Money Management | Vol. 35 No 2 | February 25, 2021

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

www.moneymanagement.com.au

Vol. 35 No 1 | February 25, 2021

LIFE INSURANCE

Industry in the spotlight

18

EQUITIES

22

The selling mentality

RETIREMENT

EMERGING MARKETS

Recovering from COVID-19

Count secures Godfrey Pembroke and IOOF firms

BY MIKE TAYLOR

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How COVID-19 has changed thinking about retirement ONE of the good things that came out of the pandemic was certainly the fact it had brought thinking and planning for retirement to the fore for many, in particular the younger generations, experts agreed.

However, the volatile market conditions have also confronted many retirees with the necessity of taking on more risk. Given the overall complexity of the Australian superannuation system, advisers will now have a crucial role when it comes to determining what level of risk their clients would feel comfortable with in retirement versus what amount of funds they would need to lock away in order to provide a sufficient level of comfort for their clients.

According to Allianz Retire Plus chief executive, Matt Rady, in a low interest rate environment a naturally risk-averse group of retirees would also be faced with the tough choice of either accepting the lower income or increasing their exposure to riskier investment asset classes. And helping people overcome the longevity risk would lead to a broader range of solutions and products which would also accommodate the diverse needs of those who have already reached retirement.

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Full feature on page 14

24

COUNT Financial has again emerged as a factor in the migration of MLC advisers to IOOF and the retention of advisers working under IOOF licenses.

Count Financial has picked up three new firms which previously worked under MLC and IOOF licenses, including Godfrey Pembroke.

The firms are Sydney-based Plan Protect and YS Financial Planning as well as Financial Stability from Melbourne.

Competition to attract IOOF and MLC Wealth firms has been strong since IOOF announced its acquisition of the MLC Wealth business in the middle of last year.

Plan Protect operated under the Godfrey Pembroke license and is the third Godfrey Pembroke

aligned firm to joint Count Financial with Ascent Private Wealth and Venture Financial Advisers having joined Count late last year.

Both Financial Stability and YS Financial Planning were previously part of the IOOF network.

Plan Protect principal, Janne Ashton, has been part of the firm since its inception and acknowledged that changing licensees represented a significant move and that she had actually shortlisted 10 differed licensees.

Of the other two firms – Financial Stability and YS Financial Planning – Financial Stability is led by Sonia Turkovic, who has over 30 years’ experience in financial planning, and has featured strongly on Continued on page 3

Govt uses super legislation to impose portfolio holdings changes IN what represents a hook in the Government’s Your Future Your Super legislation, it has quietly moved to impose portfolio holdings requirements on superannuation funds.

The legislation effectively removes the exemption which allows superannuation fund trustees to choose not to disclose up to 5% of their superannuation holdings.

The specific section of the bill is headed “Application of amendment relating to portfolio holdings disclosure” and states that “the amendment of section 1017BB made by Schedule 3 to the Treasury Laws Amendment (Your Future, Your Super) Act 2021 applies in relation to the reporting day that is 31 December, 2021, and to later reporting days.

The explanatory memorandum to the Bill notes that it “includes amendments to the portfolio holdings disclosure rules, which generally require trustees to publish information about their disclosable Continued on page 3

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February 25, 2021 Money Management | 3

News

Industry funds rail against Government ‘kill switch’

Expect Australia to outperform the US this year

BY MIKE TAYLOR

BY LAURA DEW

INDUSTRY superannuation funds are accusing the Government of unprecedented legislative over reach within its Your Future Your Super legislation particularly around powers to ban superannuation fund investment and expenditure decisions.

Both Industry Super Australia (ISA) and the Australian Institute of Superannuation Trustees have signalled they will be pushing for the legislation to be reviewed by a Senate Committee.

Australian Institute of Superannuation Trustees (AIST) chief executive, Eva Scheerlinck said that while her organisation supported the intent of the legislation it stopped well short of addressing under-performance across the superannuation sector.

What is more, she said that the legislation lacked important detail around the power of the Government to ban any super fund or investment or expenditure regardless of whether it was in members’ best interests.

“This is an extraordinary over reach of power with no precedent in this country,” Scheerlinck said. “The change removes the certainty needed for long-term investing and risks significant impact on investment outcomes for members.”

For its part, the ISA described the Government’s proposed new powers as “regulatory kill switch” which was unnecessary and an ideological over reach.

“Reports today suggest extreme

AUSTRALIAN shares could outperform the US this year as the country recovers from the pandemic despite not having such a strong economic rebound.

The S&P 500 returned 7.8% in 2020, helped by the success of technology stocks which dominate the index and had outperformed in the pandemic, while the ASX 200 returned 1.4%.

In an AMP webinar, senior economist Diana Mousina, said: “The US will do well this year, it could see growth in the ballpark of 7%-8% but the global economy is rebounding. Non-US markets underperformed last year but now global growth is improving, they have the opportunity to outperform this year given they didn’t have a such a strong rebound”.

While she said Australian shares would likely manage to outperform the US this year, the travel restrictions would continue to have an economic impact due to Australia’s heavy reliance on tourism as well as international students.

“Australian GDP [gross domestic product] is pretty solid but the problem will be that Australia relies on migration to drive GDP. It lost a big chunk of demand from COVID so there will be this big chunk of the economy that you can’t get back again until you see the population rebound.

“GDP is unlikely to reach pre-COVID levels until then.”

Unemployment, she said, was likely to be 6% by the end of the year, only a slight increase from the 5% it was expected to have been pre-pandemic, and 90% of jobs had already been regained.

Meanwhile, while the US was expected to see growth of 7% to 8% supported by stimulus packages and vaccine deployment, the undivided Congress and White House, which were now both Democratic, was unlikely to be positive for the stockmarket.

elements of the Coalition party room will try and use this power to ban fund ESG [environmental, social, and governance] investment or vital investments in affordable housing. An added regulation making power is equally concerning, it appears it would allow the minister to dictate what is in members’ best financial interest giving politicians unfettered control over workers’ super.”

However, the ISA’s own approach calls for legislative changes which would force the closure of underperforming funds.

Count secures Godfrey Govt uses super legislation Pembroke and IOOF firms to impose portfolio holdings changes Continued from page 1 radio and in print articles across Melbourne media during her career, while YS Financial Planning is headed

by Yasu Kuramochi who established the business in 2015.

Commenting on the moves by the three firms, Count Financial chief advice officer, Andrew Kennedy said the business had been targeting quality advice firms to join its network.

He said the appointment of Plan Protect represented a significant couple for Count.

With respect to Financial Stability and YS Financial Planning, Kennedy said that Turkovic and Kuramochi were quality financial advisers who would bring experience and expertise to the Count network while being a great cultural fit for the Count Financial community.

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Continued from page 1 investment items on their website. The portfolio holdings disclosure rules currently contain an exemption that allows trustees to choose not to disclose up to 5% of superannuation holdings”.

The Treasurer, Josh Frydenberg and the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, in announcing the introduction of the bill to the Parliament, made reference to the portfolio holdings requirement changes under the heading of “Increasing

transparency and accountability”.

Their statement said: “The Government will increase trustee accountability by strengthening their obligations to ensure trustees only act in the best financial interests of members.

“The Government will also require superannuation funds to provide better information regarding how they manage and spend members’ money in advance of Annual Members’ Meetings and disclose all of their portfolio holdings to members”.

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4 | Money Management February 25, 2021

Editorial

mike.taylor@moneymanagement.com.au

GOVT NEEDS TO DESTRESS LICENSEE BALANCE SHEETS If the Government wants the industry to pay for a compensation scheme of last resort then it needs to review and remove many other regulatory costs, starting with professional indemnity insurance.

COUNTPLUS chief executive, Matthew Rowe, did not particularly endear himself to his fellow licensee heads when he earlier this month published an analysis of the profitability of the major dealer groups and provided it to financial advisers working under the CountPlus and Count Financial mastheads.

Given the level of competition between licensees to attract both individual advisers and advice practices, it is hardly surprising that Rowe’s efforts were less than welcomed by some of his competitors, and understandably so.

The top line analysis provided

by Rowe was that, looking at Australia’s Top 50 licensees, “almost all lose money or at best report low profitability” and that “not one is achieving an adequate risk-weighted return on capital”.

“It is obvious that without product subsidies most would not exist,” Rowe’s message to advisers said. “Three are many fragile balance sheets that may not stand up to the challenges inherent in adapting to a required shift in the economic model demanded by the new world of financial advice.”

While these words from Rowe gained plenty of attention, what should have also warranted attention was his analysis that obtaining professional indemnity (PI) insurance is becoming increasingly

difficult and that stretched balance sheets might make it difficult for them to meet any claims resulting from complaints to the Australian Financial Complaints Authority (AFCA).

As the Government more closely considers the implementation of a compensation scheme of last resort as recommended by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry it should also reflect upon Rowe’s analysis and consider both the relevance and sustainability of the PI insurance regime.

As every adviser and as advice firm well knows, licensees are required by regulation to hold professional indemnity insurance and as every licensee wells knows the cost of obtaining that PI cover has risen year after year as fewer and fewer insurers have opted to operate in the market.

What licensees also know is that even when PI cover is obtained it will not necessarily serve to meet their needs – something which is sometimes reflected in the “unpaid determinations” column of the Australian Financial Complaints Authority (AFCA) and its predecessor, the Financial Ombudsman Service (FOS).

While AFCA does not regularly detail the size of the firms responsible for unpaid determinations, the FOS has

previously disclosed that, for the most part, they are smaller operators and that many determinations remained unpaid because the responsible entity simply ceased trading.

The ability of the big banks and major institutions to compensate clients was never at issue. It was always a cohort of the smaller firms which proved problematic.

The bottom line in 2021 is that the PI insurance regime is not working as originally intended and that it is inevitable that the financial advice industry will be asked to pay its share of the cost of a compensation scheme of last resort. It is arguable that the advice industry should not be asked to do both.

If the Government is going to pursue an industry-funded compensation scheme of last resort then it should undertake a thorough review of the PI Insurance regime to determine whether it remains fit for purpose.

Rowe is right. The balance sheets of many financial planning licensees are stretched. A starting point for removing some of that balance sheet stress will be scaling back the regulatory expense before imposing something as inherently costly as a compensation scheme of last resort.

Mike Taylor Managing Editor

FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000 Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com.au News Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au Senior Journalist: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au Journalist: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au Events Executive: Candace Qi Tel: 0439 355 561 candace.qi@fefundinfo.com ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Amy Barnett Tel: 0438 879 685 amy.barnett@moneymanagement.com.au Account Manager: Damien Quinn Tel: 0416 428 190 damien.quinn@moneymanagement.com.au PRODUCTION Graphic Design: Henry Blazhevskyi

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16/02/2021 3:34:21 PM

February 25, 2021 Money Management | 5

News

Should wholesale advice clients be treated differently under PI?

BY MIKE TAYLOR

ANY introduction of a compensation scheme of last resort should generate a thorough review of the professional indemnity (PI) insurance requirements imposed on financial planning licensees, including defining different treatment for retail and wholesale advice clients.

Suggestions of a thorough revision of the PI regime have come amid recent concerns expressed by CountPlus chief executive, Matthew Rowe, about the cost and availability of PI insurance and his statement that he is “growing increasingly concerned, from an industry perspective, of the growing level of ‘junk’ PI insurance finding its way into the market”.

Former dealer group head, Paul HardingDavis, said that the answer might lie in actually separating wholesale and retail clients, in circumstances where wholesale clients arguably should not qualify for access to a compensation scheme of last resort.

“If you look at the level of wealth and knowledge expected of a wholesale client then it is arguable that they should not have access to a last resort compensation scheme or to the Australian Financial Complaints Authority (AFCA),” he said.

“It makes sense that wholesale clients can afford to utilise the courts system and that their financial advisers can, in turn, utilise the PI regime to deal with any remediation,”

Harding-Davis said.

His comments come against the background of historic Financial Ombudsman Service (FOS) data suggesting that most unpaid determinations were owed by smaller licensees rather than the larger players.

In a recent analysis of the situation facing licensees, CountPlus’s Rowe referred to a “hardening in the PI market” and the need for annual rigorous renewal processes including face to face interviews with major underwriters in London.

“In every renewal with underwriters, we are reminded of the need for technology-enabled,

Scaled financial advice not in best interests for life/risk: Synchron

BY CHRIS DASTOOR

SCALED advice may not effectively work smoothly as a way to reduce the cost of advice, as it may not be in the best interests of the client, according the director of Synchron.

Don Trapnell, Synchron director, said both the Government and the Australian Securities and Investments Commission (ASIC) had been openly stating that scaled advice was a way of reducing costs to consumers.

“The trouble is – and I agree with it – providing strict life insurance as opposed to full holistic financial advice is scaled advice,” Trapnell said.

“But the challenge is, if you do a scaled advice piece for a client, you still have a

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best interests duty and that best interest duty says you still must consider all their relevant circumstances.

“Which means risk advisers still have to go through the full fact find process and if that risk adviser finds a shortcoming in that client’s retirement planning based on the goals they’ve set in the fact finding process, they have to refer that to another adviser or do it themselves when they’re not qualified.”

Trapnell said that was a result of best interests duty not working in the best interests of the client.

“There’s nothing wrong with best interests duty, it just needs to be relevant and I’d like to see it replaced with a duty to provide appropriate advice.”

real time data driven supervision and monitoring, conservative and defensible research processes, capital adequacy of the licensee and the need for robust and resourced first, second, and third lines of defence with risk management,” he said.

He said that these were all factors that made it increasingly difficult for smaller players to compete for the limited capital available in the PI market.

“I am growing increasingly concerned, from an industry perspective, of the growing level of ‘junk’ Professional Indemnity insurance finding its way into the market,” Rowe said.

Westpac confirms BT Wrap migration as priority WESTPAC has nominated the acceleration of advice remediation and the migration of BT Wrap customers to Panorama as being amongst its priorities for the current financial year.

In a first quarter update released to the Australian Securities Exchange (ASX), the big banking group also noted the ending of its relationship agreement with IOOF as being amongst the strategic priorities it delivered together with the sale of its NZ Wealth advisory business.

Commenting with the update, Westpac Group chief executive, Peter King, said it had been a good quarter or the company with hither earnings, a stronger economy and “solid progress on our fix, simplify and perform strategic priorities”.

The update revealed a first quarter unaudited statutory net profit of $1.70 billion and improved cash earnings of $1.97 billion.

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6 | Money Management February 25, 2021

News

Mortgage broker best interests duties wide reaching: The Fold

BY JASSMYN GOH

LICENSEES are now under best interests duty for all its credit representatives’ business, and best interests duty also applies to the entire business of a mortgage broker, and these rules could apply even if the credit assistance does not relate to a mortgage, according to The Fold Legal.

An analysis by the Fold’s solicitor director – Sydney, Jaime Lumsden, said the mortgage broker’s best interest duty came into effect on 1 January, 2021.

This applied to a licensee providing credit assistance where the licensee was a mortgage broker or a credit representative providing credit assistance where either the licensee or the credit representative was a mortgage broker.

Lumsden noted the definition of a mortgage broker was one that:

• Carried on a business of providing credit assistance in relation to credit contracts secured by mortgages over residential property; • Did not perform the obligations, or exercise the rights, of a credit provider in relation to the majority of those credit contracts; and • In carrying on the business, provided credit assistance in relation to credit contracts offered by more than one credit provider.

Examples, she said, of situations where best interest duty would apply even if the product was not a mortgage were: • Someone who met the definition of mortgage broker advising on personal loans and credit cards; • A broker offered their own product but they broker more than half their business; • A credit representative of an aggregator

provides credit assistance on any product (even if none of it is home loans) where the aggregator meets the definition of a mortgage broker; and • A mortgage broker passes an application to an asset finance broker in such a way that the mortgage broker is providing credit assistance and not just acting as an intermediary. In this instance, the best interests duty will apply to the credit assistance the mortgage broker provides.

But it will only apply to the asset finance broker if they (or their licensee) meet the definition of mortgage broker.

Who can help you to navigate an evolving investment landscape?

Over half of firms see profits rise in 1H21 as profits recover from COVID-19

BY LAURA DEW

OVER half of companies which have reported their first-half 2021 results have seen their profits rise as the recovery from the COVID-19 pandemic begins to take effect.

The figure of 61% of companies which had seen profits rise compared to 36% of companies six months ago.

A further 46% of companies had beaten expectations, compared to 32% in the previous half.

When it comes to dividends, 54% of companies had increased their dividends

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which was a turnaround from the 55% who slashed dividends in the previous half. Several financials had already announced an increase in dividends including Centrepoint Alliance, Pinnacle and Fiducian.

Earnings were expected to rebound with technology stocks expected to rise by 109% and resources up 47%. Healthcare, media, and gaming stocks were also expected to do well.

Companies still set to report this week included BHP, Coles, Charter Hall and Whitehaven.

Shane Oliver, chief economist at AMP Capital, said: “It’s still early days in the

December half earnings reporting season with only around 19% of companies having reported so far. While there have been some notable disappointments there has been a big turnaround from the lockdown impacted June half.

“Retailers and miners are doing well, and banks are boosting dividends, but insurers and utilities have been weak.

“Key themes are likely to be a rebound in dividends, stocks benefiting from a surge in housing activity and a likely outperformance of value and cyclicals over growth stocks, and small caps outperforming large caps.”

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February 25, 2021 Money Management | 7

News

ASIC went direct to academics to commission controversial submission

BY MIKE TAYLOR

THE Australian Securities and Investments Commission (ASIC) has admitted that it went direct to Griffith University academics to produce what has proved to be a controversial submission on the Financial Adviser Standards and Ethics Authority (FASEA) code of ethics because it was running short of time.

It had been assumed the submission had been commissioned via ASIC’s Consumer Advisory Panel, but the regulator has admitted it went direct and commissioned the submission itself, paying $10,000 to the academics, Dr

Hugh Breakey and Professor Charles Sampford.

In a detailed explanation responding to specific questions from a Parliamentary Committee, ASIC said it adopted this approach because of the tight timeframe and acknowledged that it had been assisted by FASEA extending the timeframe for submissions.

“In this case, ASIC undertook a direct approach to a number of possible suppliers and recommended suppliers. Direct approaches to particular suppliers was considered appropriate as the work required specialist expertise and needed to be completed within a short time

frame,” the regulator said.

“The scope of the work was set out by email to the identified supplier, Dr Breakey, who had the necessary expertise, capacity and availability to prepare the submission and attend a roundtable on 29 June, 2018, in response to the Financial Adviser Standards and Ethics Authority consultation about: i) The draft code of ethics for financial advisers; and ii) The proposed guidance on educational pathways for all advisers developed by FASEA. “Dr Breakey is an expert in the area FASEA was consulting on. He was the President of the Australian Association for Professional and

Applied Ethics, and a Senior Research Fellow at the Institution for Ethics, Governance & Law at Griffith University.

“Because of the narrow scope of the work, short time frame and cost of the procurement, the Commonwealth Standard Purchase Order terms and conditions were used to govern this arrangement,” it said.

NSW Liberal backbencher, Jason Falinski, had used questions on notice from the Parliamentary Joint Committee on Corporations and Financial Services to question precisely how ASIC had decided to pursue Dr Breakey to develop the submission.

Who else, but Elston.

Elston Group ACN: 130 771 523 EP Financial Services Pty Ltd ABN 52 130 772 495 AFSL: 325 252 © 2019

Ethics Centre among beneficiaries of left-over remediation payments THE Ethics Centre has been a beneficiary of a practice adopted by the Australian Securities and Investments Commission (ASIC) which has seen surplus/residual remediation funding directed towards consumer and charity groups.

ASIC has admitted to a Parliamentary Committee that in circumstances where remediation funds have not been capable of being returned directly to affected consumers they are directed at ASIC’s discretion to “appropriate recipients”.

Answering a question on notice, the regulator said that from time to time it

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monitored consumer remediation programs conducted by firms.

“Sometimes these programs include a residual payment where funds could not be returned directly to affected consumers, so instead a residual payment was passed by the firm on to an appropriate recipient to be used to provide services, information or education to consumers of a type that may be affected by the misconduct,” it said.

“In these situations the underlying principle is that a firm should not benefit from the profits of their breach. In both these circumstances,

the firm directly pays the relevant recipient.

“Examples of recipients who have received payments under either a CEU and/or residual remediation payment include: • Ecstra Foundation • Financial Literacy Australia (wound-up) • The Financial Counselling Foundation • The Ethics Centre • Smith Family • Brotherhood of St Lawrence • Salvation Army • Cerebral Palsy Alliance • Dementia Australia

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8 | Money Management February 25, 2021

News

Government faces rare coalition of forces opposing its super changes

BY MIKE TAYLOR

THE Federal Government is facing a rare coalition of forces opposing key elements of its Your Future Your Super legislation, particularly the sections imposing a best financial interest duty on superannuation fund trustees while delivering significant discretionary powers to the minister.

The Government’s draft legislation has brought industry funds, accountants, employer groups, the Law Council and company directors into alignment in pushing back against what is being described as significant legislative and regulatory over-reach.

A webinar conducted by the Australian Institute of Superannuation Trustees (AIST) revealed almost unanimous opposition expressed by the Law Council of Australia (LCA), the Australian Industry Group (Ai Group), the Australian Institute of Company Directors (AICD) and the Australian Council of Trade Unions (ACTU) with the accounting group CPA Australia similarly opposed.

At the core of the opposition to the Government’s approach is the suggestion that the draft legislation and the insertion of the word ‘financial’ into best interests effectively reverses legal burden of proof for superannuation fund trustees.

Law Council of Australia representative, Natalie Cambrell, said the LCA actually rejected the view that the best interests duty was in need

of clearer articulation, particularly by legislation.

“Both the proposal to add the word ‘financial’ to the existing best interests covenant and the proposal to reverse the evidential burden of proof are not warranted,” she said.

Ai Group chief policy officer, Peter Burn, said the approach taken in the legislation to protect member interests was poorly conceived and poorly designed.

“It fails to clarify what is meant by acting in members’ best interests (or best financial interest,” he said. “It proposes an illogical and unprecedented power for regulators to prohibit actions that are in members’ best financial best interests. “…it proposes an overly prescriptive, burdensome and heavy-handed approach that conflicts with good regulatory practice and the Government’s commitment to reducing regulatory burdens.”

ACTU assistant secretary, Scott Connolly, said the legislation would create an uneven market for superannuation funds, especially when combined with other aspects such as the exclusion of administration fees from benchmarking.

“The specific and warrantless exclusion of dividend payments to parent companies from being required to comply with the newly worded best financial interest test means this bill is shockingly hypocritical and unfair,” he said.

“This will allow for-profit funds to advertise without obligation, engage in political advocacy or

make political donations. The passage of this Bill would create a wholly uneven market for superannuation funds, especially when combined with other aspects of the package, like the exclusion of administration fees from benchmarking.”

The AICD’s Chris Gergis said the organisation did not support the legislative changes because they appeared to work from the premise that, in general, directors were not acting in the best financial interests of beneficiaries – something which was not justified.

Members who withdrew super will never recover the impact: Combet

BY JASSMYN GOH

IF the superannuation guarantee (SG) does not go ahead, there will be no increase in super, no wage increase, and people will miss out on hundreds of thousands of dollars in retirement, according to Greg Combet.

Speaking on a panel at the Association of Superannuation Funds of Australia (ASFA) conference, IFM Investors and Industry Super Australia chair, Combet, said it was an “oddity” that the Liberal Party did not support private savings when this had been their philosophy for a long time.

“On the wages and super and the trade off, of course the

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economic theory and research indicates there’s some trade-off between the two. When super was introduced it was done on the trade-off at a different economic period, higher inflation, better wages growth and was an attempt also to defer some wages growth to compulsory system,” he said.

“I’m not denying there is a trade-off between these two things but what I object to is the only thing on the table is to stop the 2.5% super guarantee increase with no guarantee of anything.

“If the SG does not go ahead there will be no increase in super, missing out on hundreds of thousands of dollars in

retirement, and no wage increase.

There won’t be a trade-off for a senior exec in a financial services firm but if you’re a hotel cleaner on minimum wages they suffer the most as they miss out on increase in super and wage increase under proposition put forward.”

Combet noted that he did not support the early release of superannuation scheme by the Government as three million people withdrew money from their super and they would never recover the impact from the withdrawal.

“What the Government in reality did was make a very large part of the COVID-19 economic stimulus package privatised

through people’s personal savings when I think that’s a responsibility of Government.

There’s not much super funds can do about it now and hundreds of thousands of young people, in particular, have completely emptied their accounts,” he said.

“People in the super sector have to be very firm to say that preservation is a fundamental pillar of the super system and we don’t want to see early release like this again or 1,000 flowers bloom about how you can use this tax advantage form of savings to pay for a housing deposit, medical bills, renovation, or an overseas trip. Everyone has an idea of how to use this.”

17/02/2021 9:40:49 AM

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10 | Money Management February 25, 2021

News

Ares drops 100% AMP bid. Only interested in AMP Capital

BY MIKE TAYLOR

THE Ares bid for AMP Limited is off but it is still interested in AMP Capital.

AMP Limited used its results announcement to the Australian Securities Exchange (ASX) to reveal that Ares had informed AMP that it did not intend to proceed with its bid for the company.

AMP said, however, that it continued to engage constructively with Ares regarding AMP Capital.

AMP’s announcement said its portfolio review had concluded that its transformation strategy for the Australian and New Zealand wealth management businesses was likely to be the optimal outcome for shareholders.

On AMP Capital, the company told the ASX it was continuing to review ways to grow and invest in AMP Capital including exploring partnership options.

AMP’s confirmation of the status of the Ares bid came as it reported a difficult full-year result with profitability down across almost all divisions.

It reported a full-year underlying net profit after tax of $295 million down from $439

million in the full year 2019 which it said reflected the impacts of COVID-19 on clients, the business and the broader economy.

The result has seen the company not declare a final dividend.

In Australian wealth management it reported net cash outflows which saw funds under management decrease by 8% to $124.1 billion.

IFM Investors denies misleading key Parliamentary Committee INDUSTRY funds backed investment manager, IFM Investors has strongly denied to a Parliamentary Committee that it overvalued an investment in a Mexican energy company, Aleatica Mexico, when giving evidence to the committee last year.

IFM Investors was challenged on the issue by the chair of the House of Representatives Standing Committee on Economics, Tim Wilson, after specialist research house, Aurora Research, produced a report claiming that IFM Investors misled the committee when it denied it was valuing its stake in Aleatica Mexico at a substantial premium to its share price.

According to the Aurora Research claims, an IFM Investors executive had falsely denied to the committee that IFM valued its investment in Aleatica Mexico at around $3.79 AUD per share, when those same shares were listed in Mexico’s stock exchange at a quoted price of around $1.52 AUD per share.

As chair of the committee, Wilson promptly sent off a question on notice to IFM Investors asking for an explanation.

IFM’s global head of investor relations and former Industry Super Australia (ISA) chief executive, David Whiteley, responded to Wilson claiming the Aurora Research report allegations were “false and misleading”.

“The allegations in the report referenced by the

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Committee are false and misleading,” Whiteley’s formal letter of response said.

“Ensuring the valuations of IFM’s portfolio companies are completed independently, appropriately and in compliance with applicable accounting standards is critically important.

“Valuations of IFM’s portfolio companies are performed quarterly by independent, expert thirdparty valuation firms, and are conducted in compliance with international accounting standards such as US Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS).

“A different independent valuation firm is appointed to value each of IFM’s investments every three years. In the case of IFM’s investment in Aleatica, two expert valuation firms have analysed the investment over time and have independently determined appropriate methodologies to establish their valuations, which must comply with the applicable accounting standards.

“Further, IFM’s corporate auditor (currently Deloitte) reviews all of the independent valuations of IFM’s investments on an annual basis to ensure compliance with the applicable accounting standards. Deloitte does not act as the independent valuation firm for any of IFM’s investments in its portfolio companies,” Whiteley’s response said.

ASIC ‘very supportive’ of quality limited advice THE Australian Securities and Investments Commission (ASIC) has defended its handling of intra-fund and limited advice delivered by superannuation funds in the face of questioning within a key Parliamentary Committee.

Asked to explain why ASIC had not taken action against superannuation fund limited personal advice given the compliance rates outlined in the regulator’s Report 639, ASIC declared “We do not consider limited advice to be a dangerous form of advice”.

NSW Liberal backbencher, Jason Falinski, filed questions on notice to ASIC within the Parliamentary Joint Committee on Corporations and Financial Services in which he compared the level of action initiated by ASIC around advice inside superannuation when compared to the action it took around its Report 413 involving life insurance advice.

Falinski referred to limited personal advice as being a “very dangerous form of advice” and suggested it was doing consumer harm and asked what action ASIC was taking to shut it down.

He also suggested that because ASIC had taken pre-emptive action against real estate agents and questioned why ASIC had not taken similar action with respect to limited personal advice provided by superannuation funds.

Answering the questions, ASIC said it was “very supportive of the provision of good quality limited advice”.

“We do not consider limited advice to be a dangerous form of advice,” the regulator aid.

ASIC said that it also did not believe that the delivery of limited personal advice by superannuation funds was “analogous to the possible inadvertent provision of unlicensed financial advice by some real estate agents”.

The ASIC answer also dismissed an admonition in Falinski’s questioning that it give a commitment to exercising its regulatory duties “without favour and in an impartial way”.

“ASIC always undertakes its regulatory duties in a diligent and appropriate matter,” the regulator’s answer said.

16/02/2021 3:35:51 PM

February 25, 2021 Money Management | 11

News

Life/risk advisers are busy but less risk being written

BY MIKE TAYLOR

SPECIALIST life/risk advisers have rarely been busier but less life insurance business is being written for the simple reason that many older risk advisers are leaving the industry and fewer generalist advisers see the economic benefit in writing risk business.

That is the bottom line for the Australian life insurance industry at the start of 2021 which stands in stark contrast to the situation in 2008/09 when, amid the confusion and volatility of the Global Financial Crisis, generalist advisers turned to advising on risk because it represented a solid revenue stream.

Around 18 months out from the Australian Securities and Investments Commission (ASIC) producing its review of the Life Insurance Framework (LIF), it is now clear that less business is being written simply because there are fewer advisers.

And for some generalist advisers, the economic arithmetic of writing risk simply does

not add up because of the limitations imposed by the overall regulatory requirements and the commission caps imposed by the LIF. The story has been underlined by the latest data from specialist life/risk actuarial firm, Plan For Life which revealed inflows into the lump sum sub-market grew by just 0.3% over the past year with mixed company-level results.

Among the market leaders, ClearView (4.6%), Zurich (3.3%), TAL (2.1%) and MLC (1.3%) experienced positive percentage increases in their Inflows with the remaining insurers reporting minimal or negative growth.

Synchron director, Don Trapnell, confirmed that specialist life/risk advisers working within the licensee were busy but that, overall, less business was being written.

Bombora Advice principal, Wayne Handley, told a similar story stating that specialist life/ risk advisers were busy and in many instances their workload was increasing as non-specialists advice firms referred clients to specialist risk advisers.

MEETS

“It’s a two-speed economy for us,” Handley said. “People who have the specialist capabilities are busy because of the referral work coming from those who don’t.”

“I’ve never seen opportunities more robust than they are at the moment but we’re losing guys because of the Financial Adviser Standards and Ethics Authority (FASEA) and regulatory requirements,” he said.

Trapnell, who has been a long-standing advocate of specialist life/risk advisers being subject to different education requirements to general advisers, said the real test would come when the time ran out for life/risk advisers to sit the FASEA exam.

“Some of the old and bold are simply not going to do it [the exam],” he said.

This was echoed by Association of Financial Advisers (AFA) general manager, policy and professionalism, Phil Anderson, who said there was a real question mark over how many specialist life/risk advisers would do the exam or leave before time expired to do so.

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This information has been prepared by Ausbil Investment Management Limited (ABN 26 076 316 473 AFSL 229722) (Ausbil) the issuer and responsible entity of the Ausbil Active Sustainable (ARSN 623 141 784) (Fund). This is general information only and does not take account of investment objectives, financial situation or needs of any person. It should not be relied upon in determining whether to invest in the Fund. In deciding whether to acquire or continue to hold an investment in the Fund, an investor should consider the Fund’s product disclosure statement, available at www.ausbil.com.au. Past performance is not a reliable indicator of future performance. Performance figures are calculated to 31 December 2020 and are net of fees and assume distributions are reinvested. The Zenith Fund Awards were issued 30 October 2020 by Zenith Investment Partners (ABN 27 130 132 672, AFSL 226872) and are determined using proprietary methodologies. The Fund Awards are solely statements of opinion and do not represent recommendations to purchase, hold or sell any securities or make any other investment decisions. To the extent that the Fund Awards constitutes advice, it is General Advice for Wholesale clients only without taking into consideration the objectives, financial situation or needs of any specific person. Investors should seek their own independent financial advice before making any investment decision and should consider the appropriateness of any advice. Investors should obtain a copy of and consider any relevant PDS or offer document before making any investment decisions. Past performance is not an indication of future performance. Fund Awards are current for 12 months from the date awarded and are subject to change at any time. Fund Awards for previous years are referenced for historical purposes only.

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16/02/2021 3:36:04 PM

12 | Money Management February 25, 2021

InFocus

MINUS ITS BIG JEWELS, IS THE AMP CROWN WORTH BUYING? Mike Taylor writes that in the wake of Ares pulling back from its bid for the entirety of AMP Limited, the board and shareholders are being made patently aware that separating the company’s component parts is a dangerous strategy.

SO, ARES MANAGEMENT Corporation ran the ruler over AMP Limited and at the end of the exercise and just ahead of AMP’s full-year results announcement concluded that it was really only interested in AMP Capital.

No one will have been particularly surprised.

But the question now being posed is: having already sold AMP Life, if AMP were to now sell AMP Capital what would it have left?

The answer is that it would have AMP Bank, its platforms and superannuation business and, of course, the financial planning business.

But the problem for AMP is that notwithstanding its threeyear transformation strategy it is the subject of a number of class actions, including one mounted by financial advisers over buyer of last resort (BOLR) arrangements, and it is still yet to complete a major financial advice client remediation project.

The lesson that the AMP board can learn from the Commonwealth Bank is that if you want to exit your financial planning businesses then you need to be capable of underwriting multi-million dollar legal indemnities to cover the cost of the remediation that you

COVID-19 COMPLAINTS

already know about and that which may yet come as a surprise.

This much was made clear when the Commonwealth Bank provisioned for more remediation with respect to Count Financial which has been indemnified to the tune of $300 million.

According to AMP’s full-year results, its client remediation program is currently 80% complete and has thus far cost $405 million but any buyer who was looking under the bonnet of AMP Limited would have looked beyond the cost of remediation to the possible costs associated with defending and possibly losing class actions.

While AMP has asserted it

believes it is on solid legal ground with respect to its handling of BOLR contracts, substantial costs would be generated if the court were to find against it because of the number of advisers who have complained about contracts which promised 4x and only delivered 1.5x.

There appear to be few companies big enough or brave enough to take on the financial planning elements of AMP Limited and most sensible licensees know that it is safer and smarter to operate on the basis of doing very little other than welcoming AMP advice practices in the event that they come knocking at their doors.

Which means that outside of AMP Capital, the remaining jewels

in the somewhat battered AMP Limited crown are the platforms business – mainly North – and the superannuation business.

The problem for the superannuation business is that, in the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, it has been losing a succession of corporate superannuation mandates such as Anglican Super.

According to the AMP balance sheet, there were outflows of $1.8 billion through the loss of corporate superannuation mandates, and this was on top of the $1.8 billion AMP superannuation funds lost as a result of the Government hardship early release superannuation regime.

That means the shiniest remaining jewels are undoubtedly AMP Bank which posted a relatively minor profit decline in the circumstances of COVID-19 and the North platform which continued to grow assets under management (AUM) but saw minor declines in cashflows and profit.

In all the circumstances, can the AMP board afford to lose any more jewels from its corporate crown or would it be better served trying to finish the repair work?

11,017

2,255

979

complaints received

COVID-19 complaints involved financial difficulty

related to superannuation accounts

Source: Australian Financial Complaints Authority (AFCA), from 3 March 2020 to 31 January 2021

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17/02/2021 1:43:35 PM

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18/02/2021 2:21:01 PM

14 | Money Management February 25, 2021

Retirement

PLANNING AHEAD FOR YOUR RETIREMENT Oksana Patron checks how COVID-19 has changed Australians’ thinking about superannuation and their own retirement and what lies ahead for product and solutions providers.

THERE IS NO doubt that recent months and the COVID-19 pandemic have changed the priorities and the ways Australians think about their retirement income strategies and how they plan for unplanned events.

At the same time, it has become clear that the complexity of the Australian retirement income system has made it hard for many to navigate, which is particularly an issue for those who enter the decumulation phase and need to rely on their savings.

The Government’s Retirement Income Review (RIR) report, which was released by the end of 2020, confirmed that providing better assistance for people on how they can optimise their retirement income through the efficient use of their savings is high on the agenda.

The report revealed that the general tendency was retirees were reluctant to draw down their savings in retirement and consume funds due to the system’s complexity as well as concerns about possible future health and needing the money for aged care costs. On top of that was the uncertainty around the impact of the COVID-19 pandemic.

The report also found that the lack of understanding of the superannuation system, combined with misconceptions and low

02MM250221_14-25.indd 14

financial literacy, often resulted in people not adequately planning for their retirement and not making enough the most of their assets when in retirement.

According to the report, one of the major misunderstandings was the view that ‘retirement income’ involved the return from investing superannuation balances rather than drawing down those balances to fund living standards in retirement.

The report revealed the majority of retirees would most likely leave the bulk of the wealth they had at retirement as a bequest even though superannuation savings were supported by tax concessions for the purpose of retirement income and not purely for wealth accumulation.

Although the overall objective of the Australian retirement income system was to deliver adequate standards of living in retirement in an ‘equitable, sustainable and cohesive way’, 71% of people aged 65 and over received the Age Pension or other pension payments, as of June, 2019, with over 60% of those people being on the maximum rate, according to the RIR. On the other hand, there were over 11,000 people with a balance in excess of $5 million, as of June 2018, of which many very large superannuation balances were built up under previous high contributions caps. The report

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February 25, 2021 Money Management | 15

Retirement Strap

confirmed that people with very large superannuation balances received very large tax concessions on their earnings.

IMPACT OF COVID-19 Although the long-term consequences of changes, including early release of super, for those in need were not yet fully known, the one thing the pandemic helped with was it brought to the fore superannuation and planning for retirement for many, including the younger generations, and that was a good thing, according to chief executive of Allianz Retire Plus, Matt Rady.

“The earlier you look at seeking some kind of advice, the greater your awareness on how much you need to save to live comfortably within your expectations in retirement and most people do not really know the answer to that question,” he said.

“I think the key role of the adviser is to help people give confidence around their choices of spending today versus the lifestyle they are going to afford or likely to be able to afford in the future. I would like to think that what we need to do is to give the community the confidence that the adviser profession is the real profession and the earlier you engage with financial advisers the more likely it will be that you achieve your goals in retirement.”

However, there was no silver bullet when it came to the needs of people who entered retirement.

People had very different ideas on what the retirement should look like and their financial

02MM250221_14-25.indd 15

needs also became very diverse, making it harder, compared to the accumulation phase, for product and solutions providers to accommodate those needs.

“When people are saving for retirement and are in the accumulation phase, their needs are in general quite similar, they try to maximise their returns, and particularly those at a younger age, are looking for the investment options that give them the highest returns by the time they get to the retirement,” Richard Dinham, head of client solutions and retirement at Fidelity International, said.

“Retirees, on the other hand, are much more diverse in their needs than the accumulators and therefore it is much more difficult to meet their needs with a single set of solutions or products.”

RETIREMENT AND RISKS It is not a secret that retirees are very conservative and tend to draw down from their superannuation less than they needed to, therefore access to financial advice at this stage of life was of particular value, according to experts.

“People do not like to take risks naturally but they have to otherwise they will be guaranteed very low returns for their investment portfolio, which may cause them difficulty later on. So retirees need to take on some risks and this is where their advisers can help,” Dinham said.

According to Dinham, the role of an adviser was crucial when it came to determining what level of risk the retiree was comfortable

with and, at the same time, advisers were also in a position to provide some comfort by locking away certain degrees of safety.

Traditionally, in a high interest environment, people were able to earn an income even on their more conservative investments in portfolios, such as cash and fixed interests.

“But in a low interest environment the only place where you can generate income is in riskier investment asset classes, such as equities, so you either accept to take the lower income or you dial up the risk and if you dial up the risk then clearly the probability of running out of money increases,” Rady said.

“So what we need to do is to provide people with a degree of confidence on how much they are able to draw down comfortably without running out of money and provide them with investment products, which help manage the downside risk in the event of market failure.”

Rady also stressed that the current system placed too much focus on the accumulation phase in super, with all the public policy concentrating on how to get money into the superannuation system while, at the same time, there was very little conversation happening on how to actually get money out of the system in most the effective ways for retirees.

“We actually have a confidence problem in the system and people do not really have the confidence to spend their superannuation balance comfortably. I think we need to talk about the ways we can provide people with a greater

“Retirees are much more diverse in their needs than the accumulators and therefore it is much more difficult to meet their needs with a single set of solutions or products.”

– Richard Dinham

Continued on page 16

17/02/2021 1:41:45 PM

16 | Money Management February 25, 2021

Retirement

Continued from page 15 degree of confidence and comfort of how much income they are going to receive on the ongoing basis and stop thinking about the super as a balance and start thinking about it in terms of how much it might help enable the regular monthly income as people need greater clarity in relation to how much income they are going to receive on a regular basis for the rest of their lives,” he said.

Ashton Jones, head of investments, retirement and new propositions at TAL, said: “TAL is focused on those post-retirement solutions to help manage risks that are more apparent in retirement, like the longevity risks management.

“One of the first challenges is to how you help retirees overcome that fear of running out of money and what are the solutions that you can offer them to help consume that balance in retirement rather than seeing it as a lump sum amount that they have to withdraw at retirement.

“Those are the areas that probably do not get a lot of focus in the accumulation phase but they become much bigger risk factors in the post retirement phase and they are events that can really affect people incomes in retirement. There has been a lot of conversation in the industry about the need to do more in retirement for members and, in particular, on a broader range of solutions.”

One of the solutions, he mentioned, might be the longevity protection or investment-linked style longevity product that would guarantee an income and allows members to have the certainty

02MM250221_14-25.indd 16

about what their income is going to be throughout the retirement.

ROLE OF ADVICE The complexity of the superannuation and retirement system had put extra pressure on retirees, who often lacked the knowledge of how to use their balances effectively but for whom the ability of making well-informed financial decisions was crucial.

Rady said that retirees definitely needed at least ‘some form of advice’, but again providing the advice to those who needed it most proved expensive.

“It is not through the lack of interest from advisers around servicing the mass market – it is the fact that advice becomes too expensive, to provide because the compliance burdens associated with doing so is too onerous,” he said.

“So, we need to find a way of removing or reducing the burden of providing advice, and enabling more scaled advice in a way that gives advisers the confidence to be able to do it.

“The second thing which is the industry challenge is providing the technology or enabling the technology which enables advisers to deliver advice in a more efficient way and clearly that is in progress but, at the moment, advisers are not affordable by the people who need them most or becoming unaffordable and the industry has the responsibility to help try to enable to make it more efficient.”

A FAMILY DECISION According to Jones, funds also needed to better acknowledge that retirement should be viewed as a family decision.

“Most people usually plan for the retirement as a family unit but products are typically designed for individuals rather than a family unit and in retirement the family unit is the most important thing because the Age Pension entitlement is based on both the spouse income as well as the primary account holder,” he said.

“The other reason is that members look at the retirement as a family event and the impact that longevity risk can have on retirement outcomes is quite different for an individual versus a couple. Looking at retirement and looking at the membership base in a family unit construct rather than the individual construct we think this is something important for funds to consider.

“The other thing we think is important for funds overall probably to try to segment their membership base into different cohorts, the pre-retirees and retirees, and try to understand what the psychological attributes and preferences for those different cohorts are because retirement is a very personal experience.”

17/02/2021 2:29:14 PM

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15/02/2021 9:44:31 AM

18 | Money Management February 25, 2021

Life insurance

PROFITABILITY THE KEY CHALLENGE FOR LIFE INSURERS Mike Taylor writes that while significant consolidation has occurred within the Australian life insurance industry, profitability remains a key challenge.

IT IS A measure of the attractiveness of the life insurance industry in Australia that in the past five years most of the major banks and, of course, AMP have exited the space.

It has only been in the past few months and after a succession of adjustments that AIA Australia Limited has managed to complete its acquisition of CommInsure from the Commonwealth Bank and it was late in December that MLC Life announced that it had received a combined capital injection of $650 million from its parent, Nippon Life, and from National Australia Bank (NAB).

Then, too, Zurich has settled down its acquisition of ANZ’s Life Insurance business while AMP Limited has started to move beyond the sale of AMP Life to Resolution Life while contemplating its own broader future.

For its part, Westpac late last year sold its general insurance business to Allianz after previously having announced a $406 million writedown of its life insurance business.

For its part, TAL picked up Suncorp’s Asteron Life insurance

business in the first half of 2019.

So, the bottom line for the Australian life insurance industry and for life/risk advisers is that, for the most part, the major banks and AMP are out of the life insurance business leaving the market to specialist insurers.

According to the latest data compiled by specialist life/risk research and ratings house, Dexx&r the industry is now dominated by three players – TAL, AIA Australia and MLC Life – who accounted for almost 50% of the market before acquisitions were taken into account.

Notwithstanding the exit of the major banks, the life insurance industry has had to work hard to maintain profitability with some product lines such as disability insurance (DI) continuing to drag on their bottom lines.

This is evidenced by the latest available data from the Australian Prudential Regulation Authority (APRA) which said that for the year to September 2020, the industry had reported a significant net loss after tax of $1.6 billion ($0.2 billion profit for the year to September 2019) and a negative return on net assets of 6.2% (0.9% for the year to

Chart 1: Revenue, 12 months to September 2020

September 2019).

The regulator said the deterioration was caused by the persistent poor performance of risk business ($1.5 billion loss during the year), and large falls in investment revenue, mainly from the market volatility impacts of COVID-19 in the March quarter.

It noted that within risk products, individual lump sum (ILS) was the only category reporting a profit in the 12 months to September 2020.

“Individual disability income insurance (DII) recorded a substantial loss of $1.3 billion during the year, primarily driven by reserve strengthening as adverse claims experience persists,” it said. “Group LS and DII have also deteriorated this year, reporting a $403.2 million and $147.9 million loss respectively.”

What should be disturbing to not only insurers but to APRA and the Government as well is the evidence that notwithstanding the struggling profitability of the industry, Australia’s underinsurance gap is continuing to widen.

This was evidenced by research published by actuarial research house, Rice Warner which late last year pointed to changes in sums insured since 30 June, 2018,

revealed that the total sum insured across all distribution channels had actually decreased.

“It has decreased by 17% and 19% for death and total and permanent disability (TPD) cover respectively since June 2018,” the Rice Warner analysis said. “This is a significant reduction and is driven mostly be the drop in group insurance inside superannuation, being 27% for death and 29% for TPD cover.”

While pointing to the decline in group insurance cover largely due to Government policy initiatives such as its Protecting Your Super regime, the Rice Warner research also pointed to declines with respect to advised insurance.

It said retail advised insurance new business sales volumes had been reducing, due to a similar reduction in active insurance advisers.

“The aggregate sum insured held via this distribution has been decreasing since the end of 2018,” the analysis said. “Although we will see product innovation as insurers respond to APRA’s intervention in Retail Income Protection products, it will be challenging to completely reverse this trend.”

Chart 2: Profitability, 12 months to September 2020

Source: APRA, Quarterly life insurance performance statistics highlights

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17/02/2021 2:03:51 PM

February 25, 2021 Money Management | 19

Life insurance

HOW EVERYTHING HAS CHANGED BEFORE THE LIF IS EVEN REVIEWED From the implementation of the FASEA regime through to the recommendations of the Royal Commission, Mike Taylor writes, a lot had changed before the Australian Securities and Investments Commission had even started its Life Insurance Framework review.

THE HARSH REALITY facing the life insurance industry is that even before the Australian Securities and Investments Commission (ASIC) completes its review of the Life Insurance Framework (LIF) specialist life/risk advisers are choosing to leave the industry.

As Money Management reported in early February, those life/risk advisers remaining in the industry have rarely been busier but less life insurance business is being written for the simple reason that many older risk advisers are leaving the industry and fewer generalist advisers see the economic benefit in writing risk.

This much is also being recognised by the major life insurers who recognise that not only has the LIF been an issue but also the impact of the Financial Adviser Standards and Ethics Authority (FASEA) regime and particularly the adviser exam. They recognise that some older and very experienced life/risk advisers are timing their retirements around the timetabling of the final sittings of the exam.

Asked to comment on the situation, TAL chief executive, Brett Clark, said the LIF review was coming at a time when there were already unprecedented pressures on the financial advice sector, as advisers were required to evolve their business and service models to adapt and continue meeting the needs of clients, in an environment of strengthened regulatory and educational requirements.

“As we look towards the postimplementation review of LIF, these are crucial considerations, and it is important that the review considers a wider context of change for the life insurance industry; that consumers continue to have choice and access to life insurance advice and products; and that the LIF exercise avoids a narrow review of simply

02MM250221_14-25.indd 19

whether life insurance commissions are good or bad,” Clark said.

“TAL believes strongly in the importance of a vibrant financial advice sector that offers high quality financial advice to customers. We are taking our own steps towards better supporting financial advisers, and the TAL Risk Academy is one example of that, but we are also working with other industry participants and stakeholders to ensure that the collection of changes being made to this sector, while improving outcomes for consumers, does not reduce access to those who depend on or benefit from it.

“Central to that is a wellconsidered commission model set at reasonable levels, with controls and consequences for poor behaviours, which strikes the right balance between cost, clear and transparent disclosure, consumer protection, and consumer accessibility,” Clark said.

He said the optimal outcome from the LIF review would be confidence.

“Confidence among both advisers and life insurers that the regulatory landscape supports both good consumer outcomes as well as a sustainable and effective financial advice sector. The effect of that will be advisers and insurers collectively innovating and investing with confidence, which has been sadly lacking in recent years,” he said.

“As many Australians face a more uncertain economic and financial outlook, and with increased pressures on our public health systems as well as households, the sustainability of a high-quality financial advice model and the role of financial advisers has never been more vital.”

ClearView managing director, Simon Swanson, also acknowledged the impact of the FASEA exam on the overall texture of the industry,

“I’ve never seen opportunities more robust than they are at the moment but we’re losing guys because of the FASEA and regulatory requirements.”

– Wayne Handley suggesting that much would depend on how it appeared after the final exam sittings in the November.

He acknowledged the impact of specialist advisers choosing to leave the sector alongside the cost pressure being felt by the industry.

The sentiment among life/risk advisers was explained by two of the most experienced executives in the sector – Bombora Advice chief executive, Wayne Handley, and outspoken Synchron director, Don Trapnell.

Trapnell confirmed that specialist life/risk advisers working within the licensee were busy but that, overall, less business was being written while Handley said that specialist life/ risk advisers were busy and in many instances their workload was increasing as non-specialists advice firms referred clients to

specialist risk advisers.

“It’s a two-speed economy for us,” Handley said. “People who have the specialist capabilities are busy because of the referral work coming from those who don’t.”

“I’ve never seen opportunities more robust than they are at the moment but we’re losing guys because of the Financial Adviser Standards and Ethics Authority (FASEA) and regulatory requirements,” he said.

Trapnell, who has been a longstanding advocate of specialist life/ risk advisers being subject to different education requirements to general advisers, said the real test would come when the time ran out for life/risk advisers to sit the FASEA exam.

“Some of the old and bold are simply not going to do it [the exam],” he said.

17/02/2021 2:04:01 PM

20 | Money Management February 25, 2021

Mental health

CREATING JOBS THAT ARE SAFE FOR WORKERS Margo Lydon explains why it is time to change the narrative of ‘more jobs’ to one focused on giving people ‘better jobs’.

LIKE MOST PEOPLE, I was pleased to hear the Government’s commitment to creating more jobs when it was announced in last year’s Budget.

There is no doubt we need more opportunities for people, especially young Australians. But in order for our economy to recover sustainably, we need the jobs of tomorrow to enable both Australian businesses and workers to thrive.

If we continue doing what we’ve been doing, I believe we will be setting Australians up for worsening mental health and workplace experiences that detrimentally impact productivity, retention, stigma and stress.

As the old saying goes, “if you keep doing what you’ve always done, you’ll get what you’ve always gotten”.

The safe work movements over the last 20 years have radically transformed our physical ways of working. Thanks to those efforts, most of us enjoy physically safer working environments and have a low risk of being physically injured at work. It’s time to pour that same energy into making our jobs and workplaces psychologically safe.

As we rebuild Australia’s economy, we have a golden opportunity to avoid repeating actions that harm workers and lead to poorer performing businesses.

The great news is that Australian businesses have a secret weapon.

In the latest edition of Australia’s largest workplace mental health study, 'Indicators of a Thriving Workplace’, SuperFriend has quantified the positive and negative impacts of 2020’s radically changed ways of working. Many are counter-intuitive to what you might expect during a global pandemic

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and economic recession. These results provide Governments and industry with a clear path forward to create ‘better’ jobs and workplaces of the future that deliver increased economic and social outcomes.

THE LINK BETWEEN TANGIBLE ACTION AND PRODUCTIVITY Workplaces that have implemented at least eight tangible actions to improve workforce mental health and wellbeing, have consistently higher proportions of workers being more productive.

In 2020, we know that worker wellbeing was far higher for those who worked remotely for at least a month (since March), those in full-time secure employment, people whose leaders were more accessible and listened, and those in workplaces that implemented practical actions to improve mental health and wellbeing.

In fact, the number of positive actions that workplaces implement is related to worker’s mental health and wellbeing in two ways: Investing in workplace mental health by taking positive action not only improves workers’ health outcomes, but it also appears to be a protective factor that helps people deal more effectively with stressful events.

The greater number of tangible workplace mental health and wellbeing actions that a workplace takes: • The more workers feel supported and enjoy their job; • The less people attribute their mental health condition to workrelated injury (i.e. work caused or made their condition worse);

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MentalStrap health

• The less mental health stigma experienced by the workforce; • The less people feel distressed in their workplace; • The more staff retention improves; • The greater the productivity gains; • The higher the score across the five domains – connectedness, culture, capability, leadership and policy; and • The higher the overall thriving workplace score.

that fewer actions are being taken in their current workplace to support and improve workplace mental health, and many can’t even access these services, unlike their permanently employed colleagues.

A higher proportion of casual workers have also experienced a decline in their mental health since the pandemic emerged. The statistics show that casual workers are being treated with less respect and courtesy and feel less connected and part of a team.

THE COST OF INACTION ON CASUAL WORKERS

THE NEW WORK COMMUNITY

Workplace mental health is a construct of interconnected factors including leadership, connectedness, policies and practices in action, capability and culture. Yet despite the known health benefits of good work, not all work is created equal.

Year-on-year, we have seen a growing proportion of Australia’s workforce be nudged towards insecure, casual work and the rise of the gig economy.

Flexibility for both the worker and employer has some benefits, but this can have enormously damaging impacts to both workers and business outcomes if we don’t consider worker wellbeing.

Even before the pandemic, casual workers were doing it tough. They have consistently been one of Australia’s most vulnerable and impacted groups of workers and are the furthest from thriving. Worryingly, the year on year survey results show this gap is continuing to widen.

This is particularly noticeable in workplace culture, where full- and part-time workers experienced strong improvements over the last year, while casual workers reported disturbingly low outcomes. Across organisations of all sizes, casual workers report

A key positive coming from the pandemic is the surge in the sense of shared purpose.

Workplaces are increasingly feeling like communities where people support each other beyond getting the job done.

It has been said that this pandemic is resulting in the biggest psychological experiment of all time, and I agree. This applies not only to our personal mental wellbeing experiences, but also our experiences at work.

The impact of 2020 on Australia’s workplaces and workers has been profound. It has forced us to pivot quickly and adapt our ways of working. In a year that has introduced ‘social distancing’ as both a behavioural norm and requirement, we now approach the one year mark of working from home policies.

Many businesses pivoted overnight, going from the office to working remotely, but with the unpredictable nature of lockdowns, the way back into the office is going to be anything but a straight path.

Employers are going to need to take the time to understand how people feel about going back to the office, whether they felt safe, both from a mental and physical health perspective.

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Time usually spent getting ready for work, commuting and attending unnecessary meetings is instead spent with loved ones, exercising, pursuing personal interests or getting more sleep – all known factors to improve wellbeing and increase productivity.

EMPLOYEE WELLBEING STARTS AT THE TOP COVID-19 has turbocharged leadership changes at Australian workplaces, particularly at organisations that are taking tangible action to improve workplace mental health and wellbeing.

Leaders who are open and approachable, practice selfreflection and act with integrity and balanced judgement are more likely to foster higher levels of inclusiveness, engagement, commitment, performance and wellbeing in their organisations.

Effective leadership increases worker morale, resilience and trust, and decreases worker frustration and conflict. Under good leadership, workers have higher wellbeing and reduced sick leave.

Workplace leaders really stepped up in the last year. In particular, leaders are being far more proactive in visibly encouraging and promoting good mental health policies and practices – and this should be the benchmark moving forward.

CHANGING THE NARRATIVE If we continue to take a myopic, economically-focused lens to designing and creating jobs, we are ignoring what people need and want from a job. We need to recognise psychological and wellbeing needs and design jobs and workplaces accordingly.

People need security, positive connections, good work and they need to be kept safe.

“Employers are going to need to take the time to understand how people feel about going back to the office, both from a mental and physical health perspective.”

– Margo Lydon

MARGO LYDON

After a decade of working with businesses of all shapes and sizes, helping them to create mentally healthy, sustainable workplaces, we have quantified evidence of the actions that make the biggest positive difference.

Many are free or low cost, and take little time to implement.

Regularly educating people leaders about mental health and wellbeing, providing all workers with access to mental health information, having effective and visible policies and practices in place against workplace bullying and harassment, and recognising and rewarding people who do good work are just some of the actions that work.

So yes, this year let’s create more jobs. But let’s create good, healthy, secure jobs in mentally healthy workplaces, and switch on Australia’s secret weapon for economic and social prosperity.

Margo Lydon is chief executive of SuperFriend.

17/02/2021 2:47:33 PM

22 | Money Management February 25, 2021

Global equities

THE ART OF SELLING As more retail investors enter the market, Lawrence Lam writes, it is as important for people to know when to sell a stock as when to buy it.

WHEN WE THINK about investing, we always think about buying. We spend enormous amounts of time forecasting the future, distilling vast stores of information into one single click of a green button. But what is commonly overlooked, is the other side of the equation - selling. It remains the poor cousin of buying, yet it shouldn’t be. Selling is as important to investing as breaking is to driving. Selling at the right time is just as important as timing on the entry. Yet all too often, investors only know the accelerator and gloss over the analytical framework of selling.

In doing so, they give up much of the hard work they have put in to establish the buy thesis.

In this article I will share my insights from the perspective of a global equities investor who has made misjudgments when selling and what I’ve learned from the mistakes of others and my own.

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WHY ARE INSTITUTIONAL INVESTORS SO BAD AT SELLING? It may surprise you to know institutional investors do not have an edge when it comes to selling.

Researchers studied the outcomes of selling decisions and determined there was substantial underperformance over the longterm. So bad were the selling decisions they even failed to beat a random selling strategy. These weren’t retail investors. The study looked at portfolio managers with an average US$600 million ($773 million) size. The outcome? They still failed to outperform a simple randomised strategy.

Without an analytical framework for selling, investors use mental shortcuts which are susceptible to behavioural biases and lead to inconsistent results.

Poor selling can hurt you in two

ways. First, you can sell out of a great company too early. The seed of a Californian redwood tree is only a tiny speck yet it has great potential beyond its appearance.

Dispose of those seeds and you end up missing out on a giant.

Second, a weakness in your selling process can lead to prolonging a losing investment far too long. Our cognitive biases can shroud our judgement. We can become committed to a previous decision and fail to see how changing circumstances no longer make an investment worthy of our portfolios.

THE PSYCHOLOGY OF SELLING Inspecting my own game, I came to realise the importance of a strong short game to complement my long game. By ‘short’ I mean selling stocks you own, not short selling

(which is selling what you don’t own). Most fund managers only focus on their long game and disregard the short (I suspect this is also true of their golf). The research supports this as it found professional investors are able to outperform through stock selection and buying, but many underperform when it comes to selling decisions.

But why? Buying and selling are simply two sides of the same coin. If one can make good buying decisions, why does it differ so much when it comes to selling?

USE HEURISTICS WITH CAUTION Recall earlier I introduced the term ‘mental shortcuts’. In psychology, these are known as heuristics.

They’re good for simple decision making, but detrimental when it comes to complex analysis required in investing. Without a system of

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Global equities thought when selling, we gravitate back towards a structureless approach. And this is where it can go wrong for many investors. Even at the institutional level, cognitive biases creep in. Research found the most common being: • The disposition effect: A reluctance towards selling losers, and inclination to selling winners; • Overconfidence: Assuming you will make the right decision to sell without any factual analysis; and • Narrow bracketing: Looking at decisions in isolation without consideration for the broader picture. Analysts who focus on one geographic or sector are most susceptible to this.

This makes sense; most institutional investors spend less time thinking about their selling framework as they are measured for their efforts in buying and incentives are centred around investment prowess, not divestment skill.

From my own experience, I deploy more capital to those investments that I have greater conviction in. The greater weighting reflects my analysis and the velocity which I think returns can be made. This conviction when entering a stock also translates to better selling performance on exit. Another takeaway from the study shows poor selling decisions tie closely with low conviction investing. Just think about those stocks representing the smallest proportion of your portfolio. These are the stocks you are most likely to make bad sell decisions with.

KNEE-JERKS THAT HURT One of the main reasons institutional investors make bad selling decisions is because they react to price movements.

All the fundamental analysis done when deciding to buy is not mirrored when they sell. Instead, sell decisions are either automatically triggered via stop losses or to capture recent gains.

Either way, basing selling decisions purely on price is what leads to underperformance. To counter this the questions investors should focus on are:

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• Have business prospects fundamentally changed for the future?

• Are customers migrating away from this industry?

• Does the company still retain its competitive edge?

“Cognitive biases cloud our judgement and none are worse than our feeling of commitment that encourages us to hold onto investments longer than we should.”

– Lawrence Lam

IT’S THAT TIME OF YEAR Following closely behind automated selling strategies are the financial calendar trades which occur when professional fund managers decide to sell for no other reason than to realise taxable losses or crystallise their gains as they massage their financial year-end results. Annual bonuses drive selling decisions which are proven to underperform in the long-term. From the portfolio manager’s perspective, it may not matter if they are rewarded for these decisions so long as they achieve their end of financial year key performance indicators (KPIs).

Knowing these weaknesses is one thing, mitigating them is another. It is only once these issues become known that addressing them becomes possible.

The single hardest and simplest correction for most investors is to align your long-term incentives with your selling strategy. If your investment strategy is long-term and you want to compound your investments, then set up a framework that rewards careful, fundamental analysis before selling.

The same questions when buying should be applied to selling.

Here is where private investors have an in-built advantage over institutions - they innately possess the flexibility and natural incentive to perform over the long-term; ignore the arbitrary financial year end distractions and focus on the real fundamentals. Institutional managers need to think as if they are the largest investor in their fund.

INVESTING WITH CONVICTION MATTERS Dipping toes in waters is not the optimal way to invest.

Concentration leads to outperformance as it encourages deeper analysis. Nothing like a big investment to ward off capriciousness. The benefit isn’t only on the buy side. The research shows selling decisions benefit

too when concentration is higher.

Invest mindfully and with meaning. Underperformance happens when you’re selling out of a stock you were never that convinced with in the beginning.

Easy come, easy go, but you will pay for it when you sell.

STRESS AND OTHER SUB-OPTIMAL INFLUENCE Your answers to the following three questions will inform whether you hold or sell: • Have business prospects fundamentally changed for the future?

• Are customers migrating away from this industry?

• Does the company still retain its competitive edge?

But as we have seen recently, when you’re facing a 30% to 40% drop in prices, the stomach will take over the mind. Stress sets in, sometimes even panic. This pressure is even greater for institutions who have to report back to thousands of clients. They become price-reactionary.

Heuristics invade the decisionmaking process when time is pressured. Evidence points to the most severe underperformance on sales coming after extreme price movements. Institutional investors are susceptible to mental shortcuts as they tend to use stop-losses, automatic rebalancing to benchmark weighting, and auto profit-taking triggers to simplify sell decisions.

Sell because of changes in business prospects, not because of stock price movements, even if you’re under extreme market pressure.

HOW TO USE FEEDBACK Institutions spend less time analysing the selling decision. They will meticulously track buying decisions, but they rarely analyse how selling decisions went.

LAWRENCE LAM

A technique I employ to improve selling decisions is to elucidate myself with iterative feedback. Track the results of selling decisions just as you would with buying decisions.

Each iteration of feedback informs how a sell decision can be improved for next time. Without it, investors are blind to their own mistakes.

Cognitive biases cloud our judgement and none are worse than our feeling of commitment that encourages us to hold onto investments longer than we should.

The sell decision is based on logic and business prospects in the future. Waiting for an eventual turnaround is useless if a company’s customer base has fundamentally changed, or if its competitive advantages have been eroded by competition. I have scars to show for this misjudgement.

Under-selling can be just as detrimental as over-selling.

The evolution of any investor understandably begins with focusing on buying, but sophisticated investors that truly understand when and how to sell, transcend into becoming adaptive investors able to compound wealth in any market condition. Adaptive capital is where you ride each wave as it presents itself. To do that, you need to be skillful at braking, not just accelerating.

Lawrence Lam is managing director and founder of Lumenary.

17/02/2021 2:46:49 PM

24 | Money Management February 25, 2021

Emerging markets

OPPORTUNITIES IN A CHANGED EMERGING MARKET UNIVERSE Douglas Ayton identifies the bright spots of the emerging markets universe as the region recovers from the COVID-19 pandemic.

EQUITY MARKETS HAVE extended their rally into 2021, discounting slowing economic growth rates emanating from renewed lockdowns, responding to central bank assurances concerning maintenance of easy monetary policies and an expectation of a successful vaccination program over 2021.

Addressing a global pandemic, vaccination progress appears to fall well short of its elimination, especially for emerging markets with several countries operating inadequate distribution infrastructure. A return to “normal” pre-COVID activity levels continues to be delayed, at this stage well beyond 2021.

Asia’s emerging markets, dominated by China, Korea, and Taiwan, have displayed better pandemic controls, and recorded solid recoveries in their respective manufacturing activity. Somewhat ironically, given COVID-19’s origin, China’s economic recovery over 2020 is virtually V-shaped, representing the only major economy to expand relative to 2019 (gross domestic product (GDP) grew approximately 2% year-onyear (YoY) versus the estimated global GDP contraction of 3.5%).

Successful suppression of COVID-19 infections is critical to keeping businesses open and goods moving. In this respect Korea and Taiwan have performed well, and their 2021 annual corporate earnings are forecast to grow 20% YoY, aided by significant technology industry representation, boosting the region’s aggregate earnings recovery.

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An attractive sector offering long-term structural growth is technology, currently via the evolution of the Internet of Things (IoT), 5G and artificial intelligence.

Digital technology is transforming the use, application and storage of information such as data, with the expanding application in our everyday lives.

Semiconductor chips are integral via the supply of memory and processing power to drive applications. Taiwan and Korea are advantageously placed with marketleading stocks, including TSMC for logic supply, and Samsung Electronics and SK Hynix for the supply of memory. Memory demand is experiencing robust demand from data centres and the early stages of the next smartphone upgrade cycle to 5G. Smartphones and highperformance computing processes are driving investment in further chip transistor compression for the provision of smaller and more powerful devices.

India is another market we view favourably. The country experienced a sharp 24% YoY contraction in 2Q20 GDP because of its two-month lockdown in response to the pandemic but was quick to recover as restrictions were eased. The government struck a balance between managing infections and keeping businesses and the population actively engaged. Activity and confidence levels have returned to near pre-COVID levels. Optimism concerning 2021 continues to rise, aided by the stark improvement in daily new infections, which peaked in mid-September but have since has fallen more than 85%.

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Emerging markets Strap

Improving sentiment is evidenced with the services PMI returning to normal levels. Confidence is an important driver for consumption growth in 2021 if health concerns subside as expected.

Indonesia is a classic emerging market with its large population base and significant development potential. The country’s recorded infection rate did not spike to the degree of India, rather experiencing a gradual consistent rise, currently at a similar new daily infection rate as India. Both countries share similar high nominal interest rates (notable exceptions in today’s global low yield environment), a carryover from the countries’ inflationary past.

Two years ago, both countries real cash rates approximated 2.5% but have since diverged with India down 2.5% and Indonesia up 2.0%. Both central banks’ policy rates followed a similar path, with the difference a function of their respective inflation rates, with Indonesia’s headline and core consumer price index (CPI) staying below the central bank’s target since 2015.

Indonesian authorities are sensitive to foreign capital inflow and currency instability, resulting in sustained high real interest rates.

Opportunity exists should real borrowing costs be reduced, particularly via productivity enhancements. In this regard we are encouraged by the introduction of the Omnibus Law (Jobs Creation Bill) in late 2020, aimed at stimulating investment and job creation. The government will in turn need to lower its twin deficit requirement following budget deficit deterioration in response to the pandemic to realise the reduction in funding cost.

SUSTAINED US DOLLAR WEAKNESS Meanwhile the US appears set to persist with elevated twin deficits in budget and trade, as the Biden administration’s substantial proposed stimulus programs are likely to gain approval from Congress, maintaining the recent record high both in nominal and real terms in broad money supply.

We quote Treasury Secretary Yellen: “In a very low interest-rate

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environment… even though the amount of debt relative to the economy has gone up… interest burden hasn’t… the smartest thing we can do is act big… the value of the US dollar and other currencies should be determined by markets”.

In our view, this represents an important positive tailwind for emerging market equity markets by attracting foreign investment, encouraging higher commodity prices, and easing funding pressure on externally-sourced debt.

Although, one potential headwind concern of a weaker USD is a stronger renminbi, reducing relative competitiveness of China’s exported goods, and those emerging markets with “managed currencies” such as Hong Kong and Taiwan.

ACTIVE MANAGEMENT IN EMERGING MARKETS China’s equities lagged the MSCI Emerging Market index over 2020 despite the economy’s impressive economic growth recovery.

Authorities have displayed relative restraint of fiscal and monetary stimulus compared with other major economies, yet there are other pressures emerging notably an acceleration in accumulated debt, evident since the Global Financial Crisis, raising debt to GDP to more than 280%, likely leading to policy enactment targeting restrained credit growth in 2021, from the +14% Total Social Financing growth rate of 2020.

China accounts for an expanded 40% share of the emerging market benchmark, triple the next largest constituent. Mainland China as an investment destination faces a material hurdle due to its high cost of capital. Over time we are observing a deterioration of desired pillars relating to investor protection, including encroachment of the Chinese Communist Party across all facets of society including the corporate sector, on top of its control of the judiciary, military, and media.

There are also concerns over property rights and the enforcement of “Variable Interest Entity (VIE)” structures where the investor does not have direct ownership of the underlying assets

as they are in sectors where foreign ownership is prohibited.

An additional mainland China corporate governance concern arose in late 2020 concerning Alibaba – the Chinese internet, e-commerce, and content behemoth. Founder Jack Ma made disparaging public remarks in October 2020 regarding the regulator resulting in the lastminute cancellation of the company’s Ant Group US$35 billion ($44.9 billion) initial public offering (IPO), the world’s largest. This coincided with an antitrust investigation into Alibaba and a two-month disappearance of Ma himself. Alibaba stock fell nearly 30% over the two months, a material occurrence given its benchmark prominence and 6% index weight.

Note that majority ownership of Ant Financial’s predecessor Alipay was transferred from Alibaba to an entity controlled by Jack Ma and 17 other executives in 2011. The transfer happened without the knowledge or approval of Alibaba’s minority shareholders, including Yahoo!, who owned 43% of the company at the time. This was possible due to the VIE ownership structure which gave Alibaba’s onshore shareholders near complete autonomy over business decisions.

Moreover, Ant Financial was set to be valued at c. $300-400 billion before its IPO was pulled, so the ownership loss of half of this significant business by Alibaba minorities in 2011 could be considered to be one of the largest cases of corporate theft in history!

Despite this historic case of egregious governance, investors still queued up for Ant Financial’s IPO last year with $3 trillion of orders.

Geopolitical tensions between China and the US are another source of potential investment risk, recent development include the November 2020 signing of an Executive Order prohibiting US investor’s purchase of securities identified as “Communist Chinese military companies”. The original list numbered 31 companies, including the three major telecommunication

players listed in the US and Hong Kong, resulting in their removal from the benchmark and a combined loss of US$30 billion in market capitalisation over six weeks.

Tensions between the US and China are also increasingly on display in the Taiwan Strait with the Chinese air force recently conducting sorties over the southwestern corner of Taiwan’s Air Defence Identification Zone. The timing is possibly an early test of the new US administration’s resolve to enforce freedom of navigation through the disputed territory in the South China Sea. Ultimately, if China gets too provocative on Taiwan, then there is a significant risk its financial markets would suffer from foreign capital outflows and trade and investment embargoes.

CONCLUSION As we commence 2021 the world continues to grapple with significant challenges, yet as always there are appealing opportunities with which to focus attention and capital.

Emerging market equities remains an attractive asset class but requiring very careful and consistent application of active equity investment.

For 2021, there is a risk the emerging market economic recovery could disappoint (due in part to the slower than expected rollout of vaccinations and some tapering in fiscal and monetary stimulus). This reinforces the requirement to own structural growth companies with strong balance sheets, that can prosper, almost on their own volition despite COVID-19 complications.

While there are several opportunities we are seeing across parts of Asia and more broadly in emerging markets, despite its V-shaped 2020 recovery, given the risks highlighted above, we remain comfortable holding a deep underweight versus China’s equity market benchmark weighting.

Douglas Ayton is emerging markets portfolio manager/analyst at Warakirri.

17/02/2021 9:41:47 AM

26 | Money Management February 25, 2021

Toolbox

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February 25, 2021 Money Management | 27

Toolbox

CONSIDERING A LISTED VEHICLE Angus Gluskie outlines the difference between listed vehicles and their open-ended counterparts and the benefits they offer investors.

THE LISTED INVESTMENT company (LIC) and trust (LIT) sector contains some of the largest and most costefficient actively managed investment entities that can be accessed by retail investors in Australia with more than 700,000 individual investors in LICs and LITs. Here we outline some of the key things financial advisers and investors need to know about this unique sector.

PROFESSIONAL INVESTMENT MANAGEMENT At their most fundamental level LICs and LITs are professionallymanaged investment entities which provide investors with the potential to receive the income and capital growth from the underlying investments.

As such they can give investors: • Access to assets and asset classes that may not otherwise be available to a small private investor; and • Exposure to differing investment management strategies and investment teams.

CLOSED-END STRUCTURE A key feature of LICs and LITs is that they are closed-end investment entities that have a fixed capital base. A fixed capital base, means that: 1) A LIC or LIT raises capital in one block at a specified point of time (unlike open-ended managed funds that may

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raise capital via investor deposits continuously); and 2) Investors in LICs/LITs increase or decrease their investment by buying and selling shares in the LIC/LIT via the Australian Securities Exchange (ASX), rather than depositing/withdrawing moneys from the LIC/LIT.

A STRUCTURE SUITED TO LONGER-TERM INVESTING In any well-functioning economy, it is vital to have investment structures that can provide long term investment funding.

Property, fixed income, infrastructure, renewable energy, lending, and even general business investment all require longer-term capital.

Closed-end funds, with their fixed capital, are one of the few investment entities that are naturally suited to the funding of assets that require this longerterm investment horizon.

This is in contrast when open-ended funds invest in longer term assets, they may be forced to sell those investments in order to fund investor withdrawal requests. This would particularly be the case in weak and fearful markets.

TAX AND COST BENEFITS A further potential benefit of the closed-end structure of LICs/ LITs are tax and cost savings.

Open-ended managed funds and exchange traded funds (ETFs) must repeatedly buy and

sell assets to match the continuous ebb and flow of investor deposits and withdrawals. These repeated purchases and sales incur transaction costs and crystallise tax liabilities on gains.

Because they do not have to sell assets to fund periodic investor withdrawals, a LIC or LIT should incur fewer transactional costs (the costs of buying and selling the underlying investment assets) and may also realise capital gains for tax purposes less frequently than open-ended funds.

LIC and LIT investors are also less exposed to the risks faced by investors in openended funds, where the hidden, deferred tax liabilities of the fund become the burden of the residual ongoing investors following a period of large withdrawals by others.

TRANSPARENT VALUATION By buying and selling shares and units in LICs and LITs on an exchange, investors transact at a price which takes account of all factors considered relevant.

This may include asset backing, structural risks, benefits and opportunities, expectations, embedded tax liabilities or benefits or differing views on the value of underlying assets.

The price of a LIC or LIT determined in the open market on the ASX may be higher, lower or the same as the underlying net asset backing. This is

Continued on page 28

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28 | Money Management February 25, 2021

Toolbox

CPD QUIZ This activity has been pre-accredited by the Financial Planning Association for 0.25 CPD credit, which may be used by financial planners as supporting evidence of ongoing professional development.

1 What are LICs and LITs? a) ASX listed closed end investment vehicles b) A SX listed open ended investment structures c) T ax minimisation investments d) A variation of ETFs e) Unlisted investments Continued from page 27 referred to as trading at a premium or discount to asset backing.

The trading of LICs and LITs at premiums or discounts to net asset backing or value is a normal and important part of closedended fund operation and is the mechanism by which the net demand of buyers and net supply by sellers may be matched-up.

STABILITY BENEFITS Because of their fixed capital, LICs and LITs are one of the few entities that can be a buyer of assets in weak and fearful markets.

This has the important benefit of assisting in the stabilisation of investment markets.

In contrast, open-ended funds and ETFs typically receive net investor deposits, and must invest those moneys, during periods of market buoyancy in turn pushing market prices higher. Similarly, such funds typically receive net investor withdrawal requests during periods of fear and market weakness and accordingly they become a seller of their underlying assets which may push asset prices down further. In this way open-ended funds and ETFs are pro-cyclical investors with the consequence for investment markets that this may exacerbate market volatility.

CORPORATE GOVERNANCE DISCIPLINES FROM ASX LISTING As ASX-listed entities, LICs and LITs must comply with the ASX Listing Rules. These listing rules contain important requirements designed to protect shareholders. They seek to promote transparent and timely disclosures of information that may be needed by investors and encourage high standards of corporate governance and oversight to be implemented.

The strength of these corporate governance protections may be one of the reasons why the ASX listed LIC and LIT sector contains several of Australia’s largest and oldest investment funds.

LOOKING AHEAD LICs and LITs have been assisting investors in growing their wealth for nearly 100 years. The efficiency and stability of their closed-end structure coupled with the corporate governance disciplines of ASX listing have proven to be far more durable than many other investment structures.

As market conditions stabilise, the industry hopes that a further range of LICs and LITs will be brought to market, in turn providing investors with a continued expansion of investment choice.

Angus Gluskie is chair of Listed Investment Companies and Trusts Association.

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2 What is the aim of the ASX Listing Rules? a) P rovide rules to protect the interests of shareholders in ASX listed LICs and LITs b) Seek to protect investors in unlisted managed funds c) S eek to protect investors in ETFs d) P rovide rules to protect advisers e) Provide rules that specify which shares an investor may buy and sell 3 As LICs and LITs do not have to sell assets to fund periodic investor withdrawals, they: a) M ay incur fewer transaction costs and realise capital gains less frequently than open-end funds b) Repeatedly buy and sell assets to match the continuous ebb and flow of investor deposits and withdrawals ave greater trading costs c) H d) A re more volatile than general equity investments e) Are harder to value 4 In any well-functioning economy, it is vital to have investment structures that can provide: a) I nvestment funding for longer-term projects b) Tax-minimisation investing for investors c) E xposure to overseas investments d) C apital-gains focused assets 5 The trading of LICs and LITs at premiums or discounts to net asset backing or value: a) I s a normal and important part of closed-end fund operations b) Does not take account of any factors other than asset backing c) I s where investor deposits and withdrawals result in variations in net asset backing d) O ffers opportunities for financial advisers

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/considering-listed-vehicle

For more information about the CPD Quiz, please email education@moneymanagement.com.au

18/02/2021 11:01:30 AM

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1/02/2021 9:45:13 AM

30 | Money Management February 25, 2021

Send your appointments to chris.dastoor@moneymanagement.com.au

Appointments

Move of the WEEK Sam Hallinan Australian chief executive Schroders

Global investment manager Schroders has appointed Sam Hallinan as Australian chief executive (CEO), commencing in April.

He joined from Nikko Asset Management where he was managing director of the Australian business since 2015.

Hallinan had over 25 years’ experience in financial services with leadership roles in the Australian asset management industry.

Macquarie Asset Management (MAM) group head, Martin Stanley, is to step down effective 1 April and become chair of the group.

Macquarie said that Stanley would become chair of MAM and remain on the regional infrastructure and investment committees.

The company said Ben Way, who currently led the global alternatives division of MAM and was also Macquarie Group’s Asia chief executive, would become group head of MAM and join the executive committee.

Lifespan Financial Planning has boosted support for its networks of financial advisers with the appoint of two national practice development managers: Kevin Mayne and Lisa Ng. Mayne joined Lifespan after more than five years as a regional manager at Elders Financial Planning, where he oversaw the firm’s advisers based in New South Wales, Queensland, Western Australia and Northern Territory.

Ng joined Lifespan from Xplore Wealth, where she served

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His role would provide a dedicated, focussed oversight of the Australian business as it invested in strengthening existing capabilities in Australian equities, multi-asset, fixed income and global equities, while extending its capabilities including the local build-out of its private debt team and tailored client solutions.

He would report to Chris Durack, coCEO APAC, who would continue to have

as state distribution manager for the firm’s managed discretionary accounts service over the past two years.

Perpetual has made three appointments to the group’s global distribution team, including two in the Australia team.

Ben Daly has been appointed as director of institutional business for Perpetual Asset Management Australia, while Nicole Aubrey had been appointed as senior manager national accounts for Australia.

Rob Kenyon has been appointed as head of intermediary and business management, Americas, and would be based in New York.

Daly had previously held senior leadership roles at T. Rowe Price and Goldman Sachs, while Aubrey had over 18 years’ experience in financial services and had held roles with HRL Morrison, Pendal Group and Investors Mutual.

Daly and Kenyon had already commenced their roles, but Aubrey would commence in early March.

Platinum Investment Management has undergone a management reshuffle with Clay Smolinski promoted from portfolio manager to

oversight of the Australian business as part of his regional responsibilities and would remain a director of Schroders Australia.

“Sam’s experience and proven leadership will add further depth to our management capability as we remain focused on delivering great investment outcomes for our Australian clients,” Durack said.

co-chief investment officer (CIO).

The firm said he would work alongside current CIO Andrew Clifford and would take effect from 1 April, 2021.

Smolinski joined the firm in 2006 and became the portfolio manager of the $542 million Platinum European fund then the $217 million Platinum Unhedged fund. In July 2018, he was appointed to comanage the $8.1 billion Platinum International fund.

Clifford and Cameron Robertson were also appointed to co-manage the firm’s Asia ex Japan strategies following the resignation of former manager Joseph Lai at the end of 2020 after 17 years.

Clifford previously managed the strategies from 2003 to 2014 while Robertson had worked as co-manager of the $176 million Platinum International Technology fund since 2017.

Meanwhile, Nikola Dvornak would be appointed as a comanager to the Platinum International fund and the Platinum Capital Ltd listed investment company, alongside Clifford and Smolinski. Having joined in 2006, he was currently manager of the $542 million Platinum European fund.

Perpetual Private is enhancing its family office services through the creation of a new team dedicated to family office clients, appointing Nick Lipscombe to head the team.

He would commence the role in March, leading the new national team based in Sydney.

An additional four specialists would join in March: Michelle Maynard as partner, Frederick Cotter and Peter Whitehead as associate partners, and Leonie Rigney as associate.

Lipscombe would be responsible for developing and extending Perpetual’s existing family office service which focused on ultra-high net worth clients and family offices.

Building and construction industry super fund Cbus has made three appointments to head its property, private equity, and equity portfolio construction teams. All three appointments would join in February.

The three new heads would be: • John Longo, head of property; • Serge Allaire, head of private equity; and • James Crawford, head of portfolio construction.

18/02/2021 10:20:08 AM

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1/02/2021 9:44:25 AM

OUTSIDER OUT

ManagementFebruary April 2, 2015 32 | Money Management 25, 2021

A light-hearted look at the other side of making money

Dear Jane, it’s a different tune but the same hymn sheet

Heroes come and heroes go but advisers soldier on

OUTSIDER has been hoping beyond hope that “Persevering Jane”, the Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume, was speaking tongue in cheek when she told the recent Association of Superannuation Funds of Australia conference that she was receiving good news from super fund boards and executives which did not line up with the bad news from industry organisations.

Persevering Jane told the conference: “Sometimes there’s a disconnect from what I heard from the funds and industry bodies. What I hear from chief executives and from boards and then there’s something completely different in newspapers – this is my greatest frustration”.

Newsflash, minister. The late Kerry Francis Bullmore Packer aside, it takes a very brave company director or executive to bluntly tell a minister of the Crown that their policy approach is crap lest it show up on the balance sheet – bad news is therefore a job

FINANCIAL planners are more often kicked than heaped with bouquets in the Federal Parliament and so when politicians come along prepared to listen to financial planners and challenge the positions and decisions of the Australian Securities and Investments Commission then they are much to be treasured.

And in recent years financial planners found some parliamentarians prepared, if not to champion their cause, then to at least not condemn them out of hand to question why financial planners were having to deal with presumed guilt even when events were perpetrated by accountants, product manufacturers or lawyers.

And among the parliamentarians to have given financial planners are fair hearing were the Liberal Member for the Sydney Northern Beaches seat of Mackellar, Jason Falinski, Queensland Liberal backbencher and former financial adviser, Bert Van Manen, and, of course, the somewhat pugnacious Queensland Senator, Amanda Stoker.

Sadly for financial advisers, Stoker has been elevated to the Government’s outer ministry as assistant minister to the AttorneyGeneral, while Falinski has been moved off the Parliamentary Joint Committee on Corporations and Financial Services where he was doing solid work in questioning ASIC. So, as the Parliamentary year kicked off in Canberra, many adviser eyes were looking towards Van Manen to keep fighting the fight.

The good news for advisers is, however, that the new chair of the Parliamentary Joint Committee, Queensland Andrew Wallace, has signalled that he has been listening to advisers within his electorate of Fisher covering the Sunshine Coast.

best left to industry bodies and associations which can then absorb the pain.

Outsider has seen the $15,000 a year and substantially higher membership fees that major corporates and superannuation funds pay to be members of industry associations and in his experience those who pay the piper call the tune even if that tune is discordant to the delicate ears of ministers.

Given the minister’s past experience in the financial services industry Outsider is surprised she does not better understand the value of outsourcing.

Manfully facing up to the impending absence of Facebook IT will surprise no one that Outsider is not “on” Facebook. He is definitely on what most would know as “Wrinkly Facebook” aka LinkedIn, but he has never thought that Facebook was the right forum for a gentleman of his stature.

What is more, Outsider has vivid memories of having espied over the shoulder of one very much former employee a comment being typed into Facebook stating “I’m bored” prompting Outsider to suggest politely that perhaps her boredom could be alleviated by doing her ^$*&^*^ job – old style management techniques still have their place.

It should go without saying, then, that neither

OUT OF CONTEXT www.moneymanagement.com.au

02MM250221_26-32.indd 32

Outsider nor Money Management give a toss about the news that Facebook will not be including news on its site because it doesn’t believe it should have to pay publishers for the privilege of doing so.

Now, because Outsider is not a member of Facebook and has no friends he can safely say he won’t notice whatever changes the social media platform puts in place and he suspects that most readers of Money Management aren’t actually using Facebook as a business resource and will similarly not feel deprived.

To those Money Management readers who do access Outsider’s content via Facebook he has two words: Bye Bye.

"If someone only has a few weeks to live, we don't give them a hip replacement and we may not give them a vaccine, so that's what we're hinting at."

"Unlikely we'll stop building buildings."

– John Skerritt, head of the Therapeutic Goods Administration on vaccines for people “nearing the end of life”

– Bill Gates

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18/02/2021 1:52:58 PM