Money Management | Vol. 35 No 4 | March 25, 2021

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

www.moneymanagement.com.au

Vol. 35 No 4 | March 25, 2021

14

INFOCUS

Rising the ASIC levy

26

PROPERTY

Income from real estate

FE FUNDINFO CROWN FUND RATINGS

Thematic investing

FPA challenges TPB to properly define ‘tax financial advice’

BY MIKE TAYLOR

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Crowns go to those astutely riding Australia’s COVID recovery THE FE fundinfo quantitative Crown ratings have been rebalanced reflecting fund manager performance through the second half of 2020 and they tell a story of how having well-directed strategies in the right sectors helped managers derive returns from Australia’s accelerating economic recovery.

The rebalance covered fund manager performance to the end of December, last year, and reflected economic and market conditions influenced by the economic and political events which occurred ahead of the significant vaccine rollouts which have marked the start of 2021.

So, the factors in play were the second waves of the pandemic sweeping through Europe and the volatility which surrounded the US presidential election leading up to the storming of the Capitol.

In circumstances where the markets moved through what effectively represented 10 months of a global pandemic, the quantitative data underpinning the Crown ratings revealed that reputations can take a battering in uncertain times, particularly for those managers focused on global equities.

The bottom line in terms of investment team experience has been reflected in the 5 Crown performances of IOOF and First Sentier Investors, while the importance of choosing the right companies in the right sectors was reflected in those managers focused on Australian small and mid-cap equities.

Australian small and mid-cap equities had the highest percentage of 5 Crown rated funds – something which appears to have reflected the manner in which the Australian economy began to regather the momentum which had been lost amid the lockdowns and job losses of the first half of 2020.

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Full feature on page 20

30

TOOLBOX

THE FINANCIAL Planning Association (FPA) has hit out at the Tax Practitioners Board (TPB) for failing to align the rules for tax financial advisers with the Financial Adviser Standards and Ethics Authority (FASEA) regime while failing to define what actually represents tax financial advice that falls outside the definition of financial advice.

In a strongly-worded submission to the TPB, the FPA said it was extremely disappointed “by the TPB’s reluctance to unconditionally accept the [Continuing Professional Education] CPE 1 completed for FASEA purposes as meeting the TPB CPE requirements for tax (financial) advisers (TFAs).

“The FPA notes that the TPB have mirrored many of the FASEA requirements in the proposed

amendments to its CPE policy.

However, as these proposals do not replicate in whole the higher FASEA requirements without conditions, it creates two mis-matched systems that will lead to confusion and more red tape for tax (financial) advisers,” the FPA said.

“Since the 11 February, 2021, release of the Exposure Draft CPE Policy for TFAs for public consultation, the FPA has received feedback from numerous practitioner members stating that the TPB draft policy (for example): • Is confusing; • Requires TFAs to undertake an additional 120 hours of CPE on top of the FASEA requirement; and • Does not align with the record keeping timeframes for FASEA CPE which will mean that TFAs Continued on page 3

FASEA January exam saw underperformance in all areas

BY CHRIS DASTOOR

ANALYSIS from the Financial Adviser Standards and Ethics Authority (FASEA) has highlighted problem areas from the January exam which has seen the lowest pass rate of the 10 exams so far.

FASEA announced a pass rate of 67% for the January exam, which included a 46% pass rate for re-sitters.

The exam tested three areas: financial advice regulatory and legal obligations, applied ethical and professional reasoning and communication, and financial advice construction.

In financial advice regulatory and legal obligations, candidates underperformed with: Continued on page 3

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March 25, 2021 Money Management | 3

News

FASEA exam sees lowest pass rate

BY CHRIS DASTOOR

ONLY 67% of advisers have passed the January Financial Adviser Standards and Ethics Authority (FASEA) exam.

The overall average pass rate for the exam was 78%, and 89% of advisers who sat the exam had now passed.

For first time sitters, 73% passed, while 46% of advisers re-sitting the exam passed on their second attempt.

Overall, 83.6% of first-time sitters had passed the exams while 55% of re-sitters had passed.

Over 12,000 had passed the exam which represented 57% of advisers on The Australian Securities and Investment Commission’s (ASIC’s) Financial Adviser Register (FAR).

Stephen Glenfield, FASEA chief

executive, said over 13,440 advisers had sat the exam with nine-in-10 demonstrating they had the skills to apply their knowledge of advice construction, ethics and legal requirements to the practical scenarios tested in the exam.

“In recognition of their achievement, passing candidates who give consent, will have their names added to the successful candidates list on the FASEA website,” Glenfield said.

Candidates who were unsuccessful in this exam would receive additional individual feedback to highlight the curriculum areas that they have underperformed.

They would also receive an invitation to a FASEA-led webinar to help them understand their results and provide guidance on how to prepare for their next sitting.

FPA challenges TPB to properly define ‘tax financial advice’

FASEA January exam saw underperformance in all areas

Continued from page 1 will need to maintain two sets of records.”

It said that, most significantly, “practitioners are confused about: • What exact TFA services they provide that are not also personal financial advice services under the Corporations Act; and • Therefore, what topic areas of CPE are not captured under the FASEA requirements, through the individual’s licensee approved CPD Plan, that the TPB would expect a TFA to undertake.”

The FPA said it had to continually request that Treasury and the TPB provide clear examples of TFA services that fall outside the definition of personal financial advice since the proposed application of the Tax Agent Services Act to financial planners in 2008.

“Clear examples of services and circumstances in which a financial planner would be providing a tax (financial) advice service, but not personal financial advice, would help the profession identify the gaps in the CPE undertaken for FASEA purposes.

“Without clear examples of these services, the TPB’s proposed CPE policy for TFAs is confusing and unnecessarily creates additional red tape for financial planners that will provide no extra benefit for consumers,” the FPA said. “Rather, it will drive up the cost of financial advice for Australians.”

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Continued from page 1 • Demonstrating an understanding of different types of advice (e.g. personal advice, general advice and factual information) and how they applied to different client scenarios; • Demonstrating knowledge of the components of key advice documentation that is provided to the client i.e. financial services guide (FSG)/statement of advice (SoA); and • Applying relevant sections of the Corporations Act when identifying responsible provider obligations, including breaches of those obligations.

In applied ethical and professional reasoning and communication, candidates underperformed with: • Demonstrating a practical application of due diligence in financial advice; • Identifying sources of judgement and biases, and their influence on financial advice;

• Applying best interest duty and associated ethical obligations when providing financial advice; and • Effectively applying the FASEA code to client various scenarios.

In financial advice construction, candidates underperformed with: • Demonstrating an understanding of the context in which financial advice was given and requested, and how this impacts decision making.

Existing advisers had until 31 December, 2021, to pass the exam and there were five more sittings available.

Over 2,300 advisers had booked for the March exam which would be held on 25 to 30 March, which had closed registrations.

Over 800 advisers had booked for the May exam which would be held on 20 to 25 May; registrations for that exam were open until 30 April.

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4 | Money Management March 25, 2021

Editorial

mike.taylor@moneymanagement.com.au

USER-PAYS A COSTLY AND FLAWED MODEL FOR ASIC FUNDING

FE Money Management Pty Ltd Level 10

The increases in the Australian Securities and Investments Commission levy and the fact that they are occurring even before a single disciplinary body or a compensation scheme of last resort are established should tell the Government its user-pays regime is badly flawed and in need of change.

THOSE financial planning firms who have already received their invoices from the Australian Securities and Investments Commission (ASIC) for the 2019-20 supervisory levy should know that, no matter how loudly they complain, there is no avoiding the reality of the near 60% increase it contains.

However, the Association of Financial Advisers (AFA) was right to suggest to its members that they should, nonetheless, make their feelings known to their local Federal Parliamentarians and, in particular, that they should seek to directly lobby the Treasurer, Josh Frydenberg, because it is the Treasurer who has the power to direct change.

Of course, the die was cast with respect to the ASIC levy well before the Frydenberg became Federal Treasurer. Indeed, the man in charge of the Treasury portfolio when the user-pays regime was introduced in 2017 was the man who is now Prime Minster, Scott Morrison.

What also needs to be remembered was that ASIC’s executive had lobbied for years in favour of a user-pays regime producing arguments highly

attractive to a Government keen to substantially remove the direct cost of financial services regulation from the Budget.

Indeed, in 2014, ASIC actually produced a brief for members of Parliament in which it argued its case by suggesting that the “proposed user-pays funding model is not about increasing ASIC’s budget but about providing economic incentives to drive the regulatory outcomes set by Government.

“The cost of using ASIC’s resources has grown significantly out of line with the revenue we collect from the sectors we regulate,” the ASIC brief said. “Recovering the cost of using ASIC’s resources through an outcomes focused user-pays funding model can drive economic efficiencies and: a) Encourage self-regulation; b) Limit overuse of ASIC’s resources; c) Create greater visibility and cost accountability for ASIC; d) Foster opportunities to better target regulatory outcomes; and e) Strengthen ASIC’s operational independence.”

While many Parliamentarians would have recognised at the time that user-pays would increase the

burden on the industry, some might have been at least partly satisfied by ASIC’s 2014 assurances that it would be working to reduce red tape and the regulatory compliance burden.

A lot has changed since ASIC produced that briefing note including a Royal Commission, a chastened regulator pursuing proactive litigation and the major banks exiting wealth management.

What financial advice firms now know is that whatever formulas ASIC believed in and promoted in 2014 have long since expired the increased cost of regulation, with the exit of the banks, is now being carried by fewer and smaller firms. What is more, all this is happening even before the Government puts in place its single disciplinary body and compensation scheme of last resort.

The message that Frydenberg should be taking on board is that ASIC’s arguments in favour of user-pays were always flawed and that it is time that key elements of financial services regulation were again underwritten by Budget financing.

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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Money Management is printed by Bluestar Print, Silverwater NSW. Published fortnightly.

Subscription rates: 1 year A$244 plus GST. Overseas prices apply. All Money Management material is copyright. Reproduction in whole or in part is not allowed without written permission from the editor. © 2021. Supplied images © 2021 iStock by Getty Images. Opinions expressed in Money Management are not

Mike Taylor Managing Editor

necessarily those of Money Management or FE Money Management Pty Ltd.

WHAT’S ON ASFA Policy Roadshow

AFA Community Social Event

Sydney, NSW 26 March superannuation.asn.au

Brisbane, QLD 26 March afa.asn.au/event

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FPA SA Chapter Professional Development

Preparing for the new Design and Distribution Obligations (DDO)

Adelaide, SA 29 March fpa.com.au/events

Webinar 30 March superannuation.asn.au

ACN 618 558 295 www.fe-fundinfo.com © Copyright FE Money Management Pty Ltd, 2021

17/03/2021 1:18:03 PM

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24/02/2021 5:26:07 PM

6 | Money Management March 25, 2021

News

Count Financial lures four more IOOF advice firms

BY MIKE TAYLOR

COUNT Financial has netted more adviser growth amid the changes being wrought because of IOOF’s acquisition of MLC Wealth with the company announcing it has picked up four advice firms which had previously worked under IOOF licenses.

Following on from announcing the recruitment of three other advice firms affected by the IOOF/MLC Wealth transaction, Count announced that the four further firms recruited to its licenses had previously been part of the IOOF network, operating under the Bridges and Executive Wealth Management Financial Services licenses.

It said the three former Bridges firms will rebrand as: • Magnis Financial Planning (formerly Bridges

Thornleigh, NSW) – with Alison Antoinette as the principal adviser; • Glenbuckie (formerly Bridges Launceston, Tasmania) with Glenn Torrents (principal) and Sally Bell as advisers; and • Aim Financial Advice (formerly Bridges Essendon, Victoria) with Susan and Luke Di Pietro, a mother and son team.

Additionally, it said that Count was also being joined by Sydney-based accounting-led firm, Strategic Wealth Management (formerly licensed through Executive Wealth Management Financial Services) and led by principal Nicholas Moustacas.

Commenting on the decision to switch licenses, Moustacas said there were three key factors that stood out.

“The fact that Count Financial are not owned by a company that’s main priority is to sell product

was important. Secondly, there are clearly no hidden agendas with their model. We have the support to succeed because they know our growth and success is linked to theirs,” he said.

“And thirdly, in my opinion their professional standards team is the best in the industry, which gives us comfort that the other advisers in the network will have the same high level of standards and processes that we strive to maintain.”

Count Financial chief advice officer, Andrew Kennedy, said the appointment of the four firms were a huge coup for the licensee which continues to target quality advice firms to join its network.

“These are all quality advice firms that have a reputation for delivering exceptional client outcomes, so we’re extremely pleased to have them coming on board.”

Who’s makes the complex simple?

AMP’s top executives on ‘retention payments’ AMP Limited has revealed it is paying some of its most senior executives retention payments to ensure they remain aboard the big financial group.

The retention payments have been revealed by AMP chair, Debra Hazelton, ahead of the company’s annual general meeting and come despite AMP having earlier notified shareholders that the chief executive and key management personnel would not be receiving short-term incentives.

It said this was to align remuneration with shareholder outcomes.

However, Hazelton said that “in recognition of the potential risk of losing key executives during the portfolio review process, the board has approved some limited retention payments to be paid later in 2021”.

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17/03/2021 3:57:26 PM

March 25, 2021 Money Management | 7

News

Salaried advisers signal preference for self-employment

BY MIKE TAYLOR

GIVEN the choice, a majority of salaried financial advisers would prefer to be self-employed authorised representatives (ARs).

That is one of the key bottom lines of a survey conducted by Money Management seeking to determine the attitudes of financial advisers amid the intense competition being exhibited by licensees to attract financial advice practices amid the uncertainty created by transactions such as IOOF’s acquisition of MLC Wealth and the restructuring being undertaken within AMP Limited.

Asked if, as a salaried adviser,

they would prefer working on a self-employed AR basis, nearly three-quarters of respondents answered ‘yes’.

But, just as importantly, the survey revealed that most advisers were cautiously open to changing licensees in the right circumstances with more than 70% stating that they were not entirely happy with their existing licensee.

And the major reason for that unhappiness appeared to be the lack of a personal approach on the part of their existing licensees and the notion that, in many instances, dealer groups were being run by people without financial planning experience.

Common explanations amongst those unhappy with their existing licensees was that those running the dealer groups were more interested in protecting the licensee’s brand rather than looking to the interests of advisers and their clients.

In a number of cases, survey respondents cited a licensee’s preference for serving the needs of salaried advisers over the needs of ARs. Some respondents were also critical of the technology made available to them via the licensee and the amount being levied on ARs to cover the cost of that technology.

Hardly surprisingly,

respondents who identified themselves as working under AMP, IOOF and MLC licenses signalled that they were most interested in the possibility of changing licensees and that they were aware over overtures having been made to the principals of the advice practices within which they were working.

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

ASIC prosecution against TAL a half win MAJOR insurer TAL has both acknowledged and defended its position with respect to having been prosecuted in the Federal Court on action pursued by the Australian Securities and Investments Commission (ASIC).

While acknowledging that ASIC had succeeded in pursuing its charges relating to TAL having breached its duty of utmost good faith in relation to some aspects of claims handling, it pointed out that the regulator had lost its argument that TAL was guilty of false or misleading conduct with respect to the handling of the claim.

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The ASIC charges against TAL flowed from a case study referred from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

TAL acknowledges the judgment of the Federal Court in the proceedings brought by ASIC involving a customer claim made in January 2014, which was previously examined as a case study by the Royal Commission into Financial Services.

“We note the Court’s dismissal of ASIC’s allegations of false or misleading conduct in the handling of this claim, and the findings that TAL breached its duty of utmost good faith in relation

to some aspects of the claim handling.

“At all times during the claims assessment process we endeavour to employ an empathetic and sensitive approach and communicate fully with our customers, and we have previously acknowledged that aspects of the handling of this claim fell below those standards.

“This is not representative of the claims experience we endeavour to provide for our customers, and we continue to refine and improve that claims experience to provide the best possible support for our customers and community.”

16/03/2021 5:10:45 PM

8 | Money Management March 25, 2021

News

AMP Capital sells its Global Companies fund

BY MIKE TAYLOR

AMP Capital has announced the sale of its Global Companies capabilities to a Canadian firm.

The company announced that it had reached an agreement with Fiera Capital for the sale of Global Companies capability including its four-strong investment team to Fiera in a transaction which will see the transfer of the Global Companies Fund (GCF) UCIT platform series.

The announcement said that AMP Capital and Fiera were committed to ensuring that existing client terms and conditions would not be impacted and clients experienced a seamless transition.

The transaction follows on from AMP Capital announcing in August last year that it

would be pursuing a strategy for its global equities and fixed income businesses to explore opportunities, including partnerships, to increase their scale to accelerate growth.

Commenting on the move, AMP Capital global head of public markets, Simon Warner, said the agreement delivered on AMP Capital’s strategy to find the best opportunities for its global equities and fixed income capabilities to achieve scale and accelerate growth.

“After being established in 2017, GCF has delivered great returns for our clients and I have no doubt this will continue under new leadership,” he said.

The announcement said that AMP Capital and Fiera Capital would formalise the longterm distribution arrangements to best support the AMP Capital Global Companies fund in Australia and New Zealand.

Will ASIC’s adviser breach regime overwhelm its own resources?

FINANCIAL advice licensees are unlikely to take any risks with the Australian Securities and Investments Commission’s (ASIC’s) new breach reporting regime meaning almost everything will be reported so that the regulator is at risk of finding itself inundated by the resultant flood of breach reports.

With financial advice companies awaiting the fine detail of the new breach reporting regulatory arrangements, a specialist financial services lawyer is

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warning that the advice industry is facing a huge change in which previously minor breaches will warrant reporting and prudent licensees are likely to do so.

While some financial advice executives yesterday told Money Management the new breach reporting regime was “impractical” and risked “driving some behaviours underground”, director with specialist financial services law firm, The Fold, Simon Carrodus, said he wondered whether ASIC

itself would be sufficiently resourced to handle the flood of breach reports which would be generated by the new regime which starts in October.

“What we’re going to see is some minor and very technical issues being compulsorily reported as a breach resulting in a significant increase in the number of reports being handled

by ASIC,” he said.

“We will have to wait and see how that plays out,” he said but noted that the regulator had been legislatively enabled to adjust the regulatory settings.

The Association of Financial Advisers (AFA) has expressed concern at the practical impact of the breach reporting regime changes but expressed the hope that ASIC may yet see the sense of taking a moderate regulatory approach.

In a communication to members, the AFA noted that the threshold for reporting breaches to ASIC had been substantially reduced as a result of Royal Commission recommendations, and this would lead to a significant increase in reportable breaches.

“The Government are still working on a regulation that will hopefully reduce the range of matters that are reportable, and ASIC will provide further guidance in due course,” the communication said.

AFA general manager, policy and professionalism, Phil Anderson, said it was a question of how the regulations played out and therefore what would ultimately have to be reported as a breach.

The breach reporting regime flagged as a result of the Government’s legislative amendments empowering ASIC steps substantially beyond what was recommended by the Treasury’s 2017 ASIC Enforcement Review which called for the clarification of the regime “to ensure that the significance of breaches is determined objectively”.

One element of the new regime is that licensees will have a new obligation to report breaches by advisers of other licensees creating not only a challenge for advisers and their licensees but for the licensees of external planning practices.

16/03/2021 5:11:08 PM

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10/03/2021 10:28:15 AM

10 | Money Management March 25, 2021

News

Will reference-checking be the big cost in adviser recruitment?

BY MIKE TAYLOR

QUESTIONS are being asked about how much more financial resource will be demanded of small financial planning groups to accommodate the Australian Securities and Investments Commission’s (ASIC) upcoming reference-checking and information sharing regime.

At the same time as financial advice licensees are competing to take advantage of IOOF’s acquisition of the MLC Wealth advice businesses, they face having to make sure that they have done adequate reference checking on both individual advisers and advice practices.

The major licensees have also signalled they are keeping a close watch on the opportunities which may arise as AMP Limited moves towards finalising the reshaping of its advice business.

There is also concern that the regime, when implemented, will put increased pressure on smaller licensees and

self-licensed financial advisers who do not boast the resources of the major dealer groups.

ASIC began the consultation process around the new reference-checking and information sharing regulatory protocols in November last year and closed off industry submissions at the end of January.

But what is clear is that there is a strong belief amongst the major groups including the Association of Financial Advisers (AFA) and the Financial Services Council (FSC) is that primary responsibility should reside with the recruiting licensee (the licensee looking to employ the adviser).

While the AFA expressed concern about the ability of small licensees to have the resources necessary to conduct comprehensive reference checks, the FSC suggested that they should have the ability to outsource the task to third parties.

It said that recruiting licensees “should be able to use the services of third parties to obtain references. If a licensee proposes to

outsource reference checking, the licensee should impose obligations on the third party consistent with the licensee’s obligations, but not to impose a requirement that the recruiting licensee obtain the consent of the prospective representative to the engagement of a third party for reference checking purposes”.

The full scope of the new ASIC referencechecking protocols is expected to become clear before the middle of the year when the regulator is expected to release the regulatory instruments resulting from industry consultation arrangements.

Two-stage process needed for superannuation performance test

BY JASSMYN GOH

THE superannuation performance test should be conducted in a two-stage approach and assessed by a panel of experienced industry professionals who are impartial, according to the chairs of major super funds.

In a submission to the government’s Your Future Your Super legislation, the chairs of Aware Super, Cbus, HESTA, QSuper, REST, and Sunsuper said the performance test stages should be the benchmark test and an independent assessment.

They proposed the process would be: • Stage one – Benchmark test: We propose that funds be subject to the performance benchmark test along the lines as proposed in the bill, (amended to account for the matters raised in other public submissions), and that the amended benchmark be used

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as the first hurdle. APRA would have the responsibility for the implementation of this stage one benchmark test; and • Stage two – Independent assessment: A second hurdle would then apply. Funds that fail the first hurdle would then be required to be assessed by a panel of industry experts. Its task would be to assess whether the performance identified by the first hurdle could be explained by factors that would be likely to continue to deliver underperformance, and importantly would also make the assessment as to whether performance has met the objectives the fund as communicated to its members. This would be a core consideration of the panel in assessing a fund.

The panel, they said, should be comprised of people who had an in depth understanding of the funds management business, the objectives of super, and a clear

sense of the policy objective of reporting rigorously and independently on performance will be the most effective way of implementing and supporting the objective of implementing the government’s policy objectives.

They also said an example criteria for the assessment would be: • The appropriateness of the fund’s long-term investment return target and risk profile; • The superannuation fund’s expected ability to deliver on the default product’s long-term investment return target, given its risk profile; • Strategic and actual asset allocation; • Market conditions impacting returns across asset classes; • The appropriateness of the fees and costs associated with the product, given its stated longterm investment return target and risk profile; • Whether the superannuation fund’s governance practices are

consistent with meeting the best financial interests of members of the fund; • The administrative efficiency of the superannuation fund; and • Any other matters the panel considers relevant.

The chairs noted the panel should advise on the determination for the asset class performance benchmarks including appropriate unlisted benchmarks, and overall fund performance targets, as part of the first hurdle criteria.

“We wish to make it quite clear that our proposal for a two-hurdle approach is not to evade clear accountability. We believe that poor performing funds that do not meet their promise to members should not be entitled to receive funds flow from a government mandated system,” they said.

“Indeed, the second hurdle will be particularly imposing for those funds that are called before the panel. No fund would want to get into that position.”

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26/02/2021 10:12:23 AM

12 | Money Management March 25, 2021

News

Private equity takes significant stake in BetaShares

BY MIKE TAYLOR

PRIVATE equity has taken a significant stake in Australian specialist exchange traded fund (ETF) manager BetaShares.

BetaShares announced that private equity player, TA Associates, had taken what it described as a “significant” stake in the business.

The announcement said TA had acquired the shares held by Mirae Asset Financial Group and other minority investors in the BetaShares business.

Confirming the move, BetaShares founder and chief executive, Alex Vynokur, referenced the private equity investment as occurring in line with the next phase in the company’s growth.

“We would like to take this opportunity to thank the team at Mirae Asset Financial Group and, in particular, founder and global

investment strategy officer, Hyeon Joo Park, for their support and confidence in our business over the years,” Vynokur said.

“We are proud to have made a contribution to the impressive growth of Mirae Asset Financial Group.”

TA Associates managing director, Edward

Dover and McMaster handed penalty

BY CHRIS DASTOOR

THE Federal Court has ordered Dover Financial Advisers pay a $1.2 million penalty for engaging in false or misleading conduct and that the firm’s sole director, Terry McMaster, pay $240,000 for being “knowingly concerned” in Dover’s conduct.

The penalties followed the Federal Court’s judgement on 22 November, 2019, which found that Dover engaged in false, misleading or deceptive conduct when it provided a client protection policy to 19,402 clients between 25 September, 2015, and 30 March, 2018, and that McMaster was knowingly concerned in Dover’s contraventions.

In that judgment, Justice Michael O’Bryan found that the title of the client protection policy “was highly misleading and an exercise in Orwellian doublespeak. The document did not protect clients. To the contrary, it purported to strip clients of rights and consumer protections they enjoyed under the law”.

In handing down his penalty decision, Justice O’Bryan said: “Many clauses of [Dover’s] client protection policy sought, perversely, to make the client responsible for failings and inadequacies in the advice provided to them”.

04MM250321_01-14.indd 12

“The contravention arose out of the conduct of the most senior management within Dover, being Mr McMaster.”

While not satisfied that McMaster was consciously aware the client protection policy contained a false or misleading statement, Justice O’Bryan observed that he had been aware of all the relevant facts making it so and that “McMaster’s behaviour following the institution of these proceedings indicates that he has only a limited appreciation of the seriousness of the contravening conduct and little if any contrition for the wrongdoing”.

Danielle Press, Australian Securities and Investments Commission (ASIC) commissioner, said the purpose of Dover’s client protection policy was to exclude or limit Dover’s liability to clients to its own financial benefit.

“The significant penalties handed down today demonstrate the seriousness of this misconduct and will act as a deterrent to others who believe they can get away with similar behaviour,” Press said.

In arriving at the penalty, the court considered the 19,402 contraventions of the law, which equalled one contravention for each time the protection policy was provided to a client.

Dover and McMaster had also been ordered to pay ASIC’s costs.

Sippel, said his firm had a long history of investing in the financial services industry, having previously supported the growth of a number of leading asset management firms globally.

“We are honoured to have the opportunity to invest in BetaShares to help further the success of this great business” he said.

“We believe that BetaShares’ sharp focus positions it to take advantage of significant opportunities in the market, particularly as the broader financial services industry is undergoing a period of disruption and change.

“We look forward to partnering with BetaShares’ management team to help further accelerate the company’s growth by leveraging its existing, highly-regarded offering, expanding its product depth, and enhancing its geographic footprint through acquisitions and strategic investments,” Sippel said.

How much BT is charging in super fees WESTPAC’S BT Funds Management (BTFM) has revealed just how much margin it makes on the administration and investment management fees it charges on BT Superannuation products.

The company has told a Parliamentary Committee that in the 2019 financial year BT Funds Management earned 0.23% while in the following financial year it earned 0.07%.

Labor members of the House of Representatives Standing Committee on Economics had sought detail of what BTFM was earning from its servicing of the BT superannuation funds, noting that according to Westpac’s annual results for 2020, BT had turned a profit of $111 million last financial year and $285 million in the previous financial year.

“How much of this profit was due to: i. Related entities servicing BT? ii. Margin built into BT administration fees? iii. Margin built into other fees charged to members?” Labor’s Andrew Leigh asked.

BT also confirmed to the Parliamentary Committee that it had moved its group insurance covering its superannuation funds from its associated company, Westpac Life to AIA Australia Limited.

“In the case of group insurance, independent advice was obtained in the process which saw the appointment of AIA Australia (an unrelated party) as BT Super’s new group insurer from 1 July 2020.

Prior to this appointment, Westpac Life Insurance Services (a related party) was BT Super’s group insurer.”

16/03/2021 5:12:38 PM

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16/03/2021 4:35:44 PM

14 | Money Management March 25, 2021

InFocus

THE ASIC LEVY THE REAL-LIFE IMPACT ON ADVISERS Financial advice firms began receiving their levy invoices from the Australian Securities and Investments Commission last week and financial advisers want the Government to know why they are angry at how much it has increased.

THE COST OF regulation is impacting all planners, but small sole practice firms are particularly affected. Chris Cornish is the principal of his own West Australian firm, Cornish Wealth Management, and he explains how he is being impacted.

“I own a small sole-planner practice. I’ve been a financial planner for 16 years and operated under my own licence for 10 years. And I’ve had a gutful of this government.

Any long-term financial adviser will agree that the regulatory changes never seem to stop. And with each change, the industry participants try to do their best to adapt. However, the last couple of years have been unlike any others.

The Financial Adviser and Ethics Authority (FASEA) exam we all need to take, the additional degree qualifications some need and the business operational changes stemming from the Hayne Royal Commission most need to make, have massively increased costs and taken up an inordinate amount of time.

Meanwhile the Royal Commission recommendations have dealt body blows to the revenue of many practices. As too has the ridiculous Government intervention into how private enterprises (life insurers) remunerate those involved in their

LIFE INSURANCE INDUSTRY PERFORMANCE

distribution (advisers). And many practices, me included, have actively cancelled a significant number of long-standing client relationships because the cost of servicing them is now too high for their modest account balances.

But the icing on the cake, or rather nail in the coffin, is the $5,122 tax bill I’ve just received from the Government to fund the Australian Securities and Investments Commission (ASIC). And for what?

Talk about fee-for-no service. $5,000 is a huge sum of money for a small business, and I feel for some of the larger practices who employ financial advisors. At a cost of $2,426 per adviser, they’d have to be questioning whether they should be culling staff.

Especially because we know ASIC will keep increasing this fee; after all, thanks to the Government’s ASIC Supervisory Cost Recovery Levy regulations they are now a bureaucracy with an open cheque.

The Federal Government must have missed the memo that pretty much all the banks have exited the advice industry, and that their red-tape and new taxes are now just negatively impacting small businesses.

It is interesting to note that the ASIC tax charges “Licensees that provide general advice only” a flat fee of $2,081 no matter how many advisers they have.

Table 1: Tax bill from ASIC given to Cornish Wealth Management Date

ASIC Ref

Description

Amount ($)

04/03/2021

000110044 DD

Financial advisers on relevant products to retail clients minimum

1,500.00

04/03/2021

000110044 DE

Financial advisers on relevant products to retail clients graduated

2,426.00

04/03/2021

000110044 NF

Insurance product distributors - flat

1,196.00

Source: Cornish Wealth Management

Imagine if the super funds, and their legion of advisers dispensing general and intra-fund advice, only pay $2,081 for the right to dispense advice.

If it turns out the $200 billion behemoth AustralianSuper only has to pay $2,081 to provide advice whilst my one-man band has to pay $5,200 then the Government, and ASIC, should

hang their heads in shame.

I will likely survive, as I have in the past. But Josh Frydenberg has a lot to answer for, and with friends like the current Federal Liberal Government, small business does not need any enemies.”

Chris Cornish volunteered his views to Money Management. www.perthfinancialplanning.com.au

$0.1b

$0.3b

$544m

net loss in 2020

net loss in 2019

Individual lump sum profit – only sector to report a profit

Source: APRA

04MM250321_01-14.indd 14

18/03/2021 10:45:51 AM

March 25, 2021 Money Management | 15

Guarantees

A GUARANTEE FOR LIFE?

Oksana Patron examines what investors might gain or lose when it comes to investing in those products with a guaranteed income stream.

THERE IS NO doubt that guaranteed investment products offer a number of features that are attractive for some groups of investors, particularly those with a shorter investment horizon and a limited risk tolerance. In the context of retirement income product and strategies, such products additionally provide a certain level of consistency which significantly reduces the risk of running out of money during this time by providing guaranteed income streams.

However, as with most things, such products come at a cost which is often high as guarantees lack flexibility and tie investors to a given

04MM250321_15-29.indd 15

provider for a long period of time, meaning the capital cannot be invested elsewhere and potentially generate higher returns, effectively forcing investors to forego exposure to better incomes.

As always, the additional risk needs to be clearly understood, both on the income and capital side.

ANNUITIES Annuities are one of the first products that come to everyone’s mind in the discussion on the guarantees and they can be only provided by a limited number of issuers in the Australian market, such as insurance companies, which

are regulated by the Australian Prudential Regulation Authority (APRA). Additionally, annuities come with a capital cost associated and a number of regulatory requirements under which insurers are obliged to keep a certain amount of capital allocated to those products.

“This is called reserving and means there are certain requirements around the type of assets that can be held in the reserve, and how the value of the assets has to be greater than the value of the liabilities, so there is definitely a capital cost associated with these types of products and that can be quite constraining for the

Continued on page 16

17/03/2021 3:43:04 PM

16 | Money Management March 25, 2021

Guarantees

Continued from page 15 issuers,” Richard Dinham, head of client solutions and retirement at Fidelity International, said.

According to Ashton Jones, head of investments, retirement and new propositions at TAL, it is also important that investors have a clear understanding about fully guaranteed products and their specific attributes.

“If the consumer is purchasing the annuity to ensure that they will get a level of income regardless of what happens it could be entirely suitable for that individual. But there is still the role for traditional annuities in the current interest rate environment and it is important to understand that annuities are very sensitive to the current interest rate environment, because they do require the underlying investment to match the income stream payment that has been provided,” he added.

“The main focus and work that we do at TAL in terms of guarantees is in the context of retirement income products. That is mainly where we are interested in roles that guarantees can play and one of the things we know around the work that we have done with our superannuation fund partners is there are some members who value the level of certainty in their retirement income.

“So what we have been focused on with our super fund partners is exploring is there a better way and better value that you can provide, to members or customers, by unbundling annuities and looking at those three different [types of] guarantees.”

Typically there are three types of the guarantees within a product like that, including a longevity guarantee, an investment performance guarantee, and for

04MM250321_15-29.indd 16

some products, an inflationprotection guarantee.

According to Bennelong Funds Management’s director, research relationships, Stuart Fechner, investors should pay close attention to who is providing the guarantee and its related structure.

“Should circumstances dictate that the guarantee is needed, you want to make sure that the company or provider behind it is in a strong financial and well capitalised position to meet this obligation, if this is what is required,” he said.

“Otherwise if it is more about the structure and operational workings of the guarantee, what happens – is there a trade-off to any other aspect of the product if the guarantee process needs to be enacted. An example might be that if the guarantee needs to kick in to provide the stated level of income, does it in any way impact where the capital itself is invested and/or the potential upside and growth in capital that can be achieved?

“There has been huge demand for products like these from investors and advisers and a strong interest from product providers and it has probably been a challenge or a focus ever since the baby boomers entered the retirement because there is a huge market with lots of opportunities.

“There is definitely a capital cost associated with these types of products and that can be quite constraining for the issuers.”

– Richard Dinham But I do not think anyone has nailed the solution as yet and that really comes back to that fundamental of risk returns and being on that risk spectrum,” Fechner said.

There are also five-year or 10-year guarantees, which are not dependent on life expectancy, and which offer the returns that are typically better than the lifetime annuities.

“From a financial planning perspective they have much more appeal because they provide certainty around the amount of income and investors have certain income needs regarding their lifestyle so they can allocate a certain amount of their capital to that, and invest the rest in more risky assets that can be more volatile but hopefully produce higher returns over time,” Dinham said.

IS IT WORTH IT? Guarantees are also often perceived in a way similar to insurance products by consumers who agree

Continued on page 18

17/03/2021 3:43:14 PM

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10/3/21 10:19 am 16/03/2021 4:30:25 PM

18 | Money Management March 25, 2021

Guarantees

Continued from page 16 to pay an often higher than average fee for protection during more volatile times.

“I think the most important point to understand is that guarantee products historically required the issuer of the product to hold quite a lot of capital against the guarantee, and typically that capital needs to be invested in a way to match the profile of the payments the product is making, and when interest rates are low it makes it often quite challenging for providers to be able to find appropriate asset classes to match that income streams against,” Jones warned.

AMP’s platform and retirement income specialist, Ian Parsons, said: “The key risk is if you fundamentally believe that the market will go up and there will be no downturns, then you are paying for something that potentially has no value”.

However, he warned, during the difficult times, like the Global Financial Crisis (GFC) or more recently during the COVID-19 pandemic, guarantees mean that in the worst-case scenario investors will still receive their money back.

“The primary thing that we are trying to address with our product [MyNorth Guarantees] is understanding the sequence risk and the sequence of returns that will have a large impact on clients, because they do not have necessary time anymore when they are moving into a retirement phase and start to cool down,” Parsons explained.

“What we are trying to do there is to say if we can guarantee a portion of the client’s account, we can guarantee the amount of

04MM250321_15-29.indd 18

money that could give them confidence which leads us to the second part of the conversation which is giving them the confidence to remain invested, knowing that there is a downside protection.

“I think one of the things that we saw during COVID-19 is that there are definitely certain members that do find market volatility quite challenging and they find it very difficult to experience and what you typically see in that sort of market environment is consumers do often make very short-term decisions,” TAL’s head of investments reminded.

According to him, the falling account balances triggered some members to take action to stop the pain of those market losses.

However, although COVID-19 brought significant volatility to the markets, many of the growth assets have largely recovered since then.

“So, for any member that sold out at the start of COVID-19 and invested in the asset class that did not have that much growth exposure, it was probably a tough decision to make at the time and it was probably not the best decision.”

Jones said that the best way for investors and clients to think about guaranteed retirement income

strategies would be as something that would provide ‘quite a nice flow’, to the level of retirement income to be received.

“And what that does is, it gives members more confidence to take a level of investment risk in the remainder of their portfolio because they know that, even if there is volatility, they still have that portion of account balance that is invested in a product that is going to give them a level of retirement income no matter what happens.”

According to Jones, it all comes down to work out which guarantees consumers value the most.

“What we have found through that is, there is definitely a section of members that really do value the longevity guarantee so that’s the confidence that they would get income for the rest of their lives no matter what the experience is,” he said.

“But those members, they also want to benefit from the higher long-term growth of the assets that they have invested in the annuity products. Those are the sort of products that we would call investment-linked annuity or a variable-style annuity, so that’s sort of the product design that we’ve been exploring with the some of our fund partners,” he said.

17/03/2021 3:43:28 PM

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16/03/2021 4:29:47 PM

20 | Money Management March 25, 2021

FE fundinfo Crown Fund Ratings

CROWNS GO TO THOSE ASTUTELY RIDING AUSTRALIA’S COVID RECOVERY Funds with experienced investment teams and a strong domestic equity focus benefited from Australia’s accelerating economic recovery in the latest FE fundinfo Crown Fund Ratings rebalance, Mike Taylor writes.

EXPERIENCED INVESTMENT TEAMS focused on the sectors most emergent from the COVID-19 pandemic represented the success stories in the latest FEfundinfo Crown Fund Ratings rebalance.

The rebalance covered fund manager performance to the end of December, last year, so reflected economic and market

conditions influenced by the economic and political events which occurred ahead of the significant vaccine rollouts which have marked the start of 2021.

And as the markets moved through what effectively represented 10 months of a global pandemic, the quantitative data underpinning the Crown ratings

METHODOLOGY FE fundinfo Crown Fund Ratings are a quantitative rating determined using FE fundinfo’s performance scorecard process which analyses a fund’s performance over the last three years.

The score is made up of three components – alpha, relative volatility, and a consistently good performance.

The funds examined were within the Australian Core Strategies universe and had at least a three-year track record.

The funds are assigned ratings based on their total scores, according to the following distribution: • The top 10% – 5 FE fundinfo Crowns; • The next 15% – 4 FE fundinfo Crowns; • The next 25% – 3 FE fundinfo Crowns; • The next 25% – 2 FE fundinfo Crowns; and • The bottom 25% – 1 FE fundinfo Crown.

04MM250321_15-29.indd 20

revealed that reputations can take a battering in uncertain times, particularly for those managers focused on global equities.

The bottom line in terms of investment team experience has been reflected in the five-crown performances of IOOF and First Sentier Investors, while the importance of choosing the right companies in the right sectors was reflected in those managers focused on Australian small and mid-cap equities.

As Laura Dew has written elsewhere in this coverage of the Crown Ratings, Australian small and mid-cap equities had the highest percentage of 5 Crown rated funds – something which appears to have reflected the manner in which the Australian economy began to regather the momentum which had been lost amid the lock-downs and job losses of the first half of 2020.

That regathering of economic momentum fed into funds such as SGH Emerging Companies, UBS

Microcap, Pendal MicroCap Opportunities, Macquarie Australian Emerging Companies and DMP Australian Small Caps Trust all being upgraded.

By comparison, some big names and some robust strategies took a beating in the global equity sector with the Magellan High Conviction, Janus Henderson Intech Global All Country Managed Volatility ex Australia and Montgomery Global all finding themselves moving down.

But for those mangers who emerged well from the latest Crowns rebalance, the key appeared to be maintaining discipline in the face of volatility, with Colchester’s head of distribution, Angela MacPherson, emphasising the value of staying focused.

IOOF chief investment officer, Dan Farmer also referenced the benefits of the scale which had been delivered from its acquisition of ANZ Wealth.

16/03/2021 5:13:53 PM

March 25, 2021 Money Management | 21

FE fundinfo Crown Fund Ratings

WHICH FUNDS WERE UPGRADED TO 5 CROWNS THERE HAS BEEN a 47% decline in the number of funds receiving a 5 Crown rating, falling to 136, while no fund was upgraded from 1 Crown to 5 Crowns.

Under the FE fundinfo Crown Rating methodology, the top 10% of funds were awarded 5 Crowns, so the low volume of 5 Crown funds reflected the difficulties firms had in achieving performance during a volatile stockmarket.

Some 43 of these funds were upgraded from a previous rating while nine received their first rating and the remainder had maintained a 5 Crown rating. There were no funds in this edition which were upgraded from 1 Crown to 5 Crowns

compared to seven funds in the previous edition.

There were three sectors within the Australian Core Strategies universe which saw six funds upgraded or receive a debut 5 Crown rating. The sectors were Australian small and mid-cap equities, global equities, and global bonds.

The global bond space saw the biggest improvements with Colchester Global Government Bond N being upgraded from 2 Crowns to 5 Crowns, Russell Global Bond, Colchester Global Government Bond A and I upgraded from 3 Crowns and IPAC SIS – International Fixed Interest Strategy

No 2 upgraded from 4 Crowns. The Colchester Emerging Markets Bond was a new entrant at 5 Crowns.

In the Australian small and mid-cap equity space, SGH Emerging Companies, UBS Microcap, Pendal MicroCap Opportunities, Macquarie Australian Emerging Companies and DMP Australian Small Caps Trust were upgraded from 4 Crowns while Bennelong Emerging Companies was a new entrant. The sector saw 17% of its funds receive a 5 Crown rating, up from 11% in the previous edition.

Lastly, the global space saw Forager International Shares increased from 3 Crowns, Evans

and Partners International, Zurich Investments Global Growth Share, AMP Capital Global Growth Opportunities and Pengana High Conviction Equities all upgraded from 4 to 5 Crowns while Lakehouse Global Growth was a new entrant.

By Laura Dew

THREE FUNDS CONSISTENTLY RANKED AS 5 CROWNS SINCE THE INCEPTION of FE fundinfo Crown Fund Ratings in 2017, there have only been three funds within the Australian Core Strategies universe that have been consistently given 5 Crown ratings every ratings rebalance.

This was down from seven funds during the last rebalance in August, 2020.

The funds this rebalance who continued to be a top performer were Cromwell Phoenix Opportunities, IOOF Multimix Growth, and IOOF Balanced Investor Trust.

Since the inception of the ratings, the Cromwell fund has returned 80.4%. The fund, like most, experienced a decrease in returns during the March sell-off last year due to the COVID-19 pandemic. However, it bounced back sharply and had already made back its losses by early August.

The fund’s portfolio manager, Richard Fakhry, said the closed fund had performed well over the last three years as it had a conservative cap on funds under management which allowed the fund to take meaningful positions in smaller securities and quickly respond to investment opportunities.

On navigating the sell-off, Fakhry said: “The very smallest companies which are the focus on

the fund’s investment strategy experienced that greatest sell off in March as forced selling dynamics and limited liquidity resulted in price movements that appeared to bear little resemblance to underlying fundamentals.

“While our execution was not perfect, we were able to add value by selectively adding to companies whose near-term revenues were most directly affected by COVID-19 such as casino operators around the March lows.”

Over the longer term, the fund

returned 135.1% over the five years to 31 December, 2020.

The two IOOF funds that were also consistently rated 5 Crowns were both multi-asset funds.

Since the ratings inception the IOOF MultiMix Growth fund returned 36.96% and the IOOF Balanced Investor fund returned 29.78%.

Over the five years, the funds returned 53.88% and 45.77% respectively.

IOOF chief investment officer, Dan Farmer, said the funds managed to navigate through

COVID-19 last year through its allocations towards direct property, especially its Australian direct property portfolio that generated a positive return.

“Our allocations to recovering retail sectors and positions in selfstorage and some commercial office operators saw us continue to deliver returns for our clients.

“We also significantly increased our allocations to credit after the COVID-19 sell off, which has added a lot of value.”

By Jassmyn Goh

Chart 1: Top rated funds since Crowns inception

Source: FE Analytics

04MM250321_15-29.indd 21

16/03/2021 5:14:05 PM

22 | Money Management March 25, 2021

FE fundinfo Crown Fund Ratings

THE PENTA-CROWNS IOOF AND FIRST Sentier Investors (FSI) lead the way when it comes to 5 Crown funds, but Colchester Global Investors has seen all four of its funds rated 5 Crowns in the latest FE fundinfo Crown Fund Ratings rebalance.

There were 21 managers that had all their funds rated 5 Crowns, although 15 of those were single fund managers.

Of the six managers with multiple 5 Crown funds, Colchester had four; Hyperion Asset Management and Simplicity NZ had three; and AtlasTrend, GQG Partners and Lakehouse Capital had two.

Colchester’s four funds put it at fifth spot in the overall tally, while both the top spot holders had eight funds which were FSI (20% of all funds) and IOOF (17%).

However, both IOOF and FSI suffered a drop-off compared to the last rebalance where IOOF had 10

funds with a 5 Crown rating and FSI had nine.

IOOF Cash Management Trust D and Strategic Cash Plus had dropped to 4 Crowns; while the CFS First Sentier US Short Duration High Yield was now rated 3 Crowns.

Macquarie Investment Management also had 10 funds with 5 Crowns in the last rebalance, but saw half of them drop to 4 Crowns.

Angela MacPherson, Colchester head of distribution – Australia, said the firm’s consistent success across all four funds was due to being disciplined regardless of market conditions of events.

“This has been on display throughout last year’s COVID-19 led market disruption and the recent volatility in yields,” MacPherson said.

“The 5 Crowns from FE fundinfo further confirms that we are

delivering not only alpha to our clients, but also delivering it with lower relative volatility and ongoing consistency.

“Our long-term track record shows that we have been able to add value through a range of market crises and interest rate cycles, with our medium-term value investment approach being indifferent to economic and financial market cycles.”

Dan Farmer, IOOF chief investment officer, said its funds benefitted from scale brought from the ANZ Wealth acquisition, with increased allocations to skilled active managers in IOOF MultiSeries and IOOF Balanced Investor Trust.

“With the transition of pensions and investments funds to IOOF we

have started to realise the scale and diversification benefits of our business integration for our clients,” Farmer said.

“In addition, fund alignment has allowed us with the opportunity to have more focussed planning and oversight, greater economies of scale with regards to manager allocations and strategies and more meaningful partnerships with our preferred managers.

“We have therefore increased allocations to skilled active managers in IOOF MultiSeries and have a continued focus on ensuring that we have high quality managers in the portfolios.”

By Chris Dastoor

THE SECTORS SEEING INCREASED 1 CROWN RATINGS THE IMPACT OF the COVID-19 pandemic on global stockmarkets has led to over a quarter of global equity funds receiving 1 Crown ratings.

In the latest edition of the FE fundinfo Crown Fund Ratings, the worst-affected sector was the global equity sector, within the Australian Core Strategies universe, which saw 70 funds receive the lowest rating.

This represented 35% of the global equity sector and 21% of total funds which received a 1 Crown rating.

The figure was up from 58 funds in the September edition of the awards, when it represented 22% of the sector, and included 39 funds which had either been downgraded or it was their first rating.

Magellan High Conviction, Janus Henderson Intech Global All Country Managed Volatility ex-Australia and Montgomery Global saw the biggest downgrades, from 4 Crowns to just 1 Crown and Packer and Co Investigator Trust was

04MM250321_15-29.indd 22

downgraded from 3 Crowns.

Overall, there were 325 funds which received a 1 Crown rating and other sectors with a high volume of 1 Crown funds included 36 funds in the mixed assetmoderate, 19 funds in the Australian listed property sector, and 23 funds in diversified credit.

No funds were downgraded from

5 Crowns to 1 Crown.

The Australian listed property sector saw 70% of its funds awarded 1 Crown as the pandemic meant offices were left empty and tenants struggled to pay rent which meant landlords saw reduced incomes.

Freehold AREITs and Listed Infrastructure, Zurich Money

Maker Series Property and APN Property For Income 2 were all downgraded from 2 Crowns but the other funds retained an existing 1 Crown rating.

For the mixed asset-moderate sector, the 36 funds represented 55% of the sector but the figure was unchanged from the previous edition of the awards.

Only three of the 36 funds were downgraded; IPAC Pathways 30, Morningstar Moderate and Optimix Wholesale Conservative Trust which were all downgraded from 2 Crowns.

In the diversified credit space, the figure was unchanged from the previous edition with all 23 funds retaining their ranking but there were three Australian bond funds which were downgraded from 2 Crowns to 1 Crowns; Altius Bond, AXA Managed Investment Plan Fixed Interest Portfolio and GAM FCM ILS Yield.

However, the 10 total 1 Crownrated funds represented only 8.5% of the sector.

By Laura Dew

16/03/2021 5:14:26 PM

March 25, 2021 Money Management | 23

FE fundinfo Crown Fund Ratings

WHICH SECTORS HAD THE MOST 5 CROWNS? AUSTRALIAN SMALL AND mid-cap equities had the highest percentage of 5 Crown rated funds in this latest edition of FE fundinfo’s Crown Fund Ratings, representing 17% of the sector and significantly beating their global counterparts.

There were 14 funds in this sector which had a 5 Crown rating compared to just two for the global small and mid-cap sector. The total was also double the number of Australian large-cap equity funds which received a 5 Crown rating.

This was a reversal of the previous edition of Crowns in

September when global small and mid-caps had the largest percentage of 5 Crown funds from any sector at 13%.

The Australian small and mid cap figure represented 17% of the sector, up from 11% in the last edition, and it also saw five funds upgraded plus one fund which debuted with 5 Crowns.

The five funds which were upgraded were SGH Emerging Companies, UBS Microcap, Pendal MicroCap Opportunities, Macquarie Australian Emerging Companies and DMP Australian Small Caps Trust, while Bennelong Emerging

Companies was a new entrant.

Small cap funds performed well during the pandemic but it had been a very stock-specific performance due to the riskier nature of their investments compared to large caps. For Australian large cap equities, just one fund (Australian Ethical Australian Shares) was upgraded to 5 Crowns and only seven received a 5 Crown rating this year, some 3.8% of the sector.

In the global small and mid-cap space, just two funds received a 5 Crown rating, representing 5.7% of the sector, which were Bell Global Emerging Companies and Prime

Value Emerging Opportunities and both retained their previous rating.

The third 5 Crown fund from the last issue, Ellerston Global Mid Small Unhedged fund, was downgraded to 4 Crowns.

The largest total volume belonged to the global sector at 26 funds but this represented a smaller percentage at 13% of the total sector. The majority of these also retained their 5 Crown rating from the previous edition, with five being upgraded and one being a new entrant.

By Laura Dew

THE NEWLY-RATED FUND RETURNING 112% IN THREE YEARS THERE WERE FIVE funds in this FE fundinfo Crown Fund Rating rebalance which received the highest ranking in their first-ever rating.

For funds to qualify for a rating they must have at least three years’ worth of returns.

The funds that were given 5 Crowns were Lakehouse Global Growth (112.67%), Bennelong Emerging Companies (77.2%), GQG Partners Emerging Markets Equity (41.4%), Atlas Infrastructure Australian Feeder Hedged (36.5%), and Colchester Emerging Markets Bond I (14.86%).

Lakehouse chief investment officer and co-founder, Joe Magyer, told Money Management his fund’s success came from backing the team’s best ideas, and sticking to their philosophy and process during good and bad times.

Magyer said during the start of the COVID19 pandemic the fund did a “fair bit of buying” but the team were also early to recognise the impact of social distancing and what that would mean to businesses.

However, he noted that the fund did not jump from theme to theme or move from growth to value between quarters. Rather, the biggest positions the fund owned were followed well become the pandemic.

“We are growth investors with a strong focus on symmetric outcomes. We’re always looking for businesses that offer multiple ways to win and few ways to lose. That can look like businesses that are gaining share in growing markets, extremely loyal customers which has a network effect, intellectual property, and strong management teams,”

Chart 1: New funds that were rated 5 Crowns over the three years to 30 December 2020

Source: FE Analytics

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he said.

“We also want to protect ourselves by paying reasonable valuation, understanding points of failure, and trying to skew the odds in our favour with each position.”

Magyer said the team worked on a ‘fascinations framework’ where his investment teams were organised around business models and core investing fascinations which were network affects, loyalty, and intellectual property.

“These are the business models we think have lasting staying power in terms of being able to drive outside returns for investors. We view them not as thematic but truly timeless,” he said.

GQG Partners deputy portfolio manager, Sudarshan Murthy, said his fund had done well over the last three years as they focused on forward looking quality, and due to their diverse team members.

During the global sell-off in March last year, Murthy said the fund curbed losses by their ability to react quickly.

“You don’t want to fall in love with your stocks. With any new data point you want to look at it afresh. This mind set helps us react faster than others when the external environment changes,” he said.

“Having a diverse team that are able to look at companies from different angles is our secret sauce as it enables us to react fast to changing data points. The culture we’ve built in the investment team is one of openness and intellectual honesty. I’d rather be corrected internally by a colleague than the market.”

By Jassmyn Goh

16/03/2021 5:14:51 PM

24 | Money Management March 25, 2021

Advice

ADVICE AND TECHNOLOGY TRENDS As the medium between the client and the adviser, writes Kathy Wilson, it is imperative for platforms to respond to technological changes and adapt to their needs.

WEALTH MANAGEMENT AND advice are predominantly analytical spheres, and the business case for investing in new technology is often related to achieving efficiencies and reducing costs. During COVID-19, we have been reminded that emotions run deep in our leftbrain dominant industry.

Care and connection were what clients sought from advisers when markets plunged and panic spread during the early days of COVID-19. A platform provider, as the medium between the two, was in a unique position to enable advisers to connect with their clients, and keep the advice relationship effective – which in turn helped to calm clients’ nerves, and give them peace of mind during an uncertain time.

Platform technology that facilitates digital consent, easy to access online reporting and notifications, and other digital functionality helped to bridge the gap caused by social distancing and remote working.

As with any intangible value, care and connection are difficult to measure. The fact that there was minimal flight to cash on BT Panorama – where nearly all investors are advised – especially in the first few rocky months of the pandemic, is potentially indicative of how successfully those intangible values were delivered.

Similarly, the value of anecdotal evidence is not quantifiable, yet a compelling narrative leaves a lasting impression. Last year we heard from advisers about how they brought clients along on the

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tech journey, especially older clients who were new to using mobile apps to manage their finances and video conferencing.

This shared experience became another powerful demonstration of the value of advice.

It’s easy to underestimate the significance of emotion in investing.

For some, it may seem surprising that robo-advice has not taken off as predicted (even in the US, where it is three times as popular as here in Australia, take-up has been relatively slow). COVID-19 has made apparent why investors prefer to get their advice from fellow human beings. Advisers’ ability to handle emotions and provide reassurance will always set them apart. While there is a role for automation in processes that are behind the scenes within an advice practice, and for roboadvice to evolve into a more hybrid solution, most investors still seem to prefer the human touch.

As life returns to normal, many advice practices are taking the learnings from COVID-19 and continuing to take great leaps forward in their digital transformation journey.

For advisers, there is now even greater emphasis on making the client interface intuitive and elegant. To provide a seamless online experience for clients, it’s imperative to connect systems such as the adviser’s client portal, the investment platform, digital ID processes, the adviser’s client relationship management system (CRM), and ancillary services such as document storage and news feeds.

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March 25, 2021 Money Management | 25

Advice

With the likes of Apple and Netflix setting the standard, consumers expect technology to enable immediate delivery of information and execution of instructions – and for advice clients, that means a pension payment amendment, a cash transaction or a tranche of money being invested should be done swiftly, and preferably via a mobile app.

A constant challenge is how to contextualise data so that clients can interpret it in a meaningful way, and easily drill down into areas of special interest. A case in point is the growing volume of information on sustainable investing, where investment options are often classed within and across interchangeable categories, sometimes rendering the classification meaningless and investors lost in the environmental, social and governance (ESG) jargon.

Platforms can assist with clearing up the confusion by organising this information in a user-friendly way.

Shaking up your world view and perceiving value in a rightbrain dominant way is a necessary exercise when it comes to designing tech that’s primarily used by clients.

The left-brain view of tech may be more familiar for many in our industry – tech improves efficiency, facilitates transactions and reduces costs.

The difference between the two perspectives is illustrated in the use of selfies. A US-based company can calculate an estimate for life insurance based on a selfie.

The primary purpose of the technology is engagement. Other companies have designed tech to allow the use of selfies for digital identification. Pictures can tell a thousand words, evoke emotions and appeal to our vanity. Because pictures or short videos can capture so much detail – moreover, biometric data that is unique to each person – when it comes to verifying identification, they can also save money and time.

Later this year, as part of the myGovID system, the Australian Tax Office (ATO) expects to be able to use selfies, along with documents, for electronic identity verification. The private sector is moving in the same direction.

For the wealth management and advice industry, a universal pain point that technology can assist with is the cost of compliance. In Australia, regtech is making compliance and risk management processes, such as advice file reviews and audits, more efficient.

We look to the largest regtech market in the world, the UK, for innovations which may be applicable to our market. Social distancing measures have seen an increasing number of UK firms

“With the likes of Apple and Netflix setting the standard, consumers expect technology to enable immediate delivery of information and execution of instructions.”

– Kathy Wilson use virtual Know Your Customer (KYC) checks. Along with digital verification and other remote customer onboarding approaches processes, according to the Financial Conduct Authority, progress in this area can result in improved financial inclusion and access to financial services.

Platforms are continually evolving to support advisers with their quest to reduce these administrative tasks and more, with processes that can adapt to different advice practices’ own processes, keeping in mind that everyone’s digital transformation journey is different.

Furthermore, wealth managers are using technology to provide support to advisers and clients 24/7, with tools such as chat bots which use artificial intelligence to learn from previous questions and continually refine a knowledge bank.

I’ve used the left vs right brain dominant language of pop psychology to discuss technology trends but in reality, the two are not mutually exclusive. To illustrate, when designing a tool to improve efficiency such as an AI-enabled chat bot, the client experience remains the priority;

furthermore, we talk about giving our chat bot a personality that reflects brand values authentically.

It’s an exciting time to be running a platform. While the COVID-19 cloud is still hovering, it has a silver lining. The pandemic has accelerated the digital transformation in the wealth and advice industry. Investors’ behaviours during market volatility have served to remind us of the intangible value of what we do, the ability of tech to connect advisers with clients and give them peace of mind. The sense of purpose we have gained from this experience motivates us to continue to innovate in a meaningful, empathetic way.

Meanwhile, the economy has come through better than we may have predicted a year ago, and with Australians’ increased interest in how their super is invested, along with medium to long-term impacts such as the great wealth transfer between generations, new opportunities are emerging.

Kathy Vincent is managing director, platforms, investments and operations at BT.

PROUDLY SUPPORTING YOUR MEMBERS TO LIVE HEALTHIER, LONGER, BETTER LIVES aia.com.au

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18/03/2021 10:44:10 AM

26 | Money Management March 25, 2021

Property

SOLVING THE INCOME DILEMMA

Unlisted property funds are an alternative option for investors, writes Hamish Wehl, as they search for income in a low-rate world.

IN AN ULTRA-LOW rate world, it is becoming increasingly challenging for advisers to find ways to meet their clients’ income needs and deliver an appropriate risk-adjusted income return. One asset class worth considering with this in mind is unlisted property funds.

With the Reserve Bank of Australia’s cash rate near zero, and with some fixed income investments returning less than inflation, the temptation is to increase allocations to equities in an attempt to restore shrinking income levels.

However, the market volatility associated with the COVID-19 pandemic in March 2020 was a harsh reminder of the impact that

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being overweight to equities can have on retirement portfolios’ total returns.

As share prices fluctuated dramatically, particularly during the first half of 2020, many investors saw their income severely disrupted as companies were forced to cut or suspend dividends.

Others had their shareholdings substantially diluted as companies were forced to raise new equity to repair their balance sheets.

Neither of these outcomes are a good result for investors nearing or in retirement, particularly when they may not have time to recoup any lost capital. This is a major concern for all advisers and unlisted property funds provide one approach that can

alleviate this concern and deliver both capital stability and attractive levels of income.

ATTRACTIVE RETURNS Most Australians hold their property exposure solely through the residential market. This is due in part to familiarity, as most investors are also homeowners, and because residential property provides investors with the ability to own and control the asset themselves.

Due, in part, to the many costs involved – including maintenance, land tax, management and agent fees and insurance – residential property investments often provide a low-income yield. Higher

yields are often found by investing in commercial properties, but this sector can be harder to access for the average investor.

While negative gearing and the chase for capital growth is an acceptable or common strategy for investment into residential property, it is not a strategy that helps investors who are specifically looking for income.

Nor is it a strategy commonly pursued by commercial property investors, where property valuations are based on the rental income they can achieve.

Higher yields can often be found by investing in commercial properties, but this sector can be harder to access for the average

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March 25, 2021 Money Management | 27

Property investor due to the much higher entry price point.

Property funds provide an alternative way to invest in commercial property for a comparatively smaller minimum capital requirement. These funds are professionally-managed which, if chosen wisely, can produce stable monthly income and capital growth over the term of the investment, without all the hassle of a residential property.

VOLATILITY, RISK AND CORRELATION As unlisted property funds are generally priced based on the underlying value of their assets, which usually happens once every 12 months, their price volatility is a lot lower than listed asset classes, such as equities or real estate investment trusts (REITs).

This means that unlisted property has a low correlation to equity markets and other listed assets and can help provide valuable diversification benefits in a broader investment portfolio, particularly when public markets are falling, as was the case during COVID-19.

Investment risk can be further reduced by diversifying across funds that hold assets in different sectors such as industrial and office, or a variety of locations such as multiple states and regions, or CBD and CBD fringe locations.

Investing in unlisted property funds can also potentially provide additional stability and consistency to an investor’s income stream. A fund that invests in high-quality assets leased to blue-chip State or Federal Government tenants on a long-term basis (or WALE

– weighted average lease expiry) will generally continue to pay consistent income, despite any negative impact on valuations that may occur over the short term.

As an example, the orange bars in Chart 1 demonstrates the consistency of the income stream paid from the Cromwell Direct Property fund since inception, with the blue bars displaying changes in capital growth over the same period.

At December 2020, the fund had a WALE of 6.5 years and held approximately 48% exposure to government or government owned assets. In total at December 2020, approximately 66% of the fund’s income was derived from a combination of government or government-owned assets and listed companies.

TAX-ADVANTAGED INCOME Property funds can also have tax advantages that help to boost net income.

In a nutshell, a managed property fund’s distribution often includes a component of ‘tax-deferred income’, which has the potential to increase the aftertax return for an investor. This component is the result of differences between the cash earnings of the fund (the rental income less expenses) and taxable income.

The tax-deferred component of a distribution from an unlisted property fund is the result of differences between the cash earnings of the fund and taxable income (or the rental income less expenses of owning and managing the asset). The fund’s taxable income may be less than actual cash earnings due to deductions on

“As part of a balanced portfolio, unlisted property funds can deliver attractive risk-adjusted returns with lower volatility than equities.”

– Hamish Wehl depreciable elements of the underlying physical asset (such as depreciation on the base building and fitout), as well as the costs of raising equity and establishing a debt facility.

From the investor’s perspective, instead of being taxable in the financial year the income is received, the tax-deferred component amounts are deducted from the cost base of the investment. The reduction of the investment’s cost base as opposed to taxable income in the year received effectively defers the tax due until a capital gain event is realised, like the eventual sale of the units in the fund.

Managing the timing of the investor’s exit from an unlisted property fund can add to the taxation benefits of this type of investment. As with most investments, if the units in the property fund are held for 12 months or more, the usual capital gains discount may apply.

Redeeming the units when the investor has retired or stepped back from full-time work may result in capital gains tax payable at a reduced or marginal tax rate, therefore a reduced tax liability.

In addition, the tax liability on redeeming an investment in an unlisted property fund can

Chart 1: Total annual return for Cromwell Direct Property fund

potentially be reduced to zero if held within a self-managed superannuation fund (SMSF).

Deferring the redemption of an investment that pays tax-deferred distributions until the member is in pension phase will effectively reduce the capital gains liability to nil.

ACCESS TO UNLISTED PROPERTY AND SELECTING A FUND Most unlisted funds are available through adviser platforms or directly via the managers website, rather than the ASX. When it comes to selecting an unlisted property fund, a factor to consider is the manager’s track record and past performance.

Although as is the case for all investments, past performance is not a reliable indicator of future performance.

Also consider asset specifics. Is the asset well located? Who are the tenants, what is the physical condition of the property and what are the lease terms?

Ideally, you want to see bluechip or government tenants with long-term leases. Look at vacancy levels, the level of capital expenditure required and the fund’s green credentials. Other factors to look at are forecast distribution yields, liquidity, gearing and the level of fees.

Remember that all property investments should be considered over a medium to long-term timeframe of five years or more. As part of a balanced portfolio, unlisted property funds can deliver attractive riskadjusted returns with lower volatility than equities.

Hamish Wehl is head of retail funds management at Cromwell Property Group.

Source: Cromwell

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17/03/2021 1:19:56 PM

28 | Money Management March 25, 2021

Equities

THE POWER OF POSITIVE INVESTMENT THINKING The frenzy surrounding GameStop earlier this year was driven almost entirely by social media hype, writes Sinclair Currie, what does that signal about future investment trends?

IN THE STORY of Jack and the Beanstalk, Jack trades a cow for some magic beans. He has faith that the beans will deliver his fortune, and he is willing to give up the value of a reliable supply of dairy to acquire them. Fortunately for Jack, his positive outlook is rewarded with a golden goose.

Similarly, in the stockmarket, exchanging cash cows for growth options has delivered some golden eggs. There are numerous examples of nascent or unprofitable businesses which have delivered spectacular share price growth such as the buy now pay later (BNPL) and software as a service (SaaS) businesses.

FAKE IT ‘TIL YOU MAKE IT Some companies have seen their share valuations rocket to dizzying heights. The power of positive thinking has driven their cost of capital so low that ‘mining the market’ via equity issuance has become a viable growth strategy. With a high enough share price, aggressive growth plans and acquisitions, the new equity is gobbled up by cashed-up investors whose focus is on the potential future growth prospects of businesses rather than financial discipline.

A high share price is a selffulfilling means to value creation – basically the cost of growing a business (buying cash cows) is a relative bargain when a company enjoys an extravagantly valued share price (a cheap supply of magic beans). In this way, convincing investors to think positively about a stock’s future as important as delivering profits and dividends.

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SOCIAL MEDIA IS A NEW BATTLEGROUND Positive sentiment has always been a powerful market force.

Stock promoters nurtured it via market releases, investment research and traditional media.

Today, social media provides a new arena to communicate positive stock narratives.

A spectacular example of this was the recent surge in GameStop.

The powerful force social media can exert on markets was on full display. Two factors help explain this power. Firstly, there is less friction on social media. Stock promoters can communicate direct to the crowd without needing to convince intermediaries such as analysts or journalists to communicate narratives on their behalf. Secondly, the reach of social media is broader than broker research or specialist financial publications. Stock promoters can mobilise enormous crowds across the globe.

What made the GameStop squeeze remarkable was its velocity and magnitude as stock promoters used social media to communicate their message to spectacular effect. The evidence suggests most GameStop buyers acted on a conviction that they would profit by selling to a forced buyer after the crowd drove up the stock price. There was limited evidence that these investors evaluated the fundamentals of the business. Alloyed by social media and lubricated with fiscal and monetary stimulus, the collective power of the positive narrative obliterated the fundamental-based reasoning of the established short interest of hedge funds.

16/03/2021 5:17:18 PM

E

March 25, 2021 Money Management | 29

Equities Strap Social media spectacularly demonstrated a unique capacity to influence traders and violently move markets. The power of sentiment, unconstrained by fundamentals was amplified, and volatility reigned.

WHY IS THIS NEW SOURCE OF VOLATILITY A BIG DEAL? It is easy to imagine that easy money combined with social media’s power to promote a narrative will result in more situations like GameStop.

Markets have become accustomed to central banks acting to limit downside volatility. It seems strange to consider that volatility on the upside might also upset markets, yet we just saw that happen.

Beyond the stories of sole traders making millions, the notable and immediate reported outcomes of the GameStop spike were: 1) Reports of heavy losses at respected hedge funds, resulting in portfolio rebalancing, liquidation, and recapitalisation; and 2) Reports of online broker Robinhood’s expedited $3 billion equity raising to meet adjusted capital buffers and margin calls.

These outcomes are indicative of the broad and meaningful implications for markets should there be a re-evaluation of volatility, even if it is skewed to the upside. GameStop’s share price spike resulted in liquidations and margin calls. These are signals of stress we usually associate with bear markets, not rising markets.

The upside skewed volatility burst also impacted long-short strategies. These strategies commonly access leverage by reinvesting the dollar proceeds of their short sales to add investments in their long exposures. Securities lending may not be traditional bank debt, but it is essentially leverage.

If markets become more wary about unpredictable upside spikes in stocks, long-short strategies are likely to become more selective with their short positions thus generating less leverage to invest in their long positions. This deleveraging is likely to reduce market liquidity. To the extent that many of these strategies crowd the same themes and factors, it may also narrow the dispersion of valuations.

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Greater volatility will also impact the activity of market makers and options traders.

Options traders use volatility to determine premiums (prices).

Generally, higher volatility makes options premiums more expensive.

Underestimating volatility is dangerous for traders selling uncovered options. Uncovered means that the trader doesn’t own the underlying stock and is therefore exposed as a forced buyer in the event of a spike in the share price. A short option position has limited upside and unlimited downside. With this sort of payoff, you do not want to sell too cheap.

Options are generally sold by market makers with large, finely tuned portfolios which are often leveraged and highly sensitive to sudden and violent changes.

Market makers are an important contributor to market liquidity and provide valuable risk management tools. Dislocations for market makers can have broad market consequences, particularly for the counterparties who use markets for the purpose of insurance rather than speculation.

EFFECTIVE MARKETS NEED SECURE COUNTERPARTIES The margin calls faced by Robinhood highlight the importance of the trading hubs upon which the integrity of financial markets depend. Much of the counterparty risk in financial markets is managed or intermediated through an exchange or a clearing house. For example, the owner of a call option relies on a clearing house to deliver on an ‘in the money’ (profitable) contract when that option is exercised. If the seller of that call option does not post sufficient margin to settle the trade, the clearing house wears the loss.

Volatile price movements can result in extraordinary margin calls (such as those demanded of Robinhood). If additional funding cannot be secured, margin calls will result in forced liquidation and can create market dislocations and elevated counterparty risks.

Layers of leverage and opacity associated with stock lending and derivatives tangles the web of counterparties. In a worst-case

scenario, a sudden breakout in volatility could erode confidence in the market hubs and thus the integrity of markets.

THE CENTRAL BANK PUT For decades investors have become accustomed to central banks providing a backstop to markets to dampen volatility. The perception is that central banks have unlimited capacity to provide adequate liquidity to overcome any market dislocation. When a systemic risk to markets emerges, we no longer hope for a central bank bailout, we expect it.

A contemporary view is that central banks should have an asymmetrical impact on markets.

That is, they should support failing markets but do not need to act against speculative bubbles. An interpretation of this might be that central banks truncate downside tail risks and thus reduce overall volatility.

The GameStop saga could justify an alternative interpretation.

Introducing asymmetry may skew the distribution of returns (to the upside) but not actually reduce volatility. If the impact of the ‘Fed Put’ is to skew returns as displayed in the below graph, volatility is not reduced, merely altered.

GameStop demonstrates a paradox. Did this happen because easy money actually contributed to a breakout in volatility?

If that is the case, further central bank actions might only exacerbate volatility and have the converse effect of reducing liquidity and risk appetite. That narrative would not bode well for markets.

THE IMPLICATION FOR AUSTRALIAN SMALL CAPS This has implications for small companies in Australia. The most direct and obvious is that it elevates the risks for short interest.

A share price spike created by a social media led buying frenzy may be short lived, however margin calls and leverage mean even brief spikes can lead to forced liquidation and significant losses. Contemporary hedging strategies for example, those used to reduce exposure to market risk or ‘beta’ might need fine tuning.

A debate about the appropriate estimate of volatility may also impact the valuation gap between market favourites and less soughtafter names. A feature of Australian small companies in recent years has been the increased dispersion of valuations between companies. Market realities and themes such as lower interest rates and growth scarcity explain most of this however it has also been exacerbated by longshort strategies. An unwinding of these positions may reduce this dispersion.

Higher volatility is also likely to impact valuation dispersion due to its negative impact on investor confidence in general. Volatility undermines investors’ confidence in their predictions. An investor’s willingness to buy a stock reflects confidence in their price predictions and the future, overall. Expensive stocks have baked in the most optimistic outlooks, and therefore have the most to lose from any decline in confidence.

If volatility has been underestimated, it is indicative of a mispricing of risk across the market. Perhaps central bank bailouts have not reduced volatility by simply truncating the downside.

Maybe they skew the distribution into a fatter tail on the upside, with less reduction in volatility than previously thought.

The best-performing stocks are generally companies which are sustainably building valuable businesses. However, if volatility has been mispriced as described, the best opportunities are likely to arise from contrarian viewpoints rather than pursuit of expensive momentum. To this end we continue to look for high quality businesses where recent (positive) changes have not yet been recognised by the market.

We believe the best antidote to volatility is to ensure that our investment process is balanced. Our approach is to construct diversified portfolio of quality businesses, anchored by fundamental conviction as well as a positive narrative.

Sinclair Currie is principal and co-portfolio manager at Novaport Capital.

16/03/2021 5:17:25 PM

30 | Money Management March 25, 2021

Toolbox

USING THEMATIC INVESTMENTS There are numerous investment themes hitting the news, Kanish Chugh writes, and advisers need to be aware of how they can get access to these if clients are seeking exposure.

THEMATIC INVESTING OFFERS exposure to some of the major socioeconomic, environmental and technological themes of our times. It has increased in popularity over the years and is now more accessible than ever with an abundance of managed investments to cover a range of themes and trends. With clients increasingly interested in using them, how do you incorporate thematic investing within their portfolios?

WHAT IS THEMATIC INVESTING? Thematic portfolios follow a top-down approach to investing.

They look at long-term macro trends, such as robotics and

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automation, and then use various screens and information sources to identify the companies or assets which support this trend through infrastructure or services.

Thematic investing is sometimes confused with sector investing. Thematic investing is more tailored and can span several sectors or even asset classes (although some might still use a sector investment for their thematic exposure). To illustrate this, consider the growth trend for technology. While one way to incorporate this might be simply including a sector investment to information technology, a thematic investment might also consider

companies outside of this sector classification which also stand to benefit by providing services associated with technology, such as Amazon or Netflix (part of the consumer discretionary sector).

IDENTIFYING THE ‘RIGHT’ THEMES AND TRENDS Avoiding passing fads or themes that may only be short-lived is the key to identifying trends to invest in.

Themes should be: • Universal rather than specific to just one company or region; • Sustainable over longer periods, in some cases 20 years or more; and • Based on known patterns and pressures.

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March 25, 2021 Money Management | 31

Toolbox Anything involving government activity, such as legislation or budget spend, is also valuable to consider as it provides regulated support for a theme to continue over long durations.

Some examples of themes include virtual connectivity, e-commerce, biotechnology, the growth of the middle-class in Asia and climate change.

VIRTUAL CONNECTIVITY AND DIGITISATION Faster and cheaper internet access, along with the unexpected changes wrought by the COVID-19 pandemic, have seen the world increasingly move interactions and consumption online. It is estimated that nearly 60% of the world’s population are internet users who embrace social media, streaming services and online shopping. The internet is rapidly becoming an essential tool of modern life, required for business processes, data storage and even supporting lifestyle improvements via automated devices. The current roll-out of the 5G network worldwide will further support this movement. It is predicted that around 500 billion devices will be connected to the internet by 2030.

Looking at current technology and use, a range of industries have been able to take advantage of the opportunities from this shift online.

Retailers and suppliers can access and service customers all over the world from one base location, which has cost savings in terms of bricks and mortar space as well as staff. Companies that were slow to move online have suffered, with a number of traditional department stores prime examples of this. This has been a space ripe for disruption and the Amazons and Alibabas of the world have set the standard for expectations of e-commerce experiences. The race continues to offer even better experiences in terms of product and delivery.

Ways of incorporating this theme for clients include sectorfocused investments, such as technology funds, sub-themes like robotics and artificial intelligence

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or even those that identify top innovative companies broadly.

BIOTECHNOLOGY Biotechnology has experienced extraordinary growth in recent times and come to popular attention as companies race to find vaccines and cures for COVID-19.

Biotechnology specifically refers to technologies that use biological processes, capturing companies that focus on research, development, manufacturing and/ or marketing of products based on biological and genetic information.

The different types of biotechnology include biological drugs, vaccines, immunotherapy, gene therapy, orphan drugs and genetic engineering.

Australian investors are typically exposed to the concentrated Australian biotechnology industry through market leaders such as CSL. However, Australians may be missing the broader and more diverse industry globally, particularly in the US, which is typically considered the centre of global biotechnology due to the world-renowned Food and Drug Administration (FDA) approval process and the large US consumption market.

Sector investments in healthcare may offer exposure to biotechnology, but there are also a range of investments available that specifically identify biotechnology companies, which may offer more targeted exposure across small to large capitalisation biotechnology companies.

THE GROWTH OF THE MIDDLE-CLASS IN ASIA The growth of the middle class across Asia has been well documented for years. The OECD predicts that households with daily expenditures of $10 to $100 per person would swell to 4.9 billion by 2030, with two-thirds residing across Asia. The region is anticipated to be responsible for 52% of global gross domestic product (GDP) by 2050.

The movement of people to higher financial status represents a huge opportunity. It is an

audience with the ability to afford more than just the basics and demand better quality.

The shift has also been responsible for the emergence of a number of global power players domiciled within the Asian region.

Armed with local expertise to manage regulations and cultural differences and anticipate demand and needs, these companies have large and growing client bases and the ability to pivot to other regions.

Chinese-based Alibaba and Indian multinational Infosys Ltd are good examples of these companies.

Investors interested in exposure to this theme could look at investments broadly focused on the region, those focused on individual countries like China or India, or sectors that may benefit from growth in this region.

CLIMATE CHANGE Ongoing population growth and climate change are placing pressure on available resources including minerals, energy, water and food sources. For example, global energy consumption is anticipated to more than double in the next 30 years. This is driving a transition to renewable and more sustainable business and lifestyle.

Wind and solar energy are forecast to supply around 48% of world electricity needs by 2050, with battery technology, gas peakers (turbines or engines that burn natural gas) and dynamic demand anticipated to drive market penetration of solar and wind by more than 80% according to BloombergNEF. Battery technology is key to supporting the transition to renewable energy and its supply chain extends from mining companies producing metals like lithium, to manufacturers of battery storage and storage technology providers.

Growth in electric vehicle use is similarly likely to fuel demand for battery storage in the coming years. BloombergNEF predicts sales to rapidly increase from 2.7% of new cars sold representing 1.7 million cars in 2020, to over half of all passenger vehicles sold by 2040 representing 54 million cars.

Exposure to this space can

Continued on page 32

16/03/2021 4:24:36 PM

32 | Money Management March 25, 2021

Toolbox

CPD QUIZ Continued from page 31

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.

come through clean energy focused investments – those that incorporate specific environmental filters or focus on specific supporting industries.

1. Which of the following items would not represent a theme to

USING THEMATIC INVESTMENTS IN YOUR CLIENTS’ PORTFOLIOS

a) Universal

Financial advisers may consider a range of options for thematic investing such as direct shares, actively managed funds and exchange traded funds (ETFs). Individual companies associated with themes may not always be accessible, due to costs or lack of access to the stock exchanges they are listed on. ETFs tend to be the lowest cost and most accessible option for investment portfolios given the potential for exposure to many companies globally and given they usually cost less than actively managed options.

c) Based on known patterns and pressures

HOW TO ALLOCATE TO THEMATIC INVESTMENTS

c) Five billion

Thematic investments are versatile and can be used in a range of ways, such as: • To complement the equities component in the core of a portfolio; • As a tactical tilt in the satellite portion of a portfolio towards trends or for growth; and/or • As a diversification tool to broaden from typical assets in a portfolio core.

An example of how this might work in practice is one investor might choose a thematic investment as part of their international equities exposure to offer diversification and to complement more traditional equity exposures such as the S&P 500. Alternatively, a different investor may view it as a growth opportunity and use it as a satellite investment. The size of the allocation may vary depending on how the investor chooses to use it, ranging from 5% to 10% per investment depending on factors such as existing portfolio composition, risk tolerance, needs and goals.

Another illustration of how thematic investing can be incorporated is shown below:

invest in? b) Driven by a temporary event d) Government involvement 2. How many devices are anticipated to be connected to the internet by 2030? a) 500 billion b) 800 billion d) Eight billion 3. Battery technology, gas peakers and dynamic demand is anticipated to drive what percentage of market penetration of solar and wind energy? a) 40% b) 60% c) 80% d) 100% 4. How can thematic investments be used in a portfolio? a) To complement the equities component in the core of a portfolio b) A s a tactical tilt in the satellite portion of a portfolio towards trends or for growth c) A s a diversification tool to broaden from typical assets in a portfolio core d) All of the above 5. What size can a thematic allocation be within a portfolio pending existing portfolio composition, risk tolerance, needs and goals? a) 0.5% to 2% b) 2% to 5% c) 5% to 10% d) 10% to 12%

Thematic investments can be a valuable way of engaging clients with their investments. They allow active participation in the major forces driving human progress and can be an opportunity to incorporate passions within a portfolio.

The increasing availability of tailored thematic investments in the market mean they are more accessible than ever, allowing financial advisers the ability to support their clients with suitable options according to their needs, goals and portfolios.

Kanish Chugh is head of distribution at ETF Securities.

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TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ using-thematic-investments For more information about the CPD Quiz, please email education@moneymanagement.com.au

16/03/2021 4:24:49 PM

HELPING ISSUERS AND DISTRIBUTORS MEET THEIR DDO OBLIGATIONS Target market data collection TMD document creation Data & TMD dissemination Data & document feeds Our extensive capabilities in data, dissemination and regulatory compliance help product issuers and distributors meet regulatory obligations, optimise resources and reduce risk.

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26/02/2021 10:18:18 AM

34 | Money Management March 25, 2021

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

Appointments

Move of the WEEK Angela Murphy Chief executive, life Challenger

Challenger has decided to combine its life and distribution, product and marketing teams at the same time as appointing Angela Murphy as its chief executive, life.

The company told the Australian Securities Exchange that the Life business would continue to sit alongside funds management and its recently acquired bank business creating three clear business lines.

MLC Life Insurance has appointed Michael Downey as new general manager of retail distribution partnerships, replacing Russell Hannah.

Downey would report to Michael Rogers, chief life insurance officer, and would be responsible for the strategic and operational leadership and direction of the retail distribution partnerships function.

Downey would join on 22 March, while Hannah would leave the role officially on 26 March.

Downey had over 30 years’ experience in financial services, which included advice and licensee strategy, strategic product development, distribution strategy and management.

He held senior executive roles in advice partnerships, wealth distribution, retail insurance, retail investments and group insurance.

Most recently, he was the general manager of advice partnerships with responsibility for leading the MLC advice licensees.

Prior to that, he led the MLC wealth strategic accounts, IFA and self-employed distribution teams.

He had also held executive management roles at Tower Australia (TAL), CommInsure and AXA Australia.

04MM250321_30-36.indd 34

Murphy had been chief operating officer of the distribution, product and marketing teams and a member of Challenger’s leadership team.

Announcing the appointment of Murphy and the combining of the two businesses, Challenger managing director and chief executive, Richard Howes, said Murphy had a strong leadership track record and had played a key role in diversifying Challenger’s product

Boutique global equities fund manager Alphinity Investment Management has appointed Elfreda Jonker as client portfolio manager to its Sydney-based team.

She had joined from Talaria Asset Management where she was director of business development.

Jonker had over two decades of financial markets and corporate experience to the firm, which included more than 13 years at Deutsche Bank, where she served as head of equity sales for the bank’s South African business.

Before that, she spent two years working for Goldman Sachs in New York, where she was a project manager for interest rate, foreign exchange and credit derivatives products.

She had also spent three years at Deloitte, in South Africa and Chicago, where she worked in the firm’s audit division.

MLC Asset Management has appointed Anthony Golowenko as portfolio manager in the multi-asset capital markets research team.

Golowenko had over 21 years’ experience and was most recently at Clime Investment Management.

At Clime, he had overall responsibility for the investment

distribution reach.

The life business was also conducting an internal and external search process for a chief investment officer.

Anton Kapel, who had been acting chief executive of the Life business, would resume his previous role as Challenger’s appointed actuary and chief financial officer of the Life business.

team, strategies and performance outcomes.

Prior to this, he was at State Street Global Advisors where he held the roles of senior portfolio strategist – Asia Pacific, head of active Australian equities and senior portfolio manager.

Channel Capital has appointed Phelim O’Neill as distribution director to its Sydney office, where he will be responsible for relationships across the adviser, family office and wholesale channels in NSW and the ACT. He joined from AMP Capital where he serviced private wealth groups and advisers, and had over 12 years’ experience in financial services across distribution, project management and wealth having worked across multiple asset classes in public and private markets.

Andrew King, Channel Capital’s head of distribution, said O’Neill was a well-regarded individual within the advice and wealth space across the eastern states.

Janus Henderson Investors has promoted Tom Kelly, Jaxon Ruddock and Fawzul Ahmed into new roles.

Kelly had been promoted to the head of institutional distribution for Australia, reporting to Matt Gaden, Janus Henderson head of Australia.

He joined the firm in 2016 as an institutional sales director and since June 2020 had been driving the strategy for the institutional business channel.

In his new role, he would lead the institutional distribution team with a focus on continuing to work closely with institutional clients to deliver increasingly tailored solutions to meet their needs.

Ruddock had been promoted to head of consultant relations for Australia.

He had been playing an increased role in broadening the relationships with institutional asset consultants in addition to his role of managing retail research.

In his new role, Ruddock would continue to work to deepen relationships with both local and global consultants and connect them with the company’s investment teams.

Ahmed had been promoted to senior client account manager and was a part of the client account management team led by Harry Wall.

16/03/2021 4:24:04 PM

BE BETTER INFORMED:

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A one Crown rating represents a fund that falls into the fourth/ bottom quartile

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Three Crowns demonstrates funds that sit in the second quartile

Four Crowns are given to funds that have placed between 75-90% of their sector peers

Five Crowns are awarded to funds that place in the top 10%

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26/02/2021 10:55:29 AM

OUTSIDER OUT

ManagementMarch April 2,25, 2015 36 | Money Management 2021

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

Is the Govt turning superannuation into Afterpay?

MAKE no mistake, Outsider is a big fan of superannuation possibly because he was reporting on it when the Hawke/ Keating Government cemented the Prices and Incomes Accord which ultimately gave rise to award superannuation and then the superannuation guarantee (SG).

You see, Outsider remembers what it was like before the SG came along and before Australia had accumulated more than $3 trillion in superannuation savings and, by definition, he is of an age that makes him closer than most to being able to access the modest superannuation balance that he has been able to accumulate.

So, Outsider admits to falling into the camp of those who believe that the Government’s COVID-19 hardship superannuation early access regime actually amounted to outsourcing income support payments away from the Federal Budget and onto people’s superannuation balances – think Afterpay.

It follows that he is also of the view that allowing victims

of domestic violence to access up to $10,000 from their superannuation to sustain themselves is also problematic for much the same reason albeit that it may at the time represent the lesser of two evils.

And he worries that the most enthusiastic supporters of these early access regimes are not those upon whom the burden falls. Oh no, by and large, the supporters are Parliamentarians who are receiving handsome salaries which include 15.4% superannuation and who know that lucrative consultancies seem to await those who retire from the Parliament or are forcibly retired by their electorates.

So, while Outsider doesn’t want to see anyone left on the bones of their bum because of financial hardship or domestic violence, he is not supportive of them avoiding penury by being required to diminish their future retirement incomes.

Wherever you stand in the debate, Outsider believes Governments should generally be discouraged from spending your money by stealth.

Blends are OK, but why aren’t diversity panels diverse?

OUTSIDER is pleased that, even though it took too long, the issue of diversity has become an important matter for many financial services firms, on the surface at least.

Outsider has noticed the increasing number of webinars dedicated to diversity, though mostly tackling gender diversity.

During one such webinar a panel discussed the number of female CEOs in the ASX 200, and workforce barriers for women.

After an audience member questioned the panel about the additional barriers faced by women from ethnic backgrounds and how firms could overcome the lack of non-white female women in executive roles, it was clear to Outsider that this particular issue was beyond the panel’s expertise.

Why? For the simple reason that the panel looked, well, uniformly Caucasian. While the panel were respected high-level women from various sectors, it appeared to Outsider none of their backgrounds could help them in providing views on how the issues of colour or ethnicity could be tackled.

This is not the first time Outsider has encountered panel discussions where the participants discussed diversity but were not particularly diverse themselves. Dammit, Outsider confesses to having been on some of those panels and his experience of diversity is limited to single malt versus blend.

Outsider reminds the industry that while gender diversity is incredibly important, diversity also included ethnic backgrounds, age, disability status, sexual orientation, gender identity, socioeconomic background, caring responsibilities, intersex status, and religious affiliation and, ahem, not Speyside versus highland.

Outsider wonders whether webinar fatigue could be overcome with more inclusivity to stand out against all the beige or, dear he suggest, white.

Will offshoring result in yesterday’s answer tomorrow?

AS someone who has had to deal with offshore service providers, Outsider is very interested in the suggestion that paraplanning services can be satisfactorily provided by people sitting offshore, probably on the Indian sub-continent.

Now Outsider totally understands the attractions of offshoring the provision of services, not least the lower cost-base but he hopes that those who are proposing such arrangements are conscious of pros and cons.

Outsider acknowledges that Money Management's owner, FE fundinfo has a reasonably global footprint and that his frequent IT problems are often resolved by colleagues based in India.

OUT OF CONTEXT www.moneymanagement.com.au

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Indeed, Outsider can think of occasions on which IT problems experienced at the throbbing heart of the Money Management newsroom were dealt with via both in the United Kingdom and India – a truly international approach to a very domestic problem.

But he points out that one of frustrations of such a situation is that when Money Management is approaching its morning newsletter deadline, it is just 3am in Chennai and 1 am in London.

Which reminds Outsider of the southern belle he met years ago in New York who said to Outsider, “Honey, is it always tomorrow where you come from?”.

She was right, you know.

"Anyone ERF their salt will tell you - reuniting lost and unproductive super is a good thing for working Australians."

"I'm selling this song about NFTs [non-fungible token] as an NFT."

– Senator Jane Hume's superannuation jokes

– Elon Musk on the new blockchain technology

Find us here:

18/03/2021 10:46:43 AM