Money Management | Vol. 34 No 8 | May 21, 2020

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Vol. 34 No 8 | May 21, 2020

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BOUTIQUES

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COVID-19 stimulus measures

Stretching for yield

ADVISER SENTIMENT

Could ASIC grant class order relief on the FASEA exam?

BY MIKE TAYLOR

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Taking a ‘glass half full’ approach IT has already been an emotional year given the wave of uncertainty and anxiety the world has been riding as a result of the COVID-19 pandemic.

Unsurprisingly, financial advisers have since been inundated with calls from clients but what is surprising is that advisers are reporting more meaningful conversations.

This is one of the rare positives to come out of the pandemic, advisers are finding that, as clients have had more time to educate themselves on investments, this has allowed for more productive conversation between advisers and their clients.

However, adviser sentiment in general has been quite mixed, according to Lifespan Financial Planning chief executive, Eugene Ardino.

Ardino said there were advisers in “pretty dark” places as they were struggling commercially and mentally due to business concerns, coupled with regulatory change, educational requirements and grappling with restructuring their income streams.

Fitzpatricks Private Wealth WA lead adviser, Garry Symonds, said it was important for advisers to have a good network during this time.

“Professional isolation is tough for people at this point in time and if advisers are not connected to groups, whether it is a dealer group or not, it would be very tough. There is a lot of value with being connected,” he said.

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Full feature on page 16

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TOOLBOX

AS a Parliamentary stalemate developed around passage of the Financial Adviser Standards and Ethics Authority (FASEA) exam extension legislation, questions were being asked about whether the Government would back the Australian Securities and Investments Commission (ASIC) delivering class order relief to affected advisers.

Industry spokesmen including Financial Planning Association (FPA) chief executive, Dante De Gori, have questioned whether the Government could allow ASIC to deliver the class order relief to advisers in the same fashion it had done so for advisers with respect to the requirement to be a member of a code-monitoring organisation.

De Gori said that the whole exercise around the passage of the legislation through the Senate had become entirely frustrating in circumstances where both the Government and the Federal Opposition had reassured his

organisation and the Association of Financial Advisers (AFA) that they would be supporting the FASEA exam extension legislation.

However, the exam extension legislation is not a piece of standalone legislation but, rather, part of an omnibus bill, elements of which the Opposition has said it wants to debate.

There is no certainty about the ability of ASIC to deliver on class order relief with respect to the exam extension, and FASEA chief executive, Stephen Glenfield, made clear to a Money Management forum last year that the authority’s hands were tied on the exam timetable in the absence of amending legislation.

De Gori told Money Management that in the absence of the major parties seeing sense on the issue in the Senate, it was likely to be many weeks before the matter could be dealt with again.

That means that a lot of planners are going to have to make some hard decisions about how and when they are going to sit the FASEA exam in the limited time that may be left.

KKR provides CBA with chance of a dignified exit from CFS THE key words to note about the Commonwealth Bank’s decision to sell a 55% stake in Colonial First State to giant private equity player KKR are these: “CBA is committed to working with KKR in the medium-term to achieve a range of objectives that will create value for all stakeholders though a successful separation of CFS from CBA and the creation of a standalone business. CBA intends to maintain its shareholding in CFS throughout this period and further assess its longer-term intentions thereafter.”

Continued on page 3

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May 21, 2020 Money Management | 3

News

35.85% of CountPlus not part of CBA/KKR transaction

BY MIKE TAYLOR

PUBLICLY-LISTED financial planning and accounting group, CountPlus Limited has breathed a small sigh of relief having received confirmation from the Commonwealth Bank (CBA) that it is not going to be tied in any way to CBA’s sale of 55% of Colonial First State to KKR. The concern within CountPlus revolved around the fact that, according to a substantial shareholder notice issued on 12 March, this year, Colonial First State Group Limited was the registered holder of 40,945,747 ordinary shares in CountPlus.

CountPlus said this number of shares equated to 35.85% of the company’s ordinary

shares on issue.

Concerned about the implications of the shareholding for its own plans, CountPlus sought clarification from the Commonwealth Bank It then announced to the Australian Securities Exchange (ASX) that it had been informed by the bank “that the shares in CUP held by Colonial First State Group were not within the scope of the sale transaction”.

The Colonial First State Group shareholding in CountPlus dates back to the Commonwealth Bank’s acquisition of Count Financial from Barry Lambert.

CountPlus acquired Count Financial from the Commonwealth Bank last year.

AMP analysis shows industries with most early release applicants

BY CHRIS DASTOOR

ANALYSIS by AMP has shown workers in hospitality, arts, recreation, manufacturing and wholesale trade industries have the highest rates of applications for the Government’s early superannuation release for financial hardship program as a result of COVID-19.

The average withdrawal amount was $8,300, below the $10,000 maximum withdrawal.

AMP received 52,379 applications from clients in the first two weeks the scheme was launched, which released $370 million of superannuation savings.

Almost one-in-five AMP clients were working in the hospitality industry had applied for the withdrawal during the first two weeks.

The average age of applicants was 40, with 66% under the age of 44, while 70% of applicants had superannuation balances below $50,000.

Lara Bourguignon, AMP managing director for superannuation, retirement and platforms, said it was important that people took the time to understand the different options available for financial assistance, as well as the longer-term impact on their retirement.

“We fully support the Government’s early release package and we’re pleased to provide our clients with quick access to their funds,” Bourguignon said.

“The volume of applicants shows how many Australians are doing it tough and we’re committed to helping them.

“We encourage all Australians to make an informed decision when accessing their super early, including speaking to their superannuation provider and taking advantage of the many information resources available.”

John Perri, AMP technical manager for superannuation, said there were other options available for those in hardship and it was important to check eligibility for JobSeeker and JobKeeper.

“Some conditions related to JobSeeker have been relaxed, such as the temporary removal of the assets test, and relaxation of mutual obligation requirements until 22 May, 2020,” Perri said.

“Many banks are also offering home loan and credit card repayment freezes, and some landlords and utility providers are also offering flexibility when it comes to rent and bill payments.”

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KKR provides CBA with chance of a dignified exit from CFS Continued from page 1 In other words, having earlier attempted and failed to get Colonial First State off its balance sheet almost two years’ ago, the Commonwealth Bank has been handed both cash and breathing room by KKR to achieve the same objective.

It should not be forgotten by anyone that the Commonwealth Bank had been seeking the substantial demerger of CFS as part of its broader exit from wealth ever since 2018 but found itself overtaken by events, not least the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and allied client remediation obligations.

Thus, in March last year, the CBA said the demerger had been placed on hold.

The transaction with KKR is certainly not a demerger, but it is definitely the next best thing for CBA chief executive, Matt Comyn, delivering the bank cash net proceeds in the order of $1.7 billion while ensuring that, with the help of KKR, CFS gets the level of investment it needs.

One of the key messages delivered by CBA and KKR was that they intended to “undertake a significant investment program, strengthening the position of CFS as one of Australia’s leading retail superannuation and investment businesses”.

This might appear like a motherhood statement but reflects the reality that CFS had not been investment priority for CBA that it had been half a decade earlier with the result that the company lost some of its primacy, particularly in the platforms market.

Comyn reflected this by saying that the two companies were confident that they could provide CFS with the increased capacity to invest in product innovation, new services and its digital capabilities.

The real question now for those watching CFS will be how long CBA maintains its remaining 45% stake and how it chooses to exit.

14/05/2020 11:03:07 AM

4 | Money Management May 21, 2020

Editorial

mike.taylor@moneymanagement.com.au

GOVT’S RC IMPLEMENTATION DEFERRAL SHOULD BECOME A REVIEW

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

The Hayne Royal Commission did not get everything right and the Government should use its six-month implementation deferral to appropriately review the things that the Commission got wrong.

The Government has seen fit to defer the implementation of the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry for at least six months. It should go further and conduct an audit of whether much of its approach even remains valid.

It is a fact of life that the Royal Commission was far from perfect and many of its recommendations were ill-conceived and flawed yet, in an act of almost breathtaking political expediency the Treasurer, Josh Frydenberg, committed the Government to an almost unquestioning ‘rubber stamp’ implementation process.

Therefore, if the postponement of the implementation timetable generated by the exigencies of the COVID-19 pandemic has done nothing else then it has given the Government time to consider whether its rush to unquestioningly implementing the Royal Commission recommendations remains wise or even equitable. Whether, instead, it might have applied some traditional discernment and carefully cherry-picked and practically modified some of those recommendations?

This is not to say that the core and well-accepted elements of the Royal Commission recommendations should be abandoned. Rather, it is to suggest that some of the less well-defined and thought through elements such as the provision of advice within superannuation and ongoing fee arrangements should be properly and objectively considered, taking on board the valid and

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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 News Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au Senior Journalist: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au Journalist: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au Events Executive: Candace Qi Tel: 0439 355 561 candace.qi@fefundinfo.com ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au

long-standing concerns of the major financial planning groups.

Frydenberg might also care to consider the degree to which the Royal Commission did not extensively dwell on the superannuation industry and the manner in which some the Government’s own backbenchers, particularly Tim Wilson as chair of the House of Representatives Standing Committee on Economics, are now traversing issues either missed or ignored by Commissioner Kenneth Hayne and his counsel assisting.

As Frydenberg and his advisers may have already noted, the political heat has long since left the Royal Commission and its recommendations as Australia has sought to deal with drought, bushfires and now a global pandemic. The political expediency; the need to be seen to be doing something, which drove the Government’s initial response to Hayne has dissipated.

And in six months’ time the political heat will have dissipated further as Australia seeks to start

clawing its way out from an exceptionally deep recession in circumstances where a great many clients will have owed the substantial preservation of their wealth to the efforts of their financial advisers.

For their part, neither the Financial Planning Association (FPA) nor the Association of Financial Advisers (AFA) should accept that the eventual implementation of the Royal Commission recommendations as a fait accompli. They should maintain their lobbying efforts, pointing out the flaws in Hayne’s recommended approach and the realities of what will work best for both clients and their advisers.

There is already talk on the part of politicians of a new reality and a new approach in the wake of the COVID-19. Financial planning should be no exception but it should be allowed to progress without being hamstrung by the things Hayne got wrong rather than the things he got right.

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Mike Taylor Managing Editor

13/05/2020 2:39:34 PM

May 21, 2020 Money Management | 5

News

Grandfathered commissions bigger impact than COVID-19

BY JASSMYN GOH

THE banning of grandfathered trail commissions has had a bigger impact on the value of financial planning practices than the COVID-19 pandemic, according to Radar Results.

The financial services mergers and acquisition firm’s latest price guide said the banned commissions had impacted as much as 25% of the recurring revenue from some practices disappearing.

In terms of COVID-19 impact, some practice revenues were down between 5% and 20%, depending on clients’ exposure to shares.

Radar noted that price multiples being paid for financial planning practices had softened due to the attitude of buyers in the current environment.

“Another factor that has lowered planning practices values is the number of sellers compared to buyers. It’s a buyers market and has been that way now for about 18 months,” it said.

“There have been thousands of planners either sacked, told to move to another licensee or given a buyer of last resort (BOLR).

“Further, many don’t wish to do the Financial Adviser Standards and Ethics Authority (FASEA) exam, and certainly, they don’t want to commence a four-year university course.”

Radar said what was in demand were accounting practices, self-managed superannuation fund administration fees that were selling for around $1.50 per $1.00, and general insurance registers or businesses.

Financial advisers pragmatically offloading unprofitable clients

BY MIKE TAYLOR

FINANCIAL advisers pragmatically discarding unprofitable clients is a real phenomenon with new data suggesting an average client reduction of around 8% per adviser.

The data has been revealed in a briefing provided by publicly-listed CountPlus in an investor briefing to Goldman Sachs, with the company noting the rate at which advisers are leaving the industry and the manner in which those remaining are trimming their sails.

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It noted that the five-year forecast remained on track for the financial advice market to shrink to 15,000 advisers with 17% of advice firms currently capable of being regarded as “willing sellers”.

“Many sellers are under financial stress and for those with sub-$500,000 in revenue there is limited demand to acquire,” the CountPlus analysis said.

“Culling of unprofitable clients and attrition by under-services clients reduced average client numbers per adviser by 8% from 102 to 94,” it said.

Faced by ASIC questioning ISA changes its early access super calculations IN the face of a formal letter from the Australian Securities and Investments Commission (ASIC) Industry funds advocacy group Industry Super Australia (ISA) has changed its modelling around the impact of people obtaining early access to superannuation.

Just days out from ISA executives being forced to front a Parliamentary Committee, ASIC has revealed it wrote to Industry Super Australia late last month “asking questions about the modelling underlying their estimates of the impact of early release of superannuation on retirement balances”.

However, ASIC has yet to decide what, if anything, it is going to do about ISA. ASIC said that in its letter to ISA, the regulator had “expressed concern that the ISA modelling did not follow all of the principles that ASIC articulated in a frequently asked question published on ASIC’s website on 16 April, 2020: How should trustees communicate the potential long-term impacts of the COVID-19 early release of superannuation scheme on retirement balances?”.

“Contrary to the ASIC principles, the ISA modelling did not use the same assumptions as the generic calculator on the ISA website. (The ASIC principles are intended to assist trustees by describing how they might minimise their risk of providing misleading disclosure. It is important to note that they do not have the force of law and estimates are not misleading merely because they do not comply with the ASIC principles.),” the ASIC answer said.

“On 4 May ISA responded to ASIC’s letter stating that it had reviewed its early release modelling and website calculators and that, as a result of that review, it would make changes to the assumptions used in its early release modelling and website calculators,” it said.

“ASIC is reviewing ISA’s changes and will then consider its next steps,” ASIC’s answer said.

However in a positive note for ISA, ASIC said it had noted that contrary to the original evidence provided to the COVID-19 Senate Select Committee by Treasury official, Robert Jeremenko, the ISA estimates were “in real, rather than nominal dollars and this is not the focus of ASIC’s engagement with ISA on this matter”.

Both ISA executives and those from industry funds-owned bank, ME Bank, have been directed to attend a special hearing of the House of Representatives Standing Committee on Economics this month.

13/05/2020 2:39:11 PM

6 | Money Management May 21, 2020

News

Big adviser groups facing degree deficit ASIC warns retail

investors against playing volatile markets

BY MIKE TAYLOR

SOME of Australia’s largest remaining financial services groups are facing a looming degree deficit among financial advisers, according to an analysis conduced by HFS Consulting director, Colin Williams.

Williams has conducted an analysis of the current state of the financial advice industry utilising the Australian Securities and Investments Commission (ASIC) adviser register and has pointed to particular problems for AMP Financial Planning, Charter, GWM (MLC) and Synchron.

He said that all these firms had a low ratio of degree qualified advisers and that those with degrees had far less experience than those without a degree.

Williams said all this was happening amid the continuing exodus of older, experienced advisers from the industry.

According to the analysis while just over half of remaining financial advisers hold a degree, they are seriously lacking in experience when compared to those headed for the exit.

It found that among the self-employed peer group of advisers 50.8% held a degree but that their average years of experience stood at 11 compared to those without a degree who boasted an average 16 years of experience.

“When looking at the total years of experience, advisers without a degree make up 58.8% of this total,” Williams’

analysis said. “This indicates that there will be continuous change in this sector, to allow degree qualified advisers to take up more responsibility as the older, non-degree advisers exit the market.”

Williams said that for the large financial planning groups with low numbers of degree-qualified advisers succession planning would become vital to longterm success.

His analysis suggested that there were 8,413 “resignations” from the industry in 2019 representing 30% of all adviser roles at the start of 2019.

Adviser shortages could last nearly a decade IT will likely take nearly a decade for financial adviser numbers to be restored to their pre-Financial Adviser Standards and Ethics Authority (FASEA) levels in circumstances where new entrants to the industry account for barely half of the advisers who have left.

That is the bottom line of research undertaken by HFS Consulting principal, Colin Williams who has compared the number of advisers who have exited the industry to those who have entered, and the bottom line is that the industry is facing an adviser shortfall which might last well beyond 2025.

Adviser exits in 2019 were 8,413 but new adviser entrants were barely 4,017, fewer than half of the exits. This compares with 2018, when the data showed that there were 8,930 new entrants to the industry compared to 6,061 exists.

Similarly, in 2017 new recruits

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marginally outweighed exits with 5,410 advisers being appointed compared to 5,281 exits.

Early data for 2020 suggests that the level of exits was still significantly outstripping the number of new entrants with the picture having been made more complex by the impact of the COVID-19 pandemic and the manner in which this has impacted the sitting of the FASEA adviser examination and the delivery of financial planning degree and bridging courses.

Williams’ data analysis shows the private client sector has held up well compared to the broader advice market with just 553 resignations in 2019 with the superannuation sector also holding up well.

However, he noted that in terms of growth in adviser numbers, the superannuation funds did not appear to have moved to fill the void left by the exit of the major banks.

THE Australian Securities and Investments Commission (ASIC) has fired a shot over the bows of retail investors who it says have been chasing quick profits by playing the markets and losing.

The regulator said that trading activity in contracts for difference (CFDs) had increased significantly during the COVID-19 period of heightened volatility and that the leverage inherent in CFDs magnified investment exposure and sensitivity to market volatility.

It said that in the week 16 March to 22 March retail clients’ net losses from trading CFDs were $234 million for a sample of just 12 CFD providers.

ASIC said an analysis of markets during the COVID-19 period had revealed a substantial increase in retail activity across the securities market, as well as greater exposure to risk.

“We found that some retail investors are engaging in short term trading strategies unsuccessfully attempting to time price trends. Trading frequency has increased rapidly, as has the number of different securities traded per day, and the duration for holding the securities has significantly decreased: indicating a concerning increase in short-term and ‘day-trading’ activity,” it said.

The regulator cautioned that “even market professionals find it hard to ‘time’ the market in a turbulent environment” and the risk of significant losses is a regular challenge.

“For retail investors to attempt the same is particularly dangerous, and likely to lead to heavy losses – losses that could not happen at a worse time for many families,” it said. “Retail investors chasing quick profits by playing the market over the short term have traditionally performed poorly – in good times and bad - even in relatively stable, less volatile market conditions.”

In addition to the increased trading, there was a sharp increase in the number of new retail investors to the market – up by a factor of 3.4 times – as well as a marked increase in the number of reactivated dormant accounts.

“The higher probability and impact of unpredictable news and events in offshore markets overnight only magnifies the danger. ASIC is therefore particularly concerned by the significant increase in retail investors’ trading in complex, often high-risk investment products. These include highly-geared exchange traded products, but also contracts for difference,” it said.

13/05/2020 2:38:48 PM

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13/05/2020 4:09:12 PM

8 | Money Management May 21, 2020

News

FASEA still on notice to explain code of ethics consultation

BY MIKE TAYLOR

THE Financial Adviser Standards and Ethics Authority (FASEA) is again on notice to explain to Senate Estimates how it went about the consultation process around the development of the financial adviser code of ethics.

Cross-bench South Australian Senator, Rex Patrick, placed key questions to FASEA on the Senate notice paper which, as yet, remain unanswered by the authority.

Patrick has asked FASEA which stakeholders were engaged in the consultation period around the development of the code of ethics,

whether the consultation was conducted by “survey, by some sort of town hall meetingand, indeed, from which entities you received submissions” and the timelines.

“Could you maybe lay out the actual internal process that FASEA went through in terms of who was involved in that final determination and how they took input from consultation and acted on it,” the Senator asked.

The questions on notice to FASEA are among a raft of questions asked during the March Senate Estimates hearings, none of which have yet been answered by any of the Government departments and agencies involved.

TPD ADL regime up for change THE so-called Activities of Daily Living (ADL) regime used by some life insurers in handling total and permanent disability (TPD) cases is being canvassed for change, following evidence given to a key Parliamentary Committee.

The Australian Financial Complaints Authority (AFCA) has told the House of Representatives Standing Committee on Economics that the ADL represented a “very tough test”.

“It really should only have very limited application, if at all,” AFCA’s lead ombudsman, insurance, John Price told the committee.

He was answering questions from the committee’s deputy chair, Labor’s Dr Andrew Leigh, who referenced a recent Australian Securities and Investments Commission (ASIC) report which suggested that claims denial rates for people

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under the ADL regime were close to 60%.

Leigh described the 60% number as “outrageously high”.

Later, in answering questions from Leigh, the chief executive of major insurer TAL, Brett Clark, pointed to impending changes to the ADL regime.

Discussing TAL’s claims denial rate of 44% with respect to ADL, Clark said: “Clearly there are opportunities to be better than that, and we’re working with our industry and also our superannuation fund partners on what might be a better benefit design than ADL”.

“Will you commit to not relying on the ADL test as unemployment spikes? You’re denying half the claims, and increasingly, as the jobless rate goes up, it’s tempting to use the ADL test and keep rejecting half the claims,” Leigh asked.

Clark responded: “We’re very aware of and sensitive to this issue in particular. It’s important to understand, for the committee’s benefit, that generally these ADL definitions will only apply after someone has ceased working for a six or 12-month period. In that intervening time, they will continue to retain their existing definition before it moves to an ADL definition. But we’re very aware of and sensitive to this issue and working through it”.

Three Sargon entities acquired

by Pacific Infrastructure Partners

BY JASSMYN GOH

PACIFIC Infrastructure Partners (PIP) has completed the acquisition of three key operating entities and assets of the Sargon Capital group of companies.

The acquisition of the three registrable superannuation entities that were part of Sargon were Diversa Trustees, CCSL, and Tidswell Financial Services had been approved by the Australian Prudential and Regulation Authority (APRA), PIP announced.

The Treasurer had also approved the purchase of the operating entities and assets after a recommendation by the Foreign Investment Review Board.

PIP is a new entity formed for the purpose of investing in technology-enabled financial services.

New York-based financiers Teddy Wasserman and Australian Matthew Kibble led the transaction through Cloverhill Group and Kibble Holdings respectively. They were joined as equity shareholders in PIP by Visa Credit Partners that also provided financing for the transaction.

Wasserman, Cloverhill’s managing partner, said: “We believe the proprietary next-generation trustee infrastructure that Sargon has developed to be world-class technology. As the new owner, PIP brings funding capacity, leadership capability and strengthened governance to unlock its enormous potential, as well as take advantage of what is a significant market opportunity, given the sector tailwinds and underinvestment in legacy systems.

“We are pleased to bring on board an experienced partner like Vista Credit Partners and thank them for the speed and certainty with which they executed this transaction.”

David Flannery, president of Vista Credit Partners, said: “This is a tremendous asset class and Australia is recognised as having one of the best models of superannuation and retirement savings in the world.

“Vista and VCP have a long and proud track-record of backing companies like Pacific Infrastructure Partners, which are at the forefront of digital transformation and have the intellectual property capable of winning on a global stage. We are pleased to make this significant investment to provide capital to PIP and we look forward to helping leadership realise their vision as part of the Vista ecosystem.”

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11/05/2020 2:35:00 PM

10 | Money Management May 21, 2020

News

One-in-three report negative effect on finances from COVID-19 pandemic

BY LAURA DEW

ONE-IN-THREE households say they are financially worse-off as a result of COVID-19 with more than half of people saying they used stimulus payments to top-up their savings.

According to the Australian Bureau of Statistics, which examined data between mid-March and mid-April, nearly half of people (45%) surveyed had had their household finances impacted by the pandemic.

Some 31% said this had been a negative impact while 14% had seen an improvement.

Others reported suffering ‘financial hardship’ with 7.5% lacking sufficient money to pay bills and 10% needing to use savings for basic living expenses.

Some 28% said they had already received the $750 economic support payment, particularly those aged over 65. The percentage of people in this demographic who had received a payment stood at 60% compared to a 19% for those aged 18-64.

Over half of stimulus recipients said they added the payment to their savings.

The survey also questioned recipients’ wellbeing and found twice as many as adults had reported experienced anxiety over the four-week period compared to results in 2017/18.

To boost their spirits in lockdown, 65% of respondents said they had increased their contact with friends and family outside of their household, the mostcommon methods being telephone, instant messaging or video calls.

Centuria makes first offshore acquisition with NZ firm CENTURIA Capital has acquired a 19% stake in New Zealand real estate funds business Augusta Capital, the firm’s first offshore acquisition.

Augusta, which had $1.7 billion in assets under management, was undertaking a $45 million equity raising to strengthen its balance sheet and provide capital for new opportunities. This consisted of a $12.4 million placement and a $32.6 million entitlement offer.

Following the placement and the institutional component of the entitlement offer, Centuria would acquire a 19% interest with the option to increase this to 24.9% in the future.

Centuria’s maximum potential

commitment to the offer was $22.3 million, funded by its cash reserves.

John McBain, Centuria’s joint chief executive, said the firm had become interested in Augusta as it looked to develop a presence in New Zealand and had confidence in its mid-to-long term outlook.

“We believe Centuria’s investment in Augusta represents a unique opportunity to develop a strong presence in the New Zealand funds management arena. We remain attracted to Augusta’s leading position in New Zealand, its strong distribution platform and its fund origination capability,” he said.

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Jana expands into retail market

BY OKSANA PATRON

INSTITUTIONAL investment consultancy, Jana, has announced its expansion into the retail market which will see the firm offer its managed account services to financial advice and private wealth practices as the response to the ongoing shift towards self-licensing.

This would mean that financial planning and private wealth firms would be provided with access to Jana’s managed account portfolios, tailored consulting services as well as a team of over 80 investment professionals.

Jana’s chief executive, Jim Lamborn, said the company would not exclude the opportunity to partner with a number of practices to help ensure the quality of advice.

According to the firm, the adviser-focussed consulting market was currently highly fragmented and had a wide range of players ranging from individual consultants through to boutiques to larger institutionally-owned consulting firms.

“The dramatically changing investment and business landscape means financial planning and private wealth practices need to readdress their investment structures and processes, with a heightened focus on good governance post-Royal Commission,” Lamborn noted.

“We are delighted to bring Jana’s 30-year history of deep investment insights and longstanding track record of excellence as a true alternative for high quality advice and private wealth practices seeking a strategic, longterm and reliable investment consulting partner.”

Jana launched its first set of managed accounts on behalf of a Melbourne-based advice business 12 months ago and since then had signed on a further two clients and was now positioned to extend those discussions further.

The firm’s total assets under advice sat at approximately $600 billion, with clients including Australia’s leading superannuation funds, insurers, government departments and long service leave funds, as well as charities and foundations.

13/05/2020 2:38:02 PM

May 21, 2020 Money Management | 11

News

Westpac creates specialist business division

BY JASSMYN GOH

WESTPAC has announced it has created a new specialist business division to simplify its wealth platforms, superannuation and retirement products, investments, general and life insurance, and auto finance businesses.

The bank announced the new division in its interim results posted to the Australia Securities Exchange (ASX) and said those businesses did not have sufficient scale or had insufficient returns for the risk.

The Westpac Pacific business would also be managed in the division to simplify the institutional bank portfolio.

Former Commonwealth Bank chief executive of Newco, Jason Yetton, had been appointed to lead the division as chief executive, specialist businesses and commenced the new role on 18 May, 2020.

Westpac noted the division contributed 10% of the indicative FY19 revenue.

Westpac chief executive, Peter King, said: ”These are good businesses with strong franchises and will benefit from being in their own division under the leadership of Jason who will bring his considerable energy to the role.

“Over the coming months we will conduct a detailed strategic review on the best options for these businesses. This will include considering

whether they would ultimately be more successful under different ownership.

“The changes today are a significant step to reducing the complexity of our portfolio and will allow the group executives to focus on improving performance in our Australian and New Zealand banking businesses.”

The bank also announced that its net profit was down 62% ($1.98 billion) during the first half

of 2020, compared to the first half of 2019 Westpac said the result was due to impairment charges thanks to the impact of the COVID-19 pandemic, costs associated with AUSTRAC proceedings, including provision for a potential penalty, and the impact of estimated customer refunds, payments, associated costs and litigation, which together reduced net profit before tax by $3 billion.

It noted that it had provisioned $900 million for a potential penalty relating to the AUSTRAC civil proceedings brought against it on 20 November, 2019.

In a letter to its shareholders, the bank said it would not be paying shareholder dividends in June 2020.

“The decision was difficult, and the board considered the uncertain economic and operating conditions and how these may develop over the next six months, and also the Australian Prudential and Regulation Authority’s consistent guidance on dividends,” King said.

“We recognise many shareholders rely on our dividends as a source of income and fully recognise the impact these decision have.

However, we must remain prudent at this point in time. The board will continue to review the dividend options over the course of this year.”

Bond income strategies harder to justify

BY OKSANA PATRON

TYPICAL income strategies based on bonds became harder to justify as interest rates ground lower in the 2010s in the wake of the Global Financial Crisis and income-seeking investors are effectively forced up the risk curve, toward corporate bonds, high-yield bonds, cash-generating real asset investments, and the share market.

What is more, according to experts, Angela Ashton, founder and director of managed account provider Evergreen Consultants, and Jamie Nemtsas, director at independent financial advisory firm Wattle Partners, the income aspect of share dividends – turbo-charged by Australia’s dividend imputation system – became a major attraction, with effective yields in the 6%–8% range readily available.

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They said investors would need to accept that the dividends should not be considered certain until they are paid; dividends were paid at the company’s discretion, and could be cut at any time – even abandoned; and that they bore the capital risk of the share market.

“As interest rates have come down over the past decade, we’ve had to change the way that we look at income; it’s become quite driven by growth assets,” Ashton said.

“Having the central part of a portfolio with respect to income production in growth assets like property or shares introduces a lot more risk, unfortunately for clients, but that’s the way you need to generate income today.”

On the other hand, Nemtsas stressed that high income was generally riskier, and ‘sustainable growth’ looked less so at the moment, if investors were thinking in terms of total return.

“You might be looking at a regional building company in New South Wales that has got a strong dividend, on paper; but it’s going to be far better to hold something like Google that has got a massive audience, low cost of capital, great balance sheet, and you’re sacrificing some kind of regular income for a very, very strong company,” he said.

According to him, it all came down to rebalancing as investors were looking to ‘harvest’ capital gains and putting them back into an income-producing bucket.

“Say you have 5% cash, 10% fixed-income, 30% Australian equities, 20% global equities, and 35% real assets. If you rebalance regularly, and your Australian equities has moved to 34%, you ‘harvest’ that 4%, and put it back to cash. Your capital gain is constantly being converted into your ‘core’ capital, which we like to have sitting there as effectively three years’ worth of

cash needs,” he added.

Nemtsas agreed that areas such as consumer staples, healthcare stocks and infrastructure stocks – ‘fallen angel’ sectors like travel – offered good opportunities at present.

“There are also some great opportunities in credit, particularly in the ‘distressed credit’ space,” Nemtsas said.

“We’re looking at a range of individual investments, some stocks, some ETFs, particularly where we think they’ve been oversold, to set up portfolios for the next few years.

“We’re getting the opportunity at the moment to build portfolios totally differently than we were eight weeks ago. But we’ll stick to that rebalancing strategy – sell those that go up, keep those that go sideways while yielding income.

And think in terms of total return, not in terms of maximising your income return.”

13/05/2020 2:36:37 PM

12 | Money Management May 21, 2020

News

AMP kicking goals with the AFL

BY CHRIS DASTOOR

THE Australian Football League Players Association (AFLPA) has extended its 20-year partnership with AMP to be the default superannuation fund for players.

The re-appointment followed a comprehensive review process commissioned by the AFLPA and the AFL, which was conducted by independent consultants.

AMP would continue to provide superannuation plans to over 3,500 past and present AFL players, as well as provide education services in conjunction with Shadforth Financial Group.

Alex Wade, AMP Australia chief executive, said the new agreement was strong recognition of the quality, competitiveness and security of AMP’s workplace superannuation offer.

“AFL football is an important part of so many people’s lives, and we’re committed to helping players manage their unique career

Tencent takes substantial stake in Afterpay

How financial planning around super will likely change

BY MIKE TAYLOR

BY JASSMYN GOH

CHINESE technology giant, Tencent Holdings has become a substantial shareholder in payments fintech Afterpay to help collaborate in technology, geographic expansion, and future payment options.

Afterpay said the lodgement of its substantial holding was confirmed to the Australian Securities Exchange on 1 May, 2020.

Afterpay co-founders Anthony Eisen and Nick Molnar, said: “Tencent’s investment provides us with the opportunities to learn from one of the world’s most successful digital platform businesses.

“To be able to tap into Tencent’s vast experience and network is valuable, as is the potential to collaborate in areas such as technology, geographic expansion, and future payment options on the Afterpay platform.”

Also commenting, Tencent chief strategy officer, James Mitchell, said outside China it actively invested in pioneering fintech companies and Afterpay had attractive business model characteristics. “…its service aligns so well with consumer trends we see developing globally in terms of Afterpay’s customer centric, interest free approach as well as its integrated retail presence and ability to add significant value for its merchant base,” he said.

“We look forward to a deep and longterm business partnership between Tencent and Afterpay.”

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and income profiles, and build sustainable long-term wealth,” Wade said.

“The quality and flexibility of AMP’s insurance offer, competitive investment management fees and insurance premiums, investment performance, diversified MySuper portfolios, and AMP’s comprehensive Financial Wellness and education programs, were all identified by the AFLPA as reasons for their decision.”

Paul Marsh, AFLPA chief executive, said the review process highlighted that AMP’s offering remained best placed to service the unique needs of current and past AFL players.

“After an extensive independent review process, the AFLPA board made the decision to continue with the AFL Players’ Association’s longstanding partnership with AMP,” Marsh said.

“Through the review it was clear that AMP’s super fund was the preferred option to support the unique requirements of AFL players.”

FINANCIAL planning around superannuation may be forced to change as a result of the impact of COVID-19 and the efforts of superannuation funds to increase their cash holdings, according to actuarial research house, Rice Warner.

It said superannuation funds are likely to keep high levels of cash well into the future for fear of a repeat of the Government’s COVID-19 hardship early release regime.

In an analysis of the impact of COVID-19 on superannuation funds, Rice Warner has pointed to the liquidity issues which have already faced funds but expressed relief that, at this stage, none appeared to have gone to the Australian Prudential Regulation Authority (APRA) seeking approval to cease rollovers due to illiquidity.

“Most funds will manage, but some operate for members in industries with high levels of unemployment,” it said. “As JobKeeper does not allow for any superannuation contributions, the regular cashflow has been severely disrupted. None

of this could have been foreseen.

“The heavily-impacted funds might need to sell some assets to support their cashflows. Not only does this mean selling at depressed prices, but it reduces the scope to buy other discounted assets as they become available,” Rice Warner said.

“Fortunately, we are not aware of any funds that will need to ask APRA for approval to cease rollovers due to illiquidity (Section 6.36 of the SIS Act).

“One of the implications of the early release scheme is that funds will hold more money in cash (earning very little). They will be worried that this precedent could be repeated, and they need to be better prepared.

“Superannuation funds with a significant proportion of members in those industries most affected at the moment (such as hospitality, retail and tourism) may seek to attract more members in other areas as well as building up membership of their account-based pensions. This will provide an increased buffer against another one of these (hopefully) onein-a-hundred-year events,” the

Rice Warner analysis said.

“Over the next decade, the superannuation industry is not likely to have the same earnings pattern as enjoyed over the last 20 years,” it said.

“This will mean new targets,” the analysis said and questioned whether Consumer Price Index (CPI) plus 3% to 4% will remain viable over the next ten years?

“Perhaps it will be if CPI is negative for some of this time,” it said.

“If targets are reduced, that will flow into communications material, online calculators and financial advice models. It will also reduce projected future retirement benefits for members and possibly reduce confidence in the system, despite its clear value for most Australians.

“It is also fair to say that forcing superannuation funds to hold more liquidity in anticipation of another unexpected Government requirement will reduce the long-term earning capacity of superannuation and eventually lead to lower tax revenue and higher Age Pension costs.”

13/05/2020 3:51:22 PM

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13/05/2020 2:42:04 PM

14 | Money Management May 21, 2020

News

YBR gets $1.9m for wealth business

BY MIKE TAYLOR

YELLOW Brick Road (YBR) has confirmed its final exit from wealth management with the completion of its sale agreement with Sequoia Group.

YBR announced to the Australian Securities Exchange (ASX) it had received a completion payment from Sequoia of $120,931, confirming that the final price for the business was $1,906,345.

It said that the transition of YBR advisers to Sequoia had been completed.

FPA challenges ASIC on advice fee arrangements in superannuation THE Financial Planning Association (FPA) has urged the Australian Securities and Investments Commission (ASIC) to be more flexible around arrangements for the deduction of advice fees from superannuation accounts, arguing that requiring repeat consent processes will not be in clients’ best interests.

In a submission filed with ASIC as part of its review of implementing the Royal Commission recommendations around advice fee consents and independence disclosure, the FPA made clear it believed ASIC’s proposed approach involving time limits and multiple consents was unnecessary.

In doing so it pointed out that around two-thirds of clients who paid fees through superannuation would have trouble paying for advice in any other way.

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“The provision of the agreed advice services should not be restricted to a time period of how long the consent will last,” it said. “The priority must be the provision of advice services in the best interest of the client and personal advice that is appropriate for the client’s circumstances.

“It is most likely that the member consent would be sought at the time of the client and advice provider agreeing on the terms of the advice engagement, including the services to be provided and the non-ongoing fee for those services,” the FPA submission said.

The submission said that the collection of vital information about the client’s circumstances and goals could significantly impact the period of time between agreeing on the terms of engagement and the provision of the advice and the statement of advice (SOA).

It said that ASIC’s proposals would impose an expiry timeframe on the member consent, and in turn, potentially on the provision of the advice.

“If the above factors resulted in the advice not being provided within the stated time period, this could lead to unnecessary duplication of the client consent process even though the terms of the advice engagement the client agreed to had not changed,” the submission said.

“The FPA suggests this is unreasonable and inconvenient for the client and does not provide any additional consumer protection under this measure. It is not in line with the best interest duty in the Corporations Act or the professionalism requirements of the new FASEA code of ethics to provide advice services diligently and efficiently by including a timeframe that could result in the need to repeat the consent process.”

Super fund comprehensive advice costed at $2.33 per member CONTINUED probing by the House of Representatives Economics Committee has revealed more about how superannuation funds are funding financial advice services and what it is costing members.

Queensland-based industry fund InTrust is the latest fund to provide details of its financial planning arrangements being delivered by two financial planners and costing a total of $317,054 in 2019.

But, most importantly, the InTrust response to questions on notice from the committee chair, Tim Wilson, has revealed the comparative cost of comprehensive advice and intrafund advice.

And, in similar terms to earlier questioning of industry funds, InTrust has calculated that the average cost to members was $2.33 per member.

The InTrust response also revealed the degree to which its advisers received bonuses for their efforts with the average in 2018 being $9,596.

Wilson asked InTrust to detail for each year of the past decade, the cost of comprehensive advice annually, and the average per fund member as well as asking what was the aggregate value of bonuses provided for comprehensive advice, and what was the average per adviser.

13/05/2020 3:51:38 PM

May 21, 2020 Money Management | 15

Wealth management

MORE THAN JUST PORTFOLIO MANAGERS As a part of its new series, Money Management speaks to financial planning groups and asks them to share their views on the industry in a new environment. This month, MM interviewed John Woodley, chair and executive director of Fitzpatricks Private Wealth.

MM: How is the current situation affecting financial planners?

Our advisers do not really position themselves just as portfolio managers and that is probably a difference because our focus is really on helping people get organised. Our advisers are actually quite relaxed at the moment because we have low client numbers to advisers. The advisers are focusing on calling their clients to see whether they are OK and reminding them of the strategies they have in place.

Right now, that value of an adviser, is to build personal relationships and personal advice to the client is gold.

People need to feel safe and they need to know what their options are. At this particular time, surrounding clients with good advice is a really important function. Everyone is affected but our advice clients are probably more prepared than others. There are still things that you cannot prepare for but having a conversation and having somebody there who can help really matters.

Right now the advice industry has a great opportunity to just deliver that community function – not to talk about it, not to focus on what the advice might be in the future or what the implications of the Royal Commission are but to actually, right now, deliver this community function. And I see that happening repetitively and that really excites me.

MM: How do you think the business model across the industry will evolve and which ones will struggle?

We are going to need a lot of people working together – because we really do believe in the value of advice delivered appropriately into different areas and obviously it will be delivered

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at different price points for different areas so there is a value in the pricing as well.

If the advice community was doing strongly we would have a healthier community – if you had a whole body of people out there who are confident about their financial future, knowing what they can do and empowered by the decisions they can make, I believe that would actually produce a healthier community but for a long time we have not been doing that.

As a whole [the industry] has not been delivering it in the best way we possibly could have and in the future I think you are going to have enough people wanting to do that, but as the advice community, we need to take a bigger view. But our view should be that a large majority of people can access good and appropriate advice or information that actually allows them to make good financial decisions.

We also have this massive transition of wealth happening – from the baby boomers to the next generation – and that is not straightforward for high net wealth clients. And that’s where

you really need holistic personal advice, not just investment or product advice, it needs to be the true value of helping people make their choices through multigenerational advice.

I think we are going to see different models pop up in different areas but the goal should be not just around businesses being able to prosper but that people could actually benefit from that community function that advisers bring.

MM: What are the strengths of your business?

We do not really see ourselves as a licensee but we see a license as a function of advice business.

There are business models out there that are really just providing licensing services whereas our advisers have joined Fitzpatricks for the way we give advice and they are subscribed to a very consistent advice model and style of the business.

That is the way we developed 20 years ago so when there were legislation changes then we adapted to those and they did not really impact our business model. We

JOHN WOODLEY

have always had a fee basis model where we are not getting commission but rather, we are paid for helping clients get organised and achieving their goals.

That is where we started and we want to help clients get organised and have a healthy space to talk about their goals, not just specifically about their investments.

Where we have come from and the way we are structured is a point of difference for us and why advisers have joined us rather than some other groups. Most licensees are advisers running their own business and they just want a licensee support whereas our advisers have joined Fitzpatricks because they love the way we give advice.

13/05/2020 2:28:05 PM

16 | Money Management May 21, 2020

Adviser sentiment

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May 21, 2020 Money Management | 17

Adviser sentiment

TAKING A ‘GLASS HALF FULL’ APPROACH While the COVID-19 pandemic has created a lot of stress, anxiety and uncertainty for financial advisers, one of the biggest positives has been the ability for them to have more meaningful conversations with clients, Jassmyn Goh finds.

THERE IS NO doubt volatility and uncertainty has plagued markets since the COVID-19 outbreak was declared a pandemic at the beginning of the year.

Globally, lives have been turned upside down as the way we live and work has changed dramatically.

Over the last few months, financial advisers have been inundated with requests from clients all while making sure their remote working setup can support their client needs without sacrificing the quality of their advice.

Advisers who spoke with Money Management said their biggest concerns were mainly surrounding the uncertain nature of the pandemic and how it would affect investments and regulation but were optimistic about the opportunities the situation brought.

The advisers also said conversations with clients were largely focused on client goals rather than investments and cashflow.

This was echoed by a survey run by Money Management that found 66.7% of respondents’ conversations with clients were on client goals, followed by cashflow, investments and portfolios.

The general outlook from these advisers lent towards being ‘neutral’ and ‘negative’ in terms of their clients’ investments over the next 12 months, with few respondents believing it would be ‘positive’.

A respondent said unemployment and uncertainty would have a major impact on market sentiment and another said as the full impact of social distancing had on economies slowly became apparent, it would

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lead to more negative sentiment.

Another said a wellconstructed portfolio would be able to withstand the downturn and the next one.

Lifespan Financial Planning chief executive, Eugene Ardino, said that adviser sentiment was quite mixed with some advisers in “pretty dark” places due to stress and anxiety, some positive, and some in between.

“It’s a really difficult time out there for advisers and consumers and it is important as a community to help each other,” he said.

Those in dark places, Ardino said, were struggling commercially and mentally as business concerns were combined with regulatory change, understanding the Financial Adviser Standards and Ethics Authority (FASEA) code of ethics, and grappling with restructuring income streams.

A recent adviser sentiment survey from MLC Wealth found that 88% of advisers were trying to stay positive and active by planning for the months ahead, 86% said the period would eventually pass, 49% had a degree of concern and were worried but were trying to remain positive, and another 36% said the pandemic was having a negative toll on their mental wellbeing.

However, while the very nature of the pandemic had hurt adviser sentiment, Ardino noted that a lot of advisers were already gearing up for a market downturn prior to the outbreak as market levels and valuations were at “crazy levels”.

“There was quite a large number of asset prices that had stretched valuations and so

advisers were gearing up for that.

No one likes account balances going backwards but if you were well positioned for it you can turn it into an opportunity,” he said.

“But the situation has still caused stress and extra work as advisers were already dealing with regulatory change, matched with the potential loss of income streams and having to restructure the way they service and charge clients, along with dealing with a massive market downturn. This will really test the viability of certain businesses.”

Pride Advice’s chief executive, Brett Schatto, said he was initially concerned about how he was going to maintain ongoing client reviews as many were used to coming into the office.

However, he said clients had been able to adapt to Zoom and online meetings and the use of virtual documents. He noted clients had actually been calling up to check whether the advisers at Pride were well and how they were coping with working from home.

Verve Group director and senior wealth adviser, Matthew Carberry, said his biggest concern was the big unknown on the timeline of the pandemic and what would happen after it was over.

However, he was confident in the advice business as people in this environment would be looking at their finances and needing advice. He noted that there would be a lot more ad-hoc advice rather than the traditional annual review from long-standing clients.

“You’ll see more ad-hoc one-off advice for clients who will come in for a specific reason.

We’ve seen a lot more strategy

Continued on page 18

13/05/2020 2:24:05 PM

18 | Money Management May 21, 2020

Adviser sentiment

Continued from page 17 advice and less on product.”

“They’ll come in with an issue such as how to deal with cashflow, planning, or how to set up a transition-to-retirement plan and then will implement it themselves.

“People potentially will look to save money by doing things themselves by seeking general advice and then going off on their own.”

He said there were still new clients flowing into the business and that panic regarding investments had eased off.

Fitzpatricks Private Wealth WA lead adviser, Garry Symonds, said he was “glass half full” on the current situation as there were new opportunities to help people with their wealth.

The MLC Wealth survey also found that 45% of advisers saw the current environment as an opportunity to focus on client growth and retention.

CLIENT GOALS Symonds said client conversations on their businesses were the focus, rather than their investments.

“We are keeping clients focused on things they can control and to look forward. Our job is to give direction, capability, and confidence because business owners are scared as they just don’t know what things are going to look like.

“Advisers have got to be available, prepared to listen and let clients talk about whatever is on their mind and try and help them. Our clients’ business forms a large part of their personal balance sheet. That’s where the cash comes from, that’s how they generate income to allows them

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to do what they want.

“As soon as COVID-19 started to become hairy my advisers have been on the front foot. They were ringing clients, talking through their situation, answering questions they had, and being proactive. That’s been key to keeping clients calm because that’s our job during this period of time – keeping them on the path on what they want to achieve.”

Schatto stressed that a successful retirement was not about how much money people had but rather their quality of life and happiness.

“This health-led economic disaster has really shown people that the conversation around their finances isn’t as great as conversation about their health.

Money doesn’t dictate happiness we have in the decades that we live,” he said.

“The pandemic has put a

spotlight on what clients want as goals, and this is refreshing. By having these conversations, advisers will come out the other end with greater relationship with clients.”

INVESTMENTS One of the positives to come out of the pandemic, Schatto said, was that clients had more time on their hands so were educating themselves on investments which created better conversations between advisers and their clients.

He said clients were now able to understand why there were particular investment decisions that had been made and that they were bringing up topics they did not understand before such as listed and unlisted asset allocation.

“For the first time clients are actually talking about unlisted asset allocation and saying ‘I didn’t know that’s where industry funds

13/05/2020 2:24:15 PM

May 21, 2020 Money Management | 19

Adviser sentiment

were invested’. And for the retirees they’re saying ‘I don’t have 30 years so why do I have money in unlisted assets?” Schatto said.

“It’s been an educational piece and clients are more understanding and are taking more interest because they’ve had the time to read and watch more investment content and this creates a better and more meaningful conversation with the adviser.”

Carberry noted that it was currently a great buying opportunity for long-term investors who had the money and the right structure to ride out the volatility.

“I’m neutral in investment sentiment over the next 12 months and positive for three to five years but it will also depend on COVID19 and how quickly things open back up again and what restrictions are in place, along with discretionary expenditure and markets,” he said.

TIPS FOR ADVISERS For advisers who were worried about the market volatility, Ardino said they needed to be in front of their clients, educating them, and making sure they were aware of what was going on.

“It is important in any crisis to try and alleviate panic and comfort clients,” he said.

Advisers also needed to make sure they were informed and aligned themselves with good research sources and houses so that they could be “armed with information” for any enquiries from clients.

Ardino said it was also important for advisers to remain calm as making rational and informed decisions would also keep clients calm.

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Despite the uncertain environment, Carberry said this was the time for advisers to show their value and said a lot of the value came from the behavioural side of things.

“A lot of it is education at the moment on what has happened, how their superannuation has been affected, what’s happened historically – which probably gives them a bit of comfort, and how things have rebounded,” he said.

“The curveball at the moment is the jobs and incomes being knocked around, with some forced closures of businesses, and what to do for clients who have had their income affected. At the moment you want to be practically providing information, service, and being accessible to help clients not make silly decisions with their money.”

Symonds agreed and said an adviser’s job was to be on the front foot and be prepared to listen to clients.

“Conversations with clients should look forward and advisers need to reassure them that they will come out the other side,” he said.

“The important questions to ask is what is the recovery and bounceback plan? What have you learnt through a bad situation?

And what can you use in the future to make your business better?”

DEALER GROUP SUPPORT Reassurance was not only for clients but for advisers as Symonds said having a dealer group and the network it came with had been very helpful during this time.

He said Fitzpatricks had held regular weekly catchups with advisers on tips for working from home and how to help clients.

“You want to be practically providing information, service and being accessible to help clients not make silly decisions with their money.”

– Matthew Carberry, Verve Group director and senior wealth adviser “I was on a call yesterday with 60 people from the adviser community and we all shared information with how we were coping, tips on technology like electronic signatures, and so on,” he said.

“Professional isolation is tough for people at this point in time and if advisers are not connected to groups, whether it is a dealer group or not, it would be very tough. There is a lot of value with being connected.”

Both Carberry and Schatto said they liked the assistance dealer groups brought to their practices and processes they could outsource.

Schatto noted that his dealer group, RI Advice, helped educate staff, and covered 20% of practice processes that could take a lot of time which allowed the advisers to spend more time with clients.

“I like having ‘Big Brother’ looking at our processes as there is safety from a client perspective when it comes to decisions made by our advisers,” he said.

In terms of information, Schatto said he was bombarded with information surrounding COVID-19 but that the dealer group’s information and its interpretation on the Government’s stimulus packages had been very useful.

13/05/2020 2:24:29 PM

20 | Money Management May 21, 2020

Boutiques

IS SIZE THE ENEMY OF PERFORMANCE? In times of stockmarket meltdown, it can be tempting to rely on larger firms, writes Chris Dastoor, but do boutiques have their own edge in times of crisis?

BOUTIQUES OFFER A smaller, single-focused investment firm when compared to institutional firms, which often allows for a tighter relationship with clients.

They tend to often operate from a single office with a smaller staff, operating products with fewer funds under administration than what would be accepted at a larger or institutional firm.

However, despite their small size relative to institutional fund managers, they are just as well equipped to deal with market turbulence from the COVID-19 pandemic – if not in a better position.

According to data from FE Analytics, within the Australian Core Strategies universe, the bestperforming boutique fund in the Australian equities sector was Hyperion’s Australian Growth Companies which returned 9.31% over the year to 30 April, 2020.

This was followed by PM Capital Australian Companies (3.09%), CI Brunswick (2.95%), Bennelong Concentrated Australian Equities (2.44%) and Platypus Australian Equities (1.43%).

These figures compared to losses of 8.6% for sector.

Mark Arnold, chief investment officer (CIO) and managing director at Hyperion Asset Management, said being a boutique manager allowed them to maintain a longterm view during market turbulence.

“Adopting a long-term investment mindset is an important factor in achieving attractive compounding returns, requiring us to think more like business owners rather than being influenced by short-term market noise,” Arnold said.

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“As a boutique, we are fully aligned with clients’ goals because we [Jason Orthman, deputy CIO and executive committee deputy chair] are both owners of Hyperion, and we only invest our personal savings into Hyperion products – we only ‘win’ when our clients win.”

Sophia Rahmani, managing director of Maple-Abbott Brown, said being part of a privately-owned boutique meant she had direct control over what actions the company took during COVID-19.

“We were very responsive getting everyone working from home and the team has adapted incredibly quickly,” Rahmani said.

“We can be very clear on where we are going and actually make longer-term decisions, so I am spending time talking to my board about where we should be investing for the future and what other efficiencies we can eke out of our business right now.

“We’re not watching our share price on a daily basis because we’re not listed, so we can actually take the time now to decide to invest more of our retained profit to build our business for the future.”

OPERATING A BOUTIQUE Despite not having the headcount that institutional firms had, boutiques could still rely on outsourcing operational infrastructure, which allowed them to focus purely on the investment mandate.

Fidante Partners invested in long-term partnerships with boutiques to provide operational infrastructure, experience in asset management and a distribution network to help boutique managers focus solely on investments.

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May 21, 2020 Money Management | 21

Boutiques Strap It partnered with managers at all stages, including ones starting out, ones growing new investment capabilities or channels, and ones considering how to maintain longterm value in an established firm.

John Burke, global head of Fidante Partners, said boutique investment managers benefitted from having an intense focus on a particular asset class or strategy.

“This specialisation means they have a high level of expertise and like any business where the management has significant ownership, they are driven by a passion for what they do and a high conviction in their ideas and processes,” Burke said.

“Boutique fund managers put their own money into their business and always invest personally in their funds.

“This means they have as much at stake as their clients, and as both investors and business owners, they’re highly-committed to the long-term success of their funds.

“Boutiques also have a singular focus – investing – and are unencumbered by the bureaucracy and politics that can come with institutional investment managers.”

Maple-Brown Abbott, founded

by Robert Maple-Brown and Chris Abbott 35 years ago, was one of the first boutique asset investment managers in Australia, and Rahmani was only the fourth managing director of the company since its inception.

“It means we only do one thing, which is investment management, we’re not a global asset manager with offices scattered around the world, but we do have clients around

the world,” Rahmani said “We’re a smaller firm that does one thing and that gives us a much closer alignment with our clients.

“We have a simple organisation structure; we don’t have layers of bureaucracy so we’re more nimble when it comes to making decisions.”

This was Rahmani’s first stint at a boutique firm so she was wellversed in the cultural differences between boutiques and the major institutional funds, having previously worked at Janus Henderson and Macquarie in Australia, Singapore and the United States.

“Because of the nature of boutiques, there’s a closer alignment in culture and values in the team, and we can talk very simply about what our purpose is,” Rahmani said.

Mark East, chief investment officer for Bennelong Australian Equity Partners (BAEP), said a key difference was the fact that the people running the business had ownership of the business – and there’s no motivator like having equity or ownership in a business.

“The added advantage of boutique management is that the [investment managers] have a huge interest in performing well and they won’t be going anywhere,” East said.

“We’re nimble, we don’t have to go to investment committees – we make thorough decisions – but we don’t have to go through tiers of management to do so.”

NOT JUST AUSTRALIAN EQUITIES Maple-Brown Abbott, Hyperion and Bennelong were all among the big boutique players in the

Chart 1: Best-performing Australian equity boutique funds over the year to 30 April 2020

Source: FE Analytics

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“It means we only do one thing, which is investment management, we’re not a global asset manager with offices scattered around the world.”

– Sophia Rahmani, Maple-Brown Abbott Australian equities sector, but investors had options for boutique managers in other sectors.

Aoris Investment Management, which is based in Sydney, ran a $225 million Aoris International fund investing in global equities. With only one office, the firm demonstrated investing globally did not necessarily require a global network of offices.

The Aoris International fund had returned 2.03% over the year to 30 April, while the global equities sector averaged 0.71% over the same period.

Stephen Arnold, founder and portfolio manager of Aoris, said a boutique ownership structure by itself did not guarantee a good or bad outcome, but it could have a material impact.

“Boutiques are often created and run by investment professionals, so investing is at their heart and soul,” Arnold said.

“Conversely, asset management institutions are most often run by salespeople, so their DNA is product creation and selling.”

Arnold said the key for a boutique was not to become institutional as they grew.

“My observation is that boutiques are built by a serious investor around an area of genuine expertise,” Arnold said.

“But over time they lose sight of their original mission and passion by creating new products and focusing on asset growth over performance.”

For Fairlight Asset Management, which launched its Global Small and Mid Cap fund in November 2018, it said a boutique was the “only model” that would allow it to run the fund with the focus and alignment it wanted. Over the year to 30 April, 2020, the fund had returned 9% compared to the sector average loss of 4.38% over the same period.

“Fairlight only offers a single fund to clients and all members of the team are also investors in the fund. Our focus is solely dedicated to finding the best investment

opportunities in small and mid-sized companies outside of Australia.” Ian Carmichael, Fairlight’s portfolio manager and partner said.

Moving to the fixed income space, Daintree Capital ran two Australian dollar actively-managed fixed income funds, the Core Income Trust fund which returned 1.12%, and the High Income Trust which lost 1.66% over the year to 30 April.

Mark Mitchell, Daintree Capital director and credit portfolio manager, said very few boutiques ran passive management strategies and the firm held a strong conviction that passive management in fixed income made considerably less sense than in certain parts of the listed equity market.

Daintree was a finalist for the Emerging Manager award in the Money Management Fund Manager of the Year awards for 2019.

“Most passive fixed income products are managed against indices that have a long duration benchmark, so they perform well when interest rates get lower,” Mitchell said.

“The challenge with these types of strategies now is that interest rates are near historic lows; there is limited scope for interest rates to move too much lower. Therefore, managers need to be very active to look for other ways to add value beyond simply mimicking a long duration index.”

Being a relatively small boutique fixed income fund manager had the extra benefit of being able to invest into markets that were smaller but still offered good relative value.

“Some large asset managers can be precluded from investing in certain areas,” Mitchell said.

“Because if they purchase the asset in a size that is meaningful for their portfolio they may end up owning all the security on offer, turning it into a highly illiquid security.

“As the old saying in asset management goes ‘size is the enemy of performance’.”

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22 | Money Management May 21, 2020

Equities

THRIVING IN LOCKDOWN The recovery from stockmarket lows in March has been the fastest rebound in history, writes Sinead Rafferty, so investors are seeking those companies which will thrive during lockdown and beyond.

WHILE STOCKMARKETS HAVE seen the fastest rebound in history since lows on 23 March, the economic data has been dire.

According to the Reserve Bank of Australia, national output is likely to fall by around 10% over the first half of 2020, with most of this decline taking place in the June quarter and unemployment is likely to be around 10% by June.

So, what is driving the rally?

The most obvious rationale is the US$8 trillion ($12.4 trillion) plus of monetary and fiscal stimulus from global governments and central banks to support their economies.

The response has been larger and faster than the Global Financial Crisis (GFC). The S&P 500 for example, is up 24% since its 23 March lows and although markets are still 15% behind the market peak on 19 February, given the

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scale of the pandemic and impact on supply chains many are asking if the rally can last.

For active investors, the opportunity set is ripe. During this period of economic uncertainty, the process to select companies for a portfolio is focused on which companies will not only thrive but survive the lockdown period. Three areas of current focus include: • Cyclical rebounds: Many industries have been decimated and those companies with strong operating cashflow, sufficient liquidity and manageable debt levels are more likely to survive.

Determining which companies will rally when the cycle turns can provide an attractive source of alpha.

• Access to capital: With limited cashflow due to the lockdown restrictions many companies

are raising equity. Some of these offers are less attractive than others but this environment also offers active investors the opportunity to pick up quality companies at a significant discount.

• The yield trap: Stocks that have traditionally been the hunting ground for yieldhungry investors could look very different in the mediumterm. With many companies deferring or cutting dividends, further analysis of balance sheet strength and cashflow is needed to assess which companies can produce reliable dividends in the future.

IDENTIFYING CYCLICAL REBOUNDS Contrary to other economic downturns such as the GFC and

Tech Wreck which have been dissected for clues on the potential path forward for the current crisis; this time there are sectors of the economy that have not only slowed but have ground to a halt. For sectors such as tourism, retail and aviation recent events may accelerate trends that would otherwise have taken years to eventuate such as the increasing trend towards online transactions and the move away from cash payments.

For some of these businesses cashflow has gone negative due to refunds for holidays that cannot be taken. Therefore, it is unsurprising that many businesses in these categories have seen their share price falls exceed the index. Some will not survive, others will need an injection of capital and others should perform well when restrictions are

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May 21, 2020 Money Management | 23

Equities lifted. Fund managers are actively assessing which companies’ earnings are likely to turn around faster than the market is expecting.

In many cases, it is dependent on consumer behaviour and what households will spend money on once lockdown restrictions are lifted.

The tourism sector has been one of the heaviest hit by the pandemic and Qantas has grounded much of its fleet and furloughed most of its staff. Active managers are assessing whether Qantas has enough liquidity to withstand the lockdown period, what history tells us about previous pandemics regarding consumer behaviour and how well Qantas can manage costs.

Virgin Australia has entered voluntary administration and could pare back its domestic network and close its international operations if it emerges. This could give Qantas more domestic monopoly routes and reduce competition for international routes.

Qantas has a strong balance sheet, entering this crisis with $2 billion in cash, $1 billion undrawn debt facilities and $4.5 billion of unencumbered aircraft. With politicians already talking about relaxing international restrictions with New Zealand preceded by the opening of domestic routes, conditions are improving. While the recovery timeline is uncertain, what occurred during the SARS outbreak could provide some insights into consumer behaviour whereby domestic travel improved before international resumed.

COMPANIES WITH ACCESS TO CAPITAL The impact of the lockdown on corporate cashflows has led an increasing number of companies to tap the market for capital. In April 2020 alone, Australian companies raised over $13 billion of equity. For some, this will ensure their survival, for others it is an effort to shore up their balance sheets as falling revenue impacts their bottom line.

Stockpickers must sift through these offers and consider whether they represent an opportunity to pick up shares in companies that they have long coveted but previously considered too expensive,

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Chart 1: Passenger traffic

Source: Sydney Airport full year results presentation 2019

or whether they should give it a wide berth based on company fundamentals or for portfolio construction reasons.

In addition, at the end of March emergency capital raising relief rules were introduced which allows issuers to issue 25% of new shares provided placements are accompanied by a share purchase plan at the same or a lower price. In these circumstances, investors can buy shares at a substantial discount.

Although these capital raisings dilute existing shareholders, they provide liquidity, a stronger balance sheet and better survival prospects for issuers.

Cochlear has a dominant position in designing and manufacturing medical devices for profoundly deaf people. In late March, Cochlear announced an $880 million capital raising at $140 a share. When markets peaked on 19 February, their share price was trading at $251, but the lockdown induced by COVID-19 led to a suspension of elective surgeries.

Accessing these types of offers is not always easy and the majority are taken up by institutional investors (including active fund managers) who can provide the quantum of support to ensure that the raising is well supported.

Furthermore, equity raisings that receive strong demand often are only available to existing shareholders. Active fund managers view capital raises as an opportunity to increase their holding in companies that they

consider good quality.

If Cochlear can resume their trajectory once global lockdowns end and the backlog of surgeries provides immediate as well as longterm revenue, investors in the equity raise could receive outsize returns.

THE YIELD TRAP With the collapse of company earnings at least in the short-term, it is not surprising that many corporates have announced dividend cuts or deferrals. Australian companies pay out over 70% of their earnings on average, a much greater proportion than their global counterparts due to Australia’s imputation system. As such, the impact of dividend cuts is likely to be greater with expectations for dividends from Australian companies at the lowest level since 2008.

Many investors faced with low deposit rates and low bond yields look to these dividends and franking credits as a source of income.

Traditionally the banking sector has provided attractive yields, paying out up to 90% of their earnings but this is changing with NAB becoming the first of the big four banks to announce a large dividend cut.

Investors looking for income will need to look more broadly across sectors going forward. The reliability of this income is one of the factors managers consider when choosing stocks to add to their portfolio. If growth and acquisition opportunities are low, paying out dividends to shareholders is an efficient use of capital.

The uncertain outlook for the Australian economy is putting pressure on bank dividends as some companies seek to preserve capital.

When Australia emerges from the current recession the outlook for the banks is likely to be closely tied to the fortunes of the Australian economy.

It must be factored the Australian Prudential Regulation Authority (APRA) provided the following guidance in April encouraging reduced distributions: “During this period, APRA expects that authorised deposit-taking institutions and insurers will seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer.

However, where a board is confident they are able to approve a dividend before this, on the basis of robust stress testing results that have been discussed with APRA, this should nevertheless be at a materiallyreduced level”.

How fast the Australian economy recovers will determine when those businesses and mortgage holders who have received deferral of interest will resume payments and when businesses look to grow and need credit again.

This assessment of future earnings combined with an analysis of company cashflows and balance sheets is needed to determine the prospects for dividend yields looking forward.

Sinead Rafferty is investment specialist at Fidante Partners.

13/05/2020 3:50:39 PM

24 | Money Management May 21, 2020

Fixed income

THE PERILS OF (OVER) STRETCHING FOR YIELD Central banks are using unprecedented levels of stimulus to support the economy, writes Kerry Craig, leaving investors with expensive bond prices and record low interest rates.

WORKING FROM HOME has greatly reduced my daily level of activity. The thousands of steps I once took per day in the daily bustle of commuting has dwindled to hundreds, if I’m lucky.

With physical fitness falling to the wayside, it’s a wonder that I haven’t stretched a muscle reaching for the banana bread.

The similar risk looms for investors, of sorts. Not gluttony, but rather the risk of overreaching. Investors who overextend themselves to find income might unknowingly add to

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unwanted portfolio risks in the drive for yield.

To understand this risk, it’s helpful to understand that markets themselves are currently somewhat overstretched, in terms of being at extreme levels relative to their own history.

In the last few weeks, investors fearful that the pandemic would cause the prices of riskier assets like stocks to fall, took shelter in lower risk assets, like government bonds. As a result of this heightened demand, bond prices, which move inversely

to yields, soared. Central banks, who pledged to support economies globally by flooding financial systems with liquidity, further fuelled that rally by promising to buy more government bonds, further driving up prices. This price movement resulted in capital appreciation for bondholders, but it also reduced the level of income payout to investors.

Where does that leave us now?

Bond prices have rallied handsomely through this crisis and they are now incredibly

expensive. At these eye-watering levels, investors may not fully grasp how painful it would be if yields were to spike back up (i.e. if prices were to fall). Because they’re no longer getting much income from these bonds, that would make capital losses all the more painful for investors.

For example, the longer the duration of a given bond, the more sensitive to interest rates it is – theoretically a 1% increase in interest rates would equate to a loss of approximately 11% in total return terms on a 10-year

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May 21, 2020 Money Management | 25

Fixed income Australian government bond at today’s yields.

All this highlights the clear need to be mindful of duration risk and potential capital losses on government bonds. While having exposure to more conservative assets like bonds should remain an important part of a balanced portfolio, especially in an environment where clear policy support from central banks will continue to bolster bond prices, investors should also be awake to the risks.

Chart 1: Central bank bond purchases. Quarterly net bond purchases by G4 central banks*, USD billions Central bank bond purchases Quarterly net bond purchases by G4 central banks*, USD billions $6,000

Projection U.S.

$5,000

Eurozone UK Japan

$4,000

Net $3,000

$2,000

$1,000

$0

QUANTITATIVE BY NAME, NOT BY NATURE Simply put, the actions taken by central banks to shore up economies around the world have had seismic implications for bond markets. In doing this, central banks have once again proven their worth as today’s modern financial heroes. Their swift and sizable actions restored market confidence and inspired the market rally we’ve seen since late March.

A number of central banks have started, or reignited, programs designed to inject money into the economy and expand economic activity by buying up government bonds or other financial assets, known as quantitative easing (QE). In reality, these new QE policies are really not quantitative at all, as the uncapped nature of bond purchases being undertaken by the world’s largest banks is focused on providing financial stability and liquidity. These QE policies aid market functioning and help to lower the cost of cash in the economy as interest rates fall to zero, or as close to zero as they will get, in many economies.

With all this buying of bonds, the ballooning size of central bank balance sheets will dwarf anything experienced in the numerous rounds of QE since the Global Financial Crisis (GFC). Already this year, the US Federal Reserve has purchased more than $1.5 trillion in US Treasuries, equivalent to 7% of its gross domestic product, and over $500 billion in mortgage backed securities, eclipsing the total

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-$1,000 '06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

'17

'18

'19

Source: Bank of England, Bank of Japan, Bloomberg Finance L.P., European Central Bank, U.S. Federal Reserve, J.P. Morgan Asset Management.

Source: Bankof of England, Bank Japan, Bloomberg Finance European Central Bank,programs U.S. Federal Reserve, *New purchases bonds are based on periodof to period changes in average holdings during L.P., the quarter across various asset purchase as reported by each respective G4 central bank (the Bank of England, the Bank of Japan, the European Central Bank and the U.S. Federal Reserve), announced purchase plans of these set Management. central banks and J.P. Morgan Asset Management projections, converted to common currency by average quarterly exchange rates.

Guide to the Markets – Australia. Data as of 31 March 2020.

purchases that were made under the first three rounds of QE up to 2010.

It’s not just the big players either –the Reserve Bank of New Zealand has purchased government bonds equivalent to 10% of the size of its economy.

This monetary support being offered by central banks is entwined with so-called fiscal support, meaning stimulative spending or policies enacted by governments to try to counteract the economic fallout of the virus containment measures.

Put another way, if central banks are the lenders of last resort, then governments are the spenders of last resort. That spending by governments, funded by borrowing through issuance of debt, has been made quite affordable by low interest rates.

As economies try to recover from lockdowns, continued support – buttressed by government debt – is going to be needed for a long time. In other words, we will see more central banks financing government deficits directly by buying up new debt issuances.

CREDIT WHERE CREDIT IS DUE As part of their expansive measures to cushion the economic consequences of COVID-19, central banks’

monetary policy toolkits continue to expand, providing support for areas of the fixed income market outside of just core government bonds. A plethora of new and revised initiatives announced by the US Federal Reserve since March have extended the Fed’s reach into the corporate bond market (i.e. into so-called credit assets).

Two key Fed programs are the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF). As the names suggest, these two initiatives will purchase bonds directly from investment-grade issuers as well as buying bonds that are already trading on the secondary market. The goal is to improve market liquidity and to reduce the difference in yields between government bonds and corporate bonds (known as credit spreads). Importantly, in the case of the SMCCF, the Fed will dabble in the high yield bond market, which is a significant departure from their traditional involvement.

The outcome of all these initiatives has been to lower the yields, or narrow the spreads, on corporate bonds, greatly reducing levels of market stress. Bond credit spreads act as a kind of thermometer for economic health – narrowing credit spreads tend to be a good indicator.

'20

J.P. Morgan As-

STRETCHING, BUT NOT TOO FAR Pricing that is responsive to central bank intervention in bond markets, and subdued economic activity as we recover from the virus, mean that investors should remain focused on quality in fixed income markets, continuing to lean into sectors that come under the wings of central banks.

Core government bonds may no longer offer up a strong level of income – or possibly none when adjusted for inflation – but their role in portfolios is still important.

It would be remiss to abandon the diversification benefits of holding government bonds as a core diversifier given the still unknown risks to the outlook.

The higher-grade corporate bond market (i.e. higher-quality bonds) is where investors can find a reasonable income and the benefits of the central bank safety net. But not all bonds are equal.

Extreme periods of stress and then recovery, as experienced in the past few months, mean that both good and bad securities rode the wave higher and lower. As a result, less credit worthy companies with weaker balance sheets may have had their corporate life extended, but this does not make them worthy borrowers or worthwhile investment choices.

Continued on page 26

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26 | Money Management May 21, 2020

Fixed income

Continued from page 25 A focus on quality and resilient business is key to picking the right bonds to invest in during a still uncertain environment. For income seekers, this means a bottom up approach in locating corporate bonds that are backed by companies with stronger balance sheets and the ability to operate throughout a potentially longer downturn.

Enormous monetary support may initially stave off some corporate defaults, but riskier credit securities, such as those backed by weaker businesses, will not be fundamentally strengthened in the long-term. Nowhere is this truer than in the high yield sector of the bond market.

Before COVID-19 was a common household term the high yield market looked to be an attractive source of relatively higher income in the bond market, because even less credit worthy companies were still likely to be able to pay back their debts, meaning a low default rate.

However, the COVID-19 induced recession and the fall in oil prices, which disproportionally impacts US high yield companies in the energy sector, has materially changed the risk-reward dynamics in high yield bonds. In other words, although these securities look like attractive sources of income because of their high yields, they may be too risky for many investors.

THE SILENT KILLER Of course, the great enemy of bond investors is inflation. This silent killer lurks in the background, slowly eroding the purchasing power of our money over time – making today’s money worth less in the future. This is why we need our investments to deliver returns that outperform inflation — what’s

08MM210520_16-29.indd 26

known as a ‘real’ or inflationadjusted return. Indeed, given low interest rates, real yields today on government bonds in the US and Australia are negative when adjusted for inflation.

The great debate is whether the trillions of dollars of fiscal and monetary stimulus will eventually result in higher rates of inflation.

The general prognosis is that the recession will be shorter than average given the nature of the shock, and that the sudden stop to many economies could soon be reversed. Nevertheless, the legacy impact of monetary and fiscal policy stimulus will act as a tailwind for some time to come, potentially leading to an overheating economy and higher inflation.

However, given that inflation did not materialise in the aftermath of the policy response to the GFC, it’s difficult to see the current situation being different. There may be spikes in spending as individuals and households once again find their freedom, but spending patterns may change and savings rate increase over the long term, leading to lower rates of consumption overall, thereby keeping inflation in check.

Uncertainty over the path ahead

“At these eye-watering levels, investors may not fully grasp how painful it would be if yields were to spike back up.”

– Kerry Craig will be with us for some time. To navigate this and keep their portfolios on track, investors should focus on those companies with the resilience to withstand the economic fallout. This means a focus on quality when thinking about income from bonds, as well as investing in bond securities that are beneficiaries of central bank purchases.

To make the most of the opportunities, however, being bound to one sector means the potential for missed income in others. A better approach for bond investors may be to focus on the opportunities presented across all segments of the global fixed income market. This may not sound very exciting, but bonds aren’t meant to be.

Kerry Craig is a global market strategist at J.P. Morgan Asset Management.

13/05/2020 2:19:36 PM

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28 | Money Management May 21, 2020

ESG

PROVIDING TRUE-TO-LABEL EXPOSURE A fund may describe itself as ‘sustainable’, writes Richard Montgomery, but how can you be sure its actions in investment are more than just a label?

RECENT YEARS HAVE seen a surge in interest in socially responsible or ethical investing, both in Australia and globally, coinciding with widespread concern around environmental and societal and governance (ESG) issues. Advisers are likely to find an increasing number of clients want to invest in a way that reflects their ethical and environmental stance.

In BetaShares’ 2019 ETF Investment Trends Report, only 16% of investors said it was of no importance that their investment portfolio contains companies with good environmental standards, with 29% saying it was ‘very important’ or ‘extremely important’.

Financial planners are responding to this demand. In the 2019 report, 34% of planners reported providing advice on responsible investments, up from 19% just two years previously.

Two important questions to consider prior to making an ethical investment are: • How do I know I’m really buying a responsible or ethical investment?

• Does responsible investment come at the cost of financial performance?

WHAT IS RESPONSIBLE INVESTING? The Responsible Investment Association Australasia (RIAA) defines responsible investing (RI), also known as ethical investing or socially responsible

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investing (SRI), as ‘a holistic approach to investing, where ESG and ethical issues are considered alongside financial performance when making an investment.

The Global Sustainable Investment Alliance (GSIA) details seven responsible investment strategies employed by fund managers. These strategies vary in the degree to which responsible considerations influence the investment approach. For example, some RI strategies can be said to seek to ‘avoid harm’, whereas others actively look for investments that target a positive social or environmental impact.

Fund managers typically employ a combination of strategies.

ESG integration: • Involves the systematic and explicit inclusion of ESG factors into the investment decisionmaking process; and • Most popular RI strategy in Australia.

Corporate engagement and shareholder action: • Refers to the use of shareholder power to influence corporate behaviour, for example by engaging directly with senior management or boards, and proxy voting in accordance with ESG guidelines.

Negative/exclusionary screening: • Involves the systematic exclusion of certain sectors,

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May 21, 2020 Money Management | 29

Strap ESG

Table 1: ESG investing spectrum

companies or practices based on specific ESG criteria, such as filtering out specific industries, sectors, or companies involved in gambling, alcohol, tobacco, weapons, pornography or animal testing; and • Most popular RI strategy globally.

Norms-based screening: • Investments that do not meet minimum standards of business practice are excluded.

Positive/best in class screening: • Investments are included in a portfolio based on specific ESG criteria such as the goods and services a company produces, for example if a company derives greater than 20% of its revenue from sustainable technologies, products and services.

Sustainability-themed investing: • Investments are made in themes or assets specifically related to improving social or environmental sustainability, such as clean energy.

Impact investing: • Investments targeted specifically to address social or environmental issues while also creating positive financial returns for investors; and • Linked to community investing, which directs capital specifically to traditionally underserved individuals or communities.

Table 1 sets out these seven strategies along a spectrum illustrating, in broad terms, where each strategy sits on a spectrum from ‘traditional investment’, with little or no regard for ESG factors, to philanthropy.

TRUE TO LABEL Ethical investors are increasingly insistent their money is being invested in a way that aligns with their values, rather than just ethical in name.

Interpretations of ‘socially responsible/ethical investing’ can vary widely, and just because an investment manager declares they are implementing responsible

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Source: RIAA, 2019, Responsible Investment Benchmark Report 2019 Australia

investment, or a fund has the word ‘responsible’ or ‘ethical’ in its name, doesn’t necessarily mean they will meet the standards of all ethical investors.

For example, some ‘ethical’ funds avoid investing in ‘pure-play coal companies’ but may still hold major coal producers such as BHP and Anglo American, on the grounds that they are ‘general mining’ companies rather than ‘coal miners’.

Some investors may be comfortable with this, but for others such exposure would be inconsistent with their principles.

The RIAA runs a ‘Responsible Investment Certification Program’ which aims to help investors navigate these complexities to find investment options that match their beliefs and personal values.

If an investment product has been certified by the RIAA it means it ‘has implemented a detailed responsible investment process for all investment decisions, clearly discloses what that process is, has been audited by an external party to verify the investment process, and has met the strict disclosure

requirements of the program’.

Another useful resource offered by the RIAA is a tool that enables investors and their advisers to search for certified funds according to particular values or interests that are important to them.

An investor can select two themes from a list that includes: • Social and sustainable infrastructure; • Sustainable land and agricultural management; • Healthcare and medical products; and • Renewable energy and climate change solutions.

The investor can also select the top two issues they want to avoid, such as: • Gambling; • Fossil fuels; • Pornography; • Animal cruelty; and • Tobacco.

PRINCIPLES OR PERFORMANCE – IS IT A CHOICE? Some investors historically have believed that they had to choose between principles and

performance, that giving priority to ethical considerations meant trading off financial returns.

The RIAA’s research does not bear this out. As at 31 December, 2018, Australian RI share funds surveyed outperformed mainstream Australian share fund benchmarks for all periods except the three-year term.

International RI share funds surveyed outperformed the Morningstar average mainstream international share fund over every time horizon (noting however they underperformed the global benchmark for all periods except the three-year term).

SUMMARY Socially responsible investing has proven financially rewarding in recent years, with the myth that responsible investing means sacrificing financial performance being dispelled by performance statistics for both Australian and global ethical funds.

Richard Montgomery is investment communications manager at BetaShares.

14/05/2020 9:27:23 AM

30 | Money Management May 21, 2020

Toolbox

A BRAVE NEW FINANCIAL WORLD

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May 21, 2020 Money Management | 31

Toolbox With the Budget postponed until October, the economic stimulus measures implemented for COVID-19 mean advisers have to contend with a whole new world, writes Jeff Scott.

THIS HAS BEEN the most unusual end of the financial year in my more than 30 years in financial services. The entire Australian population has been affected by COVID-19 and financial services has not been immune from this impact.

The Australian Budget that is normally delivered annually by the Treasurer in May has been postponed until October, 2020. We have also witnessed both sides of politics at the State and Federal levels work together to put a range of measures in place to financially assist Australians and weather the economic uncertainty associated with COVID-19.

Below are details of some of the most significant changes associated with COVID-19.

FINANCIAL ASSISTANCE BENEFITS 1. The Coronavirus Supplement The Coronavirus Supplement is an additional fortnightly $550 payment for individuals on top of eligible income support payments, intended to be in effect for up to six months from 27 April, 2020. It will be automatically added to the following eligible income support payments: JobSeeker Payment; Partner Allowance; Widow Allowance; Sickness Allowance; Youth Allowance; Austudy; ABSTUDY; Living Allowance; Parenting Payment; Farm Household Allowance; or Special Benefit.

2. Deeming rates From 1 May, 2020, deeming rates used to assess benefit eligibility under the Income Test have been reduced: from 1.0% to 0.25% for the lower tier; and from 3% to 2.25% for the higher tier. For singles, the first $51,800 of their financial assets has the deemed rate of 0.25% applied, while anything over $51,800 is deemed to earn 2.25%. For couples, the first $86,200 of their combined financial assets has the deemed rate of 0.25% applied, while anything over $86,200 is deemed to earn 2.25% 3. JobKeeper payments Eligible employers will be reimbursed a fixed amount of $1,500 per fortnight for each eligible employee stood down as long as their job is kept open. JobKeeper payments can be made for the period beginning 30 March, 2020.

The Government made the first payments to eligible employers in the first week of May 2020.

SUPERANNUATION 1. Minimum payment amount for a superannuation income stream For the next two financial years, the minimum pension drawdown rates have been reduced by 50%.

This will allow members of superannuation funds to retain more of their capital in retirement while we are experiencing volatile investment markets and low fixed interest returns.

Table 1: Minimum payment amount for a superannuation income stream Age of beneficiary

Current percentage factor (1 July, 2019 to 30 June, 2021)

Percentage factor (1 July, 2013 to 30 June, 2019)

Under 65

2%

4%

65 to 74

2.5%

5%

75 to 79

3%

6%

80 to 84

3.5%

7%

85 to 89

4.5%

9%

90 to 94

5.5%

11%

95 or more

7%

14%

2. Early access If a member of a superannuation fund has been financially affected by COVID-19, they may be able to access some of their superannuation early. Eligible citizens and permanent residents of Australia or New Zealand can apply for: • Up to $10,000 in 2019/20 if they submit an application through myGov by 30 June, 2020; and • Up to a further $10,000 in 2020/21 if they submit an additional application between 1 July, 2020 and 24 September, 2020.

In order to access these amounts, a member must meet one of the following criteria: 1) Currently unemployed; 2) Receiving either Jobseeker payment, parenting payment, special payment, farm household allowance, or youth allowance for Jobseeker (unless undertaking full-time study or new apprentice); 3) On or after 1 January, 2020: Were made redundant; a. b.

Had working hours reduced by 20% or more; or c.

As a sole trader there was a reduction in turnover of 20% or more.

Specified temporary residents are permitted early release of superannuation under specific circumstances.

There is no tax to be paid on funds released and these will not need to be included in an individual’s tax return. It may only be paid to an Australian bank account. An application can't be withdrawn or cancelled once it has been submitted.

When advisers are discussing early release of funds from super with their clients, they should remind them that accessing super early will affect super balances and may affect future retirement income, due to a reduction in longer term savings due to compounding or realising losses in the current volatile investment market. It may also result in loss of life insurance as the member’s account may have insufficient assets remaining to pay

JEFF SCOTT

premiums, if the member’s account has been inactive (no contributions or rollovers), or the account balance falls below $6,000. For inactive accounts and low balances, members can retain their insurance if they notify the trustee of the superannuation fund in writing (i.e.

– opt in).

Responsibilities of financial advisers The Australian Securities and Investments Commission (ASIC) has made a series of amendments to advice requirements in relation to COVID-19.

Where a client requests urgent advice due to adverse economic effects of COVID-19, an adviser has up to 30 days to provide a statement of advice (SOA), but must inform the client of a cooling off period if they are acquiring a new product.

Where the COVID-19 advice is in relation to the early release of superannuation of an existing product held by the client, the adviser will only need to provide a record of advice. The record of advice must stipulate: basis for early release; client circumstances that makes early release necessary; the implications of early release of super benefits; and any remuneration or benefits received by the financial adviser. The advice provided to the client may not have eventuated from unsolicited contact from the adviser, and the fee charged cannot exceed $300.

Similarly, where the financial adviser is providing advice due to the adverse economic effects of COVID-19 in relation to existing Continued on page 32

Source: Source: SIS Regs 1994 - Schedule 7

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32 | Money Management May 21, 2020

Toolbox Continued from page 31 products held by the client, a record of advice may be used instead of an SOA, where an SOA has been provided previously. The record of advice must include: a brief explanation of the changes in the client’s relevant personal circumstances; the basis on which the recommendations are made; any remuneration, benefits or other interests received by the financial adviser; and any additional charges or any loss of benefits.

EXISTING EOFY STRATEGIES While there is still economic uncertainty due to COVID-19, advisers should remind their clients there continue to be opportunities to benefit from traditional end of financial year tax and super contribution strategies.

Income protection premiums Policyholders who pay their income protection premiums by 30 June, 2020 are eligible to claim a tax deduction for the premiums in the 2019/2020 financial year. If they delay paying the premiums until July, then the tax deduction will be deferred until the 2020/2021 financial year.

For individuals who are currently applying for cover, the policy must be in-force and the premiums received, that is, debited and banked, by 30 June, 2020, for the policy holder to claim a tax deduction for the 2019/2020 financial year.

While there is no cap to the tax deductions in relation to income protection premium payments, taxpayers must remember that the entire income protection premium may not be tax deductible. Where a portion of the premium is attributable to a capital payment (rather than an income payment), then that proportion of the premium is not tax deductible (i.e. specified injury benefits and trauma benefits).

If the life insurance product provider does not itemise the proportion of the premium attributable to the capital and income components, then the

08MM210520_30-36.indd 32

Australian Taxation Office (ATO) has the right to deny the deduction.

Government super co-contributions The economic impact of COVID19 has caused some workers to lose their jobs, and others to have significantly reduced incomes. Depending on a client’s level of income, they may qualify for a Government co-contribution this financial year. The member must have made at least one eligible personal super contribution to their super account during the 2019/2020 financial year, and be less than 71 years old at 30 June, 2020.

The member must have a total superannuation balance (across all funds and all accounts) of less than the transfer balance cap at 30 June, 2019 ($1.6 million for 2019/2020 financial year).

They cannot have exceeded their non-concessional contributions cap of $100,000 for the 2019-2020 financial year, and they must have lodged their tax return.

Working from home deductions The ATO has always permitted tax deductions for working from home, with strict limitations, documentation and record keeping conditions. With so many Australians working from home due to COVID-19, the ATO has modified the record-keeping requirements for the 2019/20 financial year.

The shortcut method allows taxpayers to claim a deduction of 80 cents for each hour they work from home due to COVID-19 to fulfil employment duties (and not just carrying out minimal tasks) (COVID hourly rate). A taxpayer is not required to have a dedicated area of the home set aside for working, but must have incurred additional expenses as a result of working from home due to COVID-19. A record of the number of hours worked from home as a result of COVID-19 must be kept (timesheets, diary notes or rosters).

Jeff Scott is head of advice strategy at MetLife Australia.

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

1. How much is the fortnightly Coronavirus Supplement? a) $550 b) $650 c) $750 d) $950 2. What has the lower tier deeming rate been reduced to? a) 0.10% b) 0.25% c) 0.40% d) 0.55% 3. How much is the fortnightly Jobkeeper payment? a) $500 b) $1,000 c) $1,500 d) $2,000 4. Under the shortcut method, what is the rate of deduction a taxpayer may claim if working from home due to COVID-19? a) $0.50 per hour b) $0.80 per hour c) $1.00 per hour d) $2.00 per hour 5. What is the maximum age that person is still eligible to receive the Government co-contribution? a) 55 on 30 June 2020 b) 60 on 30 June 2020 c) 65 on 30 June 2020 d) 70 on 30 June 2020

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/brave-new-financial-world

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

13/05/2020 3:49:13 PM

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34 | Money Management May 21, 2020

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

Appointments

Move of the WEEK Peter Burgess Deputy chief executive and director of policy and education SMSF Association

Self-managed superannuation fund (SMSF) professional body, the SMSF Association (SMSFA), has appointed industry veteran and technical specialist, Peter Burgess as deputy chief executive and director of policy and education, effective from 1 June, 2020.

Burgess had worked at the SMSFA as technical director for three

Australian Unity has appointed Victor Windeyer to lead the development of a new healthcare investment initiative in its funds management business.

Windeyer joined from an advisory role at QIC Private Capital where he originated and developed QIC Global Infrastructure’s first major investment in the healthcare sector.

Before that, he spent eight years at Citigroup where he led the Australian healthcare equities research team.

He was also general manager and chief operating officer at listed medical device company Sunshine Heart, as well as held senior roles at Ventracor, Vision Systems and Cochlear.

The new initiative would strategically invest capital with the long-term objective of addressing key issues that faced Australia’s health and ageing sectors, including

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years before joining SMSF administrator SuperConcepts in 2013 as general manager, technical services and education, and had also previously served on the SMSFA board.

John Maroney, SMSFA chief executive, said Burgess had built up a well-deserved reputation across SMSF policy and technical issues.

“His presentations at National

ageing population, chronic diseases, technology advances and social infrastructure.

Asset management firm Allan Gray has added LJ Collyer, Marietta Gibbs and Chris Hestelow into new roles in its distribution team.

Collyer would take the role of head of adviser distribution; while Hestelow transitioned from relationship and research associate to relationship manager.

Gibbs, a former Allan Gray state manager, took the role of national account executive and would assume additional national responsibilities including strategic distribution initiatives.

Julian Morrison would continue his role as head of research houses and key accounts.

The Financial Services Institute of Australasia (FINSIA) has ap-

Conference are always a highlight of that event, with Peter holding the rare honour of having addressed every conference,” Maroney said.

Burgess said he was excited to be re-joining the body at a time of enormous change in the industry, not solely because of COVID-19, but also other recent superannuation and advice reforms.

pointed Commonwealth Bank executive Grant Cairns as vice president.

Cairns was one of the first candidates to graduate through the Chartered Banker programme when it was introduced in Australia last year.

His current role at the Commonwealth Bank was executive general manager, regional and agribusiness banking.

Statewide Super has appointed Simone Dyda as chief financial officer and Jason Muir as chief risk officer, both effective from 15 May, 2020.

Dyda joined from EY where she had spent the last 15 years working with clients in the financial services industry and for member-based organisations.

She held various leadership roles and excelled in financial reporting, financial due diligence,

regulatory and compliance matters, evaluation of systems and controls, and financial risk management.

Muir joined from Deloitte where he was director in the firm’s risk advisory practice and had 12 years’ experience in risk management and assurance.

He had led risk and compliance teams, including at BT Financial Group, where he supported the development of the risk and compliance framework for the advised and non-advised platform superannuation products.

Muir had also worked on the simplification of member pricing and the removal of grandfathered remuneration from legacy products.

He had worked with People’s Choice Credit Union, Beyond Bank, Australian Executor Trustees, Super SA, and HomeStart Finance.

14/05/2020 9:29:19 AM

Fidelity International is proud to be awarded the 2020 Morningstar Australia Fund Manager of the Year.

The award recognises Fidelity’s consistently high-performing investments and our ability to serve as first class stewards of our investors’ capital over the long-term.

We believe it’s our team of 400 investment experts sharing insights in real time, from 18 locations around the world, that sets us apart. From London to Mumbai, Shanghai to Sydney, we connect across asset classes, sectors and regions, identifying trends and investment ideas.

Our unwavering focus and rigorous research never stop. Because we know that by going further we see what others may miss.

For our clients that means better investment decisions and better insights to help navigate the most challenging times with you.

Learn more at fidelity.com.au/why-fidelity Morningstar Awards 2020 ©. Morningstar, Inc. All Rights Reserved. Awarded to Fidelity International for 2020 Morningstar Australia Fund Manager of the Year.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters and seek independent financial advice before acting on the information. This document may not be reproduced or transmitted without the prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. © 2020 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

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5/05/2020 3:00:49 PM

OUTSIDER OUT

ManagementMay April21, 2, 2020 2015 36 | Money Management

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

When all else fails, can advisers rely on ASIC?

Will CFS deliver diamonds or stones for KKR?

OUTSIDER knows that there a certain number of financial advisers who like nothing better than sticking the boot into the Financial Planning Association and the Association of Financial Advisers over their shortcomings – real or otherwise.

Outsider is also never one to walk past the opportunity of a free kick but he is currently urging a modicum of sympathy be directed towards the FPA’s chief executive, Dante De Gori, and the AFA chief executive, Phil Kewin, because they have clearly become victims of the “Canberra bubble”.

There was De Gori, on the Friday before Parliament was due to resume, happily quoting the Assistant Minister for Superannuation, Financial Services and Financial Technology, Senator Jane Hume’s assurance that the legislation to extend the Financial Adviser Standards and Ethics Authority (FASEA) exam timetable would be passed by the Senate only to change his tune by midday Tuesday.

Thereafter, De Gori and Kewin were forced to stand on the sidelines watching as first the Government blamed the Opposition and then the Opposition blamed the Government for not dealing with the FASEA exam extension bill.

The blame, as it usually does in Canberra, could be apportioned to both sides – to the Opposition for wanting to amend an obscure element of the omnibus bill and to the Government for trying to avoid more frequent sittings of the Parliament through the COVID-19 and winter period.

Outsider knew things were becoming desperate when it was suggested that the Australian Securities and Investment Commission may yet come to the rescue of financial planners with a class order – something considered about as likely as porcine flight.

OUTSIDER was delighted to read the news that, finally, the Commonwealth Bank had found an outfit with the will and the pockets deep enough to take on Colonial First State.

That outfit is, of course, US-based private equity player KKR which comes to the CFS party with a multibillion war chest and a track record of turning around companies which have well, ahem, lost their mojo.

If you’re wondering, as Outsider was, about what other Australian investments KKR has on its books then think Arnotts, MYOB and radiation oncology group, GenesisCare to name but a few.

But by any measure, the 55% stake in CFS represents KKR’s biggest current play in Australia and Outsider can only conclude that it sees great potential in the company’s superannuation and platform assets if, perhaps, not the shape and scale of its management team and workforce.

There was a time when CFS led the way in the Australian platform market only to find itself overtaken by the likes of HUB24 and Netwealth,

therefore Outsider wonders whether some of the company’s former platform executives, and they know who they are, might be capable of being lured back.

By unloading 55% of CFS, the Commonwealth Bank has taken another step towards almost totally exiting the wealth management market.

Outsider suspects that there are those on the board of National Australia Bank (NAB) who are feeling a tad envious as they look at the future prospects of MLC.

James, Jim or Jimmy rather than any Tom, Dick or Harriet OUTSIDER is sure he was not the only one who scratched his head in confusion when Elon Musk announced his newborn son would be named X Æ A-12.

It seems to Outsider that every year that goes by, baby names become more and more creative or perhaps predictable from the Leafs and Rivers of the late 1960s and early 1970s, to the Shanes of the 1990s and more recently the Archies of the 2020s.

Now, Outsider is all for creativity when it comes it naming children as it is hard these days to not associate a name with somebody you already know, a bonus if you actually like the person! However, Outsider frowned as his attention turned to Platinum Asset Management’s so-called “diverse workforce” and had a look at its 36 portfolio managers and analysts.

OUT OF CONTEXT www.moneymanagement.com.au

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Taking a closer look, it seems that if you want to work at Platinum it is better that you are either named James or Jim. In total, Platinum has three James’, a Jim, and a Jimmy. Two of the James’ and Jimmy also all work in the consumer team along with odd-one out Nick.

Outsider was upset when he realised that the number of Jims and James’ were more than the number of female portfolio managers and analysts – the number is four if you were wondering, three of whom work in the healthcare team.

Outsider wonders what ‘regular’ official name Elon will give his child as the state of California has rejected X Æ A-12 as an official name. Though, if he wants his child to work at a certain asset manager, perhaps Jim, Jimmy, or James will do.

"We are living in the world of coronavirus and the most repeated statement we hear is 'we must listen to the experts'."

- Alan Jones, on the advice he received from doctors to retire

"You only have to read the press to know there is resistance to what we are doing."

- Stephen Glenfield, FASEA chief executive speaking to the ABC

Find us here:

14/05/2020 10:52:06 AM