Money Management | Vol. 36 No 6 | April 21, 2022

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

www.moneymanagement.com.au

Vol. 36 No 6 | April 21, 2022

14

INFOCUS

Financial adviser exam

22

INVESTMENT

Dividend payments

GLOBAL EQUITIES

Digital advice

How many advisers are still yet to pass exam?

BY LAURA DEW

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Seeking lower correlation WITH investors making higher allocations to global equities, it is important they ensure that they have the lowest correlation with their domestic Australian exposure.

While diversification is always important in a portfolio, it is especially important given the lack of diversification within the ASX which is dominated by financials and materials stocks.

It also helps in an uncertain economic environment as, while the ASX 200 is currently benefiting from higher commodity prices, this will not be the case long term and financials are susceptible to an economic slowdown.

Money Management has used FE Analytics data to examine which sectors, fund and geographic regions have the lowest correlation with the ASX 200.

Geographically, China is the biggest market with a low correlation to Australia at just 0.02 and offering a broad constituent set of more than 700 companies.

However, it has made a smaller return than the Australian market at 20.7% over five years compared to 55.4% by the ASX 200.

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Full feature on page 16

28

TOOLBOX

DATA from the Australian Securities and Investments Commission (ASIC) revealed there were 882 advisers who were still yet to pass the financial adviser exam at the end of 2021.

Answering questions on notice from Senator Susan McDonald, the regulator said data from the Australian Council for Educational Research (ACER) showed 882 advisers qualified for the extension as they had failed the exam twice.

Some 333 of those sat the exam in February, which had a pass rate of less than a third, with 108 passing.

This left a total of 774 advisers who had to pass the exam in the May, July or November.

This figure was out of 17,563 advisers listed as ‘current’ on the Financial Adviser Register at the end of 2021, although this number had since fallen to 17,173. This included 130 advisers who had their status changed to ‘ceased’ as a result of not having passed the exam by 1 January.

ASIC said it expected the number to fall further as the year went on and was conducting a review to ensure Australian Financial Services (AFS) licensees had made the required notifications to ASIC on the status of their advisers.

“Over 2022, ASIC expects that the number of financial advisers on the FAR will fall. This is because, by either 1 January, 2022 or 1 October, 2022 for Continued on page 3

Innovative presentations needed for SoAs THE future of the Statement of Advice (SoA) will be less about the compliance requirements and more about the document’s presentation to clients, according to Fourth Line.

The risk management firm said SoAs were a necessary part of the personal advice process but that advisers needed to be “brave and innovative” when it came to presenting the document to clients.

By doing so in a clear and concise manner, this would help the client to make an informed decision about the advice they received.

The firm said: “Astute advisers know the future of the SoA will be less about highlighting compliance and regulatory requirements and more about the method, style and technology used to communicate the information in an easy-to-understand manner.

“This will increasingly be the case as technology permits the quality Continued on page 3

14/04/2022 11:11:31 AM

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Disclaimer: This information has been prepared and issued by Perennial Investment Management Limited (ABN 13 108 747 637, AFSL No. 275101) as Responsible Entity and is for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs and you should not construe the contents of this material as legal, tax, investment or other advice. Past performance is not a reliable indicator of future performance. A copy of the PDS, Additional Information Booklet and the TMD is available at www.perennial.net.au.

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April 21, 2022 Money Management | 3

News

Clients overwhelmed by excess ESG information

BY LAURA DEW

ADVISERS need to be careful not to overwhelm clients with ESG information, according to adviser Farren Williams, as they already implicitly trust their adviser.

Speaking at the Responsible Investment Association of Australasia (RIAA) conference in Sydney, Williams, adviser and partner at Koda Capital, discussed providing information about environmental, social and governance (ESG) investments for clients.

She was asked by a delegate whether it was the financial adviser who went into depth or whether clients asked for this information.

Williams said there was usually an implicit trust that advisers were acting in the best interest of clients and did not require masses of information.

“Clients have advisers because they want someone they can trust and who

will come up with a solution that is appropriate for their needs.

“They won’t be interrogating every single recommendation and wanting every piece of due diligence to make their own decision. There is an implicit trust that you have put the recommendations together in a thoughtful way.

“There are some clients who are very sophisticated and will have very detailed questions and then you will need to go to the bottom of the iceberg but, by and large, clients want the advice process to be easy.”

She recommended advisers stayed at the ‘top level’ and ensured the recommendations were aligned with clients’ objectives and values.

“Otherwise you end up overwhelming them, their eyes glaze over and they don’t know how to make a decision. You should try to keep it as straightforward for the client as possible.”

Akambo and First Financial announce merger

BY LIAM CORMICAN

AKAMBO Financial Group and First Financial wealth management firms have merged, a move they say will increase their capabilities in providing investment solutions to the advisory market.

The two brands would remain client facing but advisers could utilise the suite of services across both firms including

accessing specialist professionals in areas such as private wealth management, investment teams and dealer services and licensing solutions.

Akambo managing director, Anthony Kapetanovic, said: “Chief executive of First Financial, Ben Rossi, and myself saw a clear opportunity to excel as market leaders in the new post-Royal Commission

How many advisers are still yet to pass exam?

Continued from page 1 advisers who qualified for the extension, all financial advisers who are ‘current’ on the FAR must have passed the exam.

“Any adviser who has not passed the exam by the relevant date must be ‘ceased’ on the FAR from that date.”

A second review would be

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conducted after 1 October, 2022 to identify any advisers who were eligible for the extension but had not completed the exam.

Any advisers who had not passed the exam by 1 October, 2022 would need to be ‘ceased’ on FAR within 30 business days of 1 October, 2022.

environment, where licensing and advice is under increased challenges and pressure”.

Kapetanovic said the new structure would service 3,000 clients across Australia, comprising over $3 billion of funds under management.

First Financial chief executive, Ben Rossi, said: “We are all trying to solve the same issues, as the landscape is

quickly evolving, with the likes of technology playing a big role in how advisers are looking for and consuming information both locally and internationally.

“We are thrilled by the opportunities for further growth in the advisory space as advisers needs and wants are now changing in not only a post-Royal Commission but also a postpandemic world.”

Innovative presentations needed for SoAs Continued from page 1 and appropriateness of the advice (relative to prevailing regulations and legislation) to be assessed as the SoA is created, rather than waiting until after the fact.

“The SoA is an important and necessary part of this process – it doesn’t mean you have to bore your clients to death with it. It means you need to make the process engaging so the information is heard, understood, and retained by the client.”

There had previously been debate around whether advisers needed a full SoA or could do a Letter of Advice and the matter was being considered in the Quality of Advice Review.

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4 | Money Management April 21, 2022

Editorial

laura.dew@moneymanagement.com.au

DEALING WITH KEY-MAN RISK

FE Money Management Pty Ltd

Asset managers are coming to terms with key-man risk as advisers and investors question the succession plans for their teams.

Editor: Laura Dew

Level 10 4 Martin Place, Sydney, 2000

Tel: 0438 836 560 laura.dew@moneymanagement.com.au

THE FALL-OUT from the exit of Hamish Douglass from Magellan is having wideranging effects as asset managers say the threat of key-man risk has become more pressing.

Chair and chief investment officer Douglass left Magellan on a temporary basis for medical reasons in February but outflows from the firm since the start of the year have reached $18 billion at the end of March.

The firm acted quickly to put a team in place in Douglass’ absence, appointing co-founder Chris Mackey as interim chief investment officer, and gave retention plans to remaining employees. However, the fallout highlights the cult of a so-called ‘star manager’.

This was echoed when SG Hiscock appointed a new chief executive earlier this month and pointed out that the appointment of Giles Croker had been in development for several years.

This included a period as co-CEO alongside Stephen Hiscock to reassure investors that the firm was in good hands.

Finally, GQG said the threat of key-man risk and the potential for a departure by a key manager was a topic being

Journalist: Liam Cormican Tel: 0438 789 214 liam.cormican@moneymanagement.com.au ADVERTISING Account Director: Damien Quinn Tel: 0416 428 190 damien.quinn@moneymanagement.com.au Account Director: Amy Barnett Tel: 0438 879 685 amy.barnett@moneymanagement.com.au Junior Account Manager: Karan Bagai Tel: 0438 905 121 karan.bagai@moneymanagement.com.au PRODUCTION Graphic Design: Henry Blazhevskyi

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frequently raised by their investors and that any succession changes needed to be communicated in a clear, transparent way.

While no firm is the sum of one person, it cannot be denied that certain industry personalities carry weight with investors and help to increase inflows for the business.

Hopefully, the temporary exit of Douglass will be a wake-up call for investment houses to consider their succession planning and to implement

structures for this eventuality.

With the number of advisers on decline, the circumstance also applies to advisory firms particularly as many consider selling up their practices or handing over to younger staff.

In this issue, we also have a guide to managed accounts which explores the growing use of the vehicle as well as why more education is needed for advisers and the changing demographics for their usage.

Laura Dew Editor

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14/04/2022 10:13:14 AM

April 21, 2022 Money Management | 5

News

‘Time to go forward, not back’: Jones

BY LAURA DEW

FINANCIAL advisers need a break to digest regulation and focus on their business without waiting for the “next regulatory hit”, according to shadow minister for financial services, Stephen Jones.

Speaking at the Responsible Investment Association of Australasia (RIAA) conference in Sydney, Labor’s Jones said the industry had been through a “tsunami” of change in the past few years.

“You’ve been through a tsunami of regulatory change; it didn’t start with the Royal Commission but that turbocharged things. We don’t apologise for spending a lot of time on the Royal Commission, but we do acknowledge now is the time to go forward, not backward.

“We want to see all these regulatory and legislative changes digested so there’s some

breathing space. There’s a whole lot of stuff that hasn’t been digested and we want to give you the opportunity to do that as we go into an even more uncertain time.

“We don’t need the sector looking over its shoulder for the next regulatory hit. What you need to be doing is focusing on the interest of the people that you invest on behalf of and to be focused on that.”

He added that a lot of change had been “politically-driven” and that was distracting the industry from their day job, particularly in the superannuation space.

“A lot of noise coming out of Parliamentary oversight committees has been, unfortunately, politically driven and has required the sector to be distracted from their day job, which is about ensuring members are getting great returns and that the funds are properly governed. Dealing with politically-motivated

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attacks, this needs to stop.

“If you’ve got a sector with $3 trillion in assets, which will move to $5 trillion over the life of the next Parliament, then you absolutely need strong regulation that is in the public interest.

“But there are other things that need to be focused on instead of super wars and political hits.”

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6 | Money Management April 21, 2022

News

BT fined $20m for incorrect commission payments

BY LAURA DEW

BT Funds Management has been fined $20 million by the Australian Securities and Investments Commission (ASIC) for incorrectly charging commission payments to certain

superannuation fund members.

The organisation charged super members insurance premiums which included commission payments until 2020. These had been banned under the Future of Financial Advice reforms since 2013.

Members of Asgard Independence Plan Division Two were also charged commission via premiums paid to financial advisers, despite members electing to have that payment removed from their account.

It also found BT, which was a subsidiary of Westpac, misrepresented to members that proper deduction had been made, even though commission were not permitted.

ASIC deputy chair, Sarah Court, said: “Over 9,000 Asgard Fund members were incorrectly charged commission payments totalling more than $9 million.

This misconduct was caused by the failure to implement proper systems to ensure consumers are correctly charged.

“As the Court finalises these matters against Westpac, we urge Westpac, and other financial institutions, to look at their culture of compliance and invest in systems that mean incorrect charging of fees, premiums and commissions does not occur.”

Westpac said it would pay over $9.8 million in remediation to over 9,900 members by July 2022.

Funds question Choice heatmap methodology SUPERANNUATION funds have raised questions about the methodology used for the Choice heatmaps, according to the Australian Prudential Regulation Authority.

Previously, the Treasury said it had concerns over data accuracy and presentation of the Choice heatmaps which had been more difficult to compile than for MySuper funds.

Speaking to Senate estimates, APRA executive director for superannuation, Suzanne Smith, said trustees of poorly-performing super funds were concerned about the methodology used rather than data accuracy.

“Most of those trustees haven’t raised issues so much in relation to the accuracy or the quality of the data we used for the Choice heatmap, which was the super ratings data. Nor have they raised questions about whether it was appropriate for us to use it. What

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they’ve raised some questions about is the methodology for mapping the data.

“The super ratings data isn’t at a level of granularity that it would be if we had our own data. So the collections that we will do in the super data transformation program will take that data to another level of granularity, which should improve some of those elements.

“What we’ve seen is the majority of trustees, though, acknowledge that their performance has been poor.

Those poorly-performing funds that were recorded in the choice heatmap have acknowledged that their performance was poor and that they have started to look at what actions they can take to improve that performance which will ultimately be of benefit to members.”

Smith said she was hopeful that the trustee-directed performance test would be ready for the 1 July start date.

Vanguard broadens adviser distribution business VANGUARD has made several leadership changes to its distribution team as it broadens out its adviser and retail direct business.

Current head of distribution, Matthew Lumsden, would depart the firm in June 2022 after 12 years to pursue other opportunities.

Rachel White had been appointed as head of financial adviser services and would join the Australian executive team.

She was currently head of product enablement.

Rebecca Pope was appointed as head of retail transformation, moving from her position as head of intermediary.

The changes followed the completion of Vanguard’s exit of the institutional mandate market in late 2021, as part of the firm’s broader shift to building out its adviser and retail direct business.

Vanguard Australia managing director, Daniel Shrimski, said: “Under Matthew’s leadership Vanguard’s distribution business has gone from strength to strength, and on behalf of the business, I thank him for his many contributions to Vanguard, and wish him well with his future endeavours.

“It’s an exciting time for Vanguard in Australia, and these new appointments bring significant expertise and experience in overseeing areas of strategic growth and change as we continue to build out our service offering for individual investors and the financial advisers who serve them.”

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April 21, 2022 Money Management | 7

News

Half of small super funds facing sustainability challenges

BY LAURA DEW

ANALYSIS by the Australian Prudential Regulation Authority (APRA) has found half of small superannuation funds, those with less than $10 billion in assets under management, are facing sustainability challenges.

The regulator said smaller superannuation funds were more likely to struggle to deliver quality and value-for-money for members.

They also faced sustainability challenges as result of declining cashflow and member accounts.

On the other hand, funds with more than $50 billion were able to spread their costs over a wider membership base and keep fees lower.

This meant operating expenses were around 0.33% of net assets compared to 0.57% for smaller funds.

APRA said mergers since the release of the first MySuper heatmap in 2019 had

delivered combined total fee savings of around $21 million per annum for 350,000 MySuper members while simplification programs had delivered fee savings of almost $16 million per annum.

APRA member, Margaret Cole, said: “While bigger isn’t always better, increased scale makes it easier for trustees to build an efficient and resilient business model that delivers strong financial outcomes for members.

“A fund that is losing members or has declining net assets will face challenges to keep fees and costs low for members, and fund operational improvements that ultimately benefit members.

“It’s for this reason that APRA will continue to encourage trustees facing performance or sustainability pressures to seek a strategic merger that can quickly deliver improved outcomes to their members.”

Not all Managed Accounts are created equal Whether you’re looking for an ‘off-the-shelf’ solution or would like to create your own tailored portfolios, BT Panorama has a portfolio construction solution that can fit your business.

Learn more about how Managed Accounts can benefit your business at bt.com.au/ManagedAccounts BT Managed Accounts

Zac Leman – Head of Managed Accounts, BT BT Portfolio Services Ltd ABN 73 095 055 2080 AFSL 233715 operates Panorama Investments and administers Panorama Super. Consider the PDS at bt.com.au/ professional before making any decisions.

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13/04/2022 2:02:29 PM

8 | Money Management April 21, 2022

News

Two pathways for super funds to address longevity risk

BY LIAM CORMICAN

ADDRESSING longevity risk in the Retirement Income Covenant (RIC) is a tougher nut to crack for superannuation funds than its mandate for funds to mitigate investment and inflation risk to retirement savings.

Speaking to Money Management, Challenger’s general manager, institutional partnerships, Simon Brinsmead, said this was because it was the only risk that funds needed to balance that existed outside of the accumulation phase.

“Why this is significant is because you’ve got around about 700 people retiring every day now, so the floodgates truly have opened,” he said.

“It really is the toughest nut for these funds to crack because they need to build this and this is where it gets really interesting.”

With the RIC deadline of 1 July getting closer, Brinsmead said funds were realising their grand plans to address longevity risk would instead need to be implemented in baby steps.

“The realisation is that this is complex, and it

really is a question of baby steps, get something built, take the first step, get something to market and then it’ll be a progression from there.”

The issue for retirees, according to Brinsmead, was that they considerably underspent due to the fear that they would run out of money, driving super funds to look for answers to the question of longevity risk.

Magellan YTD outflows pass $18b

BY LAURA DEW

MAGELLAN Financial Group has seen net outflows of more than $1 billion in March as the continued absence of Hamish Douglass weighs on the firm.

In an announcement to the Australian Securities Exchange (ASX), the asset manager said funds under management were $70 billion as at 31 March, 2022.

Assets were divided between $25.7 billion in retail and $44.3 billion in institutional assets.

“Magellan has experienced net outflows of $1.1 billion from the most recent update of 11 March, 2022 to 31 March, 2022, which comprised net retail outflows of $0.5 billion and net institutional outflows of $0.6 billion.

“In addition, Magellan has received notifications of intention to redeem of $0.2 billion which is reflected in the FUM figures.”

In total, net outflows for the March quarter were $18.1 billion, which comprised $12.9 billion of redemptions and $5.2 billion in notifications of intentions to redeem, the firm told Money Management.

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Its share price had fallen 9.4% since the start of the year however, it had improved in the past month, rising 36% over the month to 07 April.

Douglass, who co-founded the company and had been working as chair and chief investment officer, temporarily left the firm at the start of February to take a medical leave of absence.

No date had yet been set for his return to the business and he had formally resigned from the board.

The company also announced it had introduced a retention program for staff around bonuses and share purchase plans which would be subject to their continued employment which would be vested in September 2024.

Kristen Morton, interim chief executive of Magellan, said: “Magellan’s employees are exceptional. They have been working tirelessly in what has been a challenging period. The staff retention initiatives comprise part of Magellan’s overall goal to be an employer of choice for our employees and provide excellent service to our clients”.

“This is where we at Challenger are having quite extensive workshop discussions with the funds and we have been for quite some time,” he said.

Brinsmead said there were two ways that funds could address implementation of the longevity risk requirement, either by working with an insurer to tackle the risk from a product design perspective or by building a pooled capability from the ground up.

“They want to insource the capability, but realistically, in order for the rubber to hit the road, they can’t.

“The funds can’t just create this capability from the ground up on day one, they’re going to have to develop a journey and this is where the partnership solutions we work on with funds is to help them get from step one to step two to step three.

“So perhaps step one would be an insurance or an insurance-related solution. And step two to three could be helping them migrate to the internally-created solution.”

Advice industry falls after uptick THE number of advisers in the profession has fallen by 24 in the week to 8 April, with losses mainly driven by Insignia and AMP. According to Wealth Data, the advice industry now sat at 17,173 advisers, with the two largest groups, Insignia and AMP both seeing a busy week of appointments and resignations.

AMP appointed three and lost 13 while AMP had four appointments and 12 resignations.

Count had its first negative week in a while, down a net of four, gaining one adviser and losing five, while TAL (Affinia) also lost a net of four – neither Count or TAL’s losses were appointed elsewhere.

Elsewhere, advisers at CBA and Independent Financial Advisers Australia fell a net of three along with seven licensee owners losing a net of two, including Fortnum, FSSP (Aware Super) and Hood Sweeney.

Looking at growth, a total of 38 licensee owners had net gains of 51 advisers and 41 licensee holders had net losses of -74.

Eight new licensees were registered, adding 14 advisers while seven licensees closed.

And it was a good week for provisional advisers with nine being appointed.

“Outside of the new licensees, Diverger grew by three advisers, the net growth was at GPS who picked up two advisers from Shartru and one Provisional Adviser, while Paragem lost and gained one adviser,” Wealth Data founder, Colin Williams said.

Seven licensee owners had a net growth of two, including Picture Wealth, with one adviser joining from Euroz and the other from Eastwoods Wealth Management. Meanwhile Oreana moved into growth territory, adding two with one adviser from Hillross and another starting as a new Provisional Adviser.

A total of 28 licensees had a growth of net one including Steinhardt Holdings (Infocus), Shartru, Perpetual and HESTA.

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April 21, 2022 Money Management | 9

News

Legal change makes it harder for partners to hide super

BY LAURA DEW

PARTIES to family law proceeding can now apply to family law courts for information about their partners’ superannuation under changes to the law.

This information was held by the Australian Taxation Office (ATO) and the organisation had been working to ensure appropriate integrity measures were in place for the information to be shared securely.

This move would enable parties to use up-to-date information on their partners’ superannuation fund and made it harder for parties to hide or under-disclose their assets.

This followed the passing of legislation in Treasury Laws Amendment (2021 Measure No. 6) Bill 2021 (Schedule 5) last September to

allow the ATO to release superannuation information on request.

Senator Jane Hume, minister for superannuation, financial services and the digital economy, said: “Superannuation is an increasingly significant asset in a separated couple’s asset pool and improving accessibility to superannuation information will better support separated couples to divide their property on a just and equitable basis.

“This will help alleviate the disproportionate financial hardship and negative impact on retirement incomes that women can experience after separation.

“This important reform will reduce the time, cost and complexity for parties seeking information about their former partner’s superannuation.”

What you don’t know can actually hurt you.

Stay on top of regulatory and technical changes with insights from BT’s Tech Team to help add value to your clients.

Visit BT Academy for the latest webinars, podcasts and articles.

BT Academy

Bryan Ashenden – Head of Financial Literacy and Advocacy, BT

This information was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian Credit Licence 233714. This information provided is factual only and does not constitute financial product advice. Before acting on it you should seek independent advice about its appropriateness to your and your clients’ objectives, financial situation and needs.

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13/04/2022 2:01:56 PM

10 | Money Management April 21, 2022

News

ASIC launches civil proceedings against Macquarie Bank

SoA COVID-19 relief to cease this month

BY LAURA DEW

TEMPORARY measures allowing financial advisers to provide a Record of Advice rather than a Statement of Advice will cease from 15 April, the Australian Securities and Investments Commission (ASIC) has confirmed.

The measure was first introduced in April 2020 as a result of the COVID-19 pandemic and had been extended twice on 15 April 2021 and October 2021.

It allowed the following forms of relief: • ‘Situations in which Statement of Advice is not required’ relief.

This relief allowed financial advisers to provide a record of advice, rather than a statement of advice, to existing clients requiring financial advice due to the impacts of the COVID-19 pandemic.

• ‘Urgent Advice’ relief. This relief allowed financial advisers additional time to give their clients a time-critical statement of advice.

In a statement, the regulator said: “ASIC undertook targeted industry consultation to better understand the effects of our approach.

“Based on feedback, we do not consider that the current status of COVID-19 responses in Australia provides a sufficient basis for a decision by ASIC to further extend the relief provided by the COVID-19 Instrument.”

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THE Australian Securities and Investments Commission (ASIC) has taken action against Macquarie Bank for failing to adequately monitor and control transactions by third parties, including financial advisers.

The regulator commenced civil proceedings as it alleged there was “limited monitoring” of transactions made through its bulk transaction system and that these transactions did not pass through a fraud monitoring system or undergo manual checks.

ASIC alleged from 1 May, 2016 to 15 January, 2020, Macquarie failed to take measures to prevent or detect transactions made using its bulk transacting system that were outside the scope of a ‘fee authority’ given by a customer, including misappropriating, and attempts to misappropriate, customer funds.

This included $2.9 million in unauthorised withdrawals made

by convicted former financial adviser, Ross Andrew Hopkins.

Hopkins made 167 unauthorised transactions between October 2016 and October 2019 on 13 of his clients’ cash management accounts via Macquarie’s bulk transaction system. He was later sentenced to six years imprisonment and banned from providing financial services or controlling an entity carrying on a financial services business.

Following engagement with ASIC, from December 2021, Macquarie remediated Hopkins’ clients approximately $3.5 million on an ex-gratia basis.

ASIC also claimed Macquarie made false or misleading representations in the promotion and offering of limited thirdparty access over cash management accounts.

ASIC deputy chair, Sarah Court, said: “Hopkins misused Macquarie’s systems by processing transactions using

his fee authority to steal client funds. Macquarie failed to properly detect and prevent these unauthorised fee transactions, many of which were over $10,000 each.

Hopkins’ conduct is an example of what can go wrong when banks do not properly monitor their systems and implement appropriate processes.

“ASIC’s case is not focused on Hopkins’ conduct but rather on alleged multiple failures by Macquarie to take proper steps to monitor, detect and prevent unauthorised transactions.”

The regulator said it was seeking declarations, pecuniary penalties and other relief from the Court, including a compliance order for an independent review of Macquarie’s fee authorities and fee transactions using its bulk transaction system to ensure recommendations regarding improvements are effectively implemented.

Strong growth of crypto in SMSFs

BY LIAM CORMICAN

CRYPTOCURRENCY holdings in self-managed super funds (SMSFs) have gone up by 74% in one year on BTC Markets’ exchange, with the largest client inflows coming from those aged 45-59 years old which rose 79% year on year.

BTCM’s Investor Study Report 2021 analysed data on its exchange for calendar year 2021, breaking down demographics (age, gender, investor type) to explore the investment behaviours of its 325,000 clients.

BTC Markets chief executive, Caroline Bowler, said growth from what it referred to as ‘mature wealth accumulators’, was encouraging due to the measured risk appetite of this age group as they approached retirement.

“They bring a wealth of experience in traditional investment markets and their decision to invest in crypto is not driven by the fear of missing out (FOMO) but on strategic research and information,” she said.

Average portfolio sizes continued to remain highest for the 60-plus year-old demographic due to higher disposable income and comfort levels in leaving their crypto on the exchange.

Overall, the report showed a spike in the average value and volume of trades executed on the exchange by 48% and 118% respectively.

SMSFs were among the fastest-growing investment segments, with sole traders jumping by 196% and companies by 79%.

The size of the SMSF investment also saw a 15% increase with initial deposits now in the hundreds of thousands compared to earlier investments in the tens of thousands, whereas companies saw an increase in the average portfolio sizes of 61%.

“This increased commitment from SMSF investors, with their lengthier investment outlook, illustrates a long-term bullish point of view,” Bowler said.

Anecdotally, BTCM said it found an established pattern for new account openings that started with individuals, then their partners, their SMSF and then their company, as they got more comfortable with the asset.

“Institutional investors and superannuation funds are now in a similar position to where the banks were, and it can only be a matter of time before market developments give them the confidence to embrace crypto,” Bowler said.

13/04/2022 2:01:33 PM

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14/04/2022 11:35:09 AM

12 | Money Management April 21, 2022

News

ClearView’s priorities for industry reform

BY LIAM CORMICAN

Slashing advice paperwork, no further change to risk commissions and measures to support stable income protection solutions are ClearView Wealth’s top three 2022 priorities

With the Quality of Advice Review happening this year, ClearView managing director, Simon Swanson, said it was crucial that regulatory settings facilitated easy access to financial advice and protection for consumers, citing recent local and global events as adding further pressures on household budgets.

In its 2022 reform agenda, Swanson said: “The devastating impact of COVID-19 and a spate of natural disasters, including the recent floods in NSW and Queensland, have heightened awareness of the importance and value of professional advice.

“However, this trend is occurring at a time when the cost of operating an advice business is significantly increasing and, in turn, pushing advice fees higher. It is important that our regulatory system is fit for purpose and does not add unnecessary complexity.”

ClearView was calling for a slimmed-down Record of Advice (RoA) to replace the Statement of Advice (SoA) in situations where simple advice was being delivered, as well as

Which market performed best in Q3?

BY LAURA DEW

The ASX 200 was the only major market to report positive gains during the third quarter of 2021/22.

Looking at data from FE Analytics, over the three months to 31 March, the ASX 200 returned 2.2% compared to losses by global markets.

It was a case of large-cap stocks being the best performers over the period with the ASX 50 returning 4% and the All Ordinaries returning 1.6% compared to losses of 4.2% by the ASX Small Ordinaries.

The ASX 50 included commodity stocks like Woodside Petroleum which was up 54%, BHP up 30%, South32 up 28% and Santos which was up 24.7%.

Dale Gillham, chief analyst at Wealth Within, said: “I do believe this trend will continue, therefore, I would advise investors to stick to the top 50 stocks in the Australian market if they want to achieve some good profits”.

Looking at global markets, the worst-performing major market was the Shanghai Stock Exchange Composite which had lost 13% followed by Japan’s TOPIX and Hong Kong Hang Seng index which both lost more than 9%.

In the US, the Dow Jones had lost 5.2%, the S&P 500 had lost 7.7% and the tech-heavy Nasdaq had lost 10.6% as technology stocks because of the long duration of their earnings in an environment with rising inflation and interest rates.

The FTSE 100 lost 2.5% and the MSCI World index lost 7%.

06MM210422_01-14.indd 12

the removal of the Safe Harbour steps, in line with the recommendation of the Financial Services Royal Commission.

The group’s reform agenda citied Financial Planning Association of Australia (FPA) research that showed the cost of a SoA had risen more than 30% in the past four years.

ClearView also reiterated its support for the life insurance commission model and welcomed the Australian Prudential Regulation Authority’s (APRA) recent decision to defer five-year contract terms for income protection (IP) products for at least another two years.

“It is crucial for life insurance solutions, including IP insurance, to be stable, sustainable and simpler for consumers,” Swanson said.

“ClearView welcomes the revised approach and we support APRA’s ongoing sustainability work. We recognise the importance of engaging with Treasury on issues about product rationalisation and quality of advice, and strongly advocate for engagement with financial adviser bodies, licensees and advisers.”

No time to be complacent about rising rates: Schroders The current state of rising inflation is a pivotal point for markets used to an environment of ‘lower for longer’ as they have not reached these heights since the 1970s, according to Schroders.

Speaking to Money Management, Simon Doyle, chief investment officer and head of multi-asset, said inflation and interest rates could raise further than the market was expecting.

US inflation reached almost 20% in the 1970s thanks to monetary policy which financed large budget deficits. In 2022, US inflation was 7.8% in February and was forecast to reach 8.5% in March.

Doyle said: “The last time inflation was this high was in the 1970s and it was very hard to generate returns in real terms. This is a pivotal point, many people in the industry now won’t have been working during that time.

“There is the potential for rates to go higher than the market expects, it could be higher than 2%-2.5% that the market is predicting.

“We shouldn’t try to convince ourselves that they can’t move much

because the market always does something we don’t expect. We need to be open to the possibility of higher rates and more instability than we would like to see.”

The Federal Reserve had begun raising rates, increasing its Fed funds rate by 25 basis points last month, but the Reserve Bank of Australia held rates at 0.1% at its meeting.

Doyle said he would like to see more equity weakness in markets as that would be a better environment to invest.

This was because a lot of money had been flowing into speculative, unprofitable technology stocks where the price didn’t justify the valuation.

“Whereas now we are seeing good businesses are being rewarded and speculative ones are being left behind.

We are returning to a world where pricing is connected to fundamentals again which is much healthier rather than one which is driven by central banks.

“Monetary policy has been the single biggest driver of returns and that is unsustainable.”

13/04/2022 2:01:12 PM

April 21, 2022 Money Management | 13

News

Superannuation trustees revise investment switching policies

BY LIAM CORMICAN

Superannuation trustees have revised their policies after the Australian Securities and Investments Commission (ASIC) found a lack of oversight and control measures in relation to investment switching.

ASIC reported its surveillance of 23 trustees in October, finding significant deficiencies in their conflicts management arrangements relating to investment switching.

“ASIC expected to find robust systems in place to prevent directors and senior executives from potentially misusing price sensitive information for personal gain. However, the surveillance revealed a lack of strong oversight in this space.”

In response to the concerns, trustees committed to a range of changes including: • Updating or establishing policies and practices to address the deficiencies ASIC highlighted by: - Identifying switching as a potential conflict of interest; - Incorporating steps to prevent inappropriate trading; - Expanding conflicts arrangements to cover

trading by related parties of directors and senior executives; • Increasing board-level engagement so there was greater board oversight, input and direction. For instance, increased monitoring of staff transactions and reporting back to the board, including on switching activity; • Increasing staff awareness of the policies and

Investment Trends announces partnership with Finura Group

Industry market research firm, Investment Trends, and global technology consultancy, Finura Group, are working together to deliver deep quantitative research on digital technology in financial services.

The firms said their alliance would bring together a wealth of research experience and deep technology expertise.

Finura Group joint managing director, Peter Worn, said: “This marks an important milestone for our business. We believe it’s a compelling combination of deep quantitative analysis and digital strategy which can drive the transformation of wealth management through technology.”

Investment Trends chief executive, Sarah Brennan, said: “Investment Trends approach has always been to evolve our research to meet the changing needs of our clients and to keep ahead of the rapid evolution in the wealth technology space.

“Working with Finura Insights means that for both Investment Trends and Finura clients, we will deliver the best fusion of research and innovation in the technology space.”

The research would focus on: • Examining adviser’s evolving technology needs, key platform and planning software industry trends, drivers/ barriers of selection and satisfaction with platforms; • Providing an in-depth review of recent developments in the Australian advice technology space, including a benchmark of functionality offered by established advice software providers; and • Latest developments in digital technology used to deliver wealth services to Australian retail consumers.

06MM210422_01-14.indd 13

their obligations through greater internal communication and training; and • Undertaking an independent review of the trustee’s broader conflicts management frameworks.

ASIC commissioner, Danielle Press, said, “Appropriate governance is integral to maintaining consumer trust and confidence in the superannuation industry. This is not something you can set and forget.

“Trustees must have conflict management arrangements in place that are continually reviewed and tested to ensure they remain appropriate.”

ASIC also completed its review of a range of transactions during the 2020 calendar year by directors, senior executives or their related parties. This involved the switching of investment settings, changes to investment contribution allocations and superannuation contributions, and the withdrawal and roll in of superannuation monies.

Based on the evidence obtained, ASIC said it was satisfied no further action was warranted against any individuals in relation to the identified transactions.

Citi appoints head of retail bank and wealth management Citi Australia has appointed Hannah Oakhill as head of retail banking and wealth management, as the business enters a pivotal stage in its transition to NAB. Oakhill joined the business from BT where she led distribution and customer experience for BT’s direct wealth business. She had more than 20 years’ experience in financial services, including roles at Westpac and Macquarie, and had broad knowledge across banking, mortgages, wealth management, life insurance and credit cards.

Chief executive of Citi Australia’s consumer bank, Alan Machet, said he was confident Oakhill was the right person to join Citi’s consumer leadership team at an important time of transition.

“I am thrilled to welcome Hannah to our business, where she will lead our retail bank and wealth functions as we enter a crucial stage in our transition to NAB,” he said

“I worked with Hannah during my time at Macquarie and Westpac and know her to be a people-first leader who focuses on delivery and strives for business outperformance.

Commenting on joining Citi Australia, Oakhill said: “I am delighted to be joining such a strong performing business, which is underpinned by a widely-held customer-first approach.

“I am looking forward to working with NAB on the transition of the Citi retail banking and wealth management businesses and will be heavily focused on the customer migration strategy and supporting the team as they move across into NAB.” Prior to Oakhill’s appointment, Richard Wilde was the acting head of Citi Australia’s retail bank and wealth management function and he had now returned to his role as head of digital, delivery and client experience.

13/04/2022 4:38:10 PM

14 | Money Management April 21, 2022

InFocus

WHY DID SO MANY ADVISERS FAIL THE FEBRUARY EXAM? Liam Cormican explores what factors might have driven a higher proportion of people to fail the Australian Securities and Investments Commission’s first financial adviser exam in February.

WITH LESS THAN a third of advisers passing the February financial adviser exam, the first exam administered under the Australian Securities and Investments Commission, there is just one question that must be asked: what is going on?

Almost three-quarters of the 333 candidates who sat the February exam were re-sitting it for at least the second time.

One of those that failed the latest financial adviser exam was Adam Graham, responsible manager of Iraklisfs Pty and holder of an Australian Financial Services License.

Graham had failed twice before but said this exam was far beyond the scope of the guidance provided by ASIC. “I’ve done five different versions of the practice exam and I’ve sat two real-life exams and they were all the same,” he said.

“In the [February] ASIC exam, there were 15 money laundering questions in there, talking about Chinese bringing Bitcoin over into Australia and which trust would be the most legal for them to move to interchange money through country through crypto.

“But that sort of stuff was never in any practice exams and FASEA and ACER [Australian Council for Educational Research] covered themselves saying the practice

THE VALUE OF HUMAN ADVICE

exam is just to guide so we can put in whatever questions we want that has to do with chapter seven of the Corporations Act. “I think ASIC has an obligation - when they put practice exams out there - at least to put us in a level where we’re in a position to have an idea of what’s coming in the exam.”

A similar complaint was raised by a Professional Year (PY) adviser who did not wish to be named due to

fear of breaching a non-disclosure condition of the exam.

“I’m in a Professional Year at the moment trying to get through to the third quarter and it is a little bit tough,” he said.

“I felt the new exam was a little bit different. I wish ASIC could update the most recent [practice exam] because it was different.”

The PY adviser said he would have liked to receive less generic

and more tailored feedback after failing the exam or at least receive his exam for review.

“Every exam I’ve done whether it’s bachelor’s – and I’m nearly finished my master’s - you’ve been allowed to get accurate feedback or see the exam and they tell you where you went wrong.

“It’s hard to pinpoint exactly what you’re getting wrong - they give you feedback, but it’s so minimal.

“It’s a big blow to confidence especially to newer people.”

After speaking with several advisers in his network, Joel Ronchi, myIntegrity in Practice principal consultant, said there was no definitive reason or theme for why so many failed.

“Some said to me, it was hard.

Some said to me, that it was the same as last year in terms of difficulty. Some said they weren’t quite prepared because it was probably too early in the year and they should have waited till May. “So in other words, there’s no-one saying to me ‘now that ASIC has taken over it’s completely different’ - that’s not what I’m hearing at all.

“For some people, it comes down to how they’ve structured their preparation and what kind of support they’ve got from the licensee potentially.”

90%

88%

5%

Human-advised clients not wanting to go digital

Digital-advised clients wanting human advice

Perceived annual value-add to portfolios for human advice

Source: Vanguard

06MM210422_01-14.indd 14

12/04/2022 4:07:00 PM

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14/04/2022 11:45:17 AM

16 | Money Management April 21, 2022

Global equities

SEEKING LOW CORRELATION

When investing in global equities to achieve portfolio diversification, investors should opt for those exposures which have the lowest correlation with their domestic shares, writes Gary Jackson.

IT IS ALMOST impossible to talk about diversification without quoting Nobel Prize-winning economist Harry Markowitz, who famously said “diversification is the only free lunch in investing”. The reason why diversification is so important to Markowitz and every other investor is because it offers the ability to reduce a portfolio’s risk without compromising the potential for returns.

On a broad asset allocation level, bonds are the most obvious way of diversifying equity exposure thanks to the fact that government bonds have historically had an

06MM210422_16-27.indd 16

inverse relationship with the stockmarket. Alternative assets such as property, gold and absolute return strategies are other common ways of diversifying a portfolio.

However, diversification is also important within asset classes.

Holding a large collection of stocks that go up at the same time only to fall together is not the best way to approach portfolio construction, so many investors aim to own equities which will not move in lockstep.

This is especially important when investors build their portfolios around a core of

domestic stocks: in order to achieve the best diversification, investors should ensure that some of their other equity positions have a low correlation to their dominant Australian shares exposure.

To this end, Money Management used FE Analytics data to determine how correlated the ASX 200 has been to more than 100 other indices, including individual countries, geographical regions, investment styles and market capitalisation, over the past five years. Of course, it must be kept in mind that past performance is not a guide to the future.

The results of this research

can be seen in Table 1. Five indices have an inverse correlation to the Australian stockmarket: those for Trinidad and Tobago, Jordan, Bosnia and Herzegovina, and Tunisia.

However, these are very small markets – each of the above MSCI indices has just two constituents, making them unlikely candidates for investors seeking to diverse away from their dominant Australian equity allocation.

CHINA Things look more promising when we get to the sixth leastcorrelated index to the ASX 200:

12/04/2022 4:07:40 PM

April 21, 2022 Money Management | 17

Global equities

MSCI China. The Chinese economy is the second-largest in the world and an increasingly important player on the global stage, putting it firmly on the radar of most investors.

The MSCI China index has had a correlation of just 0.02 to the Australian stockmarket. However, it has made less than the ASX 200’s 55.4% total return, gaining just 20.7% in Australian dollar terms in the five years to the end of March 2022.

The index offers much broader investment set than the smaller markets highlighted above: there are 738 constituents in the MSCI China index, covering about 85% of the Chinese large- and mid-cap equity universe.

Large companies found in the index include technology and entertainment conglomerate Tencent, e-commerce giant Alibaba and financial services group Ping An Insurance, which should be familiar names to many investors.

Of the Chinese equity funds available to Australian investors, the lowest correlation to the ASX 200 came from Jing Ning’s Fidelity China fund – it’s five-year correlation is just 0.02. The fund has a long-track record, having launched in 2005, and has made almost an identical return to the Australian market over the past decade, although it is underperforming the ASX 200 over shorter time frames.

Other China funds with a low five-year correlation to Australia include Vasco ChinaAMC China Opportunities (0.03), Premium China (0.14) and VanEck FTSE China A50 ETF (0.16).

While Chinese equities have underperformed the home market in recent years, not every region with a low correlation to Australia is lagging behind it.

MIDDLE EAST Our research also suggests that the Middle East could be a source of investment opportunities for those looking to diversify. While many of the individual countries in the region have a limited number of stocks in their indices, the MSCI Arabian Markets index presents a larger opportunity set with 85 constituents.

Its five-year correlation to the ASX 200 is just 0.37 and it has made a far higher total return at 113.6%, largely down to its very strong performance over the past year or so.

Some of the biggest members of the index are Saudi Arabia’s Al Rajhi Bank, United Arab Emirates telecommunications firm Etisalat and Qatar National Bank; around 60% of the index is in financials, with 15% in materials and 11% in communication names.

Other countries that have outperformed Australia while holding a relatively low correlation include Denmark (up 124% with a correlation of 0.33), Vietnam (up 88.5% with a correlation of 0.43) and India (up 71.8% with a correlation of 0.54).

EQUITY SECTORS When it comes to global equity sectors, the lowest correlation came from consumer staples companies. The MSCI AC World Consumer Staples index has a correlation of 0.21 to the ASX 200 while posting a 40.2% total return over five years.

Consumer staples firms produce essential products that people are unable or unwilling to stop buying regardless of their financial situation – goods like food and beverages, hygiene products, household goods, alcohol and tobacco.

Continued on page 18

Table 1: Equity indices with the lowest correlation to the ASX 200 Index

Correlation

5yr total return

MSCI Trinidad and Tobago

-0.16

4.5%

MSCI Jordan

-0.12

-29.4%

MSCI Bosnia and Herzegovina

-0.07

85.2%

MSCI Tunisia

-0.06

30.4%

MSCI Lebanon

0.01

28.8%

MSCI China

0.02

20.7%

MSCI Jamaica

0.04

41.7%

MSCI Russia

0.06

-100.0%

MSCI Bangladesh

0.07

-1.5%

MSCI Botswana

0.1

-20.3%

MSCI Qatar

0.1

52.3%

MSCI Sri Lanka

0.1

-53.4%

MSCI Zimbabwe

0.11

249.6%

MSCI Serbia

0.13

-6.6%

MSCI Kenya

0.17

69.5%

MSCI ACWI/Consumer Staples

0.21

40.2

MSCI Egypt

0.23

-18.4

MSCI Oman

0.24

70.57

MSCI Bulgaria

0.26

4.79

MSCI Chile

0.26

-15.8

MSCI Saudi Arabia

0.26

131.19

MSCI Turkey

0.27

-39.08

MSCI ACWI/Telecommunications Services

0.27

10.28

MSCI BRIC

0.28

24.25

MSCI Malaysia

0.29

7.05

MSCI Switzerland

0.29

72.22

MSCI ACWI/Utilities

0.29

53.69

MSCI Taiwan

0.31

139.13

MSCI Hungary

0.32

27.31

MSCI Romania

0.32

99.56

MSCI ACWI/Health Care

0.32

82.47

MSCI Denmark

0.33

123.96

MSCI Hong Kong

0.33

23.85

MSCI Philippines

0.33

4.29

MSCI Bahrain

0.35

104.94

MSCI Japan

0.35

36.59

MSCI Kuwait

0.35

140.59

MSCI Ukraine

0.35

-48.37

MSCI Argentina

0.36

-17.62

MSCI Kazakhstan

0.36

100.75 Source: FE Analytics

06MM210422_16-27.indd 17

12/04/2022 4:07:46 PM

18 | Money Management April 21, 2022

Global equities

Continued from page 17 Because their products are always in demand, consumer staples businesses tend to display steady growth and are especially resilient in recessionary times, becoming something of a safe haven for investors.

Among the companies in the MSCI AC World Consumer Staples index are big names such as Proctor & Gamble, Nestlé, Coca Cola, Walmart, Philip Morris, Unilever and L’Oreal.

Global telecommunications stocks are another potential diversifier with a low correlation of 0.27 to the Australian market, as is healthcare with a 0.32 correlation.

Like consumer staples, both sectors are seen to have defensive characteristics and are used by investors to improve the resilience of equity portfolios in times of market stress.

Among the investment styles, the past five years have seen the Australian equity market have the strongest correlation to value stocks (0.68), which is not too surprising given the heavy weighting to cyclical sectors like financials and materials. But the correlation to growth stocks – from sectors like information technology – is not far behind at 0.60.

Global quality stocks potentially offer the most diversification benefit with a correlation of 0.54 to the Australian market, which is interesting at the moment as many see these as a good way to protect portfolios against the impact of soaring inflation and rising interest rates. Stocks such as Apple, Microsoft, Meta, Taiwan Semiconductor Manufacturing and

06MM210422_16-27.indd 18

Visa are counted among the largest constituents of the MSCI ACWI Quality index.

And on market capitalisation, global large-caps have the lowest correlation to the ASX 200, although this is still quite high (0.68). For global small-caps and mid-caps, the correlations are 0.80 and 0.78 respectively.

GLOBAL EQUITY FUNDS In order to diversify their equity exposure away from Australian stocks, many investors’ first port of call will be a global equity fund. Our research shows that the correlation here is still on the high side – the average fund in FE fundinfo’s ACS Equity Global sector has a 0.74 correlation with the ASX 200, which is higher than the index’s correlation to the MSCI World (0.69).

Of the 194 global equity funds with a long enough track record, just 14 have a correlation of less than 0.45 to the Australian market.

They can be seen in Table 2 along with their returns over the five years in question.

The lowest correlation came from Fidante Credit Suisse Global Private Equity, which has had an inverse relationship with the Australian market. However, this inverse correlation is down to the fact that the fund has lost almost 30% over five years, while the ASX 200 has been rising.

But several of the funds on that list have beaten the Australian market over this period, with the strongest returns coming from CFS FC Baillie Gifford W LT Global Growth (up 138.2%) and Loftus Peak Global Disruption (up 144%).

Even the under-fire Magellan

Table 2: Global equity funds with the lowest correlation to the ASX 200 Fund

Correlation

5yr total return

Fidante Credit Suisse Global Private Equity

-0.22

-28.8%

Lanyon Global Value

0

33.6%

Bateau Global Opportunities

0.06

-4.1%

CFS FC Baillie Gifford W LT Global Growth

0.31

138.2%

Packer & Co Ltd Packer & Co Investigator Trust

0.33

32.1%

AtlasTrend Online Shopping Spree

0.36

71.8%

CFS Stewart Investors Wholesale Worldwide Leaders Sustainability

0.37

68.4%

First Sentier Stewart Investors Wholesale Worldwide Sustainability

0.38

62.0%

Loftus Peak Global Disruption

0.39

144.0%

Magellan Global

0.39

65.5%

Franklin Martin Currie Global Long-Term Unconstrained

0.42

80.0%

Morningstar Global Shares

0.43

80.7%

Platinum International

0.43

35.5%

Insync Global Capital Aware

0.44

91.2%

S&P ASX 200

0.6% Source: FE Analytics

Global fund is ahead of the ASX 200 by more than 10 percentage points over this period.

It’s worth pointing out that all of the funds on table have lagged far behind Australian shares over the past three months, when the global market has been panicked by rising inflation, interest rate hikes and the war between Russia and Ukraine but the domestic stock market has managed to make a positive return.

Some of the strongest funds over five years have been hit hardest in 2022’s first quarter, with CFS FC Baillie Gifford W LT Global Growth down 24% and Loftus Peak Global Disruption losing 14.5%.

But investors seeking diversification in the ACS Equity

Global sector are not limited to the 14 funds on the table. A ‘strong’ correlation is anything above 0.70, but there are 142 funds in the global peer group with a correlation below this and therefore the potential to offer diversification away from the home market.

Among these are some of the bigger names in the sector, including Vanguard International Share Index (0.68 correlation to the ASX 200), Macquarie IFP Global Franchise (0.50 correlation), MFS Concentrated Global Equity Trust (0.50 correlation), VanEck MSCI World ex Australia Quality ETF (0.51 correlation) and Hyperion Global Growth Companies (0.56 correlation).

12/04/2022 4:07:58 PM

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14/04/2022 11:45:55 AM

20 | Money Management April 21, 2022

Tax

TRUSTS A HEADACHE THIS EOFY Trusts are in the spotlight as we approach the end of the financial year, with rules having recently been tightened for discretionary family trusts, writes Alexandra Cain.

FOLLOWING THIS YEAR’S Federal Budget, discretionary family trusts are under scrutiny while many advisers will be helping their clients work through a larger-than-usual GST impost as receipts rise in line with inflation.

Discretionary family trusts are in focus this 30 June after the Australian Taxation Office (ATO) published new guidance material regarding section 100A of the Income Tax Assessment Act 1936.

The ruling affects how trusts distribute income and impacts common tax structures for highnet-worth individuals (HNWs) and small businesses.

“As a result, there will be less scope to widely distribute income among family groups, which is likely to result in higher taxes for family members who are beneficiaries of a discretionary family trust,” explained Pete Pennicott, principal adviser of financial advice firm Pekada.

The ATO’s updated guidance may not impact every discretionary trust. Nevertheless, advisers are spending considerable time in the lead up to the end of the financial year working through their clients’ affairs to ensure all trust distribution arrangements are in line with the ATO’s latest guidance.

“We are forming views on how the ATO’s announcements affect clients’ specific situations,” said HLB Mann Judd Sydney tax partner Peter Bembrick.

Founder of and principal adviser at Wealtheon Financial Services, Kristopher Meuwissen, said some other wealth management tax

06MM210422_16-27.indd 20

issues for HNWs this year included land tax and capital gains tax.

“There is going to be downward pressure on growth asset values with interest rates slated to increase. So HNW investors are looking to take some risk off the table and get ready for a market correction. This means selling assets like property, shares and crypto that have done very well over the last five years.”

With market volatility spiking in recent months, advisers are spending considerable time as we head towards 30 June assessing clients’ capital gains and capital loss status on their investment portfolio. ”While the overall portfolio return may be positive, there could be opportunities at the moment to exit positions where the client’s investment conviction has changed and trigger a capital loss to offset capital gains this financial year or into future financial years. This will also allow clients to recalibrate their portfolio for current conditions,” said Pennicott.

It’s important to start this process sooner rather than later.

This is because tax loss harvesting tends to peak late into the financial year, which can prompt extra weakness for assets whose investment values have already dropped this financial year.

NAVIGATING SUPER AND PENSION RULES Concessional superannuation contributions may be a way to address capital gains implications from investment returns achieved in the first half of 2021/22.

12/04/2022 4:08:15 PM

April 21, 2022 Money Management | 21

Strap Tax

E “Disparity between spouses’ super balances is really common, which presents an opportunity to reduce tax and make progress in achieving a balance between both partners’ accounts.

“Although, it’s important not to fixate too much on the current financial year and instead think long term about the best way to approach the balance transfer cap, which is currently $1.7 million. So, annual super contribution strategies should be front of mind if it’s likely one spouse will breach this level and the other one will fall short,” said Pennicott.

In this situation, it can make sense to carry forward contributions if one half of the couple has a total super balance of less than $500,000 as at 30 June, 2021.

“They can carry forward any unused concessional contributions cap amounts accrued from 2018/19 to 2020/21 to increase their concessional cap in 2021/22. This may be particularly useful where a large asset has been sold, such as an investment property,” he added.

New laws mean retirees who could not previously make contributions to their super, based on their age, may now be able to add to their fund. Under previous rules, members must have been no older than 67 on 1 July of any financial year to be eligible to use the bringforward rule. From 1 July, 2022, members may be able to access the bring-forward rule if they are less than 75 on the prior 1 July.

Under the bring-forward provisions, eligible super fund members may contribute funds equivalent to three years of the annual non-concessional contributions cap to their super fund in one year, without paying more tax.

If a member’s total super balance is less than $1.48 million, he or she

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may be able make non-concessional contributions of up to $330,000 in a single financial year or over a threeyear period using this provision.

“Other eligibility rules will continue to apply, such as the total super balance limits, so make sure you understand your eligibility before making any contributions,” said Pennicott.

Super aside, relaxed pension drawdown rules also remain in place for the time being, with the 50% reduction to minimum pension drawdowns extended for the 2022/23 financial year.

“These measures have been in place since the 2019/20 financial year and the extension is an opportunity for people to preserve their tax-free pension balance. This is a big win for self-funded retirees, who may have other assets to draw on to support their lifestyle in less tax-effective structures,” he added.

What’s key is to assess whether clients need more than the reduced minimum pension requirement to support their lifestyle.

Pennicott added: “If not, then it may be beneficial to retain their funds within the tax-free pension environment, allowing them to continue compounding. Also remember the reduced minimums are an option and not mandatory”.

For retirees, an important issue is maximising deductible super contributions, subject to their level of taxable income, where possible continuing non-concessional contributions to move available cash into the more tax-effective structure of a super account or self-managed superannuation fund (SMSF).

“Tax-effective estate planning is very important for retirees, including reviewing the use of testamentary trusts in their wills and reviewing CGT implications of key assets that will be inherited by

their children and other family members,” said Bembrick.

Tax issues triggered by downsizing the family home, including maximising use of the CGT main residence exemption and making down-sizer super contributions, also occupy advisers’ minds at this time of year.

Bembrick also recommends at this time of year, retirees consider the implications of tax-effective transfers or gifts of assets to their children during the retirees’ lifetime, including managing CGT and transfer duty issues and tidying up family investment structures.

TAKING CARE OF BUSINESS As usual, this year’s Budget was full of tweaks both positive and negative to the tax and legal system governing small businesses. These changes will likely keep advisers awake at night for the next few months.

For instance, a 120% tax deduction for external staff skills and training costs for small businesses starts immediately and runs until 30 June, 2023.

“Although any amounts spent before 30 June, 2022 can only be claimed in the 30 June, 2023 year,” said Bembrick.

Qualifying small businesses can also immediately enjoy a 120% tax deduction for digital technology expenses. This provision starts now and runs until 30 June, 2023.“The additional deduction allowance for any amounts spent in the 2022 year can only be claimed in the 30 June, 2023 tax return, along with any amounts spent in the 2023 year, capped at $100,000 of qualifying expenditure per year,” he added.

Advisers are also helping clients navigate changes to the employee share scheme rules for start-up businesses. This includes

“Disparity between spouses’ super balances is really common, which presents an opportunity to reduce tax and make progress in achieving a balance between both partners’ accounts.”

– Pete Pennicott a rise in the concession limit from $5,000 to $30,000.

Payroll tax as well as fringe benefit tax paid by companies who have provided extra benefits to employees alongside or instead of pay rises, are some of the other major tax issues small businesses and their advisers are managing this financial year end. Additionally, this year many businesses will likely need to pay more GST than usual.

This is because inflation has lifted the price of goods and services, which directly translates to higher GST costs for many firms.

Other areas of focus include profits paid as company dividends, including the reduction in small business company tax rate to 25% from 1 July, 2022, and ensuring the correct franking percentages.

“We’re working on correctly accounting for shareholder loans and discretionary trust distributions to companies to ensure compliance with the rules in Division 7A, including timing of loan repayments or entering into complying loan agreements,” said Bembrick.

“Analysing the impact of the ATO’s new guidelines on allocation of professional firm profits, which impact a wide range of professions such as lawyers, medical practitioners, vets, accountants, architects, engineers, management consultants, actuaries and more, is also in focus this year,” he added.

Against this backdrop, it’s shaping up to another busy end of tax year for financial advisers and their clients to ensure everyone is in the best possible financial and tax position.

12/04/2022 4:08:19 PM

22 | Money Management April 21, 2022

Equities

MAXIMISING DIVIDEND PAYMENTS

There are multiple ways for investors to generate higher dividend for their retirement income strategy, writes Max Cappetta, but not all are created equally.

EARNING INCOME BY receiving a share of the profits, paid as dividends by companies listed on the stock exchange, remains a central pillar to any retirement income investment strategy. But not all approaches to investing for higher dividend income are the same. It is possible to maximise income using forecasts of future dividends and stock selection insights to generate improved income and total return outcomes.

This is a better approach than simply focusing on historical dividend data alone which - despite understanding that past returns are not an indicator of future performance - is a method than many employ.

THREE COMPONENTS OF EQUITY RETURNS Owning shares in a listed company entitles an investor to exactly that: part ownership of the assets and earnings of a company - a ‘share’ of the business. Australian equity investors receive three sources of

return, which together produce the total return of the investment.

The share price return is the first, and it is the change in the price at which the shares you own are traded on the stock exchange. While share price movements can be volatile, the average share price returns (over the past 40 years from the S&P/ASX All Ordinaries / ASX 200 index or “Benchmark”) has been an average rise of 4% a year.

Secondly, share investors also receive a share of the profits earned by companies, paid as dividends.

Over the long term, the annual dividend yield on the benchmark has averaged 4.3% a year. It’s a dividend yield which is certainly attractive in the current environment, and when compared to traditional retirement income investments such as term deposits which offer close to zero return.

Thirdly, for Australian-based companies which pay tax in Australia, the dividend payments will often include an attached imputation credit. This imputation

credit reflects the tax that the company has already paid on its profits. Since its introduction in 1987, the average level of imputation credits has been 1.3% a year.

The fact that the Australian equity market is one of the highest dividend-paying markets in the world is in part thanks to the impact of imputation credits. The imputation credit system passes through the tax paid by companies as credits to investors when they receive their dividends.

It was introduced to avoid the double taxation of profits (when earned by the company and again when investors pay their own income tax). It prompts companies to pay ‘franked’ dividends to investors, rather than undertake other forms of capital management such as buying back their own shares on market, which would see tax credits accumulate needlessly inside the company.

In total, it means Australian investors can expect the benchmark will return them a gross dividend

yield of 5.6% a year (the 4.3% average dividend yield plus the 1.3% imputation credit).

And given that the underlying value of the shares is also growing at an average of 4%, it means that annual income has more than kept up with inflation and maintained its purchasing power.

So far, so good.

Chart 1: Best growth/income split for accumulation vs retirement

Source: Redpoint / ASX data (1979-2021)

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Equities SEEKING AN INCOME AND GROWTH SPLIT However, based on an investor’s initial investment (or super balance), a 5.6% gross yield on average may not be high enough to provide the income level that they require or wish to have.

Some investors may choose to sell some of their capital base to fund the difference: but, as we will explain, this is a bad idea.

Others may seek to invest in those companies which pay higher dividends: but again this is a bad idea.

The good news is that there is a way in which investors can earn a higher yield of their equity investments.

As Chart 1 shows, ideally investors would be in a better position if they received the total return of the ASX 200 in slightly different proportions: This approach is especially attractive for Australian investors who can reclaim imputation credits on dividends earned.

A higher dividend component = a higher level of imputation credits. This is an additional bonus as our analysis also shows that the value of imputation credits is not fully recognised in share price movements when companies declare and go ‘ex-dividend’. This occurs due to the fact that offshore investors may not be able to claim these imputation credits and some taxable investors may wish to avoid earning dividends to reduce their taxable income.

Being able to earn additional imputation credits is why focusing on maximising your dividend income will always be a better option in the long term, versus selling assets to

make up for a lower dividend yield (assuming your total return is at least the same as the benchmark before tax credits).

RULE #1: LOOK BEYOND EXISTING HIGH YIELDS When investors look to maximise income capture from Australian equities it is easy for them to think that they can just buy those stocks currently paying the highest dividend relative to their price (the high yielders). But this approach is often a recipe for disaster. This group will include companies whose share prices are currently depressed and under stress.

This could in fact be a precursor to needing to cut their dividend payments. A high yield may also indicate a lack of growth opportunities: thus management is returning profits to shareholders rather than reinvesting in new opportunities.

Focusing on a high past dividend and low current price can deliver a decent dividend harvest for investors, but this approach runs the risk of your invested capital falling by more than just the impact of a high dividend payment.

Our advice to income seeking investors is to look beyond high yielding stocks and embrace all dividend opportunities including off-market share buybacks.

History shows that there are over 300 individual dividend payment events on more than 100 distinct trading days each and every year across the ASX 200 universe.

Not every company pays their dividends on the same day, some pay two dividends each year (interim and final), some four while some even pay special dividends from time to time.

Chart 2: Average monthly gross dividend yield 1994-2020

“Being able to earn additional imputation credits is why focusing on maximising your dividend income will always be a better option in the long term.”

Trading into and out of companies based on expected dividend payments through the year can achieve good results. It pays to consider expert estimates of dividend payments to assist in trading across different companies and sectors over the course of the year.

Investors also need to be on the lookout for off-market buybacks.

This is when companies seek to return excess capital to investors in the form of a large fully-franked dividend and a small capital component. Such events can be beneficial to retirees and low tax rate payers.

RULE #2: ALIGN STOCK SELECTION WITH YOUR OBJECTIVE Looking beyond just the highest yielding companies to a broader set of dividend payers requires a degree of turnover to position the portfolio to capture the excess income that investors desire. This is where stock selection can assist: it is important to invest in those companies which are attractive because they pay a dividend and because they are attractive as investments in the here and now.

Our view at Redpoint is that the most relevant stock selection views must be weighted towards shorter horizon views: sentiment based disciplines which focus on near term events related to change in analyst earnings estimates and the re-rating of share prices driven by investor preferences, news and corporate announcements are what we focus on.

At the same time, we also incorporate longer horizon views on company quality, growth and ESG sustainability as conviction elements in our overall stock selection.

Earning a higher income from equities necessitates that overall

portfolio growth (price return) is lower by a similar amount. We believe that additional insights from stock selection which operate within the same frequency as the turnover required to capture additional income is best placed to provide an additional uplift to overall portfolio performance in the long term.

RULE #3: BEING RISK AWARE MAKES FOR A BETTER LONG TERM TRADE-OFF Lastly, it also makes sense to consider the risk of your overall portfolio relative to a standard index (such as the S&P/ASX 200 or 300).

Stepping too far away from benchmark in a search for excess income can lead to being overly invested in a few industries while having no exposure to others. Noting that different companies within the same industry pay dividends at different times of the year can open up opportunities to trade across multiple companies to earn excess income. Using stock selection insights to inform this decision can also be of benefit.

But it is a trade-off…. and a complicated one at that. We all want the cake and to be able to eat it: higher income, commensurate growth, risk awareness, stock selection, sustainability, low cost trading.

When it comes to maximising the income from your equity portfolio you cannot review your portfolio only a few times each year. Those in retirement will know how hard they have worked to save for a comfortable retirement – and it is important to ensure your client’s investment portfolios continue to work hard for them in retirement.

Max Cappetta is chief executive and lead portfolio manager at Redpoint Investment Management.

Source: Redpoint / ASX data (1979-2021)

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24 | Money Management April 21, 2022

Property

BEING A GOOD NABER The commercial real estate has avoided the ESG spotlight for now, writes Vincent Li, but investors should still consider all parts of its operation.

WHENEVER STRANDED ASSETS are mentioned we are likely to conjure the image of a dilapidated oil terminal that no longer has any value attached to it due to alternate fuels or costly environmental regulations.

Commercial real estate rarely enters our consciousness and, as a result, the REIT sector has never had the intense environmental, social and governance (ESG) spotlight shone on it by the public or the wider investor base.

HOW IS ESG IMPACTING INVESTING? ESG-focused investing has really ramped up in recent history and has gradually shifted from just the direct operations of a company to now analysing the impact of all its organs. As a result, firms will have to reflect and act on every part of their operations - whether that includes a manufacturer assessing the carbon intensity of its HQ, a pharmaceutical trying to lessen water usage at its distribution centre or a tech company maximising the air quality on its campuses.

Thus, the real estate occupied by those firms will become increasingly scrutinised and assets that cannot be adapted to the tenant’s growing requirements risk becoming obsolete and costly for its owners to hold.

While there are many prisms to look at commercial property from an environmental perspective, the NABERS (National Australian Built Environment Rating System) Energy rating guide is arguably the most comprehensive in its coverage, especially for

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Australian office assets.

Buildings are given a rating on their energy efficiency using a 1 – 6 star system on a relative basis compared to their peers.

While there are similar NABERS ratings on water, indoor air and waste, energy has grown to be the most prolific due to legislative requirements. Under the current system all commercial offices over 1000 square metres that wish to advertise for leasing or selling purposes must disclose their NABERS energy rating.

Furthermore, in order to attract the Government as a tenant, the base building requires a minimum 4.5 star NABERS rating. As a result, NABERS has become the leading benchmark for assessing the ‘green-ness’ of a property.

WHAT CAN BUSINESSES EXPECT? The current landscape in the Australian market is that of institutional investors leading the pack and commandeering more of the higher star rating assets.

Morgan Stanley research found that the three-largest listed office landlords had a significantly high performing portfolio with Mirvac (MGR), Dexus (DXS), and GPT achieving a portfolio average rating of 5.5, 5, and 5 respectively for their office assets.

This has largely been the result of an active development pipeline helping refresh the age of the portfolio as well as conscious decisions to refurbish older assets to meet modern environmental standards.

Employees are also increasingly expecting their employers to be environmentally conscious – a survey by HR

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Property Strap

resource company ELMO found that 71% of Gen-Z workers would refuse to work for a company that was not seriously dealing with climate change.

Furthermore, ambience and aesthetics are also rising in importance with a future workplace wellness study finding that 31% of employees lose the equivalent of 60 minutes of productivity if the environmental wellness of their environment such as air quality and other factors were not satisfactory.

Increasingly, the mental health of employees is being brought to the fore and companies who wish to be seen as socially responsible will need to accommodate this.

Employers are taking note - JLL reported that 73% of their APACbased tenants surveyed will be retrofitting assets by 2025 to meet these requirements such as achieving net zero and ensuring the office is a pleasant location to be.

The COVID-19 pandemic has shaken up the office sector in various ways. Vacancies in CBDs have ballooned, with Sydney climbing from 4% pre-pandemic to 13% currently. Companies are re-assessing their space requirements which will certainly be influenced on how successfully they are able to persuade staff to return to the office. With widespread reports of labour shortages, it looks that the balance of power has shifted towards the employees.

Employers in a post-COVID world will face the dual challenges of retaining staff by aligning their actions with staff’s ESG values as well as providing enticements to lure them back to the offices – challenges landlords will have a stake in.

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It has become clear that for employers to retain talent and encourage employees back to their offices for physical collaboration, they will need to ensure their assets and workspaces are up to scratch.

Feedback from asset owners and leasing agents are that expectations from tenants are shifting to asset owners providing the amenities required by their employees such as coffee shops or breakout areas whereas previously the landlord was only responsible for the capital to ensure the base building was environmentally friendly.

The costs of these amenities historically would be recouped through higher rents or lower incentives however the supply/ demand dynamics in this market means tenants have effectively externalised a portion of their costs to meet environmental and social expectations to landlords.

WHERE ARE WE SEEING VACANCIES? If history is any guide, the current over-supply situation (highlighted by elevated vacancies) will result in lower rental price growth and higher incentives (in the form of fit out contributions or rent-free periods) which negatively impact the cashflow of the landlords.

While this trend was observed in 2020/21, our channel checks have found that the performance of assets have become increasingly bifurcated. Prime grade assets (Premium and A grade) continue to hold onto higher rents and lower vacancy while the declines in rents has mostly been felt in B grade assets and below. One asset owner has even stated that they are seeing further bifurcation with A grade

starting to lose some of its lustre leading to a ‘Premium vs everything else’ situation. This trend has been accelerated postCOVID with a common theme in the Feb-2022 reporting season being an acute sense of ‘flight to quality’.

For example, Mirvac said 80% of their vacancies were located in their lower tier assets. This is not surprising given higher-grade assets predominately have 5-6 star ratings further enhanced with numerous amenities to maintain tenants and their increasingly demanding staff.

The Australian listed market and other large institutional owners have been acutely aware of this and have largely been successful in ensuring their portfolios are at the higher end of the NABERS spectrum.

Conversely, B grade assets and below are mostly held by private owners. Typically such owners have less access to capital and as such may struggle to make the necessary investment to upgrade the asset ratings. Refurbishments required to drive an increase in the NABERS ratings require significant capital and often involve asset downtime (from one-two years). Activities such as replacing the cladding of a building has shown to potentially cost greater than 10% of the asset value itself. As such, we expect more and more assets becoming more obsolete as the capital costs to upgrade older assets are prohibitive especially for non-institutional investors.

Debt markets are also starting to differentially price ESG factors.

In 2021, GPT issued their inaugural Green Bond of $250m and we expect this to be the first

“Companies are re-assessing their space requirements which will certainly be influenced on how successfully they are able to persuade staff to return to the office.” of many. Whilst this has not translated to lower cost of debt for green assets yet, expectations are that liquidity pools will become more discerning around ESG which over time should translate to higher cost of debt for ESG-poor assets.

Ultimately while we are concerned about the current oversupply in the market and the uncertainty in the sector’s vacancy outlook due to COVID and increased working from home, we are somewhat comforted by the fact that the Australian listed players have positioned themselves relatively well in regards to the sustainability of their asset portfolios.

This should partially offset future structural uncertainties as we believe not all the competing supply in the market is fit for purpose and given ESG requirements on buildings are only getting more stringent, we expect the pool of ‘ESG-ready’ assets to shrink further.

Vincent Li is research analyst at Tyndall Asset Management.

13/04/2022 9:14:46 AM

26 | Money Management April 21, 2022

Equities

HOW WILL QUALITY PERFORM IN 2022?

The risk of elevated inflation and higher interest rates is likely to drive investors’ focus back to considering company fundamentals, writes Joel Connell.

A PAPER WE wrote early last year highlighted that the risk of rising inflation and higher interest rates could be a catalyst to drive focus back to company fundamentals and be supportive for our ‘quality at a reasonable price’ investment strategy.

At the time of writing the paper, we had seen a short-term market rotation into some of the deeper value and cyclical segments of the market, along with ongoing exuberance in many non-profitable growth and thematic stocks, which had contributed to short-term underperformance for our

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strategies relative to our benchmark. As the year unfolded, we saw the market mindset shift back towards rewarding underlying company fundamentals and as a result each of our global equity strategies performed strongly in 2021.

As expectations for inflation and interest rates have continued to evolve over the past 12 months, we thought it was worth providing an update on the current market environment, along with reasons why we continue to believe that our ‘quality at a reasonable price’ investment approach remains well positioned to outperform.

INFLATION Inflation has so far proven to be stronger and more persistent than many anticipated at the start of 2021.

The February 2022 US CPI rose 7.9% from a year earlier, the fastest pace since 1982. Core US CPI (which excludes food and energy) increased 6.4%, the strongest rise since 1982.

It is a similar story across other parts of the world, including the UK where the annual inflation hit 6.2% in February, the highest rate in 30 years, and the Eurozone where inflation reached a record high of 5.9% in February.

The Russian invasion of Ukraine has further exacerbated the supply chain pressures and inflationary forces across the world, likely keeping inflation at elevated levels for longer than previously anticipated. This is reflected in the US 5-year breakeven inflation, which has climbed to 3.4%, from 2% at the start of 2021.

The US unemployment rate has reduced significantly from 6.7% in December 2020 to 3.6% in March 2022 and the tight labour market is contributing to significant wage pressures and staff shortages across various industries, which is likely to persist for some time to

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Equities

come. Input cost pressures also continue to bite, with the S&P GCSI Index, which tracks a basket of over 20 soft and hard commodities including oil, gas, gold, copper, aluminium, wheat, corn, cotton, cocoa, cattle etc., increasing another 53% since the end of March 2021 and up 65% compared to the start of 2020.

INTEREST RATES This time last year the consensus view was that we wouldn’t see US interest rate hikes until at least 2024. However, the strong macro conditions and increasing inflation pressures are forcing the hand of the US Federal Reserve and other central banks around the world to act earlier than previously expected.

The US Federal Funds rate was hiked by 25 basis points at the March 2022 meeting and the projection is that we will see a further 10 quarter point rate hikes by the end of 2023 to 2.75% – as indicated by the Fed’s dot plot which outlines the forecast trajectory of rate increases.

In addition to rate hikes, the Fed recently indicated it will start to shrink its balance sheet by letting some maturing bonds ‘roll off’ without reinvestment, at a maximum monthly pace of $60 billion in Treasuries and $35 billion in mortgage-backed securities.

This process of quantitative tightening is likely to put further upward pressure on long term interest rates, which have already seen a sharp rebound in recent months. For example, the 2.77% yield on US 10-year Treasury note is now well above pre-COVID levels, and pushing back towards the 10-year peak in late 2018. This is flowing through to borrowing costs such as the important 30-year fixed mortgage rate in the US which recently pushed back above 5%, the highest level since 2010, after starting the year at 3.3%.

IMPACT ON STOCKMARKET POSITIONING As the focus on inflation and interest rates continues to intensify this is likely to have flow on effects

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to various parts of the stockmarket.

The end of ‘easy money’ and higher interest rates has already contributed to some of the heat coming out of the more speculative areas of the market, translating into material declines in the share prices of many non-profitable growth and thematic stocks which had risen to unsustainable levels and were largely ignoring the risk of rate rises. For example, the Goldman Sachs non-profitable technology index has pulled back over 50% since the February 2021 peak, after an exceptionally strong rally during 2020.

The heightened inflation expectations and growing concern for further interest rate hikes has also led to a recent rotation back into many of the perceived beneficiaries including commodity producers, banks and many cyclical industrials which typically sit within the ‘value’ segment of the market.

As we outlined last year, this type of rotation is typical for what we would expect during the early stages of a cyclical recovery, although it often results in a ‘rising tide lifting all boats’ where many companies in the more rate-sensitive sectors rise in tandem regardless of their quality or underlying fundamentals. Our focus on investing in quality companies means that our portfolios could potentially lag the market during this initial rotation but historically any underperformance has been relatively short lived.

We would argue that as we move forward many of the ‘value’ companies are much more susceptible to earnings risk than ‘quality’ companies, given that ‘quality’ companies tend to have better margin profiles, stronger pricing power, more robust free cashflow and less balance sheet leverage, which are important attributes when inflation is running rampant, rates are rising and economic growth likely decelerates.

As the dust settles, we would once again expect investor focus to shift back towards the quality

of the underlying businesses and their valuations. Ultimately, earnings will be the key driver of shareholder returns over the long term and ‘quality’ companies with more durable earnings growth will be best placed to reward investors, in our view.

GROWTH VS VALUE The ‘growth’ versus ‘value’ debate is often a key focus for investors and understandably so given this can be a key driver of returns for many investment strategies. After many years of outperformance from growth assets, the prospect of higher interest rates increases the risk of valuation compression for certain growth assets which have much of their value predicated on long-dated cashflows.

While quality investment styles are often tilted towards growth, we would note that the implementation of our quality at a reasonable price (QARP) investment approach is designed to provide a more balanced exposure to a range of quality companies with both growth and value characteristics, albeit we tend to have little exposure to companies at the extreme ends of the spectrum (i.e. deep value cyclicals or excessively expensive or non-profitable growth stocks).

The ultimate aim of our QARP approach is to generate more consistent investment returns through different market conditions irrespective of which style may be outperforming.

For example, during 2021 we saw some extreme short-term divergences between value and growth, in both directions. Using the MSCI World Value and Growth Indices as proxies, we saw value outperform growth by 5.0% in March and by 4.5% in December. At the other end of the spectrum, growth outperformed value by 6.0% in June.

During each of these months, our Global Core, Select and SMID strategies all outperformed their respective benchmarks, demonstrating the ability to deliver good performance outcomes regardless of whether growth or value may be in vogue.

OUTLOOK – WHY QARP IN 2022 AND BEYOND Predicting exactly how the macro environment and investment markets play out over the next 12 months is a difficult task. On the positive side of the equation, GDP growth across many regions of the world is strong, unemployment rates are low, consumer balance sheets are in good shape and interest rates remain low by historical standards.

However, there are a range of headwinds that could weigh on markets including the threat of persistently high inflation and likelihood of interest rate hikes, the ongoing uncertainty created by geopolitical events and any new COVID-19 variants, the negative impacts from supply chain disruptions, risks associated with the removal of various stimulus measures, and the real threat of a deceleration in global economic growth.

Overall, we believe that 2022 will likely be a year where investors will finally start to factor in more risk within their investment decision making, after a number of years where many risk factors had arguably been ignored. This type of environment is ripe for our QARP investment approach to be rewarded.

We will continue to work hard to construct a portfolio of quality companies with key attributes such as good pricing power, strong balance sheets, durable earnings growth and highlyvisible cashflows, and less exposure to companies with high valuation risk.

We believe having exposure to companies with these attributes has been a key reason why we have been able to outperform during historical periods of rising inflation and interest rates and we have no reason to believe this time will be any different.

Joel Connell is senior global equities analyst at Bell Asset Management.

14/04/2022 10:12:40 AM

28 | Money Management April 21, 2022

Toolbox

ROBO ADVICE VS DIGITAL ADVICE: WHAT’S THE DIFFERENCE?

Changes to advice technology are prompting more interest from clients in digital advice so it is important that advisers understand the difference, writes Craig Keary.

THE GOVERNMENT’S QUALITY of Advice Review is one of the most important financial services policy reviews to be held in recent years. It will consider improvements to the regulatory framework to reduce complexity and better enable accessible and affordable advice for consumers, so they can access quality advice when they need it and in a form they want.

Included in the Review’s terms of reference is

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consideration of the opportunities for digital advice to address some of the industry’s impediments to delivering scaled and affordable advice.

But what exactly is digital advice? Isn’t it just a new name for ‘robo-advice’? And can it really deliver personal advice of the same quality and to the same compliant standards as traditional personal advice?

Although the industry often uses the terms robo-advice and

digital advice interchangeably, there are in fact fundamental differences and, in our view, digital advice is the key to bridging Australia’s growing advice gap.

WHAT IS ROBO-ADVICE? Robo-advice platforms, or roboadvisers, first appeared in the mid-2000s in the United States, gaining traction after the global financial crisis.

They are an online-only, direct-to-customer investment

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Toolbox

service that generally takes customers through simple factgathering and then uses basic algorithm calculations to suggest or allocate a suitable portfolio or set of investments (often a single multi-asset product in practice) which are managed on an ongoing basis for a fee.

Because of the relative simplicity of this approach, there are many providers of roboadvice services ranging from fintechs to major asset managers. The appeal of roboadvice for institutions is a new channel to serve and have a direct relationship with investors who cannot access or do not want traditional personal advice.

Customers gain a quick, simple and affordable way to invest.

Robo-advice is usually delivered as general advice but can also be delivered as personal advice. When delivered as general robo-advice, there is no requirement for the provider to document the advice, although a Financial Services Guide and general advice warning must be provided to the customer prior to the general advice being given.

If delivered as personal roboadvice however, similarly to traditional human personal advice, the advice must be documented in a Statement of Advice (SoA) detailing the advice, how it is in the individual’s best interests and disclosing the costs and limitations of the advice.

Following robo’s launch in the US by first movers such as Wealthfront and Betterment, fintech entrepreneurs such as Nutmeg in the United Kingdom followed suit, offering roboadvice and related portfolio implementation and management. Despite a quality digital experience and low pricing, many early propositions initially struggled to gain traction due to

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lack of brand awareness and high customer acquisition costs.

However, in recent years both the US and UK markets have evolved significantly with the arrival of institutional incumbents launching robo-advice through their own platforms, especially Vanguard. Others have entered via acquisition of early entrants such as J.P. Morgan’s purchase of Nutmeg.

In Australia, robo-advice was seen by some as a way to reduce the cost of advice and make it easier for investors to access advice. However, take-up of robo advice in Australia has been low.

Many institutions have taken a conservative position and have a baseline that interactions with customers should come with a SoA and the regulatory requirements that accompany this. Research shows that only 7% of investors in Australia have accessed robo-advice compared with 23% of investors in the US and 13% of investors in the UK .

Over recent years, advice technology has evolved to the level of sophistication that allows for compliant, personalised and engaging customer experiences – digital advice. The UK wealth market is seeing digital advice rapidly move to become a mainstream strategy where it is helping to close a significant advice gap.

Similarly in Australia, digital advice technology is available today and ready to be deployed by institutions and advice providers to bridge our own advice gap.

WHAT IS DIGITAL ADVICE? Digital advice is the digital enablement of personal advice delivery. Unlike robo advice, digital advice is not simply calculators and investment risk engines, nor is it limited to investments.

“Over recent years, advice technology has evolved to the level of sophistication that allows for compliant, personalised and engaging customer experiences – digital advice.”

Rather, digital advice delivers personal advice on investment, insurance, retirement accumulation (superannuation) and decumulation (pension) decisions and products. It combines customer facts with both regulatory inputs and assumptions where gaps exist, then uses sophisticated algorithms to produce single issue personal advice outcomes that comply with the Best Interests Duty and related obligations.

Compliance and other safeguards are built-in to the advice journey to capture all data points with full transparency, while quickly and easily identifying when customers are not suited to digital advice. This can be because of affordability, suitability or complexity of advice.

While a customer can be entirely self-directed in a digital advice journey and obtain advice with no human intervention, digital advice equally supports and leverages a human adviser-led model, or a combination of the two.

This is known as a hybrid model of digital advice delivery and demonstrates that technology augments human advice rather than replaces it.

A key advantage of this model is that it allows institutions and other digital advice providers to offer their customers the best of both worlds - consistency and accuracy in relation to functional and portfolio tasks, the convenience of an engaging

Continued on page 30

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30 | Money Management April 21, 2022

Toolbox

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

1. According to the 2020 Investment Trends Robo-advice Report, what proportion of investors in Australia access robo-advice? a) 7% b) 12% c) 17% Continued from page 29

d) 22%

online advice experience, and the assistance of a human adviser when required for more complex tasks and emotional needs.

Technology does the heavy lifting of data gathering and fact finding, while a human adviser can intervene at friction points along the journey. Technology also simplifies the compliance process with full auditability and transparency by capturing every data point and keystroke.

By leveraging digital advice technology, advice providers and advisers can better deliver to their customers’ preferences, scale their business models and leave more time to focus on delivering uniquely human skills.

2. Digital advice is different to robo advice because it:

WHO IS DIGITAL ADVICE SUITED TO?

a) Not enough interest in robo-advice from Australian investors.

Since the Royal Commission, the regulatory requirements for personal advice have increased significantly due to additional compliance burdens, more comprehensive due diligence processes, and more time required to meet the Best Interests Duty.

This has simultaneously increased the cost of financial advice and reduced the number of advisers available to provide it.

Meanwhile, the need for financial advice has only continued to grow as the population ages, with one in five people saying the pandemic has led to dramatic financial changes or extreme hardship and 25% of people worrying more about money than any other concern.

Financial advice improves wellbeing and should be both accessible and affordable for everyone who wants or needs it.

Traditional comprehensive financial advice has become more expensive and less accessible and not everyone wants or needs to deal with all of their potential financial goals simultaneously or continuously (as in a comprehensive financial plan). The typical customer for whom digital advice is well-suited only needs simple advice for a specific purpose on a piece-by-piece basis.

It's far more likely that over time, customers who start with digital advice will evolve to seeking comprehensive advice for more complex circumstances from traditional advisers, than the other way around.

Digital advice technologies will help take institutions and advisers to the next level in their businesses. The cost effectiveness and scalability of digital advice lowers barriers to entry to advice for everyday consumers and allows institutions and advice providers to address a huge consumer market who need quality, easy to access and affordable advice.

By giving these consumers easy and affordable access to financial advice, institutions and advice providers can make a significant positive difference to their customers’ long-term financial wellbeing.

b) Australia doesn’t have the technological capabilities.

Craig Keary is CEO Asia Pacific at Ignition.

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a) Primarily uses algorithms and calculators to provide investment solutions. b) Supports both human and digitally led models, including a combination of the two. c) Will increase, not decrease, the cost of providing advice. d) They are different terms used to describe the same thing.

3. Why has take-up of robo-advice mainly been slow in Australia compared to the US and UK?

c) Current Australian regulations make it too difficult to deliver robo-advice. d) Many institutions have taken a conservative view.

4. Which areas of finance can digital advice be legally offered to investors? a) Investments. b) Insurance. c) Superannuation. d) All of the above.

5. Digital advice is best suited to which types of customers? a) One who needs a comprehensive and full financial plan. b) One who needs personal advice for a specific purpose on a piece by piece basis. c) One who has complex financial requirements. d) One who wants general information only.

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ robo-advice-vs-digital-advice-what-difference For more information about the CPD Quiz, please email education@moneymanagement.com.au

13/04/2022 9:13:18 AM

April 21, 2022 Money Management | 31

Send your appointments to liam.cormican@moneymanagement.com.au

Appointments

Move of the WEEK Michele Bullock Deputy governor Reserve Bank of Australia

The Reserve Bank of Australia appointed Michele Bullock as deputy governor, replacing Guy Debelle after his departure in late March.

Bullock was formerly assistant governor (financial system), a role which she had accepted in October 2016. This involved responsibility for

BetaShares opened an office in Perth with former financial planner, Brendan Prowse, leading its distribution efforts as a director in Western Australia.

Prowse joined BetaShares from Vanguard where he was a business development executive for 11 years and had previously worked at AMP and Zurich. He also spent seven years as a certified financial planner with AMP. Alex Vynokur, chief executive of BetaShares, said: “We are delighted to welcome someone of Brendan’s calibre to our growing team. Brendan is well-known and highly regarded across the financial services industry, particularly in his home state of Western Australia.

“BetaShares has been fortunate to benefit from strong growth and Brendan’s appointment allows us to expand our presence in Western Australia by adding a dedicated resource for the more than 1,700 financial advisers in that state.”

Financial planning support firm Virtual Business Partners (VBP) made two appointments in newlycreated roles.

Lia Gunawan was appointed as strategic relationship manager

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financial stability and oversight of the payments system.

Prior to this, she had held a variety of other roles at the bank including assistant governor (business services) and assistant governor (currency).

RBA governor, Philip Lowe, said: “Michele brings a wealth of

while Hannah Pike was appointed as client services specialist.

Gunawan joined from AMP where she was commercial partnerships manager and would be tasked with refining and enhancing the firm’s strategic relationship management framework and delivering strategic key account plans across its client base.

Pike was a former financial planner and had 13 years’ experience in the industry, most recently as an operations manager in a financial planning practice. In her new role, she would be responsible for the firm’s development of financial planning assistants across administrative tasks and serve as subject matter for financial planning administration.

DomaCom chief executive, Arthur Naoumidis, left the business while former Liberal leader, John Hewson, was appointed as a nonexecutive chair.

In an announcement to the Australian Securities Exchange (ASX), it said John Elkovich had been appointed as chief executive with immediate effect to replace Naoumidis, who founded DomaCom in 2011.

experience to the position.

“She has played a leading role in the Bank’s work on financial stability and has a well-deserved international reputation for her work on payments systems.

Michele also brings considerable management experience to the role and I look forward to working with her.”

Angela Williams would also join the board as a director.

Former chairman, Grahame Evans, would remain on the board as non-executive deputy chairman.

The new board said it intended to promptly apply to relist the company and commence a fundraising period to “grow and scale the company substantially”.

Mason Stevens appointed Jacqueline Fernley as chief investment officer (CIO) and Wayne Twomey as chief financial officer (CFO).

Fernley joined with experience across multiple asset classes, capital allocation, governance and investment strategy with previous roles including head of equities at JB Were, Australian equity portfolio manager at CFS, head of research at Wilson HTM, and portfolio manager and head of research at Magellan.

Meanwhile, Twomey joined with experience from a range of senior finance roles including CFO at Mastercard for Australia and New Zealand, CFO of PwC Australia, and a decade in the United States in various senior finance roles for American Express.

PGIM appointed Benjamin Price to the newly-created role as managing director and head of Australia wealth.

Based in Sydney, Price joined PGIM from Macquarie Asset Management where he was head of wholesale in Australia and he had almost 20 years’ experience in the industry.

He would be responsible for developing and implementing PGIM’s wealth distribution strategy for the Australian intermediated wholesale advice market, particularly those who work with high net worth and sophisticated investors.

Global X ETFs announced the appointment of Blair Hannon as head of investment strategy, Australia to support the development of the firm’s local exchange traded fund (ETF) business.

Hannon most recently served as NSW state manager at BlackRock, where he spent the past four years driving ETF adoption. His key focus was the investment advice market segment of brokers and private bankers, providing market analysis linked to trade ideas, educational content and thought leadership.

12/04/2022 4:11:08 PM

OUTSIDER OUT

ManagementApril April21, 2, 2015 32 | Money Management 2022

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

Taking a political detox

The f-word LIKE Liberal Senator Andrew Bragg, and the Australian Securities and Investments Commission (ASIC) chair, Joe Longo, Outsider has difficulty saying the f-word.

Unlike millennials, Outsider can’t say the f-word with gusto, like he is without a care in the world.

“I always have difficulty with that word,” said Longo at a Senate economics legislation committee hearing.

Replying to Longo’s mention of the mere thought of the f-word, Bragg said: “I find it very hard to keep a

straight face at the best of times.”

ASIC’s new information sheet Info 269 – is so delicate with the f-word that it does not even mention it, despite the guide being entirely about it.

The guidance warned that f-words who provide unlicensed advice could receive penalties of up to five years in prison or hefty fines, while paying f-words for promoting investment products could also spell trouble.

Whatever the case, Outsider hates how f-words have ruined two of his favourite things: finance and Tik Tok.

AT last! Prime Minister Scott Morrison has announced an election date for 21 May. And to top it off, Outsider picked the date on his favourite betting app, winning $1.50 on his $10 bet.

The next thing for Outsider to bet on is who will be the next PM? Will it be the guy who fudged the cash rate figure when probed by a journalist or the one who missed the mark on JobKeeper expenditure by $60 billion?

“Too hard to call”, Outsider thought to himself.

Instead, Outsider decided to put $1 on Clive Palmer to win a Senate seat with hopes of winning $66 back.

Outsider has had so much fun with betting apps, he has decided to devote more time to it by deactivating his Twitter account and taking a break from reading the paper or watching the news.

And what better time to do that than during an election cycle.

A silver anniversary IT is well-known that Outsider is always up for a celebration, so he is breaking out the champers for an unusual anniversary noted by the Senate Estimates committee.

Appearing before the committee, Australian Securities and Investments Committee chair, Joe Longo, temporarily paused proceedings to make an announcement.

What could be so important to warrant an interruption to important Government proceedings, Outsider wondered?

The answer, he discovered, was that this session was the 25th appearance by

OUT OF CONTEXT www.moneymanagement.com.au

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"Just one-off handouts to get through an election, with all the sincerity of a fake tan.

- Albo reacts to ScoMo’s election promises

ASIC commissioner, Cathie Armour, in front of the committee, her silver anniversary one might say.

“This will be the 25th Senate Estimates appearance since her appointment in 2013. I thought I should mark the occasion by recognising her service to ASIC and her dedication to making our financial system fair, strong and efficient,” said Longo.

In fact, it turned out Armour was ending things on a round number as that session would be her final appearance.

Outsider wishes the commissioner well and thanks her for her service.

"You can feed two birds with one scone" - Ethinvest’s Trevor Thomas mixes his proverbs

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14/04/2022 10:14:02 AM