MM15 2017

MAGAZINE OF CHOICE FOR AUSTRALIA’S WEALTH INDUSTRY

Vol. 31 No 15 | September 14, 2017 | www.moneymanagement.com.au

MANAGED ACCOUNTS

Managed accounts finally fulfilling their promise

12

MANAGEMENT

Future proof your business with the decisions you make today

FEE COMPARATOR

26

TOOLBOX

2017 Budget measures

Govt panel backs tougher ASIC banning powers

BY MIKE TAYLOR

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When fund manager fees outstrip performance MONEY MANAGEMENT'S inaugural Fee Comparator feature has confirmed the reality that while investors are prepared to pay for outperformance and to meet objectives such as environmental sustainability, fund managers must ultimately be seen to deliver on their promise.

Utilising FE’s analytics, Money Management's journalists drilled down on fees and performance across the various asset allocation sectors and, legacy products aside, there was no disguising the reality that viewed purely on the basis of ‘quant’ a number of managers have cause to consider whether they are actually delivering value to investors.

The Fee Comparator exercise comes ahead of FE launching its quantitative Crown Fund Ratings in Australia aimed at helping investors identify funds which have displayed superior performance in terms of stockpicking, consistency, and risk control.

The FE Money Management's Fee Comparator exercise is important because it provides a snapshot of fees in the various funds management sectors ahead of the Australian Securities and Investment Commission’s implementation of Regulatory Guide (RG) 97 intended to provide greater transparency around fees and costs.

However, there are often mitigating factors where performance falls short of the fees charged, and as Money Management's recent feature on environment, social and governance (ESG) investing and fund manager Australian Ethical make clear, there is a price to be paid for applying ethical screens just as there is a price to be paid for intensive research into the balance sheets of small companies.

Very often, savvy investors are prepared to pay that price.

Equally, as BT Financial Group pointed out, changing times can alter perceptions of fees and value for money.

All of which comes against the background of consumer group, Choice, telling the Productivity Commission (PC) that it should be questioning whether active fund managers are actually delivering value for the fees they charge.

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Full feature on page 16

32

THE EXTENSION of the Bank Executive Accountability Regime (BEAR) to other finance sector executives was actively canvassed by the Government panel tasked with reviewing the Australian Securities and Investments Commission’s (ASIC’s) power to ban senior officials in the finance sector.

The panel’s report, which has been opened for industry discussion, freely acknowledged that consideration had been given to extending the provisions of the BEAR to other fi nancial services executives but the panel had ultimately stopped short of doing so.

The panel has nominated two key options for strengthening ASIC’s banning powers, but noted that ‘an alternative would have been to adopt in ASIC’s legislation a regime similar to that contained in the BEAR”.

“This would involve imposing a new set of duties or expectations on individuals within the regulatory purview of ASIC, and enabling ASIC to ban an individual who does not meet those expectations or comply with those duties,” it said.

“However, it said that while understanding the reasoning behind the implementation of the BEAR regime, it considered that ASIC’s powers could be adequately enhanced through other measures.

Prime amongst those measures is removing some of the limitations which have inhibited ASIC’s use of its banning powers therefore expanding the scope of banning orders so that the regulator has the power to ban a person from “performing a specific function in a fi nancial services business, Continued on page 3

Calls for KiwiSaver improvements as New Zealand heads to polls WHILE the Australian superannuation industry continues to push for the faster progression of the superannuation guarantee (SG) to 12 per cent, New Zealanders are contemplating getting their KiwiSaver contributions up from three per cent to four per cent.

Research commissioned by the New Zealand Financial Services Council (NZFSC) and released at its annual conference has revealed Kiwis wants KiwiSaver beefed up including more options with respect to contributions and access.

According to the NZFSC research, 67 per cent of those surveyed supported increasing both employer and employee contributions from three per cent to four per cent by 2021.

The survey also showed that despite concerns about an increased contribution rate costing employers, a majority of business executives, managers, business proprietors and self-employed people supported a Continued on page 3

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2 | Money Management September 14, 2017

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1. “Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings?” Sloan, R.G., The Accounting Review, as of 1996, 71, 289 – 315 2. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency,” Jegadeesh, Narasimhan and Titman, Sheridan, The Journal of Finance, Vol. 48, No. 1, as of 3/1993, pp. 65 – 91 3. “The cross-section of expected stock returns,” Fama, E. & French, K., Journal of Finance, June 1992, 47, 427 – 465; Fama, E., & French, K., “Common risk factors in the returns on stocks and bonds,” Journal of Financial Economics, Volume 33, issue 1, as of 6/1992, 3 – 56 4. Bender, J., R. Briand, D. Melas, R. Subramanian and M. Subramanian. 2013. Deploying Multi- Factor Index Allocations in Institutional Portfolios.

Issued by State Street Global Advisors, Australia Services Limited (AFSL Number 274900, ABN 16 108 671 441) (“SSGA, ASL”) www.ssga.com. This material is of a general nature only and does not constitute personal advice. It does not constitute investment advice and it should not be relied on as such. It does not take into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. You should seek professional advice and consider the product disclosure document, available at www.spdrs.com.au, before making an investment decision. ©2017 State Street Corporation — All Rights Reserved. AUSMKT-3827 | Expiry date: 31 August 2018.

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6/09/2017 2:49 PM

September 14, 2017 Money Management | 3

News

Accountant licensing has added $2,000 to SMSF running costs

BY MIKE TAYLOR

REGULATORY changes including the licensing of accountants have added an extra $2,000 in fees per year to the running of a self-managed superannuation fund (SMSF).

That is the assessment of the SMSF Association which has told the Productivity Commission inquiry into superannuation efficiency and competitiveness, that the introduction of the $1.6 million transfer balance cap represents an example of a policy that will materially affect the behaviour of SMSF trustees.

“This will involve the continual monitoring of event based reporting to the Australian Taxation Office (ATO) and increased contact with intermediaries such as a financial advisor or accountant,” it said.

“Further, the inclusion of superannuation as a financial product under the AFSL [Australian Financial Services Licence] regime requires financial advisers to be licensed when giving advice relating to a member’s SMSF. This has resulted in statements of advice being required in an environment when in the past they have not been. The SMSFA estimates that recent regulatory changes could cost an SMSF an extra $2,000 in fees per year where additional advice is required.”

“The SMSFA is completely supportive of measures that increase

the standard of financial advice and integrity in the superannuation system but note these changes also can have adverse effects on the competitiveness and efficiency of the superannuation system,” the submission said.

The SMSF Association has also expressed concern at the time it takes for Australian Prudential Regulation Authority (APRA)regulated funds to roll over superannuation balances into self-managed funds, arguing this problem could be addressed by the implementation of a centralised clearing house.

“Currently the process for rolling over superannuation from an APRA-regulated fund is inefficient and anti-competitive.

Rollover processes to SMSFs are inconsistent amongst funds. Some funds utilise digital platforms to rollover funds to SMSFs while many APRAregulated funds still require members to submit rollover requests via paper forms which are sometimes not available through their website,” the submission said. “This makes transferring retirement savings to an SMSF an inefficient exercise.”

“Allowing individuals to orchestrate a transfer of their retirement savings to an SMSF through a centralised clearing house would improve the efficiency and competitiveness of superannuation,” the submission said.

Subscale super funds negatively affect 1.7 million members JASSMYN GOH

A member of a subscale superannuation fund could be potentially $170,000 worse off than a member of a best performing fund because of the current industrial system, according to the Financial Services Council (FSC).

Using Australian Prudential Regulation Authority (APRA) and modern awards data, an analysis by the FSC found subscale funds managed $94 billion and left up to 1.7 million members potentially hundreds of thousands of dollars worse off in retirement.

The FSC said subscale funds made up 153 (30.2 per cent) of modern award superannuation listings and 33 funds managed less than $10 billion in funds. The average performance of the 33 funds over 10 years was 4.5 per cent.

The FSC said this was 0.8 per cent lower than the average 5.3 per cent performance of all ‘growth’ options in the market for both industry and retail funds, and 1.4 per cent lower than the performance of the best performing MySuper products.

The weakest performing fund returned 2.7 per cent over 10 years, managed less than $1 billion, and was listed in two modern awards.

FSC chief executive, Sally Loane, said: “If this many Australian workers were enabled by law to languish in poorly paying jobs with working conditions way below their peers, for as long as 40 years, there’d be outrage across the entire community”.

“So, we shouldn’t tolerate a system which leaves people in superannuation funds delivering significantly poor returns, for years and years,” she said.

“Many can’t change funds because of the current industrial laws governing default super, and many are chronically disengaged and disinterested. Either way, the system needs to change if the policy is going to work for all Australians.”

Loane said the prevalence of subscale funds in the default system was a major public policy issue that need to be addressed given the negative impact on consumers’ financial outcomes.

The FSC’s submission to the Productivity Commission on the competitiveness and efficiency of the super system recommended a model that allowed consumers to exit underperforming, subscale funds and switch to a fund regardless of whether it was a retail or an industry fund, which would deliver stronger returns and a more comfortable retirement.

Govt panel backs tougher ASIC banning powers Continued from page 1 including being a senior manager, or a control of a financial services business; and/ or performing any function in a financial services business”.

The taskforce has considered this issue and believes it could be adequately addressed by expanding the scope of the banning order, so that ASIC should have a power to ban a person from: “5.1. performing a specific function in a financial services business, including being a senior manager, or a controller of a financial services business; and/or 5.2. performing any function in a financial services business”.

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The panel has also suggested changes to prevent executives and managers escaping ASIC’s net and noted that this can be addressed by broadening the circumstances in which ASIC may make a banning order against individuals to expressly cover directors, officers and senior managers of financial services companies.

The panel cited instances where such people were not deemed to be “fit and proper” and where a person had more than once been an officer, partner or trustee of a company that had been the subject of an adverse report by the Australian Financial Complaints Authority (AFCA).

Calls for KiwiSaver improvements as New Zealand heads to polls Continued from page 1 gradual increase to four per cent.

Commenting on the research, NZFSC chief executive, Richard Klipin said that after ten years of KiwiSaver New Zealanders were maturing in their understanding and appreciation of the scheme.

“Given the universal support this research shows we now need to have a constructive policy debate on contribution levels and how we can increase them in a sustainable manner,” Klipin said.

“With support for strengthening KiwiSaver so high there is a clear challenge for our political leaders two weeks out from the election to show their roadmap for backing what voters want and growing KiwiSaver,” he said. “It is important that these findings are given serious consideration at policy level.”

7/09/2017 4:10 PM

4 | Money Management September 14, 2017

Editor

mike.taylor@moneymanagement.com.au

THE FOLLY OF REMOVING ASIC FROM THE PUBLIC SERVICE

FE Money Management Pty Ltd Level 11 4 Martin Place, Sydney, 2000

The Public Service Act sets a high bar for the conduct of Government agencies and those who work within them. It would be folly to remove the Australian Securities and Investments Commission from the Australian Public Service.

Managing Director: Mika-John Southworth Tel: 0455 553 775 mika-john.southworth@moneymanagement.com.au Managing Editor/Editorial Director: Mike Taylor Tel: 0438 789 214 mike.taylor@moneymanagement.com.au

IN WHAT represented something of a valedictory speech to the West Australian Chamber of Commerce and Industry the soon to retire chair of the Australian Securities and Investments Commission (ASIC), Greg Medcraft extolled the virtues of the regulator no longer being an Australian Public Service (APS) entity.

Suggesting the Government would soon move the legislation necessary to see ASIC personnel removed from public service employment, Medcraft also extolled the virtues of an industry funding model and noted that few, if any, ASIC employees had actually been recruited from the public service.

It was clear from Medcraft’s comments in Western Australia that he has little experience in and little knowledge of the Australian Public Service and the value that can be delivered by Government entities funded under the Budget process and staffed by people who have a capacity to make fearless judgements unfettered by commercial considerations.

There are good reasons why financial services regulators ought to remain substantially funded out

of the Budget and why regulatory personnel ought to remain subject to the requirements of the Public Service Act. ASIC is not a Commonwealth corporation. It is a regulator and it should be structured and funded accordingly.

Before pursuing his agenda, Medcraft would have done well to consider the stated objectives of the Public Service Act 1999 and how well they fit with what ought to be public expectations of a Commonwealth regulator.

In particular, he might have noted that the main objectives of the Act are: a) To establish an apolitical public service that is efficient and effective in serving the Government, the Parliament and the Australian public; b) To provide a legal framework for the effective and fair employment, management and leadership of APS employees; c) To defi ne the powers, functions and responsibilities of Agency Heads, the Australian Public Service Commissioner and the Merit Protection Commissioner; and d) To establish rights and obligations of APS employees.

There is nothing the consultants

are likely to write into the charter and objectives of an ASIC withdrawn from the umbrella of the APS that is likely to deliver the same level of certainty around how both the regulator and those working within it perform their functions and the consequences if they do not.

It is greatly to be hoped that when the Government introduces the legislation necessary to remove ASIC from the terms of the Public Service Act, it is not simply rubber-stamped by the Parliament.

The implications of the move need to be fully investigated and debated.

Somewhat typifying his tenure as ASIC chair, Medcraft had no hesitation in claiming substantial ownership of the changes which are being wrought on the regulator including the industry funding agenda and removal from the public service.

It should follow that he must own whatever shortcomings eventually emerge.

Perhaps, though, some of the more thoughtful heads in the Parliament might seek to temper the outcome.

Mike Taylor Managing Editor

News Editor: Malavika Santhebennur Tel: 0438 776 358 malavika.santhebennur@moneymanagement.com.au Features Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com.au Journalist: Hope William-Smith Tel: 0438 836 560 hope.william-smith@moneymanagement.com.au Product Marketing Manager: Dale Henry Tel: 0439 076 518 dale.henry@moneymanagement.com.au ADVERTISING Sales Director: Craig Pecar Tel: 0438 905 121 craig.pecar@moneymanagement.com.au Account Manager: Ben Lloyd Tel: 0438 941 577 ben.lloyd@moneymanagement.com.au Account Manager: Tom Nagle Tel: 0438 879 685 tom.nagle@moneymanagement.com.au PRODUCTION Graphic Design: Henry Blazhevskyi Subscription enquiries: www.moneymanagement.com.au/subscriptions Money Management is printed by Bluestar Print, Silverwater NSW. Published fortnightly.

Subscription rates: 1 year A$244 incl GST. Overseas prices apply. All Money Management material is copyright. Reproduction in whole or in part is not allowed without written permission from the editor. © 2017. Supplied images © 2017 Shutterstock.

Opinions expressed in Money Management are not necessarily those of Money Management or FE Money Management Pty Ltd.

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This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity. Prior to making an investment decision, retail investors should seek advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. © 2017 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

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6 | Money Management September 14, 2017

News

Fund trustees should step in to mitigate unpaid super: IFS

BY JASSMYN GOH

EARLY intervention by superannuation fund trustees is critical to addressing unpaid super, Industry Fund Services (IFS) believes.

Pointing to data by the Australian Taxation Office (ATO) that found Australian workers had been underpaid $17.1 billion in compulsory super entitlements from 2009 to 2015, IFS said 90 per cent of employers with unpaid super employed 10 or fewer fund members.

The tax audit also found that small-to-medium businesses in the construction, retail, food services, and accommodation sectors were the worst offenders.

IFS chief executive, Cath Bowtell said: “Most employers do not set out to fall behind with super payments, and most cases are resolved, without recourse to litigation”.

Bowtell said that often the fund trustee was the first to know that a payment was missed.

“The earlier the super fund trustees act to recover unpaid super, the more likely the debt will be paid with a simple phone call,” she said.

IFS said this was apparent in insolvency cases, where the age and size of the debt was smaller for members of funds with an active arrears process compared to those with a less robust process.

IFS also welcomed the Government’s changes to give the ATO greater power to crack down on non-compliant employers.

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September 14, 2017 Money Management | 7

News

Are industry funds ‘under-reporting’ their exposures?

BY MIKE TAYLOR

MANY superannuation funds with unlisted assets are effectively ‘under-reporting’ the extent of their growth asset exposures, according to NAB Wealth.

In what appears to be a direct reference to the practices of some industry funds, NAB Wealth has used its submission to the Productivity Commission (PC) inquiry into superannuation competition and effectiveness to question the practice of funds self-classifying assets into growth and defensive categories.

It said many funds classified their unlisted property and infrastructure assets as entirely or partially defensive while those funds with listed exposure to the same asset classes classified them entirely as growth assets.

“This results in inconsistent classification of growth exposures across funds,” it said.

“As such many funds with unlisted assets are effectively ‘under-reporting’ the true extent of growth asset exposure in their portfolio, and as a consequence are being grouped in the same risk categories as lower growth funds,” the submission said.

The submission said this was occurring despite the fact that such funds had higher growth

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exposures as well as higher illiquidity risk.

“Due to the diverse range of products available and the differing services and insurance

options available to fund members, this impacts on the ability to appropriately compare like-for-like superannuation products,” it said.

The submission said that Australian Securities and Investments Commission (ASIC) Class Order 14/1252 and RG97 had

introduced significant changes to the manner in which fees and costs would need to be treated and disclosed but suggested it would take time to determine

whether the changes succeeded in addressing concerns of underdisclosure of fees and costs in super and managed investment scheme products.

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8 | Money Management September 14, 2017

Fund manager profile

CONSISTENT APPROACH MAKES FOR STABLE RETURNS Reducing risk may appear to be a defensive tactic for the Schroder Balanced Fund – W Class but it really represents aggressive positioning given the tendency of the market to roll on, Hope William-Smith finds.

WHEN IT COMES to multi sector fund success, valuations matter as they tell managers about return and risk, according to Schroders head of fi xed income and multi asset, Simon Doyle.

Doyle is the face behind the Schroder Balanced Fund – W Class which took home another trophy in the multi sector category at this year’s Money Management/Lonsec Fund Manager of the Year Awards.

FE Analytics data showed the growth of the wholesale Schroder Balanced Fund – W Class has been on a steady climb for the past 12 months, with an annualised return of 2.57 per cent to May 2017.

The fund has also returned 6.62 per cent and 9.97 per cent over the past three and five year measured periods respectively.

The data found the fund also held out its performance position in the top 25 per cent across the one, three, and five year annualised periods.

According to Doyle, the investor sentiment headlining the 2017/18 financial year was in favour of the consistency the fund has produced.

“Some people would probably categorise me as being conservative – I don’t tend to see it that way, valuations matter, they tell us about future return, they tell us about risk,” he said.

“We do tend to reduce risk a bit early which appears to be defensive, but sometimes that’s actually quite aggressive positioning given the tendency of markets to roll on.”

Doyle said the fund would take a slightly conservative approach to meet challenges caused by the recent US and UK elections.

“You get a lot more volatility whereas we have less embedded risk asset exposure and we are probably a bit more tactical in how we approach it,” he said.

Even with the current wave of baby boomers entering retirement and an investment landscape fraught with the yet-to-be determined results of multiple policy changes, Doyle was confident the fund had more solid results ahead.

In terms of sector performance, Doyle said the achievement of in-house targets would remain frontal.

CHART 1: SCHRODER BALANCED FUND – W CLASS 3 YEAR PERFORMANCE

“In terms of total returns numbers are going to come down across the board because when you look at equity markets they look pretty fully priced. If those valuations are anything to go by that’s fairly low return for equites and also given where bond yields

are, you’re likely to get low returns from bonds,” he said.

“If you’re just relying on big asset allocations, positions or market timing, you’ll be right some of the time but you’re just as likely to be fi rst quartile as you are fourth quartiles.”

FACT BOX: SCHRODERS BALANCE FUND – W CLASS Year manager was founded: Financial services has been a core business in Australia since 1961.

Number of Employees: 95 Key Personnel: • Chief Executive Officer: Greg Cooper • Chief Investment Officer: n/a • Managers of retail funds: Ray Macken (head of sales), Mardi Hall (head of retail sales), Graeme Mather (head of distribution and product) • Portfolio Manager: Simon Doyle (head of fixed income and multi asset) Investment style used for the Schroder Balanced Fund – W Class: Philosophy based on the idea that understanding, managing and allocating risk is as important to meeting our investment objectives as is our understanding and allocation to sources of return. While accepting risk is necessary in order to lift returns over time, investors often take more risk than they need to achieve their goals. A properly constructed balanced fund should be a fund that will perform well across diverse economic and market environments (not just in rising equity markets).

The fund’s investment process incorporates strategic asset allocation; tactical asset allocation; security selection and portfolio construction.

Asset Classes covered: Multi asset Schroder Balanced Fund – W Class: • Minimum investment amount: From 1 August 2017 – $20,000 for an initial investment and $5,000 the minimum additional investment amount • Fees/MER: 0.90 per cent • Last 12 months performance of fund: See Chart 1 • Research house ratings for fund: • Zenith: Recommended • Lonsec: Highly Recommended • Morningstar: Gold • Major platforms through which fund is available: BT Wrap/SuperWrap, Asgard, ANZ (OneAnswer, GROW Wrap, Oasis, PortfolioOne), IOOF (Pursuit Select, Employer Super, Portfolio Service), Macquarie (Consolidator/Manager), NetWealth, WealthFocus, HUB24 Invest/Super, Fiducian Total Retail/Wholesale FUM: $820,656,189 Total FUM: $1,026,061,981 Firm FUM: $43,999,181,411

Source: FE Analytics

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10 | Money Management September 14, 2017

Infocus

PUTTING THE CBA PROBE IN CONTEXT Mike Taylor writes that the Australian Prudential Regulation Authority’s probe into the Commonwealth Bank may be unprecedented but its outcome will fall far short of many expectations.

TWO THINGS NEED to be recognised about the Australian Prudential Regulation Authority (APRA) “independent prudential inquiry” into the Commonwealth Bank. First, it is being paid for by the bank itself and, second, it was only initiated after consultation with the bank’s board and chief executive.

Thus, as the Treasurer, Scott Morrison has over recent weeks sought to portray the APRA inquiry as the Government “taking action now” and better than a Royal Commission into the banking and financial services industry the reality will be a very much gentler and bureaucratic outcome.

But what ought to be recognised about the APRA inquiry is that it represents an unprecedented step on the part of the regulator, representing an interesting interpretation and extrapolation of its powers under the Australian Prudential Regulation Authority Act 1998.

There is nothing specific within the APRA Act with respect to its ability to conduct its inquiry into the Commonwealth Bank. Rather, the regulator is relying on Section 11 (1) of the legislation which, dealing with APRA’s powers states: (1) APRA has power to do anything that is necessary or convenient to be done for or in connection with the performance of its functions.

What is clear, though, is that

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while APRA’s chair, Wayne Byres, undoubtedly authored the necessary documentation initiating the inquiry into the Commonwealth Bank he did so in the context of both the Treasurer, Scott Morrison and the chair and CEO of the Commonwealth Bank being consulted/informed.

Byres was not hiding this fact.

His official statement issued on 28 August stated: “The chairman and CEO of the CBA have assured me that the bank will fully cooperate with the inquiry, and APRA welcomes that cooperation”.

He said the names of members who would make up the inquiry panel and the “agreed terms of reference” would be finalised at the commencement of the inquiry with the costs of the inquiry being met by the Commonwealth Bank.

In other words, and crucially, the terms of reference to be pursued by the APRA-appointed panel will be

58.7% of retail fund holders are satisfied

determined “by agreement” and the costs of the inquiry process will be borne by the organisation being investigated.

All of which appears to undermine the Treasurer’s claim that the APRA inquiry represents a better outcome than the calling of a Royal Commission because it represents “taking action now”.

Morrison is right that there is an element of immediacy in the APRA inquiry, but he would well understand that the ability of the APRA panel to dig beneath the surface of what has happened within the Commonwealth Bank falls well short of the forensic investigatory powers of a Royal Commission.

In any case, the nature of the likely outcomes of the APRA panel have already been outlined by Byres who said that, “broadly, the goal of the inquiry is to identify any shortcomings in the governance,

73.8% of SMSF holders are satisfied

culture and accountability frameworks and practices within CBA, and make recommendations as to how they are promptly and adequately addressed”.

“It would include, at a minimum, considering whether the group’s organisational structure, governance, financial objectives, remuneration and accountability frameworks are conflicting with sound risk management and compliance outcomes.”

“The independent panel would not be tasked with making specific determinations regarding matters that are currently the subject of legal proceedings, regulatory actions by other regulators, or customers’ individual cases.”

The bottom line, therefore, is that whatever the APRA panel discovers it is not going to be in the business of traversing the issues which have already proved most controversial for the Commonwealth Bank – the AUSTRAC charges or the many matters already being looked at by the Australian Securities and Investments Commission (ASIC).

Just to put the standing of the APRA inquiry into further context, the panel’s report is expected to take six months to complete, meaning it is not likely to see the light of day until the 2018 Budget session of the Parliament – the one immediately preceding the next Federal Election.

58.2% of industry fund holders are satisfied

Source: Roy Morgan Research

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September 14, 2017 Money Management | 11

SMSFESSENTIALS

Are tax outcomes the major SMSF attraction?

BY MIKE TAYLOR

THE Productivity Commission (PC) needs to consider why Australian Prudential Regulation Authority (APRA) funds do not allow their members to achieve the tax outcomes enjoyed by members of self-managed superannuation funds (SMSFs), according to specialist firm, Dixon Advisory.

The company has used its submission to the PC’s inquiry into superannuation efficiency and competitiveness to counsel the commission to be careful in seeking to make comparisons between APRA-regulated funds and SMSFs. In particular, it suggested that the PC’s surveys of SMSF trustees needed to be carefully worded to obtain an accurate picture.

“To ensure a balanced assessment of competition across the system and genuine alignment to members’ best outcomes, the commission should extend the scope of Trustee surveys to consider why APRA funds do not allow their members to achieve

tax outcomes that are already utilised by SMSFs (i.e. separation of capital gains income out from investment income would allow unitised funds to apply a 10 per cent tax rate to capital gains, rather than applying an overall tax rate of 15 per cent to all income),” the Dixon Advisory submission said.

In doing so, it noted that some APRA funds had moved to adopt a whole of life investment approach which allowed members to retain investments from accumulation all the way to the pension phase, allowing members to take a long-term investment approach and reduce unnecessary transactional costs, including in some instances tax, as well as risk.

“In determining the reasons why trustees establish an SMSF, the commission should consider the final wording of survey questions carefully,” it said.

The submission said that given one of the major benefits of superannuation is the tax concessions provided for saving towards retirement, “it would be unusual that individuals don’t identify tax as a

reason for using their particular super fund”.

The Dixon Advisory submission pointed to the significant differences which existed between APRA-regulated funds and SMSFs, not least the generally much older demographic of SMSF trustees and the substantially higher account balances contained within SMSFs.

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6/09/2017 2:53 PM

12 | Money Management September 14, 2017

Managed accounts

MANAGED ACCOUNTS FINALLY FULFILLING THEIR PROMISE The managed account market is dominated by small providers but big players are starting to throw money into the sector that experts have said is big enough for everyone, Janine Mace finds.

WHEN IT COMES to managed accounts, this day has been a long time coming.

For a decade or more the managed accounts cheer squad has been talking up the benefits of these structures and predicting they will break into the big time.

Finally, it seems their time has come.

With the big banks throwing serious resources at the managed account market and financial advisers and dealer groups increasingly embracing them, all the enthusiasm now seems justified.

HUB24 managing director, Andrew Alcock, said: “We are watching the managed accounts market reach its tipping point”.

Institute of Managed Account Professionals (IMAP) chair, Toby Potter, agreed as “the time is right for managed accounts”.

Their view is supported by the research. The Investment Trends ‘April 2017 Managed Account Report’, that surveyed 474 fi nancial advisers, found a sharp lift in adoption of managed accounts during 2016/17, according to research director, Recep Peker.

“We have seen a continuing steady increase in the number of fi nancial advisers recommending managed accounts to clients, with 26 per cent of fi nancial advisers recommending them,” he said.

This is up from only 16 per cent in 2012 and 22 per cent in 2016.

FOLLOW THE MONEY So, the big question is, why managed accounts and why now?

As always in the financial services market the answer is about

2017_MM14.09_012-27.indd 12

where the money is going. Advisers are increasingly putting clients’ assets into managed accounts, so service providers of every stripe are keen to ensure they don’t miss out on their slice of the action.

Over the period 2012-2016, annual growth in the number of advisers recommending these products was flat at around one per cent to two per cent, but in 2016/17, interest took off with a four per cent growth in the number of advisers using them, according to Peker.

The number of advisers intending to use these structures is also on the rise.

“Our research shows 20 per cent of fi nancial advisers expect to recommend managed accounts to clients in the future,” Peker noted.

“The industry is at the point where a quarter of fi nancial advisers are currently using managed accounts and are sold on it, but interest is in the three quarters who are not using it.”

According to Peker, planners are increasingly seeing managed accounts as a whole-of-portfolio solution and that means there is potential for even stronger asset flows. In 2013, the average adviser was recommending managed accounts for only 10 per cent of the new client money they were advising on, but by 2016/17 this had increased to 26 per cent.

“Increasingly advisers are saying in an ideal world, out of all client monies, they would like to put 70 per cent of all client assets and new business into these solutions. This situation has been in the making for a decade, but now it appears to be finally happening,” he said.

6/09/2017 9:24 AM

Y

September 14, 2017 Money Management | 13

Strap Managed accounts ADVISORY BUSINESSES UNDER PRESSURE The obvious question of course, is why advisers are moving client assets into managed accounts right now.

From the adviser and licensee perspective, these structures have many attractions in an increasingly efficiency-driven environment.

Advice businesses are eager to embrace any solution that can deliver improved productivity and competitiveness. managedaccounts.com.au head of distribution and marketing, Tony Nejasmic, explained that advisers’ businesses were under the pump.

“This is an efficiency play for advisers. They can manage 500 clients without the administrative burden, which is very attractive in an environment where margins and fees are being squeezed,” he said.

Alcock agreed: “It’s a competitive market and managed accounts help market participants

to compete better”.

Clients and licensees also benefit, according to Potter.

“Managed accounts deliver in spades for advisers in the efficiency area, while also helping clients. From a licensee perspective, they can also be confident that all their clients are getting what they want,” he said.

Many of the large dealer groups have already embraced the efficiencies provided by these types of structures.

“The biggest managed account programs are those run by substantial advice business like Shadforth, Centric and Perpetual Private Clients, as opposed to those run for sale to others,” Potter said.

Managed accounts also helped advisers demonstrate to clients the value they are adding.

“If independent non-aligned advisers have the ability to exercise more choice, it allows

“With managed accounts you can engage more with financial advice and understand what you are investing in to reach your retirement goals.”

– Andrew Alcock them to show clients how they are adding value,” Alcock explained.

“For advisers, these kinds of structures help them deepen client relationships and demonstrate why they are being paid and how they are getting better outcomes for clients.”

INVESTMENT CLARITY AND CHOICE The lack of transparency and direct asset ownership inherent in traditional managed funds is also helping boost the appeal of managed accounts.

“Some of the growth [in

managed accounts] is organic and we are seeing very significant growth of that type, but it’s also due to advisers migrating existing client assets from a managed funds approach,” Potter said.

Transparency is now vital to clients and this is helping drive advisers into the arms of managed account providers.

One of the key drawbacks with traditional managed funds is that clients do not know what is in their portfolio, Nejasmic said.

“With managed accounts there Continued on page 14

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14 | Money Management September 14, 2017

Managed accounts Continued from page 13

ANDREW ALCOCK

are no surprises, as they can see what they own.”

Alcock agreed that clarity was important to investors. “Customers are increasingly sophisticated and want to think carefully about their retirement and scrutinise what is going on,” he said.

“Managed accounts allow the ability to see what you are investing in at a greater level. With managed accounts you can engage more with fi nancial advice and understand what you are investing in to reach your retirement goals.”

Technological innovation is helping by giving market participants more choice and flexibility.

“Managed accounts allow

different industry participants to collaborate to see which have the best solution for their clients. For example, a licensee can pick the best asset manager and administration platform to offer solutions to clients, not just the traditional packaged managed funds,” Alcock noted.

A good managed account provider allows advisers to customise a portfolio so that if they want a particular investment manager, but do not want a particular stock they hold, it can be removed.

“Technology allows you to package up something with much more flexibility than was previously available to retail clients,” he said.

SLOWER TIMES FOR PLATFORMS Strong adviser interest in managed accounts is attractive, given the sluggish growth being experienced by traditional platforms. They have responded by making managed accounts more readily available.

“In 2006, there was only one platform through which advisers

could access managed accounts,” Peker noted.

“In 2016 there were 12 platforms, so there is an increasing number of financial advisers that can access managed accounts on their preferred platform and that makes things so much easier.”

Potter sees this as a sensible response to a shifting market.

“The platform market is not enjoying the growth of previous years and [adding managed accounts] is a classic product improvement strategy in a slowing market,” he said.

It also reflects the changing nature of the market.

“Traditionally the large players in the managed accounts market were high net worth private client providers, brokers or trust companies. Then you got the emergence of specialist providers who competed with platforms – such as managedaccounts.com.au, DNR Capital, and Implemented Portfolios – and now we are seeing platforms coming along to facilitate managed accounts. Mainstream platforms are making managed accounts a core part of platform functionality,” Potter explains.

He believed the fi nancial dynamics of a post-Future of Financial Advice (FOFA) world were having an impact.

“FOFA led to the demise of platform rebates, so platform providers are strengthening their platform capabilities and are now charging for something that previously they gave away,” he said.

Introducing managed accounts to your platform was also one way to capture some of the huge pool of self-managed superannuation fund (SMSF) assets, Potter argued.

“The administration solutions provider, Class, published research on SMSF assets which noted only eight per cent to nine per cent of SMSF assets are on-platform, so a big proportion of fi nancial assets in SMSFs are not on-platform and this is a big prize,” Potter said.

ATTENTION FROM BIG PLAYERS The supply side of the equation is responding swiftly as advisers increasingly turn their sights

2017_MM14.09_012-27.indd 14

towards managed accounts.

“Everyone is exploring this market at the moment. But the big guys have to play catch-up, as a big chunk of the money in the market is going to the smaller groups,” Nejasmic said.

Large-scale players like BT, Colonial First State (CFS), and Macquarie are throwing significant resources at the market, Potter noted.

“You are seeing mainstream platforms committing substantial platform capabilities to support managed accounts. They are putting a good deal of both development effort and marketing effort into it,” he said.

All this interest is likely to see some changes in how marketshare is carved up, particularly given that the Investment Trends’ research found that the managed account market was currently dominated by a small number of providers.

“When advisers were asked which solutions they used, three providers were neck and neck: Praemium, HUB24 and MLC Wrap/Navigator,” Peker says.

“These three are the biggest in terms of the proportion of financial advisers using them and this is also a good indicator of future flows.”

However, some advisers indicated they intended to start using other solutions in the future, he noted.

“These were BT Panorama and CFS First Wrap, with HUB24 close behind. The BT distribution team has been very active in promoting Panorama and so it comes up a lot, but also CFS,” Peker said.

Nejasmic believes all the interest is good for the market as “they are spending more money and that is leading to greater awareness of managed accounts. The market is big enough for everyone”.

Looking to the future, questions linger over how the heavy-weights will approach the market.

“The big three or four players are looking at the market, but the question is what form their offering will take. It’s unlikely to be as discretionary as the offerings from smaller players,” he argued.

“The banks are looking at the

6/09/2017 9:25 AM

September 14, 2017 Money Management | 15

Managed accounts mass market, but we are looking at niche markets, as specialist advisers want full discretion and more choice in what they can offer clients.”

INTEREST FROM ASSET MANAGERS The burgeoning managed accounts market is also drawing the attention of international investment houses.

“Managed accounts are allowing international managers and those with good money management skills to enter the market. For them managed accounts are invaluable, as the barriers to entry are less than if they use a traditional managed funds structure,” Alcock noted.

By way of example he pointed to the availability of international asset managers like Alliance Bernstein, Franklin Templeton and Arnhem on the HUB24 platform – fi rms that were

traditionally only available to institutional investors.

Potter agreed that money managers were eyeing off the market.

“There are going to be investment managers developing products for sale by licensees or advisers, and others selling portfolio construction or investment ideas such as DNR Capital, Morningstar, and Lonsec,” Potter said.

For Alcock, the arrival of new investment managers in the retail market was invaluable.

“It’s about time for the market to have new entrants, as it allows more competition and allows existing inefficiencies to be challenged,” he said.

an advantage in in terms of scale and technological expertise,” Potter said.

“There will be a role for small investment managers to come in and offer investment management services, but when it comes to the administration service itself, we are starting to see the benefits of scale.”

In terms of innovation, Nejasmic expected to see reporting and performance outputs to improve. “Advisers and clients will be able to see more detail. The big platforms will bring substance to the business in this area,” he said.

With no ‘killer product’ on the horizon, innovation in product features is likely to be steady rather than disruptive.

“We will see increasing LOOKING TO THE FUTURE fl exibility and innovation around Although things appear rosy for Hi-Res PDF - GOOD For Print the basic structures, such as the the managed account sector, some AcD PrM SIGN OFF BOX GrD inclusion of international divergence is likely. currencies to managed accounts,” “I believe there will be a vibrant Alcock predicted. market, but some providers will have

RECEP PEKER

Nejasmic agreed: “We will see a further rollout of international capabilities such as international managed funds, international bonds and international shares”.

Alcock was extremely confident about the future of the sector.

“I think the market has been treating it as something new, but this will change and managed accounts will become mainstream and the dominant way of investing at the retail level,” he said.

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6/09/2017 9:25 AM

16 | Money Management September 14, 2017

Fee comparator

WHEN FUND MANAGER FEES OUTSTRIP PERFORMANCE Money Management's inaugural Fee Comparator research has confirmed that some high fee fund managers need to rethink their value proposition but, as Mike Taylor writes, not everything is black and white.

MONEY MANAGEMENT’S INAUGURAL Fee Comparator feature has confirmed the reality that while investors are prepared to pay for out-performance and to meet objectives such as environmental sustainability, fund managers must ultimately be seen to deliver on their promise.

Utilising FE’s analytics, Money Management’s journalists drilled down on fees and performance across the various asset allocation sectors and, legacy products aside, there was no disguising the reality that viewed purely on the basis of ‘quant’ a number of managers have cause to consider whether they are actually delivering value to investors.

The Fee Comparator exercise comes ahead of FE launching its quantitative Crown Fund Ratings in Australia aimed at helping investors identify funds which have displayed superior performance in terms of stockpicking, consistency, and risk control.

The FE Money Management Fee Comparator exercise is important because it provides a snapshot of fees in the various funds management sectors ahead of the Australian Securities and Investment Commission’s implementation of Regulatory Guide (RG) 97 intended to provide greater transparency around fees and costs.

However, there are mitigating factors where performance falls short of the fees charged, and as Money Management’s recent feature on environment, social and governance (ESG) investing and fund manager Australian Ethical make clear, there is a price to be paid for applying ethical screens just as there is a price to be paid for intensive research into the balance sheets of small companies.

Very often, savvy investors are

2017_MM14.09_012-27.indd 16

prepared to pay that price.

Equally, as BT Financial Group pointed out, changing times can alter perceptions of fees and value for money.

“Across the industry there are a range of fee structures that were developed to reflect the different arrangements and areas of demand that were relevant at the time of investment,” BT said.

What is also evident from the FE data and the explanations provided by the fund managers, is that few investment methodologies are fit for purpose all the time.

Those sorts of explanations aside, it is unsurprising that in the Australian equities space it was the microcap and smaller companies funds which emerged at the upper end of the fee spectrum but, as was pointed out by Australian Unity’s general manager of investments, Geraldine Barlow, the nature of the sector requires more intensive and therefore more expensive research.

The task for financial planners and dealer group investment committees is therefore to determine whether the returns generated by such funds justify the level of fees and, on the face of it, the FE data suggests that a number of fund managers who have reduced their fees over the past 18 months, including Kerr Neilson’s Platinum Asset Management, were justified in doing so.

Platinum in April cut its base fee from 1.5 per cent to 1.35 per cent and as low as 1.1 per cent when combined with a relative outperformance fee of 15 per cent and it was a move which arguably took Platinum outside of the range of the FE Money Management Fee Comparator radar.

There are certainly winners and losers in the Fee Comparator exercise, and the charts accompanying each sector analysis

have shown for instance that top five funds in terms of low fees and better performance in the Australian equities sector are the Franklin Templeton Australian Equity Wholesale Fund, the CFS Realindex RAFI Australian Share-Class A, the Lazard Australian Equity I, the Allan Gray Australian Equity A, and the Macquarie Australian Equities Fund.

FEE COMPARISON METHODOLOGY In Money Management’s inaugural Comparator report the sectors analysed were Australian equities, Australian fixed income, international equities, international fixed income, and listed property.

Using FE Analytics, the FE data team looked at the entire Australian managed investments universe and included both retail and wholesale funds, but excluded platform funds.

Both retail and wholesale funds were included as there is currently no standard definition of what a wholesale fund is in terms of minimum investment.

For example, one wholesale fund could have a minimum investment of $25,000, and at the same time, another retail fund could have a minimum investment of $25,000.

Unsurprisingly most of the funds that had high fees were retail funds. Even though those funds may have had a wholesale offering too, the retail fees were nonetheless higher than the rest and were therefore still included on the list.

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18 | Money Management September 14, 2017

Fee comparator Continued from page 16

MICROCAP AND SMALL COMPANY RESEARCH LIFTS AUSSIE EQUITY FEES

BY JASSMYN GOH

MICROCAP and smaller company funds have topped the fee charts when it comes to Australian equity funds, according to FE Analytics data.

The data found that the Acorn Microcap Fund had the highest annual fee charge at 2.53 per cent, followed by Australian Ethical Australian Shares Fund at 2.5 per cent, SGH Micro Cap Fund at 2.15 per cent, Australian Ethical Emerging Companies Fund at 2.2 per cent, and Advance Australian Smaller Companies Multi Blend Fund at 2.15 per cent.

Australian Unity said its Acorn fund was an actively managed fund with an intensive research process and that this process contributed to their fee reasoning.

Australian Unity’s general manager of investments, Geraldine Barlow, said the microcap sector comprised of companies that were not well represented on the ASX 250 and was largely made up of developing companies, that either were not yet generating revenue or were very early in their revenue generation.

“Understanding and assessing the prospects of such companies requires a much deeper research process as information is not readily available to assess like it is with the larger companies on the ASX,” Barlow said.

Barlow said the unique part of the fund was the skillset the team brought in their bottom-up research of each of the stocks, and that it had remained true to its sector neutral approach since inception.

She noted that the fund has been closed to new investment since June 2013.

Performance wise, the fund has outperformed its Acorn Capital/ AGSM Microcap Index over 10 years to 31 July 2017 at 0.11 per cent, compared to -1.75 per cent.

“Given the nature of microcaps, this fund is classified as high risk and it can and does experience significant volatility. As such, this is a long-term investment with a recommended investment timeframe is long at seven years plus,” Barlow said.

“Recently the microcap sector has also been impacted by what is termed the ‘great rotation’. This is where large cap managers have added some small/microcap exposure to their portfolios looking for EPS [earnings per share] growth and have then rotated out of the sector.

“This rotation out of microcap names back into large cap names has led to a broader sell-off in microcaps.”

She noted that many institutional clients were making the sector rotate out of microcaps, resulting in further downward pressure on prices.

“These rotations do occur from time to time in the microcap space and investors should expect volatility.

However, the rotation can open up good buying opportunities for skilled managers and for investors comfortable with the risk of investing in microcaps,” she said.

On Australian Ethical’s Australian Shares Fund and Emerging Companies Fund, the fi rm said its fees were based on the cost of servicing its clients as most of their funds under management (FUM) and flows

TABLE 1: AUSTRALIAN EQUITY FUNDS WITH THE HIGHEST FEES

went into their wholesale offering.

Australian Ethical chief investment officer, David Macri, said the firm was committed to keeping their retail offering open and to give their investors and potential investors a choice if they had less than $25,000 to invest as they were “not going to shut them out of this option”.

Macri said the costs included servicing clients, onboarding clients, marketing, obtaining legal documents, producing the product disclosure statement (PDS), prospectus, and so forth.

“We think it’s a bit elitist to say ‘if you’ve got more than $25,000 you can invest in our fund and if you have less forget about it we don’t want your money’,” he said.

“At the same token, we don’t want to lose money in managing a product.

Some of these retail funds are very small and that’s exactly why the fees are that high.”

Macri noted that the firm did not have the same scale and distribution channels as the banks nor did it have it’s own platform.

He also said that there was an extra cost in establishing their investment universe due to their ethical charter driving their investment process.

On the investment side, he said the Australian Shares Fund strategy was based on stock picking to generate significant alpha.

“We’ve built a track record against picking both stocks in the right sectors particularly within small caps, we’ve managed to generate a lot of alpha in that fund,” he said.

The fund’s performance reflected this by beating the sector average over three years to 31 July 2017 at

CHART 1: AUSTRALIAN ETHICAL AUSTRALIAN SHARES FUND CUMULATIVE PERFORMANCE RETURNS FIVE YEARS TO 31 JULY 2017

Annual fee charge

Initial Investment

Acorn Microcap Trust Ret

2.53%

$5,000

Australian Ethical Australian Shares

2.50%

$1,000

SGH Micro Cap Trust

2.15%

$20,000

40

Australian Ethical Emerging Companies

2.20%

$1,000

20

Fund

12.59 per cent, five years at 15.44 per cent, and 10 years at 7.32 per cent.

On the firm’s Emerging Companies Fund, Macri said it was “based on the success of the Aussie shares fund, we think we have inherent skills in buying outperforming small caps stocks and that’s where the fund came from, and that fund has a performance fee”.

While the fund is only two years old it outperformed the benchmark over the two years to 31 July 2017 at 12.08 per cent (compared to 10.21), and one year at 6.93 per cent (compared to 0.93 per cent).

Similar to the Acorn fund, the SGH Micro Cap Fund’s fee strategy was a result of their research into true microcap stocks.

SG Hiscock and Company’s chair and managing director, Stephen Hiscock, said many microcap funds had fund sizes much larger than theirs which SGH believed meant that they were not investing in true microcap/startup companies, or they had taken in too much money which would pose a problem with liquidity if they needed to sell down their holdings rapidly.

“The flip side of having such a

120 100 80 60

Advance Australian Smaller Companies Multi Blend

2017_MM14.09_012-27.indd 18

0

2.15%

$1,500

Aug 12

Aug 13

Aug 14

Australian Ethical - Australian Shares TR in AU

Aug 15

Aug 16

AMI Equity - Australia TR in AU

7/09/2017 4:23 PM

September 14, 2017 Money Management | 19

Fee comparator small and nimble fund is that fees need to compensate the manager for their investment time, and research, and obviously cover the other costs, hence why the fee is 2.15 per cent,” he said.

“Because the fund also looks at pre-IPO [initial public offering], and unlisted investments, the fund is actually a low risk way to get exposure to private equity and venture capital type deals – and compared to those sorts of fund structures, which often also have lock-ups, the fees are reasonable, even low.”

While Hiscock said while last year was a tough year for microcaps, his fund had a minimum investment timeframe of five or more years.

The fund has overall performed similar to the benchmark over the past five years with a five year to 31 July 2017 cumulative return of 67.98 per cent, compared to 73.73 per cent.

Since around the Global Financial Crisis (GFC), BT Financial

TABLE 2: AUSTRALIAN EQUITY FUNDS WITH THE LOWEST FEES AND HIGHEST PERFORMANCE Fund

Annual fee charge

Initial Investment

1 year return

3 year return

5 year return

Franklin Templeton Australian Equity W

0.39%

25,000

13.53%

4.53%

11.41%

CFS Realindex RAFI Australian Share-Class A

0.46%

5,000

11.46%

5.63%

11.49%

Lazard Australian Equity I

0.67%

20,000

10.39%

5.60%

13.37%

Allan Gray Australia Equity A

0.75%

10,000

16.39%

9.12%

15.60%

Macquarie Australian Equities

0.77%

20,000

12.87%

11.70%

14.96%

Group’s Advance Australian Smaller Companies Multi Blend has consistently performed below its benchmark. The fund returned 0.1 per cent over one year to 31 July 2017, 4.86 per cent over three years, 5.83 per cent over five years, and -1.11 over 10 years.

BT declined to speak to Money Management about their fee and investment strategy but provided a written statement that said its fund

was closed to new investors and that “across the industry there are a range of fee structures that were developed to reflect the different arrangements and areas of demand that were relevant at the time of investment”.

“Often these older retail funds are relatively small compared to the currently available options, but are maintained by their providers to ensure investors can continue to hold

their investment if they choose,” the statement said.

FE Analytics found the Australian equity funds with the lowest fees and the highest performance were Franklin Templeton Australian Equity W, CFS Realindex RAFI Australian ShareClass A, Lazard Australian Equity I, Allan Gray Australia Equity A, and Macquarie Australian Equities.

Continued on page 20

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2017_MM14.09_012-27.indd 19

7/09/2017 4:02 PM

20 | Money Management September 14, 2017

Fee comparator Continued from page 19

THE HIGHER COST OF FINITE CAPACITY -1.83 per cent to 31 July 2017, 2.73 per cent for three years, and 3.78 per cent for five years.

“We’re trying to get the beta exposure to that asset class. There’s not going to be much in alpha generation in terms of security selection and we think over the full cycle the process does lend itself to small outperformance,” he said.

The almost five-year-old Realm High Income Fund returned similar to the benchmark with a three year to 31 July 2017 return of 3.86 per cent, and a one year return of 4.83 per cent.

Realm’s founder and investment manager, Andrew Papageorgiou, said in terms of total FUM structure, the unit class accounted for two to three per cent of the firm’s FUM. “Whether it be a retail or wholesale fee class, the simple fact of the matter is we are running a fund that is finite in capacity,” he said.

“We’ve communicated to the market that the maximum amount that we are looking to raise in this strategy is $700 million. The reality is within fixed income the majority of funds are running strategies more than excess of $1 billion.”

BY JASSMYN GOH

TWO RETAIL AUSTRALIAN fi xed income funds, which feature a lower minimum initial investment, had the highest annual fee charge within the sector at 1.5 per cent for the Australian Ethical Fixed Interest Fund and 1.2 per cent for the Realm High Income fund, according to FE Analytics.

Both funds said the fee charge reasoning was because those were funds that did not receive as much attention as other funds.

Australian Ethical chief investment officer, David Macri, said most of the firm’s funds under management (FUM) and flows went into their wholesale funds, and their fee charge was the cost of servicing their clients and establishing their investment universe that had to be satisfied by their ethical charter.

Macri noted that while they focused more on their wholesale funds that had a lower fee, they did not want to shut out investors who had less than $25,000 to invest.

According to FE Analytics, the fund had an annualised return of

CHART 1: AUSTRALIAN FIXED INCOME FUNDS WITH THE HIGHEST FEES PERFORMANCE THREE YEARS TO 31 JULY 2017 12 9 6 3 0 -3

2015

2016

2017

DDH - Preferred Income TR in AU

Realm - High Income TR in AU

AMI Fixed Int - Diversified Credit TR in AU

AMI Fixed Int - Australian Bond TR in AU

AMP - Capital Corporate Bond H TR in AU

SGH - Professional Property TR in AU

*PE Capital Y was not included in this chart as the fund does not have one year return results yet.

TABLE 1: AUSTRALIAN FIXED INCOME FUNDS WITH THE HIGHEST FEES Fund

Annual fee charge

Initial investment

Australian Ethical Fixed Interest Trust

1.50%

$1,000

Realm High Income

1.20%

$25,000

PE Capital Y

1.03%

$20,000

DDH Preferred Income

0.82%

$2,000

AMP Capital Corporate Bond H

0.77%

$500,000

He noted that the vast majority of money in their fixed income fund was invested within the adviser class of the fund with a fee of 0.77 per cent.

“We want them to go to advisers because often credit instruments and credit funds can be misused by investors. It can be incorrectly used for proxies as cash and we value the contribution that the advisers make to the whole part of the process.

“To be blunt the amount we have within retail is miniscule, and it’s not a unit class that we spend any great amount of time in leveraging up in terms of getting more people through that door. Equally our focus is not on retail direct investors.”

For the almost one-year-old PE Capital Y fund, scale and covering costs were the main reasons for its 1.03 per cent fee, according to PE Capital’s chief operating officer for funds management, Anthony Mann.

“It’s just covering costs and we are predicting a 5.5 per cent return,” Mann said. “We outsource the fund management capability and the one per cent is covering our costs.”

Mann said he started the fund because there was demand for a

TABLE 2: AUSTRALIAN FIXED INCOME FUNDS WITH THE LOWEST FEES AND HIGHEST PERFORMANCE Fund

Annual fee charge

Initial Investment

1 year return

3 year return

5 year return

Firstmac High Livez Wholesale

0.45%

$10,000

5.81%

4.20%

5.99%

Nikko AM Australian Bond

0.45%

20,000

-0.05%

4.09%

4.37%

Macquarie Australian Fixed Interest

0.49%

20,000

-0.07%

4.23%

4.73%

The Trust Company Bond

0.72%

5,000

3.47%

3.80%

4.28%

Aberdeen Active Index Income

0.20%

20,000

-0.31%

4.08%

4.14%

2017_MM14.09_012-27.indd 20

liquid fund that returned better than term deposits. The fund currently has five investors and around $700,000 in FUM. Mann noted that until there was more scale the fee would not reduce.

The DDH Preferred Income fund was the best performing fund in terms of performing above the benchmark where it only failed to do so for its 10-year return to 31 July 2017 at 4.26 per cent. The fund’s annualised return was at 8.43 per cent, three years at 3.98 per cent, and five years at 6.23 per cent.

The fund’s investment manager, GCI Australia’s director, chief executive, and CIO Renny Ellis said its good profits were from new issues and benefited from the on-going margin contraction in sub debt.

Ellis said 0.55 per cent of the 0.82 per cent fee was to GCI, and the rest for admin, custody, and responsible entity fees to DDH Graham.

“While I agree the MER [management expense ratio] is high for a debt fund we do actively manage the fund and have achieved and reported after fee returns above the target rate of return,” Ellis said.

“I inherited the MER and when I took over the fund from Evans and Partners so I cannot change it.”

The AMP Capital Corporate Bond H fund performed below but similar to its benchmark, and had a cumulative return five years to 31 July 2017 of 25.1 per cent compared to 28.2 per cent.

AMP Capital declined to speak to Money Management on its 0.77 per cent fee but provided a statement that said the fund managed to “deliver a specific outcome to an investor rather than to beat a benchmark”.

7/09/2017 4:12 PM

September 14, 2017 Money Management | 21

Fee comparator

HIGH LISTED PROPERTY FEES JUSTIFY HIGH RETURNS

BY OKSANA PATRON

DESPITE A HARD few months for the Australian listed property sector, Money Management’s analysis, based on FE Analytics, found that the high fees charged by some of the funds were justified by their performance.

According to FE Analytics, the most expensive funds across the sector had delivered on their promise, based on their returns over a 12-month performance period ended 31 July 2017, where all but one sat in the top quartile of the sector.

The data found that the Crescent Diversified Property Fund, managed

by Crescent Funds Management, topped the ranking with its annual fee at 1.1 per cent and was followed

by The Trust Company Diversified Property and the SGH Professional Property Fund which charged 1.03 per cent and one per cent, respectively. Both Folkestone Maxim A-REIT Securities and SGH Property Income Funds charged an annual fee of 0.95 per cent.

Over the year to 31 July 2017, the Crescent Diversified Property Fund delivered returns of 3.57 per cent which placed it well above the sector’s average of -7.83 per cent.

Although the fund did not provide a specific comment with regards to its fee structure, according to its website, it is available to both retail and wholesale investors in Australia and aims to invest in property trust securities listed on the Australian Securities Exchange (ASX) as well as real properties and development opportunities.

The fund has applied the philosophy, according to which, both

listed and unlisted markets are inefficient and therefore has an opportunity to generate excess returns by capitalising on these inefficiencies.

The second most expensive fund in the sector, according to FE Analytics, was The Trust Company Diversified Property with an annual fee of 1.03 per cent. The fund managed to deliver a performance above the sector’s average of -4.03 per cent for the 12 months to 31 July 2017.

According to Perpetual, which was appointed as its fund manager in July 2014, the previous fund manager had invested under a totally different investment strategy and used another investment approach, therefore all the performance information before July 2014 was not directly comparable.

The SGH Professional Property Fund was the only fund in this group which did not enter the top performance quartile, and based on its performance covering the period of 12 months to 31 July 2017, the fund returned-9.59 per cent which placed it in the second quartile.

When asked about the fund’s fee strategy, Stephen Hiscock, SG Hiscock and Company’s managing director and chair stressed that the fund should be excluded from the list as it was “really a platform fund” and therefore SGH had no control over the fund’s fee.

Money Management’s analysis only excluded master trust platforms.

As the SGH Professional Property fund is available as a standalone fund they were still included in the report.

“The underlying fund is the SG

TABLE 1: LISTED PROPERTY FUNDS WITH THE HIGHEST FEES Fund

Annual fee charge

Initial investment

Crescent Wealth Diversified Property Fund

1.10%

$5,000

The Trust Company Diversified Property Fund

1.03%

$5,000

SGH Professional Property Fund

1.00%

$5,000

Folkestone Maxim A-REIT Securities Fund

0.95%

$5,000

SGH Property Income Fund

0.95%

$20,000

CHART 1: LISTED PROPERTY FUNDS WITH THE HIGHEST FEES PERFORMANCE ONE YEAR TO JULY 2017 10 5 0 -5 -10 -15

Aug 16

Jan 17

Crescent - Diversified Property TR in AU AMI Property - Australia Listed TR in AU

Hiscock Wholesale Property Fund which has a fee of 0.78 per cent which we understand is below the average of funds, and very competitive given the fund has such a high active share,” he said.

As far as SGH’s second highest fee charging fund – the SGH Property Income Fund – was concerned, Hiscock said that it charged a fee which was only 0.09 per cent above the average fund’s fee rate in the sector which he described as “a quite small difference”.

“I am a bit surprised it is one of the “highest fee” funds given its fee is below one per cent,” he said.

TABLE 2: LISTED PROPERTY FUNDS WITH THE LOWEST FEES AND HIGHEST PERFORMANCE Fund

Annual fee charge

Initial Investment

1 year return

3 year return

5 year return

Resolution Core Plus Property Securities Fund

0.70%

$5,000

-6.74%

11.83%

13.91%

Macquarie Master Property Securities Fund

0.72%

$20,000

-8.43%

10.73%

12.77%

Zurich Investments Australian Property Securities Fund

0.81%

$5,000

-7.57%

10.95%

14.13%

Cromwell Property Securities Fund

0.82%

$20,000

-5.94%

12.38%

16.10%

APN AREIT Fund

0.85%

$1,000

-9.32%

10.44%

13.18%

2017_MM14.09_012-27.indd 21

Folkestone Maxim - A-REIT Securities TR in AU

The Trust Company - Diversified Property TR in AU

SGH - Property Income TR in AU SGH - Professional Property TR in AU

“The fund has the highest active share in the sector, and with a different benchmark and portfolio to the vast majority of A-REIT [Australian real estate investment trust] funds (it is an inflation plus four per cent benchmark), we feel the fee structure is appropriate.”

According to FE Analytics, over the period of 12 months to 31 July 2017, the Maxim A-REIT Securities Fund delivered a return of -3.85 per cent which placed it in the top quartile.

Folkestone Maxim Asset Management’s managing director, Winston Sammut said: “Whilst a number of our peers claim to be “active” managers, most are considered to be index huggers.

Actively managed funds tend to charge higher fees than benchmark aware funds”.

“Folkestone Maxim is a “high conviction” active manager and our fees, which are all inclusive and are considered appropriate,” he said.

“We should also point out that the Folkestone Maxim A-REIT Securities Fund has one of the lowest risk profiles of the sector.”

Continued on page 22

7/09/2017 4:03 PM

22 | Money Management September 14, 2017

Fee comparator Continued from page 21

STRETCHING TO PERFORM

BY OKSANA PATRON

WITHIN THE INTERNATIONAL equities sector, the market only saw one fund out of the five most expensive funds that sat in the top performance quartile, for the 12 months to 31 July 2017, according to the FE Analytics.

The highest charging funds were the Australian Ethical International Shares Fund and the Advance Asian Equity Fund, both with an annual fee of 2.2 per cent. They were followed by the Advance International Shares Multi Blend Fund at 2.1 per cent, the Advance International Sharemarket Fund at 2.05 per cent and the Hunter Hall High Conviction Equities Trust at 1.8 per cent.

BT Financial Group owned Advance Asia Equity Fund was the only fund that was placed in the top performance quartile at 24.44 per cent, for the year to 31 July 2017, against of the sector’s average of 11.54 per cent.

However, its Advance International Shares Multi Blend Fund and Advance International Sharemarket Fund returned 11.08 per cent and 8.91 per cent, respectively.

BT Financial Group declined to speak to Money Management but provided a statement that said the funds were closed to new investors, and the range of fee structures were developed to reflect the different arrangements and areas of demand that were relevant at the time of investment.

“Often these older retail funds are relatively small compared to the currently available options, but are

maintained by their providers to ensure investors can continue to hold their investment if they choose,” the statement said.

“It’s important for investors to seek professional advice to determine if it remains appropriate to maintain their investment holdings based on their needs and circumstances, including their current tax position.”

Australian Ethical’s chief investment officer, David Macri stressed that in his view the universe of funds surveyed by FE Analytics was predominantly made up of wholesale funds.

He explained that Australian Ethical offered both a retail and a wholesale version of the Australian Ethical International Shares Fund and the retail fee was 2.2 per cent per annum while the wholesale fee was 0.85 per cent, and that the wholesale fund could be accessed via platforms or directly for the customers who had $25,000 or more to invest.

“We are very confident that our wholesale fee is priced extremely competitively,” he said.

“For the year ended 30 June 2017, the performance of our wholesale fund after fees was 14.8 per cent, this was 0.1 per cent above the benchmark which is the widely used MSCI World ex Aus Index on an after fees basis.

“The performance of our retail fund after fees was 13.9 per cent and this compares to the median of 15.1 per cent,” Marci said.

Speaking about the fund’s investment strategy, he said that there was an extra cost for establishing the investment universe

TABLE 1: INTERNATIONAL EQUITY FUNDS WITH THE HIGHEST FEES Fund

Annual fee charge

Initial investment

Australian Ethical International Shares Fund

2.20%

$1,000

Advance Asian Equity Fund

2.20%

$1,500

Advance International Shares MultiBlend Fund

2.10%

$1,500

Advance International Sharemarket Fund

2.05%

$0.00

Hunter Hall High Conviction Equities Trust

1.80%

$5,000

CHART 1: INTERNATIONAL EQUITY FUNDS WITH THE HIGHEST FEES PERFORMANCE ONE YEAR TO 31 JULY 2017 25 20 15 10 5 0 -5 -10 -15 -20

Aug 16

Jan 17

Advance - Asian Equity TR in AU

Australian Ethical - International Shares TR in AU Advance - International Sharemarket TR in AU

that was under an ethical charter as there was a lot of work with screening the investment universe.

“We still have to run a profit to be a sustainable business,” he said.

“With our international fund, we try to give our investors a return in light of the benchmark, the MSCI World ex-Australia, whether we’re beating the index it doesn’t mean anything for us but what we’re trying to do is get the benchmark performance but under our ethical criteria.”

To achieve that, the fund said a lot of time was being spent ensuring

TABLE 2: INTERNATIONAL EQUITY FUNDS WITH THE LOWEST FEES AND HIGHEST PERFORMANCE Fund

Annual fee charge

Initial Investment

1 year return

3 year return

5 year return

Invesco Wholesale Global Opportunities Hedged A

0.75%

$20,000

27.05%

11.61%

16.15%

MLC MK Unit Trust Global Share Growth Style

0.77%

$0

13.02%

13.03%

16.92%

IOOF MultiMix International Shares

0.90%

$25,000

11.65%

13.13%

18.14%

Optimix Wholesale Global Share Trust B

0.91%

$0

12.40%

13.34%

17.69%

AXA Wholesale Global Equity Growth

0.95%

$0

15.37%

12.86%

16.32%

2017_MM14.09_012-27.indd 22

Hunter Hall - High Conviction Equities Trust TR in AU

Advance - International Shares Multi Blend ARS NEF TR in AU AMI Equity - Global TR in AU

that the screening process reflected the ethics and integrity.

Following this, he said: “Obviously we don’t have an investment team sitting in New York or London or Hong Kong trying to pick outperforming stocks so what we do is we try and generate a portfolio that is going to perform like the benchmark so ‘index like’ ”.

According to FE Analytics data, the Hunter Hall High Conviction Trust’s performance for the 12 months to 31 July 2017 stood at -20.03 per cent.

Although the fund did not provide any specific comments on fees and charges, it announced in August that since the merger between Hunter Hall and Pengana Capital all the strategies would be run by Pengana’s international capital team and Hunter Hall’s strategy would no longer apply.

Following this, a few Hunter Hall funds reduced their fees. However, at this stage, the company did not make comments on its plan for the High Conviction Equities Trust.

Continued on page 24

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24 | Money Management September 14, 2017

Fee comparator Continued from page 22

HARD YARDS JUSTIFY HIGH FEES

TABLE 1: INTERNATIONAL FIXED INCOME FUNDS WITH THE HIGHEST FEES Fund

Annual fee charge

Initial investment

Advance International Fixed Interest Multi-Blend Fund

1.85%

$1,500

AMP Capital Future Directions International Bonds Fund

1.03%

$500,000

Premium Asia Income Fund

0.98%

$0.00

AB Global High Income Fund

0.95%

$25,000

Unconstrained Bond Fund Wholesale

0.95%

$20,000

BY HOPE WILLIAM-SMITH

WITHIN THE INTERNATIONAL fixed income space, three of the five funds with the highest fees performed below their respective benchmarks in the 12 months to 31 July 2017, according to FE Analytics.

Advance Asset Management’s Advance International Fixed Interest Multi Blend fund, which charged the highest fee in the sector, at 1.85 per cent, did not comment specifically on the fees and charges for the fund.

The fund sat in the fourth performance quartile with negative returns of -0.21 per cent in the 12 months to 31 July 2017, behind a low sector average of 1.76 per cent.

In a general statement from BT Financial Group on the fee structure of the Advance fund, the company said a range of fee structures were developed to reflect the different arrangements and areas of demand which were deemed relevant at the time of investment, and that the fund was close to new investors.

For AMP Capital’s AMP Capital Future Directions International Bond A, which recorded the secondhighest fees with an annual charge of 1.03 per cent, results for the past 12 months also placed it in the fourth quartile below the benchmark.

In a statement to Money Management, AMP Capital said the fund played a defensive role within a diversified portfolio and that fees differed according to the choices investors made around fund accessibility. “[The fund] gives investors access to government bonds, corporate bonds, and securities assets, all of which require specialised management. This can sometimes result in higher fees,” the statement said.

Premium China Funds executive director, head of distribution and operations and chief investment specialist, Jonathan Wu, spoke directly to Money Management on the fees charged for the Premium Asia Income fund, which had the thirdhighest fees at 0.98 per cent.

In terms of performance, the fund ranked highly overall with

2017_MM14.09_012-27.indd 24

strong returns of 11.33 per cent between 31 July 2016 and 31 July 2017, far ahead of the 5.21 per cent benchmark.

Commenting on the fee charge, Wu said he was confident that although high, they were reflective of the fund’s returns.

“We go out into the market and do all the fundamental research ourselves which takes a heck of a lot more work than us taking a ratings agency research off the shelf,” he said.

“Usually those bonds that either don’t have such good ratings from ratings agencies or are not even rated by ratings agencies allows them to find better value for clients, hence a lot more work.

“We specialise in credit, credit being non-sovereign debt [and] those are probably the two biggest rationales as to why our fees comparably are higher.”

Wu said the fund worked on a binary outcome where “you either get your money back or you don’t”, and said institutions were limited by their risk management protocols.

“Institutions will screen us out because we have high fees,” Wu said.

“Institutions are so deadest against fees they basically don’t care

CHART 1: PREMIUM ASIA INCOME FUND CUMULATIVE RETURNS THREE YEARS TO 31 JULY 2017 35 30 25 20 15 10 5 0 -5 2015

2016

Premium - Asia Income TR in AU

2017 AMI Fixed Int - Diversified Credit TR in AU

about returns, that’s what I’m seeing in the market.”

AllianceBernstein director – Australian client group, Ben Moore said the 0.95 per cent fee set for the AllianceBernstein Global High Income fund was mostly a result of lack of attention due to lower popularity.

At the time of the launch of what is AllianceBernstein’s oldest fund, Moore said fees were determined by the unconstrained, high income space and comparisons to Franklin Templeton funds amongst others.

“When you’re in a high yield and riskier credit spectrum, it is hard work, you need to hire more analysts who can do more work around credit and know the funds,” he said of the fee determining factors.

“More people became more interested in some of our other funds and so that meant was we didn’t spend as much time on global high income from when it was launched.”

Moore said he saw continued strong income from the fund, which sat ahead of the sector average of 5.21 per cent, with strong returns of 10.84 per cent.

The PIMCO Unconstrained Bond Wholesale rounded out the five most expensive funds within the asset class, also with an annual charge of 0.95 per cent.

PIMCO did not comment on the fee structure of the fund directly, but provided a comment to Money Management which said the strategy behind it harnessed a “unique investment process”.

TABLE 2: INTERNATIONAL FIXED INCOME FUNDS WITH THE LOWEST FEES AND HIGHEST PERFORMANCE Fund

Annual fee charge

Initial Investment

1 year return

3 year return

5 year return

PIMCO Global Bond Wholesale

0.49%

$20,000

2.72%

5.83%

16.15%

Russell Global Bond NZD

0.60%

$0.00

1.42%

5.24%

5.53%

Russell International Bond A$ Hedged A

0.73%

$10,000

1.53%

5.22%

16.32%

Spectrum Strategic Income

0.75%

$5,000

4.95%

4.63%

7.22%

7/09/2017 4:28 PM

September 14, 2017 Money Management | 25

Strap Women in Financial Services

WINNING WOMAN OF THE YEAR, WHAT IT REALLY MEANS Money Management's 2016 Woman of the Year, Deborah Kent, looks at why it is important for women to believe in themselves and how winning the award changed her outlook on life.

IT IS DIFFICULT to believe that it’s nearly a year since I sat in the audience of the Money Management’s Women in Financial Services Awards. How rewarding it was to watch many wonderful women being recognised for their achievements.

The memories are still very fresh in my mind.

However, there are some memories that were concerning to me. It was troubling to hear a number of the female recipients accepting their award stating: “I did not prepare a speech as I did not believe I would win this award”.

We all suffer sometimes from self-doubt, even the most powerful female leaders do.

As the finalists for the Money Management’s ‘Woman of the Year’ award were announced, my own misgivings kicked in.

These were all amazing women who had achieved so much in our Industry and for themselves. As a wave of doubt hit me, I remember thinking most of these amazing

2017_MM14.09_012-27.indd 25

women were doing so much more than me, this is going to be hard.

Well as history shows, much to my surprise, I did win. It was such an exciting and exhilarating experience, one that I will not forget.

It was as I reflected on this experience, I put the question to myself, what does it mean to win Woman of the Year?

To me, it is about being recognised for the work that I have done over the years and the many sacrifices that I have made to help this industry to excel; with the incredible support of my family.

It’s knowing that the belief and guidance my mentors gave to me, and the valuable lessons instilled in me through my late father have helped me to become the woman that I am today.

Mostly an award such as this, comes with huge responsibility.

To be a role model and a champion of women, to empower, motivate, encourage, support and mentor them to be the best that they can be; it is a role I take seriously. The Woman of the Year award

somehow made me realise that this is my purpose in life.

Why did so many women on that night feel that they would not win or in fact that they did not deserve to win?

So many women continue to doubt their abilities, constantly saying sorry, hanging back, and not speaking up for fear that it might somehow place them in an awkward position. Too often I hear about female colleagues not taking that job or promotion for fear that they do not have all the skills to meet the role; feeling guilt about putting career ahead of family. Till finally it manifests into situations such as winning an award that “surely I can’t win”.

I have worked hard to overcome these types of issues through personal experiences. Each experience challenged my thinking, taking me out of my comfort zone and making me stronger as I faced difficult situations; allowing me to back myself and stand tall.

Launching my ‘Dare to Dream’ video series became a priority to

me so that I could share my experiences and help to guide women in understanding that they too can achieve their dreams.

I want each woman to know that it is within them to be the best that they can be, by being resilient, educating themselves, getting out of their comfort zone, believing in themselves, taking risks and being prepared to fail.

As Oprah would say, “step into yourself”, understand what your purpose is and believe in yourself.

Could you be the next Money Management Woman of the Year?

Yes, you could be!

Deborah Kent is founder and director of Integra Financial Services.

MONEY MANAGEMENT’S 2017 WOMEN IN FINANCIAL SERVICES AWARDS WILL BE HELD ON 26 OCTOBER.

TICKETS ARE ON SALE NOW.

6/09/2017 9:27 AM

26 | Money Management September 14, 2017

Management

FUTURE PROOF YOUR BUSINESS WITH THE DECISIONS YOU MAKE TODAY Sherise Mercer explores what wealth firms need to consider to evolve their focus on the client experience, their operating model, and staff development to retain and grow their business.

AS THE WEALTH management industry in Australia continues to evolve through an extended period of regulatory change and market disruption, the key question facing many advice principals is how the key decisions they make today are going to impact the success of their firms in the future.

In an environment where the total client experience firms deliver is more important than ever, the opportunity exists to embrace even greater client centricity.

Macquarie recently led a group of wealth management professionals to the US to understand how businesses there are changing the way they drive results for clients to enable more superior outcomes and satisfaction.

The tour saw our delegation meet with more than 15 businesses, from leading investment management firms to technology leaders, and draw out a number of key lessons which are highly relevant for our industry here in Australia.

WE’RE IN THE EXPERIENCE BUSINESS Clients no longer compare companies on simply a like for

2017_MM14.09_012-27.indd 26

like basis. Rather, they are comparing all the companies they interact with based on the overall experience they receive.

Businesses need to be thinking about how they can make it easier and more enjoyable for clients to interact with them.

In the US, fi rms are focusing on delivering a seamless experience to clients through both staff relationships and their ability to customise the client experience.

Wealth professionals in Australia face this same challenge. Firms need to be considering how they can evolve their focus on the client experience, their operating model and staff development to retain and grow their business for the years ahead.

A simple place to start is to consider all the various ways clients engage with your business and map out the journeys your clients currently take with your team – how does this experience feel from the client’s perspective?

What are the positive elements and what are the pain points? Is the way your team currently spend their day the best use of their time and expertise?

For example, rather than having various specialists and contacts

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September 14, 2017 Money Management | 27

Strap Management

“The role of a leader is... no longer just about managing people, rather it’s about coaching and inspiring people, equipping them with the tools they need and empowering them to make and own their decisions.”

SHERISE MERCER

who engage with clients at different points in time, some firms are introducing one key contact who is responsible for the relationship with the client.

This relationship manager then interacts with all relevant internal and external stakeholders to ensure the firm delivers a superior experience and the client is clear on the status of their affairs at all times.

TECHNOLOGY AS AN ENABLER, NOT A CHALLENGE Technology should strengthen the experience delivered to clients, helping them to make informed, conscious decisions about their fi nancial affairs.

As we toured high performing businesses in the US, it was striking how each of them had a clear focus on using technology to systematise various parts of the client experience, in order to free up staff to focus on higher value, more customised experiences.

By reviewing the parts of the business that can be systematised, advisers have the opportunity to focus on building and sustaining relationships, while spending more time concentrating on individual client situations.

For example, we’re already seeing this as Australian firms consider how they execute investment approaches for clients.

The growth and integration of comprehensive managed account solutions on platforms is a key enabler of this as advisers can

2017_MM14.09_012-27.indd 27

customise, while using technology to systemise, what they do for clients.

Advisers now have the option to access off the shelf separately managed accounts (SMAs) that align with their existing investment approach, partner with a research house to develop a custom SMA or where appropriate, build their own SMA to deliver via their platform.

Regardless of the approach advisers take, the benefits offered by managed accounts include a consistent client experience, greater efficiency and a reduction in paperwork.

SUPPORTING YOUR TEAM TO ADD TRUE VALUE When the client experience matters more than ever, fi rms and principals need to be consciously building their teams to make adding value to enduring client relationships a real point of difference.

The role of a leader is evolving in line with this – it’s no longer just about managing people, rather it’s about coaching and inspiring people, equipping them with the tools they need and empowering them to make and own their decisions.

This includes providing regular and ongoing feedback, and recognising that once you connect team members with the resources they need, letting them test and then learn from any mistakes made is an important part of the process.

Education and an ongoing communication from leadership is

key to enabling and empowering staff to deliver a sustainable and superior client experience. On our tour, we met with many US fi rms who are realising the value of getting this right from the very start and actively changing their recruitment approach as a result, showing that diversity of thought, perspectives and experience are critical to building a stronger overall experience.

Central to all of this is having a well understood brand promise – on what you deliver to clients and how you ensure staff can consistently communicate your firm’s story to the market. Ensuring this commitment around what you stand for is well understood is critical not just for existing staff, but for the new recruits who will be central to building your culture in the years to come.

OPPORTUNITIES FOR THE FUTURE We’re discussing each of these opportunities with the fi rms we work with, to ensure the decisions they make today will position them for ongoing success in the future.

Ultimately, in a world where clients no longer differentiate their experiences along industry lines, the need for businesses to embrace client centricity is more important than ever.

Firms who recognise this opportunity will evolve their client experience model, and rather than being challenged by technology, will use it as an opportunity to add to the value of their services and business.

Sherise Mercer is head of Macquarie’s virtual adviser network.

6/09/2017 9:28 AM

28 | Money Management September 14, 2017

Investment

COMPOUNDING: THE NOT-SO-SECRET SAUCE TO EXTRAORDINARY RETURNS Lawrence Lam looks at why compounding should not be overlooked for investors with a long investment horizon during a low growth environment.

SINCE 2013 WE’VE been told by fi nancial forecasters to expect a new world of low earnings growth. We’ve been told that the economic challenges in the US and Europe combined with deceleration in China has led to a new shift in economic paradigm – the ‘low growth environment’.

Investors should temper their return expectations and respond by focusing on high-income assets such as bonds, infrastructure investments, and

high-dividend paying stocks. In short, capital growth will be hard to achieve, so the advice has been to focus on seeking yield/income generation instead.

For investors with a long investment horizon, I offer an alternative view. I highlight why investing purely for yield overlooks one of the most powerful and not-so-secret concepts in fi nance – compounding. In this article, I’ll highlight why focusing on compounding can lead to superior long-term returns.

CHART 1: GROWTH OF A SAVINGS ACCOUNT

COMPOUNDING: THE EIGHTH WORLD WONDER Einstein once said “compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t, pays it.”

A few centuries earlier, Benjamin Franklin wrote: “Money is of a prolific generating nature.

Money can beget money and its offspring can beget more”.

The advice given by Mr. Einstein and Mr. Franklin holds true even in today’s uncertain economic environment. In essence, the value of a dollar invested does not grow in a straight line. It grows exponentially.

So, an investor can truly harness the power of compounding by remaining invested for as long as possible, allowing returns to hockey stick in investments that have the highest return. Chart 1 from JP Morgan Asset Management visually illustrates the power of compounding.

Firstly, the chart shows that by consistently reinvesting, the value of an investment grows exponentially. The more money you have working for you, the more offspring it will beget you.

The weakness of focusing solely

on yield is that one ignores the value of reinvestment and instead values withdrawing cash from the investment.

In the process of blindly searching for yield, one overlooks one of the greatest advantages an investor has. For an equities manager, instead of focusing on stocks that pay out a large portion of their earnings as dividends, the power of compounding can work in your favour if you select stocks with high rates of capital reinvestment.

For these stocks, cash is retained in the company rather than paid out in dividends.

Provided the cash is used sensibly in value-adding reinvestments, it continues to compound at a much higher rate within the company rather than being paid back to investors as cash. So why choose to receive cash now when keeping the money invested generates a higher return?

DIVIDENDS OR CAPITAL GROWTH? Unless you are a retiree or have a strong preference to receive cash, a sensible investor would choose to keep their investment compounding at high rates rather

Source: JP Morgan Asset Management

2017_MM14.09_028-36.indd 28

6/09/2017 9:28 AM

September 14, 2017 Money Management | 29

Investment

than be paid out. This holds true especially in today’s low interest rate environment.

Dividends paid out as cash earn low single digit returns, whereas keeping the money on the compounding train yields the return on equity being generated – most likely higher than current interest rates if the stock has been carefully selected.

Although the investor receives less cash now, the money is reinvested back into the company to develop new products, innovate, expand the business, and ultimately increase the intrinsic value of the stock.

So, if an investor has a longterm horizon and does not have a strong need for cash, they would choose to invest in great compounders where high rates of reinvestment lead to intrinsic value growth, as opposed to cash cow stocks that pay high yield and therefore unable to compound significantly. Total shareholder returns should be the focus, not just yield.

COMPOUNDING DURING UNCERTAINTY The focus on yield comes from the rhetoric that we are in a time of unprecedented uncertainty in global politics, markets, and economics. Established companies with long histories are subject to disruption and it has become increasingly difficult for companies to grow earnings. If we take a longer term perspective we can see that this simply isn’t true.

For long-term investors it would be dangerous to act on these short term economic forecasts.

Chart 2 shows McKinsey’s study of the average historical rate of return on invested capital (ROIC) from 1963 to 2004 of 7,000 publicly listed non-financial US companies.

ROIC is an indicator of how effective companies are at generating returns on their capital reinvestments. For investors in companies, it is a proxy for the rate of compounding they can expect if a company was to retain its earnings rather than pay them out

CHART 2: RETURN ON INVESTED CAPITAL FROM 1963 TO 2004

“The challenge for most investors is not to seek the shelter of yield in times of uncertainty, but it is to find those investments that will continue to compound over the long-term.” as dividends.

Since 1963, we have had numerous wars, oil shocks, the introduction of the internet and multiple economic cycles over this long-term period, the fact is that average ROIC has remained stable.

Companies retaining cash to reinvest in their business have generated a return of seven per cent to 10 per cent regardless of the macroeconomic environment.

History doesn’t repeat, but it does rhyme. And the weight of history tells us that companies will continue to compound at much the same rate. Especially in these times of technological change, it is important for companies to reinvest to adapt to new competitors to drive future growth. Now is the time to invest in companies focused on growth and reinvestment, not cash cows that return high yields.

HARNESSING THE POWER OF THE COMPOUNDERS The ‘low growth’ rhetoric isn’t a mindset we ascribe to. On the contrary, we remain optimistic about the long-term prospects of quality companies. We take a longterm investment strategy, we aren’t desperate for cash and would much prefer to maximise total returns rather than simply focusing on yield and miss the benefit of compounding.

The challenge for most investors is not to seek the shelter of yield in times of uncertainty, but it is to find those investments that will continue to compound over the long-term.

The historical ROIC from Chart 2 is an average of US companies. Knowing that history is in our favour is one thing, but fully capturing the benefits of compounding still depends on being able to select specific companies to invest in.

There are many ways to do this and I’ve highlighted only one way in this article via the ROIC. Another way to identify quality compounding investments is to align with quality management.

A company’s ability to compound depends on its management’s ability to recognise new markets and execute growth strategies for the long-term benefit of the company.

It also depends on the opportunity set available to each company and for this reason it is worthwhile for most investors to consider looking at the entire universe of companies on a global scale. The chances of finding great compounding opportunities is much improved by looking beyond local borders.

For those investors currently focusing solely on yield, you might be unnecessarily narrowing your investment options and missing out on some great compounding companies.

They may not be great yield investments, but you’ll have the exponential force of compounding working in your favour instead.

Lawrence Lam is the founder and portfolio manager of Lumen Investment Management.

Source: McKinsey & Company

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6/09/2017 9:28 AM

30 | Money Management September 14, 2017

Economy

RESERVE BANK OUTLOOK POINTS NORTH FOR INTEREST RATES The Australian dollar is being overvalued at current levels and the strong dollar hinders domestic growth and reduces inflationary pressure, Simson Sanaphay writes.

RESERVE BANK OF Australia (RBA) governor Philip Lowe would likely have a growing sense of confidence toward the Australian economy, as improving employment conditions, steady trade volumes, and continued

2017_MM14.09_028-36.indd 30

accommodative policy settings, nudge the economy’s growth trajectory higher.

This constructive macroeconomic backdrop creates fertile conditions for the next rate move to be upwards, and it’s pertinent to

note the US has already entered an upward trajectory, with Europe currently pondering when to follow.

But despite the positive signposts we don’t expect the current record low cash rate of 1.5 per cent to shift anytime soon, and likely not until late next year.

Our reasoning is that the economy continues to transition towards growth from infrastructure building and non-mining business investment in areas like education and tourism.

But while ongoing transition in the economy takes place, we continue to be challenged by highly indebted households, a slowing contribution from housing investment, and at times an overly strong currency – although the latter does create opportunities for investors looking offshore.

Even the RBA’s own assessment that core infl ation (that excludes energy and food) will struggle to get back to two per cent until 2019, implies the RBA won’t be rushing to lift the cash rate, even if it is more confident about the economic outlook.

Despite concerns for higher utility prices like electricity, inflation continues to be anchored by low wage growth and the creation of new

jobs in below average wage occupations.

Quarterly labour data released in June showed that 86 per cent of strong employment gains in the previous three months had come from four sectors – healthcare and social assistance, accommodation and food services, professional services and transport – or to put it another way, hospital workers, baristas, app developers, and Uber drivers.

The issue is that these sectors tend to offer lower wages, and so it also partially answers the question on why Australia is experiencing such low wage growth. The exception is professional services, but most of those jobs are concentrated in NSW. Additionally, the three highest paid sectors, mining, utilities, and finance are still shedding jobs.

July data did show strong employment growth of 27,900 jobs, and the unemployment rate fell slightly from 5.7 per cent to 5.6 per cent. However, the numbers came with a loss of 20,000 full-time positions and a 0.8 per cent decline in aggregate hours worked.

Full employment still looks some way-off. At his testimony recently Lowe said it could be another two years before the economy reaches full-employment.

With the unemployment rate seemingly welded to a rate around 5.5 per cent despite strong headline employment gains, his comments deserve attention.

As such, we don’t expect significant pick-up in wage growth in

6/09/2017 9:28 AM

September 14, 2017 Money Management | 31

Strap Economy

CHART 1: FAMILY FINANCES SENTIMENT AND HOUSEHOLD CONSUMPTION

Source: ABC, Haver, MI-Westpac, and Citi Research

the near-term. Our forecast for the Wage Cost Index, which is used in formulating industrial relations, wages policies, and economic analysis, is an increase of two per cent in 2017, and 2.2 per cent next year, which will maintain the trend established since June quarter 2014.

And that lack-lustre wage growth is reflected in consumer spending, which has risen only 2.3 per cent in the past 12 months, and has been below average so far this decade.

As the RBA has noted on many occasions, households are also highly indebted, and when combined with low income growth, it creates a trend of households lowering their saving ratio to support spending.

This cannot continue indefinitely.

Not surprisingly, views about family fi nances, which lead consumption, are subdued. It is hard to see how consumer spending growth can pick up

materially given these headwinds.

The other challenge for the Australian economy is that currency investors have latched onto the RBA’s confident view. Add in improved commodity prices and diminishing US dollar strength on the back of a legislative log jam and lower expectations for rate hikes, and the obstacles are diminishing for the Aussie dollar to revisit recent two-year highs.

Despite traders’ optimism, we view the Aussie dollar as being overvalued at current levels, and note that a strong dollar hinders domestic growth and reduces inflationary pressure. We forecast US$0.75 on a six to 12-month time horizon.

Until then it’s unlikely for the RBA to undertake a rate cut to drive down the dollar, as this may intensify borrowing into a housing market that is already a source of systemic concern, given the high

level of household housing debt.

Instead, we believe the RBA will be hoping that the US Fed sticks to its guidance and continues to gradually raise interest rates, despite a more dovish consensus market view. That could force a repricing of the US dollar and put downward pressure on the Aussie dollar. But this could be a protracted process, so the RBA will need to be patient.

Citi believes the next interest rate movement will be higher, but patience and time are the keys for the local economy to be in a position to better absorb less monetary accommodation.

But as that scenario plays out, the period of strength that remains for the Aussie dollar does provide an opening for investors to consider expanding offshore asset holdings.

The best time to buy offshore assets is when the local currency is strong, and the currency you are buying into is weak, as you get more for your outlay. Despite good economic signals the US economy has been hit by a number of uncertainties, meaning the greenback is not as strong as market consensus expected.

If you buy income producing assets, like dividend-paying US equities or bonds, and the local dollar falls, the translation from US to Aussie dollars puts more money in your pocket, and the same result is achieved if you sell offshore assets.

“Despite traders’ optimism, we view the Aussie dollar as being overvalued at current levels, and note that a strong dollar hinders domestic growth and reduces inflationary pressure.”

Simson Sanaphay is Citi’s wealth management investment strategist.

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2017_MM14.09_028-36.indd 31

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6/09/2017 9:29 AM

32 | Money Management September 14, 2017

Toolbox

2017 BUDGET MEASURES The Government’s 2017 Budget had plenty of measures financial planners need to understand to help navigate their client’s goals, Richard Press writes.

WHILST THE FEDERAL Government’s 2017 Budget tried its hand on housing affordability, looked to reign in the federal government’s spending on tertiary education, and looked to have the major banks and large multinationals fund a raft of spending promises through new and increased taxes, there was still plenty in it that will allow financial planners to help their clients navigate the new measures targeted in the budget.

HOUSING In housing affordability space, both first home buyers and old Australians thinking of downsizing, will potentially have the use of the

2017_MM14.09_028-36.indd 32

concessionally taxed superannuation environment to help boost their financial position, be that entering the housing market, or reducing their exposure to this same market.

To assist younger Australians, save for their first home the Government has introduced legislation enabling super not just to be used as a retirement savings vehicle but also one that will help them fund their entry into the property market.

The First Home Super Saver Scheme (FHSSS) will allow first home buyers to contribute up to $30,000 towards a first home deposit, then later withdraw these proceeds plus the notional earnings as outlined below. This will allow

them to benefit from the low tax environment of superannuation.

In addition to the contributions made under this scheme, notional earnings associated with those contributions will be able to be withdrawn. These associated notional earnings will be calculated as accruing at the rate of the shortfall interest charge which is currently 4.78 per cent per annum.

The Australian Taxation Office (ATO) will be responsible for administering the FHSSS. It will determine the amount a client can withdraw and will be responsible for ensuring the client uses the proceeds to buy their first home.

For older Australians (people aged 65 and over) looking to either downsize or leave the property

market altogether the budget introduces legislation allowing them to contribute up to $300,000 of the proceeds (or $600,000 for a couple) into their super funds.

This is to apply from July 2018, and will apply to the sale of their principal residence. This non-concessional (after-tax) contribution will be allowed regardless of work tests or age limitations. The proceeds will count towards their Centrelink and Department of Veterans’ Affairs income and assets tests.

In addition to these measures, a number of proposals were made in relation to foreign investors in Australian residential property.

These include: • A charge of at least $5,000

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September 14, 2017 Money Management | 33

Toolbox where a residential investment property is left unoccupied for six months or more a year.

This is to take effect on investment applications made from Budget night; • The removal of the capital gains tax (CGT) main residence exemption for foreign and temporary tax residents. This will take effect from Budget night but existing properties will be grandfathered until the end of the 2018/19 financial year; • Increasing the CGT withholding rate to 12.5 per cent and reducing the threshold to $750,000 from 1 July 2017; and • Foreign investment in new developments will be capped at 50 per cent.

It is hoped that these changes will assist in bringing additional housing into the market by restricting the amount of property “warehousing” by foreign investors, allowing first home owners better access to future new developments.

Stronger provisions have been proposed to ensure that transactions between a member of a super fund and a related party are kept to an arm’s-length basis. The provision, to apply from 1 July 2018, will ensure that “the non-arm’s length income provisions will be amended to ensure expenses that would normally apply in a commercial transaction are included when considering whether the transaction is on a commercial basis”.

The government said this measure is aimed at ensuring the 2016/17 superannuation reform package operates as intended.

EXTERNAL DISPUTE RESOLUTION The Government has proposed it will introduce a new dispute resolution framework that will empower consumers in the financial sector. There will be a new one stop shop – the Australian Financial Complaints Authority (AFCA) – for external dispute resolution and greater transparency of internal dispute resolution by financial firms.

AFCA will replace the Financial Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO), and the

2017_MM14.09_028-36.indd 33

Superannuation Complaints Tribunal (SCT). It will be established as a company limited by guarantee and will commence operations from 1 July 2018.

TAX LEVIES There were several changes made to taxation system in the 2017 Budget.

It was proposed that the Medicare levy increase to 2.5 per cent from 1 July 2019. This will also increase taxes based on the top marginal tax rate inclusive of the Medicare levy, such as the Fringe Benefits Tax. It has been proposed that this increase in the Medicare Levy be directed towards the support and guaranteed provision of the National Disability Insurance Scheme (NDIS). This means that one-fifth of the revenue raised by the Medicare levy will be directed to the NDIS Savings Fund to fill the current funding gap for the Commonwealth’s contribution to funding the NDIS. It would appear the government intends to remove the temporary budget repair levy of two per cent on the highest marginal tax rate (MTR) from the end on 30 June 2017. As there was no announcement in the budget indicating this measure would be extended it can be assumed that it will be discontinued.

The government has proposed that from 1 July 2018 income levels at which HELP debts must begin to be repaid will be lowered from $55,874 2017/18 to $42,000 in the 2018/19 financial year. The rate at which repayments must be made for higher income earners will also increase, with repayments increasing from four per cent of income, up 10 per cent of income, for those earning more than $119,881.

Currently, these thresholds are indexed in line with Average Weekly Earnings (AWE). It’s proposed they be indexed in line with the Consumer Price Index (CPI) from 1 July 2019.

SMALL BUSINESSES In the 2015/16 Budget, the ability for small businesses to immediately write off depreciating assets was temporarily increased from $1,000 to $20,000. This increase was due to

end on 30 June 2017, but has now been proposed to be extended until 30 June 2018.

Also, the laws that prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out will also continue to be on hold until 30 June 2018.

Small businesses are defined as those with an aggregated turnover of less than $10 million.

New integrity measures are proposed to be introduced from 1 July 2017, to further ensure the small business CGT concessions only benefit genuine small businesses and their associated assets.

The Government will amend the small business CGT concessions with effect from 1 July 2017 to ensure that the concessions can only be accessed in relation to assets used in a small business or ownership interests in a small business.

This proposed amendment is targeted at taxpayers who are able to access these concessions for assets which are unrelated to their small business, for instance through arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.

The small business CGT concessions will continue to be available to small business taxpayers with aggregated turnover of less than $2 million or business assets less than $6 million.

The budget also proposes a range integrity measures around investment property expenses.

From 1 July 2017, the Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential properties.

Plant and equipment items are usually mechanical fixtures, or those that can be “easily” removed from a property such as dishwashers and ceiling fans. These changes will apply on a prospective basis, with existing investments grandfathered.

More specifically: • Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already

entered into at 7:30pm (AEST) on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life; and • Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property. Acquisitions of existing plant and equipment items will be reflected in the cost base for CGT purposes for subsequent investors.

This is an integrity measure to address concerns that some plant and equipment items are being depreciated by successive investors in excess of their actual value.

DEDUCTIONS From 1 July 2017, the Government will disallow deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property.

This is an integrity measure to address concerns that many taxpayers have been claiming travel deductions without correctly apportioning costs, or have claimed travel costs that were for private travel purposes. This measure will not prevent investors from claiming a deduction for costs incurred in engaging third parties, such as real estate agents, for property management services.

Conversely, the CGT discount on certain affordable investment properties is proposed to be increased to 60 per cent from 1 July 2018. In order to benefit from this concession, certain conditions would need to be met. These include: • Rent must be charged at a discount to the market rate; • The housing must be managed through a community housing provider; and • The investment must be held for at least three years.

Continued on page 34

6/09/2017 9:30 AM

34 | Money Management September 14, 2017

Toolbox

CPD QUIZ Continued from page 33

SOCIAL SECURITY Whilst there were no major changes to the social security system, there were several amendments made that will effect clients in this area.

The pensioner concession card will be reinstated for those who lost their pension as a result of the assets test changes that came into effect from 1 January 2017.

Any clients in receipt of the Age Pension, Disability Support Pension, Single Parenting Payment and several DVA payments received a one-off payment to assist with the rising cost of electricity. The payment was $75 for single recipients and $125 for couples.

It has been proposed that the maximum Liquid Assets Waiting Period will increase from 13 weeks to 26 weeks, effective 20 September 2018.

There has been a proposed tightening of residency from 1 July 2018 for those intending to claim the Age Pension or Disability Support Pension.

The proposed requirements are as follows: • Have 15 years of continuous residence in Australia; • Have 10 years of continuous residence in Australia, with five years of this period being during their working life; • Have 10 years of continuous residence in Australia without having received an activity tested income support payment for a total of five years; or • Have become disabled in Australia (DSP only).

A new payment, the Jobseeker Payment will replace the Newstart Allowance and Sickness Allowance, from March 20, 2020. This new benefit will be set at the same level as the current Newstart Allowance.

A number of payments that are no longer available to new applicants are proposed be phased out. These include: • Widow Allowance; • Partner Allowance; • Widow B Pension; and • Wife Pension.

Those currently in receipt of these payments will be transferred to the Age Pension, or in a few cases the Carers Payment.

From 1 July 2018, the government proposes to apply a 30-cents-in-thedollar taper rate to Family Tax Benefit (FTB) Part A for recipients with family income over the Higher Income Free Area ($94,316 currently).

The government has also proposed not to proceed with an increase to the maximum rate of FTB Part A announced in the ‘2015/16 Mid-Year Economic and Fiscal Outlook’. It has also proposed to freeze the rates of FTB for two years from 1 July 2017.

BANKS In a move designed to raise further revenue the government has a proposed a new tax of 0.06 per cent will be applied to the liabilities of banks meeting certain size criteria, with the effect that, initially, it will apply from 1 July 2017 to the five largest banks (ANZ, Commonwealth Bank, NAB, Macquarie, and Westpac).

The tax is expected to raise $6.2 billion over the forward estimates or around $1.5 billion annually. The tax will apply to corporate bonds, commercial paper, certificates of deposit, and Tier 2 capital instruments. It will not apply to additional Tier 1 capital and customer deposits protected by the Financial Claims Scheme (FCS). Large deposits (not covered by the FCS) would be subject to the new tax.

Richard Press is technical services manager at Fiducian Financial Services.

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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. It is proposed that the First Home Super Saver Scheme (FHSSS)… a) Allows all Australians to save for their home using their superannuation b) Allows first home owners to access their full superannuation entitlements c) Incorporates a notional, rather than actual, return on contributions d) Will be administered by ASIC 2. Older Australians looking to sell their principal residence will be allowed proceeds into their super funds. Which statement is correct? a) Only those over age 65 will be able to take advantage of this opportunity b) This new opportunity starts from 1 July 2017 c) There is no limit to the contribution you can make d) This applies to the sale of any residential property 3. What are the proposed changes to small business CGT Concessions? a) A small business for the small business CGT Concessions purposes is considered one with aggregated turnover of less than $2 million or business assets less than $6 million b) Ensuring small business owners can arrange their affairs so that their ownership interests in larger businesses can count towards eligibility for the concessions c) Ensure that the concessions can only be accessed in relation to assets used in a small business d) Allow a CGT concession of 60 per cent for small business owners 4. a) b) c) d)

Which change tax levy change is correct?

Medicare levy to increase by 2.5 per cent from 1 July 2019 Medicare levy to increase to 2.5 per cent from 1 July 2019 The Temporary Budget Repair levy to remain until 1 July 2019 The Temporary Budget Repair levy to remain indefinitely

5. a) b) c) d)

From 20 March 2020, Jobseeker Payment will replace Newstart Allowance Newstart Allowance and Partner Allowance Partner Allowance and Sickness Allowance Newstart Allowance and Sickness Allowance

6. As a result of new integrity measures… a) You not be allowed to claim any travel expenses related to inspecting, maintaining or collecting rent for a residential rental property b) Owners will continue to able to depreciate the value of plant and equipment in residential property, this deduction will continue for any subsequent owner. c) Plant and equipment refers to the permanent fixtures of the property and includes assets such as lifts and building security systems d) These rules will affect purchases of plant and equipment from 1 July 2017 7. The Australian Financial Complaints Authority (AFCA) replaces: •Financial Ombudsman Service (FOS); •The Credit and Investments Ombudsman (CIO); and •The Superannuation Complaints Tribunal (SCT) True/False

To submit your answers visit http://education.moneymanagement.com.au/ course/2017-budget-measures

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

6/09/2017 12:07 PM

September 14, 2017 Money Management | 35

Send your appointments to hope.william-smith@moneymanagement.com.au

Appointments

Move of the WEEK David Smith Local Government Super Chief executive

Former Zurich Financial Services chief executive, David Smith has been appointed as the new chief executive of Local Government Super.

Smith was most recently the chief executive of AXIS Speciality Australia.

The Commonwealth Bank has appointed a former NSW public service head and Westpac executive, Robert Whitfield to its board.

The big banking group announced to the Australian Securities Exchange (ASX) that it had appointed Whitfield as a nonexecutive director, effective immediately, with the retirement of Launa Inman and Harrison Young.

The big banking group also announced that former AMP Limited chief executive, Andrew Mohl would seek re-election for one more year on the board.

Whitfield is currently director of NSW Treasury Corporation and, until recently, was secretary of the NSW Treasury and NSW Industrial Relations.

He is a former chief executive of the Westpac Institutional Bank.

Former Macquarie Group head of investment strategy and head of private markets, Simon Conroy is joining Ignition Wealth as the

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Confirming the appointment, LG Super chair, Katherine O’Regan said Smith had been chosen for his track record in financial services and his fit with the fund’s values and ability to deliver on its strategy.

“I am confident he shares our

passion for the best possible retirement outcomes for members, and that this will remain at the heart of all decisions,” she said.

“David’s C-suite experience brings additional capability to LGS and its members as we enter the next stage of growth.”

advice technology provider’s investment committee chair.

Ignition Wealth chief executive Mark Fordree announced the appointment of Conroy, who has held various senior investment and banking roles, and would join Ignition Wealth from a 10-year tenue with Macquarie Group.

“The appointment of Simon Conroy as chairman of the Ignition Wealth investment committee is part of our ongoing commitment to drive the business forward,” Fordree said.

Other Ignition Wealth board members include fintech expert Peter Oakes and The Fold Legal managing director, Claire Wivell-Plater.

Diversified financial services firm, Thorn Group has appointed Tim Luce as its new managing director and chief executive officer effective from 1 March 2018.

It said the acting Thorn Group chief executive, Peter Forsberg

would continue in his role until Luce started his employment and would then resume his role as chief financial officer.

Commenting on the appointment, Thorn Group chair, Joycelyn Morton said Luce was a career retailer with a deep understanding of consumer finance, operations, sales distribution and marketing.

“His experience in Australia is enhanced by his executive roles in Asia and his extensive digital credentials,” she said.

“He is well positioned to lead our team, and to enhance Thorn’s core business while developing emerging businesses and opportunities to grow.”

Global institutional trading network, Liquidnet has appointed a new head of Australia.

The company announced that it had appointed former Citigroup and TradingScreen executive, Murrough O’Brien to the role with a remit to drive the next phase

growth for the company.

O’Brien has over 12 years of experience in financial markets and had business and technical roles at JP Morgan, UBS, Nomura, and HVB-Unicredit in both New York and London.

Confirming the appointment, Liquidnet Asia Pacific head, Lee Porter said O’Brien’s extensive experience in electronic trading, combined with his leadership skills, would underpin the future expansion of the Australian business.

“Murrough’s high profile in the industry, extensive skill set on the vendor side and solid understanding of electronic trading and technology, makes him a potent force to lead our business in Australia,” Porter said.

O’Brien replaces the former head of Australia, Tristan Baldwin, who has relocated to Hong Kong, following his promotion as Liquidnet’s Regional head of sales for APAC.

7/09/2017 3:25 PM

ManagementSeptember April 2, 2015 36 | Money Management 14, 2017

OUTSIDER

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

And good luck with your career, too!

BEWARE the retiring fund manager.

You never know what they may choose to say.

That, at least, is what Outsider believes to be the case with Insight Investment founder, Marg Waller, who is rumoured to be working on a “mocumentary” covering her time in the funds management industry both in Australia and elsewhere.

Marg was awarded this year’s Lifetime Achievement Award by Money Management's sister publication Super Review and Outsider discovered over a discreet lunch that she had been working with Insight Investment’s Bruce Murphy on the concept of a “mocumentary” covering her career in the industry and the people she had met.

Outsider thought the concept was delightful until he realised that Marg, a country girl, has a habit of being somewhat blunt in her assessments (calling

a spade a bloody shovel) and risked ruffling the feathers of a few of the peacocks who are known to inhabit the world of institutional and retail asset management.

Listening to Waller, Outsider decided that his favourite comment from Waller was her description of working with one particular chap – “it was like bouncing a ball in mud”.

About another: “I am happy about the way his career worked out”.

It seems to Outsider that viewings of the Waller mocumentary will need to be by invitation only.

Six years, five PMs, four Federal Treasurers, one Medcraft AND so, as the sun finally sinks in the west, we bid farewell to the chair of the Australian Securities and Investments Commission, Greg Medcraft.

Well, not quite yet, but Outsider noted that one of the more colourful characters to chair the corporate regulator last month gave what amounted to a valedictory address to what must have been a rapt audience – the West Australian Chamber of Commerce and Industry – describing his “career at ASIC”.

Now, notwithstanding the fact that Outsider and most dictionaries define a “career” as “an occupation undertaken for a significant period of a person’s life and with opportunities for progress”, it has to be acknowledged that Medcraft did make an impression. He will undoubtedly be remembered by the members of the various Parliamentary Committees entertained by his various interjections and insights. Just as he will likely be remembered by those manning the executive lounges at various international air terminals.

He will also likely be remembered by the many in the financial services industry who find themselves paying the price of the industry funding of ASIC and also by those in the superannuation industry who are wondering why the Superannuation Complaints Tribunal needed to become part of a one stop shop.

Outsider hesitates to consider how the ASIC chair might be remembered by financial planners.

Of course, Medcraft had a much longer career at Societe Generale than he had at ASIC, including in New York as global head of securitisation in what turned out to be the lead-up to the sub-prime crisis but that must pale into insignificance with what he achieved in his six years at the helm of the regulator.

A small deposit brings a lot of luck OUTSIDER WAS MOMENTARILY concerned for the health of one of his young colleagues last week when she entered the office declaring that she had been in an “accident”.

He was much relieved to learn that the “accident” involved the mid-flight excretions of one of our feathered friends and thus was not so much an “accident” as an “unfortunate mishap” and something which Granny O once told Outsider brought with it luck. And be in no doubt, Granny O was a woman who knew her shite.

OUT OF CONTEXT

Still, Outsider was reminded of a little ditty from his childhood: A little bird came flying by And dropped a poop in Outsider's eye Don't cry Outsider, don't cry Just thank God that cows don't fly.

In these days of so much concern about the Hermit Kingdom “dropping the big one”, Outsider reckons his young colleague was, as Granny O rightly said, “lucky”.

“If I say nothing and you write in the article we did not comment, it’s like asking Donald Trump why did you not condemn the Nazis in the first place – you know his answer.”

“Today we’ll see in the Parliament whether the Labor Party are going to end this ‘Wreck-It Ralph’ approach to the Parliament and actually focus on the issues that matter to the Australian people.”

– Premium China Fund’s Jonathan Wu reacts to the notion that fund managers had declined to comment on their funds to Money Management’s journalists.

– Federal Treasurer, Scott Morrison seems to be channelling former Prime Minister Julia Gillard’s view of obstreperous oppositions.

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7/09/2017 4:48 PM