companions to ease the loneliness of lockdown. In comparison, Australians lost a total of $360,000 in all of 2019 to the scams. The most popular breeds for the scammers (and I for one find this difficult to believe) are French bulldogs and Cavoodles.

Less cuddly, but more alarming, has been the increase in online gambling. According to credit bureau Illion, in conjunction with Accenture’s AlphaBeta, online gambling in the second week of May was up 114% compared with a “normal” week.

Although only one of these is illegal, they are both designed to part you and your money for no economic benefit.

The other thing that Australians have been doing at a greater rate than ever before is day trading.

To illustrate this, we turn to data released in the ASX Managed Products Monthly Report where we see that the traded value in the exchange traded product market skyrocketed in March, and continued to be elevated in April.

March, of course, proved to be the most vola-

tile month for financial markets since the start of the Great Depression.

Looking at the exchange traded product (ETP) market in Australia, we saw a massive spike in traded value, particularly in products that are geared to the sharemarket. Traded value is measured by the amount of trades in a particular product. If a product is purchased for $1, then the traded value is $1. If it is bought and sold the traded value is $2.

If it is bought, sold and another product bought the total traded value is $3, and so on.

In January this year the traded value of all ETPs on the Australian market was $5.1 billion, according the ASX Investment Products Monthly Report. That was off the back of net flows of $1.9 billion.

That figure rose to $7.2 billion in April and a record $17.8 billion in March, the most volatile month. To put it in perspective the total assets being managed at the end of March was $59.5 billion, meaning nearly one-third of dollars invested was turned over in a single month.

While the increase in puppy scams and online gambling was no doubt caused by people staying home as a result of the COVID-19 pandemic, the turnover in ETPs was more likely related to the volatility in the market, which was caused by the very same pandemic.

To illustrate just how high this volatility was, in March the S&P/ASX 200 Index had average

price changes of 4.3% per trading day. In comparison the average price change in January was 0.6%. That’s a sevenfold increase in volatility.

In April things were settling down somewhat with the traded value still at an elevated $9.3 billion and the average daily price change for the month being 1.7%.

With those daily price changes it was a very attractive market for day traders, particularly if they used geared products. The highest traded product in March was the BetaShares Australian Equity Strong Bear Fund, which is a leveraged bet that the price of Australian shares would fall. It’s not a large fund. At the end of March it had $366 million in assets under management. But with the leverage its average price changes would have been around 9% a day.

Its traded value for the month was $1.9 billion – 11% of the total for a fund with assets represented 0.6% of the total.

Of course, trading ETPs is only one way to trade the market (as opposed to strategic long term investing). The thing I’ve noticed is an uptick in the marketing of trading platforms on my social media for CFDs (Contracts for Difference).

Now I don’t know anything about short term trading and I suspect most of the people receiving this marketing don’t either.

Meanwhile, I have a Cavoodle to cuddle. It should be here any day now. fs

Super funds

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10 PERIOD ENDING – 31 MARCH 2020

Workplace Super Products

1 year % p.a. Rank

3 years

5 years

SS

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

MYSUPER / DEFAULT INVESTMENT OPTIONS

* SelectingSuper [SS] quality assessment

1 year % p.a. Rank

3 years

5 years

SS

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

PROPERTY INVESTMENT OPTIONS

State Super (NSW) SASS - Growth

2.2

1

5.9

1

5.3

5

-

Australian Ethical Super Employer - Balanced (accumulation)

0.9

2

5.6

2

4.8

15

AAA

smartMonday PRIME - Property Global Listed ($A hedged)

QSuper Accumulation - Lifetime Aspire 1

-0.2

5

5.5

3

5.7

1

AAA

First State Super Employer - Growth

-0.9

9

5.0

4

4.9

12

AustralianSuper - Balanced

-2.2

22

4.9

5

5.5

VicSuper FutureSaver - Growth (MySuper)

-0.4

6

4.9

6

Media Super - Balanced

-2.0

19

4.7

7

TASPLAN - OnTrack Build

-2.0

20

Mercy Super - MySuper Balanced

-2.5

ANZ Staff Super - Balanced Growth

-1.9

SelectingSuper MySuper/Default Option Index

-3.6

10.4

1

15.7

1

19.5

1

AAA

-22.5

28

8.3

2

-2.2

41

AAA

CareSuper - Direct Property

1.4

4

7.3

3

9.4

2

AAA

AAA

Telstra Super Corporate Plus - Property

0.6

5

7.0

4

9.0

3

AAA

2

AAA

Rest Super - Property

-0.8

6

6.6

5

8.1

4

AAA

4.7

18

AAA

Australian Catholic Super Employer - Property

2.5

2

6.5

6

6.2

10

AAA

5.1

8

AAA

Acumen - Property

-1.4

9

6.0

7

7.6

5

AAA

4.5

8

AAA

Intrust Core Super - Property

-9.0

18

5.2

8

7.1

6

AAA

25

4.5

9

5.0

9

AAA

Catholic Super - Property

-4.0

13

5.1

9

6.8

7

AAA

17

4.5

10

4.5

23

AAA

HOSTPLUS - Property

-4.8

15

5.0

10

6.7

8

AAA

SelectingSuper Property Index

-15.3

3.4

3.9

AUSTRALIAN EQUITIES INVESTMENT OPTIONS ESSSuper Beneficiary Account - Shares Only

27

Prime Super (Prime Division) - Property

0.2

2.6

FIXED INTEREST INVESTMENT OPTIONS

-5.0

1

4.3

1

4.1

1

AAA

Australian Catholic Super Employer - Bonds

6.1

2

5.2

1

3.9

2

AAA

UniSuper - Australian Shares

-11.3

6

2.6

2

2.5

6

AAA

UniSuper - Australian Bond

6.1

1

5.0

2

3.5

4

AAA

Intrust Core Super - Australian Shares

-11.3

5

0.9

3

3.1

2

AAA

GESB West State Super - Mix Your Plan Fixed Interest

5.3

4

4.8

3

3.7

3

-

Media Super - Australian Shares

-11.5

8

0.8

4

2.3

14

AAA

First State Super Employer - Australian Fixed Interest

5.7

3

4.7

4

3.4

5

AAA

AustralianSuper - Australian Shares

-12.2

18

0.8

5

2.6

5

AAA

Mine Super - Bonds

4.9

8

4.4

5

3.2

8

AAA

Virgin Money SED - Indexed Australian Shares

-11.2

4

0.7

6

AAA

AMG Corporate Super - AMG Australian Fixed Interest

4.3

12

4.2

6

3.0

13

AAA

Mine Super - Australian Shares

-12.6

30

0.7

7

2.3

11

AAA

AMP Flexible Super Emp - Super Easy Australian Fixed Interest

5.2

6

4.1

7

2.7

21

-

MTAA Super - Australian Shares

-12.6

31

0.6

8

2.4

10

AAA

Vision Super Saver - Diversified Bonds

5.3

5

4.1

8

3.2

9

AAA

StatewideSuper - Australian Shares

-13.5

47

0.6

9

3.0

3

AAA

Sunsuper Super Savings - Diversified Bonds Index

5.1

7

4.0

9

3.4

6

AAA

First State Super Employer - Australian Equities

-11.9

11

0.6

10

2.4

9

AAA

HOSTPLUS - Diversified Fixed Interest

4.0

14

3.9

10

4.6

1

AAA

SelectingSuper Australian Equities Index

-13.7

-0.7

1.2

INTERNATIONAL EQUITIES INVESTMENT OPTIONS Integra Super CD - OnePath Global Shares

SelectingSuper Australian Fixed Interest Index

1

11.1

1

9.0

1

-

AustralianSuper - International Shares

7.0

2

10.5

2

8.1

2

AAA

Intrust Core Super - Cash

First State Super Employer - International Equities

4.3

4

9.6

3

7.3

4

AAA

NGS Super - Cash & Term Deposits

Media Super - Passive International Shares

4.5

3

9.5

4

6.9

8

AAA

AMG Corporate Super - AMG Cash

Virgin Money SED - Indexed Overseas Shares

4.2

6

9.2

5

AAA

Mercer CS - Mercer Passive International Shares

3.6

9

8.6

6

6.9

7

Sunsuper Super Savings - International Shares Index (unhedged)

2.1

16

8.4

7

7.2

AMP Flexible Super Emp - Super Easy International Share

3.2

10

8.3

8

AMP SignatureSuper - International Share Index

3.1

11

8.3

FirstChoice Employer - Colonial First State Index Global Share

3.1

12

7.9

-3.5

5.0

3.2

3.7

AUSTRALIAN CASH INVESTMENT OPTIONS

7.9

SelectingSuper International Equities Index

2.1

3

1.8

1.6

1

1.8

1.5

2

1.7

1.4

7

1.7

4

Virgin Money SED - Cash Option

1.3

13

AAA

Sunsuper Super Savings - Cash

1.3

5

AAA

State Super (NSW) SASS - Cash

6.7

10

-

9

6.6

12

-

10

6.3

16

AAA

4.7

GESB West State Super - Cash

2.0

1

-

2

1.9

2

AAA

3

1.8

4

AAA

1.9

3

AAA

1.7

5

AAA

8

1.6

6

1.7

6

AAA

1.1

24

1.6

7

1.7

8

-

First State Super Employer - Cash

1.2

15

1.6

8

1.6

17

AAA

EISS Super - Cash

1.3

10

1.6

9

1.6

24

AAA

Media Super - Cash

1.4

4

1.5

10

1.6

14

AAA

SelectingSuper Cash Index

0.9

Notes: Investment options are sorted by their three year net performance results. All performance figures are net of maximum fees. * Indicates constitutionally protected superannuation funds and therefore untaxed. ^ represents interim results.

The 2020 ratings are in Are you working with AAA rated super funds?

For more information visit www.selectingsuper.com.au

1.5

1.3

1

1.4 Source: SelectingSuper www.selectingsuper.com.au

28

Economics

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

The US yield curve inversion of 2019 was right all along Ben Ong

“Flattening the curve”.

T

his is the overriding aim of governments and health officials everywhere when they implemented social distancing and lockdown measures.

Many have flattened their respective curves and are now gradually relaxing restrictions.

While unlocking lockdowns prematurely could prompt a resurgence in new infections, it couldn’t be denied that the earlier restrictions are lifted the sooner life and business returns to normal, the quicker economic growth rebounds from recession.

For sure and for certain, the freezing of economic activity around the planet has ensured a deep recession but I wonder if a recession would have been forestalled had the virus not escaped from a lab in Wuhan or jumped from a bat or pangolin into humans (take your pick).

That other curve – the yield curve (which presages a US recession) – rules (again), reinforcing its predictive power.

Back in August last year, I boldly went where only a few dared to go, predicting that a US recession was a sure thing because of the inverted US yield curve.

The Fed’s pause in early 2019 and three interest rate reductions later plus the “first phase deal” between the US and China turned the yield curve positive around October of that year and continued to steepen.

So much so that by the Fed’s December 2019 meeting, chair Jerome Powell was waxing optimistic: “Our economic outlook remains a favourable one despite global developments and ongo-

ing risks. With our decisions through the course of the past year, we believe that monetary policy is well positioned to serve the American people by supporting continued economic growth, a strong job market, and inflation near our symmetric 2% goal”.

Ergo: “The current stance of monetary policy will support sustained growth, a strong labor market, and inflation near our symmetric 2% objective.”

This optimism is consistent with the December 2019 dot plot of FOMC participants’ assessment of appropriate monetary policy where 13 of 17 foresee no change in interest rates in 2020 and the other four expecting a rate hike this year.

Financial markets appear to agree and this is consistent with the CME FedWatch Tool that shows majority of market participants expect no change in US interest rates in 2020.

All is well! US recession is averted!

But the inverted US yield curve is just like Pringles – once you pop, you can’t stop!

In August last year, I said the Fed could cut and cut and even initiate QE but the die had been cast.

The Fed’s percentage point rate reduction from 5.25% in 2006 to 4.25% in 2007 was unable to prevent the US recession from the December quarter of 2007 to the June quarter of 2009.

The turn in the US yield curve from negative to positive (in 1990, 2001 and 2008) and the corresponding reduction in the probability of a US recession (in 1990, 2001 and 2008) still produced a US recession.

The coronavirus pandemic has hastened and deepened the inevitable US recession signalled by the inverted yield curve nine months ago. fs

Monthly Indicators

Apr-20

Mar-20

Feb-20

Jan-20 Dec-19

Consumption Retail Sales (%m/m)

-

8.47

0.60

-0.41

Retail Sales (%y/y)

-

10.07

1.83

1.95

2.60

-48.48

-17.85

-8.22

-12.52

-3.76

Sales of New Motor Vehicles (%y/y)

-0.79

Employment Employed, Persons (Chg, 000’s, sa) Job Advertisements (%m/m, sa) Unemployment Rate (sa)

-

5.92

25.63

12.73

-53.12

-10.05

1.55

-3.41

28.37 0.70

-

5.23

5.09

5.29

5.07

Housing & Construction Dwellings approved, Tot, (%m/m, sa)

-

-1.16

-0.39

0.22

1.47

Dwellings approved, Private Sector, (%m/m, sa)

-

-3.98

19.38

-13.65

3.97

Housing Finance Commitments, Number (%m/m, sa) - Housing Finance Commitments, Value (%m/m, sa)

-

Survey Data Consumer Sentiment Index

75.64

91.94

95.52

93.38

95.10

AiG Manufacturing PMI Index

35.80

53.70

44.30

45.40

48.30

NAB Business Conditions Index

-34.09

-22.00

0.52

1.17

2.15

NAB Business Confidence Index

-45.65

-65.35

-2.12

1.07

-4.86

Trade Trade Balance (Mil. AUD)

-

10602.00

3865.00

5046.00

Exports (%y/y)

-

7.60

-8.19

-1.99

7.33

Imports (%y/y)

-

-8.59

-6.66

-2.25

5.63

Mar-20

Dec-19

Sep-19

Jun-19

Quarterly Indicators

5292.00

Mar-19

Balance of Payments Current Account Balance (Bil. AUD, sa)

-

0.96

6.50

4.58

-1.88

% of GDP

-

0.19

1.29

0.92

-0.38

Corporate Profits Company Gross Operating Profits (%q/q)

-

-3.45

-0.61

4.46

2.07

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

Wages Total Private Industries (%q/q, sa)

-

0.45

0.92

0.38

0.39

Wages Total Public Industries (%q/q, sa)

-

0.45

0.83

0.46

0.46

Inflation CPI (%y/y) headline

2.19

1.84

1.67

1.59

1.33

CPI (%y/y) trimmed mean

1.80

1.60

1.60

1.60

1.50

CPI (%y/y) weighted median

1.70

1.30

1.30

1.30

1.40

Output

News bites

BOE forecasts The Bank of England (BOE) predicts that the UK economy will experience its worst recession in 300 years. The British central bank expects GDP to drop by 3% in the first quarter of this year and by a whopping 25% in the second quarter before rebounding later this year but still leaving national output 14% lower by the end of 2020. The BOE also expects the unemployment rate to double from a near 45-year low of 4.0% (February 2020) to 8% by the end of this year, while at the same time acknowledging that the risks remain “skewed to the downside”. The BOE’s illustrative scenario forecast UK GDP to rebound by 15% in 2021 and the unemployment rate to decline slightly to 7%.

Australia job ads The social distancing measures and lockdowns

in almost all non-essential sectors of society – public and private – have hit the Australian labour market hard. The ANZ reported that total job advertisements dropped by 53.1% in the month of April – the most on record – following a 10.0% decline in the previous month. This translates to a 62.2% reduction in job ads compared with the same month in 2019 and portends rising unemployment and is consistent with earlier predictions that the jobless rate could rise to around 18%. The Morrison government’s JobSeeker payment scheme has since tempered expectations, with the RBA recently forecasting the unemployment rate to peak at 10% over the coming months.

US non-farm payrolls The US Bureau of Labour Statistics (BLS) non-farm payrolls report showed that the economy lost 20.5 million jobs in April. This was slightly better than market expectations for a total reduction of 21.0 million but is greater than the 870,000 workers (revised from the initial estimate of 701,000) handed their marching orders in March. The report showed widespread job-shedding, led by the leisure and hospitality sectors with around 7.7 million jobs lost.

Equally bad, the US unemployment rate soared to 14.7% in April – the highest level on record – from 4.4% in the previous month, notwithstanding the sharp decline in the participation rate from 62.7% in March to 60.2% in April. fs

Real GDP Growth (%q/q, sa)

-

0.53

0.55

0.60

Real GDP Growth (%y/y, sa)

-

2.19

1.82

1.62

0.50 1.75

Industrial Production (%q/q, sa)

-

1.53

0.48

1.37

0.39

Survey Data Private New Capex, Total, Chain, Vol, (%q/q, sa)

Financial Indicators

-

08-May

-2.79

-0.44

-0.93

-1.76

Mth ago 3 mths ago 1Yr Ago 3 Yrs ago

Interest rates RBA Cash Rate

0.25

0.25

0.75

1.50

1.50

Australian 10Y Government Bond Yield

0.89

0.91

1.05

1.74

2.68

Australian 10Y Corporate Bond Yield

2.07

2.26

1.82

2.59

3.26

Stockmarket All Ordinaries Index

5488.0

4.36%

-22.94%

-13.60%

-6.95%

S&P/ASX 300 Index

5359.9

3.83%

-23.17%

-13.85%

-7.80%

S&P/ASX 200 Index

5391.1

3.54%

-23.23%

-14.01%

-8.17%

S&P/ASX 100 Index

4446.4

2.96%

-23.64%

-13.98%

-8.83%

Small Ordinaries

2429.5

11.24%

-19.27%

-12.92%

1.91%

Exchange rates A$ trade weighted index

57.80

A$/US$

0.6541 0.6211 0.6689 0.7009 0.7387

54.70

58.10

60.50

64.50

A$/Euro

0.6016 0.5717 0.6100 0.6256 0.6757

A$/Yen

69.61 67.54 73.42 77.22 83.30

Commodity Prices S&P GSCI - commodity index

278.13

277.08

386.20

436.78

371.10

Iron ore

86.84

82.87

81.65

94.19

59.50

Gold WTI oil

1704.05 1647.80 1572.65 1285.20 1229.80 24.63

24.97

50.34

62.13

Source: Rainmaker /

46.46

Sector reviews

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

Australian equities

Figure 1: Australian CPI inflation measures

Figure 2: Employment & Job ads

5.0

5

4.5

ANNUAL CHANGE %

CPD Program Instructions 60

ANNUAL CHANGE %

4.0

Trimmed mean

3.5

Weighted median

ANNUAL CHANGE %

Employment

Headline

4

40

ANZ job ads (lagged 3 months) - RHS

20

3

3.0

0

2.5

2

RBA target band

-20

2.0

1

1.5 1.0

Prepared by: Rainmaker Information Source: Thompson Reuters /

-40

0

-60

0.5

-80

-1

0.0

2004

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

2006

2008

2010

2012

2014

2016

2018

2020

The outlook for Australia, according to COVID-19 Ben Ong

“A stronger economic recovery is possible if there is further substantial progress in containing the coronavirus in the near term and there is a faster return to normal economic activity. On the other hand, if the lifting of restrictions is delayed or the restrictions need to be reimposed or household and business confidence remains low, the outcomes would be even more challenging than those in the baseline scenario.” eserve Bank of Australia (RBA) governor R Philip Lowe’s May 5 statement puts into black and white the collective and individual thoughts of all (not most) central bankers and governments on the planet.

All depends on the success or failure in containing/finding a cure/preventing a second wave of COVID-19.

International equities

It better come soon. For even the RBA’s best guess (baseline) scenario is bad.

This included that: “Output falls by around 10% over the first half of 2020 and by around 6% over the year as a whole. This is followed by a bounce-back of 6% next year.” “…the unemployment rate peaks at around 10% over the coming months and is still above 7% at the end of next year.”

“In the March quarter just passed, CPI inflation rose to 2.2%, but it is expected to turn negative temporarily in the June quarter, due to falls in oil prices, the introduction of free child care and deferrals of various price increases. Further out, in the baseline scenario inflation is 1-1.5% in 2021 and gradually picks up further from there.”

The drop in the Commonwealth Bank Composite PMI for Australia to a record low of 21.7 in April from 39.4 in the previous month – as

Figure 1: Euro Stoxx-50 and VStoxx index 90

INDEX

Vstoxx

70

Stoxx-50 index - RHS

Australian equities CPD Questions 1–3

both manufacturing (down to 45.6) and services (down to 19.5) contracted at their fastest pace on record – gives credence to the RBA’s gloomy outlook on Australian economic growth.

The lead from the ANZ job ads series also supports its dim view of the labour market. Job ads in newspapers and on the web plummeted by 53.1% over the month of April and by 62.2% from a year earlier.

The outlook would have been worse had it not been for JobKeeker payments that limited the issuance of pink slips.

But even this isn’t good enough. Treasurer Josh Frydenberg estimates that the economy will lose A$4 billion for every week restrictions remain.

It’s a tough choice – economic recovery or risking a second wave (which endangers economic recovery)but one the government must make. fs

1500

5

2000

0

2500

-5

50

3000

-10

40

3500

-15

60

30

Prepared by: FSIU Sources: Factset Prepared by: Rainmaker Information Source:

4000

20 10 0

4500 5000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

-20

QUARTERLY CHANGE %

R

ecent indications – slowing rate of infections and deaths – that the Eurozone has passed the peak of its coronavirus pandemic – has member nations either planning or have already gently eased lockdown and social distancing restrictions, among them the single currency region’s biggest economies – Germany, France, Italy and Spain.

This relative optimism is reflected in the sharp drop in the VStoxx (Euro Stoxx 50 Volatility Index) – the eurozone’s version of the fear gauge – from a near-GFC high reading of 85.62 points on March 16 to 38.32 points as atMay 4.

This, in turn, has improved the Euro Stoxx-50 index’s performance. The benchmark index has rallied by 18.1% from this year’s low of 2,385.8 points recorded on March 18.

However, it remains 24.8% below where it was at the start of 2020 – underperforming its peers: the S&P 500 (-12.0%); the FTSE-100

1. What is the RBA’s fullyear 2020 GDP growth forecast? a) -10.0% b) -7.0% c) -6.0% d) +6.0% 2. At what level does the RBA expect the unemployment rate to peak? a) 7% b) 8% c) 9% d) 10% 3. Australian headline CPI inflation reached the RBA’s target band in the March quarter. a) True b) False

International equities CPD Questions 4–6

4 May 2020

-25 -30 NASDAQ

S&P 500

MSCI

MSCI

DEVELOPED EMERGING

DJIA

NIKKEI -225

ALL ORDS

FTSE -100

STOXX 50

Eurozone to get worse before it gets better Ben Ong

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].

Figure 2: Equity markets INDEX

80

29

(-23.7%); the Nikkei-225 (-16.8%) and even the All ordinaries index (-20.8%).

For good reasons. The rush to unlock could unleash a second wave of infections. Then again, even if this second wave doesn’t materialise the first has already caused so much damage.

Eurozone GDP contracted by 3.8% in the first quarter of 2020 (from a 0.1% expansion in the final quarter of 2018). This translates to an annualised rate of minus 14.4% and minus 3.3% year-on-year.

The drop in the flash estimate of the IHS/ Markit Eurozone composite PMI to an all-time low of 13.5 in April from 29.7 in March suggests that the second quarter is off to a bad start. Even worse, the region’s preliminary manufacturing PMI estimate for April had been downgraded from a reading of 33.6 points (the lowest in 134 months) to a final reading of 33.4 (the lowest on record). Government enforced shutdowns and social isolation measures and limited business

operations drove the service sector PMI down to a record low preliminary reading of 11.7, more than half the 26.4 recorded in the previous month.

Not surprisingly, as Factset reveals: “Commentators highlighted that while many governments in Europe have announced strategies to gradually ease lockdowns, no one is expecting economies to return to normal before Q1 2021 … headline focus has been on firms scrapping dividends, withdrawing FY guidance, tapping credit facilities and warning over the outlook.”

“For Q3, analyst expectations are now set for a 29.1% fall in EPS vs 27.6% a week ago. Further out, Q4 earnings expectations turned negative during the middle of the month and have quickly fallen to -8.8% y/y.”

Overlayed against all these is the ECB’s reluctance to do whatever it takes. At its April meeting, the ECB left its key policy settings on hold and did not expand QE. fs

4. Which Eurozone member country has recently shown slowing rates of coronavirus infections/deaths? a) Germany b) Italy c) Spain d) All of the above 5. Which indicator showed improvement in Eurozone economy in April? a) IHS/Markit Eurozone manufacturing PMI b) IHS/Markit Eurozone services PMI c) Both a and b d) Neither a nor b 6. The VStoxx index’s recent fall reflects the relative improvement in financial market sentiment in the Eurozone. a) True b) False

30

Sector reviews

Fixed interest CPD Questions 7–9

7. What was the BOJ’s policy decision at its April meeting? a) It removed the limit on purchases of 10-year JGBs b) It increased its purchases of commercial paper and corporate debt to ¥20 trillion c) It maintain its “Quantitative and Qualitative Easing (QQE) with Yield Curve Control” policy d) All of the above 8. What is the BOJ’s GDP growth forecast for FY2020? a) +0.8% to +1.1% b) +0.8% to +0.9% c) -0.4% to – 0.1% d) -5.0% to -3.0% 9. The BOJ expects consumer prices to be in deflation in FY2020. a) True b) False Alternatives CPD Questions 10–12

10. Which equity market remains lower this year to date? a) Developed equity markets b) Emerging equity markets c) Both a and b d) Neither a nor b 11. In its April World Economic Outlook report, what is the IMF’s 2020 growth forecast for the emerging market and developing economy group? a) -1.0% b) +1.0% c) +3.7% d) +4.4% 12. Emerging market currencies remain weak. a) True b) False

Go to our website to

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All answers can be submitted to our website.

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

Fixed interest

Figure 1: Japanese real GDP growth

Figure 2: Japanese inflation

12

4 PERCENT

ANNUAL RATE %

8

3

4

2

0

1

-4

0

-8

-1 Headline inflation

Annualised quarterly growth rate

Prepared by: Rainmaker Information Prepared by: FSIU Source: Trading Economics Sources: Factset

-12

-2

Quarterly Annual

-16

Core-core inflation (ex food and energy) Core inflation (ex-food)

-3

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Expanded Enhancement of Monetary Easing: Bank of Japan Ben Ong

T

he Bank of Japan (BOJ) added another monetary policy term to our vocabulary at its March 2020 meeting – “Enhancement of Monetary Easing.”

It had the same label for its expanded policy initiative at its April meeting. Perhaps, the BOJ should have called it “Expanded Enhancement of Monetary Easing”.

Most notable, the new programme removed the limit on purchases of 10-year JGBs to keep its yield at 0%; it increased its purchases of commercial paper and corporate debt to ¥20 trillion (from ¥3.2 trillion and ¥4.2 trillion, respectively); it will continue purchases of ETFs and J-REITS; and maintain its “Quantitative and Qualitative Easing (QQE) with Yield Curve Control”.

This follows Prime Minister Shinzo Abe’s announcement in early April “to carry out an

Alternatives

Prepared by: Rainmaker Information Prepared by: FSIU Source: Sources: Factset

unprecedentedly massive scale of economic package worth ¥108 trillion, or 20% of GDP, following the immense damage to the economy from the novel coronavirus…”

The BOJ’s revised GDP and inflation projections explain why both fiscal and monetary are pulling out all the stops.

The BOJ also downgraded GDP growth to -0.4 to -0.1% in FY2019 (from +0.8% to 0.9% predicted only in January – before the coronavirus turned into a pandemic) and by -5.0% to -3.0% in FY2020 (from +0.8% to 1.1%).

While the BOJ largely maintained its CPI inflation forecast at +0.6% in FY2019 (from +0.6% to +0.7% in January), it now sees inflation at around -0.7% to -0.3% in FY2020 (a sharp turnaround from the +1.0% to +1.1% rate projected only three months earlier).

Bad as it may seem, these downgrades could

Figure 1: MSCI Developed vs Emerging Market Equities 105

still be downgraded “depending on the timing of the spread of COVID-19 subsiding and on the magnitude of the impact on domestic and overseas economies”.

This is also because the forecasts are “based mainly on the assumption that, while the impact of the spread of COVID-19 remains, firms’ and households’ medium- to long-term growth expectations will not decline substantially and the smooth functioning of financial intermediation will be ensured with financial system stability being maintained…”

It’s hoping for the best but is prepared for the worst…

“With regard to the risk balance, risks to both economic activity and prices are skewed to the downside, mainly due to the impact of COVID-19...” …and formulating another label for its next policy initiative. fs

Figure 2: Emerging Market equities & currencies

INDEX (JAN 2020 = 100)

67000

100

JP MORGAN INDEX

61000

90

58000

85

55000

80

MSCI Developed

52000

75

MSCI Emerging

49000

70

46000

65

43000 FEB20

MAR20

APR20

MAY20

JAN 17 MAY 17 SEP 17

97 96

64000

95

JAN20

MSCI INDEX

95 94 93 92 91 90

MSCI emerging equity market index JP Morgan emerging market currencies index - LHS

89 88

JAN 18 MAY 18 SEP 18

JAN 19 MAY 19 SEP 19

JAN 20 MAY 20

Are emerging markets emerging?

Ben Ong

W

e’re all in this together.

Just as the coronavirus doesn’t distinguish between race, colour, creed or political affiliations, responses by governments – rich or poor –had been the same all over the world (well, almost except notably Sweden), restrictions on social interaction, business lockdowns, and those that could, working from home.

Frozen economic activity – either forced upon is citizens by governments or loss of employment or fear of contracting the disease or all of the above – have sent both developed and emerging equity markets into freefall. Developed equity markets are down 11.6% this year to date, emerging ones have lost 12.8%.

This is to be expected. The world is in this together.

What a difference three months make. At the start of the year, in its ‘World Economic Outlook’ (WEO) report, the IMF’s (International

Monetary Fund) crystal ball predicted that “emerging market and developing economy group, growth is expected to increase to 4.4 percent in 2020 and 4.6% in 2021” – an improvement from the 3.7% growth rate for 2019.

This becomes even more convincing given the three interest rate cuts implemented by the Fed in July, September and October 2019.

Until the coronavirus became a pandemic, that is. In its April WEO update, the IMF declared that, “Among emerging market and developing economies, all countries face a health crisis, severe external demand shock, dramatic tightening in global financial conditions, and a plunge in commodity prices, which will have a severe impact on economic activity in commodity exporters. Overall, the group of emerging market and developing economies is projected to contract by -1% in 2020…”

This is a 5.4% downgrade from its January 2020 projections. But if you think this is bad,

the IMF sees economic growth dropping by much more in developed economies – it slashed its 2020 GDP growth forecast by 7.7% and now predicts economic growth in advanced economies contracting by 6.1% (from growth of 1.6% forecast in January 2020).

This provides a strong case to overweight emerging equity markets versus developed ones. They have lesser cases of infection and are unlocking lockdown restrictions (notably, China) earlier than their developed country counterparts.

The again, emerging market currencies remain under pressure against the US dollar and this will persist for as long as financial markets remain volatile.

The depreciation in emerging market currencies would compound emerging market debt that’s ballooning as their respective governments try to mitigate the economic fallout from the pandemic. fs

Sector reviews

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

31

Property

Property

CPD Questions 13–15

Prepared by: Rainmaker Information Source: NAB

he latest NAB Commercial Property Index T – a measure of commercial property market sentiment – fell eight points to be flat at a below average zero in the March quarter.

While COVID-19 may have played a small role in the fall, it wasn’t totally due to the pandemic, with the survey carried out between February 25 and March 23.

CBD hotels were hit the hardest, down 55 to -38. Sentiment around industrial, offices and retail only fell modestly over the quarter, however may have fallen further since.

“Travel restrictions and quarantine measures appear to have impacted this market immediately, with the survey estimating hotel occupancy rates plunged to 68% in the March quarter, from 83% in the previous quarter,” NAB chief economist Alan Oster said.

The hit to commercial property markets from COVID-19 overall has so far been relatively muted, NAB said. The 12-month measure dropped by four to +9 and the two-year measure dropped by one to +17.

Oster said if broader economic sentiments as

Commercial property market sentiment takes hit Jamie Williamson

a result of COVID-19 are sustained, it will feed into the commercial property sector and impact future confidence.

Average capital growth expectations for the coming year also moderated across office and industrial but remain positive, whereas retail property values are expected to fall going forward in all states. Strangely, despite the surge in people working from home and shutdowns of many non-essential businesses, rental expectations for offices and industrials were unchanged.

The outlook remains strongest for industrial property, NAB said.

National office vacancy rates are expected to hold steady at 8% over the next two years, NAB said. But retail vacancies have climbed to a high of 6.9%, with Victoria the only state to hold steady over the quarter, and greater falls are expected nationwide over the coming 12 months due to COVID-19.

Strangely, property professionals in NSW were the most optimistic they’ve been in two years (+30), particularly around retail property – up 13 points. This makes NSW the most con-

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fident state when it comes to the outlook for the retail sector, while Victoria is most confident in terms of offices and Queensland when it comes to industrial property.

“As it becomes increasingly clear that efforts to contain the coronavirus are having a very sharp impact on the economy, the true impact on commercial property capital values, rents and vacancy will depend on how long the virus takes to get under control, the extent of the containment measures and the timing of the phasing back to normal,” Oster said.

Property developers have also pushed out timelines for starting new work, which suggests uncertainty over the outlook for construction, he added.

About 320 property professionals participated in NAB’s Q1 2020 survey.

NAB’s survey from Q4 2019 showed the index increased by five points to an above average +8.

At the time, Oster said it was underpinned by a rebound in the CBD hotel sector following a glut of new supply. fs

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14. Which of the following reflects NAB’s findings? a) Hotel occupancy rates have remained steady during the pandemic b) Falls in the commercial property market are not totally due to COVID-19 c) The outlook remains weak for industrial property d) Retail property values are expected to remain steady this year 15. According to NAB’s survey, the outlook remains strongest for industrial property. a) True b) False

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13. Economist Alan Oster forecasts which of the following? a) Rental expectations for offices are significantly negative b) Quarantine measures are unlikely to impact the commercial property market c) The pandemic’s true impact on commercial property is yet to be seen d) Rental expectations for industrial property are very low

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Profile

www.financialstandard.com.au 25 May 2020 | Volume 18 Number 10

A TALE OF TENACITY Michelle Lopez is about to cap off her first year as the head of Australian equities at Aberdeen Standard Investments. She shares with Kanika Sood the journey that got her there and the challenges facing women in funds management.

hen 2018 ended, Michelle Lopez had no W idea that six months later she would be promoted to Aberdeen Standard Investments’ head of Australian equities, a role overseeing $1 billion in investments for the global funds management giant.

However, there were signs and a clear succession plan.

Prior to the job offer, the company had sent her to an INSEAD leadership program in France and London and then head of the Aussie equities team Robert Penaloza had been introducing her to the research houses that rated its funds as his deputy.

For her part, Lopez had been tallying up knowledge of areas likes fund pricing, trading compliance and marketing - outside of her main passion for picking stocks.

“It was a clear, deliberate succession plan.

The INSEAD program was really the start of thinking about who will be the next person whenever the situation arose,” she says.

Lopez was born to a Spanish couple who immigrated to Australia. She grew up in a strict catholic household and attended public schools while living in Sydney’s West Ryde.

The family was entrepreneurial in spirit, with Lopez’s father owning a string of businesses.

This, Lopez says, gave her a sense of hard work.

“You know, I saw my parents build something and that was a greatl foundation for me, and it was also an instigator of learning, growth and that natural curiosity,” she says.

“One of the things my dad used to say is reputation carries through roles and positions. Always act with integrity.”

For her university education, she picked a double degree in law and applied finance, drawing from her interest in math and physics at school.

However, she soon realised law wasn’t for her and instead graduated with a double degree in applied finance and a bachelor’s of commerce with a major in marketing. She would later complete a CFA qualification in her early years working at Aberdeen.

Coming out of university, she knew a little about the banking and corporate finance world but almost nothing of funds management.

The latter came in the form of a job at Watson Wyatt, now Willis Towers Watson, where she researched investment funds and strategies for the firm’s institutional clients.

“I was doing all the quarterly statements, analysis, reviews of funds and very quickly realised I actually wanted to be on the other side of that table as an analyst and eventually as a portfolio manager,” she says.

The opportunity to switch presented itself as a job advertisement in the Australian Financial Review. Aberdeen was hiring graduate analysts and Lopez decided to take a pay cut and handed in her resignation at Watson Wyatt within about six months of joining.

Aberdeen in 2004 was a different world. It was yet to go through the mergers and acquisitions, the team was about a third of what it is now, and the current managing director Brett Jollie was one of the many distribution staff.

Its Australian business focused on fixed income funds, while the international equities business was tilted towards emerging markets.

“It was still a big organisation but there was a very local feel and a huge amount of autonomy,” she says.

Lopez’s initiation into the business came with a shock. Within six months for her joining, the majority of the equities team quit in rapid succession for family reasons.

The development forced Aberdeen to lean on its Singapore-based equities team and build out its local team which included Natalie Tam, who is still on the team as an investment director.

“My current boss [head of Asia ex Japan equities] Flavia Cheong took me under her wing a little bit. And we quickly built out our team here,” Lopez says.

“So that was my start to ASI, and I think with hindsight that really strange initiation into the organisation was a blessing in disguise.

It allowed me to learn about all aspects of funds management.”

Over the next 17 years, Lopez would rise from graduate analyst to an investment manager, then investment director, and finally in January last year to deputy of the Australian equities team, as Penaloza decided to move to Aberdeen’s Thai office.

She says the business’ willingness to invest in its employees, the diversity of its leadership, a strong investment process and her love of investing is what has kept her there.

Her promotion has so far proved fruitful, with all of ASI’s Australian funds beating the benchmarks on a three and five-year basis.

In the next six months, she will announce her own deputy, but for right now Lopez can only share the three qualities looked for in that person.

“Firstly is support of the broader strategy and the team. I didn’t want an individual player that was most concerned about their own output,” she says.

“Second one is, someone who was respected for the ‘investor’ that they are. So if someone comes into this role and they don’t have the respect of the table, you will have people leaving within months.

“Third is, a person who comes to our investment meetings and draws the best out of positions. I wanted to make sure they were drawing information out of individuals that made the investment case a better one.”

On why so few women hold leadership roles in funds management, she points to a lack of flexible working arrangements.

“And this is where it gets a bit contentious, funds management is a very demanding job. And to do it well and to have that long tenure, you do need to make sacrifices and tradeoffs with regards to family life,” she says.

“I can’t be the mother that does [school] pickups and drop-offs every day or cook every meal.”

One of the things my dad used to say is that reputation carries through roles and positions. Always act with integrity.

Michelle Lopez

Drawing on her own experience in an equitable workplace, Lopez is a strong advocate for greater inclusion in funds management, through her directorship at Aberdeen where she is part of the investment diversity team, the company’s graduate programs, FINSIA initiatives and university trading competitions.

She also hopes that the COVID-19 enforced work-from-home arrangements will nudge management teams towards allowing more flexibility, in what could keep more women in leadership positions in funds management.

For Lopez, her success is due in large part to her investment prowess, but also comes down to the firm’s culture, which has supported many non-caucasian or non-male leaders in rising through its ranks.

She says she has come to realise that it is ultimately about what you say, not who you are or what you look like, that matters.

“Maybe I am lucky because I hear a lot of stuff that happens in our industry. Maybe I am naive but I’ve never, to this point, felt like a victim from that perspective,” Lopez says.

She also doesn’t hold back in voicing her opinion or disagreeing if she knows where she’s coming from and it’s not emotionally geared, she adds.

“And I actually encourage the others around me [to do this] as well because it leads to better decision making. If you want to talk about diversity…there’s a lot of companies that honestly, pay lip service,” she says. fs

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