Money Management | Vol. 33 No 10 | July 4, 2019 by FE Money Management

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Vol. 33 No 10 | July 4, 2019

EDITORIAL

Advisers deserve an exam timetable extension

INFOCUS

Community more important than ever for embattled advisers

ALTERNATIVES

What is wrong with alternative assets?

ASIC says it can intervene irrespective of legal breaches BY MIKE TAYLOR

ANNUITIES

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Looking beyond super to meet retirement needs WHEN it comes to planning retirement savings, there is one existential fear always lingering in the back of everyone’s minds: what if I outlive my money? No one knows when they (and their partner) will die and with life expectancy always improving, people are living for longer, often leading to later retirement ages. Annuities offer a guaranteed income stream for life, which sounds like it would easily solve the problem, but the trade-off mean it’s not as lucrative as a market-linked investment. That low-rate of return can mean annuities alone are insufficient to provide a comfortable standard of living in retirement, but when applied to a broader strategy, it can offer protection. Andrew Lowe, head of technical services at Challenger, says annuities complement other retirement income sources, like super and the age pension, in retirement. “If I look at the most important application, I see a lifetime income stream to work hand-in-hand with the age pension a client will be eligible for,” Lowe said. “That ensures no matter what happens, the client can always meet their required income needs in retirement.”

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Full feature on page 23

THE AUSTRALIAN Securities and Investments Commission (ASIC) believes it can exercise its financial services product intervention power even if there has been no breach of the law. The regulator’s position was made clear in its draft regulatory guide and may act as a precursor to future legal challenges in circumstances where it seems to extend beyond the reach of the Corporations Act. Discussing what might be ASIC’s basis for intervening with respect to a product, the draft guide explained that the regulator would make a product intervention order “if we are satisfied that a product (or class or products) has resulted, will result or is likely to result in significant consumer detriment”.

It then went on to state: “We can exercise the product intervention power in relation to a product regardless of whether there has been a breach of the law. For example, we could exercise the power even if: a) a person has complied with the disclosure requirements in Ch 6D or Pt 7.9 of the Corporations Act; and b) a person has complied with the design and distribution obligations in Pt 7.8A of the Corporations Act.” The draft regulatory guide then stated that the products covered by the Corporations Act which might be affected include securities, interests in managed investment schemes, derivatives, insurance products, superannuation products and deposit-taking facilities.

First planners, now accountants warn of exodus THE Australian Securities and Investments Commission (ASIC) has been warned that accountants operating under limited advice licenses have been struggling with the financial and emotional cost of dealing with the additional red tape associated with removal of the so-called “accountants exemption”. As well, the regulator was warned that “an exodus of accountants from the financial advice industry at a time when the Government (through FASEA) is trying to increase the level of qualifications and professionalism would not be in the public interest”. Accountancy body, Chartered Accountants Australia and New Zealand (CAANZ) made a plea on behalf of its limited advice license members as part of a submission to ASIC responding to the regulator’s Cost Recovery Implementation Statement, the details of which were revealed this week. The CAANZ submission stated: “Australian financial services Continued on page 3

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July 4, 2019 Money Management | 3

News

TPB adding to adviser woes says AFA BY MIKE TAYLOR

THE financial advice sector would be singled out for different treatment to other professional sectors if the Tax Practitioners Board (TPB) moved to force specific client approval for tax advisers to move them to a new adviser. That was the assessment of the Association of Financial Advisers (AFA) in a submission responding to a TPB practice note dealing with proposed changes covering the transfer of business including a letter of engagement. “We are not aware of any other profession (doctors, lawyers, accountants, dentists, physiotherapists, chiropractors etc) that requires positive client consent as part of the sale or transfer of a business,” the AFA submission said. “Moving to a model of positive and specific consent from each client would have a very material impact upon the financial advice profession and put at risk the clients of financial advisers.” The AFA also pointed out that the TPB’s

proposal was being put forward at the same time as a large number of financial advisers were being forced to change licensees and when a substantial number were considering their intention to remain in the financial advice profession. The AFA submission said that the proposal from the TPB along with the Letter of Engagement proposal was likely to have a further material negative impact upon the viability of the financial advice sector. “It will also likely serve as an additional impost on clients who are already required to complete a raft of declarations and red tape, and possibly discourage them from continuing their advice relationship,” it said. “To put it plainly, there are many financial advisers across Australia who are currently struggling and in elevated states of distress and anxiety. This proposal, and the likely consequences in terms of the valuation of financial advice businesses will add to the mental health issues that are now impacting the financial advice profession,” the AFA submission said.

FASEA gives credit to FCHFP and SMSF Specialist designations MEMBERS of the Association of Financial Advisers (AFA) and the SMSF Association who have done coursework associated with those organisation’s key designations can now rely on it being recognised by the Financial Adviser Standards and Ethics Authority (FASEA), but they may not be happy with the credit value. The authority has confirmed the recognition of coursework from the AFA and SMSF Association as part of its education standards for financial advisers, with the AFA’s Fellow Chartered Financial Practitioner (FChFP) attracting two credits for recognition of prior learning (RPL) while the SMSF Association’s SMSF Specialist Adviser designation on or after 2005 will attract one credit for RPL. The maximum two credits earned by the AFA coursework appeared to reflect its depth and relatively recent currency. The FASEA announcement said that advisers who had completed, the AFA’s Fellow Chartered Financial Practitioner (FChFP) and Chartered Life Practitioner (ChLP) in or after 2013, had been awarded two credits for RPL in line with an application submitted by the AFA.

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It said that advisers who had completed the SMSF Association’s, SMSF Specialist Adviser designation on or after 2005, had been awarded one credit for RPL in line with the application submitted by the SMSF Association. Commenting on the development, FASEA chief executive, Stephen Glenfield, said the awarding of credits for coursework to attain the AFA and SMSFA designations provided appropriate recognition to existing advisers who had undertaken the further studies. Explaining the process, FASEA said its review of the programs followed an application from each of the professional associations and was in line with the RPL sought. “The approval is recognition of the course content and assessments advisers are required to undertake to successfully complete the program,” it said. A maximum of two credits towards completion of higher education requirements can be awarded for an existing adviser who has completed one or more of the prescribed approved courses to attain a professional designation.

“In our view, what has been proposed is excessive and is being proposed at the worst possible time for the financial advice sector.”

First planners, now accountants warn of exodus Continued from page 1 providers have been struggling with the cost, both financial and emotional, in dealing with additional red tape as a result of the removal of the accountant’s exemption”. “These costs encompass additional continual professional development as well as Cost Recovery Implementation Statement (CRIS) levies. Many of our members that are Australian financial services providers have to comply and pay other CRIS levies as well. The cumulative effect of levies, especially on small businesses which need the multiple registration is significant,” the submission said. “Members who have limited licences are finding these costs particularly onerous and may are looking to exit this industry at a time when the government is trying to increase the level of qualification and professional in the industry,” it said. The CAANZ submission urged ASIC to take into consideration when determining the CRIS levy how it would affect the business models of limited licensees and suggested a reduction in these fees could be achieved by waiving the fixed levy, reducing the per adviser levy or charging a fee aligned with revenue. ASIC released its estimated Cost Recovery Implementation Statement for 2018-19 last week confirming that licensees providing personal advice to retail clients on relevant financial products will be paying amongst the highest levies estimated at a total of $25.031 million.

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4 | Money Management July 4, 2019

Editorial

mike.taylor@moneymanagement.com.au

ADVISERS DESERVE EXAM TIMETABLE EXTENSION

FE Money Management Pty Ltd Level 10 4 Martin Place, Sydney, 2000 Managing Director: Mika-John Southworth Tel: 0455 553 775 mika-john.southworth@moneymanagement.com.au

Even the frequent critics of financial advisers should acknowledge that their calls for an extension to the Financial Adviser Standards and Ethics Authority exam timetable is not unreasonable and will ultimately better serve consumer needs. NOTWITHSTANDING all the negative publicity which has surrounded financial planners over the past five years, crossbench Senators in the new Parliament would be acting unfairly if they denied those planners a full two years to prepare for and sit the Financial Adviser Standards and Ethics Authority (FASEA) exam. When the chief executives of the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA), Dante DeGori and Phil Kewin, had their first meeting with the newlyensconced Assistant Minister for Superannuation, Financial Services and Financial Technology, Senator Jane Hume, the timetabling of the financial planner exam was, quite properly, one of the priority issues they chose to raise. And Hume, if she is to be entirely fair, will support the industry’s calls for planners to have a full two years to prepare for and sit the exam not only on equity grounds but because it will ensure that the original intent behind the underlying legislation is fulfilled.

What needs to be understood about the situation facing financial planners is that the amount of time taken by the FASEA to put the exam logistics in place has served to compress the two-year timetable originally announced by former Minister, Kelly O’Dwyer. At best, the originally promised two years has turned into 18 months. The problem, of course, is the inflexibility inherent in the fact that the dates by which existing advisers are expected to pass the exam – January, 2021 – have been embedded in the legislation. This approach may have played well amid the anti-planner sentiment which surrounded the Minister’s first-reading speech but it looks decidedly impractical today. A more practical approach would have been to cite January, 2021 as a target date within the legislation, but to have allowed some regulatory flexibility on final implementation dates in recognition of the substantial challenges which were always going to be encountered by a body such as FASEA. It is in these circumstances that

the united call by the FPA and the AFA on behalf of their members is not a call for special treatment or an attempt to avoid the requirements, it is simply a practical reminder of what was originally promised and the benefits which will flow from maximising the number of advisers who can and will pass the exam. One of the realities which no one has cared to dispute is that there is growing demand for good financial advice and that this demand is occurring at a time when upwards of 30 per cent of advisers are likely to leave the industry as a result of the FASEA regime and an end to grandfathered commissions. Therefore, if the Government does decide to recognise the industry’s calls for an extension to the exam timeframe, the Senate cross-benchers should give any legislative amendments a sympathetic hearing in the knowledge that it will ensure more competent advisers remain in the industry.

Mike Taylor Managing Editor

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

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July 4, 2019 Money Management | 5

News

FSC imposes genetic testing moratorium BY MIKE TAYLOR

ALL Australian life insurance companies will adhere to the Financial Services Council (FSC) moratorium on genetic testing for life insurance cover up to $500,000. The moratorium came into effect from Monday, 1 July and follows extensive consultation with the life insurance industry and genomics community. Announcing the moratorium, the FSC pointed out that its standards were mandatory for FSC members and that all companies offering life insurance in Australia were members of the FSC. Commenting on the move, FSC chief executive, Sally Loane, said it meant that people could decline to share genetic testing with their life insurer. “We know the community benefits from genomic research and the moratorium is key to giving Australians the reassurance they

need and the flexibility to evolve as the science does,” Loane said. “Genomic research has already led to better treatments for a number of illnesses, such as breast cancer, and has led to new ways for people to understand and better manage their health risks.” “Australia aims to be at the forefront of genomic science and is now the only country in the world outside the United Kingdom where a favourable genetic test result can be disclosed, but an adverse result doesn’t have to be,” she said. “The FSC believes it is vital to have an agile solution like a moratorium which, unlike legislation, can easily adapt and change as new breakthroughs are discovered – which is why we committed to having it in place by 1 July this year.” The FSC said the moratorium would be regularly reviewed to support scientific research and genetic inclusion, while

protecting the interest of the wider community who had life insurance. It said the moratorium would be included in the Life Insurance Code of Practice which is currently under review, meaning the moratorium would have independent oversite by the life code compliance committee who would have the power to sanction members who do not comply. Key features of the new moratorium included: • It would be place until at least 30 June 2024; • It would be reviewed in 2022 with a view to extending the end date, the financial limits and any other required changes; • It would allow consumers to choose to disclose a favourable genetic test result; and • The insurance cover limits would compare favourably with other countries, being closely aligned to Switzerland and Germany, and significantly higher than Sweden and Holland.

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6 | Money Management July 4, 2019

News

Compliance issues continue to erode BOLR pay-outs BY MIKE TAYLOR

THE private contractual nature of Buyer of Last Resort (BOLR) arrangements has meant that the major financial planning organisations have had little scope to become involved in the issues which have arisen between planners and their licensees. Amid continuing reports that the value of BOLR arrangements have been eroded through the so-called “weaponization” of compliance audits and the Government’s decision to hand the Australian Financial Complaints Authority (AFCA) the ability to look back at complaints dating back 10 years, advisers had found themselves facing some tough decisions. This much was acknowledged by Financial Planning Association (FPA) chief executive, Dante De Gori, who said while issues around BOLR had been raised by members during his organisation’s

recent national roadshow, there was little that could be done because of the individual nature of the BOLR contracts. He said that, very often, the best advice that could be given was that affected planners should contact their lawyers. Association of Financial Advisers (AFA) chief executive, Phil Kewin, said that his organisation was similar aware of some of the BOLR issues but not closely involved. At least one of the problems which has emerged is adviser record-keeping in

circumstances where industry convention has held that records should be kept for a minimum of seven years but where the Australian Securities and Investments Commission (ASIC) fee for no service investigations and AFCA’s legacy complaints changes are looking back 10 years. Advisers have told Money Management that the imposition of tough compliance audits had seen the value of some BOLR pay-outs reduced to as little as one times earnings.

Super fund to renew board after involvement from APRA BY HANNAH WOOTTON

LOCAL Government Super (LGS) is seeking an independent chair and two new independent directors after ongoing discussions between its board and the Australian Prudential Regulation Authority (APRA), as well as a permanent chief executive. The Board agreed to a constitutional change to enable these board appointments to better meet the regulator’s requirements around superannuation governance in an attempt to enhance the fund’s governance, performance and sustainability. The change, which was approved by LGS shareholders last month, would enable the fund to recruit directors with new skills to supplement the experience of the existing directors, two of which would be displaced to make space for the new chair and two

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independent replacements. The size of the board would thus grow from eight to nine. LGS chair, Bruce Miller, noted that expertise in the areas of business and investment management were especially needed in the new directors, in line with APRA’s recent guidance and expectations, and this would be a consideration in their selection. “Bringing in independent directors with new skills, capabilities and perspectives will strengthen the Board’s ability to provide effective oversight to the execution of the fund strategy including ensuring that the protection of the best interests of members and delivering strong member outcomes is the top priority in a challenging financial environment,” he added. LGS expected the new chair and director to be in place by 31 August, this year. Recruitment for the permanent chief executive was already underway.

Academic calls for heads to roll at FASEA FINANCIAL planning academic and, according to some in the industry, “whistle-blower”, Adrian Raftery, has called for the resignation of four Financial Adviser Standards and Ethics Authority (FASEA) directors, including its former acting managing director, Mark Brimble, as well as the release of 12 months of documents and submissions relating to the Authority’s decisions. The director of professional and executive education (domestic) at Deakin Business School alleged that FASEA’s chair, Catherine Walker, directors, Matthew Rowe and Simon Longstaff, and Brimble, all of whom had been on the Authority’s board since its inception, each had inadequately managed conflicts of interest. He called for the release of all public submissions to the Authority and the agendas and minutes of all contributors meetings over the last year, regardless of whether suppression orders were in place. Posting on LinkedIn from Europe, he wrote “I bet they won’t” make the release, implying that not doing so would put the FASEA’s directors in breach of the Authority’s own Code of Ethics. “I would encourage the FASEA directors to look at their very own Code of Ethics and their inner ethical self to determine their own course of action,” he wrote, referring to standards three and 12, which respectfully ban conflicts of interest and require the upholding and promoting of the profession’s ethical standards and accountability in the protection of the public interest. “As the nation’s leading ethical authority it is absolutely imperative that FASEA acts with integrity and transparency, devoid of any conflicts of interest,” Raftery believed, saying that the document release was aimed at this end. The academic, who recently announced he was leaving Deakin University, also asked the planning industry for its support in making what he described as a “brave move”, noting that he had been called a whistle-blower for his action. “Today I got called a whistle-blower for the first time ... sometimes you have to make a stand for what you believe is right. Especially in such a conflicted environment,” he wrote in another LinkedIn post. “It will become news very shortly ... I just hope others in the financial planning industry have the guts to support me. It’s time to stand up for what is right because it is horrible seeing what is happening before advisers’ eyes!” At the time of writing, over a dozen advisers had offered him their support over the professional networking site.

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8 | Money Management July 4, 2019

News

Clime makes an offer to acquire CBG BY OKSANA PATRON

CLIME Capital Limited has announced that CBG Capital Limited’s independent directors have advised their intention to recommend CBG shareholders accept the former’s acquisition offer, in the absence of a superior proposal. Clime made an offer to acquire all the remaining shares in CBG under an off-market turnover bid, with 0.84441 fully paid ordinary shares in CAM and 0.2740 listed convertible notes issued by CAM for each CBG share held. The offer would imply value of $1.0336 per CBG share, the firm said in a statement issued to the Australian Securities Exchange (ASX).

Will APRA’s latest AMP hit impact super outsourcing tenders? BY MIKE TAYLOR

WITH around seven corporate superannuation outsourcing mandates currently in market, the Australian Prudential Regulation Authority’s (APRA’s) decision to impose additional licence conditions on AMP’s superannuation businesses could not have come at a more awkward time. Money Management had it confirmed by tender consultants that at least seven corporate superannuation outsourcing tenders are currently in process in the market, with AMP Limited involved in the process as either the current outsource provider or one of the providers being considered as an outsource destination. However, while those outsourcing processes were underway, APRA announced on Friday that it had imposed directions and additional licence conditions on AMP’s superannuation businesses – AMP Superannuation Limited and N.M. Superannuation Proprietary Limited.

In doing so, the regulator said the new directions and conditions were designed to deliver enhanced member outcomes and said the areas which had been identified included conflicts of interest management, governance and risk management practices, breach remediation processes, addressing poor risk culture, and strengthening accountability mechanisms. AMP responded by stating that it had accepted the APRA conditions and was well-advanced in addressing the issues raised by the regulator. However, the tender consultants said that while AMP had been working hard in the aftermath of the negative findings of the Royal Commission, there was no avoiding the fact that the latest APRA announcement would likely impact perceptions and outcomes. Australia Post announced that it would be changing from AMP to AustralianSuper as its corporate super provider soon after APRA’s announcement.

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Additionally, the offer was expected to provide significant benefits to CBG’s shareholders by giving them exposure to higher yielding securities, a reduced pro-forma management expense ration arising from economies of scale, and an increase in liquidity of shares arising from the larger capital and shareholder base, among others. Also, the transaction would result in a materially larger investment company with a portfolio value of $137.2 million. The company advised that each of the CBG directors confirmed they intended to accept the offer for all of the shares in which they had a relevant interest, subject to the same conditions.

Planning firms should brace for legacy complaints FINANCIAL planning firms should brace for the possibility of an influx of legacy complaints, following the Australian Securities and Investments Commission (ASIC) having cleared the way for the Australian Financial Complaints Authority (AFCA) to investigate issues dating back to 1 January, 2008. The legacy complaints move was announced by the Government in February with ASIC putting the necessary regulatory approvals in place today, prompting AFCA’s chief ombudsman and chief executive, David Locke to suggest that financial planning firms will have first responsibility to deal with the matters via internal dispute resolution procedures. He said AFCA had a 12-month window to accept and investigate these complaints which must not have been dealt with by AFCA, its predecessor schemes, courts, or tribunals. “AFCA’s ability to consider legacy complaints dating back to 2008 provides people with the opportunity to now have their matters independently reviewed,” he said. “We have identified thousands of complaints that could potentially be made to AFCA, based on those that were lodged but deemed outside the jurisdiction of previous schemes.” Locke said AFCA would accept complaints from 1 July 2019 and follow its usual practice of referring them back to the financial firms to resolve them. “It is our expectation that firms will proactively resolve these legacy matters themselves where possible, as part of their commitment to justly remediate the misconduct of the past and meet the community’s expectations of fairness. “Where firms are unable to satisfactorily resolve the complaints, AFCA will start investigating these matters from 1 October 2019,” he said.

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July 4, 2019 Money Management | 9

News

ASIC foreshadows ‘novel’ instances from legacy complaints BY MIKE TAYLOR

AS financial planning firms brace for the possibility of having to deal with client complaints dating back to 2008, the Australian Securities and Investments Commission (ASIC) has acknowledged the likelihood of “novel” issues arising which may require further regulatory tweaks. However, while it was ASIC which gave regulatory effect to the new legacy complaints regime imposed by the Government in the wake of the Royal Commission, the regulator made clear that it was not directly responsible for either the process or the outcome. While handing the Australian Financial Complaints Authority (AFCA) the rules under which the scheme will operate, ASIC made clear it “has no role in individual complaints handling (under the AFCA Scheme) and will not intervene in the decision-making processes of AFCA”. At the same time, serious questions were asked about whether financial planning licensees

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would be able to rely on their professional indemnity insurance coverage in circumstances where a succession of legislative changes were imposed over the 10-year legacy period, including the Future of Financial Advice (FoFA) changes. What was already known about the legacy complaints regime and what had been

confirmed by AFCA chief ombudsman and chief executive, David Locke, was that the authority had “identified thousands of complaints that could potentially be made to AFCA, based on those that were lodged but deemed outside the jurisdiction of previous schemes”. And it appeared to be this reality which prompted ASIC to forewarn of the possibility of “novel” issues arising. “The new jurisdiction, which covers complaints about conduct going back to 2008, may raise novel issues about how AFCA deals with complaints,” the ASIC statement said. “If these issues require or necessitate material changes to the scheme, then ASIC will need to review these as part of our ongoing oversight role.” The AFCA chief executive made clear that while the legacy complaints would need to be lodged with AFCA in the first instance, they would then be referred to individual licensees for the possibility of resolution via internal dispute resolution processes.

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26/06/2019 4:53:47 PM

10 | Money Management July 4, 2019

News

Jury still out on life/risk commission realities BY MIKE TAYLOR

FURTHER work needs to be done on understanding the role and appropriateness of commissions in life/risk advice, according to the technical manager of wealthdigital, Rod Lavery. Pointing to the renewed debate around life/risk commissions generated by the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Lavery suggested that a question mark still hangs over the issue of whether commission-based remuneration models represent a conflict of interest for advisers. Pointing to overseas experience and research including the experience in Holland where commission-based payments for mortgage advice were banned, Lavery noted a range of differing opinions. He pointed to the Dutch research which had found that in the wake of the banning of commissions the proportion of clients seeking advice had

dropped from 67 per cent to 55 per cent. Lavery also pointed to European, US and Canadian research which suggested that commissions could work for the benefit of clients if those clients were appropriately informed. Having looked at the various pieces of research Lavery said he believed the debate around commissions was far from settled. “The conclusions drawn by the research conducted to date are

still debatable, and further independent studies are essential to inform the direction of the industry, particularly in Australia,” he said. “History shows that, just because something sounds true, doesn’t mean it is.” “It is important to keep in mind that studies only represent trends, averages and means. Adviser-client interactions occur every day, and the quality of advice provided is in the hands of each individual planner,” Lavery said.

Beaumaris adviser permanently banned by ASIC BY CHRIS DASTOOR

THE Australian Securities and Investments Commission (ASIC) has permanently banned Murray Graham Davies from providing financial services and engaging in credit activities, after filing a misleading insurance claim. Davies, from Beaumaris, Victoria, was found by ASIC to have been dishonest and was not of good fame or character. From October to November 2016 Davis had: • Back-dated an insurance policy for a factory building after the building had been damaged in a fire; • Lodged an insurance claim for the damage to the factory building and contents and for a vehicle; and • After lodging the insurance claim for the vehicle, added information to the vehicle insurance

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policy which increased its insured value. Davies was a director of Carmel Moriah Holdings Pty Ltd, an entity that held a credit licence and a corporate representative of Community Broker Network Pty Ltd (formally known as National Adviser Services Pty Ltd) and Gold Financial Pty Ltd. He was also an authorised representative of Community Broker Network Pty Ltd (a financial services licensee) and Gold Financial Pty Ltd (a financial services licensee). Davies still had the right to appeal to the Administrative Appeals Tribunal for a review of ASIC’s decision. Update: ASIC had amended their statement on 21 June to clarify Davies and Carmel Moriah Holdings Pty Ltd’s status as authorised representatives of Community Broker Network Pty Ltd was revoked in October 2017.

HNWIs demand tech-enhanced services A new report from Forbes Insights and Temenos surveying wealth managers and high net worth individuals (HNWIs) underscores the importance for private banks to continue their digital transformation. Those surveyed had seen increased demands that technology and robo-advice play a greater role in the wealth management, with HNWIs looking to wealth managers and banks to invest in technology to de-risk investment management and tailor advice to individual needs. Wealth managers believed that delivering highly personalised services would be essential to achieve a competitive differentiation, but a third were unable to use personalised services to the degree they wished. The report highlighted three “pathways to success” that would define the next generation wealth manager: customer experience enhanced by digital client services and personalisation; insight gained through artificial intelligence (AI) and analytics; and new markets defined by the mass affluent and alternative investments and operational efficiencies. Among the top findings of the report: • 64 percent of wealth managers said digitisation was essential for communications and service enhancement, up from 52 per cent in 2017 and 25 per cent in 2016; • 83 per cent of HNWIs believed senior management needed to commit greater resources to technology investment; • Acceptance in digitization among HNWIs had significantly increased over the past three years (up to 87 per cent); • 86 per cent of wealth managers saw AI as important in data analysis and personalised insights compared to 67 per cent in 2018; and • Technology should unlock more active portfolio management, provide insights driven by AI and reveal new opportunities in alternative investments.

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News

‘Flawed’ AFCA changes leaving large firms at risk

AllianceBernstein explores carbonneutral strategy

BY LAURA DEW

ALLIANCEBERNSTEIN has launched an Australian equities strategy which aims to generate attractive returns while being carbon-neutral, challenging the belief investors need to sacrifice returns for a low carbon footprint. AB Managed Volatility Equities - Green is based on the firm’s AB Managed Volatility Equities (MVE) fund, which was launched in 2014, and will look to exploit the lowcarbon characteristics of many low-volatility stocks. It would look to achieve carbon neutrality by constructing a portfolio with emissions 90 per cent lower than the index and will offset the remaining emissions through the retirement of carbon credits. It started by anchoring the portfolio in low-volatility equities and then applying a ‘price on carbon’ during the stock selection process. Applying a price on carbon would help to reduce carbon emissions by quantifying the amount of emissions within the portfolio which helps with the efficient retirement of carbon credits. Roy Maslen, chief investment officer for Australian equities at AllianceBernstein, said: “Green MVE challenges the either/or paradigm and aims to give investors superior performance in terms of both environmental outcomes and investment outcomes. “We think investors will appreciate not only the potential for positive environmental and investment outcomes, but also the transparent and quantifiable way in which those outcomes are achieved.” It had already attracted support from the Myer Foundation and the Australian Government’s Clean Energy Finance Corporation.

CHANGES made to the Australian Financial Complaints Authority (AFCA) following the Hayne Royal Commission are ‘flawed’, according to legal firm Creevey Russell Lawyers, as they leave larger businesses at risk. The Royal Commission extended the six-year limitation period for AFCA to commence litigation to 1 January, 2008 from 1 July, 2019. But principal Dan Creevey said this extension was limited to credit facilities not exceeding $5 million so those businesses and farmers with facilities greater than $5 million would be worse off under the new rules as they would be unable to seek compensation. He said he felt it was ‘inconsistent and inequitable’ by AFCA not to

provide the same extension to these larger firms. “Aggrieved businesses and farmers with facilities over $5 million are likely to have suffered greater losses. They may well now be in a worse financial position than parties with credit facilities under $5 million who are able to seek compensation through AFCA. “Additionally, these parties would need to fund their own

actions so that there would be no cost to Government. We think this matter needs to be raised with politicians by aggrieved farmers and on their behalf by bodies such as the National Farmers Federation to ensure this unfair and unjust gap is closed.” Creevey said he had already raised his concerns with the Department of Treasury and National Farmers Federation.

Court cracks down on unnecessary liquidator charges BY HANNAH WOOTTON

THE Federal Court has fixed the remuneration of the liquidators of three Adelaide companies at $3.9 million, compared to the $5.8 million they sought, in a decision that raises key issues for registered liquidators to consider. The liquidators, John Sheahan and Ian Lock of Sheahan & Lock, were also ordered to repay the difference of $1.9 million, as well as interest and the Australian Securities and Investments Commission’s (ASIC’s). The Court heard that both the hourly rates charged and the volume of work undertaken by Sheahan and Lock had concerned the regulator, given that the surplus funds they recovered from receivership appointments over the companies that were sufficient to pay all creditors in full plus interest and make distributions to shareholders. Justice Besanko, presiding over the matter, agreed with ASIC’s submission that the liquidators undertook unnecessary work streams and also performed those that were needed to a greater extent than required. The regulator also argued that Sheahan and Lock’s charge rates, travel claims, and the amount of work performed by senior staff were excessive.

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His Honour discounted the partner and manager rates the two liquidators charged by 20 per cent, and senior manager rates by 10 per cent. He also ordered additional reductions in remuneration related to identified work streams by 0 – 65 per cent, depending on whether either the work undertaken, or the extent of work were necessary. The decision could serve as a reminder to liquidators that timesheet entries must be approved prior to seeking approval from the creditors, and that they needed to be descriptive enough to allow determination of which work stream or task the time related to. ASIC also warned that shareholders needed to be better regarded by liquidators, cautioning liquidators to both consider the benefit investors would receive by undertaking a work stream and justify the continuation of streams shareholder weren’t keen on. Finally, the regulator advised liquidators to manage work streams with work plans and to remember that remuneration for preparing non-compliant remuneration reported wouldn’t be paid. The three now-liquidated companies Sheahan and Lock’s contentious work related to were SK Foods Australia Pty Ltd, Cedenco JV Australia Pty Ltd, and SS Farms Australia Pty Ltd.

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News

IMAP creates model portfolio data standard BY LAURA DEW

IMAP has announced an agreed industry standard for the transmission of model portfolio data covering areas such as file format, model components, security code definitions and model movement. Known as the Model Portfolio Data Standard, it would provide an incentive to prevent further proliferation of propriety specifications. The organisation said the growth in managed accounts had presented efficiency problems for model portfolio managers and the platforms that use this data.

This meant the cost and efficiency savings promised by managed accounts were at risk of being eroded by back office incompatibilities as the industry was reporting difficulties in meeting data requirements. More than 20 industry participants, including Money Management parent Financial Express, from platforms, research houses and fund managers participated in workshop meetings for over a year to document their processes. Toby Potter, chair of IMAP, said the group’s research could be extended into shadow weights, FUM reports and naming conventions.

Industry bodies unite to protect life insurance commissions BY HANNAH WOOTTON

AS reported by Money Management some weeks ago, the Association of Financial Advisers (AFA) and the Financial Planning Association (FPA) have teamed up to form a life insurance taskforce, in preparation for the corporate regulator’s review of the Life Insurance Framework (LIF) in two years’ time. The show of unity came after similar joint actions from the two professional associations, such as a joint code monitor application, who seemed to have learnt a lesson from how mortgage broking industry bodies previously managed threats to its commission system by showing a unified front. Indeed, AFA chief executive, Philip Kewin, cited a combined association approach as key in securing a life insurance industry that delivers the best possible outcomes for consumers after the 2021 Australian Securities and Investments Commission (ASIC) review. “We believe it is very important to have a united and consistent message from the advice community about the future of life insurance, that we can share with Government and the regulators,” he said. “This will also allow us to work collaboratively as a community with Government, towards the shared goal of great outcomes for consumers.” One focus of the taskforce would be to improve the general understanding of consumers of the importance of having choice in how they pay for life insurance advice, suggesting that the body would be pitching to keep commissions. “The aim is to create greater understanding of financial advice, the role of advisers and how life insurance commissions offer consumers an affordable way to access life insurance advice,” Kewin said. The taskforce, which would consist of two senior representatives and two advisers from each organisation, would also report back to advisers with a common view on what would be required of them after the 2021 review.

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“This working group has been tremendously effective at working together to bring greater efficiency to the market we work within,” he added.

Partners Wealth Group appoints new wealth GM BY CHRIS DASTOOR

PARTNERS Wealth Group has appointed Brett Mennie to the role of general manager – wealth, as which he will be responsible for the development of the company’s wealth division, with a focus on their joint venture model and accountant referral network. His most recent role was as national sales manager at JP Morgan Asset Management, and he had previously spent over six years at Vanguard developing its retail intermediary business and adviser distribution team.

Matthew Cassidy, Partners Wealth Group’s managing director, said Mennie’s role would help their team support, develop and grow their 12 existing and new joint venture partners, as well as developing our referral network of 200 accountants. “The exit of the big banks from the wealth space represents a huge opportunity for accounting firms looking to diversify their offering and provide fully integrated services to their clients via a diversified and highly skilled professional wealth services offering,” Cassidy said.

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News

Questions raised over FASEA approval process BY CHRIS DASTOOR

ADRIAN Raftery, associate professor of the financial planning program at Deakin University, said he was critical of how FASEA handled its accreditation process. “Deakin Business School is delighted that we had two versions of our graduate diploma approved as well as our three bridging courses, as well as historical diplomas going back to 2006,” Raftery said. “I was dismayed with what appears to be preferential treatment with some institutions with approvals with TPB (Tax Practitioner Board) sign-off and a clear blatant disregard to the alignment of certain subject outlines compared to FASEA’s clear Curriculum guidelines for bridging courses.” “I have seen a few instances where bridging courses that were put forward to FASEA

- and subsequently approved – are clearly commercial and business law subjects, and not financial advice law subjects.” There was also the omission of certain courses that were expected to have been approved during the current approval process.

This included Deakin’s Master of Financial Planning, which was submitted in the same application as the graduate diploma. “I am surprised that we are waiting on FASEA Approval for more Professional Designations by Coursework such as CFP 1-4, FChFP and CPA because I understand that these were submitted several months ago by the respective professional bodies,” Raftery. “I was also surprised by one admission and that was the Ethics Centre as they were on record on Money Management only a month ago saying they had an accredited FASEA ethics bridging course.” “And I know Stephen Glenfield [FASEA chief executive officer] did a subsequent clarification that there was no bridging courses approved at that stage, so I was expecting the Ethics Centre to have that course approved so it was a surprise it was omitted.”

Leadership changes at ANZ New Zealand

AMP signals compliance with new APRA conditions

ANZ has appointed Antonia Watson as acting chief executive officer (CEO) of ANZ New Zealand, following the departure of David Hisco amid health and accountability concerns. Hisco’s departure followed ongoing health issues as well as board concern about the characterisation of certain transactions following an internal review of personal expenses. Although Hisco did not accept the concerns raised by the board, he accepted accountability and agreed the characterisation of the expenses fell short of the required standard. Rt Hon John Key, ANZ New Zealand chair, said they were disappointed Hisco was leaving under these circumstances, but it was the correct decision. “We are fortunate to have an experienced executive in Antonia Watson to step in while we conduct a search for a replacement,” Key said. “Antonia’s extensive banking career has her well placed to help ANZ manage through this transition.” Hisco would receive his contracted and statutory entitlements to notice and untaken leave, with all unvested equity to forfeit.

THE Australian Prudential Regulation Authority (APRA) has imposed new conditions on AMP Limited’s superannuation businesses including board renewal and the removal of conflicts of interest. In a move which represented its second-ever use of its new broader enforcement powers, the regulator announced that it had issued directions and additional licence conditions to AMP Superannuation Limited and N.M. Superannuation Proprietary Limited. It said it had imposed the directions and additional licence conditions to address a range of concerns regarding AMP Super’s compliance with the Superannuation Industry (Supervision) Act 1993 (SIS Act). APRA said the action arose from issues identified during APRA’s ongoing prudential supervision of AMP Super, along with matters that emerged during the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The regulator’s announcement said the new directions and conditions were designed to deliver enhanced member outcomes by requiring AMP Super to make significant changes to its business practices. “Areas identified for improvement include conflicts of interest management, governance and risk management practices, breach remediation

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BY MIKE TAYLOR

processes, addressing poor risk culture and strengthening accountability mechanisms. The directions also require AMP Super to renew and strengthen its board.” “Additionally, APRA requires AMP Super to engage an external expert to report on remediation and compliance with the new directions and conditions,” the APRA announcement said. The announcement said this was the second time APRA had used the broader directions power that was granted in April following the passage of the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Bill 2019. It also demonstrates APRA’s commitment to embedding the “constructively tough” enforcement appetite outlined in April’s new Enforcement Approach. AMP formally responded to the APRA move, stating that it will fully implement the directions and additional conditions and that it had been working constructively with APA and had already taken action on a number of the issues raised. It said that it had in May expanded the superannuation trustee boards to broaden the range of skills and experience and that this, together with a new trustee operating model, was designed to strengthen the independence of the trustees and ensure they continued to work in the best interests of members. AMP said that, in addition, it had significantly reduced fees on its flagship MySuper products as well as reducing fees on its MyNorth platform.

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News

Fiducian buys MyState’s ﬁnancial planning business BY OKSANA PATRON

FIDUCIAN has announced the acquisition of MyState’s retail financial planning business in Tasmania for $3.5 million. The transaction, which was expected to be completed by 30 June, would see the addition of a client book for financial planning clients with more than $340 million in funds under advice. Fiducian, which has currently more than $2.7 billion in funds under advice across 40 offices nationally, said that the announcement was a continuation of its ongoing expansion strategy. The group also said in the statement issued to the Australian Securities Exchange (ASX) that the transaction would

see both parties entering into an ongoing referral arrangement that would involve referrals for financial planning from MyState to Fiducian and home mortgage lending and trustee services from Fiducian to MyState. “We are excited to consolidate our presence in Tasmania

with this acquisition and to work with MyState to ensure that our clients continue to have access to quality financial planning services and as well, have the benefit of trustee and home lending services from MyState,” Fiducian’s head of business and distribution, Jai Singh, said.

Ausbil looks to UK for overseas expansion BY LAURA DEW

AUSBIL chief executive Ross Youngman has indicated the firm could target the UK market as it considers expanding its global footprint and launching funds offshore. Youngman, who had worked as chief executive since 2017 and was previously head of institutional business, joined Ausbil from Five Oceans Asset Management in 2015. He said: “Because of our relationship with New York Life, we have a strong global footprint so all markets are open to us. “In particular, there are a lot of similarities with the UK so that is somewhere we would need to look at. Japan is also a strong market for global listed infrastructure and that is right on our doorstep.” The firm had already been taking steps to become more accessible for overseas investors by launching two global funds, in addition to its existing Australian equities funds. These were the $46 million Global Essential Infrastructure fund, which launched in December, and the $22 million Global SmallCap fund which launched last May. He said: “We have expanded beyond just Australian equities and started to manage global strategies. We already have a position in the market

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for Australian equities and are well supported by financial planners here so we have taken this approach and also added it to global strategies.” Youngman said Ausbil intended the infrastructure fund, in particular, to be exported to international markets as it could provide a consistent income via quarterly distribution which was appealing to those investors in retirement. “We are going back to basics with the infrastructure fund such as toll roads, airports and tunnels, those assets that are able to generate returns even in the face of a downturn. “There is a need to look for products that have an income bias and offer a consistent income and we expect these types of infrastructure assets to be resilient because of the regulatory aspect.” Since its launch in December 2018, the fund has returned 19.8 per cent versus returns of 14.1 per cent by the ACS Equity- Infrastructure sector, according to FE Analytics. Although it was keen to expand overseas, despite the firm’s US strategic partner in New York Life, Youngman said America was not a market Ausbil was considering in the near term. “The US is more complicated for us from a regulatory perspective but it is something we would look at in the future.”

ANZ complies with ASIC enforcement THE Australian Securities and Investments Commission (ASIC) has announced ANZ has complied with the court enforceable undertaking regarding its fees for no service conduct for its Prime Access service. On 31 May, ASIC received an audited attestation from Michael Norfolk, managing director private banking and advice at ANZ, and an independent report from Ernst & Young. ASIC said it was ‘satisfied’ with these and that compliance with the court enforceable undertaking had been finalised, subject to some remaining refunds to be paid by mid-July 2019. ANZ had also announced it would no longer offer the Prime Access service to new customers and will phase it out for current customers over the next 18 months. ANZ had attested that the: 1) the changes to ANZ’s systems, controls and processes that have been implemented in response to the fees for no service conduct; 2) ANZ has provided documented annual reviews to Prime Access customers who were entitled to such reviews in the period from January 2014 to March 2018; 3) in the 1,410 instances where documented annual reviews were found to have not been provided, ANZ is in the process of refunding those customers (with remediation expected to be complete by mid-July 2019); and 4) that ANZ now has systems, controls and processes that seek to ensure documented annual reviews are being provided, and that instances of non-delivery are detected and remediated.

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InFocus

THE BEST TONIC FOR CHANGE FATIGUE IS COMMUNITY Paragem’s Nathan Jacobsen argues that financial advice practices impacted by factors such as the new Financial Adviser Standards and Ethics Authority regime and the consequent departure of senior personnel need to embrace change. ADVISERS are hurting out there. Licensees are making big decisions about the future of their businesses, leaving many advice practices to work out what is next for them. Other practices are dealing with rising compliance activity, business succession, and confronting FASEA education pathways – all reasons to reassess their operating model. Some advisers are even reassessing their future as an advice professional. Do they want to be part of the future advice industry and does it want them? The Royal Commission shone the spotlight on what was bad in the industry, and some more experienced advisers feel they have been tarnished with this brush. While heightened professional standards and regulatory change is necessary to restore trust, the departure of the expertise held by the more experienced advisers is leaving a huge hole in many businesses. The fact is, the professional and business skills of these experienced advisers cannot easily be replaced in a small business with limited staff. As a result, principals are facing premature business transformation and accelerated business

QUARTERLY AUTHORISED DEPOSITTAKING INSTITUTION (ADI) PERFORMANCE STATISTICS

succession to junior partners or salaried advisers who may not yet be ready or equipped for this level of change at this point in time. While they may have brought in extra support staff and advisers to assist with business growth and added compliance obligations, it is the wisdom and experience that comes with 30 years in front of clients and owning a business that cannot be replaced quickly. The key question is this – who do you need around you to help make this change a successful one? Who are the network of peers and mentors that guide and support you? This environment we are in underlines the importance of community. Partnering for change is

crucial and despite all the hype and noise around what is being offered by licensees in the market, the culture of the community that an advice practice wraps around itself and the quality of the person leading that community, is a real differentiator. If your business is one of those facing the departure of significant expertise, it is a good time to think about what community your business needs to help you to steady the ship and start moving forward again. A practice that recently joined a new licensee community is going through this exact transformation. Its challenge was the unplanned departure of a senior adviser who had decided to

retire rather than meet the new education requirements. The challenge for this business is that it has built its niche around providing aged care expertise to clients. The departure of this adviser from providing advice meant the practice had a brand promise that its younger advisers, whilst experienced and capable, were not yet well equipped to deliver. This business decided to leave its existing licensee and to partner with a new licensee where they could join a community of advisers who had this expertise and who could provide the support to help them through the change. Accessing a community of like-minded peers that shares expertise to help each other grow, makes all the difference in these transitions. A well organised community which knows where the relevant expertise sits and can help guide you through the journey is invaluable. The right community for your practice feels easy. You feel heard. You are treated like an adult. You belong and you not only benefit from the expertise in the community, you contribute to it. Nathan Jacobsen is managing director of Paragem Pty Ltd.

$34.7 bn

51.3 %

$4.83 tn

net profit after tax for all ADIs for the year ending 31 March 2019

the cost-to-income ratio for all ADIs for the year ending 31 March 2019

the total assets for all ADIs at 31 March 2019

Source: Australian Prudential Regulation Authority

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Alternatives

WHAT IS WRONG WITH ALTERNATIVES?

Alternatives present a broad spectrum of assets available to investors. With such a wide variety to choose from, Laura Dew looks at how investors can determine which are legitimate and which present risks. AS INVESTORS SEEK secondary ways to supplement their income beyond the traditional bond and equities options, they have found an answer in the Australian alternatives market, which has reached more than US$275 billion in size. The figure makes Australia the fourth-largest alternatives market in the world, according to Austrade, although there is still a way to go before it reaches the size of world leader North America at US$3.7 trillion. It is also a fraction of the size of the Australian equity market which is

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over US$685 billion. Austrade said: “Australia’s alternative investment industry is substantial and its outlook for growth is promising during periods of financial market volatility and economic uncertainty around the globe. “One of the important features of alternative investments is their ability to help manage volatility and preserve capital in a diversified portfolio. In other words, the attraction of these investments is increased diversification and returns and/or reduced risk.” The demand for alternatives is

growing thanks to interest by pensions funds, by high net worth investors who hold them in their self-managed super funds (SMSFs) and as other asset classes become more expensive. It is also helped by ongoing fears of a market downturn caused by geopolitical issues such as the US/China trade war.

WHAT IS CLASSED AS AN ALTERNATIVE? Alternatives cover a wide range of assets; the ACS Alternatives sector includes long/short funds, managed futures, micro-caps, absolute return and commodities.

Separately, the term can cover physical assets such as art, cars and wine which are brought directly rather than via a managed fund. This wide breadth of asset types makes it difficult to make comparisons between them, for example, when looking at the ACS Alternative sector, this contains 163 funds and has lost on average 0.01 per cent over one year to 24 June, according to FE Analytics. But when you drill down into looking at the individual funds, returns vary from losses of 24 per cent for the Tribeca Global Natural Resources fund to gains

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July 4, 2019 Money Management | 17

Alternatives Chart 1: Price of Bitcoin in AUD since June 2016

Source: GoogleFinance

of 21 per cent for the Enlihtan Global Opportunity Single fund. Scott Haslem, chief investment officer at Crestone Wealth Management, said: “One issue we find with alternatives is most are skills-based strategies so you get more manager return dispersion between the best and worstperforming funds. The range of outcomes is wider than you’d find for equities and fixed income.” In light of pros and cons of alternatives outlined in table one, investors need to be careful when considering the asset class and only hold them as a portion of their portfolio to avoid single asset risk. Jean Christophe de Beaulieu, head of investments for Australia at Acadian Asset Management, said: “I would avoid holding more than 20 per cent in alternatives, it should play a role alongside bonds and equities rather than being held as a single exposure.” While fees can be high for these types of funds, they have been coming down more recently thanks to wider industry pressure on fund pricing which has seen some move from 2/20 per cent to 1/10 per cent. However, one area to still monitor is the watermark when the performance fee kicks in as this should only be once a suitable period of outperformance has been achieved rather than just returning above the market.

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CRYPTOCURRENCY A newer type of alternative investment that has emerged recently is cryptocurrency such as Bitcoin. Bitcoin was originally developed as a decentralised global payment system back in 2009 but has evolved into being bought and sold in large quantities for investment purposes. As of 24 June, one Bitcoin

equals $15,350 but it peaked as high as $25,709 in December 2017, in Australian dollar terms. But the Australian Securities and Investments Commission (ASIC) describes cryptocurrency as being highly speculative and leaving investors at risk of losses. “The exchange platform on which you buy and sell digital currencies are not regulated, so if the platform fails or is hacked, you

Table 1: Pros and cons of alternative investments

Pros

Cons

Alternatives are uncorrelated with traditional market returns so should generate returns even when markets are in a downturn

Alternatives are more volatile

They offer diversification benefits alongside equities and bonds in a portfolio

They are more illiquid so difficult to price on a regular basis

They offer the potential for higher returns

They tend to have higher fees, a common model is two per cent annually plus a 20 per cent performance fee They are less regulated so client money isn’t as safe or protected Investors may be required to lock up their money for several years, private equity often requires a lockup of six to 10 years for example There is a higher chance the fund could be suspended, leaving investors unable to withdraw their investment

will not be protected and will have no legal recourse. Cryptocurrency failures in the past have lost investors significant amounts of real money,” it said. “A cryptocurrency is not guaranteed by any bank or government. Its value is based on popularity at a given time, which is influenced by factors such as numbers of people using it, the ease with which it can be traded or used and the perceived value of currency and its underlying blockchain technology. Investing in virtual currencies is considered highly speculative, as values can fluctuate significantly over short periods of time.” This was echoed by de Beaulieu who said his firm had researched the asset but struggled to find sufficient evidence to make it worth investing. “Crypto is tricky as it has little economic underpinning. We did some work on Bitcoin and it was very hard to find statistically robust evidence so we would not recommend making a large allocation to crypto as it is highly volatile and hard to forecast its movement,” he said.

HOLDING COLLECTABLES For those holding SMSFs, one method of supplementing these is the purchase of investments such Continued on page 18

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Alternatives

Continued from page 17 as art, wine and cars which are known as ‘collectables and personal use assets’. According to the Australian Taxation Office, around $366 million is held in these type of assets but this represents only a 0.05 percentage of total SMSF assets. Assets must be held with the intention of providing future retirement rather than present day benefits, must have a documented investment strategy, must be insured and cannot be stored in the private residence of any related party. When it comes to be sold, the asset price must be determined by a professional, independent valuer. However, single risk is high for these type of assets, valuations are highly correlated to market sentiment and markets are less liquid and transparent. The Australian Shareholders Association cautions: “It is important not to get caught up in marketable stories of immense

“I would avoid holding more than 20 per cent in alternatives, it should play a role alongside bonds and equities rather than being held as a single exposure.” - Jean Christophe de Beaulieu, Acadian Asset Management wealth generated from a single asset. For every Ferrari 250 GTO, there are 100 Leyland P76s.”

FUTURE OF ALTERNATIVES There is no question alternatives are a growing part of the investment market and this is likely to continue over the next five years as newer products come to market. This includes those targeting retail investors such as Pengana, which launched a global private equity listed investment trust in April, and

Metrics which runs a variety of products covering areas including private debt and real estate debt. John O’Keeffe, head of boutique strategy at Fidante, said: “We are seeing listed investment companies and listed investment trusts who are offering access to underlying real estate, infrastructure and private equity as a way for investors to access things that had previously been difficult. That is definitely a pitch to the retail market and it will grow over the next five to ten years.” de Beaulieu said the timing

Chart 2: ACS Alternatives v S&P ASX 200 over three years to 20 June

Source: FE Analytics

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for growth was prescient as the long-term valuations of other assets were reaching extreme valuation territory. “It is hard to find a place where you have confidence it will generate returns over the next five to 10 years so people are thinking outside of these traditional asset classes as they are all getting expensive.” According to a global alternatives report by Joachim Klement, head of investment research at Fidante, the future annual growth rate of alternative investments should average 15.7 per cent over the next three years globally. “Most of the growth is forecast to occur in private markets with infrastructure and private debt investments showing annual growth rates of 38.6 per cent and 22.8 per cent respectively, and property investment not far behind. Hedge funds and natural resources investments in private markets are expected to be laggards over the coming three years.” For retail investors who were considering the asset class, Haslem said there were several factors for them to first consider which might not apply to traditional investments. “The challenge for retail investors is to understand what you are investing in, what your motivation is for investing in alternatives, what the risk/return profile is and the liquidity of the asset. Manager selection is also important as there is more dispersion in manager returns.” “They should also remember a cheap fee does not mean a fund is good or bad and nor does having a high fee indicate quality,” added de Beaulieu.

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investmentcentre.moneymanagement.com.au

INVESTMENT CENTRE a part of

INDIA STANDING TALL AMONGST APAC EQUITIES Emerging markets are growing in popularity and those in the Asia Pacific ex Japan sector, and in India in particular, have a lot to offer investors, Laura Dew writes. A LARGE POPULATION, innovative technology companies and rising GDP are just some of the reasons investors are eschewing traditional developed markets in favour of fast-growing emerging ones. Rather than investing in Europe or the US, investors are searching for opportunities in Asia Pacific ex Japan funds which invest in countries such as India, China and Taiwan. Japan is excluded as it is classified as a developed rather than emerging country. According to FE Analytics, there are currently 34 funds in the ACS Asia Pacific ex Japan sector plus a further 20 in the ACS Asia Pacific Single Country sector for those who seek more specific exposure. In comparison, there are more than 300 funds which invest in Australian equities. “There have been a few companies looking at Asia but there are far fewer options for the Australian retail investor if they want to invest in Asia. We are still a way off yet from seeing lots of funds launching in this space,” said John O’Keeffe, head of boutique strategy at Fidante. Many of these funds are small in size, with only nine funds out of 54 holding more than $100 million in assets under management and only three, the Platinum Asia, Platinum Japan funds and BlackRock iShares Asia 50 ETF, holding more than $300 million. Somewhat confusingly, some funds in this sector invest heavily in Australia and New Zealand rather than continental Asia so it is important to check where the fund is seeking its exposure. This includes the $221 million

10MM0407_16-34.indd 19

Lakehouse Small Companies fund and the $95 million Ellerston Australian MicroCap fund. Investment director of the Fidelity China fund, Catherine Yeung, said: “Asia Pacific is not a homogenous block, there are many different markets which are all at different stages of the cycle.” The aforementioned Lakehouse fund, which invests in Australian and New Zealand small-cap companies, is the best fund in the sector with returns of 26.5 per cent over one year to 31 May 2019. At the other end of the spectrum, the Optimal Japan and Asia Trust fund has lost 11.7 per cent over the same period. Across the whole sector, the ACS Asia Pacific ex Japan sector has lost 0.4 per cent over the same period while the ACS Asia Pacific Single Country sector has lost 2.6 per cent. However, when you go back to the previous year, the sectors had annual returns of 15.3 per cent and 11.1 per cent respectively. Given this volatility investors are urged to consider emerging markets and Asia for the long

term, at least a 10-year period, rather than for a short term boost. These type of markets tend to be less transparent, corporate governance is hard to define, it can be hard for foreign investors to access, and there can be a lack of liquidity. Yeung said: “You have to be prepared to do more due diligence and cross check the information, the Indian and Chinese domestic markets have huge depth but you need the manpower. “I would say to take a broadbased exposure, don’t focus on one particular sector and don’t try to time the market. There are lots of opportunities but also lots of risk.”

INDIA Half of the top 10 best-performing funds over the year to 31 May are invested in India including the Ellerston India fund with returns of 18.7 per cent, Jaipur India Growth with returns of 17.2 per cent and returns of 10.6 per cent for the India Avenue Equity Wholesale fund. The reason India has been doing so well recently is the

Chart 1: Performance of the ACS Equity- Asia Paciﬁc ex Japan sector versus S&P ASX 200 over three years to 21 June 2019.

Source: FE Analytics

LAURA DEW

re-election of Prime Minister Narendra Modi earlier this year. Critics praised the continuation of the Modi leadership who has pushed through reforms such as demonetisation and the Goods and Services Tax. Going into his second term, bold reforms are anticipated and a focus on overseas market should stimulate employment growth. Yeung suggested India could be a potential beneficiary if companies moved their manufacturing away from China in light of the ongoing trade war between the US and China. “If Modi can get his reforms through then India could benefit and absorb that manufacturing demand. The key for Modi is job creation but they need to improve the infrastructure first,” she said. “India has a great long-term story but it is also one of the most expensive countries in the region.” Kris Walesby, managing director at ETF Securities, which last month launched an ETF tracking Indian equities, said: “India is very interesting as its growth rates and the foundations underpinning this growth are arguably more robust than China’s. India is a domestic consumption-driven economy with nearly 60 per cent of India’s GDP driven by domestic private consumption. “The government has made an active effort in recent years and will continue to campaign for investment and trade co-operation.”

26/06/2019 4:31:41 PM

INVESTMENT CENTRE

a part of

ACS CASH - AUSTRALIAN DOLLAR

ACS EQUITY - AUSTRALIA EQUITY INCOME

Fund name

Macquarie Australian Diversified Income ATR in AU

0.22

2.8

3.09

Armytage Australian Equity Income ATR in AU

0.96

9.2

9.03

109

Macquarie Diversified Treasury AA ATR in AU

0.22

2.77

3.04

Plato Australian Shares Income A ATR in AU

1.84

9.2

8.51

104

Mutual Cash Term Deposits and Bank Bills B ATR in AU

0.19

2.3

2.26

Nikko AM Australian Share Income ATR in AU

-0.01

5.62

8.43

109

Pendal Stable Cash Plus ATR in AU

0.19

2.25

2.24

Lincoln Australian Income Wholesale ATR in AU

-0.58 10.18

8.36

Mutual Cash Term Deposits and Bank Bills A ATR in AU

0.19

2.3

2.23

Zurich Investments Equity Income Pool ATR in AU

2.02

11.12

8.28

Australian Ethical Income Wholesale ATR in AU

8.88

8.17

101

2.23

2.16

Legg Mason Martin Currie Equity Income X ATR in AU

2.36

0.18

Macquarie Treasury ATR in AU

0.46

2.3

2.08

Lincoln Australian Income Retail ATR in AU

-0.64

9.61

7.61

CFS Colonial First State Wholesale Strategic Cash ATR in AU

0.16

2.03

Legg Mason Martin Currie Ethical Values with Income A ATR in AU

3.21

8.51

7.5

103

IOOF Cash Management Trust ATR in AU

0.17

2.07

2.01

Legg Mason Martin Currie Equity Income A ATR in AU

2.29

8.04

7.4

101

Mercer Cash Term Deposit Units ATR in AU

0.18

2.07

2.01

UBS IQ Morningstar Australia Dividend Yield ETF ATR in AU

0.33

11.8

7.22

109

Crown Rating

Risk Score

Crown Rating

Risk Score

ACS EQUITY - AUSTRALIA SMALL/MID CAP

ACS EQUITY - ASIA PACIFIC EX JAPAN

Fund name

OC Micro-Cap ATR in AU

1.91

4.42

16.96

106

SGH Emerging Companies Professional Investors ATR in AU

7.95

19.2

16.61

126

Macquarie Small Companies ATR in AU

-1.6

0.44

15.24

125

Cromwell Phoenix Opportunities ATR in AU

-1.38

4.96

15.03

111

SGH Emerging Companies ATR in AU

6.99

14.93

14.89

126

114

Macquarie Australian Small Companies ATR in AU

-1.58

0.75

14.79

125

12.27

144

Pendal MicroCap Opportunities ATR in AU

0.8

8.78

14.77

2.74

12.12

103

Smallco Investment Manager Smallco Investment ATR in AU

-0.52 13.73

14.04

139

-0.11

11.64

126

Fidelity Future Leaders ATR in AU

-0.13

9.55

13.47

113

132

Allan Gray Australia Equity A ATR in AU

0.83

6.77

13.29

109

Fund name

SGH Tiger ATR in AU

3.93

17.55

15.84

128

Schroder Asia Pacific Wholesale ATR in AU

-8.2

-0.44

15.61

137

Advance Asian Equity Wholesale ATR in AU

-6.74

-1.89

14.42

133

Fidelity Asia ATR in AU

-5.55

4.49

13.92

133

Advance Asian Equity ATR in AU

-6.82

-2.82

13.35

133

Maple-Brown Abbott Asia Pacific Trust ATR in AU

-5.11

1.54

12.55

Premium Asia ATR in AU

-7.71

-5.84

CI Asian Tiger ATR in AU

-5.74

Maple-Brown Abbott Asian Investment Trust ATR in AU

-7.21

T. Rowe Price Asia Ex Japan ATR in AU

-5.84

-0.74

Crown Rating

11.17

Risk Score

Crown Rating

Risk Score

ACS EQUITY - EMERGING MARKETS

ACS EQUITY - AUSTRALIA

Crown Rating

Risk Score

Dimensional Australian Value Trust ATR in AU

1.89

9.22

14.54

111

JPMorgan Emerging Markets Opportunities ATR in AU

-6.06

3.84

15.27

123

DDH Selector Australian Equities ATR in AU

-1.03 14.26

14.44

135

Legg Mason Martin Currie Emerging Markets ATR in AU

-6.62

-3.36

14.5

133

Alphinity Sustainable Share ATR in AU

2.47

12.85

13.32

103

CFS Realindex Emerging Markets A ATR in AU

-4.17

2.6

14.18

115

Macquarie Australian Shares ATR in AU

1.15

8.14

13.24

101

Fidelity Global Emerging Markets ATR in AU

-2.4

8.63

14.12

110

Macquarie Wholesale Australian Equities ATR in AU

1.05

8.07

13.14

102

MFS Emerging Markets Equity Trust ATR in AU

-5.52

-0.32

12.48

113

Macquarie Australian Equities ATR in AU

1.05

8.02

12.98

102

Schroder Global Emerging Markets Wholesale ATR in AU

-5.23

-0.47

12.38

119

Legg Mason Martin Currie Select Opportunities X ATR in AU

0.43

2.4

12.7

108

Dimensional Emerging Markets Trust ATR in AU

-3.43

0.85

12.15

101

Alphinity Sustainable Share B ATR in AU

2.46

12.71

12.6

103

OnePath Wholesale Global Emerging Markets Share ATR in AU

-5.6

0.34

12.14

112

Maple-Brown Abbott Australian Equity Trust ATR in AU

1.34

11.27

12.48

130

Pendal Global Emerging Markets Opportunities-WS ATR in AU

-2.82

1.86

12.07

Lincoln Australian Growth Wholesale ATR in AU

-0.01

16.36

12.44

107

CFS Wholesale Global Emerging Markets Sustainability ATR in AU

0.73

9.55

11.59

10MM0407_16-34.indd 20

Crown Rating

Risk Score

Fund name

26/06/2019 4:16:23 PM

INVESTMENT CENTRE

a part of

ACS EQUITY - GLOBAL

ACS EQUITY - INFRASTRUCTURE

Fund name

Hyperion Global Growth Companies B ATR in AU

-2.51

19.16

20.83

126

Zurich Investments Concentrated Global Growth ATR in AU

-1.05

17.2

CFS Generation WS Global Share ATR in AU

-5.81

14.98

CFS FirstChoice Acadian Wholesale Geared Global Equity ATR in AU

-10.65

CC Marsico Global Institutional ATR in AU

Crown Rating

Risk Score

Fund name

Crown Rating

Risk Score

Macquarie Global Infrastructure Trust II A ATR in AU

40.53

29.37

203

134

Macquarie Global Infrastructure Trust II B ATR in AU

40.07

29.36

200

16.56

118

BlackRock Global Listed Infrastructure ATR in AU

1.22

24.89

12.76

-7.17

16.04

260

Lazard Global Listed Infrastructure ATR in AU

-1.29

9.95

12.59

1.95

9.45

12.39

-4.05

6.37

15.32

139

Mercer Global Unlisted Infrastructure ATR in AU

T. Rowe Price Global Equity ATR in AU

-4.07

9.95

15.03

118

RARE Infrastructure Income A ATR in AU

0.11

20.64

11.68

CC Marsico Global B ATR in AU

-4.04

6.41

14.98

139

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

0.74

22.58

10.74

-3.65

17.16

14.61

115

Macquarie True Index Global Infrastructure Securities ATR in AU

Loftus Peak Global Disruption ATR in AU

-9.02

7.31

14.52

160

AMP Capital Global Infrastructure Securities Unhedged Wholesale ATR in AU

1.56

24.94

10.57

104

Zurich Investments Unhedged Global Growth Share Scheme ATR in AU

-2.2

14.45

13.92

122

AMP Capital Global Infrastructure Securities Unhedged R ATR in AU

1.54

24.59

10.32

104

AMP Capital Global Infrastructure Securities Unhedged A ATR in AU

1.53

24.57

10.32

104

ACS EQUITY - GLOBAL HEDGED Fund name

Zurich Investments Hedged Concentrated Global Growth ATR in AU

-2.58

9.34

13.61

147

Evans And Partners International Hedged B ATR in AU

Fund name

-3.39

14.51

13.08

121

BT Technology Retail ATR in AU

-4.11 14.13

21.82

159

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

-4.12

8.3

12.61

123

-7.87 14.56

17.43

151

Evans And Partners International Hedged ATR in AU

CFS Wholesale Global Technology & Communications ATR in AU

-3.44

13.9

12.46

121

Fiducian Technology ATR in AU

-6.96

6.36

16.1

177

Magellan Global Hedged ATR in AU

-4.13

8.05

12.37

109

-7.99

-4.61

12.08

123

Macquarie Arrowstreet Global Equity Hedged ATR in AU

Platinum International Brands C ATR in AU

-5.12

0.29

11.52

124

Fidelity Hedged Global Equities ATR in AU

-4.01

1.27

11.28

108

-4.03

1.27

11.34

116

Barwon Global Listed Private Equity ATR in AU

Cooper Investors Global Equities Hedged ATR in AU

-1.85

6.91

10.82

127

-4.3

3.34

10.92

114

Platinum International Health Care C ATR in AU

MLC Wholesale Hedged Global Share A ATR in AU

0.31

10.48

112

-4.41

0.23

10.87

114

Platinum International Technology -6.61 C ATR in AU

Russell Global Opportunities NZ Hedged A AUD ATR in AU

-6.1

0.32

10.82

121

CFS Wholesale Global Health & Biotechnology ATR in AU

-1.39

8.58

9.29

154

CFS Colonial First State Australian Share Growth ATR in AU

1.54

10.65

8.12

108

IML Industrial Share ATR in AU

0.28

6.81

6.19

Crown Rating

Risk Score

ACS EQUITY - GLOBAL SMALL/MID CAP Fund name

Crown Rating

Risk Score

Bell Global Emerging Companies ATR in AU

-2.11

16.19

11.05

Yarra Global Small Companies ATR in AU

-4.68

1.14

10.43

122

Supervised The Supervised ATR in AU

-3.78

-2.44

9.44

108

Microequities Global Value Microcap Ordinary ATR in AU

-2.16

1.36

9.17

110

Pengana Global Small Companies ATR in AU

-6.08

-8.67

8.95

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

-4.15

-1.23

8.5

113

Mercer Global Small Companies Shares ATR in AU

-5.24

-1.5

8.36

126

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

-4.17

Pengana International Ethical Opportunity ATR in AU

-3.25

3.88

8.24

Dimensional Global Small Company Trust ATR in AU

-5.94

-2.8

8.16

10MM0407_16-34.indd 21

-1.38

8.29

109

ACS EQUITY - SPECIALIST Crown Rating

Risk Score

ACS FIXED INT - AUSTRALIA / GLOBAL Fund name

IOOF MultiMix Diversified Fixed Interest ATR in AU

1.3

5.94

4.36

PIMCO Diversified Fixed Interest ATR in AU

1.42

6.89

4.25

PIMCO Diversified Fixed Interest Wholesale ATR in AU

1.42

6.83

4.2

Macquarie Dynamic Bond ATR in AU

1.1

7.28

4.1

OnePath Wholesale Diversified Fixed Interest Trust ATR in AU

1.37

6.47

3.97

UBS Diversified Fixed Income Fund ATR in AU

1.51

6.76

3.83

CFS FirstChoice Wholesale Fixed Interest ATR in AU

1.31

7.47

3.76

AMP Capital Specialist Diversified Fixed Income A ATR in AU

1.83

6.95

3.75

AMP Experts' Choice Diversified Interest Income ATR in AU

1.85

6.97

3.75

124

BT Wholesale Multi-manager Fixed Interest ATR in AU

1.45

6.96

3.66

113

Crown Rating

Risk Score

27/06/2019 3:58:47 PM

INVESTMENT CENTRE

a part of

ACS FIXED INT - AUSTRALIAN BOND Fund name

ACS FIXED INT - GLOBAL STRATEGIC BOND Crown Rating

Risk Score

Crown Rating

Fund name

Risk Score

Dimensional Global Bond Trust NZD ATR in AU

0.72

8.8

4.52

6.53

Pimco Dynamic Bond C ATR in AU

0.12

3.04

4.49

4.89

Pimco Dynamic Bond Wholesale ATR in AU

0.11

2.92

4.39

Dimensional Global Bond Trust AUD ATR in AU

1.43

7.22

4.02

JPMorgan Global Strategic Bond ATR in AU

-0.27

2.7

3.15

IOOF Strategic Fixed Interest ATR in AU

0.3

3.24

2.54

Australian Unity Strategic Fixed Interest Trust Wholesale ATR in AU

-0.02

2.8

2.12

T. Rowe Price Dynamic Global Bond ATR in AU

2.29

3.02

2.01

Elstree Enhanced Income ATR in AU

8.15

7.71

DDH Preferred Income ATR in AU

0.28

5.31

Legg Mason Western Asset Australian Bond X ATR in AU

1.76

9.19

BlackRock Enhanced Australian Bond ATR in AU

1.73

9.1

4.69

Macquarie Core Australian Fixed Interest ATR in AU

1.74

8.95

4.61

Legg Mason Western Asset Australian Bond A ATR in AU

1.72

8.79

4.54

Macquarie True Index Sovereign Bond ATR in AU

2.09

10.31

4.5

ACS FIXED INT - INFLATION LINKED BOND

AMP Capital Wholesale Australian Bond ATR in AU

1.73

8.99

4.48

Fund name

OnePath ANZ Fixed Income ATR in AU

1.71

9.11

4.45

PIMCO Global RealReturn Wholesale ATR in AU

2.09

6.1

5.77

Morningstar Australian Bonds Z ATR in AU

Ardea Real Outcome ATR in AU

0.93

6.25

5.59

1.62

9.04

4.41

Ardea Premier Australian Inflation Linked Bond ATR in AU

3.35

10.15

5.26

Ardea Australian Inflation Linked Bond ATR in AU

3.34

9.82

Macquarie Inflation Linked Bond ATR in AU

2.93

10.02

4.37

Mercer Australian Inflation Plus ATR in AU

1.03

4.16

3.42

Morningstar Global Inflation Linked Securities Hedged Z ATR in AU

1.11

5.16

3.37

Aberdeen Standard Inflation Linked Bond ATR in AU

1.47

5.35

2.96

ACS FIXED INT - DIVERSIFIED CREDIT Crown Rating

Risk Score

Crown Rating

Risk Score

Fund name

Premium Asia Income ATR in AU

0.48

11.01

8.94

DirectMoney Personal Loan ATR in AU

0.64

8.34

7.67

Bentham High Yield ATR in AU

-1.23

4.87

7.16

PIMCO Capital Securities Wholesale ATR in AU

-0.93

4.24

6.29

Bentham Global Income NZD ATR in AU

-1.58

2.61

6.08

Fund name

Bentham Syndicated Loan ATR in AU

-0.44

2.21

5.95

3.3

20.55

10.12

142

Bentham Syndicated Loan NZD ATR in AU

Macquarie Property Securities ATR in AU

-1.12

3.76

5.88

UBS Property Securities Fund ATR in AU

2.63

21.47

10.06

128

Bentham Global Income ATR in AU

-0.88

0.96

5.76

Macquarie Core Plus Australian Fixed Interest ATR in AU

3.28

20.35

9.99

142

2.07

11.08

5.31

Macquarie Wholesale Property Securities ATR in AU Charter Hall Maxim Property Securities ATR in AU

1.02

16.79

9.89

CFS Wholesale Global Credit ATR in AU

0.27

6.31

5.27

AU Property Securities Growth Units ATR in AU

1.78

19.28

9.66

162

Crescent Wealth Property Retail ATR in AU

0.41

9.37

9.63

Resolution Core Plus Property Securities A PF ATR in AU

2.1

17.47

9.61

126

AMP Capital Listed Property Trusts ATR in AU

2.24

21.91

9.59

135

AMP Capital Property Securities ATR in AU

2.26

21.87

9.48

135

The Trust Company Diversified Property ATR in AU

2.34

15.49

9.28

123

ACS FIXED INT - GLOBAL BOND Fund name

Crown Rating

Risk Score

PIMCO Income Wholesale ATR in AU

0.42

5.4

5.75

PIMCO Emerging Markets Bond ATR in AU

0.56

2.59

5.35

Supervised Global Income ATR in AU

0.88

2.37

5.35

ACS PROPERTY - AUSTRALIA LISTED Crown Rating

Risk Score

ACS PROPERTY - GLOBAL PIMCO Emerging Markets Bond Wholesale ATR in AU

0.56

2.47

5.26

Mercer Emerging Markets Debt ATR in AU

1.9

6.49

5.14

Invesco Senior Secured Loans ATR in AU

-0.5

2.74

5.1

Invesco Wholesale Senior Secured Income ATR in AU

-0.5

Legg Mason Brandywine Global Fixed Income Trust X ATR in AU

0.84

4.03

4.46

PIMCO Global Bond ATR in AU

1.23

5.49

4.4

Legg Mason Brandywine Global Opportunistic Fixed Income X ATR in AU

0.74

3.64

4.39

2.7

5.03

Fund name

Crown Rating

Risk Score

Premium Asia Property ATR in AU

-3.5

6.26

13.2

150

APN Asian REIT ATR in AU

2.66

24.06

11.45

IOOF Specialist Property ATR in AU

1.09

14.91

9.59

Quay Global Real Estate C ATR in AU

1.71

20.92

9.58

Quay Global Real Estate A ATR in AU

1.67

20.88

9.11

Advance Global Property ATR in AU

0.82

12.72

9.03

Perpetual Private Real Estate Implemented Portfolio ATR in AU

1.94

15.83

8.95

Resolution Capita Global Property Securities Hedged II ATR in AU

0.41

10.33

8.95

Principal Global Property Securities ATR in AU

0.89

12.63

8.92

Resolution Capita Global Property Securities Unhedged II ATR in AU

1.79

18.39

8.84

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

10MM0407_16-34.indd 22

27/06/2019 3:58:35 PM

July 4, 2019 Money Management | 23

Annuities

A LIFETIME OF SECURITY As future retirees weigh up their options on how to best distribute their post-retirement income, Chris Dastoor finds that annuities offer part of a greater option to maintain a secure, dependable income stream. IT’S DIFFICULT TO plan your retirement down to exact specifics; after all, no one is sure how long they’ll live, which makes it difficult to plan for how much money is needed. This means retirees are always stuck with the fear in the back of their mind that their hardearned superannuation may dry up while they’re still enjoying retirement. Andrew Lowe, head of technical services at Challenger, said the secure and guaranteed

10MM0407_16-34.indd 23

income stream annuities provided give it a unique advantage when it comes to retirement planning. “The first thing is the income stream component itself, we offer a range of either fixed and agreed terms for clients, so they can invest for a year or up to 50 years,” Lowe said. “Or we also offer a range of lifetime income streams, which offer guaranteed payments for life. “Life is a really important element and that’s for as long as the client lives, if that be, a short

term, average time, or they live for a really long time in retirement.” The other key advantage is they aren’t linked to market performance. They won’t improve with the market, but they also won’t decline, providing stability. “The payments that we offer at commencement are guaranteed and will only increase in accordance with the terms of the arrangement,” Lowe said. Peter Rowe, general manager of Optimum Pensions, said what

the firm’s annuities offer is different to a traditional annuity. “We’ve broken the annuity [offered by Optimum] down into two discrete elements, one being the lifetime guarantee of income and the other one is the investment component,” Rowe said. “Traditional annuities are bundled up together and you pay a price, you buy the annuity and that’s it. We’ve actually split it up so the members actually choose their Continued on page 24

26/06/2019 4:24:52 PM

24 | Money Management July 4, 2019

Annuities

Continued from page 23 investments and yet we ensure the longevity elements, so they get the guaranteed income for life. “A lifetime pension or annuity, you are locking money up for that lifetime period, but what you’re doing is buying an income that’s payable for life.” Many firms work on the basis that you only put part of your retirement savings in the product. Rowe’s assessment was that people had three main needs in retirement: regular income for life, access to capital and the opportunity to have some independence afterwards. “By mixing and matching the product you can actually get the right trade-off for a person and to secure that income for life,” Rowe said. “Without it, so many people are going to run out of money before they die, unfortunately.” Neekhil Shah, principal consultant at McGing Advisory, said that while annuities are supposedly risk-free because of their guarantee, in this low interest rate environment the assets that underpin annuities are not producing much income, as opposed to a balanced fund. “Annuities are seen to be quite expensive, due to the profit margin and the low interest rate

environment, so they’re not very popular for locking away savings,” Shah said. “However, they are part of the solution, because they do provide guaranteed income for life.”

WORKING WITH THE AGE PENSION Lowe said annuities complement other retirement income sources, like super and the age pension, in retirement. “If I look at the most important application, I see a lifetime income stream working hand-inhand with the age pension a client will be eligible for,” Lowe said. “That ensures no matter what happens, the client can always meet their required income needs

in retirement.” The age pension for a couple is about $36,000 a year, and for a single it’s about $24,000. Because this can be insufficient to get by on, clients looking to retire may decide to prioritise aiming for a certain level of income. “A lifetime annuity allows them to ensure that come what may, they can meet those particular needs for as long as they live,” Lowe said. “If I look at the Association of Superannuation Funds of Australia (ASFA) retirement standard that’s $61,000 or so for a comfortable retirement for a couple. “We’re not trying to provide all of that, we’re trying to provide a layout over and above the age

pension to meet the essential expenditure of a client retirement.” That combination of an account-based pension with an annuity could be the difference of how comfortable a lifestyle someone may have in retirement. “I think there’s been a misconception, people think they’re just for rich, but they’re not,” Rowe said. “We’ve done some modelling for people with around just $100,000 in a superannuation account when they’re retiring. If they just draw an account-based pension then that money is going to disappear after a while.” The start of this financial year saw the introduction of new rules

Your clients have a lot of living to do in retirement. Be confident they can pay for it with a guaranteed income for life. To find out more, go to challenger.com.au/liquidlifetime or speak to your Challenger BDM. This information is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger), the issuer of Challenger Guaranteed Annuity (Liquid Lifetime). This information has been prepared without taking into account any person’s objectives, financial situation or needs. Because of that, each person should before acting on any such information consider the PDS and its appropriateness, having regards to their objectives, financial situation and needs. A copy of the PDS can be obtained at www.challenger.com.au. References to guaranteed payments refer to the payments Challenger promises to pay under the relevant annuity policy.

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July 4, 2019 Money Management | 25

Annuities

for social security means testing (the income and assets test) for lifetime income streams, which included lifetime annuities. The new rules mean 60 per cent of any amount invested in a lifetime income stream will be counted as an assessable asset until age 84 or for a minimum of five years, and just 30 per cent will be counted as an asset thereafter. “Where a client is receiving a part-age pension, reduced because of the assets test, an investment in a lifetime income stream on or after 1 July 2019 can immediately increase their age pension,” Lowe said. “Where a client is currently not receiving an age pension because of the assets test, an investment in a lifetime income stream on or after 1 July 2019 could reduce their assets sufficiently to ensure they are eligible for a part-age pension.” Lowe said given the core strength of annuities is a secure income in their retirement income stream, this is not the best option if they’re happy with everything being variable. “Say we take that ASFA comfortable standards of retirement and that’s about $61,000, if I work out what I think is about the recurring essential expenditure I probably land on a number that’s

about $42,000,” Lowe said. “Which is more than the current maximum age pension rate for a couple which is $36,000. The difference between $42,000 and $36,000 is what I want to spend each year in retirement. “Could a retiree with $300,000-$500,000 afford $6,000 worth of CPI-indexed income payable for life? My answer is generally they can.”

FITTING TOGETHER Annuities offer a defensive counter-weight to market linked investments which have higher returns, but lack stability. “If I look at most clients who are getting advice, and they were implementing a retirement income stream, it’s rare there would be a recommendation to rely on one source,” Lowe said. Managing director of Story Wealth Management, Anne Graham, said income in retirement comes from many sources, and may include dividends from shares, rental income, interest or even defined benefit pensions. “Diversifying sources of income or ‘layering’ income can provide some protection and certainty in retirement,” Graham said. “We need to think more creatively about retirement

“Could a retiree with $300,000-$500,000 afford $6,000 worth of CPI-indexed income payable for life? My answer is generally they can.” - Andrew Lowe, Challenger income as we are living longer, and our resources need to last as long as we do. “The age pension is a safety net and over time it will be more difficult to qualify for, due to the ageing population and shrinking tax base.” Graham said annuities can provide another layer of income and complement income from super/ pension accounts and age pension. “If considering annuities for a client, we would allocate a portion of available funds to an annuity and certainly wouldn’t recommend investing all of a client’s portfolio in an annuity,” Graham said. “Annuities can be blended with a more diverse portfolio of assets that might be skewed toward growth.” As a financial planner, Graham said most clients would benefit from having a range of retirement income options, because clients’ needs vary and not all

investments suit all people. “Some clients prefer certainty and security of income and don’t like to take risks, others are very comfortable investing in share portfolios and relying on dividends,” Graham said. “Annuities can provide an element of certainty to retirement income and may suit more conservative clients or those who receive part pension.” Shah said since the Murray Financial Services Inquiry, the superannuation industry had shown it operated effectively in the accumulation phase, but now needed to do more for the postretirement decumulation phase. “It seems that we’re needing products to help people without risk of outliving their savings,” Shah said. “Which is great, people are living longer and healthier, but their savings are not keeping up.” Continued on page 26

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Annuities

Continued from page 25 The Murray Inquiry led to a recommendation for the development of a product as part of the superannuation strategy to protect against this longevity. “What has come about is this product, which is a comprehensive income product for retirement, which will help to provide longevity,” Shah said. “Whether that’s through an annuity, or through an individual self-insuring themselves against living too long, or some sort of other longevity risk.”

MARKET OUTLOOK According to Investment Trends, planners’ use of annuities had plateaued, although a greater offering of them in the market could change this. As it stands, the market is dominated by Challenger. “The usage of annuities among Australian financial planners went through a growth spurt between 2012 and 2016, but has since remained steady with 44 per cent of planners saying they currently recommend annuities,” Investment Trends’ research director, Recep Peker, said. “There remains strong desire to utilise annuities more, with 59 per cent saying would do so if all types of annuities were available to them.” Peker said the most-sought annuities are lifetime fixed and variable annuities, which aligned with clients’ demand. “From the consumer perspective, research reveals the top priority in selecting a retirement income product is income that lasts for life – ahead of guaranteed minimum income payments,” Peker said. Shah said the discussion around annuities and the overall

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post-retirement space is signalling a fundamental change as Australians are aging. “We speak to super funds regularly, and more funds are thinking about products in tandem with financial advice and member experience,” Shah said. “This was not the case historically and we were pleased to see the change.” Lowe said there is a huge opportunity because there is a significant under-representation to secure income in retirement. “The average retiree these days gets to retirement and converts the accumulated superannuation into an accountbased income stream which is market-linked,” Lowe said. “I think increasingly more of those clients are allocating part of it to secure or guaranteed income streams and I anticipate that grows over time. “If I look at product developments that have come to market in the last decade that will roll through from 1 July this year,

we are looking at more flexible, guaranteed income streams than we’ve ever had.” Rowe said because the government introduced a change in 2017 to open the market up so super funds could offer more products, the market has already changed drastically. “They’ve been talking about it for a while, but what you’ve seen since then is the Australian Prudential Regulation Authority (APRA) looking at member outcomes where the funds have not to just look at the outcomes for people in the accumulation phase, but also for outcomes for retirees. Funds are going to be expected now to develop a retirement income framework. “What you’re seeing is the beginning of that change, we’re engaged with a number of funds and we know a number already have set budgets in place for the next financial year to look at how they’re going to implement retirement products for themselves.”

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Your clients have a lot of living to do in retirement. Be confident they can pay for it with a guaranteed income for life.

Life is for living, not worrying about the next power bill. A Challenger lifetime annuity can help your clients face the future with confidence. Designed to complement other sources of retirement income like an account-based pension or the Age Pension, a lifetime annuity can be funded by using part of their super or savings to provide a guaranteed income for life.

To find out more, go to challenger.com.au/liquidlifetime or speak to your Challenger BDM. The information provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger), the issuer of Challenger Guaranteed Annuity (Liquid Lifetime). This information has been prepared without taking into account any personâ&#x20AC;&#x2122;s objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, financial situation and needs. Each person should obtain and consider the Challenger Guaranteed Annuity (Liquid Lifetime) Product Disclosure Statement (PDS) before making a decision about whether to acquire or continue to hold the annuity. A copy of the PDS can be obtained from your financial adviser, our Investor Services team on 13 35 66, or at www.challenger.com.au All references to guaranteed payments refer to the payments Challenger promises to pay under the relevant policy documents. Neither the Challenger group of companies nor any company within the Challenger group guarantees the performance of Challengerâ&#x20AC;&#x2122;s obligations or assumes any obligations in respect of products issued, or guarantees given, by Challenger.

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Emerging markets

INVESTING IN EMERGING MARKETS: THE IMPORTANCE OF THE G IN ESG

The growth of emerging markets has taken off and looks set to continue its upward trajectory. For those looking to identify reliable investment options in the asset class, Alex Duffy writes, good governance is the bedrock upon which everything else rests. THE EMERGING MARKET asset class (EMs) has been growing rapidly in recent years. In fact, they now represent nearly 60 per cent of global growth and more than 50 per cent of global GDP. Once dominated by agriculture and cheap manufacturing, EM countries are today home to some of the world’s fastest growing economies and most innovative companies. A quick look at the labels in most people’s wardrobe or the appliances in their kitchen highlights that China now produces more than 25 per cent of everything manufactured around

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the globe. But other developing economies are powering ahead too. South Africa is a leading producer of motor vehicles, as well as precious metals, iron and steel. Brazil is home to four of the world’s 100 largest banks, as well as Embraer, the world’s third largest aircraft manufacturers, according to S&P Global Market Intelligence. And India’s economy is booming to the point where the Indian Ministry of Commerce & Industry reported that merchandise exports and imports grew 11.02 per cent and 21.04 per cent respectively in the year to February 2018.

As money flows in, these economies are beginning to account for a much higher percentage of global GDP. In fact, The World in 2050, a PWC report into the growth of the ‘E7’ (the seven largest emerging market economies), showed that in 1995 these nations had a combined GDP less than half that of the G7 (the seven largest advanced economies). By 2040, however, it’s estimated emerging economies will have an output that is double the developed world. In other words, in the space of 45 years emerging markets will have gone from a peripheral

position in the world economy to a central one. Despite this, they still account for just a fraction of most Australian investment portfolios.

A DEMOGRAPHIC SHIFT One of the reasons why many emerging markets are experiencing such solid growth, is because they are undergoing a profound demographic shift. While much of the developed world struggles to come to terms with the cost of supporting an aging population, developing economies typically don’t have this problem as much of their population is still young.

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July 4, 2019 Money Management | 29

Emerging markets India, for example, has a median age of 27.9, compared to the European Union median age of 42.6, according to the World Factbook. This means that there are still plenty of productive workers to keep the economy running and fewer retirement age workers to support. As more of these productive aged workers find meaningful work, they also tend to have more disposable income which means we’re seeing a new middle class rising out of emerging market economies. Between 2009 and 2030, China alone is expected to add 850 million people to its middle class, in the process taking it from 12 per cent of its population to 73 per cent of its population, a 2010 OECD Working Paper found. With this increased affluence comes increased consumption – not just of consumer goods such as cars, technology and electrical goods, but of more sophisticated products and services. China’s healthcare industry for example grew four-fold between 2006 and 2016. McKinsey reports that China is now also the second largest global market for financial services – behind only the United States – with home loans, deposits, life insurance and investment advice all becoming more integral to the way the economy functions and people live their lives.

company’s ownership in the first instance - who are we investing alongside and what do they want the business to achieve? The answer to this will go a long way to determining how the company allocates its capital. When a government is a major shareholder, for example, investors should not be surprised if the company makes decisions that prioritise national interests over those of other shareholders. It also helps to know exactly what management teams are paid to achieve, which is why clarity around targets and incentives is so important. Through fundamental research and analysis we can build a comprehensive picture of a company’s opportunity set for creating long-term value. However, this is purely theoretical unless management is motivated to put it into practice. As asset managers, we like companies that allocate their excess capital at an accretive rate of return, creating intrinsic value for investors over time – in other words, firms investing in projects which return more than their cost of capital. When managements are incentivised to think about the sustainability of cash flows, and

“The companies, driven by their different governance systems, responded in very different ways to the pressures and had very different results.” - Alex Duffy, Fidelity when the shareholder structure supports that behaviour, it tends to lead to sustainable outcomes for the business. This can manifest in low staff turnover, or better investment in research and development leading to more efficient, cleaner manufacturing processes. If a company cuts environmental corners to maximise short-term returns, for instance, at some point this will become a financial liability. In this way, ESG and financial success are one and the same.

DIFFERENT GOVERNANCE SYSTEMS IN PRACTICE Companies in emerging markets with robust governance structures can create huge amounts of value, while those with poor governance can destroy it. AVI, a South African food and beverage firm, and Petrobras, a

Brazilian oil and gas company both suffered currency devaluations of more than 50 per cent in the decade following 2008’s financial crisis. But the companies, driven by their different governance systems, responded in very different ways to the pressures and had very different results. AVI’s costs for raw materials such as coffee, tea and wheat are in US dollars, while its products are priced in South African rand, which meant the weakening currency dramatically increased its cost base. However, AVI’s management felt they could not raise prices to offset the higher costs when their customers’ spending power was also deteriorating. Instead, they recognised that conditions were Continued on page 30

Chart 1: AVI’s profit, invested capital and ROCE over the last decade

ESG: FOCUSING ON THE G However, despite these positive trends, one common concern for investors in emerging markets is environmental, social and governance (ESG) factors and how they could impact returns. Good governance is the bedrock upon which everything else rests; it determines the actions of management, employees and shareholders, guides a company’s approach to environmental and social issues, and drives financial returns. If you get the ‘G’ right, the ‘E’ and the ‘S’ usually follow as a robust corporate structure and decision-making process creates the optimal framework for ESG-aware policies. It is crucial to understand a

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Source: Company statements, Fidelity International, December 2018

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Emerging markets

Continued from page 29 practices. In turn, this creates foundation of all fundamental results are shown in chart three. not ripe for growth and stopped research. A company’s governance long-term intrinsic value, and that These case studies help investing in the business. is music to investors’ ears. framework drives its capital illustrate why, to me, good For almost five years, AVI allocation decisions, which governance is not just a bonus or added no net new capacity, determine the sustainability of even one-third of a broader ESG choosing to focus on sweating the Alex Duffy is portfolio manager of strategy, but the starting point and both returns and broader business the Fidelity Emerging Markets fund. asset base and increasing return on invested capital through cost cutting, price optimisation and Chart 2: Petrobras’ profit, invested capital and ROCE over the last decade branding. While invested capital stayed flat, absolute profits began to increase and return on capital employed (ROCE) jumped from just over 20 per cent to 30 per cent. As a result, as chart one shows, AVI’s decision-making has helped preserve its ROCE and increased intrinsic value. On the other hand, Petrobras’ major shareholder was the Brazilian government, which recognised that by 2009 the economy was under pressure and it needed to create jobs. Petrobras ramped up capital expenditure by around US$50 billion a year, with little regard for the returns such projects were generating. Invested capital rose from just under BRL150 billion to more than BRL250 billion in under four years, while ROCE plummeted and absolute profits fell sharply. Source: Company statements, Fidelity International, December 2018 The contrast in the impact of this poor capital management on Petrobras’ ROCE compared to Chart 3: Diametric returns of AVI and Petrobras that enjoyed by AVI is evident in chart two. Because of its capital management decisions, AVI was able to triple its dividend between 2008 and 2018. Meanwhile Petrobras eventually had to scrap its dividend after over-investing in projects that did not generate any cash flow, ultimately undertaking a massive capital raise to support its stressed balance sheet. Petrobras, at one point one of the largest companies in the world and included in almost every emerging market portfolio at its peak, saw its share price fall almost 80 per cent over 10 years. In contrast AVI, a lesser-known mid-cap in South Africa’s wellpenetrated consumer goods sector, delivered a 340 per cent share price return over the same period. These Source: Refinitiv, April 2019

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32 | Money Management July 4, 2019

Management fees

WHAT WILL SMART BETA COST ACTIVE MANAGERS? Arian Neiron writes that a combination of high fees and underperformance means that Australian equity managers are due to be disrupted, and that smart beta could be how they start to deliver value again. SMART BETA IS set to disrupt the Australian funds management industry and displace active equities managers, with many charging too much for the relatively poor outcomes they provide. This was the finding of a new VanEck research paper, When are fees too high? The potential impact of smart beta to disrupt active Australian equity strategies. The analysis found that most Australian fund managers don’t add value to the portfolios they manage, benchmark hugging as many of them do. Most Australian equity funds should be charging management fees of between 0.35 per cent p.a. and 0.65 per cent p.a. given the ‘alpha’ that they provide to investors, according to the analysis. Yet many active managers charge management fees at least double that. VanEck’s analysis reveals most of the performance of Australian equities managers can be explained by factors, the very same factors used in smart beta strategies. As a result, 65 per cent of those managers will potentially be displaced by smart beta strategies, as institutional investors walk away from benchmark-hugging active managers and insource investment management and/or employ smart beta approaches in the pursuit of better investment outcomes.

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INVESTORS VOTING WITH THEIR FEET ON FEES These conclusions are reinforced by the growing number of superannuation funds that have insourced investment management as funds under management grow, including Australia’s largest pension fund, AustralianSuper. Other superannuation funds that now have their own investment teams include First State Super, Sunsuper, QSuper, REST, CBus, Vision Super, HESTA and Telstra Super. Many funds have removed mandates from underperforming active managers with the aim of maximising returns for members and lowering costs. The nation’s sovereign wealth fund, the Future Fund, also undertakes its own asset management rather than outsource. Retail investors, too, are questioning the high fees they are sometimes charged. Largecap Australian shares managed funds charged fees from 0.35 per cent to 2.05 per cent in 2018, with the average around one per cent, according to analysis by Canstar. Small to mid-cap managed funds fees averaged 1.27 per cent but were as high as 2.5 per cent. Small differences in fees can have a large impact on your returns in the long run. On a $50,000 investment, an investor in a managed fund who is charged management fees of 2.5 per cent a year would be required to fork out $1,250 a year on fees.

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Management Strap fees

NO BANG FOR YOUR BUCK? Given intense competition in the investment management industry, and a demand for better investment outcomes given rampant underperformance, only those active managers who can demonstrate identifiable and persistent ‘real’ alpha will prevail, according to VanEck. If this can’t be achieved, then investors will continue to question the fees they are being charged and inevitably,

Australian equity managers that continue to offer benchmark-like performance for high fees will be displaced by smart beta strategies. The underperformance of active managers is backed by S&P Dow Jones Indices research. Its SPIVA Australia Scorecard recently found that over the one-year period ending December 2018, 86.7 per cent of large-cap equity funds and 98.4 per cent of bond funds in Australia underperformed their

benchmarks on an absolute basis. On an absolute and riskadjusted basis, 86.7 per cent of funds failed to outperform the benchmark. Over the five- and 10-year periods, 79.6 per cent and 83.2 per cent of funds underperformed the S&P/ASX 200 on an absolute basis, respectively, the scorecard found. The SPIVA Australia Scorecard also noted consistent underperformance by the

majority of Australian active funds in most categories over five, ten, and 15-year periods. This has been one reason passive investments such as exchange traded funds (ETFs) have grown in popularity. Investors no longer want to pay high fees for poor performance. Morningstar highlighted this, as chart one illustrates, with investors funds moving away Continued on page 34

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Continued from page 33 from actively managed funds to passively managed funds.

THE RISE OF SMART BETA In separate research, published in the CFA (Chartered Financial Analyst) Institute’s Investments Analysts Journal by Ronald Kahn and Michael Lemmon, The Asset Manager's Dilemma: How Smart Beta is Disrupting the Investment Management Industry, the authors state: “We believe that smart beta is a disruptive innovation with the potential to significantly affect the market for investment products, particularly traditional active products.” In their paper Kahn and Lemmon compared, what they called, ‘pure alpha’ being generated by global active managers to the fees they were charging. ‘Alpha’ is financial industry jargon for outperformance above the market

benchmark. The ‘pure alpha’ the authors refer to is the alpha that cannot be explained by smart beta factors. A fund manager’s outperformance can be broken down as chart two shows. In order to survive, active managers need to evolve. Kahn and Lemmon recommend that in order for active managers to evolve, they must assess their smart beta performance and the pure alpha they offer and charge fees accordingly. Asset owners and fund managers, we think, will expand their offerings to include the factors which make up their current processes. It is possible to ‘port-out’ that part of performance which can be explained by factors to create investible product solutions to compete with existing providers. Asset owners and fund managers, we think, will respond and expand their offerings to

include the factors which make up their current processes. The Australian funds management industry is set for a shake-up. Overall, the rise of smart beta will lead to investors having greater choice, greater transparency and lower costs. Arian Neiron is the Managing Director - Head of Asia Pacific, VanEck

Chart 1: Cumulative and passive ﬂows since April 2015

Source: Morningstar Direct. Data as of 31 March 2019

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Chart 2: Fund manager’s outperformance breakdown

Source: VanEck

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Toolbox

WHEN IS THE RIGHT TIME TO INVEST IN ALTERNATIVES? A technical expert from Capital Fund Management explores how alternative strategies can provide returns without increasing portfolio risk THE TERM ‘ALTERNATIVES’ is used in many ways, and for many different asset classes, strategies and investments. So, it is unsurprising that some investors and advisers are unsure what alternatives are, their potential benefits, availability, and how to use them in portfolio construction.

ALTERNATIVE ASSETS v ALTERNATIVE STRATEGIES Broadly speaking, alternatives come in two forms - alternative assets and alternative strategies. Alternative assets include a range of assets outside of what we class as ‘traditional’ assets - stocks, bonds and cash. They include investments like private equity funds, hedge funds, managed futures, commodities, real estate funds and derivatives contracts. Alternative strategies, on the other hand, are strategies in which the underlying traded instruments may be traditional equites, bonds and/or other assets, but which are different from the buy and hold or ‘long only’ strategies typically used to invest in equities, bonds and cash. They aim to be absolute return strategies as they seek to create positive performance in all market conditions. They use specific strategies and techniques, often

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across a wide range of instruments, including short selling and/or leverage, aiming to produce returns which tend to be de-correlated from equity and bond benchmarks. Alternative beta strategies are alternative strategies which aim to capture risk premia or beta in a systematic way. It is difficult to strictly define alternative beta strategies, but various important themes do emerge. They: • Persist over long periods of time – often decades or centuries. Their statistical significance needs to be high enough to establish a strong conviction that they are well-anchored in the structure of the market; • Move slower than short-term inefficiencies which time generally arbitrages away. Slower moving strategies tend to be scalable to higher capacity; • Are explainable, understandable and plausible; and • Can generally be split into two types – risk rewarding and pure market anomalies, often of behavioural origin. Alternative beta strategies tend to exhibit less volatility than equity markets generally, thus serving to dampen portfolio volatility overall. They tend to have lower drawdowns (peak-to-trough decline in the

asset’s value during a specific time period), are liquid and transparent, and usually exhibit little or no correlation with traditional equity and bond benchmarks.

A PROVEN ALTERNATIVE BETA STRATEGY Long-term trend-following is an alternative beta strategy which aims to go long markets which are rising in price, and short markets that are falling. It is a trading strategy which tries to capture gains by analysing, and profiting from, a stock’s momentum in a particular direction. Trend-following strategies are based on certain trends existing in financial markets across multiple timeframes, geographies and asset classes, including bonds, stocks, rates, commodities and currencies. These trends are created by powerful behavioural forces which influence price movements so that they do not always behave in line with Eugene Fama’s Efficient Market Hypothesis. Fama’s hypothesis states that share prices reflect all information available, and that as a result, consistent alpha generation is in fact impossible, because only by purchasing riskier assets or by possessing inside information can an investor expect to consistently outperform the market.

Behavioural economics, in contrast, applies psychological insights into human behaviour to economic decision making, arguing that investors aren’t as rational as the Efficient Market Hypothesis suggests, and instead suffer from behavioural flaws which mean they act in ways that can push prices above or below their fundamental value, resulting in a long series of pricing anomalies, or trends. Trend-following is a strategy which seeks to benefit from the fact that Fama’s hypothesis does not always hold true, so that even if prices do revert to fundamental value over time, there are periods when they move up and down in line with other forces, and trends form. Trend-following does not attempt to predict the movement of asset classes, but instead seeks to profit from the existence of the trends, regardless of whether they are moving up or down.

WHAT DO TREND-FOLLOWING PORTFOLIOS LOOK LIKE? Not all trend-following portfolios are the same, but they typically invest across a very wide range of assets and financial contracts. If we take alternative beta Continued on page 36

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Toolbox Continued from page 35 manager CFM’s ISTrends Trust program as an example, it seeks to capture trends across five asset classes – commodities, currencies, fixed income, shortterm interest rates and equities – by trading on more than 100 financial contracts. Within each of the five major asset classes, there are sub-assets. Within commodities, for example, CFM ISTrends program seeks to identify trends in the prices of base metals, precious metals, energy, softs, grains and meats. Within currencies, the fund analyses 10 different global currencies, and in equities, nine different countries’ equities are included.

HOW TREND-FOLLOWING WORKS IN PRACTICE A typical trend is made up of three stages – the lag, the overreaction and the end of the trend. How and why this happens is explained in chart one. Lag Initially, the price of a stock will lag a shift in fundamental value, because there will be a period of time in which new market information is not fully reflected in the price. In the chart below, the fundamental value of the stock has risen, perhaps due to a positive earnings release. The change in the value of the

stock is immediate, but the market price initially lags. Behavioural economists have identified a number of reasons for this, including: • Investors’ views tend to be anchored to historical data, and they do not adjust their views in a sufficiently timely manner to new information, which can lead to prices under-reacting to news; • Investors tend to sell their winners too early, and hang onto losers for too long. This is known as the ‘disposition effect’. This is inextricably linked to the Loss Aversion principle of Kahneman and Tversky, in that investors prefer avoiding losses to making equivalent gains. When they sell a winner too early it puts downward pressure on the price and when they hang on to a loser for too long, hoping to recoup losses, this can stop the price of a stock from falling to where it should be, as quickly as it should; and • The influence of central banks, which take actions aimed at reducing volatility in the fixed interest and currency markets. These actions also have the potential to slow price adjustments, as do the actions of investors who mechanically rebalance to strategic asset allocation weights.

Chart 1: Stylised plot of the lifecycle of a trend

Source: CFM ISTrends

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Market overreaction After the initial lag, the price overreacts. This overreaction (when the price of the stock moves above its fundamental value) occurs due to a number of reasons, including: • Herding and feedback trading, where investors react to information on other investors’ behaviour and jump on the bandwagon, pushing a price up; • Confirmation bias, when investors look for information confirming what they already believe, and rely on recent price movements as being indicative of the future – this can lead to a trend continuing; and • Fund flows often chase recent performance, so outperforming stocks (and managers) receive inflows, putting buying pressure on their positions. End of the trend At some point in the process described above, the price will extend too far beyond fundamental value, and as investors recognise this, prices revert to fundamental value and the trend is over.

CAPTURING THE TREND: A HOW-TO GUIDE A trend-following strategy aims to buy the asset on the upward price move and therefore capitalise on the subsequent overreaction, while also

shorting markets which have fallen, and are expected to continue to fall. With the benefit of hindsight, recognising trends over history is relatively straightforward, however identifying these trends before they occur and capturing them while they last is of course much more difficult. This is why the large majority of trend-following strategies are run by quantitative managers, which invest in a systematic way, using math models and computational power to analyse data and guide trading and investment decisions. Experienced managers combine machine learning with research by humans to create trend-following strategies with an economic rationale. These algorithms take years of trial and error to produce strong results and are constantly re-assessed and modified. Experienced alternative beta managers can see through reams of data, remove market noise and interpret quantitative and qualitative data, analyse what computers produce, then refine strategies to ensure that returns are produced in line with expectations, and that diversification benefits are sound.

DIVERSIFICATION BENEFITS OF TREND-FOLLOWING AS AN ALTERNATIVE STRATEGY Trends are volatile and should be viewed over a long-term horizon,

Table 1: Table of recent examples of market stress

Source: CFM ISTrends

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July 4, 2019 Money Management | 37

Toolbox

over which trend-following has consistently exhibited the following characteristics: • A trend-following strategy applied to a pool of liquid futures has historically delivered a system with a modest, though significant, positive Sharpe ratio; • Trend-following can be used alongside more traditional portfolios of stocks and bonds, typically contributing to improved portfolio Sharpe expectations; and • Trend-following exhibits a favourable relationship with market stress. It can perform equally well in a range of economic conditions but particularly in market crises when investors become more synchronised in their actions and asset classes become more correlated, exaggerating losses. Examining the worst historical periods of market crisis, table one shows trend-following has been generally positive and anticorrelated to the S&P 500.

SUMMARY Diversification has been called the “only free lunch in finance”, however conventional ideas of diversification, adding bonds to a portfolio to diversify away from equity risk for example, is proving ineffective, as is the common practice of diversifying within an asset class by choosing different managers. When we look at the

evidence, there is often little or no true diversification benefit of this latter practice as the managers are themselves highly correlated, as table two shows. Even if the specific equities they choose are different, they are still invested in the equity market as a whole, and will therefore be affected by market movements. The same goes for fixed interest, regardless of manager difference, all fixed interest portfolios are affected by market movements in fixed interest markets generally. Alternative beta strategies, like trend-following, on the other hand, have been known to be often de-correlated from equity and bond benchmarks, and so adding these strategies to a portfolio means that returns tend to increase more quickly than risk, and the net result is better riskadjusted returns. Understanding why one crisis occurred is often of little value when it comes to predicting the next one, and that’s why there is no “right time to invest”. Instead, as the old adage goes - “time in the market is more important than timing the market”. By having an allocation to trend-following strategies over time, investors have a chance to effectively protect their portfolio for an inevitable market downturn. This Toolbox was produced by the CFM ISTrends Trust.

Table 2: Low diversiﬁcation beneﬁt of combining four highly correlated Australian equity managers

CPD QUIZ This activity has been pre-accredited by the Financial Planning Association for 0.25 CPD credit, which may be used by financial planners as supporting evidence of ongoing professional development. 1. What is the difference between an alternative asset and an alternative strategy? a) An alternative strategy is a collection of alternative assets combined in a portfolio b) There is no difference between alternative assets and alternative strategies, they are just different terms for the same thing c) An alternative asset is any asset other than an equity, bond or cash and alternative strategies are absolute return strategies which employ specific strategies and techniques across a range of financial instruments. 2. What are the underlying investments in a long-term trendfollowing portfolio? a) A range of equities b) A range of equities and bonds c) A range of alternative assets, including property and commodities d) A large number of major traditional and alternative asset classes as well as financial contracts 3. When should alternative strategies be added to a portfolio? a) When a market crisis is imminent b) When interest rates and inflation are low c) Alternative strategies are not time-sensitive, they are long-term strategies which should be part of a portfolio for the long term d) As an alternative to bonds in a diversified portfolio 4. What do alternative strategies aim to add to a portfolio? a) Diversification due to non-correlation with equity and bond benchmarks b) Lower volatility than market indices c) Performance in a range of market conditions, including during market crises d) A positive increase in the portfolio Sharpe ratio e) All of the above 5. What is long-term trend-following? a) An alternative beta strategy which seeks to identify upward trends in equity prices and benefit from these b) An alternative beta strategy which seeks to identify and profit from long-term trends, or momentum, both up and down c) A strategy for investing in equities which looks at price movements in the past to make predictions about the future 6. Alternative beta strategies are most suitable for institutional and/ or sophisticated investors because they are expensive and illiquid. a) True, like hedge funds, they are expensive to invest in and can be difficult to get out of b) True, because they add nothing to a smaller portfolio, but only to a portfolio of a larger size c) False, they can add diversification benefits to all portfolios, but are very expensive to invest in d) False, they can add diversification to all portfolios, and are accessible on a number of major platforms, are liquid and low cost

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ when-right-time-invest-alternatives

Source: SQM Research, 5-year Sharpe Ratios to 30 June, 2018

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

27/06/2019 3:36:47 PM

38 | Money Management July 4, 2019

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

Appointments

Move of the WEEK Renato Mota CEO IOOF

Renato Mota has been confirmed as the chief executive officer of IOOF Group effective immediately. The company announced to the Australian Securities Exchange (ASX) that Mota’s appointment had been confirmed, with the company’s chair, Allan Griffiths stating it “marks a new era as we reset the business and

Westpac has hired Guilherme Lima as chief executive of its new restructured Business division, to start later this year. Lima joined Westpac from HSBC where he was group head of wealth management and was previously group head of strategy in London and a partner at consulting firm McKinsey & Co. In total, he had 22 years of experience in banking and consulting. The Westpac Business division was created following a restructure in March when the private wealth, platforms, investment and superannuation businesses were merged into a Business division. He would be replacing Alastair Welsh, who had been working in the role on an interim basis since March until a replacement was found.

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focus on the future”. He said the appointment confirmation had followed a thorough executive search involving external candidates. IOOF also announced the appointment of Andrew Bloore as an independent non-exeuctive director. Bloore had been an

The Financial Services Council (FSC) has appointed BT general manager of platforms, investments and operations, Kathy Vincent, to its board, with her background in product, portfolio strategy, and marketing contributing to her selection. Vincent would bring 25 years’ experience in the financial sector to the board, particularly in retail super, investment platforms, product strategy, and distribution. Her product knowledge spanned co-investment and unlisted equity transactions, asset management, and managed funds. Centuria Capital has adapted its senior management structure to appoint Jason Huljich as joint chief executive alongside John McBain.

independent non-executive director on the boards of IOOF subsidiaries including Australian Executor Trustees and IOOF Investment Management. The company said there would be further announcements regarding non-executive directors as IOOF continued its board renewal process.

The two have worked together for more than 20 years building up the Centuria platform to $6 billion in assets under management and the group said the joint position was the future-proofing of the firm’s senior management. Prior to taking on this role, Huljich worked as head of real estate and fund management and was also an executive director at the firm. In light of the restructure, Ross Lees was promoted to head of funds management from his current role as fund manager of the Centuria Industrial REIT. He would continue managing the fund until a replacement manager is found. Aberdeen Standard Investments (ASI) has announced the promotion of

Michelle Lopez, an investment professional, to lead its Australian Equities team. She would replace Robert Penaloza who had been appointed to head of Thailand for ASI. Lopez, who had more than more than 15 years of investment experience, joined the company as an investment analyst from Willis Towers Watson in 2004 and was promoted to the positions of investment manager and then investment director before being appointed deputy head of Australian Equities. ASI’s Australia managing director, Brett Jollie, said Lopez would report in her new role to Flavia Cheong, head of Asia Pacific equities, and there would be no change to the firm’s investment process nor the current team structure under her leadership.

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OUTSIDER

ManagementJuly April4,2,2019 2015 40 | Money Management

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

Conscientiously dealing with the recently unconscious. OUTSIDER is conscious of Australia’s recent revolving door approach to Prime Ministerships but perhaps not as conscious as an erstwhile colleague and life company corporate affairs operative currently recovering from a cerebral haematoma. This particular chap, who has also served time as a political staffer, found it amusing that after his operation the nursing staff kept asking him what day it is and who is the current Prime Minister. Outsider is led to believe that while his former colleague began answering

the frequently asked questions honestly and accurately, he soon tired of the exercise and began worrying the staff by churning out what could only be described as spurious data. Perhaps they woke up to his ruse when he declared that Wednesday was Monday and that the Prime Minister was, to the best of his knowledge, Sir Robert Menzies. At least he didn’t suggest the Prime Minister was Bill Shorten – something which might have seen him carted straight back into the operating theatre.

FASEA receives a message from Lisbon THERE was Outsider thinking that Royal Commissions and other factors had brought down the curtain on significant offshore conferences in the financial planning industry, and then Adrian Raftery’s issues with the Financial Adviser Standards and Ethics Authority served to suggest otherwise. You see Adrian made a few assertions on social media about perceptions of conflicts of interest with respect to some members of the FASEA board, acknowledging in doing so that he was in Lisbon, Portugal, and would soon be going to bed. Knowing of Raftery’s status as chairman of the Association of Independently Owned Financial Professionals, Outsider checked what was up and discovered that Raftery and a bunch of other members were in fact attending the AIOFP 2019 Conference in not just Lisbon, but also London and that Raftery had raised his issues when addressing conference delegates. The Lisbon leg of the conference went for three days before delegates jetted off to London for more conference activity. According to the official AIOFP web site, the Lisbon leg of the conference included one dinner and two conference sessions, while the London leg involved two conference sessions and two dinners plus the option of attending a One Day cricket match at Lords. Given that the timetable of the conference coincided with that of the two FASEA adviser exams, it seems safe to assume those delegates will be sitting that test at a later date.

Why Outsider and Boris should not be PM AS a student of history, Outsider knows that the 1920s and 1930s bred a particular type of national leader – the fascist - and he notes global media coverage suggesting that the current times are breeding another particular type of national leader – the populist. That, at least, seems to be the view of the New York Times which Outsider notes has drawn parallels between the personalities of the United Kingdom’s Tory Prime Ministerial aspirant, Boris Johnson, and US President, Donald Trump. The parallels seem to rest on the observation that Johnson “has a history of loose-cannon behaviour” but “his hard-core supporters seemed to like him even more” – something which seems inordinately familiar to US journalists covering Trump.

OUT OF CONTEXT www.moneymanagement.com.au

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Boris was, of course, once a journalist and Outsider has worked with many colourful journalists few of whom he would have backed to become Prime Minister. Having said that, he notes that Australia has had its fair share of scribblers turned politicians, not least former Prime Minister, Malcolm Turnbull and former Minister for Foreign Affairs and former NSW Premier, Bob Carr. Then, too, another former journalist, Brian Burke, was Premier of Western Australia before resigning and later being jailed for false pretences over his travel expenses. Outsider has always had a jaundiced view of those working in the real estate industry but he notes the chequered political histories of some former journalists and wishes the Poms well.

"Does it matter? It matters if you are a Chinese pig. It matters if you like eating pork in China."

"What's the benefit of what is being proposed by Facebook?"

Paul Donovan, global chief economist at UBS Group, commenting on African swine fever affecting pork prices.

Andy White, chief executive of AusPayNet, on Facebook's proposed 'Libra' cryptocurrency.

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