Money Management | Vol. 34 No 10 | June 18, 2020

www.moneymanagement.com.au

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

Vol. 34 No 10 | June 18, 2020

FINANCIAL ADVICE

Cost of adviser registration

16

EQUITIES

22

Alternative sources for income

RATE THE RATERS

The law of quant amid COVID-19

Platform consolidation on the horizon

BY MIKE TAYLOR

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Fund managers torn between SQM Research and big research houses FUND managers have again delivered a mixed picture, with preferences being split between fast-growing SQM Research and two of the biggest research houses, Zenith and Lonsec, according to the first part of Money Management's 'Rate the Raters‘ survey.

The annual survey examines fund manager sentiment and their relationships with the research houses that rate their products.

This year’s result was very different because of the COVID-19 pandemic and the partial lockdown of global businesses around the world. Fund managers used their responses to the survey as an opportunity to flag a number of new disruptions in their relationships with research houses.

The difficult time resulted in more requests for data, additional difficulties around meeting offshore-based portfolio managers and, in some cases, holding back ratings on new products.

Having said that, fund managers recognised once again the value of North Sydney-based SQM Research which placed first in four categories: transparency of research process, staff quality, feedback, and rating satisfaction.

Zenith was appreciated for its research methodology and saw the highest number of respondents who said they had their products being rated by the agency.

At the same time, Lonsec was voted the winner in one category for its accurate selection of peer groups and sectors.

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Full feature on page 18

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TOOLBOX

THE Australian investment platform market is facing further consolidation with Colonial First State (CFS) now in the hands of private equity, MLC close to sale and with Westpac/BT understood to have briefed some dealer group executives about its future intentions with respect to its array of platform offerings.

Dealer group executives have told Money Management they expect that, in the end, BT/ Westpac’s platform offerings will be focused on BT Wrap and Panorama, leaving a question mark hanging over Asgard.

Senior platform executives had also noted the changes to the market driven in large measure by the exit of the major banks, leaving Netwealth and HUB24 to dominate adviser satisfaction

ratings and acknowledged the likelihood of further consolidation, particularly as the sale of CFS and MLC play out.

However, they are also suggesting that while there may be fewer platform offerings, those platforms may have to have greater scale in circumstances where many are already arguably much smaller than the largest industry superannuation funds.

HUB24 director of strategic development, Jason Entwistle said the consolidation would be driven by the reality of net flows, in circumstances where the days of healthy inflows had ended with many of the major platforms now having to deal with outflows.

He said that when this was taken together with the expected changes to ownership at MLC and Continued on page 3

AFCA hit by super early release complaint surge THE Australian Financial Complaints Authority (AFCA) has confirmed the degree to which superannuation fund members have become irritated when their superannuation funds have sought to check the validity of their claims under the Government’s hardship early release program.

AFCA has confirmed to the House of Representatives Standing Committee on Economics that 89% of complaints it received had related to the denial of early release superannuation or delays in facilitating early release.

The issue has become such that AFCA said in some instances it has initiated weekly meetings with superannuation trustees. “…a significant number of COVID-19 related superannuation complaints are about early release of superannuation. The most Continued on page 3

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June 18, 2020 Money Management | 3

News

Sam Henderson faces dishonest conduct charges

BY MIKE TAYLOR

FORMER celebrity financial adviser, Sam Henderson has been charged by the Australian Securities and Investments Commission (ASIC) with three counts of dishonest conduct and two counts of giving a disclosure document known it to be defective.

The regulator said the charges related to alleged false representations made by Henderson that he had a Master of Commerce.

It said it would be alleging that Henderson, whilst a senior financial advisor and director of Henderson Maxwell Pty Ltd, engaged in dishonest conduct when he made false representations that he had a Master of Commerce: • In PowerPoint presentations he gave to prospective clients from 2010 to 2016; • On the Henderson Maxwell website from October 2012 to August 2016; and • In Henderson Maxwell brochures distributed between 2013 and 2016 and in an information memorandum dated May 2011.

ASIC said each dishonest conduct offence under s1041G Corporations Act 2001 (Cth) carried a maximum penalty of 10 years’ impris-

onment or a fine of up to 4,500 penalty units.

The regulator said it was also alleging that Henderson breached s952D(2)(a)(ii) of the Corporations Act in 2014 and 2016 by giving at least two clients a financial services guide, containing the false representation that he held

Platform consolidation on the horizon Continued from page 1 CFS, it was hardly surprising that there was an expectation of consolidation.

Netwealth joint managing director, Matt Heine said there was definitely a lot of activity in the platform market.

“After a number of years of speculation, we are starting to see ‘a changing of the guard’ with new owners emerging, such as KKR buying into CFS, IOOF acquiring ANZ wealth and the recent announcement by Iress to acquire OneVue,” he said.

“Whilst it’s not hard to imagine consolidation could continue at both ends of the market there is still a lot to play out over the next 12 to 18 months and we could just as easily see the current number of providers exist but under new owners or structures.”

Heine said scale remained important, given increased

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operating and regulatory costs at a time when fees had been reducing, but only if there was a commitment to ongoing investment into technology and the service that supports it.

“The needs of advisers and their clients continue to evolve rapidly and platforms need to be evolving with them to remain relevant today and into the future.

This has become even more apparent during the pandemic as digital adviser and client led solutions become increasingly necessary to manage remote staff and client relationships efficiently and effectively.”

Wealth Insights managing director, Vanessa McMahon said she was aware of the discussion around further consolidation but noted that the platform sector had gone through many such exercises in the past when the likes of Skandia, ING and AXA were operating in the space.

a Master of Commerce (Financial Planning).

Each s952D(2)(a)(ii) Corporations Act offence carries a maximum penalty of five years’ imprisonment and/or a fine of up to 200 penalty units.

It said the charges followed an ASIC investigation into Henderson Maxwell and Henderson after evidence of misconduct was presented in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry which uncovered allegedly false representations about Henderson’s qualifications made between 2010 and 2016.

Commenting on the charges, ASIC deputy chair Daniel Crennan QC said they demonstrated that ASIC will investigate allegations of breaches of the law by financial advisers when dealing with their clients, including allegations of giving inaccurate and dishonest information.

The charges against Henderson were mentioned at the Downing Centre Local Court on 9 June, 2020. Henderson did not enter a plea and the matter will next come before Downing Centre Local Court on 4 August, 2020.

The Commonwealth Director of Public Prosecutions is prosecuting this matter, following a referral of a brief of evidence from ASIC.

AFCA hit by super early release complaint surge Continued from page 1 prominent theme in these complaints are service-related issues such as delays in processing customer applications,” it said.

AFCA said the matters that could lead to a delay or denial of early access included: • The superannuation trustee challenging discrepancies in the complainant’s identification data; • The superannuation trustee needing original documents to prove complainant identity (when the postal service is slow); and • Superannuation trustee delays in coordinating with the ATO in relation to early release of superannuation applications.

“In response to the above, AFCA has put in place several measures including meeting on a weekly basis with superannuation trustees to discuss our approach to resolving these complaints and address any challenges they may be experiencing with dispute resolution,” it said.

AFCA said it had so far received only three income protection complaints relating to COVID-19 superannuation complaints.

“One of these relates to the denial of an income protection application by a consumer, who was made redundant as a result of COVID-19 and wishes to access his income protection as a result.

The second complaint relates to delay, where the complainant is concerned her income protection cover will cease before she is able to get the surgical treatment,” it said.

“The third complaint relates to the ceasing of payments, as result of non-provision of information to the financial firm.”

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4 | Money Management June 18, 2020

Editorial

mike.taylor@moneymanagement.com.au

SUPERANNUATION TOO IMPORTANT FOR TINKERERS

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

There has been a good deal of policy kite-flying around superannuation but it is arguably too important for policy kite-flying.

Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814

WHEN Peter Costello was Federal Treasurer in the Howard Government he set about changing the nation’s approach to the superannuation guarantee regime implemented by the previous Hawke and Keating Labor Governments.

Nearly a quarter of a century later he and his acolytes are still seeking to implement change.

Over the years, Costello has leveraged his position as chair of the Future Fund to canvass a range of changes to superannuation not least to default superannuation by suggesting the possibility that the Future Fund might act as the manager of default funds in similar manner to the Canadian Pension Plan Investment Board.

As Treasurer, Costello is wellremembered for initiatives such as the superannuation surcharge, the superannuation co-contributions regime, transition-to-retirement (TTR) pensions and, of course, the employee choice of fund legislation which passed the Senate in July, 2005, and was expected by some to undermine the default flows into industry funds.

History shows that far from undermining the default flows to industry superannuation funds, Costello’s choice of fund had little or no effect. It also shows that the co-contributions and TTR regimes had to be wound back because they were deemed too expensive, particularly amid the economic challenges which followed the global financial crisis.

What history also shows is that when Costello left office in 2007 the superannuation

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guarantee stood at 9% and that it took another six years before it climbed to 9.25% where, thanks to the Abbott Coalition Government, it rose to 9.5% but has remained locked on that number until it is due to be lifted to 10% from 1 July, next year.

So, the bottom line with respect to the superannuation guarantee is that the Hawke and Keating Governments had the objective of lifting it to have reached around 15% more than a decade ago but, instead, it has risen just 1.5% in 13 years. It will be mid-2025 before it reaches 12% assuming there is no more Government tinkering.

Fast forward to 2020 and NSW Liberal Senate tyro and former Financial Services Council (FSC) policy executive, Senator Andrew Bragg appears to have adopted much of the sentiment if not the entire mantra of the Costello years with respect to the default status of industry funds but he has taken the debate a furlong further.

Bragg, while accusing the superannuation sector of being a hotbed of vested interests, has variously canvassed an element of voluntarism with respect to superannuation guarantee contributions alongside people being able to access their superannuation as part of a broader First Home Super Saver Accounts Scheme.

He has also canvassed the Government making its COVID-19 hardship early access superannuation scheme a permanent part of the superannuation landscape.

Given that the tax concessional status of superannuation contributions was always premised on the sacrifice of people not having access to their contributions until they reached preservation age (currently age 65), Bragg’s proposals inevitably raise questions about the future tax status of superannuation and, by definition, its ultimate attractiveness as an investment destination.

As the machinations of the Costello years as Treasurer prove, policy changes come and go according to the political and economic priorities of the day, but it is folly to undermine the underlying objective of Australia’s superannuation guarantee regime – the ability, via a combination of superannuation and the Age Pension, to deliver Australians a comfortable retirement.

Some would argue that the persistent delays to lifting the superannuation guarantee have undermined that objective and it would seem equally arguable that allowing people to access their superannuation for home ownership will further impede that objective.

It was only a few short years ago that the Coalition, recognising that superannuation fund members want certainty, was promising not to adversely tinker with the superannuation policy settings. That sentiment seems to have been lost on those currently enjoying their policy kite-flying and consequent publicity.

oksana.patron@moneymanagement.com.au News Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au Senior Journalist: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au Journalist: Chris Dastoor Tel: 0439 076 518 chris.dastoor@moneymanagement.com.au Events Executive: Candace Qi Tel: 0439 355 561 candace.qi@fefundinfo.com ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Amy Barnett Tel: 0438 879 685 amy.barnett@moneymanagement.com.au Account Manager: Amelia King Tel: 0407 702 765 amelia.king@moneymanagement.com.au PRODUCTION Graphic Design: Henry Blazhevskyi

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Mike Taylor Managing Editor

10/06/2020 3:12:04 PM

June 18, 2020 Money Management | 5

News

Accountants want more SMSF clients

BY JASSMYN GOH

ACCOUNTANTS want to grow their self-managed superannuation fund (SMSF) client base by 35%, according to Investment Trends.

The research house’s latest SMSF accountant report found that while SMSF trustees already comprised 36% of accountants’ total client base, accountants estimated another one-in-eight clients were suitable for an SMSFs, and half of this cohort had expressed an interest in establishing one.

Investment Trends senior analyst, King Loong Choi, said: “Given the large pool of potential SMSFs, there is a clear opportunity for service providers to help accountants better serve this segment.

“To help educate clients and facilitate SMSF set up, accountants want to be better equipped to explain the suitability of SMSFs (52%), and the roles and responsibilities of trustees (49%).”

The report noted that the top challenges for accountants were regulatory related such as licensing restrictions on providing financial advice (49%), heightened regulation in setting up SMSFs (34%), and compliance obligations (31%).

“However, many accountants also face issues on the client-facing side, such as competitive pricing/fee recovery (38%) and attracting new SMSF clients (29%),” Choi said.

The report also found that BGL Simple Fund led satisfaction ratings for specialist software used to service SMSFs by accountants as 35% of accountants rated it as ‘very good’, ahead of Class Super (29%), and SuperMate (17%).

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10/06/2020 3:12:16 PM

6 | Money Management June 18, 2020

News

Money Management Fund Manager of the Year finalists announced FPA offers licensees an olive branch of sorts

BY MIKE TAYLOR

THE Financial Planning Association (FPA) has sought to offer an olive branch to licensees over its adviser registration proposals, with chief executive, Dante De Gori, arguing licensees will continue to play “a crucial role in developing, training, educating, and supporting licensed financial planners”.

Confronted by push-back by six key licensee chief executives about the FPA’s proposals for adviser registration to supplant authorisation under an Australian Financial Services License (AFSL), De Gori sought to emphasise that it was early days and all part of a five-year plan.

The six licensees had questioned the FPA’s proposed approach and its ultimate impact on client best interests, noting the high cost of professional indemnity insurance, the importance of regulatory compliance and the necessity of continuing professional development.

“The FPA Policy Platform has 19 critical recommendations for reform that are aimed at reducing regulatory duplication for financial planning professionals, lowering the cost of advice and helping more Australians access advice,” De Gori said.

“One of our policy positions is that the future regulation of financial advice should occur through individual registration and oversight, rather than an AFSL system.

This has triggered important discussions among the industry as we work together to create a better operating environment for financial planners and their clients.

“Individual registration is an innovative concept for financial planning but not for other professions. It should not be confused with self-licensing or individual licencing under the existing AFSL system, which would still result in a duplication of regulation and unnecessary costs for financial planners.

“The FPA acknowledges that licensees continue to play a crucial role in developing, training, educating, and supporting licensed financial planners.”

De Gori said licensees would continue to be needed to provide business development services, technology, education and many other services that give value to financial planning practices.

“Removing the AFSL requirement for financial planners won’t change this,” he said.

“The AFSL does not make the planner, just as the hospital does not make the doctor, nor the law firm the lawyer. Individual financial planners are the ones who provide financial advice and the regulatory system should focus directly on their professional qualifications and behaviour.

“The FPA looks forward to more discussion of its fiveyear strategy and working with industry and government stakeholders to identify innovative ways of improving the profession for all financial planners and their clients.”

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MONEY Management has announced the finalists for the Money Management 2020 Fund Manager of the Year Awards – the first awards judged utilising a whole of market approach involving the combined efforts of ratings houses Lonsec, Mercer and SQM and the associated input of IOOF. The award platinum sponsor is Equity Trustees, the silver sponsor is MSC Trustees.

The award winners will be announced in a Livestream event on 30 July.

Registration is free.

The finalists by category are: AUSTRALIAN LARGE CAP EQUITIES • Alphinity Sustainable Share Fund • Bennelong Concentrated Australian Equities • Greencape High Conviction • Platypus Australian Equities Trust Wholesale • Bennelong Australian Equities AUSTRALIAN SMALL/MID CAP EQUITIES • Ausbil MicroCap • Fairview Equity Partners Emerging Companies • Fidelity Future Leaders • OC Micro-Cap • Australian Ethical Emerging Companies Wholesale GLOBAL EQUITIES • Hyperion Global Growth Companies B • CFS Generation WS Global Share • Loftus Peak Global Disruption • Legg Mason Martin Currie Global Long-Term Unconstrained A • Zurich Investments Concentrated Global Growth GLOBAL EMERGING MARKET EQUITIES • MFS Emerging Markets Equity Trust • GMO Emerging Markets Trust

• Fidelity Global Emerging Markets • CFS FirstChoice Wholesale Emerging Markets • Legg Mason Martin Currie Emerging Markets LONG/SHORT EQUITIES • CFS FirstChoice Acadian Wholesale Australian Equity Long Short • Bennelong Long Short Equity • Wavestone Dynamic Australian Equity • Regal Long Short Australian Equity AUSTRALIAN PROPERTY SECURITIES • Charter Hall Maxim Property Securities • UBS Property Securities Fund • Cromwell Phoenix Property Securities • Pendal Property Securities • AMP Capital Listed Property Trusts A GLOBAL PROPERTY SECURITIES • Resolution Capital Global Property Securities Unhedged II • Dimensional Global Real Estate Trust Inc AUD • Quay Global Real Estate C • APN Asian REIT • IOOF Specialist Property INFRASTRUCTURE SECURITIES • 4D Global Infrastructure A • Lazard Global Infrastructure • AMP Capital Global Infrastructure Securities Unhedged A • Magellan Infrastructure Unhedged • CFML First Sentier Investors Infrastructure AUSTRALIAN FIXED INCOME • Nikko AM Australian Bond • Macquarie Core Australian Fixed Interest • Legg Mason Western Asset Australian Bond A • BlackRock Enhanced Australian Bond • OnePath Optimix Wholesale Australian Fixed Interest Trust A

GLOBAL FIXED INCOME •C olchester Global Government Bond N •L egg Mason Brandywine Global Opportunistic Fixed Income A •R ussell Global Bond AUD •L egg Mason Brandywine Global Fixed Income Trust A •P IMCO Global Bond MULTI ASSET – BALANCED •A dvance Balanced Multi Blend Wholesale • I OOF Balanced Investor Trust •B endigo Balanced Index • Australian Ethical Balanced •F iducian Balanced EMERGING MANAGER •F airlight Global Small and Mid Cap A • I nsync Global Quality Equity •E lston Australian Large Companies A ombora Special •B Investments Growth A SEPARATELY MANAGED ACCOUNTS – AUSTRALIAN EQUITIES •B ennelong Australian Equities Model Portfolio Core •D NR Capital Australian Equities High Conviction Portfolio • Elston Australian Large Companies Model Portfolio •B lackmore Capital Blended Australian Equities Portfolio RESPONSIBLE INVESTMENTS – all rated

by Lonsec •A lphinity Sustainable Share Fund •N anuk New World Fund •A ustralian Ethical Australian Shares Fund •A usbil Active Sustainable Equity BEST-PERFORMING FUND WITH A WOMAN IN A LEADERSHIP ROLE •B ianca Ogden •K ate Howitt •Q iao Ma •M ary Manning ulia Forrest •J

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8 | Money Management June 18, 2020

News

Northern Trust and BlackRock enter strategic alliance

BY CHRIS DASTOOR

NORTHERN Trust has entered a strategic alliance with BlackRock to deliver enhanced operations, data and servicing capabilities to mutual clients through its whole office integrated asset serving platform.

The new capabilities would be delivered through Aladdin, BlackRock’s investment management and operations platform, to provide clients with more efficiency, interoperability and transparency across the back, middle and front office.

The service included outsourced trade execution for asset managers and owners and a digital and service platform for global asset allocators; currency management and FX algorithmic trading; integration with industry trading platforms; and collateral optimisation, risk analytics and digital innovation for asset servicing.

Centrepoint acquires Enzumo

BY MIKE TAYLOR

PUBLICLY-LISTED financial services group, Centrepoint Alliance is to acquire financial planning software provider, Enzumo for $1.5 million in cash.

Centrepoint announced the transaction to the Australian Securities Exchange (ASX) stating that acquiring Enzumo represented the latest step in Centrepoint’s strategic refresh and would accelerate the company’s development of a scalable, recurring fee-based revenue model.

Enzumo is currently owned

by Chant West Holdings.

The company announcement said Enzumo’s offerings were highly complementary to Centrepoint Alliance’s advice services business, bringing a new and highly valued extension to the company’s offering to financial advisers.

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Rob Goldstein, BlackRock’s chief operating officer and head of BlackRock solutions, said the current climate had demonstrated the importance of data symmetry and streamlining communication across the investment lifecycle from the asset manager to the asset servicer.

“BlackRock and Northern Trust are committed to providing increased transparency, accuracy and operating model flexibility for our mutual clients, leveraging our joint capabilities through Aladdin Provider,” Goldstein said.

Pete Cherecwich, president of corporate and institutional services at Northern Trust, said this was part of a clear strategic pathway.

“We will continue to enhance our capabilities and add future functionality through a combination of buy, build or partner with bestin-class providers to benefit our global asset manager and asset owner clients,” Cherecwich said.

Sequoia takes PCL adviser customer base SEQUOIA Financial Group has entered into an agreement to acquire the advice elements of Philip Capital Limited (PCL).

Sequoia said the arrangement would see Sequoia Wealth Management acquire the customer base of PCL’s existing advisers and corporate authorised representatives who would come under the Sequoia Wealth Management brand from mid-July.

It told the Australian Securities Exchange (ASX) the client of 23 PCL advisers would be sent a negative consent letter by the advisers in coming days with the client transfers and adviser commencement with Sequoia expected to take place before mid-July, 2020.

As part of the transfer to Sequoia, PCL advisers had been offered agreements that would see them

maintain their existing entitlements and conditions.

The announcement said the successful acquisition of the PCL customer base would add approximately 5,500 equity accounts to Sequoia’s executive and clearing business, Morrison Securities and see an increase of around $1 billion in funds under advice adding $4 million of gross revenue.

It said the acquisition consider might be up to $1 million depending on the number of advisers who accepted the offer.

The company said the purchase was consistent with Sequoia’s strategy of providing licensee services to the financial advice market and followed the previous acquisitions of Interprac, Libertas and YBR Wealth Management.

10/06/2020 11:19:27 AM

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11/06/2020 9:44:00 AM

10 | Money Management June 18, 2020

News

APRA put under pressure to consider early access scheme

BY LAURA DEW

THE Australian Prudential Regulatory Authority (APRA) was given less than one day to consider the early access to super scheme.

In a session with the Senate Select Committee on how it had handled the economic impact of the COVID-19 pandemic, APRA deputy chair Helen Rowell said it was given a “high level verbal outline” of the scheme on 18 March.

The Government said it wanted a response to this on the same day and APRA said there were internal discussions but that it was unable to consult with any other organisations such as the Australian Taxation Office (ATO).

It said it considered factors such as the impact on the super system, levels of possible payments and if this volume of payments would be able to be managed by funds.

An updated parameter was then sent to APRA “a few days later” which reflected the scheme as we know it.

The Australian Securities and Investments Commission (ASIC), in the same Senate session, said it was given a “heads up” about the scheme from the Treasury a few days before it went live.

The early access to super scheme allowed people to access up to $10,000 from their superannuation until 30 June, 2020, and a further $10,000 in the next financial year.

Since the scheme came into force, APRA

had been monitoring the level of funds accessed and how quickly payments were being made. This was being balanced with supporting members who were not accessing their super.

“We are focused on management of the system and balancing that with asset management and the needs of members not accessing their super such as liquidity measures, asset allocation and rebalancing as well as how funds are meeting payments.”

APRA said there had initially been a “high level” of applications to the early release scheme but that they had “steadied out” to around 200,000 per week.

The number of members accessing super had been higher than expected but the amount of dollars drawn down was “in line with initial assumptions”. It said it was monitoring this closely and expected an uptick towards the end of the scheme.

Rowell said: “Applications started out at a high level but has now steadied out to 200,000 per week.

“The levels of access payments we are seeing are manageable and we expect it to continue to be so.

“We expect an uptick towards the end of the scheme and then a second uptick at the start of the second tranche.”

Daly and Linchpin directors banned for five years by ASIC

BY MIKE TAYLOR

WELL-KNOWN dealer group director Peter Daly and two other directors of Linchpin Capital Group have failed in their bid to avoid an Australian Securities and Investments Commission (ASIC) order banning them from providing financial services for five years.

ASIC announced it had banned Ian Williams, Peter Daly and Paul Raftery from providing any financial services for a period of five years each, noting they were all directors of Linchpin Capital Group Ltd and Williams and Raftery were also directors of Endeavour Securities (Australia) Ltd (Endeavour).

ASIC said its banning decisions were made in November 2019 but that following

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this, Williams, Daly and Raftery each appealed to the Administrative Appeals Tribunal (AAT).

They applied for a stay of the decision and a confidentiality order preventing ASIC from publishing information about the banning order until the decision had been reviewed by the AAT. On 29 April, 2020, the AAT heard the applications for stay and confidentiality orders for each of the applicants. On 27 May, 2020, the AAT dismissed the applications for stay and confidentiality orders.

The hearings for the review of the banning decisions have not yet been listed for any of the applicants.

ASIC banned Williams, Daly, and Raftery for their roles in the operation of managed

investment schemes by Linchpin and Endeavour. ASIC found that they each: • Failed to act in the best interests of the members of the Investport Income Opportunity Fund; and • Used their position as officers of the companies to gain an advantage for other persons and cause detriment to members of the Investport Income Opportunity Fund.

ASIC found that Williams, Daly and Raftery did not understand the importance of the duties of directors to protect members of the managed investment schemes and, as a result, their conduct put significant amounts of other people’s money at risk.

ASIC said the banning orders for Williams, Daly and Raftery had been recorded on ASIC’s Banned and Disqualified Register.

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June 18, 2020 Money Management | 11

News

Little appetite for a new financial planning body

BY MIKE TAYLOR

IT would be extremely challenging to establish a new financial planning representative organisation with 70% of advisers who responded to a Money Management survey suggesting there is simply not room to do so alongside the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA).

The survey, conducted in the wake of the FPA announcing a new strategy and the redundancy of around eight staff, found 94% supported a merger of the AFA and the FPA and very little support for the establishment of a new organisation.

Those survey respondents who believed the FPA and AFA should not merge, were then asked whether they believed there was room for the establishment of a new adviser representative organisation, with 70% responding ‘no’.

This was despite the fact that 83% of respondents to the survey said they believed that financial planners

would be best represented by a single organisation.

Importantly, while 70% of respondents who were members of the FPA said they did not believe they were being well-served by the organisation, compared to 47% of members of the AFA this was significantly below the nearly 82% who expressed a similar sentiment with respect to other representative groups within the financial planning sphere.

Which funds could gain from the Iress/OneVue acquisition?

BY LAURA DEW

THERE are five funds which could be set to benefit from the acquisition of OneVue by Iress this week after the financial technology firm announced a capital raising and a scheme of arrangement to acquire OneVue. Iress chief executive, Andrew Walsh, said the proceeds of the capital raising would be used to partially fund the OneVue acquisition as well as strengthen the balance sheet.

According to FE Analytics, there were five funds in the Australian Core Strategies (ACS) universe which held a stake in Iress in their top 10 largest holdings, all of which invested in small-cap equities.

These were Celeste Australian Small Companies, CFS Colonial First State Wholesale Australian Small Companies, CFS FirstChoice Wholesale Australian Small Companies, Hyperion Small Growth Companies and Zurich Investments Small Companies.

The largest stake was held by Hyperion Small Growth Companies, which had 5.65% allocated to the technology firm. Weightings to Iress in the other four funds ranged from 2.3% to 4.15%.

Hyperion was the only one of the funds to have reported positive performance since the start of the year, having returned 4% to 29 May, compared to losses of 9% by the small-cap sector over the same period.

There were no funds in the ACS universe which held OneVue Holdings in their top 10.

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Iress moves to acquire OneVue FINANCIAL services technology company, Iress has moved to acquire OneVue. Iress had announced a capital raising at the same time as announcing a scheme of arrangements under which it would acquire OneVue. The announcement followed hard on the heels of OneVue announcing that its impending sale of Madison Financial Group had become overshadowed by the involvement of a Chinese stateowned enterprise.

Iress announced that it had launched an equity raising with a view to the acquisition of OneVue. Iress chief executive, Andrew Walsh said the proceeds would be partially used to fund the proposed acquisition of OneVue as well as to strengthen the balance sheet.

The transaction already had the sanction of the OneVue board.

The formal ASX announcement said a Scheme Implementation Agreement had been entered into with OneVue Holdings Limited under which Iress would acquire 100% of the outstanding shares of OneVue and that under the terms of the Scheme, OneVue shareholders would be entitled to receive consideration of $0.40 per share for their OneVue shares representing a 67% premium to OneVue’s closing share price on 28 May 2020 and a 19% premium to OneVue’s 12-month VWAP. Explaining the move, Walsh, said: “With structural shifts and changing market dynamics, our strategy is to continue to generate long-term growth opportunities, leveraging technology and automation, while helping clients achieve efficiency, compliance and growth.

“The combination of OneVue’s strength and position in administration of managed funds, superannuation, and investments, with Iress’ strength in software and data will drive innovation through technology. This includes the development of software and services that brings advice and investments closer together, resulting in greater efficiency and productivity for professional advisers and businesses in Australia.

“OneVue has scale in managed funds administration as the largest single third-party fund registry in Australia and there is opportunity to build on OneVue’s business.

“I am pleased that OneVue’s managing director, Connie Mckeage, will continue to play an important role during the transition period and will consult to us on growth, strategy and clients after completion.”

The ASX announcement said the full OneVue board of directors had unanimously recommended that OneVue shareholders vote in favour of the scheme in the absence of a superior proposal and subject to an independent expert concluding (and continuing to conclude) that the scheme was in the best interests of OneVue shareholders.

OneVue managing director, Connie Mckeage, said: “We are pleased to have entered into an agreement with Iress to acquire OneVue. The offer represents a premium to our current share price and a full cash offer provides compelling certainty for our shareholders.

“Iress is a company we have significant respect for and we know they are committed to continuing to deliver high levels of service and excellence to our clients and are looking forward to working more closely alongside our clients and partners.”

10/06/2020 11:19:11 AM

12 | Money Management June 18, 2020

News

Life insurance industry loses $1.8b

BY JASSMYN GOH

THE life insurance industry has lost $1.8 billion after tax for the one year to March 2020, driven by poor performance of risk businesses and a substantial collapse in investment revenue owing to the COVID-19 related volatility in investment markets, according to data.

The Australian Prudential Regulation Authority (APRA) data found the loss was a significant reduction from $759 million profit the previous year.

The data also found that compared to the December 2019 quarter, the March

FASEA still under pressure on Standard 3

BY MIKE TAYLOR

THE Institute of Managed Account Professionals (IMAP) has added its voice to the chorus of voices telling the Financial Adviser Standards and Ethics Authority (FASEA) it needs to address Standard 3 of the Code of Ethics.

IMAP has confirmed that it has lodged a nine-page letter with FASEA chief executive, Stephen Glenfield, identifying key problems with the code.

Those problems were: • The conflict between certain standards and established law and regulatory policy; • Inconsistency between the Code and FASEA’s guidance, particularly in relation to the way a Code Monitoring Body may adjudicate a matter under the terms of Standard 3; • Inconsistency in the manner in which the code must be applied between members of the advice profession; and • The lack of a materiality test.

In sending the letter, IMAP has joined a long list of industry participant organisations concerned about the code and, in particular, Standard 3.

IMAP’s outline of its concerns comes just a week after the gazetting of FASEA answers to

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Senate Estimates revealed that the development of the code had been the result of consultations and input from “the collective skills of management and directors”.

In a communication to IMAP members, the organisation’s chair, Toby Potter, said that in sending the letter, “we wanted to set out IMAP’s position, particularly on Standard 3 of the FASEA Code of Ethics, which we believe is structurally flawed”.

“Importantly, we think it appropriate to note the differences between Standard 3 and the way in which conflicts are required to be addressed by other professions, like law and accounting, which have had considerably longer experience in addressing this issue.”

The IMAP Regulatory Group was seeking a review of Standard 3, which it believed was not only important for professionals working in the managed accounts sector, but for all financial advisers.

“Standard 3, as it currently sits, imposes a significant burden on the provision of advice. It contradicts another standard in the FASEA Code of Ethics, as well as established law,” Potter said.

2020 quarter was down 798.7% in terms of investment revenue. Compared to the March 2019 quarter, investment revenue was down 88.4%.

“All risk products deteriorated with the only exception being the individual lump sum product,” APRA said.

“In particular, individual disability income insurance (also known as income protection insurance) reported a substantial loss, primarily driven by loss recognition as adverse claims experience persists.”

Individual disability income insurance lost $1.4 billion, over the year to 31 March, 2020.

Financial planners support merger between FPA and AFA

BY OKSANA PATRON

THE time may be right for formal merger talks between the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA), according to a Money Management survey.

The survey revealed that the majority of planner respondents believe they should be represented by a single organisation resulting from a merger between the two dominant bodies – the FPA and AFA. The survey sought to gauge the views of advisers following the announcement from the FPA that it would be restructuring in the face of declining adviser numbers – a process which resulted in eight redundancies.

It found that out of the over 80% of respondents who wanted to be represented by a single body, 95% said they would expect the merger of the FPA and the AFA. Of those who welcomed a broader representation for the financial planning community only one-third had said they believed there was still room for the establishment of a new adviser representative body.

Asked how they believed the FPA and AFA were currently serving their needs – 72% of respondents said they were dissatisfied with the FPA compared to 51% for the AFA. At the same time, there was strong consensus among respondents (92%) that there were too many organisations seeking to represent them.

Around the half of those who participated in the survey identified themselves as current members of the FPA and less than 30% said they were members of the AFA and only 8% said they were currently represented by both organisations.

10/06/2020 11:18:33 AM

June 18, 2020 Money Management | 13

News

Investors dumping property for stocks

BY CHRIS DASTOOR

AUSTRALIANS now prefer to invest in stocks over property, term deposits and other investments, according to a survey.

According to the May 2020 Fear, Greed and Hope survey from Switzer Financial Group, some 62.8% preferred stocks over property, and 62.5% of stock investors believed it was a good time to invest in the stockmarket.

This compared to the February survey where 37.4% of investors believed the stockmarket would crash in 2021 with 40.7% expecting it to crash in 2025 or later.

When it came to their investment strategy due to the COVID-19 pandemic, 38.7% said they

ASIC reiterates retail investors’ mistakes in market timing

BY LAURA DEW

THE Australian Securities and Investments Commission (ASIC) has highlighted the failures of retail investors who are ‘not proficient’ in trying to time the market.

In a session with the Senate Select Committee, ASIC commissioner Cathie Armour was questioned on the regulator’s decision issue a notice to retail investors warning of volatility in markets.

She said the regulator had carried out the investigation after seeing increased retail activity and a change in behaviour in March and April as well as hearing anecdotal comments from market participants.

Armour said: “[We found] far greater numbers of retail investors were coming into the market and there were greater instances of ‘day trading’ where they were buying and selling very quickly rather than holding for the long-term.

“This was married with a propensity to guess wrong as they made the wrong speculation.

“Retail investors were buying just as the market fell rather than when it was going up which was a concern.

“We wanted to make people think about trading and if they were being sensible in this volatile time.”

Her comments were supported by the ASIC report ‘Retail investor trading during COVID-19 volatility' which stated for more than half of the days on which retail investors were net sellers, their share price increased the next day.

“For more than two-thirds of the days on which retail investors were net buyers, their share prices declined over the next day. For more than half of the days on which retail investors were net sellers, their share prices increased over the next day. If all retail investors held their positions for only one day, total losses would have amounted to over $230 million,” the report said.

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had become more conservative investors, while 21.5% said more aggressive.

Peter Switzer, director of Switzer Financial Group, said: “This great move up for stocks out of the bear market is a welcome trend that tells us that there’s an expectation that our economic future is looking miles better today than it did one, two and six weeks ago”.

Australian investors also thought biotechnology firm CSL and Macquarie Group were the stocks that would perform best over the next 12 months.

The survey featured almost 3,000 respondents which reflected the investing strategies of middle to mature aged investors who were either full-time workers or retirees.

Government’s fintech regulatory sandbox available from September THE Federal Government is finalising regulations to make it easier for fintech businesses to trial new products in an enhanced regulatory sandbox, which will be available from 1 September, 2020.

Parliament had previously passed the law in February, to provide a boost to Australia’s fintech market by reducing barriers to entry and promoting competition.

The sandbox would allow fintech firms to test the viability of new products and services without holding licences.

It would have 24 months to test products with customers, before being required to obtain a financial services licence or a credit licence from the Australian Securities and Investments Commission (ASIC).

The sandbox broadened the range of financial services available to market testing, including services that advise on or distribute non-cash payment products, insurance, superannuation, simple managed investment schemes, listed securities and consumer credit

contracts between $2,000 to $25,000.

Senator Jane Hume, Assistant Minister for Superannuation, Financial Services and Financial Technology, said robust consumer protections remained in place.

“Firms will be required to demonstrate that their proposed service is genuinely innovative and is likely to result in net consumer benefit,” Hume said.

“Product limits and caps on aggregate and individual exposures also apply. Firms will be required to have adequate professional indemnity insurance and be a member of the Australian Financial Complaints Authority [AFCA].”

NEVER MISS A BEAT Get the latest news and funds information delivered straight to your inbox.

Subscribe now at www.moneymanagement.com.au/newsletter-signup

10/06/2020 11:18:46 AM

14 | Money Management June 18, 2020

InFocus

CONDUCTING REVIEWS IN DIFFICULT TIMES In the second part of his look at client reviews, Astute Wheel’s Hans Egger outlines the steps which should be taken in the actual client review.

IN PART 1 in the previous issue of Money Management, we looked at why the client review meeting is so important, particularly in these difficult times. Here we outline the steps to take in the actual client review meeting.

1. BUILD OR REBUILD RAPPORT To build relationships you need to understand the uniqueness of your client’s circumstances. It only takes five minutes to read your file notes and remind yourself of what’s important to them, or to build on your knowledge by exploring these aspects of their life.

Even though this meeting, at least for the moment, will most likely need to be conducted virtually, spend some time reconnecting. You could do this by discussing things like: • Children; • Extended family; • Pets; • Work; and • Hobbies.

2. SET THE AGENDA Take control of the meeting. This could be done by saying something like: “The reason for meeting today is to review your financial situation.

Before we begin, can I confirm you have set time aside and don’t need to rush off?”

Then introduce the agenda: “There are lots of things to cover today. I’ve prepared an agenda so that we don’t miss anything.”

This approach provides the client with an outline of what will be addressed and confirms that you are in charge and have a plan for the meeting.

You could then ask your client if there is anything they want to discuss. In this way you are reassuring them that they also have some influence in the meeting. They may want to raise emotional issues or grievances. Rather than address these immediately, with limited time to consider a response, listen to them, ask for clarification if needed

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and make notes. You can then address these issues at an appropriate time in the meeting.

3. WORK THROUGH AGENDA ITEMS Include the following agenda items: Changes in circumstances and goals One of the most important aspects of the review is to understand changes in the client’s circumstances. If you don’t have an online reverse fact-find or client portal to gather this information before the meeting, have a checklist of questions so that nothing is missed.

Review the client’s goals with them and confirm whether they are still relevant or require adjusting. Also check if the client has any new goals.

Portfolio performance Provide context around the broader investment markets so that clients can see how their portfolio performed in relation to the market.

Show them an investment markets update document or PowerPoint presentation and discuss how the performance of their portfolio and individual investments compare to the overall performance of the market. Any performance concerns raised by the client can now be addressed in detail.

“You said earlier that you were concerned about the fall in value of your investments. Let’s look at how stockmarket performance is affecting your portfolio.”

You will also be able to relate any portfolio changes back to the information you have presented.

The next step is to show the client how the portfolio performance relates to their broader goals. This is best done through modelling software. Use a simple chart to show the end goal (e.g. retirement) and how this year’s investment returns have impacted on those goals. Next, discuss strategies to get them back on track, if necessary.

Changes impacting the plan Generally, three types of changes will impact the client’s plan: • Circumstances – change in income, children finishing school, reaching retirement age, etc; • Legislative – taxation, superannuation, pension, Centrelink; • Market conditions – interest rates, currency, share market valuations.

Changes can then become the basis for a conversation around opportunities or threats to the client’s financial plan and a starting point to explore and model strategies to improve outcomes.

In the current COVID-19 crisis, the following changes may require discussion: • Income – interest rate reductions may increase cashflow for some clients.

Others may be struggling with lower incomes due to job losses and business closures; • Insurance – clients may have a better understanding of the importance of insurance after seeing first-hand the effect of lost income; • Debt – some clients will have increased their debt by using credit cards, lines of credit or deferring mortgage payments.

They will require help to understand and restructure their debt position; and • Estate planning – unfortunately many older Australians will die this year, many without an estate plan. COVID-19 may have given clients a better appreciation of the importance of having one.

By taking this approach you have confirmed your value and provided comfort to the client that their goals can still be achieved.

4. END THE MEETING As the meeting draws to a close, summarise what has been discussed with the client by ticking off the agenda items. Agree to a list

of actions that you and the client need to complete after the meeting.

Ask your client if they are happy with the meeting and your services in general. If they are not, address any issues raised and determine if a failure can be rectified or a compromise reached.

The next step is to present your new ongoing service agreement (or relevant authority) and confirm that your client is happy to remain a client for another year at the agreed fee.

If you are introducing a change in the fee structure then this is the time to discuss it and answer any questions.

Finally, explain to your client that you are available to help their work colleagues, friends or family members that fit your criteria and would benefit from your services.

THE ROLE OF TECHNOLOGY As a result of COVID-19, many advisers will be conducting virtual reviews for the first time. But whether conducted online or in person, using visual and interactive tools will greatly improve the experience.

Technology also simplifies the review process. For example, it is now possible for clients to update their information online before the meeting and this information can flow through to various tools and modelling calculators.

Technology also helps you efficiently meet your compliance obligations. It is much better to have compliance automatically embedded in systems and processes than to retrofit it manually afterwards.

The more efficient and thorough your review process, the more clients you will be able to service – and the more those clients will value your service.

Hans Egger is managing director of www.AstuteWheel.com.au

10/06/2020 12:03:23 PM

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11/06/2020 9:43:08 AM

16 | Money Management June 18, 2020

Financial advice

FPA’S ADVISER REGISTRATION PROPOSAL RESONATES BUT WHAT WILL IT COST? Mike Taylor writes that the Financial Planning Association may well have identified a key element of the future of the financial advice industry but no one should overlook the costs and who will pay.

WHEN THE FINANCIAL Planning Association (FPA) sought to take control of the debate on the future status of financial advisers proposing that formal adviser registration have primacy over their status under an Australian Financial Services License (AFSL) it was pointing a way to the future without paying enough heed to the past.

It took less than 24 hours for six significant licensee chief executives (dealer group heads), five of whom had paid for the privilege of being FPA ‘Premium Partners’ to challenge the FPA’s position noting, amongst other things, that they had not even been consulted about the FPA’s policy push.

A further 24 hours later, and with their initial surprise and consequent anger having dissipated, a number of those licensees had acknowledged that the FPA’s proposal, while much more complicated than most advisers seemed to believe, was worthy of further discussion and debate within the sector.

The complexity with respect to the FPA’s proposal comes with the reality that it would require close cooperation with the Federal Government to achieve key changes to those elements of the Corporations Act which have given shape and form to the financial planning industry for most of the past 40 years.

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And the most important part of the Corporations Act for financial advisers when it comes to understanding how they arrived at where they are today is Part 7.7 which provides that “entities that provide financial product advice to retail clients must prepare and provide a Financial Services Guide (FSG), give a general advice warning when giving general advice, and prepare and provide a Statement of Advice (SOA) when giving personal advice”.

The Australian Securities and Investments Commission (ASIC) when discussing Part 7.7 goes further stating: “To determine your obligations under the licensing provisions you first need to consider whether you provide a ‘financial service’.”

“You provide a financial service if (among other things) you: • ‘Provide financial product advice’; or • ‘Deal in a financial product’.”

The keyword in the Corporations Act is “PRODUCT”. The financial planning industry has been built up around the sale of and advice around product. A look at the histories of companies such as AMP Limited will serve to validate to the degree to which product sales were central and it was only later that advice took a seat at the table.

Almost incredibly, given the amount of money which was expended on the services of Kenneth Hayne, the Royal

11/06/2020 10:19:30 AM

June 18, 2020 Money Management | 17

FinancialStrap advice

Commission into Misconduct in the Banking, Superannuation and Financial Services Industry barely glanced at the reality that the vast majority of the issues which gave rise to misconduct evolved out of the confusion and conflation of product and advice.

And therein lies both the victory target and the challenge for the FPA – achieving amendments to the Corporations Act which will be necessary to appropriately eliminate the focus on “product” with respect to advice structures.

Then, too, any move towards adviser registration holding primacy over an AFSL will require the Government to address issues such as the requirement to hold professional indemnity insurance, the scale of any compensation scheme of last resort and who will actually have the job of funding that scheme.

The chief executive of CountPlus and former chair of the FPA, Matthew Rowe, is one of those licensees who, after joining the five other licensees to express his concern about the FPA’s proposed policy move later reflected that it was worthy of further exploration in the context of the broad future of the industry.

However, Rowe makes no bones about the value which the licensee/dealer group model has delivered to advisers in the context of continuing professional development, regulatory compliance and the all-important PI insurance.

He said that while he had always been a supporter of separating product and advice, he understood only too well the underlying expenses and

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obligations which went with running a financial planning business in a tightly-regulated environment.

For former dealer group head and current planning group board member, Paul Harding-Davis, the greatest attraction of adviser registration would be the removal of advisers’ reliance on a licensee for their planner status.

“Putting aside the questions of what dealer groups deliver to advisers, which is often quite a lot, I cannot help but think it is inappropriate that it is licensees which determine the status of advisers when they themselves might not hold an advice qualification,” he said.

Harding-Davis said he believed that this was something which should be front and centre in the development of adviser registration.

He noted that individual adviser registration might have obviated the problems which confronted advisers who had been impacted by the closure of dealer groups, forced or otherwise.

Harding-Davis’s views were reflected in comments to the Money Management website following publication of the objections expressed by the six licensees, with readers claiming that out of the six licensee chief executives only one of them, Rowe, actually held a financial planning qualification.

Notwithstanding their acknowledgement of the need to separate product from advice and the value of removing licensee control of adviser status, Rowe and Harding-Davis admitted that any changes would have a significant impact on dealer group

structures which had already faced multiple adjustments to their commercial models over the past decade as a result of the Future of Financial Advice (FOFA) and other changes.

For his part, the chief executive of the FPA, Dante De Gori, was late last week seeking to mollify the dealer group heads by clarifying the approach being proposed by the FPA. He insisted that the licensees would continue to play a vital role.

“The FPA acknowledges that licensees continue to play a crucial role in developing, training, educating, and supporting licensed financial planners,” he said. “Licensees will continue to be needed to provide business development services, technology, education and many other services that give value to financial planning practices.”

“Removing the AFSL requirement for financial planners won’t change this,” De Gori said.

“The AFSL does not make the planner, just as the hospital does not make the doctor, nor the law firm the lawyer. Individual financial planners are the ones who provide financial advice and the regulatory system should focus directly on their professional qualifications and behaviour.

“The FPA welcomes the ongoing debate and discussion of its five-year roadmap and policy platform, which has been supported by members and sparked constructive dialogue with industry stakeholders.”

De Gori reinforced that the adviser registration policy proposal was part of a five year plan but others in the industry are

suggesting that it change may well occur faster than that as the Government seeks to implement a range of measures including its compensation scheme of last resort, the imposition of a single disciplinary body and to determine the future funding of the Financial Adviser Standards and Ethics Authority (FASEA).

The original FASEA funding arrangements were underwritten by the four major banks but with the substantial exit of those banks from wealth management the Government is going to have to come up with a new funding formula, with the easiest and most expedient formula likely to be yet another levy on the industry.

Then, too, is the question of whether the Government will look to address the perception of broad industry dissatisfaction with the performance of FASEA and the perception of regulatory proliferation by consolidating its functions within that of the single disciplinary body.

What the Government has made clear via the Assistant Minister for Superannuation, Financial Services and Financial Technology is that it wants to turn financial planning into a profession and that it is not, in general terms, opposed to the changes being canvassed by the FPA. But one thing has also been made certain by this Government.

It prefers a user-pays model so whatever costs are associated with the development of a profession will be carried by the industry, not the taxpayer and that includes a compensation scheme of last resort, a single disciplinary body and FASEA, if it remains as a standalone body.

10/06/2020 4:13:45 PM

18 | Money Management June 18, 2020

Rate the raters

HAS COVID-19 IMPACTED THE RELATIONSHIP BETWEEN FUND MANAGERS AND RESEARCH HOUSES? Oksana Patron examines the relationship between fund managers and research houses and whether it has been affected by the recent COVID-19 pandemic.

FUND MANAGERS HAVE continued to see research houses as a fundamental part of the industry and viewed their services as of high quality despite the difficulties created by the COVID-19 pandemic and the partial lockdown of global businesses around the world, according to the findings of the first stage of Money Management’s 2020 'Rate the Raters’ survey.

The survey aims to gauge fund manager sentiment towards the main research houses.

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Although the majority of fund managers who participated in the study this year said recent events had a very limited impact on their relationships with the raters and the way the business operated, other than a stronger reliance on technology and the introduction of online interaction, some flagged a number of new disruptions.

This included more requests for their data, the impact of international travel restrictions on meeting their offshore-based

portfolio managers and, in some cases, holding back ratings of new products or making it more difficult for managers to launch a new global capability into the Australian market.

A few fund managers pointed to growing conflicts of interest as research providers were aspiring to become asset managers and, additionally, some research houses also distributed their own asset management products or were engaging in paid sponsorships,

such as conferences, from fund managers.

SO, WHAT’S NEW? This year’s study has again delivered a mixed picture from fund managers as they were split in their opinions between Zenith, SQM Research, and Lonsec.

The fast-growing North Sydney-based research house led

by Louis Christopher, SQM Research, has continued its upward trend and was recognised by fund managers who

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June 18, 2020 Money Management | 19

Rate the raters

appreciated its dominant position across four categories: transparency of research process, staff quality, feedback, and rating satisfaction.

Additionally, SQM was praised for its expertise in fixed income and credit products, its depth and data-driven approach, as well as a thorough understanding of the mortgage and property industry.

Zenith, which announced and then aborted the acquisition of superannuation-focused ratings house Chant West in February, came second and managed to attract the highest ratings for its research methodology. According to fund managers participating in this year’s study, Zenith saw the highest number of fund managers who said their products had been rated by this research house.

A revamp of the research team at the end of last year and the company’s recently launched new approach to environmental, social and governance (ESG) factors saw Lonsec being voted a winner by fund managers in that category as respondents decided that Lonsec’s selection of peer groups and sectors was the most accurate among all raters.

USAGE The results once again confirmed that the two traditionally biggest research houses, Zenith and Lonsec, registered the highest numbers of managers, of those participating in the study, who admitted that their products had been rated by these two firms.

Approximately 68% of respondents said that they had their products rated by Zenith while 66% said that their products were evaluated by Lonsec, respectively.

Following this, there was also no surprise when it came to the

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third spot which traditionally belonged to Morningstar, although a slightly lower number of fund managers participating in the study (56%) said this year that their products were rated by this firm.

Almost half of respondents (48%) said that they had their products reviewed by SQM and 40% said the same thing about Mercer.

METHODOLOGY Fund managers said that when it came to the research methodology that rating houses applied to their products, they expected the rating agencies to demonstrate a level of expertise relative to each of the asset classes, and to spend more time to understand a manager’s process and help fund managers navigate through the requirements.

According to the managers, the winner in this category was Zenith as it managed to attract the highest proportion of either ‘excellent’ or ‘good’ ratings for its research methodology. The Melbourne-based firm, which also scored the highest number of the best ratings in absolute terms, was praised for “investing more time mid-cycle to meet with the fund managers and have

portfolios updates”.

This category’s traditional winner, Lonsec, was rewarded the highest combined rating from only 79% of fund managers in this year’s survey, compared to 87.5% last year, which saw the research house being pushed down to the third spot and overtaken by SQM Research which managed to attract combined ‘excellent’ and ‘good’ ratings from 86% of those fund managers who rated it.

At the same time, 78% of fund managers rewarded last year’s winner Mercer’s methodology with a combined rating of either ‘excellent’ or ‘good’, which placed Mercer in fourth place, after Lonsec.

Morningstar earned the highest ratings in this category from 61% of fund managers, which represented a significant growth from last year when only 42% of respondents described its research methodology as either ‘excellent’ or ‘good’.

RATING SATISFACTION SQM Research was the clear winner in this category in the eyes of fund managers, with close to half (47%) of all respondents

Continued on page 20

11/06/2020 11:04:14 AM

20 | Money Management June 18, 2020

Rate the raters

Continued from page 19 describing their level of satisfaction with a rating given by this research house as ‘excellent’.

SQM was also the only research house in the category which did not earn any ‘poor’ ratings.

The firm was highly rated by managers due its “thorough and professional process”, with one fund manager saying the rating their fund had received “genuinely reflected” the fund’s value and the fund was granted the rating “it deserved”.

Last year’s winner, Lonsec, which in 2019 saw 43% of respondents saying they were highly satisfied with a rating given by the company. However, this year only saw 37%, relegating it to third place.

Zenith managed to record a small climb from the third spot last year to second position this year thanks to 39% of fund managers who described their level of satisfaction with Zenith’s

rating as ‘excellent’.

Mercer and Morningstar were the two research houses with the bottom numbers of fund managers who were satisfied with their ratings, with only 29% and 19%, respectively, giving out their top ratings to those two research houses. Additionally, Morningstar saw a quarter of managers who described their level of satisfaction with a rating granted by the firm to their products as ‘poor’.

TRANSPARENCY As far as the transparency of the rating process was concerned, fund managers pointed out a number of things that affected how they rated each of the research houses. First of all, there was a clear bias among the rating agencies with regards to particular styles or processes.

Also, a few respondents expressed a degree of

disappointment with the amount of time being dedicated by research houses to each of their products, saying that quite often multiple products were being rated during the same meeting.

This meant the time spent in total per product was significantly lower than what it would have been had the products been rated separately.

Having said that, SQM Research came out as the winner with almost 90% of those fund managers who shared their views with Money Management having given it the highest combined ratings and evaluated SQM’s transparency as either ‘excellent’ or ‘good’.

By comparison, last year respondents seemed to be divided between Lonsec and SQM with the two companies attracting a similar proportion of combined ‘excellent’ and ‘good’ ratings (83%).

However, this year Lonsec was pushed down to the third spot as only 72% of respondents assessed the firm’s transparency as either ‘excellent’ or ‘good’.

At the same time, Zenith advanced to second place after having attracted either ‘excellent’ or ‘good’ ratings from 83% of respondents, compared to only 74% last year.

PERSONNEL Similar to the previous years, fund managers raised a number of

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issues when they were asked to gauge the level of quality and experience of the rating houses’ personnel, with the general consensus being that only those analysts who had previous experience in managing money had the right degree of understanding the fund managers’ products. At the same time, managers complained that there was still quite a number of lessexperienced analysts and the gaps in their knowledge were often exposed when interacting with the fund managers.

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June 18, 2020 Money Management | 21

Rate the raters

Despite this, SQM Research managed to make a comeback to the top spot, after it was pushed down last year to second position by Zenith.

The quality of a relatively smaller research house and its staff was rated by almost 80% of respondents as ‘above average’.

Managers praised SQM’s head of manager research, Rob de Silva, for his high level of competence and in particular his expertise in fixed income.

Zenith came second this year with only 66% of managers who

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assigned their highest ratings with regards to the quality of the company’s staff, compared to 70% last year.

What is more, Mercer, which saw 63% of respondents who said they were happy with the level of service provided by its staff last year, kept its third spot. However, the company saw a slight drop in ratings as only 55% of fund managers said this year that the staff was ‘above average’.

At the same time, Lonsec, which suffered from significant staff turnover, ended up in fourth place with only 48% of managers rating the quality of this research house staff as ‘above average’. The company also saw the highest proportion of managers (11%) who were highly dissatisfied with the level of competency of Lonsec’s staff and assigned it a ‘below average’ rating.

Although Morningstar was praised this year for “investing in experience” of its staff the firm managed to attract the lowest proportion of managers (47%) who gave it the highest ratings across this category.

FEEDBACK Feedback from the research houses was, in general, viewed by fund managers as “good to get” and “always appreciated”.

Some managers even admitted that they had worked hard and

were very specific to source this feedback from research houses and that it was even more difficult to receive feedback from those rating houses which did not charge for their ratings, one manager said.

Fund managers once again decided that the most satisfying feedback was received from SQM Research, with 65% of respondents describing SQM’s feedback as ‘above average’. By comparison, last year 61% of managers participating in the survey voted for SQM and assessed the firm’s feedback as the most valuable.

Zenith managed to overtake Lonsec as the firm recorded a substantial jump from 42% of managers who described its feedback as higher than average last year to 60% of those who were of a similar view this year.

Lonsec, which dropped to third position this year saw only half of respondents having rated its feedback as ‘above average’.

According to the survey, both Mercer and Morningstar attracted less than 30% of managers who chose to describe the quality of their personnel as ‘above average’ at 29.7% and 21%, respectively.

PEER GROUP When asked to rate the accuracy of peer groups and sectors

selected by individual research houses which evaluate the performance of their funds, the data collected from fund managers through the survey revealed that Lonsec emerged this year as the strongest player in this category at 92% of managers.

According to further data, Lonsec was closely followed by Zenith which according to 91% of fund managers participating in the survey has also selected an adequate representation of the peer group for their products.

Last year’s winner SQM Research dropped to third spot this year with 88% of fund managers being satisfied with the firm’s selection of the peer group compared to 90% of fund managers who were of this view a year before.

On the other hand, Morningstar which came last this year with only 63% of respondents being positive about its peer group selection, compared to 72.1% last year.

Mercer’s peer groups choice satisfied 77% of managers as some described its approach as “hard to understand” by one fund manager, who found the’s firm comparison between active and passive managers as “creating strange outcomes”.

11/06/2020 11:04:37 AM

22 | Money Management June 18, 2020

Equities

FIVE STEPS TO GETTING YOUR EQUITY INCOME STRATEGY BACK ON TRACK As companies move to slash or cancel dividends, writes Rudi Minbatiwala, investors who rely on income are having to find alternative sources to generate income for their retirement.

FOR MORE THAN 15 years I have been encouraging investors of the critical need to think differently when it comes to generating income from equities compared to traditional income asset classes like bonds and cash.

However, there is an understandable desire to keep things simple when it comes to implementing client portfolios. As a result, the investment world is prevalent with the use of ‘rules of thumb’ and ‘assumed truths’.

The belief that ‘high dividend yield delivers high income’ is a simplification that receives widespread coverage in this income-starved market.

Educating our clients about the reality of this concept provides a valuable opportunity to demonstrate the value of seeking expert financial advice to assist with meeting their retirement income challenge.

Income from equities had been relied upon as one of the last sources of meaningful income following years of yield compression in the fixed income space. However, in the wake of this global pandemic, the income outlook is a major concern for many investors. Given the unimaginable extent of the dividend cuts across the market, equity income investors must explore new ways to generate sufficient income. In this article, we cover how to design a retirement income strategy that can potentially deliver reliable, consistent income through a

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multitude of market scenarios.

STEP 1: Step back from just thinking about dividend yields For a large number of investors, their equity income strategy is based on identifying the most attractive high dividend yield names to invest in.

Most income investors will only invest in high dividend yielding stocks like Telstra and National Australia Bank (NAB).

These stocks with higher dividend yields may be attractive in the short-term to meet your income needs but are these stocks effective at providing income over time? Take a look at the following four stocks. Which of the following stocks do you think delivered the highest income on a $10,000 investment between June 2004 and June 2019? You may find the results surprising!

Look at the difference between yield and long-term income. Investors in the low yield stocks would have received significantly more income than those in high yield names.

Investors need to look beyond dividend yields for better income and total return opportunities.

STEP 2: Think about income as a dollar concept, not a percentage (yield) We often see the terms yield and income used interchangeably when describing investment strategies.

When developing retirement income plans, the discussion with

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June 18, 2020 Money Management | 23

Equities Strap Chart 1: Income and growth from $10,000 invested over 15 years

Chart 2: Dividends and franking income received over 15 years

Source: First Sentier Investors, Factset, IRESS

the client is in dollars; how much savings do they have? What are their expected spending plans in retirement? Yet we switch to percentages when thinking about investment strategies. Focusing on yield, which is simply the dividend income as a percentage of the current share price, is a classic example of this change.

But as you can see from the higher income delivered by Computershare and Ramsay Healthcare, they couldn’t be further apart. This difference even includes the income from franking credits.

The clients’ world is all based on dollars – we need to think about their investment strategy the same way. I know this may sound counterintuitive to some, but thinking about dividend income on a ‘yield’ basis can deliver poor income on a ‘dollar’ basis over the long-term.

STEP 3: Adopt a long-term mindset when thinking about income In the early years, stocks with higher yields will generate more

income. But in the long-term, it’s a very different story. For stocks like Ramsay Healthcare, Computershare, and countless others, the low yield has been paid on a share price that has been growing over time.

These companies reinvested in their business rather than just paying out high dividends in the early years. Over time, companies that can achieve higher earnings per share typically deliver stronger share price appreciation – and a higher dividend per share growth. This results in potentially higher income – and total return – for the investor over time. This is the key to generating sustainable, long-term income.

STEP 4: Embrace a total return focus By thinking long-term and understanding that longer-term earnings growth will underpin long-term dividend income, investors can embrace a total return approach to selecting stocks in their portfolio.

Just think how powerful that is. A total return approach

Chart 3: Annual income per year

Source: First Sentier Investors, Factset, IRESS

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provides the flexibility to be invested in the right stocks, at the right time, at the right price during different market conditions. This approach can seek to deliver a diversified portfolio that can weather a multitude of market conditions and avoid the concentration problems experienced by many equity income strategies.

This means your conservative equity income investors can continue to access the best investment ideas across the share market, even when there is a need for income.

STEP 5: Understand the role options can play in your equity income strategy The steps so far focus on understanding how to deliver higher long-term income for your clients. But what if your clients want more income now? A carefully implemented options strategy can be used to balance short-term income needs with the generation of long-term total returns – and be delivered with smoother returns through the market cycle.

In addition to the two traditional streams of income generated from dividends and franking credits, an options strategy can exploit share price volatility to generate a third stream of income called option premium income.

This additional stream generates potentially higher income when the market is experiencing elevated volatility – particularly through the tougher periods where companies are forced to cut dividends. These three sources of income provide opportunities to generate above market income distributions

through various market conditions.

This strategy is commonly referred to as a ‘buy-write’ or ‘covered call’ approach. The benefit for income-oriented investors is that we can take back control of the investment universe.

The investment opportunity set for these income investors no longer needs to be narrowly defined by stocks paying a certain level of yield. Income-focused investors can continue to access and be exposed to innovative, growth ideas where detailed, fundamental stock research suggests long-term wealth can be created.

The use of a combination of stocks and the options to invest in these names addresses the needs of late stage accumulators and retirees for a balance between generating attractive long-term returns, lower volatility and higher, consistent income.

Income-oriented investors also tend be prefer more conservative investment strategies that place a higher focus on capital preservation and risk management. Investing in a small universe of high yield stocks, irrespective of market conditions, does not protect a portfolio from significant market declines. The ability to search a broader universe for companies that are better suited to the prevailing market conditions can help manage risk.

The lessons for equity income investors are clear. Dividends cannot be relied upon as annuity sources of income. Understanding this and the need for a long-term, total return approach to income generation will be critical to getting your equity income strategy back on track.

Rudi Minbatiwala is head of equity income and portfolio manager at First Sentier Investors.

10/06/2020 11:20:57 AM

24 | Money Management June 18, 2020

Infrastructure

BUILDING A NEW FUTURE While airports may have come under recent scrutiny, writes Sarah Shaw, the wider infrastructure sector has tremendous opportunity to support the economic recovery.

THE COVID-19 PANDEMIC has almost certainly plunged the international economy into recession as it cuts a swathe through global equity markets.

As an equity asset, listed infrastructure hasn’t been immune to the COVID-19 market sell-off. This price volatility could continue for a while yet, until it becomes clearer that health authorities around the world are getting on top of the outbreak and an economic recovery is in hand.

However, it is important to remember that infrastructure is a very long duration asset with a five to 10 plus year investment

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horizon and earnings that are generally underpinned by contract or regulation. Indeed, once we move past the worst impacts of the virus and the world’s economy returns to a more stable environment, infrastructure, in all its forms, will be integral to the global economic recovery and returning society to a ‘new normal’. There is no global growth recovery without roads, railways, pipelines, power transmission networks, communication infrastructure, ports and airports.

For quality infrastructure assets the sell-off has, we

believe, been overdone. Despite the market exodus, the earnings of these assets will prove to be far more resilient than the current equity sell-off implies. To better appreciate the opportunity emerging in the infrastructure asset class, it is important to understand the sector’s key features and prevailing thematics.

ESSENTIAL SERVICES AND USER-PAYS INFRASTRUCTURE Infrastructure comprises two quite distinct and economically diverse asset subsets: essential services and user pays.

Essential services are the regulated utilities in the power, gas and water space. These assets are largely immune to economic shifts (up or down), as a function of: • They are a basic need; and • The structure of their regulatory environment, which measures returns independent of volumes.

These assets are more ‘bond proxy’ in nature, particularly over the shorter term. They are more immediately adversely impacted by rising interest rates/inflation and are slower to realise the benefits of economic growth. At

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June 18, 2020 Money Management | 25

Infrastructure

the same time, they are less exposed to economic contraction and benefit from lower interest rates. These assets are an attractive overweight investment in depressed economic environments as they can offer earnings growth and yield support even in weak growth scenarios.

In contrast, user-pay assets are positively correlated to gross domestic product (GDP) growth and wealth creation. Typical userpay assets are airports, toll roads, rails and ports, where users pay to use the asset.

These stocks capture GDP growth via volumes and often have built-in inflation protection mechanisms through their tariffs.

As interest rates/inflation increase over time, this macro correlation leads to earnings upside. This should then be reflected in the relevant stock price and performance. As such, these assets are well-suited to growth environments or buoyant economic climates.

Historically, the earnings of the utilities sector have been largely immune to economic shifts – and indeed we have seen many utilities already reiterating their full year earnings guidance and dividends policies, despite the COVID-19 impact. Fundamentally, they are holding up pretty well, as expected.

By contrast, we can expect user-pays assets to see sharp earnings shifts this year, especially in the airport space.

But even in their case, the valuation impact of a harsh 2020 does not justify the market falls that we have seen to date. Many of these user-pay assets are offering significant fundamental value at these levels.

Infrastructure offers earnings

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defensiveness with economic and geographic diversity. The structural opportunity is premised on a huge need for infrastructure investment as a result of decades of underspend, and the changing dynamics of the global population.

The advent of COVID-19 hasn’t changed this reality.

THEME 1: POPULATION GROWTH, THE EMERGING MIDDLE CLASS AND ENVIRONMENTAL FACTORS The first driver of the need for infrastructure investment is population growth. In 1900 the global population was about 1.65 billion people, and today it is over seven billion – keeping in mind that some of the infrastructure we are still using today was built to service that 1.65 billion.

By the turn of the next century, the global population is expected to be over 11 billion, underpinning the need for yet more spend. As a society we need to first play catch-up and then invest for future generations.

Importantly, much of this population growth is coming from the emerging world, where demographic trends are very supportive of economic evolution and infrastructure investment.

From an individual’s perspective, as personal wealth increases in a country (reflected by a growing middle class) consumption patterns inevitably change.

This starts with a desire for three meals a day, then moves to a demand for basic essential services such as clean water, indoor plumbing, gas for cooking/ heating and power (and all this requires infrastructure). With power comes the demand for a fridge or a TV, which increases the need for port capacity and

logistics chains (more infrastructure). Over time this evolution progresses to include services that support efficiency and a better quality of life, such as travel – with a demand for quality roads (on which to drive that new scooter and then car) and airports (to expand horizons).

Importantly, one of the clear and early winners of the emergence of the middle class is infrastructure, which is needed to support the evolution. For example, around 10% of the Chinese population currently holds a passport (and less than 5% in India), yet pre COVID-19, airports globally were reporting record passenger numbers driven

by Chinese tourists. At the World Economic Forum in Davos last year, the chief executive of Chinese travel provider Ctrip predicted the number of Chinese passport holders would grow to 240 million by 2020.

This population growth has also raised a number of environmental and climactic challenges that underpin the need for even more spend on infrastructure to ensure the sustainability of the planet. To that end, renewable energy and the energy transition are thematics in which we invest.

From an infrastructure investment perspective, the consequences of this changing demographic are enormous. This includes the domestic demand story within emerging markets by way of utility, communication and transport investments, as well as a growing need for new and expanded international (and domestic) airports, toll roads, port infrastructure and utility services more generally.

When you put all these factors

SARAH SHAW

Continued on page 26

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26 | Money Management June 18, 2020

Infrastructure

Continued from page 25 together (developed market replacement spend, population growth largely driven by the emerging markets, and the emergence of the middle class in emerging markets), the need for global infrastructure investment over the coming decades is clear. It is also clear that governments, the traditional providers of infrastructure, are simply not going to be able to fully fund this need – thereby creating a huge investment opportunity for the private sector over the coming years.

THEME 2: THE ‘OTHER SIDE’ OF THE COVID-19 PANDEMIC While the health crisis continues, increasing focus is turning to what economic life may look like on the ‘other side’. The pace of recovery will crucially depend on policies undertaken during the crisis. If policies ensure workers do not lose their jobs, renters and homeowners are not evicted, companies avoid bankruptcy, and business and trade networks are preserved, the recovery will occur sooner and more smoothly.

What we do know is the economic response to the COVID19 pandemic from governments and central banks around the world has been massive and continues to grow.

Meanwhile, solid well-managed infrastructure companies are in robust financial positions. Balance sheets were in strong starting positions (in many cases much stronger than prior to the GFC) and few are reporting a liquidity squeeze at present. Companies are in fact communicating robust liquidity positions, including even the hard-hit airport sector, which

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should sustain them through COVID-19 into 2021 and beyond.

Prudently, some companies have cut dividends in order to further improve available cash, as well as appease social expectations from domestic governments.

However, these are not what we would call forced cuts but rather a sensible reaction to a very uncertain environment.

Management teams are also taking the opportunity of open credit markets and low interest rates to secure financing from both financial institutions and the bond markets to ensure ongoing liquidity through the COVID-19 period.

Despite near-term uncertainty around economics and the duration of the pandemic, the underlying fundamentals of these assets remain attractive to debt investors which should go some way to reassuring equity investors. This is particularly true given that, during the GFC, debt markets were generally far better indicators of pending market problems than equity markets.

BUY TIME LOOMING? The combination of attractive fundamentals, long-term structural thematics, the COVID-19 response and currently very attractive stock prices represents a unique buying \ opportunity for listed infrastructure.

“Much of this population growth is coming from the emerging world, where demographic trends are very supportive of economic evolution and infrastructure investment.”

COVID-19 has clearly caused considerable economic damage and seen equity markets fall. But this has created a fantastic investment opportunity in global listed infrastructure. Once the virus is contained and/or a vaccine developed, the current pandemonium surrounding daily life will ease. While we have not yet reached that point, when we do, the impact of the massive global monetary and fiscal policy response will show, driving up global economic growth.

Global infrastructure will be fundamental to that growth, and asset values will respond accordingly. Studies suggest that for every $1 of infrastructure investment an economy gets a boost of anywhere between $3-$5.

That is a significant boost as a result of the infrastructure investment potential.

Sarah Shaw is chief investment officer and global portfolio manager at 4D Infrastructure.

10/06/2020 11:21:44 AM

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28 | Money Management June 18, 2020

ETFs

THE GOLD FACTOR The price of gold could surpass US$2,000 in the next 12 months, writes Russel Chesler, as more capital is forced into the relative safety of the precious metal.

WITH THE WORLD mired in debt and economic despair, the price of gold precious metal has rallied to nine-year highs and could soon surpass its all-time high as systemic financial risk grows with every dollar spent by governments trying to stimulate economies.

Gold could reach over US$2,000 ($2,874)/ounce within the next 12 months, with huge debt burdens and bankruptcies potentially overwhelming economies, forcing even more capital into the relative safety of gold, potentially benefitting listed Australian gold stocks.

While gold has consolidated around US$1,700 in recent weeks, trading at its highest levels since 2011, the precious metal could surpass its all-time high of US$1,895, as economic risks mount. The main areas of systemic risk are deflation, debt, inflation and loss of confidence Negative real interest rates in the US are also positive for gold.

When real rates are negative, gold becomes competitive with interest-bearing assets.

DEFLATION In terms of deflation, the COVID-19 pandemic is a deflationary shock of the highest order, where demand for almost everything has collapsed virtually overnight.

Global gross domestic product (GDP) has fallen sharply and global recession is likely. If this were to be an average recession, it would not trough until April 2021.

However, a myriad of factors make it easy to imagine a recession with

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deflationary pressures that lasts longer than average.

The IMF has forecast that global GDP will contract 3% this year, compared to a 0.1% contraction amid the global financial crisis. While growth may return in 2021, the IMF has warned that many countries face a multilayered crisis comprising a health shock and economic disruptions, including falling external demand, capital flow reversals and a collapse in commodity prices.

This would exacerbate the length of any recession.

DEBT While economic downturns are not necessarily drivers of the gold price, or high debt levels, the financial stress that accompanies recessions could trigger large scale debt defaults in the US and elsewhere as companies’ cashflows freeze up.

Globally, debt has ballooned.

The bailout efforts for the COVID-19 pandemic are the most significant in the G7 history and global debt to GDP is now over 300%. All of this stimulus, all of these bailouts and support is creating an incredible amount of systemic risk, which could benefit gold over the short and longer term.

In the US, Goldman Sachs has forecast the US budget deficit will reach US$3.6 trillion this fiscal year and US$2.4 trillion in 2021.

This is on top of US$17.9 trillion worth of existing debt, which now exceeds 100% of GDP. Based on these figures, it appears unlikely that the US government will ever

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June 18, 2020 Money Management | 29

Strap ETFs

Chart 1: Gold price since 2015

Chart 2: US Federal Reserve balance sheet assets

Source:

pay back the money it owes.

At zero interest rates, money is free, and sovereign debt keeps piling up. The US Federal Reserve may never be able to raise rates for fear of a ruining rise in debt service costs. Anyone who owns a business or runs a household knows intuitively that this is unsustainable. Nonetheless, no-one knows whether it can persist, end in failure, or whether government debt eventually gets pared down in a cycle of inflation.

According to Rosenberg Research, the volume of business debt in the US has roughly doubled this cycle to over US$10 trillion.

Many businesses are now taking on more debt to deal with the lockdown collapse in revenues through bond offerings, revolving credit lines, and new government lending programs.

All corners of the private debt markets are under acute pressure.

INFLATION Another area of systemic risk is the possibility of inflation. While the global economy will be mired in deflationary pressure for the foreseeable future, inflation could eventually follow. Central banks have been trying unsuccessfully to generate wage and price inflation for years.

Instead, their policies have brought asset price inflation – bubbles in stocks, bonds and real

10MM180620_16-29.indd 29

Source:

estate markets. However, if economic growth ever returns to historic norms, complacency towards inflation, coupled with the massive pandemic stimulus, could bring high levels of wage and price inflation.

The world is on a war-footing to fight the COVID-19 pandemic.

Past wars have brought doubledigit inflation in the US, as the table below shows. The end of WWI also coincided with the Spanish Flu pandemic when inflation peaked at 24%: War

End of War

Peak Inflation/Year

WWI

1918

24% / 1920

WWII

1945

20% / 1947

Vietnam

1975

15% / 1980

The COVID-19 war might end with another cycle of unwanted inflation.

LOSS OF CONFIDENCE As this systemic risk mounts, confidence in the US dollar may diminish. After WWll, the Bretton Woods Agreement created a global monetary order in which US dollars were convertible to gold by foreign governments. The Bretton Woods system ended in 1971 as the US was spending heavily on social programs and the Vietnam War.

Some countries lost confidence in the US dollar, demanding more gold than the US was willing to provide. Thus, the gold window was closed and the current system of fiat currencies and floating exchange rates was adopted.

Now, that system is being trashed by rampant QE and government borrowing. Call it monetisation, helicopter money, or modern monetary theory; no financial system has survived such currency devaluation. If investors lose confidence in the US dollarbased system, it will be time for a new Bretton Woods, a new global monetary order. Gold would be the last currency standing.

These four areas of systemic risk will continue to support gold price well into the future. That should lift the price of gold miners, whose price typically rises more than the metal itself.

As gold shares can pay dividends, gold equities also provide income, something gold bullion does not.

GOLD INDUSTRY SITS ON SOLID GROUND Against this economic background, the gold industry is thriving while dealing with COVID19 protocols. During the pandemic, gold miners have taken all precautions to continue running their businesses.

Although we anticipate that some

operations will be impacted, the discussions we have had with gold companies indicate that every effort is being made to ensure inventories, supply lines, employee health and back-up redundancies are in place to sustain production.

We expect limited to no credit problems in the gold mining sector.

The lengths to which gold miners have gone to reduce costs and capital expenditures and to avoid mistakes of the past could translate to a significant increase in free cashflow from current levels if the gold price moves to US$1,800 and then beyond to US$2,000.

We see the Australian gold miner sector as standing toe to toe with international gold miners, including mid-tier miners Northern Star, Saracen Mineral Holdings and AngloGold Ashanti, which have gained around 55.3%, 62.8% and 107.5% respectively over the year to 31 May 2020. The prices of other gold stocks listed on the Australian Securities Exchange have run to multi-year highs or all-time records this year.

Yet gold companies continue to exhibit, we believe, truly compelling fundamentals and valuations, including Australian firms.

Russel Chesler is head of investments at VanEck.

10/06/2020 3:14:59 PM

30 | Money Management June 18, 2020

Toolbox

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June 18, 2020 Money Management | 31

Toolbox

THE LAW OF ‘QUANT’ AMID A GLOBAL PANDEMIC With investors forced to navigate unpredictable stockmarkets, and with a global recession looming, it is an environment where the investing methodology that is quantitative investing comes into its own, writes Max Cappetta.

QUANTITATIVE INVESTORS RESEARCH and use a range of disciplines to determine which stocks are worth acquiring and, importantly, those which are not worth buying. These range from longer-horizon, financial statements-based disciplines such as valuation, quality, sustainability, and growth, through to shorter-horizon strategies that aim to capture investor sentiment, company news and market events. This differs from a traditional fundamental approach which usually focuses on just one style or investment discipline.

Both traditional and quantitative approaches are founded on a belief that investment strategies can be built to outperform passive approaches; a quantitative approach relies on breadth. By accepting that no one investment discipline is consistently rewarded, a quantitative approach will seek a broad range of inputs.

This results in a highly-diversified portfolio with many small bets (overweight and underweight) relative to its benchmark. A traditional approach will rely on depth of conviction by focusing in specific sectors or style groups and relying on individual analysts to research a small sub-set of investment opportunities in detail. The outcome is usually a more highly concentrated portfolio consisting of a smaller number of larger relative bets.

Both approaches require an information edge to succeed, and is derived from research and analysis. Both quantitative and fundamental approaches utilise financial statement analysis. Both

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will consider a range of other data: broker forecasts, news events, economic and risk analysis. A quantitative approach will take advantage of its capacity to analyse vast amounts of data quickly and systematically, whereas a fundamental approach will focus on a much smaller research universe, seeking to identify a smaller number of opportunities with high conviction.

A quantitative investment manager will rely on being able to combine perspectives on a firms’ valuation, growth prospects, earnings certainty, market sentiment and risk. These are then used in a risk-managed way to construct a portfolio.

Each of the insights will have been tested to determine their performance through different markets cycles and economic circumstances. Back testing of strategies helps to ensure that specific stock selection insights are reflected in the portfolio appropriately proportioned to their expected future return and risk. Judgement and experience are also key: history never repeats but it often rhymes.

UNCERTAIN TIMES An active quantitative approach remains highly relevant in today’s investment environment. The COVID-19 crisis is a health and economic crisis unlike anything the world has seen since – rivalling the second world war for economic fallout and consequence. The ongoing effects of the pandemic will continue to impact society and the economy long after the immediate health crisis has been dealt with.

There is no doubt that the

current situation is economically painful and highly uncertain, however share prices will be more volatile than the underlying fundamentals of good businesses over the long term. For investors, it is important to remain focused on the longer term – through to the other side of the pandemic.

As we saw in the Global Financial Crisis (GFC) in 2008/2009, prices initially fell and dividends were cut. The share prices rallied back in 2009 ahead of dividends being fully reinstated.

GENERATING RETURNS As with all investment philosophies, the performance of quantitative strategies is largely influenced by the market and economic environment.

Post the GFC, the investment landscape was dominated by central banks injecting liquidity into the system, with this monetary stimulus fuelling the risk appetite of investors.

During this period, price volatility fell (low dispersion) as investor confidence responded to the assumption that monetary stimulus will always be applied by policy makers to mitigate downside events. Traditional markers of valuation became less relevant as interest rates fell to (and remain) near zero. The present value of future cashflows discounted at low rates has allowed for higher valuations to be ‘normal’. Investors starved for returns in the cash and bond markets have been attracted to any and all growth opportunities in the equity market, sometimes at ‘any price’. This has been an especially challenging environment for managers

Continued on page 32

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32 | Money Management June 18, 2020

Toolbox

Continued from page 31 focused on valuation. This skewing of markets meant it was a difficult environment for active managers to outperform.

Fast forward a decade to the COVID-19 crisis, and investors are likely to have to contend with lingering volatility. This increased uncertainty across financial markets is expected to drive investors to focus on the fundamentals of individual stocks, and is usually when traditional active and active quantitative-style management are able to outperform and offer investors improved return. Among this uncertainty, investors will be reacting to fears of further market falls on some days and fear of missing out on others. A quantitative approach, by virtue of being systematically disciplined, can remain devoid of emotion and make decisions based purely on the numbers.

The quantitative approach analyses the same financial statements data used by fundamental analysts. Specific metrics are calculated from reported data and stocks are scored on various characteristics aligned with the company exhibiting financial strength (or weakness), cheap or expensive valuation, or that are being re-rated by investors. This analysis is both retrospective and forward-looking.

Historical outcomes can be used as a base forecast for the future. Forward estimates from broker research teams can also be gathered to enhance forecast metrics. One research team will monitor and evolve the decisions rules over time, with these insights then combined and used to construct a portfolio. Riskcontrolled portfolio construction – which uses a range of disciplines to determine which stocks to buy – minimises the unintended biases inherent in more simplistic screening approaches.

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THE ROLE OF ESG There is no doubt there is increasing demand for investment strategies which embed sustainability considerations within their delivery, and this demand shows no sign of abating. A quantitative investing style can effectively accommodate an investors desire to acquire companies which adhere to environment, social, and governance ESG principles.

Having a perspective on how firms manage their risks in terms of their ESG practices, for example, can assist in identifying good quality firms which are being well managed for the long-term.

Combining this with rigorous analysis of the company’s financial statements can provide new insights towards making better investments for the long-term.

This is where quantitative investing comes into its own. It uses both financial and non-financial investment insights in a disciplined and consistent fashion. It makes

intuitive sense that the way in which a company manages its environmental footprint, for example through energy and water utilisation, will affect earnings over the long term. A quantitative approach will seek to understand this relationship through statistical research across all industries and countries.

Over the past 10 years, there have been a lot more companies that have started reporting ESG data, and a lot more data vendors who have started expanding their ESG data coverage. Similar to their influence on broader society, technology and data have had an ever-growing impact on the world of ESG investing. Relying on sound data collection processes of underlying ESG vendors is an efficient means of collecting and managing data available.

Although sourced externally, the critical step in rating an investment on ESG factors is how a manager uses the data.

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June 18, 2020 Money Management | 33

Toolbox

Some quantitative managers will internally develop a process which evaluates what components of the data are material, and what makes sense in terms of that respective manager’s specific investment process. An example of this is the vision of a company – this is an important marker in some ESG data sets, but it is not one that is well-suited for a quantitative investment process. However, while certain aspects of ESG data related to health and safety are easily quantified and are a window into staff productivity and wellbeing, it is important to understand the strengths and limitations of data available in this space.

Considerable time and effort are ordinarily required to develop frameworks to standardise data – it is an inherent by-product of quantitative investing. A critical part of this standardisation is establishing a stable universe of securities and then rank each security for ESG consistently relative to this universe.

Because of the proliferation of ESG data reporting in the market in recent times, there is a great deal of data available to perform this ranking task.

In addition to standardisation over a stable cohort of companies, a quantitative manager might look at the data being utilised to ensure a reasonable balance between indicators which are comparable across countries and industries, and indicators which drill down into specific company level information.

Incorporating all these elements are important when thinking about standardising data within a quantitative investment process. This highlights the art and science of a quantitative approach.

Using data blindly can lead to incorrect or inaccurate conclusions.

Being totally led by the data can paint a rosy picture of the past which will bear no resemblance to

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what may be achieved in the future.

A quant approach needs to be guided with experience and knowledge of the characteristics of investment outcomes.

Greater availability and access to ESG data is more material than the standardisation of it. While a quantitative manager would be comfortable selecting and standardising data in keeping with its investment process, gaining access to deeper, more accurate and more timely data is what would be more useful to investors over the longer term.

A quantitative approach is also adept at tailoring investment outcomes for specific client needs. Some clients may wish to incorporate ethical investment criteria or some may wish to have portfolios with higher or lower active risk relevant to a benchmark. The quantitative portfolio construction process is well placed to deal with multiple investment objectives. Many traditional active managers offer one specific strategy or a small number of variants. Neither approach is better or worse but simply highlights some of the different ways in which a quantitative and fundamental approach are best utilised.

The data space is rich and complex – and different individuals will have different perspectives even if they are of a like mindset or come from the same organisation. The challenge is to provide a data framework that allows investors to tailor portfolios to meet their ethical belief set, while also managing the risk implications associated with their decisions and managing for the long-term capital appreciation that they need from their investment.

Max Cappetta is CEO and senior portfolio manager at Redpoint Investment Management.

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 factors does quantitative investment managers rely upon in their stock selection analysis? a) Economic b) Fundamental c) Meeting with company management d) Combination of a) and b) 2. Which of the following is an example of a long-term factor that quantitative managers use in assessing stocks? a) Valuation b) Investor sentiment c) Company news d) Market events 3. Quantitative investors are currently in a position to capitalise on which of the following? a) Low rates b) Market volatility c) Investor sentiment d) Company forecasts 4. Which of the following factors are critical to the development of data standardisation frameworks? a) Availability and access to data b) Use of stable cohort of companies c) Indicators which are comparable across countries and industries d) All of the above 5. What is having the greatest impact on the ability for quantitative managers to incorporate ESG into a portfolio? a) Data b) Regulatory constraints c) Investor demand d) Value

TO SUBMIT YOUR ANSWERS VISIT https://www.moneymanagement.com.au/ features/tools-guides/ law-quant-amid-global-pandemic For more information about the CPD Quiz, please email education@moneymanagement.com.au

10/06/2020 3:16:42 PM

34 | Money Management June 18, 2020

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

Appointments

Move of the WEEK Rodney Cook Chief executive and managing director MLC Life Insurance

MLC Life Insurance has appointed Rodney Cook as chief executive and managing director after an extensive search following the departure of David Hackett in January.

Cook would join MLC on 15 June, 2020 and had previously held several senior managerial roles at firms such as AMP New Zealand, Zurich Financial Services and Prudential UK. Most recently, he was chief executive of UK insure Just Group for nine years until he

Former REST chief executive, Damian Hill, has been appointed as the new chief executive of Commonwealth Superannuation Corporation (CSC) and will start in the role in July.

CSC board chair, Patricia Cross, said Hill brought depth of experience and knowledge to CSC and that his “particular customer focus” would complement the initiatives the fund had implemented over the years.

Hill said: “I am really looking forward to working at CSC. It is responsible for both defined benefit and defined contribution super schemes, and there will be significant challenges in every aspect of managing a large complex organisation like CSC”.

Allianz Retire Plus has appointed Sally Evans as independent nonexecutive director to the board.

She had over 30 years’ experience across investment and wealth management, as well as healthcare operations.

Her non-executive director

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left in June 2019.

He would take over from Sean McCormack who had been working as acting chief executive and managing director for the last five months in an interim capacity.

McCormack would remain at MLC in an expanded role.

Hackett left MLC in January and had been the firm’s first chief executive as it separated from National Australia Bank.

experience covered private, social enterprise and government advisory boards, and she had board committee experience on areas of risk, audit and remuneration.

She was also a non-executive director on the boards of Healius, Rest and Oceania Healthcare; and was an advisory group member of EveryAge Counts, and the Aged Care Quality and Safety Commission.

Evans’ senior executive roles included head of retirement at AMP, aged care investment director at AMP Capital, aged care investment manager at Westpac, and Asia Pacific healthcare director Compass Group.

Warakirri Asset Management has appointed Scott Curtis to its retail distribution team as business development manager, as the firm continues its expansion in the Australian retail market.

In the newly-created role, he would responsible for expanding Warakirri’s relationship with high

net worth and retail advisory markets in NSW and Queensland.

Curtis had over 14 years’ experience working in financial services across commercial and business development roles.

He would report to Stuart Devlin, head of distribution.

First Sentier Investors has appointed Harry Moore to its newly-created role of global head of distribution, based in London.

Moore has over 20 years’ distribution and investor experience, and had been with the firm for the past decade where he most recently led the distribution teams in Australia, New Zealand and Japan, which comprised $113 billion of the firm’s $201 billion in assets under management (as at 31 March, 2020).

In his new role, he would be working more broadly with the regional teams and developing stronger global relationships.

The firm said that the new leadership structure had prompted a number of promotions. In Asia,

Lauren Prendiville was promoted to head of distribution, Southeast Asia and Middle East; and in Australia, Peter Heine to head of institutional Southern Region; and Jeannene O’Day to head of institutional Northern Region.

Ross Crocker, head of consultant relationships, would have an expanded remit to manage the Australian client services team, and would continue to work with colleagues in each region to better co-ordinate the firm’s engagement with global consultants.

Moore would take over distribution activities from managing partner, FSSA Investment Managers and managing director, Asia, Michael Stapleton; and managing director, EMEA, Chris Turpin, who remained in those roles.

Bachar Beaini, managing director, Americas, would retain responsibility for distribution in his region, working closely with Moore, who would oversee distribution teams in all regions.

10/06/2020 3:15:39 PM

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9/06/2020 1:51:02 PM

OUTSIDER OUT

ManagementJune April18, 2, 2015 36 | Money Management 2020

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

Is a short recession too good to be true?

MRS O likes to do things old school.

No electronic billing, just what comes in the mail.

Thus, Outsider noted as he opened an old-fashioned paper-based bank statement that the financial institution involved had printed the warning that “if something looks too good to be true, then it probably is”. His bank balance, by the way, did not look too good to be true.

The bank’s admonition was, evidently, aimed at people who transact online but it did give Outsider pause to consider the plight of people such as US hedge fund guru, Paul Tudor Jones who admitted earlier this month that he had been someone blind-sided by the continuing recovery in markets in the face of the COVID-19 pandemic.

It seems that Tudor Jones was initially sceptical of the Wall Street rally but is now accepting that it is the product of the trillions of dollars in stimulus from the US Congress and the Federal Reserve prompting him to state: “our citizenry has more cash now than they had going into what will

be the shortest recession in the history of the United States”.

Outsider hopes that Tudor Jones’ recent embrace of optimism about the solidity of the market recovery is justified, but he fears that all that glistens is not gold when it comes to the current state of the markets.

Indeed, Outsider reckons it might be a very good time to buy some gold because, as the message from his bank said, “if something looks too good to be true, then it probably is”.

Inducement to return to work: Pain in the hip pocket nerve PANDEMIC or no pandemic, Outsider has been back at his desk at Money Management Central for a few weeks now and he knows that Mrs O is grateful that he is no longer under her feet and raiding the biscuit jar.

Thus, Outsider could not help but notice the public relations company which was offering “a story about the strategies and tactics businesses are using to entice and motivate staff back to work”.

Money Management will not be publishing the story, but apparently businesses “are already coming up with ingenious ways to entice staff back to work. These include perks, creative activities, wellness equipment, elaborate desktop accessories, parties and more”.

Outsider thought about this for exactly a nano-second and concluded that he was obviously missing something. Indeed, he concluded it was probably an age-based thing.

You see, Outsider wondered why, when people are being paid to come to work, they would need any more enticement than the lure of employment and a pay packet.

Now, to be fair, given the nature of the pandemic and the perils of public transport, some of Outsider’s young colleagues are continuing to work from home but he feels sure that when things are back to the new normal they will understand that failure to show up may induce a sharp pain in their hip pocket nerves.

Oh, that’s right, they carry their mobile phones in their hip pockets.

Private equity, MLC and known knowns AMID persistent reports that National Australia Bank is well down the path of flogging off MLC to private equity, Outsider wonders whether any of the buyers are keeping a weather eye on the state of Australia’s superannuation industry.

A significant part of the value of MLC is tied up in its wealth and superannuation platforms and Outsider would hate to think that those advising any of the private equity bidders had overlooked the impact of the Government’s hardship superannuation early release regime or the manner in which certain Coalition back-benchers are

OUT OF CONTEXT www.moneymanagement.com.au

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advocating for long-term superannuation policy change.

If the private equity advisers were paying attention they would have noted that MLC’s superannuation offering was among the 10 funds named by the Australian Prudential Regulation Authority as having the highest level of early release outflows.

However, given the number of Coalition operatives who have found their way into the executive suites and boardrooms of financial services companies, perhaps the private equity bidders for MLC know something that Outsider does not know.

"We did not build rigorous analytics behind that field that asked for the estimated number of employees that businesses had [claimed for]."

– Steven Kennedy, Treasury secretary, on the JobKeeper estimation variation.

"As businesses are having to adjust, every arm of cartels are having to adjust."

– Kevin Merkel, US Drug Enforcement Administration attache for Australia, New Zealand and Pacific.

Find us here:

11/06/2020 9:17:54 AM