Money Management | Vol. 33 No 8 | June 6, 2019 by FE Money Management

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

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Vol. 33 No 8 | June 6, 2019

ELECTION WRAP-UP

Hume inherits a portfolio of unﬁnished business

INFOCUS

Breaking into the New Zealand asset market

INFRASTRUCTURE

CAPITAL GROWTH

How to build long-term wealth in a low-growth world

ASIC chooses industry fund default BY MIKE TAYLOR

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Building a strong foundation for investing INFRASTRUCTURE is the foundation of how cities and societies are built, so it shouldn’t be any surprise it’s a sector that generates attractive investment opportunities. We rely on infrastructure to get to places, either by car, train, plane or boat, and to receive energy, water and telecommunications. Gerald Stack, from Money Management's Fund Manager of the Year Infrastructure Securities award winner Magellan Infrastructure Securities, said the benefit of the sector is its reliable and predictable returns. “That’s the magic of infrastructure, the fact that earnings are reliable and dependable, no matter what the world throws at them,” Stack said. The benefit of those investments is not only a healthy return, but also contributing to the building of systems and assets that are the foundation of the growth of economies. It’s because of that investment, that other sectors are able to grow, develop and evolve, and despite the new technologies and sectors that are attractive to invest in, none of them exist without a strong infrastructure background to build-off. It’s a portfolio that offers strengths all through different business cycles, whether it’s steady regulated utilities that offer consistent returns, or user pay assets that strengthen as the overall economy does.

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Full feature on page 26

THE AUSTRALIAN Securities and Investments Commission (ASIC) has chosen Australia’s largest industry superannuation fund, AustralianSuper as its default fund for ASIC employees. The regulator, which had been criticised by some elements of the financial services for the perception that it favoured industry funds, selected AustralianSuper as a default on the basis of its change of status as a Government entity. Those employed by ASIC were now employed under the ASIC Act instead of the Public Service Act.

The regulator said that as part of the transition process it had selected AustralianSuper as the new default superannuation fund for employees who joined from 1 July this year and who did not nominate a fund. It said there was no change to arrangements for existing employees, including those who are members of the Commonwealth Superannuation Scheme, the Public Sector Superannuation Scheme and the Public Sector Superannuation accumulation plan. ASIC said it would be reviewing its default fund arrangements every four years.

Accountants seek voice in retirement advice provision ACCOUNTANTS have sought a place at the table when the Government initiates a review of the retirement income system, suggesting an essential element is proving access to affordable financial advice. The Institute of Public Accountants (IPA) welcomed a recent announcement by the Treasurer, Josh Frydenberg, that he would be commissioning a review of the retirement income system which would be inclusive of the interfaces between superannuation, government pensions and taxation. Commenting on the move, IPA chief executive, Andrew Conway, said the review was long overdue in circumstances where there was no well-defined view on what a retirement living standard should look like. “There is also the budgetary considerations of funding the age pension and superannuation tax concessions and ensuring that the system is sustainable going forward,” he said. “The need to encourage greater investment in superannuation to facilitate self-funded retirement is critical as Australia will not be able to fund government pensions in the future, especially considering our ageing population,” Conway said. “Different mechanisms need to be considered given the longevity risk when Continued on page 3

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TAL offers training in FASEA ethics requirements BY HANNAH WOOTTON

A MAJOR insurer is moving into the adviser education space as the deadline for compliance with the Financial Adviser Standards and Ethics Authority’s (FASEA’s) regime draws nearer, with TAL offering a training course on the Code of Ethics. Almost 500 advisers attended the first training course, run by TAL national technical manager, David Glen, showing the demand for greater resources and clarity around meeting FASEA’s requirements. The TAL training focused on helping advisers fulfil their education requirements under FASEA, as well as prepare for the mandatory exam to be imposed by the Authority. “Currently, there are very few resources available to support financial advisers in understanding the code of ethics and how it applies to their day-to-day business dealings and

customer interactions,” TAL head of licensees and partnerships, Beau Riley, said. “Through our TAL Risk Academy ethics course, we want to equip advisers with a solid understanding of the scope of the code of ethics and the procedures they need to put

LICs boosted by Coalition win BY OKSANA PATRON

A COALITION win has provided an extra boost for the listed investment companies (LICs) sector, according to Zenith Investment Partners. Although Liberals managed to save a ‘retiree tax’, the sectors which had raised more than $11.7 billion dollars of new investor capital over the last five years would still need to provide answers to key issues such as how this would affect the search for yield. Also, Zenith’s report “2019 Listed Investment Entities Sector Report” would examine whether LICs investing in Australian equities would remain attractive as an investment tool. Zenith’s head of property and listed strategies, Dugald Higgins, said: “Australian equities have traditionally been a high yield market. While driven in part by favourable taxation, when removing the impact of franking credits, Australian equities are still one of the highest yielding asset classes available in a liquid, easily diversifiable format.” According to Higgins, when viewed from a structural perspective, the company structure of a LIC could have advantages when compared to the structures utilised by LITs due to the difference in taxation treatment. Additionally, the increased popularity of other assets classes helped boost the usage of trust structures via LITs, Zenith said, which was a logical progression of a maturing listed investment market. At the same time, Zenith said that despite favourable conditions for capital raising over the past several years, most managers of LICs and LITs emerging during that time were yet to experience operating listed vehicles in a bear market. “Too many managers are ignoring aspects that can result in increased investor dissatisfaction when conditions get tough,” Higgins said. “Those who construct and operate LICs and LITs should make use of all available tools to maximise market integrity and client satisfaction in their products. Issues which are seen as merely irritating in the good times can turn deadly for sentiment in the bad times.”

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in place to ensure they adhere to the code and demonstrate their adherence to others.” Under FASEA’s regime, advisers would have to complete nine Continuous Professional Development hours in Professionalism and Ethics and pass an exam section on ethics.

Accountants seek voice in retirement advice provision Continued from page 1 superannuation members retire. This includes the development of annuity type products.” However, he said there was significant complexity in the system with many competing interests, which all needed to be given due weight if Australia was to develop an equitable retirement income system. “For instance, we cannot ignore the findings of the Productivity Commission report which suggested reforms to benefit members through lower fees and higher investment returns could generate an extra $533,000 for a new job entrant today when they eventually retire,” Conway said “An essential element of this review will be to provide access to affordable financial advice, which is what public accountants, as trusted advisers, can deliver,” he said.

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Editorial

mike.taylor@moneymanagement.com.au

LEARNING THE VALUE OF SPEAKING WITH ONE VOICE Financial advisers have been badly served by the disagreements and divisions of past years and should encourage their representative organisations to speak with one voice in what will represent one of the industry’s most challenging periods. FEW PEOPLE in the Australian financial services industry evidenced any regret that the Liberal/National Party Coalition Government was returned to Government at the 18 May Federal Election, in circumstances where many had specifically campaigned against the policies of the Australian Labor Party (ALP). As was made clear by the Association of Financial Advisers (AFA) in the days following the election result, a number of the financial services representative bodies had formed their own coalition to oppose key elements of ALP policy but, most particularly, the removal of refundable franking credits. As the AFA stated: “The weekend election by the Coalition removes the threat for clients posed by the ALP policies on banning cash refunds for excess franking credits, banning negative gearing on the purchase of existing properties, a reduction in the capital gains tax discount and a range of changes to superannuation. “The AFA was firmly opposed to the ban on cash refunds for excess franking credits and we worked closely with a range of other associations such as the SMSF Association, the Stockbrokers and Financial Advisers Association, Australian Shareholders Association and National Seniors Australia as part of an alliance to bring attention to the impact of this

policy on a range of people, however, particularly those retirees who were just above the age pension thresholds.” In other words, there was unanimity of purpose demonstrated by a significant cohort of the industry in opposing Labor policy and, post-election, we have seen further signs of unanimity of purpose with the AFA and the Financial Planning Association (FPA) confirming that they have formed a taskforce to deal with the future of life/risk commissions in a post-Life Insurance Framework (LIF) world. It might also be noted that the AFA, FPA and the SMSF Association are amongst those which have combined to contemplate the formation of code monitoring body under the Financial Adviser Standards and Ethics Authority (FASEA) regime. Given all of this, it is not a significant leap to conceive of a single lobbying voice evolving to represent to Government the industry’s concerns on key policy issues such as the future of life/risk commissions and, indeed, the workings of the FASEA regime. The inability of the financial planning industry to consistently speak with a single voice over the past 20 years has arguably cost financial planners dearly when it is weighed against the lobbying successes of groups such as the industry funds and, one might

FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000

argue, the policy influencers within the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). It seems that at least a part of the motivation for the FPA and AFA to speak with one voice on life/risk commissions was the obvious success of a united mortgage broking industry in seeking to argue the value of that industry’s commissions-based remuneration arrangements. It is a lesson which was obvious and should have been learned much earlier. Anyone in the financial planning industry who imagines that the re-election of the Coalition Government will make their lives easier is deluding themselves. The same challenges which existed before the 18 May election remain – the future of LIF, the timetable for phasing out grandfathered commissions, the rollout of the FASEA regime, and the chestbeating aggression of the regulators, just to name a few. And, on top of this, planners will have to come to terms with the changing commercial environment which will come with the retreat of the banks. It is against this background that planners must remember that disunity is death.

Managing Director: Mika-John Southworth Tel: 0455 553 775 mika-john.southworth@moneymanagement.com.au Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com.au Senior Journalist: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au Features Journalist: Hannah Wootton Tel: 0438 957 266 hannah.wootton@moneymanagement.com.au Journalist: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au Events Executive: Candace Qi Tel: 0439 355 561 candace.qi@financialexpress.net ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Ben Lloyd Tel: 0438 941 577 ben.lloyd@moneymanagement.com.au Account Manager: Amy Barnett Tel: 0438 879 685 amy.barnett@financialexpress.net PRODUCTION Graphic Design: Henry Blazhevskyi

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30/05/2019 11:22:30 AM

June 6, 2019 Money Management | 5

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Industry funds become corporate super advice turnkey BY MIKE TAYLOR

THE industry funds’ financial planning footprint is expanding as a result of key outsourcing decisions being made by corporate superannuation funds. Superannuation outsourcing tender consultants confirmed to Money Management that industry funds emerged as the preferred outsource option for corporate superannuation funds in the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, including for the provision of financial planning services. In many instances the financial planning beneficiaries were not just Industry Funds Financial Services but those self-licensed financial planners who had made it onto the panels approved by the winning industry superannuation funds. The continuing trend towards corporate funds selection industry funds for outsource arrangements was confirmed by both Deloitte and

actuarial consultancy, the Heron Partnership, with Deloitte superannuation partner, Russell Mason, saying it reflected the evidence which was heard during the Royal Commission. Heron Partnership managing director, Chris Butler also confirmed that industry funds were tending to be the front-runners in the outsourcing tender stakes, with some corporate fund trustees specifying which retail fund providers should not be included in the tender process. Former Workplace Super Specialists (WSSA) chief executive, Douglas Latto said there was no doubt that industry funds had become frontrunners but said it was not just based on what had been heard during the Royal Commission but also on investment performance. “Investment performance is pretty important and ultimately tends to trump administration,” he said. The discussion around the success of industry funds in winning corporate superannuation outsourcing mandates came at the same time as the Australian Securities and Investments Commission (ASIC) announced

that it had selected AustralianSuper as the default fund for its new employees. ASIC made the default fund selection in line with it having been removed from coverage by the Public Service Act.

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Accountant-planner relationship needs to evolve BY OKSANA PATRON

THE accountant-planner relationship is evolving to better serve self-managed super fund (SMSF) trustees and demonstrating SMSF expertise will be key, these were the highlights from Investment Trends’ 2019 SMSF Accountant Report. Accountants would need to expand their value proposition as SMSF trustees who had traditionally relied on accountants for their expertise to set up their fund were now looking at SMSF admin firms as well. Also, a growing number of the accountant practices were to employ in-house planners (48 per cent, up from 41 per cent in 2014) instead of referring their clients externally (25 per cent, down from 36 per cent). “Accountants with in-house expertise have had greater success in servicing SMSFs than those who refer clients externally. Currently, those with in-house planning expertise typically

service more SMSF clients (71 versus 45) and derive a larger proportion of their income from SMSFs (22 per cent versus 19 per cent),” Investment Trends’ senior analyst, King Loong Choi, said. Additionally, among SMSFs looking for a new adviser relationship, their top selection criterion was an advisers’ expertise in SMSFs (46 per cent), ahead of integrity (42 per cent), low fees (38 per cent) and value for money (35 per cent).

According to Choi, an SMSF accreditation from a professional association could help assure clients of their ability, while at the same time equip them with a tangible qualification and knowledge. Class Super topped the satisfaction ratings as for software used to services SMSFs, with 95 per cent of accountants who used the software rated it as ‘good’ or ‘very good’ overall, and ahead of BGL Simple Fund 360 which ended in second spot (89 per cent).

Have product providers jumped the gun on grandfathering? BY MIKE TAYLOR

FINANCIAL advisers have expressed anger at the manner in which some major product providers have written to clients about the switch-off of grandfathered commissions before the Government has even legislated on the recommendations of the Royal Commission. Responding to reports in Money Management about the manner in which major investment bank, UBS downgraded its earnings expectations on AMP and IOOF and pointed to platform profits declining by as much as 30 per cent, advisers have pointed to clients receiving letters from product providers telling them how to switch off commissions. One adviser specifically referenced ANZ’s OnePath as having written to advice clients telling them they could request the switch-off of commissions on their account without needing to contact their adviser. The advisers said they were angry that companies were looking to act on grandfathered commissions ahead of the Government’s 2021 switch-off date and the actual passage of legislation. The letters sent to clients were understood to have been received ahead of the outcome of the 18 May federal election.

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The Treasurer, Josh Frydenberg in late March announced exposure draft legislation to ban grandfathering of conflicted remuneration paid to financial advisers from 1 January, 2021. He also announced the issuing of a ministerial direction requiring the Australian Securities and Investments Commission (ASIC) to undertake an investigation to monitor and report on industry behaviour in the period 1 July, 2019 to 1 January, 2021. The Federal Opposition had signalled before election that it was disposed towards the almost immediate end to grandfathered commissions.

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ASIC suggests formal IDR complaint recognition of Twitter comments THE Australian Securities and Investments Commission (ASIC) has canvassed giving social media comments such as those made on Twitter or Facebook formal complaint status under the internal dispute resolution (IDR) processes required of financial planning firms and superannuation funds. ASIC had issued a discussion document in which it has not only canvassed the recognition of social media comments, but also an expansion of what represented a complaint to include “expressions of dissatisfaction about staff”. The discussion paper said ASIC considered the move to be appropriate, “given that long-established patterns in how consumers complain to organisations are changing dramatically”. “We consider that as consumers move beyond telephone, email and traditional written mediums, financial firms should: (a) adopt a proactive approach to identifying complaints made on their social media platform(s); and (b) have processes in place (including appropriate links between media and complaints departments) to deal with these matters through their IDR process,” the discussion paper said. It said that, at a minimum, ASIC expected that “complaints made on a financial firm’s own social media platform(s) will be dealt with through the firm’s IDR process when the consumer is both identifiable and contactable”. The discussion paper said ASIC’s own research into consumer experiences with financial IDR processes and consumer research conducted by the Central Bank of Ireland indicated that social media was being used by consumers as a complaints channel to financial firms. “In addition, more general consumer research in the Australian, UK and US markets strongly indicates that social media is being used by many consumers as a preferred channel for customer service interactions with organisations,” it said.

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Push for easier super fund comparability BY HANNAH WOOTTON

NEW research has shown that a large cohort of Australians are misinformed about both their super fund type and performance, prompting a major industry body to call for a Government-sanctioned online tool to help Australians make more informed choices about their superannuation savings. The Australian Institute of Superannuation Trustees (AIST) said the research, which was conducted by Essential Media, showed the need for the Government and industry regulators to develop an easy-to-use online comparator tool. “Many Australians are languishing in poorly-performing super funds with no easy way of knowing that their fund is a dud. In the 21st century, comparing super funds shouldn’t be that hard,” AIST chief executive, Eva

Scheerlinck said, pointing out that even consumers invested in MySuper options often needed to search across multiple websites to compare funds. It was even harder for members looking to invest in Choice options, as standardised reporting was yet to be enacted for the sector, despite it accounting for almost twice as much savings under management as its MySuper counterpart. Money Management’s sister publication, Super Review, had this year focused on improving comparability between super fund options, regularly delivering data analysis of performance and risk through FE Analytics and integrating fund data into its site. Essential Media’s research reinforced the need for such comparison, finding that many retail fund members were unsure of how their fund was performing and one in four mistakenly thought they were in an industry fund.

AFCA strengthens team

FASEA announces exam registrations and dates

BY OKSANA PATRON

BY MIKE TAYLOR

THE Australian Financial Complaints Authority (AFCA) has announced it will be recruiting a new deputy chief ombudsman and general counsel to support AFCA through its rapid growth and the expansion of its jurisdiction. Chief ombudsman and chief executive, David Locke, said that AFCA experienced an unprecedented level of complaints in six months of operation, with over 35,000 consumers and small businesses having had raised complaints with AFCA. “This is extraordinary and really reflects an increased awareness by consumers of their rights, and an increased willingness to complain,” Locke said. “Appointing the key senior roles of deputy chief ombudsman and general counsel will ensure AFCA is able to deliver a fair, proactive and customer-focused dispute resolution service in a rapidly changing, complex operating environment.” He stressed that organisational culture and leadership would be a key focus to AFCA which would be also looking to work with the financial firms who are members to improve their Internal Dispute Resolution (IDR) practices. In addition to this, AFCA would be also recruiting a lead ombudsman – banking and finance, following the resignation of Philip Field who would finish up at AFCA at the end of July.

THE Financial Adviser Standards and Ethics Authority (FASEA) has cleared the way for financial advisers to register to sit the FASEA exam. The authority announced that both new entrants and existing advisers had until 31 May to notify their intention with FASEA chief executive, Stephen Glenfield describing it as a significant milestone and urging advisers to register as early as possible. Along with the announcement, the FASEA released a curriculum, reading list and practice questions, with the practice questions presenting advisers problem of finding answers to a range of scenarios. The FASEA announcement said it would be available to new entrants and existing advisers between 20 June and 24 June and would be held across nine locations – Sydney, Canberra,

Brisbane, Townsville, Melbourne, Adelaide, Perth, Darwin and Hobart., It said subsequent exam sittings this year would be in September and December, with further exam sittings next year. The exam was a key requirement of legislative reforms introduced in 2017 to raise the education, training and ethical standards of financial advisers. Existing advisers would be required to pass the exam by 1 January 2021. New entrants would be required to pass the exam before they commence Quarter 3 of their Professional Year. The exam would test the practical application of knowledge in the following competency areas in financial advice regulatory and legal requirements, financial advice construction, and applied ethical and professional reasoning and communication.

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AMP admits planner wrongdoing BY MIKE TAYLOR

THE Australian Securities and Investments Commission (ASIC) has scored a victory, with AMP admitting that it failed to ensure AMP financial planners acted in the best interests of their clients and provided appropriate advice. In doing so, AMP told ASIC it does not wish to maintain their denials of the contraventions. The matter was now listed for a final hearing on 19-21 June at which time ASIC will ask the Court to make declarations of contraventions and order AMP to pay an appropriate penalty. ASIC was also seeking compliance plan orders to ensure AMP does not engage in the conduct again. Commenting on the development, ASIC deputy chair, Daniel Crennan QC said ASIC’s case argued that AMP, one of Australia’s largest financial institutions, failed to ensure its financial planners acted in the best

interests of their clients as well as other contraventions of the law. “AMP has now admitted to all of these contraventions and ASIC will ask the Court to make declarations of contravention and order AMP to pay a penalty,” he said. “AMP has made these admissions of wrongdoing prior to a contested liability hearing to be held in June which would have lasted two weeks. A decision on liability is no longer necessary. Instead, there will be a three-day hearing in June to determine penalty.” Crennan said this was an important court managed process to determine the penalty appropriate for the admitted wrongdoing. “We welcome this development and are pleased that because of AMP’s admissions, the matter will be resolved significantly sooner than if the matter was fought on liability,” he said. “ASIC is committed to improving the

conduct in the wealth management industry, both by financial advisers and the companies who employ or authorise them, and that the interests of their clients are put first. ASIC will continue to pursue these cases in court to sanction unlawful conduct and deter others from repeating it.” In a statement issued relating to the development, AMP said the proceedings related “to historic insurance rewriting conduct between 2013 and 2015 by certain AMP Financial Planning advisers”. “AMP has been co-operating with an ASIC investigation of the matter, which commenced in 2014 shortly after AMP terminated the financial adviser at the centre of the matter and reported him to the regulator,” it said. “AMP has continued to enhance its monitoring and supervision processes, including stronger data analytics, to help protect clients against insurance rewriting.”

Fixed income investors spooked by falling house prices BY LAURA DEW

AUSTRALIAN fixed income investors believe falling house prices pose the biggest risk to credit markets with 95 per cent expecting prices to fall further. Responses to the 2Q19 Fitch Ratings KangaNews Australian Fixed Income Investors survey in mid-March found the property market was concerning the majority of fixed income investors. Some 70 per cent of respondents said a downturn in the domestic housing market was the top risk for local credit markets. House prices declined for several quarters in Australia due to an economic slowdown and the withdrawal of foreign buyers and are expected to fall further this year with particular sharp declines in Sydney and Melbourne. Looking to labour, all of the respondents said they expected unemployment would stay at or below six per cent in 2019 and they did not foresee any significant deterioration in the job market until the end of 2020. The softening of the jobs market led Reserve Bank of Australia governor Philip Lowe to hint this week at a possible rate cut from 1.5 per cent in June and survey respondents agreed, saying there was zero chance rates would rise in the next 12 months. Within businesses, firms said capital expenditure was the least-likely use of cash over the next 12 months while shareholder-orientated activities were the most likely.

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Zenith acquires NZ’s FundSource RESEARCH house, Zenith Investment Partners has announced a key expansion acquisition. The company announced that it had entered into a conditional sale and purchase agreement with NZX Limited to acquire New Zealand’s leading research business, FundSource, as it expands into offshore markets. FundSource was one of New Zealand’s longest standing investment research houses, having supplied analysis to financial advisers and fund managers since 1983. The announcement said FundSource was a well-known and trusted brand in the New Zealand market, monitoring approximately 700 funds (unit trusts,

KiwiSaver schemes, personal schemes and insurance bonds) totalling over $100 billion in NZ Household savings. It said Zenith would continue to build on the brand excellence FundSource had become known for in the NZ market over the past 35 years while also expanding upon the suite of services available to users. Commenting on the acquisition, co-founder and director, David Smythe said Zenith was committed to growing the NZ market for funds research and saw a great opportunity to bring together the synergies of a strong brand in the NZ market with the size and scale of our Australian operation from a research and analytical perspective.

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10 | Money Management June 6, 2019

News

FSC urges single adviser regulatory regime BY MIKE TAYLOR

THE Financial Services Council (FSC) has called on the freshly re-elected Morrison Government to move to a single regulatory regime for financial advisers, streamlining the Tax (Financial) Adviser requirements into the Financial Adviser Standards and Ethics Authority framework. In a statement congratulating the Government on its re-election, the FSC also restated what it saw as its policy priorities including a compensation scheme of last resort and changes to the default superannuation fund regime. FSC chief executive, Sally Loane said that now that the election was over, the financial services sector was looking to the Morrison Government for strong leadership and a transparent policy agenda underpinned by effective consulta-

tion with stakeholders. “Some of the biggest decisions Australians make in life such as buying a house, starting a family, choosing a superannuation fund are all supported by the financial services sector, which is the largest sector of our economy, contributing almost ten per cent to GDP,” Loane said. “The Government has been given a mandate to work with the sector to restore consumer and business confidence following a challenging and difficult period.” She said the FSC believed the matters of policy priority included: • A commitment to work carefully and closely with the industry to develop all relevant policy changes, particularly the responses to the Hayne Royal Commission into financial services; • Introducing a comprehensive product rationalisation strategy

to reduce inefficiency and costs from legacy financial products; • Appropriate and sustainable design of a Compensation Scheme of Last Resort along with a commitment to strengthen the licensing regime; • Abolish non-resident withholding tax for investments in the Asia Region Funds Passport; • One regulatory regime for Financial Advisers, streamlining the Tax (Financial) Adviser requirements into the FASEA framework; and • A fair and competitive default superannuation framework where individuals only default once. “The FSC urges the LiberalNational Government and the Parliament to prioritise and consult with the sector on these matters,” Loane said.

Can the Morrison Govt ignore the cost of franking credits THE Federal Government may yet have to examine the cost of refundable franking credits to its corporate tax base, according to major consultancy KPMG. KPMG tax partner, asset and wealth management, Damian Ryan noted the manner in which the Australian Labor Party’s proposal to remove refundable franking credits impacted its election chances but said the politicisation of the issue only served to cloud the reality. “What was lost in much of the Election discussion around the removal of the refund of franking credits for individuals and superannuation funds, was the tax policy issue that is trying to be addressed,” he said. “This is that as the Australian population ages, and as more shares are held by retired Australian individuals and/or superannuation funds with a significant proportion of members in pension phase, a significant part of the corporate tax base is refunded, thereby putting a strain on the country’s tax base. “In Australia, income tax is levied at a company level. To avoid double taxation of the profits, we have a system of dividend imputation. When a company pays a dividend, it attaches a franking credit.. When received by a shareholder, the shareholder receives a tax offset for the tax paid at the company level. “Where an individual’s rate of tax is less than the corporate rate of tax, the excess franking offset is used to offset the tax liability on other income. Similarly, for a superannuation fund, with a tax rate of 15 per cent for

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income in accumulation phase, the excess franking offset is used to offset the tax liability on other income (including assessable contributions),” Ryan said. “To state the obvious, where the excess is refunded, the Federal Government is refunding part of the corporate tax base. This is not necessarily wrong. It is however, a tax policy choice, with longer term implications for the stability of the revenue base,” he said. “According to one view of tax policy, the imputation system is to avoid double taxation on the company profit. This view would support of view that provides an offset for the franking credit, but not a refund.” However, Ryan said another valid view was that an individual (or superannuation fund) should be put in the same situation regardless of whether they derived the income directly or whether they invested collectively via a company, and received the return via a dividend. “Both arguments have merit from a tax policy perspective. During the election campaign, on one side, refundable franking offsets were described as a ‘tax rort by the big end of town’. On the other side, providing an offset but not a refund was described as a ‘new tax on retirees’. In reality, neither description is accurate.” Ryan said the policy issue was whether income tax at a corporate level was a tax in itself, or rather a prepayment of tax, with the ultimate level of tax dependent upon the tax profile of the individual and the superannuation fund.

Centuria buys 63% stake in property fund manager BY OKSANA PATRON

CENTURIA Capital Group has announced the acquisition of 63.06 per cent stake in healthcare property fund manager, Heathley Limited, for $24.4 million which will see the creation of a jointly-owned specialist healthcare funds management vehicle Centuria Heathley. The acquisition, which was carried out by the firm’s whollyowned subsidiary Centuria Platform Investments, would bring the group’s assets under management (AUM) to $6.2 billion. The move came after an earlier announcement by Centuria in which the company said it was to enter the affordable housing market. Centuria Heathley would leverage Centuria’s capabilities in house real estate management and combine them with Heathley’s healthcare market experience in order to form deeper relationships with healthcare partners. Additionally, it was believed the new venture would have capacity to expand to around of one billion dollars in AUM in the near term with the ability to increase its asset footprint and unlock new retail and wholesale mandates within the sector. Heathley was a specialised healthcare property fund manager with $620 million of AUM platform of unlisted funds which include medical centres, day hospitals and tertiary aged care.

29/05/2019 11:10:12 AM

June 6, 2019 Money Management | 11

News

APRA move means more home loan borrowing BY CHRIS DASTOOR

THE Australian Prudential Regulation Authority’s (APRA’s) scrapping of the seven per cent ‘stress test’ buffer on home loans will effectively see a nine per cent increase in borrowing capacity for owner-occupiers, according to RiskWise Property Research. This would rise to between 13-14 per cent if the Reserve Bank of Australia (RBA) undertakes two interest rate cuts before the year is out. With the stress test reduced or removed, it would mean if the interest rate for owner-occupiers was about 3.75 per cent, they would pay about 6.25 per cent which would create a nine per cent borrowing capacity. Doron Peleg, RiskWise chief executive, said with the current ultra-low interest rate and two interest rate cuts projected by the RBA, APRA’s stress test was a major barrier for borrowers in an already tough market. “If there are no interest rate cuts the increase in borrowing capacity will be an increase of around four-tofive per cent for investors and for owner-occupiers about nine per cent,” Peleg said.

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“However, if the RBA cut rates twice, we will see an increase of around

nine per cent for investors and potentially 13-14 per cent for owner-occupiers.

“This will be a major boost to the market, especially as now the number

one risk has been removed thanks to a Coalition win and the elimination of the

threat of taxation changes to negative gearing and capital gains tax.”

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28/05/2019 2:50:49 PM

12 | Money Management June 6, 2019

News

Millennials need to focus on insurance options BY CHRIS DASTOOR

MILLENNIALS need to be more engaged with insurance options, according to Andrew Kennedy, risk adviser at HLB Insurance Services. Kennedy said the issue millennials faced was getting engaged with insurance and making a conscious decision about whether they’re going to have it. “It’s too easy to let the default rule whatever their superannuation provides, and then assuming that is correct for them,” Kennedy said. “Or conversely deciding it’s not correct for them and just cancelling it because all they see is a premium coming out of the bank

account for their super fund without knowing what it does and what it’s providing.” This apathy was also supported by having parental support as a safety net while transitioning into fully independent adults. “One of the conversations I’ve had with people who are 20-25 [years old], the default assumption is their parents will look after them,” Kennedy said. “But the counter argument I have to that is, parents [of people that age] are getting towards the point where they’re going to retire. “Do you really want to be a burden on your parents if you can’t go back to work ever again, when they’re supposed to be retiring and enjoying every moment?”

Although it was common for people not to get engaged in super until they’re over 30 or 40, there was a much greater risk for not taking insurance seriously when you’re in your 20s. “The argument I always make is, in your 20s and 30s, your biggest risk is not being able to work again, not are you going to have enough for retirement,” Kennedy said. “If you’re never able to work again, that’s a far greater financial risk than potentially eroding a superannuation balance by paying insurance premiums and maybe not having enough to retire. “If you’re 20 and you’ve got 45 years ahead of you of no income, that financial cost is way more than not having enough money in superannuation.”

SMSF sector welcomes super policy stability, no dividend reform BY HANNAH WOOTTON

THE self-managed superannuation fund (SMSF) sector has unsurprisingly welcomed the re-election of the Coalition Government, after running an extensive campaign alleging that Labor’s proposed removal of franking credit tax concessions was inequitable. The SMSF Association said that many SMSF trustees would be “relieved” that the policy, which it believed was of an “unfair and discriminatory nature”, wouldn’t be going ahead. Association chief executive, John Maroney, pointed out that the group had collaborated with other partner associations to ensure that the policy was “well understood by the broader community” in the lead-up to the election. In the aftermath of the election however, there had been much analysis around the Coalition’s labelling of the franking credit proposal as a “retiree tax” and of depictions of the policy as an unfair tax reform rather than the removal of a concession that wasn’t originally intended to be permanent. The SMSF Association also welcomed Prime Minister Scott Morrison’s re-election as the harbinger of three years of policy stability for the superannuation sector. “After the introduction of the significant legislative changes that took effect on 1 July 2017, it’s essential that members of superannuation funds can have a period of sustained stability,” Maroney said. “For SMSF members, policy continuity means they can focus on managing their financial needs rather than being constantly forced to consider significant changes to their retirement plans.” Maroney said that the Association would continue to urge all political parties to legislate the objective of superannuation to encompass its wider application, purpose and how it could deliver for all Australians as a matter of priority.

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Kaplan links to Deloitte’s Sanders on bridging courses BY MIKE TAYLOR

KAPLAN has linked with former Financial Adviser Standards and Ethics Authority chief executive, Deen Sanders, to help build and deliver bridging courses required under the FASEA regime. Kaplan announced that Sanders, who is leader of Ethics and Professionalism at Deloitte, would help design the bridging courses aligned to FASEA’s curriculum. Kaplan Professional chief executive officer, Brian Knight said he was delighted to work with Deloitte and especially Sanders as he wanted to work with the very best people available

to set the benchmark for adviser education. “Together, we have assembled a team of market-leading academic and practitioner experts to build out these bridging courses. This includes Sydney University behavioural scientists, and legal and professional ethics leaders from both Sydney University and the University of New South Wales,” he said. “The involvement of Deloitte will ensure these bridging courses are best-in-breed – unprecedented, innovative and cutting-edge, and will significantly contribute to the fabric of adviser education. We wanted to go ‘above and beyond’ the norm and transform what is available in the market.”

29/05/2019 11:13:25 AM

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The information on this page is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (MLCI) a member of the group of companies of National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) (NAB Group). An investment with MLCI does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. You should obtain a Product Disclosure Statement (PDS) relating to the MLC Inflation Plus portfolios (ARSN 165 016 035; 165 016 151; and 117 295 315) and consider it before making any decision about whether to acquire or continue to hold those products. A copy of the PDS is available upon request through MLC Platforms and the MLC Investment Trust by phoning 133 652 or on our website at mlc.com.au/inflationplus. Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. A150017-0519

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22/05/2019 3:28:55 PM

14 | Money Management June 6, 2019

News

Ratings agency points to economic challenges BY HANNAH WOOTTON

INTERNATIONAL ratings agency, Fitch Ratings has pointed to a slowing economy and rising unemployment as among the challenges confronting the re-election

Liberal/National Party Coalition Government. “We forecast the Federal government to reach an underlying cash surplus by next fiscal year. But a challenging economic environment poses risks to this

outlook,” the company said in a post-election analysis. “The economy is slowing and the unemployment rate has inched up, which could weigh on fiscal revenues. A sharper economic slowdown could also lead to pressures for greater fiscal stimulus. “The likely continued need for cross-bench support in the Senate could limit the government’s ability to advance some of its policy priorities. This poses additional risks to the budget outlook and the government’s ability to tackle mediumterm economic reforms,” the Fitch Ratings analysis said. However, it said that it expected the re-election would bring broad party policy continuity in line with the fiscal priorities announced in the Government’s pre-election budget.

Challenger annuities launched on HUB24 BY CHRIS DASTOOR

CHALLENGER has announced its full range of fixed term and lifetime annuities, including CarePlus, are available via HUB24’s investment and superannuation platform. Advisers could now generate quotes, submit new applications and view their clients’ Challenger annuities alongside other investments in HUB24. Advisers would also be supported by Challenger tools, resources and calculators. Richard Howes, Challenger chief executive officer, said this would make the process easier and more efficient for advisers to include guaranteed income steams in their clients’ portfolios. “Challenger annuities are a compelling product for retirees who want peace of mind around their income and spending,” Howes said. “Making our annuities available via the HUB24 platform allows us to reach a wider

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range of advisers who are looking to ensure their clients’ can access secure income in retirement. “Advisers are an important channel in reaching retirees and making annuities available via platforms will support the recent growth in sales we have seen by independent financial advisers.”

ASIC chair issues industry ‘fairness challenge’ BY LAURA DEW

AUSTRALIAN Securities and Investments Commission (ASIC) chair James Shipton has issued a ‘fairness challenge’ to the financial services industry, asking it to consider if any of their practices or products have negative consequences. Speaking at the ASIC Annual Forum in Sydney, Shipton said he was “not convinced” by the level of questioning and discipline firms applied when launching new products. “They need the procedural discipline to ask ‘is this practice or product going to cause harm, be detrimental or have a negative consequence?’ “I am not convinced this level of questioning and procedural discipline has been applied by the financial industry when developing, and reviewing, business practices and financial products.” He also felt financial services needed to be more inclusive and include every segment of the community, a quality that would improve Australians’ trust in the financial services industry. “Ultimately, we need a financial system that not only serves every segment of the community but also is one where those who work in it feel proud of being a part of it. “Proud because there is a broader community purpose to what they do and proud because they are professional in how they do it. “If we can achieve this then we will have gone a long way for Australians to have trust and confidence in the financial system- something that is not only what Australians deserve but what is their right.”

29/05/2019 3:22:00 PM

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so you can give your clients even more value. For full details, contact your MLC Business Development Manager or visit mlc.com.au/wrap 1 Based on benchmarking conducted by Chant West. Cash account interest rates are as at 31 December 2018. Chant West is solely liable for this information. 2 Based on price changes across MLC Wrap Super Series 2 and MLC Navigator Retirement Plan Series 2 super products only. See the relevant Product Disclosure Statement (PDS) for further details. 3 Terms and conditions apply. Issued by National Wealth Management Services Limited ABN 97 071 514 264. The information in this flyer is correct as at 4 February 2019, but may change in the future. Interests in MLC Wrap Super and MLC Navigator Retirement Plan are issued by NULIS Nominees (Australia) Limited, ABN 80 008 515 633, AFSL 236465 as trustee of the MLC Superannuation Fund, ABN 40 022 701 955. Interests in MLC Wrap Investments and MLC Navigator Investment Plan are issued by Navigator Australia Limited, ABN 45 006 302 987. Before making a decision to purchase or continue to hold a product, you should read the relevant PDS or Financial Services Guide, which can be obtained by calling us on 133 652. The information in this document is general information only and doesn’t take into account your personal financial situation or individual needs. A150004-0519

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22/05/2019 3:30:27 PM

16 | Money Management June 6, 2019

News

Super funds headed toward majority ASX control BY HANNAH WOOTTON

SUPERANNUATION funds could control more than half the Australian Securities Exchange (ASX) within 15 years, with the portion it holds in ASX-listed domestic equities experiencing faster growth than market capitalisation of the Exchange. Super funds currently held almost 40 per cent of the ASX, representing $700 billion, with an increase of 6.7 per cent over the past five years and 9.4 per cent over the past decade. Should this holding continue its current growth of one per cent per year, in 10 years ownership levels would be 50 per cent, and in 20 years, 60 per cent. According to Rainmaker Information, not for profit super funds accounted for just under half of the industry’s total ownership of ASX stocks, retail funds one quarter, and selfmanaged super funds (SMSFs) 27 per cent. Further, Australian Prudential Regulation Authority (APRA) regulated funds held an estimated 20 per cent of the banking sector, with

the inclusion of SMSFs potentially bringing that to one third. The most popular companies for super funds were led by CSL, followed by NAB, Westpac, ANZ, BHP Billiton, Commonwealth Bank, Wesfarmers, Macquarie Group, Woolworths, and Telstra. These companies could have to get used to having larger, more interested investors

ANZ winds down Prime Access BY MIKE TAYLOR

ANZ has announced it will no longer offer its Prime Access financial advice service to new customers and will phase it out for current customers over the next 18 months. The banking group’s decision was announced by ANZ managing director Private Banking and Advice, Mike Norfolk who said the move was part of a change in approach by the company. “We are determined to keep making improvements to the way we offer customers high quality and accessible advice,” he said. “We know we need to think differently about how we do this, which is why we are taking a new approach to providing our customers ongoing advice and phasing out Prime Access as part of that.” Norfolk said ANZ financial planners would talk to current Prime Access customers during their annual review to understand their ongoing needs and how the new advice model could best work for them. The move came after ANZ unveiled its plan to improve financial planning 12 months ago, which included the removal of all sales incentives for financial planning bonuses and speeding up customer remediation. It said Prime Access was first offered in 2003 and that ANZ started a fee reimbursement approach in 2015 for customers that did not receive an annual documented review as part of their Prime Access package between 2006 and 2013. The Australian Securities and Investments Commission (ASIC) accepted this approach as part of an enforceable undertaking

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should super funds become their dominant shareholders, executive director of research at Rainmaker, Alex Dunnin, said. “While this may challenge some companies that are not used to dealing with larger, active investors, the upside is that this new dynamic will lower the cost of capital for these companies and will actually help them expand their growth opportunities,” he added.

ASIC clarifies litigation approach THE Australian Securities and Investments Commission (ASIC) has clarified its so-called “why not litigate” approach with its chair, James Shipton making clear the regulator will likely only litigate if it is in the public interest and it is likely to be successful. Addressing the annual ASIC Forum, Shipton made clear that ASIC’s approach was very different to a “litigate first” or a “litigate everything” strategy. “‘Why not litigate?’ is our own strategic construct and the aim of this is to deter future misconduct and address community

expectations that wrongdoing be punished and publicly denounced through the courts,” he said. This meant that once: • ASIC was satisfied breaches of the law were more likely than not; and • the facts of the case showed pursuing the matter would be in the public interest; then • ASIC would actively ask itself: why not litigate this matter? Shipton said ASIC’s enforcement work had a core focus on deterrence, public denunciation and punishment of wrongdoing by way of litigation.

29/05/2019 3:21:14 PM

June 6, 2019 Money Management | 17

News

NAB sells Ausmaq business to Clearstream BY LAURA DEW

NATIONAL Australia Bank (NAB) has agreed to sell its managed funds service business Ausmaq to Clearstream, a post-trade services provider owned by Deutsche Boerse. The transaction was expected to be completed in the second half of 2019 subject to closing conditions including regulatory approval. This would be the first time Clearstream has entered the Australian market as the company focuses on external growth of its investment fund business. It said it was attracted by the fact Australia was the largest funds market in Asia Pacific. Clearstream provided an

infrastructure service to handle the link between Australian funds market back into global markets. Following the sale, Ausmaq customers would now have access to Australian custodian banks, wrap platforms and wealth managers with access to its fullyautomated global funds processing platform Vestima. Bernard Tancré, head of investment funds services at Clearstream, said: “Ausmaq is a perfect fit for Clearstream’s strategy in the AsiaPacific region. As an established provider of fund processing solutions, the acquisition allows us to broaden our fund service offering in Australia and to provide our international customers with integrated solutions for the domestic market.”

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29/05/2019 11:09:23 AM

18 | Money Management June 6, 2019

InFocus

THE LAND OF THE LONG WHITE CROWD Many Australian fund managers have tried and struggled to enter the New Zealand asset market. But they won’t find meaningful success there, Clayton Coplestone writes, unless they better tailor their offerings to meet the different needs of advisers across the Tasman.

FOR MANY AUSTRALIANDOMICILED fund managers, the allure of raising assets following a three-hour flight to New Zealand can appear easy. After all, there’s Mutual Recognition between the two countries permitting business to begin with very few conditions. Assuming that a product disclosure statement (PDS) has been registered with Australian authorities, it is a relatively simple registration and filing exercise with the New Zealand equivalent. The best way to think of the

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opportunity is by reflecting on what the Australian financial services industry looked like back in the late 1990s: an embryonic industry, with a newish regulator (Financial Markets Authority) and an equally newish enthusiasm towards retirement savings (KiwiSaver). But that’s where the comparison stops, with a heavily fragmented retail industry, relatively small and highly sophisticated institutional population, and equally dispersed wholesale community awaiting unsuspecting travellers.

The Kiwi retail industry comprises of two categories of financial adviser, with around 1,800 authorised financial advisers (AFAs) who are permitted to utilise investment capabilities, and circa 6,000 registered financial advisers (RFAs) who are typically sales folks aligned with larger financial entities. The average age of the AFA community is similar to that of the Australian industry, with many participants having one eye on the exit door. The majority of AFAs are geographically dispersed

throughout the country (following an increasing proportion of retail investment clients migrating to grey-zones) and use independent research for guidance rather than relying on model portfolios. Morningstar is the dominant researcher supplying product appraisals, with Zenith a very recent entrant through their acquisition of the FundSource business from the New Zealand Securities Exchange (NZX). Whilst there are a selection of industry bodies, the primary retail entity is called Financial Advice New Zealand (FANZ), which encourages membership from the investment, mortgage and insurance industries. There aren’t many dealer groups to speak of, with most of these being a collective of like-minded individuals rather than any formally structured arrangement. Lastly, and most significantly, the retail advisory industry is highly relationshipcentric, with a growing number of advisers unwilling to receive the endless meeting invitations that are offered. The reliance on platforms within the industry is also unique and relatively embryonic, with Aegis (a subsidiary of ASB) providing a supermarket approach for their $15 billion of funds, and FNZ offering circa 14 white-labelled gateways into their $15 billion technology. More recently the platform oligopoly has attracted several newer entrants who are differentiating themselves largely through price – with fees as low as single digits. Irrespective of

30/05/2019 1:40:45 PM

June 6, 2019 Money Management | 19

InFocus

the platform participant, none of these demand shelf space or marketing fees from product manufacturers and are purely in the job of providing a consolidated support vehicle for a reasonably uncomplicated advice industry. The wholesale silo comprises many different forms, and includes community trusts, not-for-profits, family offices, fund of funds, and indigenous settlements (IWI). Whilst many seek guidance from asset consultants (both locally and abroad), sophistication levels vary considerably and there is no single formula in tackling these heavily fragmented and distinct groups. Intended regulatory changes to the Trustee Act will no doubt encourage the wholesale community to increase their reliance upon external consultants, as they transition from being stewards of money towards having more fiduciary responsibilities. Whilst small in number, the New Zealand institutional population is arguably one of the most sophisticated in the region, with a preference towards internal management and external tilts. Institutional investors tend to utilise

FINANCIAL RESILIENCE AMONG INDIGENOUS AUSTRALIANS

“Their success in raising meaningful assets from these ﬂy-in-ﬂy-out approaches is patchy at best, despite being greeted with a genuine appreciation for the meeting.” asset consultants for their preliminary screens, albeit with much less reliance on any portfolio advice than their Australian counterparts. Many of these institutions are well serviced by visiting Managers with a heightened cynicism towards the endless procession of me-too stories. Given the asset gathering challenges being faced in Australia (and further afield), it’s not surprising that New Zealand is experiencing a growing volume of foreign managers crossing the ditch to present their investment capabilities. Whilst many of these ‘tourists’ have an initial preference towards institutional targets, some venture into the retail and wholesale neighbourhoods. With a few notable exceptions, their success in raising meaningful assets from these fly-in-fly-out approaches is patchy at best, despite being greeted with a genuine appreciation for the meeting. More recently, entrepreneurial Kiwi groups have targeted offshore managers with assurances of significant levels of support, which

is dependent upon the manager’s development of local product structures known as Prescribed Investor Rate funds (PIR Funds). Unfortunately, this “build it and they will come” approach often ends in tears, as managers come to terms with forfeiting a reasonable margin in exchange for product structures that are without any meaningful audience. Locally, the funds management scene is relatively small and is dominated by larger manufacturers who enjoy firstmover advantages of being default KiwiSaver providers, with price becoming a meaningful point of difference in a universe that is overrepresented in the conservative risk category. Outside of these, there is a buoyant group of boutique managers offering various flavours of domestic and Australasian investments. Some have ventured into providing global capabilities with mixed success, with very few attempting to promote their expertise back into the Australian market. For domestic equities, the

general industry consensus on capacity is circa $1.2 billion – $1.5 billion of funds under management – which often coincides with the Managers’ decision to increase their direct advertising to investors. Contrary to popular belief, New Zealand is not the seventh state of Australia, with no easy approach in raising assets from the Kiwi industry. Plenty of foreign managers have failed to gain meaningful traction despite frequent visits and – more recently – promises of support in exchange for domestic product structures. The successful solution involves confirming that the investment capability is unique enough to initiate a conversation, combined with a distribution strategy that is both efficient and effective. Attributes such as product structure, institutional versus retail targets, and frequency of meetings all become relatively easy once the market for the capability has been confirmed. Clayton Coplestone is the director of Heathcote Investment Partners, a leading distributor of boutique investment services in New Zealand.

41%

75 %

46%

had borrowed credit in the last 12 months

had difficulty getting help from financial services in the last 12 months

had family help them with money

Source: The Indigenous Financial Resilience 2018 report

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BOUNCING BACK FROM THE END OF THE BOOM Laura Dew writes that the Australian Commodities and Energy sector has recovered well since the end of the mining boom, with demand for resources now extending beyond just fossil fuels. IN A COUNTRY where resources make up nearly three-quarters of national exports and are expected to generate some $252 billion in 2019, it is no surprise that commodities and energy funds are a popular choice, but investors need to be mindful of risks. The mining boom is well documented for taking place between 2005-2011 but when demand weakened, prices fell sharply until bottoming out in January 2016. Since then, however, the sector has been rebounding and has now risen 121 per cent since its lowest point. Over the past year, the ASX 200 Resources index has risen 11.8 per cent over the past 12 months which compares favourably with returns of 7.5 per cent over one year by the S&P ASX 200. The government has also released a National Resources Statement, its first long-term plan for the resources sector in 20 years and an indicator of the

demand expected for resources going forward. In the statement, the Australian Government said: “Significant opportunities exist for new and expansion projects across most mineral and energy commodities as growing demand begins to fully absorb the supply overhangs of the last decade. “Global demand for resources is projected to grow at a steady rate over coming decades, driven by growing populations and economic development in emerging economies.”

FUND PERFORMANCE According to FE Analytics, there are 19 funds in the ACS Commodity and Energy sector, 10 of which are exchange traded funds (ETFs), across a variety of sectors such as agriculture, mining, gold and resources. Jun Bei Lei, portfolio manager at Tribeca Investment Partners, said an active manager was the best way

for investors to access the sector. “If you don’t have the expertise, active managers are good at what they do and look globally so they are an easier way to play resources than buying the physical commodity.” This was echoed by David Bassanese, chief economist at BetaShares: “Resources are more volatile than other sectors, there is a level of complexity required when investing in them so if you don’t have that knowledge then consider a diversified resources fund.” The best-performing funds over the year to 27 May were both Australian resources ETFs, from VanEck and BetaShares, both returning 11 per cent. At the other end of the spectrum was an active fund run by Terra Capital, Terra Capital Natural Resources, which invests in micro-cap natural resources companies and lost 27 per cent over the same period. Terra Capital, in particular, is a good example of the vagaries of investing in resources as its fall in

Chart 1: Five-year performance of the S&P ASX 200 v the Commodity and Energy sector to 28 May, 2019

Source: FE Analytics

08MM0606_21-39.indd 21

LAURA DEW

2018 proceeded an extremely strong run in 2017 when it returned more than 74 per cent. In a note to clients, the firm blamed lagged performance of small and mid-cap energy names for the downturn this year. Resources funds can be more volatile than other sectors however, as they are more sensitive to economic and regulatory developments. There are also question marks over what can be included in a ‘resources’ fund, leaving investors potentially invested in dubious companies if they don’t do their homework. Bassanese said: “Iron ore and oil have been performing strongly but agriculture has been weak due to poor growth conditions. They are a diverse group so you have to know what you are doing.” “Resources are absolutely more risky than other sectors,” said Liu. “They give good rewards if you buy at the right time of the cycle but supply will always come on so you have to be mindful of that risk.” Looking at the outlook for the sector, the push for electric cars is already fuelling demand for materials such as cobalt and lithium. However, Bassanese cautioned investors from getting caught up in market hype. “Fossil fuels are popular but in the long term newer areas such as lithium and renewable energy may do relatively well. But I would caution investors to be wary of buying into a strongly-rising market and not to get caught up in speculative bubbles.”

30/05/2019 11:17:43 AM

INVESTMENT CENTRE

a part of

ACS CASH - AUSTRALIAN DOLLAR

ACS EQUITY - AUSTRALIA EQUITY INCOME

Fund name

Macquarie Australian Diversified Income ATR in AU

0.34

2.75

3.15

Armytage Australian Equity Income ATR in AU

3.22

9.54

10.31

110

Macquarie Diversified Treasury AA ATR in AU

0.32

2.72

3.09

Nikko AM Australian Share Income ATR in AU

2.76

5.97

9.98

109

Mutual Cash Term Deposits and Bank Bills B ATR in AU

0.19

2.29

2.27

Lincoln Australian Income Wholesale ATR in AU

2.94

13.37

9.67

Pendal Stable Cash Plus ATR in AU

0.19

2.23

2.25

Plato Australian Shares Income A ATR in AU

0.7

9.3

9.11

103

Mutual Cash Term Deposits and Bank Bills A ATR in AU

0.19

2.28

2.24

Lincoln Australian Income Retail ATR in AU

2.86

12.77

8.91

Australian Ethical Income Wholesale ATR in AU

0.21

2.21

2.19

Legg Mason Martin Currie Equity Income X ATR in AU

1.91

6.43

8.45

102

CFS Colonial First State Wholesale Strategic Cash ATR in AU

0.19

2.05

Zurich Investments Equity Income Pool ATR in AU

1.92

9.41

8.23

IOOF Cash Management Trust ATR in AU

0.15

2.08

2.02

UBS IQ Morningstar Australia Dividend Yield ETF ATR in AU

4.84

12.81

7.99

107

Mercer Cash Term Deposit Units ATR in AU

0.18

2.05

2.02

Lazard Defensive Australian Equity ATR in AU

1.71

5.79

7.76

Macquarie Treasury ATR in AU

0.31

2.01

1.99

Legg Mason Martin Currie Equity Income A ATR in AU

1.84

5.6

7.68

102

Crown Rating

Risk Score

ACS EQUITY - ASIA PACIFIC EX JAPAN

Crown Rating

Risk Score

ACS EQUITY - AUSTRALIA SMALL/MID CAP

Fund name

Schroder Asia Pacific Wholesale ATR in AU

3.4

9.43

21.3

Advance Asian Equity Wholesale ATR in AU

2.97

4.48

19.81

Advance Asian Equity ATR in AU

2.89

3.49

Fidelity Asia ATR in AU

2.8

SGH Tiger ATR in AU

Risk Score

Fund name

132

Macquarie Small Companies ATR in AU

5.65

8.03

18.08

122

129

OC Micro-Cap ATR in AU

5.27

4.91

17.91

105

18.68

129

Macquarie Australian Small Companies ATR in AU

5.68

8.04

17.61

121

14.04

18.59

123

Cromwell Phoenix Opportunities ATR in AU

4.31

6.72

16.44

106

0.7

13.97

18.46

128

4.86

11.87

15.97

116

Premium Asia ATR in AU

2.44

4.99

16.86

140

SGH Emerging Companies Professional Investors ATR in AU

Maple-Brown Abbott Asian Investment Trust ATR in AU

4.59

19.96

15.78

141

4.81

6.47

15.95

121

Smallco Investment Manager Smallco Investment ATR in AU Fidelity Future Leaders ATR in AU

3.51

13.82

15.6

112

2.37

11.82

15.5

Crown Rating

Risk Score

Maple-Brown Abbott Asia Pacific Trust ATR in AU

4.09

5.83

15.71

111

Pendal MicroCap Opportunities ATR in AU

CI Asian Tiger ATR in AU

4.26

11.53

15.61

Ophir Opportunities Ordinary ATR in AU

8.43

14.52

14.98

141

T. Rowe Price Asia Ex Japan ATR in AU

2.09

6.05

15.54

128

Smallco Investment Manager Smallco Broadcap ATR in AU

5.44

18.8

14.77

136

ACS EQUITY - AUSTRALIA

ACS EQUITY - EMERGING MARKETS

Fund name

DDH Selector Australian Equities ATR in AU

7.36

19.2

16.41

Lincoln Australian Growth Wholesale ATR in AU

2.44

21.83

Macquarie Australian Shares ATR in AU

2.3

Dimensional Australian Value Trust ATR in AU

Risk Score

Fund name

133

JPMorgan Emerging Markets Opportunities ATR in AU

3.86

6.28

18.75

118

14.74

106

Legg Mason Martin Currie Emerging Markets ATR in AU

3.07

1.21

18.58

129

8.29

14.44

100

Fidelity Global Emerging Markets ATR in AU

4.1

7.45

16.2

103

1.95

8.29

14.28

111

2.48

3.03

16.05

106

Solaris High Alpha Australian Equity Inst ATR in AU

MFS Emerging Markets Equity Trust ATR in AU

2.42

10.82

14.1

106

OnePath Wholesale Global Emerging Markets Share ATR in AU

2.57

3.79

15.76

106

Macquarie Wholesale Australian Equities ATR in AU

2.31

8.09

14.02

101

Schroder Global Emerging Markets Wholesale ATR in AU

2.96

1.26

15.53

114

Lincoln Australian Growth Retail ATR in AU

2.39

21.06

13.9

106

CFS Realindex Emerging Markets A ATR in AU

1.83

1.84

15.1

111

Macquarie Australian Equities ATR in AU

2.3

8.05

13.85

100

Pendal Global Emerging Markets Opportunities-WS ATR in AU

0.89

3.12

14.89

Bennelong Australian Equities ATR in AU

3.72

10.19

13.62

107

CFS FirstChoice Wholesale Emerging Markets ATR in AU

3.71

2.15

14.56

117

Legg Mason Martin Currie Select Opportunities X ATR in AU

2.45

2.51

13.44

110

Macquarie True Index Emerging Markets ATR in AU

3.08

1.82

14.28

114

08MM0606_21-39.indd 22

Crown Rating

Risk Score

29/05/2019 2:52:58 PM

INVESTMENT CENTRE

a part of

ACS EQUITY - GLOBAL

ACS EQUITY - INFRASTRUCTURE

Fund name

Hyperion Global Growth Companies B ATR in AU

6.24

28.52

24.86

125

CFS FirstChoice Acadian Wholesale Geared Global Equity ATR in AU

5.11

10.65

23.14

CFS Generation WS Global Share ATR in AU

5.82

22.76

Zurich Investments Concentrated Global Growth ATR in AU

5.05

CC Marsico Global Institutional ATR in AU

Crown Rating

Risk Score

Fund name

Crown Rating

Risk Score

Macquarie Global Infrastructure Trust II A ATR in AU

37.37

30.62

205

253

Macquarie Global Infrastructure Trust II B ATR in AU

36.83

30.45

202

21.9

113

BlackRock Global Listed Infrastructure ATR in AU

2.05

24.22

14.12

24.13

20.73

133

Macquarie True Index Global Infrastructure Securities ATR in AU

1.72

20.74

12.19

6.18

15.91

20.53

136

Lazard Global Listed Infrastructure ATR in AU

2.36

8.83

12.14

CC Marsico Global B ATR in AU

6.2

15.45

20.13

136

0.97

16.26

11.76

105

Loftus Peak Global Disruption ATR in AU

Redpoint Global Infrastructure Retail ATR in AU

6.5

24.67

20.05

158

1.17

8.39

11.64

T. Rowe Price Global Equity ATR in AU

Mercer Global Unlisted Infrastructure ATR in AU

3.93

16.55

18.82

116

0.87

19.95

11.6

Montgomery Global ATR in AU

6.7

16.77

18.61

115

RARE Infrastructure Income A ATR in AU

Legg Mason Martin Currie Global Long-Term Unconstrained A ATR in AU

1.96

18.46

11.59

3.88

24.71

18.19

109

ClearView CFML Colonial Infrastructure ATR in AU AMP Capital Global Infrastructure Securities Unhedged Wholesale ATR in AU

1.61

22.65

11.24

102

Fund name

BT Technology Retail ATR in AU

7.15

25.73

27.93

160

8.53

29.68

23.66

149

ACS EQUITY - GLOBAL HEDGED Fund name

Zurich Investments Hedged Concentrated Global Growth ATR in AU

4.52

16.68

17.65

144

Evans And Partners International Hedged B ATR in AU

6.21

23.61

15.69

116

Crown Rating

Risk Score

ACS EQUITY - SPECIALIST Crown Rating

Risk Score

Evans And Partners International Hedged ATR in AU

6.18

22.94

15.06

116

Magellan Global Equities (Currency Hedged) (Managed) ATR in AU

CFS Wholesale Global Technology & Communications ATR in AU

4.28

16.75

14.88

113

Fiducian Technology ATR in AU

5.01

21.08

22.98

175

Magellan Global Hedged ATR in AU

4.24

16.54

14.63

104

4.48

16.71

119

2.33

6.45

14.49

114

Platinum International Brands C ATR in AU

5.51

Russell Global Opportunities NZ Hedged A AUD ATR in AU Macquarie Arrowstreet Global Equity Hedged ATR in AU

5.12

9.2

14.8

110

2.16

6.41

13.83

120

Platinum International Technology C ATR in AU

Fidelity Hedged Global Equities ATR in AU

-2.75 13.19

14.14

125

3.74

7.67

13.65

113

Platinum International Health Care C ATR in AU

Zurich Investments Hedged Global Growth Share ATR in AU

-2.2

13.77

13.11

151

3.97

10.95

13.6

131

CFS Wholesale Global Health & Biotechnology ATR in AU

Cooper Investors Global Equities Hedged ATR in AU

3.4

10.83

13.46

110

6.6

12.82

103

CFS Colonial First State Australian Share Growth ATR in AU

3.95

11.25

9.54

108

IML Industrial Share ATR in AU

2.93

5.87

7.43

ACS EQUITY - GLOBAL SMALL/MID CAP Crown Rating

Fund name

Yarra Global Small Companies ATR in AU

4.26

9.73

14.53

Pengana Global Small Companies ATR in AU

6.31

0.2

13.12

Bell Global Emerging Companies ATR in AU

3.37

19.62

12.98

Mercer Global Small Companies Shares ATR in AU

4.43

6.91

Dimensional Global Small Company Trust ATR in AU

4.75

OnePath Optimix Wholesale Global Smaller Companies Share Trust B ATR in AU

3.62

OnePath Optimix Wholesale Global Smaller Companies Share Trust A ATR in AU

3.59

4.13

12.24

111

Supervised The Supervised ATR in AU

2.52

1.13

11.64

Pengana International Ethical Opportunity ATR in AU

3.07

5.65

Fiducian Global Smaller Companies and Emerging Markets ATR in AU

3.84

1.92

08MM0606_21-39.indd 23

Risk Score 118

Barwon Global Listed Private Equity ATR in AU

ACS FIXED INT - AUSTRALIA / GLOBAL Fund name

Macquarie Dynamic Bond ATR in AU

0.46

6.29

4.18

105

PIMCO Diversified Fixed Interest ATR in AU

0.42

5.81

4.12

12.7

123

PIMCO Diversified Fixed Interest Wholesale ATR in AU

0.41

5.75

4.07

5.08

12.55

120

IOOF MultiMix Diversified Fixed Interest ATR in AU

0.49

4.9

3.95

4.29

12.45

111

Onepath Wholesale Diversified Fixed Interest Trust ATR in AU

0.46

5.66

3.86

ClearView CFML Fixed Interest ATR in AU

0.45

4.91

3.71

UBS Diversified Fixed Income Fund ATR in AU

0.32

5.74

3.67

101

CFS FirstChoice Wholesale Fixed Interest ATR in AU

0.39

6.19

3.64

11.38

BT Wholesale Multi-manager Fixed Interest ATR in AU

0.29

5.84

3.54

11.11

AMP Capital Specialist Diversified Fixed Income A ATR in AU

0.2

5.21

3.47

Crown Rating

Risk Score

29/05/2019 2:53:10 PM

INVESTMENT CENTRE

a part of

ACS FIXED INT - AUSTRALIAN BOND

ACS FIXED INT - GLOBAL STRATEGIC BOND

Fund name

Elstree Enhanced Income ATR in AU

0.46

7.05

7.49

DDH Preferred Income ATR in AU

0.49

5.05

6.74

Legg Mason Western Asset Australian Bond X ATR in AU

0.36

8.03

4.74

BlackRock Enhanced Australian Bond ATR in AU

0.35

7.96

4.54

Macquarie Core Australian Fixed Interest ATR in AU

0.36

7.85

4.5

Legg Mason Western Asset Australian Bond A ATR in AU

0.33

7.63

4.4

AMP Capital Wholesale Australian Bond ATR in AU

0.32

7.88

4.34

ACS FIXED INT - INFLATION LINKED BOND

OnePath ANZ Fixed Income ATR in AU

0.46

8.07

4.34

Fund name

Macquarie Australian Fixed Interest ATR in AU

0.34

7.62

4.26

Ardea Real Outcome ATR in AU

0.6

5.81

5.6

0.18

4.24

5.27

Macquarie Enhanced Australian Fixed Interest ATR in AU

PIMCO Global RealReturn Wholesale ATR in AU 0.27

Ardea Premier Australian Inflation Linked Bond ATR in AU

0.72

7.31

4.73

Ardea Australian Inflation Linked Bond ATR in AU

0.69

4.46

Macquarie Inflation Linked Bond ATR in AU

0.85

7.7

3.96

Morningstar Global Inflation Linked Securities Hedged Z ATR in AU

0.4

4.57

3.3

Mercer Australian Inflation Plus ATR in AU

-0.11

3.5

3.15

Aberdeen Standard Inflation Linked Bond ATR in AU

0.75

4.69

2.84

7.97

Crown Rating

4.26

Risk Score

ACS FIXED INT - DIVERSIFIED CREDIT Crown Rating

Risk Score

Fund name

Crown Rating

Risk Score

Dimensional Global Bond Trust NZD ATR in AU

-1.14

8.24

5.14

Pimco Dynamic Bond C ATR in AU

0.65

3.53

4.63

Pimco Dynamic Bond Wholesale ATR in AU

0.65

3.41

4.53

Dimensional Global Bond Trust AUD ATR in AU

0.18

6.61

3.72

JPMorgan Global Strategic Bond ATR in AU

0.8

2.46

3.48

IOOF Strategic Fixed Interest ATR in AU

0.27

3.34

2.52

Australian Unity Strategic Fixed Interest Trust Wholesale ATR in AU

0.51

3.06

2.51

T. Rowe Price Dynamic Global Bond ATR in AU

-0.1

-0.27

1.42

Crown Rating

Risk Score

Fund name

Premium Asia Income ATR in AU

2.26

9.49

9.81

Bentham High Yield ATR in AU

1.82

5.8

7.94

Bentham Global Income NZD ATR in AU

-0.24

2.78

7.74

DirectMoney Personal Loan ATR in AU

0.68

8.36

7.66

Bentham Syndicated Loan NZD ATR in AU

0.11

4.32

7.35

Fund name

Pimco Capital Securities Wholesale ATR in AU

2.37

2.98

7.25

AU Property Securities Growth Units ATR in AU

-1.81

22.91

10.83

161

Bentham Syndicated Loan ATR in AU

1.52

2.46

6.52

Charter Hall Maxim Property Securities ATR in AU

-1.39

10.75

Bentham Global Income ATR in AU

1.15

0.82

6.47

CFS Wholesale Global Credit ATR in AU

-0.43

10.15

10.19

0.95

6.37

5.5

Crescent Wealth Property Retail ATR in AU

Macquarie Core Plus Australian Fixed Interest ATR in AU

UBS Property Securities Fund ATR in AU

-1.6

21.64

10.14

125

0.35

9.5

5.17

Macquarie Property Securities ATR in AU

-2.99

20.73

137

Macquarie Wholesale Property Securities ATR in AU

-2.99

20.52

9.88

137

ACS FIXED INT - GLOBAL BOND

18.22

9.79

122

-2.24

23.01

9.77

129

AMP Capital Property Securities ATR in AU

-2.26

22.99

9.67

130

5.65

AU Property Securities Ordinary Units ATR in AU

-0.15

15.52

9.22

5.58

Pimco Income Wholesale ATR in AU

0.81

4.63

5.93

Invesco Senior Secured Loans ATR in AU

1.56

3.42

Invesco Wholesale Senior Secured Income ATR in AU

1.54

3.38

Russell Global Bond AUD ATR in AU

-1.29

2.11 5.28

5.12 4.52

Crown Rating

Risk Score

42 52

Mercer Emerging Markets Debt ATR in AU

0.74

Russell Global Bond NZD ATR in AU

-1.29

5.28

4.32

PIMCO Global Bond ATR in AU

0.33

4.52

4.22

-2.34

Risk Score

-2

0.69

Resolution Core Plus Property Securities A PF ATR in AU

Crown Rating

AMP Capital Listed Property Trusts ATR in AU

Fund name

Supervised Global Income ATR in AU

ACS PROPERTY - AUSTRALIA LISTED

4.42

Franklin Templeton Multisector Bond I ATR in AU

1.71

-0.07

4.21

PIMCO Global Bond Wholesale ATR in AU

0.33

4.48

4.18

ACS PROPERTY - GLOBAL Fund name

Crown Rating

Risk Score

Premium Asia Property ATR in AU

-1.5

9.61

150

Quay Global Real Estate C ATR in AU

0.62

20.93

11.74

Quay Global Real Estate A ATR in AU

0.6

20.95

11.28

APN Asian REIT ATR in AU

0.46

20.24

10.81

Resolution Capita Global Property Securities Unhedged II ATR in AU

0.1

16.83

10.25

CFS Colonial First State Wholesale Geared Global Property Securities ATR in AU

0.88

11.43

10.01

217

IOOF Specialist Property ATR in AU

-0.13

15.21

9.63

Resolution Capita Global Property Securities Hedged II ATR in AU

-0.63

11.24

9.41

Advance Global Property ATR in AU

-0.45

12.96

9.19

Perpetual Private Real Estate Implemented Portfolio ATR in AU

-0.99

15.53

9.1

The tables and data contained in the Investment Centre are intended for use by professional investors and advisers only and are not to be relied upon by any other persons.

08MM0606_21-39.indd 24

29/05/2019 2:53:20 PM

HOW DO YOU BENCHMARK YOUR PORTFOLIO PERFORMANCE? Australiaâ&#x20AC;&#x2122;s top advisers understand the value of relevant benchmarks and objective portfolio comparisons. FE Analytics unlocks this data; providing access to the leading source of SMA and superfund data as well as unique multi-asset benchmarks.

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OR CONTACT Bruce Jenner: bruce.jenner@financialexpress.net or 0425 234 275 For more information about FE Analytics, visit www.financialexpress.net

5258_FE_print2.indd 25

30/05/2019 12:02:30 PM

26 | Money Management June 6, 2019

Infrastructure

BUILDING A PORTFOLIO THAT TAKES YOU PLACES As well as offering diversification and an opportunity to benefit from the world’s booming population growth, infrastructure investments can help recession-proof portfolios, Chris Dastoor writes. STARSHIP MAY HAVE built their city on rock and roll, but in the real world, cities are built on airports, transport lines, and telecommunication networks. In other words, on infrastructure. And as the planet’s population rapidly grows, cities are being built faster than ever. So, advisers looking to diversify and recession-proof clients’ portfolios could do worse

08MM0606_21-39.indd 26

than to build them around infrastructure investments. Infrastructure is considered an effective asset class because of monopolistic market conditions, with high barriers to entry and returns underpinned by regulation or contract. It’s also considered a defensive asset class, as it generally has lower volatility of earnings and a higher yield to the new broader equity market.

AN ASSET CLASS FOR ALL SEASONS An infrastructure portfolio can be positioned to take advantage of both the opportunities and challenges the asset class offers, as it comprises two quite distinct and macro diverse asset subsets: regulated utilities and user pays. Regulated utilities (i.e. electricity, water and gas providers) can be adversely

impacted by rising interest rates/ inflation and are slower to realise the benefits of economic growth. User pay assets are where users pay to use the asset (airports, toll roads, rails and ports), and they are positively correlated to gross domestic product (GDP) growth and wealth creation. Sarah Shaw, chief investment officer (CIO) and portfolio manager of 4D Infrastructure,

28/05/2019 2:38:40 PM

June 6, 2019 Money Management | 27

Infrastructure

said infrastructure is an asset class for all stages of the investment cycle. “The way we look at infrastructure is there are two quite distinctive subsectors within infrastructure and their popularity will come and go depending on the macro environment,” Shaw said. “This is why infrastructure is a great asset class for all points in an economic cycle or market cycle, because you have these really distinct subsectors.” Shane Hurst, portfolio manager for RARE Infrastructure Income Fund, said within a portfolio, infrastructure offers investors the potential for lower volatility, stable cash flows, inflation protection and diversification. “Due to the essential nature of infrastructure assets, demand is relatively stable providing lower volatility than traditional equities, and resiliency of infrastructure revenue during various business cycles,” Hurst said. “Even at times of economic weakness, consumers continue to use water, electricity and gas, drive cars on toll roads and use other essential infrastructure services.” Gerald Stack, Magellan’s head of infrastructure, can consider himself an authority on infrastructure investments, having come away with Money Management’s Fund Manager of the Year award in Infrastructure Securities last month for the Magellan Infrastructure fund. “If you think about infrastructure equity, it needs to provide different risk/return characteristics, and what we believe infrastructure delivers you is very reliable and

08MM0606_21-39.indd 27

predictable returns,” Stack said. “That’s what we believe investors expect out of infrastructure and that’s the promise.” Stack said infrastructure should be about making sure you are getting reliable earnings and cash flows. “That’s the magic of infrastructure, the fact that earnings are reliable and dependable, no matter what the world throws at them,” Stack said. “The specific test we apply is 75 per cent of earnings have to be derived from either regulated utilities or transport infrastructure assets. “If you apply that test, then our universe as we measure it is about 140 stocks, with a market cap of about one and a half trillion US dollars.”

HUNTING FOR VALUE OPPORTUNITIES For Magellan, utilities are the bigger part of their universe, contributing about 60 per cent, while transport infrastructure contributes about 40 per cent. “Within transport infrastructure, space, airports and toll roads had traditionally been very popular, and communications assets are quite popular as well,” Stack said. “And now that popularity will ebb and flow depending upon the valuation opportunity, we would say today that everything looks reasonably priced. “Therefore, there will be the odd opportunities that are particularly attractive, but we don’t see anything that’s structurally cheap today.” Kirsten Whitehead, QIC head of portfolio management of global infrastructure, said the opportunity set for infrastructure is huge and

“Now that popularity will ebb and flow depending upon the valuation opportunity, we would say today that everything looks reasonably priced.” - Gerald Stack, Magellan no two assets are the same. However, there are some areas they believed offered attractive relative value supported by long-term growth thematics. Infrastructure is one of those foundation themes, but technology and societal change drove them to auxiliary options. “Consider the growing importance – and recognition of the importance – of energy efficiency and sustainability, amongst communities, governments and investors,” Whitehead said. “This truly global drive for waste reduction and sustainable waste treatment is creating an enormous opportunity for investment in the waste-toenergy sub-sector. “And we only see this increasing, thanks to China’s ban on waste imports, and the direct link to increasing urbanisation.” An explosive growth in demand for data and computing had made digital infrastructure another key area of focus for QIC. “Telecommunication is one of the most capital-intensive sectors globally,” Whitehead said. “It will require a significant capital infusion to accommodate the roll-out of 5G, national fibre networks, the centralisation of computing and the ‘Internet of Things’.”

The final theme they look at is decentralisation, where infrastructure sub-sectors transition toward decentralised models of delivery. This is due to trends in technological innovation and heightened customer expectations for customisation, efficiency, responsiveness and resilience. “Energy assets are becoming smaller in scale, decentralised in configuration, modular in deployment and smarter in application,” Whitehead said. “Urban mobility and healthcare services are also increasingly being delivered by highly-tailored networks of distributed assets. “The outlook for these assets is robust for those infrastructure investors that have long-term ‘patient’ capital and the capability to actively manage such dynamic businesses.”

DOMESTIC V INTERNATIONAL V EMERGING ECONOMIES One justification for a global perspective of portfolio diversification across geographies, sectors, regulators and political regimes as that it ultimately dampens down risk. This opened access to different economies and market Continued on page 28

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Infrastructure

Continued from page 27 cycles by investing in both developed and developing markets, RARE believed. “Currently the RARE Value Universe has 200 global companies that satisfy their definition of infrastructure, but only seven are Australian companies,” Hurst said. And when it comes to the success of taking a global approach, the proof is in the pudding. According to FE Analytics, of the top 10 performing funds in the Infrastructure Equities sector over the last five years, only Magellan had more than 20 per cent of their regional weightings in Australia. The two top performers were both focused on offshore investments. The Macquarie Global Infrastructure Trust saw the highest performance, with annualised returns of 21.06 per cent over the five-year period to

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last month’s end, followed by the same manager’s True Index Global Infrastructure Securities fund, with a performance of 13.4 per cent. Stack said there’s nothing wrong with investing in domestic infrastructure however, and there are great infrastructure companies in Australia. Internationally there’s a greater degree of choice though, which means you’re more likely to find stocks that are mispriced. “When it comes to emerging markets, what they particularly offer you is growth,” Stack said. “Toll roads where traffic grows, airports where passengers grow and you get a passenger service charge - they can be particularly attractive in emerging markets.” Whitehead said QIC had a global remit, and the ability to invest both domestically and internationally.

This ensured they were able to find assets which represented the most attractive relative value for their client’s portfolios. “The ability to invest globally also provides us with important portfolio diversification, particularly where we gain exposure to offshore macroeconomic drivers such as inflation and economic growth,” White said. “That said, international investment also brings foreign exchange risk, which is why QIC has a strong in-house capability to appropriately manage this.” For Shaw, the difference between domestic, international and emerging markets wasn’t distinctive as it comes down to a county-by-country basis. “We determine invest-ability at the country level first, based on things like economic, financial and political risk,” Shaw said. “Then we take it down into the

asset level, and really look at whether that country environment is favouring utility investments or macro-sensitive user pay investments.” Hurst said the main advantage of investing in emerging markets is exposure to its secular growth. “Although all emerging markets will go through periods of higher and lower growth, at RARE we seek assets that are directly leveraged to the longerterm growth thematic and the associated increased demand for higher quality infrastructure from the growing middle classes in these economies,” Hurst said. “Emerging market investing also reduces risk in RARE’s strategies, with exposure to different economic and market cycles.” Stack said emerging markets offered choice and high growth, but the companies and governing environment are less mature, so there can be high risk. “The fact there are opportunities in those markets means that from time to time, if you can identify locations where not just companies, but industries are not particularly mature, then you can find pretty exciting opportunities,” Stack said. He pointed to Mexico as an example: despite being a less robust economy with the likelihood of swings between highs and lows, it still offered opportunity. “There’s a secular change of people moving from buses to aviation, that’s meant the number of passengers using airplanes in Mexico is growing strongly,” Stack said. “It’s attractive, and emerging markets give you opportunity, but there’s also a different set of risks.”

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Infrastructure

Chart 1: Top infrastructure securities funds over the ﬁve years to April’s end

Source: FE Analytics

4D Infrastructure relied on emerging markets for 34 per cent of its portfolio, so watching geopolitical trends and policies was a priority. They were optimistic about a US/China trade deal being done, which Shaw said will support the Chinese recovery and continue to evolve their middle class. But in terms of which emerging markets had the strongest outlooks, it might be Indonesia that remained the most attractive option. This was largely due to their emerging middle class and a strong political environment on the back of their last election, with incumbents focused on infrastructure investments. “We’re a big believer in the emergence of the middle class, and when Indonesia is the third largest population in the world

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that emergence of the middle class is really going to help their country to evolve and support infrastructure investments,” Shaw said. “We also believe Indonesia was unfairly sold-off last year as a result of the US Federal Reserve interest rate hike, and that was a legacy issue about the exposure of Indonesia to US dollars, which is much lower today than it has been historically.”

RECESSION-PROOFING Shaw said if we see the economy shift towards a recession, they would move their exposure from user pay assets into regulated utilities. Their current portfolio is a diversified mix of both user pay and regulated utilities, with regulated utilities offering downside support.

However, they are currently overweight with user pay because the macro outlooks remained positive. “It’s not as strong as it has been, but it is still positive territory,” Shaw said. “But if we see that shift, if we see error by the US Federal Reserve or the US/Chinese trade deals totally collapse or a sustaining version of the yield curve, all of these factors we’re following very, very closely.” “I’m not saying in a market downturn that utilities won’t fall, but they won’t fall as much, and the earnings resilience will still be there.” RARE finds by tilting towards defensive utility stocks in a poor economic environment, and towards GDP-sensitive user pays stocks in a strong economic environment, they’re safe regardless of the economic outlook.

“In the end RARE invests in essential service infrastructure, with the underlying assets delivering consistent cashflows through all parts of the economic cycle,” Hurst said. “This stability in underlying cashflows ensures in times of economic stress, infrastructure assets provide a defensive exposure in listed markets.” Stack said their key contingency was how their portfolio was defined; regulated utilities get a regulated return, irrespective of how many customers they serve. “For transport infrastructure, toll roads, airports and data communications networks, there are underlying trends in terms of the number of people who use the roads, airports, or their mobile phones,” Stack said. “That means in the short term a recession may lead to some impacts on underlying financial performance, but it should be somewhat muted.” “Over the long run it should be largely irrelevant, so we would feel a recession is unlikely to have a significant impact on the underlying financial performance of those assets.” At QIC, they’re deliberately planning around this happening and they’re focused on building truly diversified portfolios that demonstrate resilience against these types of macro events. “We have a long history of successfully building–from the ground up–diversified portfolios which deliver strong and robust returns throughout market cycles, taking into account both macro and asset-level risks,” Whitehead said. “If that’s a core capability, then you don’t need a contingency.”

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Election wrap-up

HUME INHERITS A PORTFOLIO OF UNFINISHED BUSINESS Mike Taylor writes that the new assistant minister for Superannuation, Financial Services and Financial Technology will find some urgent matters sitting in her portfolio in-tray. WHEN THE NEW assistant minister for Superannuation, Financial Services and Financial Technology, Senator Jane Hume, received her Treasury Department briefing on her portfolio responsibilities in late May, she would have quickly become aware of the challenges immediately confronting her. Hume, who succeeded in making a name for herself as chair of the Senate Standing Committee on Economics as it traversed issues such as the performance of the Australian Securities and Investments Commission (ASIC) and who had previously worked in banking and for AustralianSuper, will know that amongst her most pressing tasks will be tidying up the roll-out and implementation of the Financial Adviser Standards and Ethics Authority (FASEA) regime. In doing so, she will be hearing from both the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA) that FASEA has not met a number of deadlines and that, as a consequence, the Government should act to allow financial planners more time to prepare for and pass the FASEA financial planning exam. The reality for Hume is that while she is succeeding former Assistant Treasurer, Stuart

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Robert in the portfolio she is, in reality, inheriting the regime and appointments left in place by the now-retired Kelly O’Dwyer. Among those appointments are the chair of FASEA, Catherine Walter and the chair of the Australian Financial Complaints Authority (AFCA), former Howard Government minster, Helen Coonan – both of whom are regarded as having placed their particular mark on the two relatively new bodies. Hume would already be familiar with the changing of the senior executive guard at ASIC, with chair Greg Medcraft being replaced by James Shipton while deputy chair, Peter Kell, resigned and gave way to two deputy chairs – former Productivity Commission deputy chair, Karen Chester and Queens Counsel, Daniel Crennan. As chair of the Senate Economic Committee, Hume signalled her satisfaction with the changes at ASIC, going to the trouble of congratulating Shipton on the appointment of Crennan, stating: “I am actually so impressed by the calibre of the people you have recruited to ASIC”. In 2018, Hume also showed her background in financial services when her questioning resulted in former ASIC deputy chair, Kell admitting that the regulator had never actually looked directly at

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Election wrap-up

industry funds with respect to their compliance with the best interest duty under the Future of Financial Advice (FoFA) legislation.

FASEA THE IMMEDIATE PRIORITY In listening to the overtures from the AFA and the FPA, Hume will also quickly come to realise that the two organisations have begun speaking with one voice on key policy issues, having been taught by the recent history of mortgage broking commissions that industry unity can win difficult arguments. Hume will also need to come to terms with the rapidly approaching deadlines attached to the imposition of the FASEA Code of Ethics and the need for ASICsanctioned code monitoring bodies. In doing so, the new assistant minister will need to consult upwards to the Treasurer, Josh Frydenberg, on whether the Morrison Government will pursue its original intentions with respect to a code-monitoring regime or whether it will follow the comments of the man who headed up the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Kenneth Hayne. While the Government’s original intention with respect to codemonitoring envisaged a regime run by professional bodies such as the FPA and AFA or by consultancies such as Deloitte or KPMG, Hayne recommended the establishment of a “new disciplinary system for financial advisers”. Given that financial advisers will have to comply with the new FASEA code of ethics from 1 January, next year and that code monitoring bodies need to lodge their applications with ASIC by 30 June for the regime to be in place by 15 November, this leaves the

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Government little time to make a firm decision. The Government’s initial response to the Royal Commission’s recommendations was that it would be introducing a new disciplinary system for financial advisers. However, it remained non-specific about whether this represented a significant deviation from the original FASEA objective of having code-monitoring bodies. The FPA chief executive, Dante De Gori, together with the AFA chief executive, Phil Kewin, confirmed to Money Management that given the looming requirements of the FASEA exam, extracting Government agreement to an extension of the time-frames represented a priority for both organisations. De Gori said that when the Government introduced the FASEA legislation into the Parliament it had signalled that advisers would be given two years to prepare for the examination, but that the time taken by FASEA had meant that this had been effectively reduced to 18 months. The FPA and AFA are hoping that Hume will facilitate the relatively easy legislative/ administrative task of delivering advisers a six-month extension to the exam preparation timetable. However, this will be occurring against the background of FASEA in early May having advised both new entrants and existing advisers to notify their intention to sit the exam, which was allied to setting initial exam dates and locations. Nonetheless, the AFA’s Kewin said he believed it was imperative that advisers be given the time they were promised to prepare. Kewin and De Gori are also speaking with one voice on the question of the FASEA Code of Ethics and code monitoring bodies

In listening to the overtures from the AFA and the FPA, Hume will also quickly come to realise that the two organisations have begun speaking with one voice on key policy issues. in circumstances where the FPA, the AFA, and the SMSF Association, together with the Boutique Financial Planners, the Financial Services Institute of Australasia and the Stockbrokers and Financial Advisers Association, have signed a cooperation agreement to provide a code monitoring solution for members. There is common acknowledgement that the ASICimposed requirements for operating a code monitoring body are both exacting and expensive and the industry will be seeking clarity from the new assistant minister before committing to proceed.

BANK EXITS POSE NEW CHALLENGES The major financial planning bodies will also be seeking clarity from the Government on the future funding of FASEA in circumstances where the initial funding has been substantially underwritten by the banks, which are exiting the industry. The FASEA business plan, released by Treasury, underscored the role of the major banks, naming ANZ, Commonwealth Bank (CBA), National Australia Bank (NAB), Westpac, Bendigo Financial Planning, Macquarie Equities, Suncorp Metway and AMP. The reality confronting FASEA and the Government is that ANZ, Westpac and Suncorp have

already substantially exited the wealth management industry with NAB and CBA looking to follow. The expectation is that the Government will resort to either an industry levy to fund FASEA or adopt a user-pays model, which might more directly affect individual financial planners.

SUPERANNUATION POLICY While the loose-ends around the FASEA regime are regarded as the immediate priority for Hume, the newly-elected Government has already signalled that it has not abandoned its desire to change the default superannuation fund regime. What is more, the Financial Services Council (FSC) made a point of welcoming the re-election of the Coalition Government with the reminder that the default regime remained to be addressed. While the Government has signalled its continuing desire to remove the default regime from the industrial awards regime, it has stopped well short of expressing any strong support for the Productivity Commission’s option of a Top 10 defaults model. The more pressing superannuation policy issue for Hume will be reintroducing the legislation necessary to complete the Government’s Protecting Your Super legislation – something which impacts the commercial underpinnings of insurance inside superannuation.

30/05/2019 11:25:28 AM

32 | Money Management June 6, 2019

AREITs

CHANGING TIMES FOR PROPERTY TRUST INVESTORS The mix of historically low interest rates, low yields and the flow of capital has collectively boosted AREITs and their attractiveness to investors, Grant Berry writes. But at this stage of the property cycle, how much longer is this likely to continue? THE VOLATILITY IN equity markets late last year led to a shift in investors seeking more defensive investment options, with Australian real estate investment trusts (AREITs) regarded as a viable alternative. AREITs generally provide a good source of predictable income driven by long-term lease agreements and supported by tangible assets. As such, they have been an attractive option for advisers and their clients who are seeking stable income as well as capital growth. For investors, listed real estate has the attraction of more predictable income streams than

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many mainstream equities, given contracted rent under lease agreements such as annual fixed increases, CPI inflation increases and, in some cases, inflation plus increases. The other attraction of AREITs is the real tangible nature of real estate. If gearing is low there is the appeal of knowing that there are real assets supporting value. This is transparent through independent valuation processes. AREITs comprise listed real estate entities across various sectors of property including commercial office, large scale retail shopping centres, industrial

and logistic facilities, childcare, retirement and rural-based assets. In addition, several AREITs undertake other activities such as development and thirdparty management, which create additional sources of income. Before the global financial crisis, AREITs had more elevated gearing in a higher interest rate environment and considerably higher pay-out ratios. As a result, there were adjustments to pay-out ratios for mainstream AREITs using the metric Adjusted Funds from Operations (AFFO), which has proven to be a more appropriate measure for

determining sustainable pay-out ratios. In addition, balance sheets are now in better shape in a lower interest rate environment. However, investors need to understand the sources of income streams, as well as the assets and balance sheets that support the investment, particularly as the property cycle reaches its later stages, as some of the drivers of the recent growth may start to taper off. Our view is that we are at a late stage of the property cycle, evidenced by: â&#x20AC;˘ Capitalisation rates are below levels previously experienced in prior peaks;

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AREITs

• Capitalisation rates have converged across sectors as well as quality types; • There have been strong investment flows towards industrial and office property, which will ultimately drive a supply cycle; and • The market is prepared to assign high multiples and growth expectations for higher risk and more cyclical activities, such as development and funds management. At the moment there is considerable pricing dispersion within the AREIT sector and, on our analysis, this is at the widest level since the global financial crisis. Investors and their advisers therefore need to review the drivers of growth for AREITs to ensure they fully understand the risks as well as the opportunities. The market is ascribing a considerable premium for what are considered higher growth groups, with earnings from development and funds management in particular. This is late cycle behaviour and warrants caution. At the other end of the spectrum, we are also observing high quality and lower risk groups trading at discounts, which we believe provides a real opportunity. Across AREITs, there are some REITs that have had more investment support than others - in particular, industrial and office-focused REITs. However, our view is that the rental growth story is more short-term than long-term, as pricing is very conducive for development, which will lead to increased supply. On the other hand, high quality retail REITs, which are traditionally defensive, are trading at discounts to their asset backing. The combination of high quality assets and discount to valuation are, in our view, attractive.

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DRIVERS OF PERFORMANCE There are several factors that have been driving the performance of AREITs. Low interest rates The continuation of historically low interest rates both locally and globally is skewing the fundamentals, leading to pockets of rising valuations past all-time peak levels. Hurdle rates of return demanded by some investors have subsequently reduced, diminishing a margin of safety one should ordinarily and prudently proceed with. On face value, this is via industrial and office exposure, versus retail and residential Low capitalisation rates/yields This has subsequently manifested itself over the cycle via a reduction in the spread in capitalisation rates/ yields between different property classes. E-Commerce and the evolution of retail Some investors are seeking industrial exposure over retail, given a view of online retail superseding physical retail. This thematic has prevailed to such an extent that bottom-quartile industrial property is outperforming top-quartile retail property in the United Kingdom, with Australia on the verge of demonstrating the same phenomenon. Such an outcome is unprecedented and unwarranted, and over long-term, retail produces a far more stable income stream than office and industrial. Flow of capital There is currently an abundance of institutional capital (especially from offshore) seeking Australian property exposure. This capital is not only playing the online retail thematic but also views Australia

more generally as a more transparent and increasingly liquid market. Global (institutional) capital has focused on Australian office and industrial assets. AREITs with funds management operations catering to this institutional capital have been the chief beneficiaries. This has been via acquiring assets and/ or developing product, with the AREIT deriving management, performance and transactional fees for the service, along with direct exposure to the asset(s).

OPPORTUNITIES AND RISKS Pay-out ratios across the AREIT sector are largely self-sustaining, with trusts having diversified their sources of debt, with substantial hedging in place, as well as tenure. Despite this approach, as with all investments, there are risks, namely the potential for sustained rises in interest rates over the longterm. The offset to this is that interest rates generally rise as economic conditions strengthen and inflation pressures emerge. This can be positive with rental growth partially mitigating the risks. There could also be marketbased risks such as overbuilding or a sharp fall in occupancy demand, albeit this is not likely in the short-term. In the case of office properties, the current buoyant conditions supporting new supply will need to be monitored. The best opportunities for distributions are in the top-tier retail portfolios. Traditionally, the income is less volatile as retail property development tends to be demandled, with more stringent planning. Development typically comprises extensions within an existing centre, with major tenants signing longerterm leases and high occupancy levels from specialty tenants. However, there is negative sentiment towards retail property

GRANT BERRY

at present, with lower retail sales growth and the increasing penetration from online sales putting pressure on bricks and mortar tenants. Higher-quality shopping centres, however, will continue to do well, albeit at lower growth rates. Our assessment after the Federal election for the retail and residential sectors is that consumer sentiment will improve, cash rates are likely to fall, there is likely to be a bottoming out in residential, and that some tax offsets are likely to be implemented. Therefore, the retail spending environment should improve along with residential sales activity. This will provide a more positive backdrop for retail and residential-exposed REITs. We are cautious towards those groups with higher sources of non-rent income and particularly given that, in the current environment, the market is prepared to assign very high multiples on some of these income streams. In summary, we are at a late stage of the cycle, and given this we would prefer exposure to: • High quality assets; • AREITs with less cyclical factors; and • AREITs trading at discounts and that are out of favour. Grant Berry is a director and portfolio manager of AREITs for SG Hiscock & Company.

30/05/2019 11:27:00 AM

34 | Money Management June 6, 2019

Superannuation

HOW TO GIVE CLIENTS’ SUPER BALANCES A POST-ELECTION BOOST Making sure clients are doing everything they can to boost their super is always a good idea, Laura Wright believes, and the lead-up to the end of the financial year is a great time to do it. FOLLOWING ON FROM a tumultuous federal election, voters have determined that the Coalition will remain in power. For Australians, changes to financial regulation that have been proposed may, if enacted, affect their current investment, taxation, pension or retirement savings status. Although daily headlines about tax, super, pension and finance issues can seem overwhelming, they also represent an opportunity to get the information and advice you need to make smart decisions now that will pay off later. The long and short of it is, being aware now means you can plan for upcoming changes or take advantage of existing rules before new ones might take their place.

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CRUNCH THE NUMBERS A great place to start – always – is with the hard numbers. There’s no better way to bring your super to life than seeing what impact, in dollar terms, your choices today will have when you really need it. Your options are likely to be different depending on whether you’ve just started out or you’re counting down to retirement; what’s important to understand is that you do have options to influence what your glory days in retirement look like. So, step one is to use online calculators to work out how you’re tracking and the kind of retirement lifestyle you can expect from your current projected super levels. If you think there’s room for improvement (and for most of us,

there is) then below are some suggestions to give your super a boost right now.

WHAT YOU CAN DO RIGHT NOW Super is all about contributions: who makes them, how much and where they come from. As matters stand, you can boost your super simply by knowing the different kinds of contributions you’re eligible to make and receive – and choosing what works for you right now.

PERSONAL LUMP SUM CONTRIBUTIONS WITH A TAX DEDUCTION If you have access to a lump sum (that is, funds not earned from wages or salary) then you might consider putting it into your super

right now. Not only will this boost your balance, but you may be able to claim a tax deduction, so long as the lump sum contribution keeps you below the concessional (or pre-tax) contributions cap of $25,000. The option of claiming a tax deduction for contributions from non-wage or salary earnings has only been available since 1 July 2017. Previously, at least a portion of funds going into super had to be from your wage or salary.

AFTER-TAX CONTRIBUTIONS If retirement is closing in, taking some advice on how to fast track your balance via non-concessional (or after tax) contributions might give you a super boost. The current rules allow you to make a contribution

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Superannuation

“Over time, even small additional amounts can make a major difference and, because they come from your pre-tax earnings, you get great value for your dollar.” of $100,000 per year if you’re aged between 65 and 74. There are quite a number of conditions attached to this kind of contribution, so it’s best to seek advice on your own situation to make sure you don’t end up with an unexpected tax bill. If you’re not in a position to make lump sum contributions, there’s good news. You can still charge up your super by taking advantage of several other contribution types – irrespective of the recent election outcome.

EMPLOYER CONTRIBUTIONS If you’re some way from retirement, asking your employer to make additional contributions to your super from your beforetax earnings is a great way to power up for the future. These employer contributions are also known as salary sacrifices.

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Over time, even small additional amounts can make a major difference and, because they come from your pre-tax earnings, you get great value for your dollar. Currently, the total of your combined employer and salary sacrificed contributions must not be more than $25,000 each year.

GOVERNMENT CO-CONTRIBUTION If, as at 2018/19 you earn less than $52,697, and you make additional after-tax payments into your super, the government can contribute up to $500 to your super account. Both single one-off payments and regular additional payments can attract a co-contribution. How much the government will contribute depends on a range of factors, including your total after-tax contributions and your total wage

or salary. There are also eligibility criteria.

SPOUSE CONTRIBUTIONS You can also either give or receive a super boost for your spouse or partner for a potential super win-win. If you’re a spouse who earns below $37,000 a year and your partner has higher earnings, he or she could receive a tax offset of up to $540 if they make a contribution of $3,000 to your super. The tax offset reduces with lower contributions and higher earnings of the receiving spouse, cutting out at $40,000 per year.

INSURANCE MATTERS Finally, from 1 July, if there have been no contributions made to your super account for 16 months or more (known as an ‘inactive account’), the default (or automatic) levels of life and, in some cases, other forms of

LAURA WRIGHT

insurance that form part of your super will be ‘turned off’. Having insurance that’s appropriate for your age and life circumstances is one of the cornerstones of financial security, so it’s a good idea to check whether your cover will be cancelled, understand what the implications are and, if you need to, seek continued cover or cover from elsewhere. Once again, taking professional advice can help you come to the right decision for you and your circumstances. When all is said and done, we don’t have a crystal ball. We don’t know which, if any, of a number of proposed changes will take effect. What we do know, however, is that by staying informed you can act right now to give your finances a post-election boost. Laura Wright is the chief executive of NGS Super.

30/05/2019 11:28:58 AM

36 | Money Management June 6, 2019

Value investing

SEARCHING FOR VALUE WHEN GROWTH IS KING While value investing has taken a beating in recent years, Peter Wilmshurst writes that there’s still opportunity to be found in companies with reasonable valuations and good prospects from several countries and sectors. IT’S BEEN A tough road for value investors during the past decade, even causing some pundits to declare the investing style is dead. While a growth-driven US market rally in the first quarter presented a challenge, however, we have still uncovered some unloved stocks and sectors around the world — with reasonable valuations and solid company prospects.

A POLICYMAKER-DRIVEN GLOBAL EQUITY RALLY In the first quarter of 2019, equities across the globe saw a big recovery from the sell-off at the end of 2018. The MSCI All Country World Index was up 12.3 per cent in USD in Q1 2019. What drove the rally? In one word, ‘policymakers’ who switched to a dovish tone. Earlier fears that US interest rates would continue to rise, were transformed as the Federal Reserve adopted a more patient approach to policy normalisation and communicated a pause in its multi-year tightening cycle. Markets have gone even further, now expecting the next move to be a rate cut.

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Similarly, the European Central Bank acknowledged economic risks had moved to the downside and delayed potential interest-rate hikes from sometime in the fall of this year to early 2020. And lastly, China also signalled monetary easing and numerous stimulus measures including tax cuts, lower bank reserve requirements and increased spending. The rally favoured high-growth sectors like technology and media and entertainment, which partly explained the strength of the techheavy US market and China. On the other hand, traditionally defensive sectors with perceived low-growth characteristics like consumer staples, telecoms and health care were the weakest sectors, as were banks, which didn’t fare as well amid a combination of low growth and lower yields. That being the case, growth as an investment style outperformed value. However, as value investors, we think that as we move into the second half of this year, we’ve got a tailwind coming. We expect more signs that the global growth slump

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Value investing Strap

is ending. Already, China’s economy appears to be rebounding, the eurozone economy is starting to accelerate and the US Fed has turned from hawkish to neutral.

FINDING VALUE WORLDWIDE From an investment standpoint, we believe the best opportunities globally are in Europe. Europe Regional valuations in Europe reflect excessive pessimism. While investors are overwhelmingly bearish on Europe, we believe the region is cheap and wellpositioned to benefit from a weaker euro, looser financial conditions, renewed fiscal stimulus, a more accommodative central bank and a potential pickup in both domestic and external (i.e. Chinese) economic activity. Banks in the region now deliver a RoE 20 per cent below the broader European market, however, the shares trade at a discount on Price to Book Value of almost 60 per cent. While we would not expect these two measures to line-up for a leveraged sector like banking, the shares would have to go up, on average, by 100 per cent for banks to trade on a multiple comparable to their returns. European banks in the portfolio have continued to boost their book values and with capital levels rebuilt and profitability on a strong recovery path, are boosting their dividends significantly. Asia Secondly, we believe there are great opportunities in Asia given the longer-term wealth accumulation and demand potential of Asian consumers. We are finding opportunities among telecom providers and consumer staples in the region. Some banks in the

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region are also generating solid returns, but trading at significant discounts to book value. United States The US market across various metrics has hit new highs for this cycle, trailing only the extremes found during the technology bubble of the late 1990s. As US corporate earnings come under pressure, we may finally see the beginning of sustained US market underperformance. That doesn’t mean we’re not investing in the US. It’s a deep and liquid market with selective opportunities. We’re just not finding enough value relative to the rest of the world to justify the global benchmark’s (MSCI All Country World Index) ~55 per cent weighting to this single market.

WHICH SECTORS ARE MOST APPEALING? Looking at specific sectors, we remain committed to healthcare despite concerns about regulation and pricing. Healthcare Healthcare has offered aboveaverage growth in profits and earnings and yet has been trading at lower-than-average valuations both historically, and against some of the other more expensive sectors. Healthcare is capable of innovating through its challenges and producing products and earnings growth that we think the market isn’t yet recognising. Technology The technology sector is generally looking expensive. We have avoided the expensive momentum-driven stocks. Instead, we have been finding opportunities in the more mature, cash-generative software firms as well as some hardware

PETER WILMSHURST

companies with restructuring potential. We have also found value in semiconductor manufacturers where supply concerns have created excessive pressure. Consumer staples In consumer staples, investors have generally gravitated towards the perceived winners that are delivering above-average growth, further pushing up already high valuations for these stocks. Over the past few years, the staples companies have countered gross margin pressure with lower overheads and marketing spend. However, as we have seen from the recent loss of market share announced by a number of companies in both Europe and the United States, it suggests that some companies have cut a bit too deeply. At the same time, we have seen the grocery channel evolving with retailers investing in e-commerce and private labels in order to fend off the rise of alternative platforms such as Amazon and the discount retailers. This is having a negative impact on a lot of manufacturers, particularly in the US. Energy Finally, energy stocks were pretty beaten up in the second half of 2018, as the price of Brent crude oil fell to US$50 a barrel after the Iranian boycott that was supposed

“When oil starts to recover like it has, it looks less attractive to us, but we continue to see value within the larger integrated oil companies.” to come into effect didn’t. The sector was arguably oversold and due for a potential rebound, which we saw in the first quarter as the price of oil rose some 35 per cent to US$70 a barrel. When oil starts to recover like it has, it looks less attractive to us, but we continue to see value within the larger integrated oil companies. They’ve had strong dividends, growing free cash flow, and increasing returns. One company we like in this space is BP. Growth projects are coming online after a decade of investment; production has grown 2.4 per cent y/y in the latest quarter. Capex has declined and has found a stable level, and management intend to keep it constant with an increasing oil price. Operating costs have fallen rapidly and have now stabilised. Dividends are well covered with the breakeven oil price for the dividend to be covered expected to fall to between $35-40 over the next few years. We believe the shares are attractive in today’s market with a dividend yield of ~ six per cent and a 2021 Free Cash Flow yield of 10+ per cent at $65 oil. Peter Wilmshurst is a portfolio manager at Templeton Global Growth Fund.

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38 | Money Management June 6, 2019

Capital growth

BUILDING LONG-TERM WEALTH IN A LOW-GROWTH WORLD Mark Arnold and Jason Orthman share tips on how to accumulate wealth in a world where growth is low and income inequality is rampant. THE SECRET TO building longterm wealth is simple – earn consistent, attractive returns on capital, and then allow them to compound and accumulate over the long-term, preferably decades. Here, we look at the three components of what we refer to as ‘capital accumulation in a capitalist society’ – building wealth, in other words. We also discuss the importance of the investment style in determining the likely cumulative rate of return an investor will achieve over the next decade.

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ACCUMULATING WEALTH IN A CAPITALIST SOCIETY Simplistically, a capitalist society is one in which there are both workers and investors. Investors provide capital to businesses (to purchase plant and equipment, for example) and businesses pay workers to create the goods and services demanded by households. Capital accumulation, or the process of investing capital with the objective of growing the initial investment over time, is a key element of a capitalist society. Those with access to capital and

the skill, ability and willingness to invest that capital have the potential to earn attractive rates of return over time. If those returns are re-invested, they can enjoy exponential growth in capital over the long-term. Growth in corporate profits positively contributes to equity investors’ returns, because profit growth results in growing income streams and intrinsic values through time. However, corporate profit growth over time is predicated on an economy that also continues to expand over

time. When the economy ceases to grow over an extended period, the rate of compounding stock market returns will be significantly diminished overall. During this slowdown, average businesses are more likely to suffer disproportionally, from the combination of poor economic conditions and loss of market share, compared to “better”, higher quality businesses. Index-based stock market investors could still enjoy some potential compounding returns from reinvesting income (dividends), however they are

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June 6, 2019 Money Management | 39

Capital growth

Chart 1: Wealth inequality is either very high or rising in most countries

SUPER OFFERS SOME RESPITE FROM RISING INEQUALITY

Source: Federal Reserve Bank of St Louis; UBS; Hyperion

unlikely to receive the returns they achieved historically. To enjoy the full benefits of compounding returns, it becomes increasingly important to identify companies with the ability to grow profits when economic conditions are difficult, and growth is stagnant. The challenge is that these companies are difficult to find and require significant skill to identify consistently. Qualitative analysis comes into its own when screening for quality investments – offering far greater insights than short-term financial heuristics, such as price to earnings (P/E) or price to book (P/B) ratios.

THE RICH GET RICHER: INCOME INEQUALITY IS GROWING Most of us are workers, in that we rely primarily on income from personal exertion, and do not have major equity ownerships in businesses and/or other investments from which we can accumulate wealth. The investors have a massive competitive advantage in term of their access to capital and ownership of capital. The reality is that people who do not have much capital to start with need to: • Achieve higher rates of return; • Save and invest more from their personal exertion income; and/or

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inequality in most countries. As chart one shows, wealth inequality is on the rise in a number of countries and remains high in others. An added problem is that the income and capital differential tend to expand over long time horizons as the extra income creates more capital, which in turn generates more income.

• Invest over a longer period, in order match the ending capital of others who had more capital to begin with. Common sense tells us that the more capital an investor starts with, the greater the dollar amount returned, and the more capital that investor has to reinvest. This means that over time the wealthy get wealthier at an exponential rate. Those who start out with more capital are at a distinct advantage, and this is one of the reasons for the concentration of capital among the wealthy because income is derived from capital as well as personal exertion. It is also the key reason for increasing income

Compulsory superannuation in Australia mandates that employees save and invest a proportion of their income over their working life. The rationale is that on retirement, workers will enjoy savings that have had the opportunity to benefit from the impact of long-term compounding returns. Our compulsory superannuation system has been partly responsible for Australians being ranked the world’s wealthiest people, according to the Credit Suisse 2018 Global Wealth Report. It has also acted to reduce wealth inequality in Australia, by forcing most Australians to save part of their

Chart 2: Corporate proﬁts, GDP, EPS and CPI – U.S.

Source: Federal Reserve Bank of St Louis; UBS; Hyperion

salary during their working lives.

START SAVING AND INVESTING EARLY Without the benefit of a large starting capital base, we all need to start saving early in our working lives to enjoy the benefits of compounding returns. Savings can be regulated, as in the compulsory super system. However, where a country’s economic conditions are such that most people cannot accumulate capital due to factors beyond their control, such as insufficient employment opportunities, inadequate wage levels, high healthcare and education costs or highly restrictive credit conditions, the divide between the wealthy and the rest of society will continue to grow. The wealthy will continue to enjoy the advantage of compounding returns from a large capital base. Ultimately, time is compounding returns’ greatest ally. The longer the period over which capital is invested, the larger the impact of compounding returns on wealth. Starting to save and invest early in life allows time for returns to compound, resulting in larger amounts of capital later in life, when individuals might like to retire. In order to achieve the maximum benefit from compounding, an investor should: • Invest in a portfolio of companies with superior economics and long-term structural growth - companies that are not reliant on the expansion of the overall economy to grow their profits; • Take a long-term view and be patient, acting like a business owner rather than a share trader; • Reinvest into their portfolio as Continued on page 40

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40 | Money Management June 6, 2019

Capital growth

Continued from page 39 much of the income and sale proceeds as possible; and â&#x20AC;˘ Maximise the amount of capital invested over time. This approach focuses on finding a small number of stocks with healthy returns that can compound multiple times over a long period of time.

EARNINGS GROWTH IS LINKED TO GDP GROWTH - WHICH IS DECLINING Chart two reveals that the broadbased equity indices show earnings growth as strongly linked to nominal GDP growth, which is true not just in the US but in Australia too. For listed businesses that make up the key stock market indices, effective earnings-pershare (EPS) and dividend-pershare (DPS) growth over time is usually below both the rate of nominal GDP growth and the rate of corporate profit growth, primarily due to dilution from increases in the number of shares on issue. In the US, dilution in EPS

has been reduced because of the large number of share buy backs that have occurred in that market. The rate of GDP growth in the US has been declining over the past 50 years. The multiple tailwinds the US economy enjoyed for most of the 20th century, including high levels of innovation, cheap and abundant energy, a young population, increased financial gearing, and a robust and growing middle class have now given way to mounting structural headwinds that are forcing the sustainable rate of GDP growth lower. Many of the businesses which supply the economy goods and services are constrained by the overall growth of the economy.

ECONOMIC GROWTH IS DEPENDENT ON CONSUMER DEMAND In most developed economies, the rate of overall economic growth is largely driven by the consumer sector because, generally speaking, the higher the rate of economic growth, the higher the

Chart 3: US corporate profits after tax as a % of GDP

Source: Federal Reserve Bank of St Louis; Hyperion

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rate of growth in sales, and therefore profits for the businesses in that economy. The corporate profit share of the economy can vary over time. In recent decades, the corporate profit share has been increasing and wages share declining in key economies, including the US. This is shown in charts three and four below. The reality is that the increase in corporate profit has been achieved at the expense of wages growth. Profit growth has supported returns on capital invested in businesses but has also contributed to the hollowing out of the middle class and increasing income and wealth inequality. Chart two shows that corporate profit growth has outperformed GDP growth since 1961; this has occurred not only in the US, but also in Australia. History show us that there are natural limits to how far profits can expand as a percentage of GDP without causing social unrest. We therefore believe it is

unlikely that corporate profits will continue to expand as a percentage of GDP over the long term. We think corporate profits are likely to remain range bound, relative to the overall economy, and the rate of growth in the U.S. and global economies is likely to continue to experience structural declines over the next decade. In a capitalist society, the keys to wealth generation are saving capital to invest, investing for the long term, and identifying high quality businesses that are well-positioned to grow sustainably over the long term. When these simple rules are followed â&#x20AC;&#x201C; investors do benefit from compounding returns over time. The low-growth and disrupted world we now live in means investors need to focus on quality more than ever and allocate capital wisely including making careful, prudent stock selection. Mark Arnold is chief investment officer of Hyperion Asset Management and Jason Orthman is his deputy.

Chart 4: US Wage income as a % of GDP

Source: Federal Reserve Bank of St Louis; Hyperion

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June 6, 2019 Money Management | 41

Toolbox

STEPPING BACK: SMSF WIND-UP OPTIONS FOR TRUSTEES Trustees looking to wind up an SMSF have a range of options available and one of the most appealing, Luke Costa writes, is rolling into a Small Australian Prudential Regulation Authority Fund. THE LATEST RESEARCH shows that over 12,000 self-managed superannuation funds (SMSFs) are wound up each year. There are many reasons, or triggers, as to why a client and their adviser may decide to wind up an SMSF. These include death, relationship breakdown, trustee capacity and disability concerns, disinterest, disqualification or non-residency. It’s common for SMSF clients to lose interest in managing their SMSF as they get older or they simply find it becomes too onerous. Others may become ineligible to be a trustee due to disqualification through bankruptcy and disqualification by the regulator,

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the Australian Taxation Office (ATO), non-residency, and, more recently, capacity concerns. The most recent data from the ATO shows the number of SMSF establishments and wind-ups each year, as shown in table one. While there has been plenty of commentary about new SMSF establishments, there is less discussion about SMSF wind-ups.

WHAT ARE THE TRIGGERS? There are seven common trigger events that can require a client who is a trustee of an SMSF to need an SMSF exit strategy. These are death, divorce, dementia,

disability, disinterest, disqualification, and departure.

such as business real property, that the family unit wishes to retain.

Death Death is a significant trigger event for a review of the viability of an SMSF. SMSF trustees are jointly and severally responsible for the running of the SMSF, but in practice there are occasions when some trustees are more responsible than others. In the event that a ‘more responsible’ trustee dies, the remaining trustees may not be willing or able to continue in the role of trustee. The payment of a death benefit also becomes an important issue if indivisible or illiquid assets are involved, or if there are assets,

Divorce If a relationship breakdown occurs between a couple who are trustees of an SMSF, it is often highly desirable for each member to make their own future superannuation arrangements. While the former couple may maintain a cordial and constructive relationship, it is not always the case. Running an SMSF with trustees who are not on good terms becomes difficult at best and can be impossible. Additionally, if a family law Continued on page 42

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Toolbox

Continued from page 41 split is being made from an SMSF, it is possible to take advantage of the capital gains tax (CGT) exemptions when moving one of the parties to a small Australian Prudential Regulation Authority (APRA) fund (SAF) or a new SMSF. This is generally not available if the family law split is paid to a public offer fund.

SMSF establishment process.

Dementia and disablement As clients age, the loss of capacity because of dementia or other illnesses is an growing source of concern for SMSF trustees. The prevalence of dementia is projected to increase, so these concerns will escalate. There are currently more than 413,000 Australians living with dementia. By 2056 this number is expected to reach 1.1 million. According to Dementia Australia, dementia is the second leading cause of death for Australians and in 2016 overtook heart disease as the leading cause of death for Australian women. If an SMSF trustee loses mental capacity, they cannot continue in the role of trustee and so are unable to be a member of an SMSF. There are no legal issues with a person who lacks mental capacity being a member of a public offer fund or a SAF. There may, however, be practical impediments to such a person becoming a member of a public offer fund or a SAF if they do not have an enduring power of attorney. Accordingly, ensuring SMSF trustees have an enduring power of attorney is an essential part of the

Disqualification A disqualified person is a person who: • has been convicted of an offence involving dishonesty; • is an undischarged bankrupt; or • has been disqualified by a Regulator of a civil penalty. If an SMSF trustee becomes an undischarged bankrupt, they must notify the ATO immediately and make alternative arrangements for their SMSF within six months of declaring bankruptcy. If alternative arrangements are not made within the six months, the fund will fail the definition of an SMSF and will not be eligible for tax concessions. A disqualified person cannot legally be a trustee and, as in the case of a loss of mental capacity, are therefore unable to be a member of an SMSF. There are, however, no legal issues with disqualified persons being members of a public offer fund or a SAF.

Disinterest Loss of interest can be a driving force behind an SMSF exit strategy. Many SMSF trustees are skilled and committed when they commence their SMSF journey but may become less interested and able as they age.

Departed To be eligible for concessional tax treatment, a super fund must meet the definition of an Australian super fund. If a fund fails to meet the test below at any time during the income year, they do not meet the definition of an Australian super fund and are

not entitled to tax concessions. A super fund is classified as an Australian super fund if: • the fund was established in Australia, or any asset of the fund is situated in Australia; • the central management and control of the fund is ordinarily in Australia; and • active members who are Australian residents hold at least 50 per cent of the fund’s value. For SMSF trustees, the residency test is particularly important. As the trustee is responsible for the central management and control of a fund, their physical location is paramount. If an SMSF trustee becomes a non-resident, the fund will generally fail to meet the definition as high-level decisions relating to the fund will be made wherever the trustees reside. There is a grace period where the trustees can be temporarily outside Australia for a period of not more than two years and can still meet the definition of an Australian superannuation fund. Absences beyond two years, however, or permanent residence overseas will generally see the fund fail the definition. Active members are members who contribute, or for whom contributions are made, to a fund. For the purpose of the residency test, contributions include rollovers to a fund. Public offer funds may have many non-resident members who contribute, however it is unlikely that the non-resident members

Table 1: SMSF establishments and wind-ups

Date

Establishments

Wind-ups

Net establishments

Total number of SMSFs

Total members of SMSFs

Jun 2014

33,358

12,654

20,704

521,467

987,452

Jun 2015

33,782

13,032

20,750

542,217

1,026,496

Jun 2016

32,861

12,350

20,511

562,728

1,060,270

Jun 2017

30,517

13,470

17,047

579,775

1,092,723

Jun 2018

25,457

20,430

5,027

584,802

1,102,730

Source: ATO self-managed super fund quarterly statistical report - March 2019.

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would hold at least 50 per cent of the fund assets. Accordingly, the active member test is usually not an issue in a public offer fund. In a SAF, however, the active member test can be an issue as membership is limited to a maximum of four members. A SAF can only meet the active member test if non-resident members don’t contribute or if contributory resident members hold greater than 50 per cent of the fund’s assets.

THE SMALL APRA FUND ALTERNATIVE A SAF is an SMSF with a professional trustee. This means the critical role of trustee and the responsibility of managing the super fund on behalf of the members is passed onto a licensed trustee company. The trustee company is also responsible for the compliance, regulatory reporting and administration for the fund. When it comes to winding up an SMSF there are several options available including: • a rollover to another APRA regulated fund (retail or industry fund); • a member benefit withdrawal payment out of the superannuation system; or • a change of trustee to a SAF. A change of trustee to a SAF is often overlooked but should be considered as a logical alternative, as it can provide additional benefits to members that are not otherwise available.

BENEFITS OF A SAF Understanding the different exit strategy options as well as the benefits to members that a change of trustee to a SAF is increasingly important. These are some of the key factors that members should consider. Investments options A change of trustee to a SAF may help members who wish to retain unique, illiquid and lumpy investments such as property, private company shares and collectables. The professional

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June 6, 2019 Money Management | 43

Toolbox

CPD QUIZ trustee of the SAF may accept the types of assets that would typically not be accepted by a retail or industry fund. This could prove most important to members with business-real property used to run a family business or a property which is currently in a capital loss position. Capital gains tax requirements In accumulation phase, if a client actions a rollover to another superannuation fund or a member benefit withdrawal there may be a significant capital gains tax (CGT) liability. Alternatively, converting an SMSF to a SAF is simply the removal of the SMSF trustee and the appointment of the professional trustee. There is no disposal of the investments held within the super fund as the fund is the tax-paying entity and it continues uninterrupted. A recent example highlighting this benefit is that of a senior executive manager, with a top-200 ASX listed company, who was required to move to New Zealand as part of their employment. A change of trustee from their SMSF to a SAF ensured no CGT event occurred within his accumulation superannuation benefit. In addition, any carried-forward capital losses will be retained in the SAF whereas they would be lost if the SMSF wind-up was a rollover or withdrawal. Centrelink implications A change of trustee to a SAF does not have any implications for the grandfathering of Centrelink deeming on pensions. The SAF will continue the existing pension arrangement that was initially established within the SMSF. On the other hand, a rollover or member benefit withdrawal payment from an SMSF may have Centrelink implications. Insurance policy arrangements If a member rolls over to a retail fund they will generally need to arrange for their insurance policy

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to be cancelled and reissued. This may result in underwriting requirements. In addition, some historic policies offer benefits that are no longer available in current day policies. Clients who choose to change the trustee to a SAF can retain their existing insurance arrangements. This means that they do not have to go through the underwriting process and can retain any policy benefits that may not be available in newer policies. The importance of continual cover should not be underestimated, as the inability to regain cover when applying for new a new policy could prove stressful for members. Estate planning opportunities Through special purpose trust deeds, a SAF can provide unique estate planning opportunities compared to a retail or industry fund, particularly for blended families and intellectually disabled members. Super versus non-super investments A member benefit withdrawal payment from superannuation requires a careful comparison of the tax-effective concessional environment of superannuation to other forms of structures outside superannuation. This decision is often balanced by the expense of running a superannuation product, as opposed to managing personal investments.

CONCLUSION There are many triggers for winding up an SMSF, namely death, divorce, trustee capacity and disability concerns, disinterest, disqualification or non-residency. A SAF can continue the memberâ&#x20AC;&#x2122;s superannuation strategy and achieve their retirement goals, even when they encounter lifechanging events. Luke Costa as Australian Executor Trustees' national specialist SMSF solutions.

This activity has been pre-accredited by the Financial Planning Association for 0.25 CPD credit, which may be used by financial planners as supporting evidence of ongoing professional development. 1. Some of the triggers for the wind up of an SMSF include: a) Divorce b) Dementia/disablement c) Death d) All of the above 2. Which of the following is a disqualified person? a) A divorced person b) A discharged bankrupt c) An undischarged bankrupt d) A non-resident 3. The professional trustee of the SAF may accept assets that would typically not be accepted by a retail or industry fund. a) True b) False 4. Some of the benefits of changing from an SMSF to a SAF when compared to transferring to a retail/industry fund include a) There are no CGT implications b) There are no Centrelink implications c) Members may be able to keep their existing insurance policy d) All of the above 5. Which of the following is not an advantage of using a SAF as an SMSF exit strategy? a) Non-resident members can always contribute to the SAF b) No capital gains tax will be crystallised c) Capital losses can continue to be carried forward d) Business real property may be accepted in the SAF

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ stepping-back-smsf-wind-options-trustees For more information about the CPD Quiz, please email education@moneymanagement.com.au

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OUTSIDER

Money Management ManagementJune April6,2,2019 2015 44 | Money

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

ASIC handles a “super” gush OUTSIDER, in a previous life, spent far too much of his time sitting in Parliamentary Committee rooms and watching as Senators and Members of Parliament appeared to relish grilling public servants. Thus, he thinks it worth mentioning that in her former life as Chair of the Senate Economics Committee, the new Assistant Minister for Superannuation, Financial Services and Financial Technology, Senator Jane Hume, exhibited a surprising level of admiration for the Australian Securities and Investment Commission (ASIC).

It seems that Hume was somewhat smitten by the appointment of Melbourne Queen’s Counsel, Daniel Crennan as the new deputy chair of ASIC, prompting the following exchange: CHAIR: “I might kick off the questions—and I know that there are lots of questions this evening for ASIC. First of all, can I just say that when I was a young I used to watch Justice League. There was Superman with Batman, Aquaman and Wonder Woman—all these sorts of things. I swear to you that when I look out at the ASIC commissioner and deputy commissioners—all these wonderful people—I am actually so impressed with the calibre of people who you have recruited to ASIC, Mr Shipton. I think I’ve just called you Superman, which is probably inappropriate!” Outsider notes that ASIC chair, James Shipton, whilst possibly tucking his cape out of sight, got on with business but did not demur. Outsider cautions however that in politics and public service, today’s rooster can be tomorrow’s feather duster.

Goose or gander. Who gets the frequent ﬂyers? OUTSIDER noted the level of adviser angst at the news that the Australian Securities and Investments Commission (ASIC) had selected the biggest industry fund, AustralianSuper, as the default fund for new ASIC employees. Not entirely unexpectedly, some financial advisers took the selection of AustralianSuper as being further evidence of the regulator showing a preference for industry funds over retail master trusts, which might not have been entirely fair given the fund’s consistency in terms of investment returns and its levels of member service. However, Outsider notes that AustralianSuper last gained some notoriety because of its offer of Qantas Frequent Flyer points to new members – something which raised questions about whether it was playing fast and loose with the sole purpose test and member best interest – a matter which should properly have been examined by the regulators. ASIC’s announcement of the selection of AustralianSuper as its default fund did not specify whether its new employees would be able to access the Frequent Flyer offer, but past convention in the Australian Public Service is that the department owned any points garnered from flying on business, not the individual public servant. However, ASIC is no longer covered by the Public Service Act and is seeking to compete with other financial services firms on equal terms so Outsider wonders whether what is good for an investment banking goose is good for a regulatory gander.

We’ll all be rooned said Hanrahan, the actuary OUTSIDER knows all the jokes about actuaries such as you know when you’ve met a gregarious actuary when he/she is looking at your shoes rather than his/her own. Thus, he notes that actuaries must have clearly been getting out and about lately because they’ve come up with an Australian Actuaries Climate Index for Summer which confirmed what Outsider already knew from his golfing expeditions – that Australia had a summer of extremes. The index confirmed that hot days were

OUT OF CONTEXT www.moneymanagement.com.au

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at an all time high, extreme rain fell in the tropics and that parts of NSW remained in drought. But the compilation of the index is not just about encouraging actuaries to spend some time outside, according to Actuaries Institute chief executive, Alayne Grace the index is intended to help businesses better assess how weather extremes translate into financial risk. Seems actuaries are amongst those who recognise that climate change is real and its impacts need to be accurately assessed.

"The capitalist system is supposed to be one of death and renewal. Companies that are inefficient, that can't make money, are meant to go bust and new ones grow."

"At one stage [Mr Bellotti] challenged the night manager, by saying to him: 'Do you know who I am?'"

Investors Mutual senior portfolio manager Hugh Giddy, at the Australian Shareholders Association annual conference in Melbourne last week.

ANZ's head of investor sales, Patrick O'Connor's experience with Steve Bellotti, then-head of global markets at ANZ

Find us here:

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