FS Private Wealth vol10 i02 by financial.standard

The Journal of Family Office Investment

Featurette

Volume 10 Issue 02

Why financial fraudsters can fool anyone

ART AND MONEY Tim Olsen, Olsen Gallery

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Contents

www.fsprivatewealth.com.au Volume 10 Issue 02 | 2021

COVER STORY

ART AND MONEY Tim Olsen, Olsen Gallery

16 SECTOR

REVIEW

Financial Standard chief economist Benjamin Ong writes that the Reserve Bank of Australia's inflation expectations remain muted, despite low unemployment and positive economic indicators.

Welcome note Christopher Page

IN THIS ISSUE FREE SEARCH IS GOOD FOR THE FREE MARKET

New research from RMIT has found that suppressing internet searches creates stock market instability, based on a study looking at Google's withdrawal from China.

HOW HNW PERSPECTIVE ON ADVICE IS CHANGING

New research from Investment Trends has revealed that high-net-worth (HNW) investors in Australia have changed their view of professional financial advice since the pandemic.

HOUSING MARKET REACHES $8 TRILLION HIGH

HIGHLIGHTS

Featurette Why financial fraudsters can fool anyone

For news updates like this follow us on social media

The residential real estate market in Australia is estimated to have surged above $8 trillion in the first half of 2021, new analysis from CoreLogic shows.

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www.fsprivatewealth.com.au Volume 10 Issue 02 | 2021

Published by a Rainmaker Information company. A: Level 7, 55 Clarence Street, Sydney, NSW, 2000, Australia T: +61 2 8234 7500 F: +61 2 8234 7599 W: www.financialstandard.com.au Associate Editor Elizabeth McArthur elizabeth.mcarthur@financialstandard.com.au Design & Production Jessica Beaver jessica.beaver@financialstandard.com.au Technical Services Roger Marshman roger.marshman@rainmaker.com.au Ian Newbert ian.newbert@rainmaker.com.au Fiona Brillantes fiona.brillantes@rainmaker.com.au Advertising

News

REGULATOR FRETS OVER SPAC BOOM STANDARD LIFE ABERDEEN REBRANDS

News

NZ OVERHAULS REGULATION OF ADVICE ALTERNATIVE TO WILLS

News

JARDEN AND NOMURA FORM ALLIANCE NEW INDIA FUND EYES HNWs

News

FINANCIAL SECTOR HAS DEEP POCKETS KIN GROUP IN TAKEOVER BID

Opinion

IF YOU MUST PANIC... PANIC EARLY Peter Esho, Wealthi Peter Esho explores one of the lessons that came out of COVID-19. While

Stephanie Antonis stephanie.antonis@financialstandard.com.au

panic is never preferable, he explains that those who panic early performed better during the pandemic than those who took a wait-and-see approach.

Director of Media and Publishing Michelle Baltazar michelle.baltazar@financialstandard.com.au Managing Director Christopher Page christopher.page@financialstandard.com.au

Cover story

ART AND MONEY Tim Olsen, Olsen Gallery One of Australia's most recognisable art identities, Tim Olsen - the son of artist John Olsen, opens up about business, investing and art.

FS Private Wealth: The Journal of Family Office Investment ISSN 2200-4971 All editorial is copyright and may not be reproduced without consent. Opinions expressed in FS Private Wealth are not necessarily those of Financial Standard or Rainmaker Information. Financial Standard is a Rainmaker Information company. ABN 57 604 552 874

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Contents

www.fsprivatewealth.com.au Volume 10 Issue 02 | 2021

WHITE PAPERS Family Office Management

FAMILY OFFICE BONUSES: GLOBAL INSIGHTS AND BENCHMARKS By Tayyab Mohamed and Paul Westall, Agreus Group Family office professionals have thrived during COVID-19 through their efforts to diversify investment portfolios, this paper considers their remuneration.

Investment

MEETING THE NEEDS OF NFPS

HOW GOOD IS YOUR MODERN SLAVERY STATEMENT? By James Halliday, Keypoint Law Australian entities with a minimum consolidated revenue of $100 million must now have a modern

By Grant Mundell, Equity Trustees When investing, not for profits must balance the associated risks against their concessional tax status and stakeholders’ interests.

Ethics & Governance

slavery statement and fulfil legislated reporting obligations in relation to supply chains, identifying risks and formulating a response plan to redress potential harms.

Taxation & Estate Planning

JOBKEEPER CASES By Letty Chen and Lee-Ann Hayes, TaxBanter This paper examines the consequences of a Federal Court decision on amounts payable to meet JobKeeper minimum requirements against overtime payments in arrears.

Taxation & Estate Planning

CGT ON A DECEASED’S ASSETS By Brett Davies, Legal Consolidated Barristers and Solicitors The implications of capital gains tax on a deceased's estate require strategies and remedies.

Investment

INVESTING IN A ZERO CARBON WORLD

By Pzena Investment Management This paper compares and evaluates global, integrated energy companies’ transition plans to a zero carbon world.

Technology

THE ABCS OF NFTS AND ART By Lisette Aguilar, Keystone Law Investing in digital art is by no means a fringe pursuit. This paper discusses the key features and perceived advantages of purchasing non-fungible tokens (NFTs) compared with traditional artworks, outlines the process to mint and trade NFTs, and evaluates NFTs’ ‘non-fungibility’ or ‘uniqueness’.

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Philanthropy

WHEN IS THE BEST TIME TO SHARE YOUR WEALTH? By Shamal Dass, JBWere Deciding how to share wealth for a philanthropic purpose requires a genuine understanding of what is needed to maximise the effectiveness of one’s intentions from the outset.

FS Private Wealth

Welcome note

www.fsprivatewealth.com.au Volume 10 Issue 02 | 2021

Christopher Page managing director Financial Standard

Art, crime, and farming elcome to the second edition of FS Private Wealth for 2021. Last quarter, we brought W you Radek Sali – a true businessman who built a vitamin empire, sold it and turned his hand to family office investing. This quarter, we have a businessman who was born into an empire. In this case, an art empire. But still, he had to forge his own path. Tim Olsen’s newly released memoir Son of the Brush chronicles how he found his way out from under the imposing shadow of his father, Australian artist John Olsen. To find his own way, Tim Olsen had to work out how his own love for art could live alongside his father’s larger-than-life art persona, he also had to face his own demons. The book is raw and honest in its portrayal of addiction and trauma. The book also offers an honest look at wealth and legacy. The Olsen family made headlines recently over an estate dispute. It was a painful reality for the family to face. And, in our interview Tim gives Elizabeth McArthur an honest account of how his journey in business and wealth paralleled his personal journey as he battled addiction and learned to live a

good life. His investing philosophy is simple but profound. And, he shares some art investments with unbelievable appreciating value. This journal also includes a featurette on financial fraud. After Bernie Madoff’s recent death in prison and Melissa Caddick making headlines in Australia, it is worth considering why investment scams are so prevalent and, unfortunately, profitable for criminals. In this featurette, forensic psychologists and experts in human behavior explain that even investment professionals and those who are highly educated in financial matters can be conned by people like Madoff. But there are things you can do to take your power back and we will dive into all the details. And finally, we bring you two special stories on farmland. The first is research on the investing opportunity and value in Australia, looking at this tightly held asset state by state. The second is about how Bill and Melinda Gates will divide their farmland empire as they divorce. Through Bill Gates’ investment vehicle, he is the number one owner of US farmland by area. Find out why his chief investment officer has been quietly buying up land. fs

There are things you can do to take your power back, and we will dive into all the details.

Christopher Page managing director, Financial Standard

FS Private Wealth

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News

www.fsprivatewealth.com.au Volume 10 Issue 02 | 2021

Free search is good for the free market

SLA rebrands Karren Vergara

Standard Life Aberdeen is changing its name to Abrdn in a bid to revamp the company with a modern edge. Standard Life Aberdeen plc will become Abrdn plc, the firm has announced. Abrdn, which is still pronounced “Aberdeen”, reflects a modern brand that will also be used for all the client-facing businesses globally, chief executive Stephen Bird said. “Our new brand Abrdn builds on our heritage and is modern, dynamic and, most importantly, engaging for all of our client and customer channels. “It is a highly-differentiated brand that will create unity across the business, replacing five different brand names that have each been operating independently. Our new name reflects the clarity of focus that the leadership team are bringing to the business as we seek to deliver sustainable growth,” he said. The vowel-free rebranding rollout will kick off in June 2021. The firm, which is listed on the London Stock Exchange, will also revise its stock ticker code, expected to take place prior to publishing its half-year results in August. Standard Life Aberdeen recently offloaded the Standard Life name to Phoenix Group. Standard Life Aberdeen, which has a 14% stake in Phoenix Group as part of the partnership, entered into a new binding agreement with the insurer which will see Phoenix acquire ownership of the Standard Life brand. The rebrand is part of several changes introduced by Bird since he took the top job in September 2020. The changes have trickled down to the local operations, with several redundancies and reshuffling of senior roles eventuating. fs

Elizabeth McArthur

N The quote

This suggests internet searching does not exacerbate investors’ biases - instead, it facilitates their ability to access and analyse information.

ew research from RMIT has found that suppressing internet searches creates stock market instability. The research reviewed the impact on stock markets of Google’s decision in 2010 to unexpectedly withdraw its search business from China. It found that risk of a stock market crash increases when firms can hide adverse information and when information intermediaries are less effective in assisting investor’s information processing. The study has been published in the Journal of Financial Economics. Lead researcher Gaoping Zheng, lecturer in finance at RMIT, said the study showed search results influence investor decisions, a challenge to previous thinking that they merely justified people’s existing ideas. “Until now it’s been widely thought that unrestrictive internet searches result in bias and an overvaluation of stocks but that would mean restricting

search would decrease stock market crash risk. Instead, we saw a significant jump,” Zheng said. “This suggests internet searching does not exacerbate investors’ biases instead, it facilitates their ability to access and analyse information.” She added that following Google’s recent attempt to withdraw from Australia after new regulation threatened to force it to pay news publishers, the research may have implications for Australia. “While China has alternative search engines, their results are concentrated and an identical search on Google would show vastly different results,” Zheng said. “Our research emphasises the importance of access to diverse results and if Google did decide to withdraw, it could have a destabilising impact on the economy.” Zheng said restricted searches gave firms opportunities to hide adverse news from the public. fs

Regulator frets over SPAC boom The US financial markets regulator has confirmed it has concerns around the rapid growth of Special Purpose Acquisition Companies (SPACs). US Securities and Exchange Commission acting director for the division of corporate finance John Coates said there are concerns around fees, conflicts, sponsor compensation, celebrity sponsorship and retail investors being drawn to SPACs by “baseless” hype. He said due to the sheer amount of capital pouring into SPACs, the SEC is looking carefully at filings and disclosures by SPACs and the private companies they seek to buy up. SPACs are essentially shell companies with no operations, which offer securities for cash through a conventional underwriting to fund a future acquisition of a private company. The SEC is concerned that SPACs circumvent some investor protections because they are not subject to all the same securities law liabilities as a vanilla initial public offering.

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“First, and most directly, all involved in promoting, advising, processing, and investing in SPACs should understand the limits on any alleged liability difference between SPACs and conventional IPOs. Simply put, any such asserted difference seems uncertain at best,” Coates said. “SPAC sponsors and targets and their affiliates and advisers should already be providing the public with the information material to the investment opportunities a de-SPAC represents, regardless of how the liability analyses ultimately play out. “Liability risk is an important feature of the conventional IPO process. If that risk drives choices about what information to present and how, it should not in my view be different in the de-SPAC process without clear and compelling reasons for and limits and conditions on any such difference.” He added that law makers could not have predicted the SPAC boom, so it is important that safe harbour laws are revisited to make sure investors are protected. fs

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How the HNW view of advice is changing

Alternative to Wills Investment bonds are the second-most effective investment solution after superannuation, and a good alternative to Wills, according to Generation Life senior distribution manager Laura Salsbury. Speaking at Financial Standard’s first Technical Services Forum for the year, Salsbury said investment bonds can be good alternatives to Wills, which may be challenged in court and trusts, and can be expensive to establish and run. “Investment bonds are becoming very mainstream in the adviser community,” she said. “They’re very simple to set up and easy to maintain. Certainly no headaches, no tax returns [and] anyone can be a beneficiary.” Investment bonds don’t incur capital gains tax. Instead, they are taxed at maximum 30%. Transferring ownership of an investment bond, for example to children, is also a non-CGT event. Investors can also withdraw their funds at any time. Further, they are treated as non-estate assets (under the Insurance Contracts Act 1984) and can be cordoned off from future claims made by creditors (under the Bankruptcy Act 1996). Salsbury said Wills are commonly contested under family provisions legislation, and it can take up to 12 months or more for a case to be heard. Of the Wills that are contested, 86% of claims are brought by the immediate family and 74% of total contested Wills are successful, she said citing CoreData. With investment bonds, when the investor dies, the beneficiaries can receive the payout in as little as two weeks. She said Generation Life receives about 41% share of inflows into investment bonds. fs

FS Private Wealth

Elizabeth McArthur

The quote

The last 12 months saw a large shift in the perceptions of advice among HNW investors.

ew research from Investment Trends has revealed that highnet-worth (HNW) investors in Australia have changed their view of professional financial advice since the pandemic. Investment Trends found that there are 485,000 HNW investors in Australia as of September 2020, defined as those with over $1 million in investable assets outside their home, business and non-SMSF super. Among this group, there has been a sharp increase in the number of HNWs that are open to receiving professional financial advice. More than half of HNWs, 56%, are now open to receiving advice while 12 months ago only 40% were. “The size of the Australian HNW population remains resilient despite tough market conditions at home and abroad. While the uncertain investing climate had minimal impact on market size, it has profoundly impacted the attitudes and preferences of HNW investors towards investing and advice,”

Investment Trends associate research director King Loong Choi said. “The last 12 months saw a large shift in the perceptions of advice among HNW investors, with a sharp increase in ‘validators’ who are open to receiving financial advice (56%, up from 40% in 2019) and a corresponding fall in ‘self-directed’ HNWs who prefer making decisions on their own (34%, down from 49%).” However, the research found that this shift in attitude has not led to greater uptake of advice. Over the last 12 months, the use of financial advisers (19%) full-service stockbrokers (15%), wealth managers (7%) and private banks (5%) among HNWs has largely remained static. “The disjoint between the positive views towards advice providers and the current muted uptake of advice highlights how advice providers need to rethink their value proposition and delivery model,” Choi said. “The uncertainties caused by the pandemic have prompted many HNWs to reconsider how they view advice. fs

NZ overhauls regulation of advice Jamie Williamson

The way in which financial advice is regulated in New Zealand has changed, with a host of new requirements introduced and robo-advice now subjected to the same rules as advice delivered in person. From 15 March 2021, all providers of financial advice to retail clients must comply with a new regulatory regime, including new licensing requirements, a Code of Conduct and new disclosure obligations. New Zealand has traditionally had three financial adviser types: Registered Financial Adviser (RFA), Authorised Financial Adviser (AFA) and Qualifying Financial Entities (QFE) adviser. These has all been removed, with all advisers now required to meet the same standards and subject to a new Code of Conduct. Now, individuals must either hold a Financial

Advice Provider (FAP) licence or be operating under a FAP licence as a financial adviser or nominated representative. Those providing advice can currently do so under a transitional licence, valid for two years from March 15, or a full licence. Those with a transitional licence will need to obtain a full licence by 16 March 2023. The code, called the Code of Professional Conduct for Financial Advice Services, outlines the expected behaviour of those providing financial advice. The code comprises nine standards across ethical behaviour, conduct and client care and competence, knowledge and skill. Standards include the need to always act with integrity and to ensure clients understand the advice being provided. People providing financial advice must also always ensure the protection of client information against loss and unauthorised access, use, modification or disclosure. fs

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Featurette

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Why financial fraudsters can fool anyone Melissa Caddick’s story has barely left the headlines since November 2020. The investment scam she is accused of perpetrating is nothing new. So why do fraudsters keep coming for our investment portfolios? And how do they pull off the con? Elizabeth McArthur writes.

n April 15, Bernie Madoff died in a prison hospital at the age of O 82. He had been serving a 150-year sentence for what is said to have been the largest Ponzi scheme in history, in which approximately 38,000 investors lost an estimated US$65 billion in principal and fake returns. As Maddoff spent his final days in a North Carolina medical centre for male offenders, a fraudster in Australia was making headlines for a similarly bald-faced scheme. Melissa Caddick had been missing since November 2020, shortly after ASIC raided her Sydney mansion. By March 2021, she was presumed dead. And, by April, ASIC had to drop the 38 charges it was pursuing against her. The regulator had to accept that Caddick wasn’t turning up for court any time soon, and by withdrawing the criminal case her victims could start civil proceedings and attempt to claw back some of what they had lost.

Like Madoff, Caddick presented herself as a highly educated, trustworthy financial professional. She let those who handed over their money to her believe that she was an investing expert, that she could manage their money in ways others could not. Caddick and Madoff both played a game of keeping up appearances. Madoff had his penthouse apartment in New York, the façade of a genuine Wall Street company and tickets to black-tie galas with the city’s elite. Caddick had some of the most expensive real estate in Sydney, designer clothes and extravagant overseas holidays. They are just two high profile examples of the kind of investment fraud that’s been around for as long as the stock market. Forensic psychologist Kim Dilati says anyone can fall for an investment scam. While it’s easy to think that only the less financially literate would get caught up in fraud, that is simply not the case.

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The quote

Everything may appear to be compliant from the outside and the scammers exploit that.

In fact, perpetrators of investment fraud are likely to see the wealthy as big targets and then will deploy their best tactics. “They’ve got the dispositions to be able to pull these scams off. A lot of these scammers have developed techniques to force compliance with their victims. It could be flattery, they could pretend to be friends with them over the course of many months, they try and build trust. A lot of them are quite deviant but you don’t get to see the precursors before the scam,” Dilati explains. “The scammers are often quite self-confident in the way they manage the scam. Everything may appear to be compliant from the outside and the scammers exploit that, they exploit their position of authority.” Professor of psychology at Wake Forest University John

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Petrocelli agrees. He has devoted much of his academic research career to studying “the art of bullshitting”, which in his opinion is a pervasive social behaviour. “Most successful Ponzi scheme operators take advantage of two things: 1) credibility, and 2) the failures of critical thinking and questioning by their victims/investors,” he says. “As long as the Ponzi scheme operator appears to have credibility and a line of prior success, people will invest in their hedge funds or whatever scheme they are promoting. People want to make money on their investments and they often treat the appearance of legitimacy and success as ipso facto highways to more money in their pockets.” Petrocelli points to Madoff as a prime example of a scammer having it made in the credibility

FS Private Wealth

The quote

The victims are never recognised by them as victims. They never acknowledge what they have done. There is no accountability.

department. Wall Street knew Maddoff Securities as a legitimate brokerage firm that the likes of Charles Schwab and Fidelity Investments would send trades through. And, Madoff himself was known as the former chair of Nasdaq – it doesn’t appear to get more legitimate than that. Caddick’s victims, too, should be forgiven for falling for her schtick. She styled herself as a successful financial adviser and Financial Planning Association of Australia member, though that was not true. She even appeared on the cover of a trade magazine. Petrocelli and Dilati acknowledge that media can play its role in lending undeserved legitimacy to individuals who people then trust with their hardearned savings. While not in the realm of Madoff, former financial adviser Sam Henderson graced the pages of Financial Standard prior to his appearance at the Royal Commission – where it was revealed he lied about having a Master’s degree and had employees impersonate clients to super funds. Henderson was even included in a list of the 50 most influential financial advisers in Australia, which Financial Standard publishes every year. Speaking to him after the Royal Commission, Henderson made it clear that he sees himself as an easy scapegoat for a regulator desperate to appear to be doing something but too weak to take on the big banks (who Henderson claimed are the real villains). More recently, ASIC has been chasing Mayfair 101, its confusing web of shell companies and its founder James Mawhinney through the courts. In court documents, ASIC said it has evidence that Mayfair companies were trading insolvent and that money raised from new investors in some products was used to pay earlier investors – in a Ponzi scheme fashion. One investor Financial Standard spoke to lost $1 million in a Mayfair 101 product after seeing it advertised in a respected national newspaper. He assumed the product was safe because of the context of the advertisement and when speaking with sales representatives at Mayfair everything seemed legitimate.

Mawhinney has since copped a 20year ban from ASIC. But he maintains that he is being prosecuted by a rogue regulator and that it is ASIC that has stopped investors from seeing the returns he promised. Dilati says if you are the victim of financial fraud, don’t hold your breath for an apology from whoever took your money. She says many of the people who run investment scams have personality disorders like narcissism. “The victims are never recognised by them as victims. They never acknowledge what they have done. There is no accountability,” Dilati said. She explains that for someone to commit fraud in the first-place certain conditions need to exist. These conditions are referred to as the fraud triangle: opportunity, incentive and the ability to rationalise their behaviour. Once those conditions are in place, she says fraudsters can “rationalise the morals out of a scenario so they don’t have guilt”. This is why fraudsters are so dangerous, she says. They become very good at manipulating people to get what they want and, according to Dilati some fraudsters might even get a self-esteem boost from having victims fall for their manipulation tactics. But, Petrocelli says investors can take their power back. “So, you say that you are inviting me to make a significant investment in an exclusive investment opportunity. What do you mean by that? What does that look like? How would it work? Tell me the logistics. How would I know it’s working? Treat claims and ideas as claims and ideas and not as facts – and investigate if the claims and ideas are justified given any readily available data,” he says. When asked how to spot a fraudster in financial services before it goes too far, Petrocelli offers: “Although I have no data on this, and know of no data suggesting it, I suspect that diagnostic warning signs include one’s general willingness and propensity to bullshit others as well as their belief that people accept bullshit as truth.” fs

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New India fund eyes HNWs

Housing market reaches $8 trillion

A new fund focusing on five key thematics across publicly listed companies in India will launch to high-net-worth investors. India Avenue Investment Management will launch India 2030 in the third quarter of 2021, a high conviction, actively managed fund that invests in small to mid-cap companies listed on the National Stock Exchange of India. India 2030 has mandated Mumbai-based Oldbridge Capital to select about 15 listed companies to cover five key themes: manufacturing, technology, real estate, rural and market share leaders. The minimum investible amount is $100,000. Speaking to the fund’s strategy, India Avenue co-founder and managing director Mugunthan Siva told Financial Standard that the demand for technology has been a boon for India as some 60% of global corporations outsource their IT services there. Technology professionals are earning more money and want to buy their first home, breaking away from the tradition of living with parents, he said, noting that this in turn will drive stronger demand for property, another key theme of the fund. “Some of the themes are linked. Because technology will do better and have young professionals moving to urban cities to buy their first homes, the technology sector will pull up real estate,” Siva said. The car-manufacturing industry will also have a significant effect on the economy. At the moment, major companies are partnering with local car makers, building on the success of existing joint ventures like the one with Suzuki and Maruti. fs

Annabelle Dickson

The quote

This puts Australian residential property at around four times the size of Australian GDP.

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he residential real estate market in Australia is estimated to have surged above $8 trillion in the first half of 2021, new analysis from CoreLogic shows. The housing market now stands at $8.1 trillion with the increase in value following capital gains in real estate markets across the country. In the three months to April 2021, national home values rose 6.8%, marking the highest quarterly dwelling growth rate since December 1988. “The Australian dwelling market has reached fresh record highs for the past four months, but the end of April marked the first time the total value of Australian housing broke the $8 trillion dollar mark,” CoreLogic head of research Eliza Owen said. “This puts Australian residential property at around four times the size of Australian GDP, and around $1 trillion more than the combined value

of the ASX, superannuation and commercial real estate stock combined.” CoreLogic noted the increased value of residential real estate puts homeowners in a stronger equity position as the RBA estimated 1.3% of mortgages to be in a negative equity position at the start of the year. Despite this, the increased valuation poses as a challenge for people looking to enter the housing market. “However, for many Australians looking to get a foot on the property ladder, the continued strength in the market is putting home ownership further out of reach despite record low mortgage rates. Wages growth simply isn’t keeping pace,” Owen said. The increase in housing values comes following CoreLogic’s 2020 Best of the Best report which found the real estate market was upheld by the Northern Territory, with luxury properties holding onto value. fs

Jarden and Nomura form alliance Karren Vergara

Investment and advisory firm Jarden and investment bank Nomura have joined forces to provide clients shared expertise. Nomura will provide its global network, product capabilities and balance sheet to support clients across equity capital markets (ECM), debt capital markets (DCM), and acquisition and leverage finance (ALF). Both firms remain standalone corporate advisory and capital markets businesses in Australia and New Zealand. The firms confirmed that this is not a merger; the alliance aims to provide greater global reach, product expertise and capital commitment for all clients of both firms. Bill Trotter, executive chair of Jarden Group, said: “Jarden has a proud history of 60 years and Nomura brings substantial balance sheet support to

our clients across the breadth of capital markets activity. We are pleased to further strengthen our global connections moving forward with Nomura.” Jarden and Nomura seek to capitalise on changing competitor dynamics in Australia and New Zealand, and the chance to offer a differentiated service, he said. Head of investment banking for Nomura Australia Andrew Macgonigal said: “Nomura and Jarden have genuinely complementary businesses in Australia and New Zealand. An alliance of this nature is highly synergistic, as not only is there limited crossover of our existing businesses, but also strategic and cultural alignment.” “We are excited that this alliance will allow us to further increase Nomura’s relevance and reach across both new and existing clients, in addition to supporting the buildout of Jarden in Australia.” fs

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Lowy-backed Assembly acquires

Financial sector has deep pockets

The Lowy Family Group backed Assembly Funds Management has acquired six early learning centres in North West Sydney. The acquisition is in partnership with Harrington Property Funds Management and will see the six childcare centres operated by Young Academics under a 15-year lease. “The risk reward balance of this transaction in the alternative asset class is appealing to the fund at this time. Childcare has proven to be a highly resilient asset class in the face of economic turbulence and offers good value in a low-yield macroenvironment,” Assembly head of transactions Tim Meurer said. “By comparison, the direction of other asset classes such as traditional retail, commercial and leisure is less certain while industrial and logistics are heavily sought-after and comparatively expensive.” Harrington Property Funds Management director Trevor Byles said the investment was prudent as he predicts institutional investors will increasingly be keen to snap up freehold early learning centres. “The early learning sector is well placed for long-term growth having the benefit of bi-partisan government support. That support is driven by academic research which has highlighted the immediate and longer term social and economic benefits of childhood participation in formal early learning programs,” Byles said. “From a real estate investment perspective, we are of the view that as the sector matures, the freehold ownership of early learning centres will become more consolidated by institutional capital.” fs

FS Private Wealth

Karren Vergara

The quote

Sustainable philanthropy is about a change in thinking, not just the rise in dollar donations.

philanthropic report has found that ASX-listed financial firms were among the largest donors that gave generously to the coronavirus and bushfire appeals. The analysis by Strive Philanthropy found the largest ASX-listed companies pledged $1.1 billion to philanthropic efforts in 2020, which is 17% more than the prior year. Thirty firms donated over $175 million to COVID-19 relief efforts, typically viral research and local communities, the 2020 GivingLarge Report found. Mining companies BHP, Rio, Newcrest and South32 contributed a combined $100 million. Macquarie Group gave $20 million via its foundation, while Woodside Energy set up a $10 million COVID-19 community fund. As for the devasting bushfires that wreaked havoc in 2019-20, some 113 companies gave $145 million in total.

The big four banks made a combined $19 million donation for bushfire appeals. News Corp and Seven Group donated $5 million each. The report calculated how much donations represented as a percentage of the company’s pre-tax profit. Coles came out on top, donating $125 million in 2020 or 7.3% of its profit on a rolling three-year basis. Commonwealth Bank led the pack among the banks, donating $70million or 0.7% of its profit. BHP gave the largest dollar value in the list of $221 million. Strive Philanthropy founder Jarrod Miles said the spike in giving in 2020 is warmly welcomed but won’t be enough. “Sustainable philanthropy is about a change in thinking, not just the rise in dollar donations. The good news of 2020 is that this change of thinking seems to be hardening and we can only hope will propel corporate philanthropy nicely into the decade,” Miles said. fs

Kin Group bids to take over McPherson’s Elizabeth McArthur

Family office Kin Group has moved to acquire consumer products and wellness company McPherson’s via its subsidiary Gallin. Gallin offered McPherson’s (ASX: MCP) investors $1.34 per share, a 9.8% premium on the 24 March 2021 close price of $1.22. Gallin was incorporated specifically to acquire MCP. Kin Group is the family office established by Raphael and Fiona Geminder. McPherson’s recommended shareholders take no action on the offer. “The board of MCP considers this offer to be utterly opportunistic and profoundly undervalues MCP. The board recommends that shareholders take no action at this time,” McPherson’s said. McPherson’s share price was boosted by the news, hitting $1.41. “McPherson’s is a business that has lost its way and is in urgent need of reinvigoration across its strategy, governance, and leadership,” Gallin director Nick Perkins said.

“The company’s performance has disappointed shareholders for some time despite owning a number of quality, attractive brands across key consumer markets.” McPherson’s financial performance has been deteriorating, Perkins said. The company reported revenue and EBITDA declining by 28.9% and 8.7%, respectively from 2016 to 2020, and Gallin said the negative trend was continuing in the first half of 2021. “Now investors face a further extended period of uncertainty, including a lack of visibility on the current performance of sales of the Dr. LeWinn’s product range into China,” Perkins said. “Although highly uncertain and with no guarantee of success, McPherson’s urgently needs to undertake a full operational and strategic review with a view of turning around the business. We have the capital, capability, wherewithal and patience to do this, while shareholders have an opportunity to receive cash now at an attractive premium.” fs

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News

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Managed funds coped with COVID-19

Vanguard slashes fees Karren Vergara

Vanguard has launched a financial advice offering in the UK that will charge a flat rate of 0.79%, a whopping three times less than what the industry charges on average. Vanguard Personal Financial Planning promises to provide high-quality, low cost, retirementsaving advice based on a tiered approach. Support-service levels increase in line with investors’ portfolios and as financial needs evolve. The all-in cost of 0.79% comprises an advice fee (0.50%) that includes value-added tax (VAT) where applicable; ongoing fund charges (0.12%); transaction costs (0.02%); and a platform fee (0.15%, capped at a maximum of £375 or $672 per year). Clients do not pay entry or exit fees. Vanguard’s fee sits well below the industry average. UK regulator the Financial Conduct Authority calculated that advisers charge 2.4% on average on investible amounts for the initial advice and 0.8% per year for ongoing advice. Clients need a minimum of £50,000 ($90,000). This cohort receives digital advice that is implemented and managed by Vanguard and reviewed annually. Those with larger balances of over £100,000 ($179,000) will receive more support via a team of financial planners available over the telephone or video, as well as an annual review. Clients with over £750,000 ($1.3m) have a dedicated financial planner. Head of Vanguard Europe Sean Hagerty commented that for some investors, the cost of advice is a barrier. “The data indicates people can pay more than 1.5% for advice, platform, and fund management charges. It’s not uncommon to see fees north of 2%,” he said. fs

Elizabeth McArthur

A The quote

There was no material decrease in the liquidity of fund assets over the first half of 2020.

n ASIC review of retail managed funds found that they effectively coped with the challenges presented by COVID-19. ASIC found managed funds largely did not face serious investor liquidity challenges during the height of COVID-19 market disruptions and that their liquidity frameworks were generally adequate. While there was a significant drop in net investor cashflow in the first half of 2020, ASIC reported that responsible entities of these funds did not tighten members’ ability to withdraw their investments. The review looked at four mortgage funds, five direct property funds and five fixed income funds between June and November 2020. These funds accounted for $1.7 billion in assets under management and more than 8000 investors had money in them. ASIC specifically chose to review these funds because it feared they were

exposed to liquidity risks due to a mismatch between investor expectations and potential desire to exit and the liquidity of the fund assets in a financial stressed market. ASIC found that across all the funds there was less cash received from investor applications versus cash paid out in investor redemptions during the first half of 2020. The average net investor cash flow declined from 19% of the funds’ net asset value in the last quarter of 2019 to 3% in the first quarter of 2020, before a moderate recovery to 6% in the second quarter of 2020. “However, this deterioration had little to no negative impact on investor redemption opportunities or on the size and frequency of distributions paid to investors,” ASIC said. “There was no material decrease in the liquidity of fund assets over the first half of 2020.” ASIC said its findings were consistent with feedback from industry associations. fs

Grant Thornton sells private wealth division Grant Thornton Australia has sold its private wealth business to its senior team members. The small private wealth team consists of Jon Black, Joanne Kenderes and Laura Perresini. They are the majority owners of Oreana Private, aligned with dealer group Oreana Financial Group. Oreana provides services in Australia and Hong Kong. Following the sale, Black, Kenderes and Perresini will be joined by several Grant Thornton employees. “The Private Wealth team provides specialist wealth advisory services to high-net-worth individuals and family offices,” a spokesperson for Grant Thornton said. “Our decision to sell this business was not taken lightly and is connected with our need to ensure that we comply with national and international independence regulations.” Grant Thornton Australia forms part of the Grant

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Thornton International network and the spokesperson added that these regulations are of critical importance for the Australian arm to comply with. “The sale of this business ensures that the firm is not affected by providing direct or indirect investment recommendations on clients or potential clients,” Grant Thornton said. “As a standalone business, the Private Wealth team will be able to focus all of their resources and priorities on providing the highest level of support to clients while meeting any additional requirements and regulations.” Clients of the private wealth team will be able to continue their relationships with the same employees and Grant Thornton said they can expect to receive the same level of service. Oreana will use Grant Thornton for other services. “We look forward to working closely with the team into the future,” Grant Thornton said. fs

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Farmland value grows Elizabeth McArthur

or the first time since 2005, every single state in Australia saw the price of farmland increase. The median price per hectare of Australian farmland increased by 12.9%, with the nation enjoying its seventh consecutive year of farmland value growth. This is according to Rural Bank’s a Australian Farmland Values 2021. Over the last 20 years, farmland value has compounded at 7.6% annually. And, according to Rural Bank, the fact that every state has experienced increased farmland value this year is a sign of the resilience of farmland as an asset. In 2019, there were historically low transaction volumes in farmland. But, in 2020 that volume increased by 14.5%. Total transactions equated to a combined 8.2 million hectares of land with a value of approximately $10 billion. Rural Bank chief executive Alexandra Gartmann said low interest rates, consistent commodity prices, exceptional seasonal conditions through 2020 and farmers with capital and an incentive to invest have all driven demand for farmland. “Historically, there has been a strong relationship between commodity prices and farmland values, however, 2020 saw an increasing gap between the two, which we first observed in 2016 and which continues to widen,” Gartmann said. “Many farmers are seeking to expand. This, combined with a smaller pool of sellers, has resulted in strong competition for property. Farmland prices and farmland as an asset class will continue to be keenly watched but increasing asset price alone

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The quote

Experienced buyers with clear heads and an eye on the longerterm will also weigh up geopolitical risks and their potential impact on commodity prices.

is no guarantee that agriculture as an industry will continually prosper.” Australian Farmland Values has tracked every farmland sale for the last 26 years. The report drew on 263,000 transactions across 315.9 million hectares of land with a combined value of $167.3 billion over 26 years. Tasmania experienced 25.3% growth in 2020, the most of any state. It was followed by Western Australia with 19.3% growth, New South Wales with 15.6% growth and Queensland with 11.8% growth. South Australia has 10.9% growth and Victoria had 6.9%. “Positive trends in commodity prices underpinned by strong export demand and a growing domestic market can be tempered by factors such as a changing climate and increasing demands from consumers for transparency within the production and supply chain,” Gartmann said. “Experienced buyers with clear heads and an eye on the longer-term will also weigh up geopolitical risks and their potential impact on commodity prices. But even with these risks in mind, it appears that high values for quality farmland will continue to be supported in the short to medium term.” Queensland’s growth was somewhat stymied by North Queensland, where farmland values declined by -1.3%, while the west of the state experienced

an impressive 39.4% value growth. Grazing regions in Queensland benefited from strong cattle prices, eventual rainfall allowing properties to sell well presented and exclusion fencing providing grazing options. In NSW, the breakdown was similar. Northern NSW had negative -3.1% growth in values while the west saw a 37.5% increase. An estimated 1.4 million hectares of farmland was traded in NSW. This was down to drought conditions in the north of the state continuing into 2020. The south (12.4%) and south west (6%) saw sales activity decline as the region was still recovering from bushfires. According to Ian McArthur from Elders in Gunnedah, mixed farming and grazing properties are in high demand and water security is the most important consideration for investors. In Victoria, demand for grazing land in Gippsland boosted median land values for the whole state. Gippland was in such hot demand that there were 302 farmland transactions there alone, 59 more than last year. Rural Bank said the findings of the latest report show that farmland remains tightly held, and consequently any land coming onto the market is generating high levels of demand. “This demand is being driven by strong, relatively consistent commodity prices, which coupled with an excellent season has also provided farmers with capital to invest,” the bank said. “Unlike other parts of the economy COVID-19 has (with some exceptions) not dented agricultural returns.” Rural Bank theorised this may be down to the powerful impact of low interest rates. “For those already in the market, increased land value provides strong balance sheets, equity, and further opportunities to invest,” it said. “When you add in record low interest rates, you have a powerful mix, underpinned by the FOMO effect (fear of missing out).” fs

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Opinion

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Peter Esho co-founder Wealthi

If you must panic... panic early ur emotions of fear and panic are part of making a O good decision. If you don’t know that there is some bad outcome which you should avoid, you cannot act on it. Some fears are bad — others are necessary. Generally I’m worried about things which have large exponential qualities and not too worried about trivial things which are linear. Pandemics like COVID are multiplicative and contagious. Car accidents are not. If my next door neighbour catches COVID, the chance of me catching it increases. On the other hand, if my neighbour dies of a car accident, the chance of me dying in a car accident don’t necessarily increase. Some things are worth worrying about. In fact, some things are worth panicking about. This is illustrated brilliantly in a recent French study I came across by Cecile Philippe & Nicolas Marques. The study looks at the relationship between different COVID strategies around the world and how they impact subsequent economic performance. The study categorised each country into three different groups - countries which sought mitigation, countries which sought elimination and countries which did nothing. Countries which panicked early did better

The quote

Countries which panicked early did better.

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France experimented with a strict lockdown early in the epidemic due to hospital saturation in March 2020. Since then, longer-term measures to reduce contacts (wearing of masks, closing of bars, cafes, restaurants, performance venues and so on) and short local lockdowns in heavily contaminated areas were imposed in the hope of keeping the number of people hospitalised within acceptable limits. Australia and New Zealand, on the other hand, imposed a strict lockdown at the start of the epidemic to eliminate the virus from its territory. They then reopened society as a whole while maintaining strict mobility controls at entry points along with active surveillance, which led occasionally to local lockdowns in areas where the virus was detected. The study showed that Australia, South Korea and New Zealand all had lower mortality and smaller declines in GDP. They have all done much better than the G10 average. This full-scale test, conducted on 82 million people, is very conclusive. Restrictions, whether imposed by the authorities or self-imposed by people seeking to limit the risk of contamination, were less severe in the Zero COVID countries in the second quarter. In the fourth quarter of 2020, these countries had almost returned to normal economic activity. Their GDP was down slightly (-1.2%) compared to 2019 due to restrictions on dealings with countries still in the grip of the virus and subject to local lockdowns linked to specific outbreaks.

Meanwhile, the decline in GDP was greater (-3.3%) in countries that had not eradicated the virus, with restrictions on movement arising from individual choices as well as from health policies. The study implies trying to kill the pandemic did not kill the economy. Shutdowns did have an economic cost, but the cost was small relative to the benefit. The countries which panicked early have come out of the pandemic best. The investor who panics early about runaway government debt, money printing and swelling central bank balance sheets will also be best placed in the next decade as asset prices grow. One of the things I’ve been writing about consistently, is the huge cost of government actions and the implications they have on movements in the price of stocks, real estate and crypto markets. If you’re worried about stocks, real estate and crypto prices falling.... you’re thinking the wrong way. Prices aren’t rising, the value of the dollar and government paper currency is collapsing relative to other assets. We’ve just gone through the biggest recession and economic shock in history, yet the price of everything keeps going up. Why? Because central banks around the world have grown their balance sheets to unprecedented levels. Crazy levels. It’s kind of masked because we don’t see it in currency swap rates because every government around the world is kind of doing the same thing. fs

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Land empire divided Before Bill and Melinda Gates filed for divorce, their investment vehicle had been snapping up one asset in huge quantities - US farmland. Elizabeth McArthur writes. ill and Melinda Gates have filed for divorce and will B now set about dividing their US$130 billion fortune. The divorce made headlines all over the world, said to be the largest in terms of assets on the table since Amazon founder Jeff Bezos divorced his wife of 25 years in 2019. However, flying under the radar was an investment decision Gates has made that could have a significant impact on his wealth going forward. The Gates’ have significant assets to divide and those assets have recently grown. In the last few years, Bill Gates’ investment company – Cascade Investments – has been quietly buying up farmland in the US. In fact, the investment has been so substantial that The Land Report recently revealed that Bill and Melinda Gates are the largest owners of farmland in the entire US, owning approximately 242,000 acres. Cascade Investment, the holding company controlled by

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The quote

The marriage is irretrievably broken.

Gates, is technically the owner of the land. The investment company told The Land Report that it is supportive of sustainable farming. Gates, answering questions on Reddit, said that the investment in farmland is purely an investment choice made by Cascade – not a choice driven by ideology or climate change. In that case, Michael Larson – who is chief investment officer for Cascade and investment manager for the Bill and Melinda Gates Foundation, seems to be behind the farmland play. The Gates’ divorce is still in the early stages. A petition for dissolution of the Gates’ marriage was filed by the couple in King County, Washington in May. They have been married since 1 January 1994. “The marriage is irretrievably broken. We ask the court to dissolve our marriage and find that our marital community ended on the date stated in our separation contract,” the filing said. Their youngest child has just turned 18, so no custody arrangements are needed, and the filings said there would be no need for child support or spousal support. There is a written separation con-

tract, which the court is asked to enforce. The Gates’ released a joint statement confirming the divorce. “After a great deal of thought and a lot of work on our relationship, we have made the decision to end our marriage. Over the last 27 years, we have raised three incredible children and built a foundation that works all over the world to enable all people to lead healthy, productive lives,” they said. “We continue to share a belief in that mission and will continue our work together at the foundation, but we no longer believe we can grow together as a couple for the next phase of our lives. We ask for space and privacy for our family as we begin to navigate this new life.” Alongside the farmland, the Gates’ assets outside Cascade Investments are said to be extensive. The Gates own an impressive art collection which includes Leonardo da Vinci’s notebook, known as the Codex Leicester, which Bill Gates purchased in 1994 for US $30.8 million. In 2017, he loaned the manuscript to a museum in Florence - its first time being displayed to the public in decades. fs

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ART AND MONEY Tim Olsen, Olsen Gallery Tim Olsen opens up on his sense for business and his investments, something he is at times reticent to discuss given the complex relationship between art and money. Elizabeth McArthur writes.

resh from appearing on Australian Story with his family and buoyed by the success of his memoir Son of the Brush, Tim Olsen has a newfound confidence. Writing his autobiography was about more than just getting the final product out there for Olsen, the act of writing it in solitude over several years was an undertaking in practicing art that he had once thought he might never be capable of. Olsen’s father, John, almost needs no introduction. He

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is one of Australia’s most famous, commercially successful artists. Now 93, he has an OBE, has won the Archibald Prize, his work has been hung in all of Australia’s most prestigious galleries and his Salute to Five Bells adorns a whole wall in the Opera House. But being the child of someone often described as a “living legend” is not without its challenges. Olsen’s childhood took him from travelling Europe to living in a commune in rural Victoria with no electricity. The family was seemingly thrown to and fro by John’s search for inspiration and space to paint.

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Since Son of the Brush was released, Olsen has been touched to receive letters from people who relate to what he’s been through. “Some have said it has helped them realise that you don’t have to live under a shadow your whole life because really, you are the one who has invented it, not the person whose shadow you are living under,” he explains. “My father never wanted to hurt me. It was really people saying, ‘in 200 years they’ll be talking about him and not you,’ it was the narrative of the public. It was also my own self-invention of believing I’ll never be good at anything that created the storm in my mind.” The imposing shadow of his father hasn’t stopped Olsen from achieving success in his own right. His gallery in Sydney’s Woollahra has been standing for more than a decade; no small feat in the competitive world of commercial art. He also represents more than 40 artists and has cemented himself as an art world identity, and taste maker, worldwide. The Olsen family has turned itself into an Australian dynasty on the back of John’s success. Louise Olsen is the founder of Dinosaur Designs and a respected artist in her own right. Recently, Tim Olsen had the pleasure of hanging art by his niece, Louise’s daughter Camille Olsen-Ormandy, in the Woollahra gallery. “It was wonderful. I represent three generations of Olsen’s and they are all talented,” he says of showing his niece’s work. “We are a true dynasty, and the great thing is that not everyone’s work looks like my Dad’s.” While the Olsens have achieved remarkable success, their rela-

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tionship with money is perhaps not as straightforward as that of other successful Australian families. The cliché of the starving artist is a cliché for a reason. Even after finding success, artists often struggle to get paid. And Olsen witnessed his father’s own inconsistent cashflow in his childhood. He’s also blunt about the fact that Australia is not a country that particularly appreciates art. It is, in his view, one of the more difficult places in the world to make a living in the arts. “I remember my father making the huge sacrifice to send me to a good school. It’s kind of interesting, most people think an artistic family would send their children to public schools or international schools,” Olsen says. His father, who himself attended St Joseph’s College in Hunters Hill, wanted his children to go to private school and saw this as a particular priority for his son because he was athletic. Olsen attended The King’s School in Sydney’s west, where fees now can run up to $38,000 a year. “Coming from a bohemian family, going to that school allowed me to understand the other side of society… I was with a bunch of country kids - having a very left-wing upbringing and going to a very right-wing school,” Olsen says. “Dad was pulling out all the stops to try and afford it. He was famous but we still lived in a very philistine country. It was when he stumbled upon drawing frogs while doing an ABC series with a naturalist in Queensland that they became, kind of, his signature image. So, he ultimately, sort of, paid my school fees in frogs.” When it came to sending his own son, James, to school Ols-

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en wanted to pass on the same opportunities he had enjoyed. “There’s a lot to be said for the public school system, but these days the corporate world sort of speaks upon the schools tie system. I don’t want to say that private schools provide a better education than public ones, but there is still a bit of a club mentality to it,” Olsen says, bluntly. “I think a lot of my clients are people I’ve got to know through going to a private school. But ultimately, I am who I am. It’s me who made me who I am, not the school I went to. Certainly, Kings was a wonderful introduction to meeting great Australians who didn’t go to Aspen or Mykonos for holidays, they’d go home and fix fences and shear sheep. I love all that. It was not always Palm Beach. Growing up with people that were taught to have a work ethic from a very young age made a huge imprint on me.” Another early memory that imprinted on Olsen was his first impression of a gallerist. He recalls being about eight years old when his father’s gallerist came to visit the family while they were living in the commune in Victoria. “He had an amazing old Jeep, and he always had very glamorous girlfriends. And I thought to myself ‘that guy has a great life… without owning casinos’,” Olsen recalls with a laugh. After finishing school, Olsen trained in art for seven years. He began to feel, though, that he didn’t have the temperament to be an artist, feeling that art was a very lonely occupation. It wasn’t until recently, writing the memoir, that Olsen overcame that sense that he couldn’t pursue a solitary passion. “Seeing the way gallery owners lived, I thought it was full of interesting people, long lunches, they had a great lifestyle without being an artist. That appealed to me when I wasn’t sure whether I had the capacity to be an artist,” Olsen says. The long lunches, he adds, nearly killed him. Olsen was an alcoholic, enabled by wine-soaked gallery openings and business meetings that seemingly couldn’t be conducted any other way than over a bottle. Business suffered during the dark years when he was frequently drunk, Olsen says. In his memoir he admits to “living like a Gatsby millionaire” while having a fairly modest cash flow. Money and art have a complicated relationship, and Olsen is attuned to this. He cites one of his great influences as Rudy Komon, who converted a wine shop into a gallery in Paddington. Olsen credits Komon with being one of the first gallerists to establish a regular payments system for artists, and Olsen says now he still follows that same system. Komon was paying his artists 10% long before Australia implemented the artists’ resale royalty scheme in 2010. In the book, Olsen discusses some of the other gallerists that have influenced him - including Ros and Tony Oxley who run Sydney’s Roslyn Oxley9, where he worked for a time early in his career. He acknowledges that Roslyn Oxley9 showed some highly uncommercial conceptual art and that this was perhaps “the privilege of the wealth - those affluent enough to run their business off their personal health - or of other established businesses.” Tony and Ros Oxley are heirs to the Waltons department store and Bushell tea fortunes, respectively. Olsen writes of respecting their somewhat philanthropic approach to showing art, showing unprofitable but experimental and exciting exhibitions more often the profitable ones. “I respect their vision (and deep pockets),” Olsen writes in the book.

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The Oxleys weren’t the only businesspeople Olsen would learn from. Asked where he has learnt the most important business lessons from, he points to two people who on the surface couldn’t be more different from one another - Andrew Forrest and Jamie Oliver. Olsen says he learned from both the importance of being surrounded by the right team. “I’m very fortunate to have long term staff here that I can delegate to and it allows me to get on with the bigger fish to fry and to be more lateral thinking, without having to worry about whether we have enough hooks to hang the pictures or whether there is enough paper in the printer,” he says. “Jamie Oliver came to the gallery one day to do a big lunch for the press. He had all these people turn up with the seafood, the rice, the gas, the pans and everything. They laid out this huge table to sit 60 people in the gallery. Jamie rocks up an hour before and cooks this paella, which usually takes hours to prepare. His team meant that he could basically turn up and push his wooden spoon around the pan and it was all done.” Olsen saw the same kind of delegation after forming a friendship, along with his father, with Forrest. “Having spent time with Andrew Forrest and his wife Nicola at Mindaroo, I saw the way he was able to juggle mining, running a cat-

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tle station and his philanthropy concurrently by knowing that he had people at the other end of the phone or out in the field all also inspired to work for him,” he says. Lessons like these, Olsen says, are as important in art as in any line of work. He has seen many, many galleries come and go in Sydney alone. “The Olsen name itself is a brand, which I was very lucky to inherit. But it’s still about getting out there, in the same way that a music producer wants to turn a musician into a rock star,” he explains. Gallerists must turn themselves into a brand but also turn their artists into brands and build them up. That’s why art prizes, social media and public relations are all important. Building artists up benefits them personally and the gallery, and Olsen gets immense pleasure out of seeing them flourish. “The first thing an artist needs is stability. I always say the first thing you have to do is buy yourself a house or an apartment,” Olsen says. “Give yourself some security where you know that’s where you will live. Secondly, try to establish a studio where you can sustain a constant presence to be able to build up a body of work. Nothing makes me prouder than to see how a lot of my artists have ended up buying property and studios.” Olsen’s own investment philosophy also has property at its core. He says he “sticks to his knitting”, investing in things he understands - art and property. “I always invest in my own buildings. I bought my two buildings, which are adjoined to each other, in one of the most expensive suburbs in Australia, in Woollahra. I bought a big old warehouse, which is an anomaly in the area, and the house next door. I’ve been offered five times as much as I paid,” he shares. “The great thing about my buildings is I am able to make them work for me. I’m making a lot more money making them work for me than I would be renting them out.” His art collection, meanwhile, could rival some of Australia’s finest. And it is perpetually increasing in value. “If you’ve been following the art auctions, it’s incredible what a lot of post-modern, post-war art is achieving,” he says. “I’ve got a wonderful lithograph by Russell Drysdale, who was my godfather. I’ve got little Brett Whiteley portraits of Bob Dylan and Shakespeare. I’ve got Fred Williams guaches. I’ve got other more mid-career artists like Nicholas Harding. There are lots of artists where it’s a difficult thing to go from being a popular young artist to a sturdy mid-career artist to a master in old age. Not many artists traverse all three tiers.” His advice for investing in art that will appreciate in value is the same advice any sensible investor in any asset would give - know the market and know what you are putting your money into. “See what people are buying at auction. Find out what

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the top galleries are. Find out who their most followed artists are, who their rock stars are. Even if you buy a little work, you’ll already have a brand attached to it, someone who has got a name,” he says. However, he doesn’t think art should ever be thought of in pure investment terms. “Ultimately, the most important thing is to like it. I think there’s a lot of karma attached to buying art for love not investment. I actually don’t like the words ‘art investment’. If it turns out to be an investment, fantastic. But you can buy with the principles of art investment in mind but buy only out of love in the moment.” Olsen says he doesn’t have a financial adviser as such, but he does have a very good accountant and friends who are in finance who have told him to invest in various ways. “I have lots of friends who are brokers and people who have told me to get into Bitcoin or what have you,” he says. “If I had the time to look into the operations of companies, maybe I would be buying more shares. But I’d rather be doing things I’m interested in, like following the careers of artists and following their work, following the art market.” That’s why Olsen says he’ll never stop putting his money where his mouth is - putting money behind artists he believes in. And, in his philanthropic work too, Olsen has focussed on what he knows and loves. He established the Tim Olsen Drawing Prize at the School of Art and Design at the University of NSW. He’s a patron of The King’s School Art Prize, gives to the Art Gallery of New South Wales restoration department and the National Gallery. “Art is art. It’s not just investment. It adds substance to our house, to our living environment, to a corporate environment. It’s about the hidden conversation we have with the outer world,” Olsen says. “I think working environments for many people, particularly in offices, is so greatly improved when corporations collect art.” He says he was devastated to see Qantas divest its art collection in 2007. He still remembers the Whiteley painting of the Opera House which used to hang in the Qantas lounge at Sydney airport and sold for $2.88 million. The collection also included a Charles Blackman which sold for more than half a million and a few of John’s works, including a frog. Ostensibly, the sale was to please shareholders. “And then the chairman gave himself a bonus to the value of the art they sold,” Olsen says. “It’s one of the disappointing aspects of Australian corporate culture, they fail to understand the deeper value of art being a corporate asset. “Art helps us realise even as businesspeople we are also creative. The act of creativity is a signal that there is more to life than just making money.” fs

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Sector reviews

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Benjamin Ong director of economics and investments Financial Standard

Sector review Low for longer atest inflation figures released by the Australian Bureau of Statistics L (ABS) underscore both the Reserve

THE 02 GOOD EDITION

ECONOMICS

GUIDE Making sense of key economic data BENJAMIN ONG

The guide Ben Ong is the author of the Money Good Economics Guide: Making sense of key economic data, a handy reference tool for investors, analysts, strategists and finance commentators, available in newsagents.

Bank of Australia’s prescience and governor Philip Lowe’s expectation that the official cash rate would remain low until “at least 2024”. According to the ABS: “Annual inflation for the March 2021 quarter increased to 1.1% following a rise of 0.9% in the December quarter.” “Price rises in tobacco and furnishings were partially offset by falls in rents, automotive fuel and utilities. While the annual rate of change in the headline consumer price index (CPI) continued to improve since the deflation of the June 2020 quarter (-0.4%) – the first since the March quarter of 1998 (-0.2%) – it remains below even the bottom end of the RBA’s 2%-3% target band. “In addition, and as the Australian central bank anticipated at its April meeting, “In the short term, CPI inflation is expected to rise temporarily because of the reversal of some COVID-19-related price reductions.” Here the RBA is suggesting that the acceleration in consumer prices over the past three quarters could reverse. But more important, the RBA’s preferred measure of inflation – the trimmed mean – decelerated to an annual rate

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to 1.1% in the March 2021 quarter – the lowest on record – from 1.2% in the December 2020 quarter. The RBA anticipated all these in its April missive: “Wage and price pressures are subdued and are expected to remain so for some years. The economy is operating with considerable spare capacity and unemployment is still too high. It will take some time to reduce this spare capacity and for the labour market to be tight enough to generate wage increases that are consistent with achieving the inflation target.” Looking through this, underlying inflation is expected to remain below 2% for the next few years in Australia. The Australian economy is certainly recovering faster than expected post-pandemic and the labour market has improved significantly. The unemployment rate dropped to 5.6% in March 2021 after jumping to 7.5% in July 2020, its highest level in 22 years. This jobless rate remains insufficient to drive wages higher. Recall the good governor of the RBA declaring that wages have to grow sustainably by more than 3% for that growth to be transmitted into higher inflation. The experience of the past few years suggests that the unemployment rate needs to drop by more than the RBA’s expectations of “around 5.25% by mid 2023”. Australia’s unemployment rate fell to around 5.0% between late 2018 and early 2019, yet growth in total wages growth reached a high of only 2.3% during that period and the annual rate of inflation remained below the RBA’s target – headline CPI and underlying measure at 1.9%. fs

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Sector reviews

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Property

Prepared by: Rainmaker Information Source: ME Bank

Jamie Williamson

espite record high sentiment in the first quarter of the year, ME Bank’s latest D Quarterly Property Sentiment Report shows affordability and supply issues are leaving a bad taste in the mouths of would-be homebuyers. Even with record low interest rates, residential property market sentiment dropped seven percentage points to 42% in the last three months. Broken down by groups, first home buyers recorded the lowest level of positive sentiment this quarter, down three percentage points to 24% (five percentage points lower than the same time last year), while investors recorded

Federal budget

$ ust about everyone is a winner in this year’s federal budget, with treasurer Josh JFrydenberg extending tax cuts, significant measures to enhance women’s economic security and a $15 billion infrastructure spend. Delivering the 2021/22 federal budget, Frydenberg declared Australia better placed than just about any other country to meet economic challenges that lie ahead due to the ongoing pandemic. Australia’s deficit will reach $161 billion this year before falling to $57 billion in 2024/25; $52.7 billion below what was forecast in last year’s budget. Significant personal and business tax

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Property sentiment sours the highest at 52%. Overall, 60% of respondents believe there “isn’t enough choice in the current residential property market” − a 17 percentage point increase since January. Regional buyers were more likely to cite this, saying there “isn’t enough choice” (65%), especially in regional New South Wales (71%), compared to metropolitan buyers (57%). Meanwhile, a whopping 91% of respondents said housing affordability is a big issue in Australia. Among first home buyers, this rose to 93%. Affordability concerns are likely being compounded by expectations for further house price growth, ME Bank said, with about 67% of those in the residential property market expecting prices to increase in their area during the next 12 months. This is 13 percentage points higher than in Q1 of this year. Flowing on from this, property owners’ ‘sense of wealth’ and general financial confidence increased to 41% and 42% respec-

tively – the highest levels since April 2019. In contrast, 82% of those looking to buy are worried about paying too much in the current market. In terms of buyer groups, more first home buyers this quarter said they are looking to purchase property in the next 12 months (52%), followed by investors (40%) and owner occupiers (21%). At the same time, about 23% of property investors indicated they want to sell their property in the next 12 months, compared to only 11% of owner occupiers. How quickly they want this to happen is evenly split, with 51% saying they’re in no particular rush, while 49% said as soon as possible. Geographically, Sydneysiders are more likely to buy (38%) and sell (13%) in the next 12 months than Victorians (32% and 10%, respectively), the survey found. Of those looking to buy, over half (58%) reported feeling “a sense of FOMO” (fear of missing out) in buying property in the current market. fs

Big deficit, but no big losers in FY22 budget cuts are expected to be a key driver of the economic recovery. For an additional year, more than 10 million low and middle-income earners will receive up to $1080 for individuals and $2160 for couples. Temporary full expensing and temporary loss carry-back for businesses, as announced in last year’s budget, is also being extended. The budget is also set to deliver cuts to the cost of childcare via a $1.7 billion investment in the sector. The government will remove the $10,560 cap on the Child Care Subsidy, benefiting about 18,000 families, while also increasing subsidies for families with more than one child under five in care by 30 percentage points, up to a maximum of 95%. This is aimed at boosting workforce participation and women’s economic security, and is expected to see 40,000 people able to work an extra day each week, Frydenberg said. Elsewhere, after many years of lobbying, the threshold that requires workers to earn

a minimum of $450 a month to be paid the superannuation guarantee has been axed. It’s expected to improve the financial situation of around 200,000 women. It’s a move that is sure to be welcomed by the Australian Institute of Superannuation Trustees, the Association of Superannuation Funds of Australia and Women in Super, who have all pushed for the threshold’s removal as a means of reducing the gender super gap. Retirees will also benefit from no longer being required to meet a work test before making voluntary contributions to super from July 2022 and the downsizer scheme being extended to those aged 60 and over. Currently, it is only available to those 65 and over. Changes to the Pension Loan Scheme are also being introduced from July next year. Older Australians will also be looked after in the form of a $17.7 billion injection into the aged care system. fs

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Key indicators

Source:

Monthly Indicators

Apr-21 Mar-21

Feb-21 Jan-21 Dec-20

Consumption Retail Sales (%m/m)

1.32

-0.78

0.29

-3.55

Retail Sales (%y/y)

2.22

9.09

10.61

9.74

137.24

22.42

5.05

11.06

13.55

Sales of New Motor Vehicles (%y/y)

Inflation CPI (%y/y) headline

1.11

0.86

0.69

-0.35

2.19

CPI (%y/y) trimmed mean

1.10

1.20

1.30

1.70

CPI (%y/y) weighted median

1.30

1.20

1.40

Output

Employment

Real GDP Growth (%q/q, sa)

3.13

3.40

-7.00

-0.30

Employed, Persons (Chg, 000’s, sa)

Real GDP Growth (%y/y, sa)

-1.12

-3.70

-6.31

1.40

-0.30

0.20

-3.01

0.10

Job Advertisements (%m/m, sa) Unemployment Rate (sa)

70.71

88.67

29.47

46.35

4.68

7.78

7.46

2.74

8.56

Industrial Production (%q/q, sa)

5.62

5.83

6.34

6.59

Survey Data Private New Capex, Total, Chain, Vol, (%q/q, sa)

Housing & Construction Dwellings approved, Tot, (%m/m, sa)

0.06

14.92

-10.64

16.53

Dwellings approved, Private Sector, (%m/m, sa)

17.39

20.11

-17.11

12.34

Survey Data Consumer Sentiment Index

118.78

111.80

109.06

107.00

112.00

AiG Manufacturing PMI Index

61.70

59.90

58.80

55.30

NAB Business Conditions Index

31.75

23.61

18.17

10.80

15.01

NAB Business Confidence Index

26.04

16.65

18.72

13.55

6.68

Trade Trade Balance (Mil. AUD)

5574.00

7595.00

9527.00

Exports (%y/y)

-5.61

8.58

1.72

-6.16

Imports (%y/y)

5.75

-4.19

-12.00

-13.23

Quarterly Indicators

7400.00

Mar-21 Dec-20 Sep-20 Jun-20 Mar-20

Balance of payments Current Account Balance (Bil. AUD, sa)

14.52

10.71

16.38

7.48

% of GDP

2.86

2.20

3.50

1.48

Corporate Profits Company Gross Operating Profits (%q/q)

-6.55

3.22

15.84

3.02

Financial Indicators

3.03

-3.08

-5.51

-1.91

14-May Mth ago 3 mths ago 1Yr Ago 3 Yrs ago

Interest rates RBA Cash Rate

0.10

0.25

1.50

Australian 10Y Government Bond Yield

1.74

1.69

1.22

0.90

2.61

Australian 10Y Corporate Bond Yield

1.96

1.57

1.27

2.01

3.31

Stockmarket All Ordinaries Index

7239.4

-0.57%

2.23%

33.62%

16.11%

S&P/ASX 300 Index

7002.3

-0.19%

3.04%

32.18%

14.95%

S&P/ASX 200 Index

7014.2

-0.13%

3.05%

31.63%

14.33%

S&P/ASX 100 Index

5809.9

0.36%

3.44%

32.12%

15.29%

Small Ordinaries

3179.9

-3.99%

0.35%

33.03%

12.39%

Exchange rates A$ trade weighted index

64.40

A$/US$

0.7769 0.7720 0.7751 0.6423 0.7555

A$/Euro

0.6403 0.6451 0.6396 0.5939 0.6312

A$/Yen

85.01 84.17 81.36 68.75 82.76

63.90

63.00

57.80

62.50

Commodity Prices

Employment

S&P GSCI - commodity index

Wages Total All Industries (%q/q, sa)

0.67

0.08

0.53

Wages Total Private Industries (%q/q, sa)

0.52

0.53

-0.08

0.38

Wages Total Public Industries (%q/q, sa)

0.52

0.45

0.00

0.45

WTI oil

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515.00

487.52

463.95

279.94

486.71

Iron ore

163.68

171.42

163.93

88.74

67.59

Gold

1838.10 1735.55 1816.35 1731.60 1319.85 65.51

63.15

59.50

27.40

71.01

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www.fsprivatewealth.com.au Volume 10 02 || 2019 2021 08 Issue Issue04

Family Office Management:

Family office bonuses By Tayyab Mohamed and Paul Westall, Agreus Group

Family Office Management

www.fsprivatewealth.com.au Volume 10 Issue 02 | 2021

CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Family office professionals have thrived during COVID-19 through their efforts to diversify investment portfolios. For the most part, these employees have received healthy bonuses, however, many would prefer the offer of a longterm investment plan over a monetary bonus. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Family office bonuses Global insights and benchmarks

Tayyab Mohamed and Paul Westall

his paper comprises excerpts from Agreus Group’s 2021 Global family office bonus benchmark report. It explores how family office professionals were awarded a bonus this season, including the structure, drivers, methodology and size. Further, it examines how bonuses correlate with assets under management, the size, structure and purpose of the family office as well as providing real-life case studies that both support and counter the statistics.

Methodology The insights presented in the report were collated via a survey which was distributed to our network of more than 20,000 family office professionals across the world. All survey respondents were family office professionals which included principals, C-suite leaders, management and junior staff across the four specialisms of investment, accounting and finance, support and operations, and executive. We also conducted a series of interviews with leaders across our four specialisms to verify these insights.

Introduction to family office bonuses Privacy, loyalty and excellence are all non-negotiable traits belonging to family office executives. In return, they require respect, autonomy and compensation. Great compensation at that. While it has to be said that professionals do not join family offices

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for the money, when it is often in the hands of one individual to generate wealth, mitigate risk and cut costs, incentivising family office staff has never been more important. Despite this importance and in spite of most of these professionals joining from the benchmarked environments of banking and broader financial services, family offices have always struggled with the concept of compensation. The requirements of a family office are unique and borderline impossible. Thus, compensation simply cannot compare to that of the corporate world. While an investment specialist in a bank may be responsible for managing client wealth within one or a few asset classes, a chief investment officer within a family office may manage a diverse portfolio consisting of both liquid and illiquid assets across multiple asset classes. They simply do not warrant the same salary. COVID-19, the push to initial public offerings (IPOs) and the rise of digital assets such as cryptocurrency have all proliferated the further diversification of investment portfolios. As a result, it has raised an even bigger question this season over how to reward and incentivise the family office professionals responsible for maintaining them. With more assets under management, a new generation of wealth and what many are calling ‘bonus backlash’ in the world of investment banking, it has never been more important to benchmark family office bonuses. This paper aims to do just that.

1. Investment professionals Ninety-seven percent of investment professionals said the portfolio

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they manage was diversified across multiple asset classes. Eighty-six percent also said it included both liquid and illiquid assets. With 78% investing directly as well as through funds, finding the right talent and retaining them has never been more important. COVID-19 has changed the way family offices invest. While the community has proven extremely resilient to the virus, it has influenced family office decisions. For example, in April 2020, 67% stated that they had further diversified their portfolio into newer asset classes as a direct result of the virus. A year on and that number is only rising, with family offices looking to decentralise risk, increase access to opportunity and fill a hole caused by declining asset classes such as real estate. As mentioned, COVID-19 alongside the push to IPOs in some of the emerging markets; a new generation of wealth; a focus on environmental, social, and governance; and a heightened awareness of digital assets such as cryptocurrency have all forced family offices to further diversify. While making the investment space a whole lot more interesting, it has further complicated how investment professionals are rewarded, especially when it comes to bonuses. Family office investment professionals led broadly by chief investment officers are responsible for a broad range of assets under management. Each of these assets necessitate a unique set of requirements from the length of time, commitment and contribution involved, the skillset and specialism required, and the level of risk it calls for. They also carry unique factors impacting levels of return and ability to measure that return from holding-period yields, inflation and interest, to demand and economic growth. Each asset class also requires a different benchmark, which as we now know is more than half of the time based on different indices, industries, regions and countries. All of these idiosyncrasies make valuing assets an individual and laborious task. Further, awarding a bonus based on those valuations is near impossible and has only been exacerbated by the move to further diversify, as well as recent investment hiring trends. We have witnessed a surge of investment professionals being brought in-house, specifically with a private equity focus, to help diversify these portfolios. We have also seen a rise in the number of hires being made for junior investment staff and portfolio managers to manage fund-made investments, to add another layer of scrutiny and security, which as we now know, is how 78% of family offices invest. All of these factors have further complicated the conversation around bonuses and, as a result, we have seen three clear trends for awarding investment bonuses: 1) The increase of discretionary bonuses based on overall fund performance 2) The slow but steady rise of the long-term incentive plan (LTIP) 3) The importance of preserving as well as generating wealth.

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Case study: Investments

Who: Chief investment officer Where: Single family office, London. Size of team: 15 investment professionals. Portfolio: Diversified across multiple asset classes, liquid and illiquid.

Tayyab

Investing type: Direct and through funds.

Mohamed,

Bonus structure: Combination of formulaic and

Agreus Group

discretionary.

Formula: Ability to earn up to 100% of annual salary upon reaching a benchmark of 7.5% of annual return. This formula exists until five years of employment when the LTIP then takes over. Discretion is used to increase the bonus based on personal and fund performance.

Dependent on asset class: No. Differs on a liquid/ illiquid basis: No. LTIP: Yes, after a five-year vesting period. Long-term investment) LTI vehicle: Onehundred-and-fifty percent of initial starting salary times upside (annual return) of each of the five years the

Mohamed is a co-founder and director of Agreus Group, a fullservice resourcing and recruitment consultancy dedicated to working exclusively with family offices throughout the world.

employee has worked for the family office. If the return is above 8%, they will receive all of the 150% of their salary over the five-year period. Below 5% equates to 70% of basic salary and 5–7% is calculated on a prorata basis. It is capped at a benchmark of 8%. Our bonus structure is simple. It is not dependent on the success of an individual asset class nor does it differ based on the liquid/ illiquid nature of the asset. Each employee is able to take home 100–200% of their salary as a bonus each year, dependent on the upside return and their own personal performance. We say it is discretionary as we frequently boost the figures to ensure they walk away with more than the matrix suggests. This year, every single employee has walked away with 150–200% of their annual salary, and we believe it is this ‘share the pot’ mentality which has awarded us a loyal and motivated team.

2. Accounting and finance professionals The purpose of a family office is to preserve and grow a family’s wealth. Finding the right people to preserve your wealth is just as important as finding those who know how to grow it—especially when 60% of family office costs were spent on staff compensation and related costs. While the previous section focused on compensating

Paul Westall, Agreus Group As a co-founder and director of Agreus Group, Westall is committed to helping family offices plan for growth, find the right people and optimise resources. He is instrumental in leading the team to achieve the strategic and the day-to-day objectives of the business.

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Family Office Management

and incentivising the professionals hired to grow family wealth, preserving existing wealth is vital, a sentiment only strengthened by the recent economic downturn. With this in mind, retaining and rewarding accounting and financial staff is equally as important as incentivising risk and opportunity, but do the bonuses belonging to both compare? Seventy-eight percent of accounting and finance professionals surveyed said COVID-19 had no impact on their bonus this season. While serving as an incredible reminder of just how resilient family offices have been to recent adversity, it suggests family office professionals who sit within the finance team have not been rewarded inline with growth. In fact, as our findings go on to reveal, accounting and finance professionals are the least likely group of family office employees to receive a substantial bonus. While 85% of investment and operational professionals received a performance bonus, just 66% of the financial equivalent were offered the same, leaving one in three without any compensation outside of their annual salary. The same revelation exists when discussing LTIPs, with just 15% of professionals eligible for a longer-term reward structure. Of the 15%, 75% were offered the opportunity to co-invest, but of the 85% who were not offered an LTIP, more than a quarter said they would like the opportunity to enrol in a long-term plan as part of their employment to align personal and office interests and, above all, feel valued. LTIPs are most-commonly used to reward investment professionals who manage a diverse array of assets with various time yields to match. LTIPs can be a fantastic way of incentivising this type of talent to stay with the family office on a longer-term basis. However, while designed to retain investment professionals, we have seen an increase in the structure being adopted across multiple specialisms. As a result, we expected a larger offering of LTIPs within this accounting and finance sector—particularly among chief financial officers. Chief financial officers across the UK most commonly take home 21–30% of their annual salary as a bonus. In the US, this is 11–20%. This equates to around £60,000 in the UK and $39,600 in the US, specific to each geography’s annual compensation. While seemingly positive when taken out of context, this figure puts chief financial officers as the lowest-compensated C-suite group

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Case study: Support and operational

Who: Chief operating officer Where: Single family office, Orange County, California. Size of team: Eight professionals. Portfolio: Diversified across multiple asset classes, liquid and illiquid. Investing type: Direct and through funds. Bonus structure: Combination of formulaic and discretionary. Formula: Interestingly, the formulaic aspect of the bonus is monetary and based on overall family office as well as personal performance. However, the discretionary element is based on KPIs. If met, they allow access to assets such as private jets, travel and luxury cars.

Dependent on asset class: No. Differs on a liquid/ illiquid basis: No. LTIP: No. My bonus is as unique as they come. If I hit all targets and KPIs, I will be eligible for a formulaic bonus which equates to 30% of my annual salary. I have received this annually now for four years. The discretionary element is the thing that keeps the role both interesting and incomparable to anything else. Again, if I meet a certain set of metrics I am able to share use of the family’s private assets. This includes use of the private jet twice a year, access to luxury cars for special occasions and use of three of the family’s holiday homes three times yearly. This includes a ski chalet, apartment in London and home in the Caribbean. For some people, bonuses are all about financial reward, but for me, I am almost certainly guaranteed a chunk of my annual salary each year while being able to live a life of luxury on occasion by simply working for wealth. It’s a win win.

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Family Office Management

with their bonus equalling less than half of chief operating officers, a quarter of chief executive and half of chief investment officers. This raises the question as to whether family offices should be doing more to motivate and retain their financial talent.

3. Support and operations professionals Every family office has a plethora of support staff and without them, it would be near impossible to operate. From handling hiring to managing diaries and minimising stress across the private and professional lives of their colleagues, support staff keep family offices alive. However, despite this, they often receive minimal recognition, resulting in high turnover—a risk most family offices cannot afford. When it comes to bonuses, however, it seems support and operational staff are highly compensated regarding their role with 85% receiving a performance bonus, and senior figures reaching over US$100,000. For the first time throughout our survey, there was also quite a disparity between family offices in the UK and those in the US, with support staff in the US walking away at times, with a much higher bonus. In the UK, personal and executive assistants most commonly receive a salary of £30,000 to £45,000. They also on average receive a performance bonus of 10% which equates to £3,000–£4,500 a year. Operations and project managers, while receiving the same percentage of salary on average, tended to reach a higher annual salary of £65,000–£75,000, making their annual bonus more in the region of £6,500–£7,500. This is seemingly aligned with the same professionals who work for US family offices, with executive and personal assistants taking home US$6,000 as a bonus on average. For operations and project managers, this figure is again comparable at US$7,200–US$8,500. The interesting contrast appears when looking at chief operating officers—arguably the most senior professional within the category of support and operational staff. chief operating officers in the UK can reach a salary of £150,000. In the US, the average chief operating officer salary is US$264,000. While alone there may not be a huge discrepancy when comparing currencies, it is all about the law of percentages. In the UK, chief operating officers receive 21–30% of their annual salary as a bonus, equating to £45,000. In the US, the average is 31–50%. This means that more than half of all US-based family office chief operating officers take home more than half of their salary as a bonus, every single year. US chief operating officers can often take home US$132,000 as a bonus, more than double the figure that most UK-based chief operating officers take home in the same time period. What neither US nor UK support and operational staff receive in the masses, however, is an LTIP. Just 15% of all professionals within the specialism were offered a long-term reward structure, the same as accounting and finance staff. This is disappointing given the risk of not retaining a valuable support function. It is also something that most support staff are looking for, with 75% seeking co-investment opportunities.

4. Executive professionals At Agreus, we define executives as chief executives, managing directors, chairpersons and heads of family offices. Twenty-eight percent of the report’s respondents were executives, of which 51% were chief ex-

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ecutives, 26% were heads of family office and 23% managing directors. As the family office marketplace evolves, s as external hires are becoming extremely fashionable. In Asia, 80% of chief executives are non-family members, in Europe it is 71%. Yet surprisingly, in the US, the most evolved marketplace, half of all chief executives still derive from the family itself. As a trend, hiring the next generation is becoming increasingly popular as next-gen leaders opt to silently lead from the Board and pursue making an impact over leading the family office. It is also a trend we have seen dominate the Middle Eastern market as family businesses go public, structuring their wealth and hiring a Western Board of executives in the process. Finding the right leadership team to run a family office is crucial and, naturally, the top talent require top compensation. However, it is not just about landing the right salary. Overwhelmingly and perhaps unsurprisingly, as a collective, family office executives receive the highest bonuses across all roles, with UK family office heads taking home £262,500 a year as a bonus based on 51–75% of the most commonly achieved salary of £350,000. Interestingly, this is the one other time in our report that we see a huge contrast with the US landscape, as US family office executives

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Family Office Management

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. What hurdle did investment professionals cite in relation to family office investment diversification? a) Family offices wanting to hold on to declining asset classes b) The lack of continuity due to their employment being on an outsourced basis c) Asset classes requiring different valuation criteria and benchmarks d) Family offices resisting hiring junior support staff 2. Which of the following statements regarding family office financial talent compensation is correct? a) Around 80% said COVD-19 had a minor impact on their bonus b) CFOs were the lowest compensated C-suite group c) Around half were offered a long-term investment plan d) Around 10% received compensation in addition to their salary 3. In terms of bonuses, support and operations staff were: a) recipients of larger bonuses if they worked for a UK, as opposed to a US, family office b) most likely to be offered co-investment opportunities as an additional reward c) lowly compensated d) highly compensated 4. Which of the following statements regarding family office executive professional compensation is correct? a) Around one-third said their bonus hinged on the success of the overall investment return b) Bonuses were highly commensurate with the diversity of portfolios which they managed c) Personal fit overshadowed personal performance d) Around two-thirds said their bonus hinged on the success of a single asset class 5. Most family office professionals cited their relationship with the principal as the greatest driver of discretionary bonuses. a) True b) False 6. Numerous family office professionals expressed a preference for a yearly bonus as opposed to a long-term investment plan. a) True b) False

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receiving an average bonus of US$198,000, nearly half the amount UK executives received. Executive leaders also told us that they oversee incredibly diversified portfolios. However, despite this, the substantial payouts listed in this report do not necessarily correlate with the diversity of portfolios in the same way that investment professional compensation might. Forty-three percent of investment professionals had a benchmark to meet before making a bonus, with another 24% stating their bonus was dependent on the success of an individual asset class. Less than a quarter of executives, however, said their bonus was dependent on the success of an individual asset class. In contrast, 30% said the overall investment return was the biggest driver behind their bonus. Another 30% said their relationship with the principal was the greatest factor. This was the lowest percentage for this answer across the whole survey. This suggests that family office executives believe their personal performance is of the same importance to personal fit; both of which are of course vital in the unique world of family offices.

Conclusion While investment bankers pull 100-hour weeks in an attempt to claw back any hope of a bonus this season, family office professionals are walking away with 100% if not 200% of their annual salary, as bonus season closes a successful year for family offices. With more than three-quarters of family office professionals stating their bonus was unaffected by the coronavirus pandemic, the community has proven once again how resilient it is to adversity. With more assets under management, a newly diversified portfolio and larger in-house teams to manage both, we were expecting a selection of sophisticated structures catering for each asset class, though it seems overall discretionary bonuses are still the most common method of reward. When it came to the key drivers behind a discretionary bonus, the majority of family office professionals believed it was their relationship with the principal which has the greatest weighting. However, executives believed their personal performance and the performance of the fund was of equal importance to their ability to have a relationship with the principal or fit in with the culture of the family office. Our 2021 global family office bonus benchmark report suggested that the UK and US specifically have a very different approach to payingout bonuses, with chief operating officers in the US taking home more than double the bonuses of their UK counterparts. When it came to executives, UK family office heads overtook every specialism across every region. Perhaps most surprisingly, given the importance of retaining talent in family offices, was the lack of LTIPs offered to professionals. While our quantitative data presents bonus trends for every specialism, our qualitative data presents a story. What it tells us is that those with longer-term reward structures are most content and driven to succeed within their family office. fs

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Ethics & Governance:

How good is your modern slavery statement?

By James Halliday, Keypoint Law

Ethics & Governance

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Australian entities with a minimum consolidated revenue of $100 million must have a modern slavery statement and fulfil legislated reporting obligations in relation to supply chains, identifying risks and formulating a response plan to redress potential harms. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

How good is your modern slavery statement?

A James Halliday

modern slavery statement (Statement) is necessary for all Australian entities or entities that carry on business in Australia with a minimum annual consolidated revenue of $100 million.1 Reporting obligations relate to the risk of modern slavery in the operations and supply chain of a reporting entity (and its owned and controlled entities), as well as the steps the entity has taken to respond to the risks identified. A significant number of Statements submitted in 2020 were found to be invalid or non-compliant by the Australian Border Force (ABF). Thus, reporting entities should ensure the quality of Statements to maintain compliance.

What is modern slavery? The Modern Slavery Act 2018 (Cth) (Modern Slavery Act) defines modern slavery to include trafficking in persons, slavery, servitude, forced marriage, forced labour, debt bondage, the worst forms of child labour, and deceptive recruiting for labour or services.

What is involved in a modern slavery statement? As per section 16(1) of the Modern Slavery Act, a Statement must, in relation to each reporting entity, among other things: a) identify the reporting entity;

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b) describe the structure, operations and supply chains of the reporting entity; and c) describe the risks of modern slavery practices in the operations and supply chains of the reporting entity, and any entities that the reporting entity owns or controls; and d) describe the actions taken by the reporting entity and any entity that the reporting entity owns or controls, to assess and address those risks, including due diligence and remediation processes; and e) describe how the reporting entity assesses the effectiveness of such actions; and f) describe the process of consultation with: i. any entities that the reporting entity owns or controls; and ii. in the case of a reporting entity covered by a Statement under section 14—the entity giving the Statement; and g) include any other information that the reporting entity, or the entity giving the Statement, considers relevant. The ABF encourages reporting entities to explain how COVID-19 has impacted their ability to assess or address modern slavery risks, such as by delaying in-person training, planned audits or surveys, or disrupting supplier engagement activities. The ABF also recommends that entities consider how COVID-19 has increased the vulnerability of its workers in global operations and supply chains to modern slavery.

Non-compliant Statements: Where it goes wrong wThe most common areas of non-compliance, as considered by the ABF, include:

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• improper indication of approval and signatures • overseas Statements being submitted without amendment to address the Modern Slavery Act’s mandatory criteria • failure to identify Australian reporting entity/ies covered by the Statement • failure to describe nature, context or extent of identified modern slavery risks • failure to explain consultation method with owned or controlled entities.

What does this mean for your organisation? Practical responses

The modern slavery reporting requirement directs corporate responses in identifying and addressing modern slavery risks in global operations and supply chains. When entities fail to undertake their modern slavery responsibilities, they expose communities to harm and themselves to risk and detriment. In order to increase the credibility and strength of your entity’s Statement, there are several measures and actions that we recommend you take and implement. The three main categories that these actions fall under are: 1. identification (section 16(1)(c)) 2. response (section 16(1)(d)) 3. evaluation of modern slavery risks (section 16(1)(d)). Category 1: Identification

To identify modern slavery risks within your operations and supply chains, entities should identify factors which contribute to modern slavery, such as: • industries (e.g. agriculture, retails, hospitality) • employee background (e.g. literacy, education, lowsocioeconomic status) • geographic location (e.g. political instability, government transparency).

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You should investigate your operations and supply chains. Companies can assess the risk level by undertaking various reviews through formal and informal means. This may include the use of data analytics, direct enquiries with suppliers and analysis of indicators. An understanding of your areas of risk should be included as a section in your Statement, as well as through policy changes or public announcements. Methodically outline and prioritise red flags in your business and develop an understanding of how these areas of risk may have common sources of causation. This stage should also include the planning and development of responses that will allow your entity to avoid, mitigate or manage these risks. The introduction of a reporting scheme to provide early warnings of situations indicating modern slavery risks may also be included in this action. Confirm your findings and conclusions of your entity’s areas of risk through consultation with relevant external stakeholders and suppliers. These actions should be continually performed along the lifecycle of your business or any business relationship to ensure that new risks are identified as they arise. Category 2: Response

In response to modern slavery risks in your operations and supply chains, entities should undertake the following procedures: • Develop a clear plan to meet human rights and modern slavery responsibilities (see also ‘Should an entity have a modern slavery policy?’ section that follows). • Include undertaking human rights due diligence to limit and combat any potential modern slavery. This may include a risk action plan implemented through employee training, duty delegation and changes to hiring processes. Entities should include these measures and publish their findings in the Statement. • Use its social capital to prevent or mitigate the harm

James Halliday, Keypoint Law Halliday is a principal at Keypoint Law. He is a corporate lawyer with nearly 25 years’ experience in M&A, fundraising and related fields, all obtained in top-tier law firms. He acts on public and private M&A, equity and hybrid capital markets transactions, joint ventures and other corporate and commercial transactions.

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. What is the minimum annual consolidated revenue above which Australian business entities must submit a modern slavery statement? a) $1 million b) $100,000 c) $100 million d) $50 million 2. Which of the following are defined as modern slavery under the Modern Slavery Act 2018? a) forced marriage b) forced labour c) people trafficking d) All of the above 3. In considering modern slavery risks in its supply chains, an entity should seek to identify which group of risk factors? a) poor literacy and regional conflicts. b) political instability, poor literacy and education. c) lack of technological development and natural resources. d) opaque government policy and lack of technological development. 4. In responding to modern slavery risks, what action is recommended to mitigate harm where an entity is linked to modern slavery? a) Provide resources and training to increase awareness of modern slavery risks. b) Use political influence to protect workers’ rights. c) Use social capital to influence change where there are wrongful practices. d) Support modern slavery survivors through employment opportunities. 5. The Australian Border Force (ABF) encourages Australian reporting entities to demonstrate how COVID-19 impacted their ability to address modern slavery risks. a) True b) False 6. For Australian reporting entities, it is compulsory to formulate a modern slavery policy. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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wherever an entity ‘causes’, ‘contributes to’ or is ‘directly linked to’ modern slavery risks. Social capital is the influence your entity has to bring about change. Namely, wherever there are wrongful practices. This can include the use of board positions, direct engagement and correspondence with investors or collaboration with stakeholders. • Redress modern slavery harms where the business has been involved in harmful practices. All actions taken in response of modern slavery risks should be included as an independent section in your Statement. Category 3: Evaluation of modern slavery risk

To evaluate responses to these modern slavery risks, entities should undertake the following actions: • Create a framework or internal reporting system that studies and evaluates commitment, risk management actions and capabilities. The findings of these reports should indicate the next step for further improvement of an entity’s modern slavery commitment. • Compare identified areas at risk of modern slavery before and after period of response to develop understanding of the effectiveness and success of any actions taken. Any findings in the evaluation of modern slavery risk responses should be reported in the Statement.

Should an entity have a modern slavery policy? A modern slavery policy need not adhere to the same criteria nor undergo the same scrutiny as a Statement. Modern slavery policies are voluntary, however, it is highly recommended that one is produced for several reasons, including: • for reporting entities, developing a modern slavery policy may provide substance to paragraph (d) of section 16(1) of the Modern Slavery Act (which deals with the criteria of a Statement) • for entities without a Statement, a policy affirms your commitment to ending all forms of modern slavery and would outline your approach to reducing the risk of modern slavery practices within your supply chain and operations • as a part of your ethical framework, a modern slavery policy would highlight your support for international conventions, treaties, and protocols relevant to combatting modern slavery, and • by protecting against possible business harm and improving the integrity and quality of your supply chain, you may be able to increase profitability, investor confidence and access finance opportunities.2

Conclusion Reporting entities must be aware that the preparation for their reporting requirements on modern slavery begins well before they start writing a Statement. The appropriate actions and steps need to be taken so that an entity’s Statement has substance enough to be credible and compliant with the requirements under the Modern Slavery Act. fs Notes 1 A lower $50 million threshold may be introduced by the Modern Slavery Act 2018 (NSW), however, this legislation has not yet commenced. 2 Department of Home Affairs ‘Modern Slavery’ (webpage, viewed 11 December 2020), Commonwealth of Australia [https://www.homeaffairs.gov.au/criminal-justice/Pages/modern-slavery.aspx].

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Taxation & Estate Planning:

JobKeeper cases

By Letty Chen and Lee-Ann Hayes, TaxBanter

CGT on a deceased’s assets By Brett Davies, Legal Consolidated Barristers and Solicitors

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: This paper examines the consequences of a Federal Court decision on amounts payable to meet JobKeeper minimum requirements against overtime payments in arrears. Further, it explains the implications of a decision on the validity of backdated ABNs and eligibility for the COVID-19 stimulus. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

JobKeeper cases Backpay counts towards minimum payments, backdated ABNs meet eligibility condition

Letty Chen and Lee-Ann Hayes

wo cases decided in December 2020 have provided much-needed guidance as to the operation of specific aspects of the JobKeeper scheme. The Full Federal Court judgment in Qantas Airways Limited v Flight Attendants’ Association of Australia [2020] FCAFC 227 means that employers may reduce the necessary ‘top-up’ JobKeeper payment to an employee for a fortnight by any payments made in arrears during that fortnight in relation to work performed prior to that fortnight. Meanwhile, in Apted and FCT [2020] AATA 5139, the Administrative Appeals Tribunal (Tribunal) confirmed that an Australian Business Number (ABN) with an effective date no later than 12 March 2020 will satisfy the eligibility requirement to hold an active ABN on that date, even if the application to reactivate (or register) a backdated ABN was granted after that date. On 24 March 2021, the Full Federal Court dismissed the Commissioner’s appeal against the decision of the Tribunal in FCT v Apted [2021] FCAFC 45. On 29 April 2021, the ATO updated its Decision Impact Statement and Law Administration Practice Statement PS LA 2020/1 Commissioner’s discretion to allow further time for an entity to hold an ABN or pro-

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vide notice to the Commissioner of assessable income or supplies in response to the Full Court’s decision. The ATO intends to review its previous JobKeeper decisions that may be affected by the case.

The Qantas case The JobKeeper minimum payment guarantee

Section 789GDA [repealed 29 March 2021] of the Fair Work Act 2009 (FW Act) provided that an employer must ensure that the total amount payable to an eligible employee in respect of a JobKeeper fortnight is at least the greater of: • the amount of JobKeeper payable to the employer for the employee for the fortnight, and • the amounts payable to the employee in relation to the performance of work during the fortnight. About the case

The case concerned two proceedings which were heard together: • An appeal by Qantas Airways Limited and QF Cabin Crew Australia Pty Limited against the Flight Attendants’ Association of Australia which cross-appealed • An appeal by Qantas Airways Limited and Qantas Ground Services Pty Ltd against the Transport Workers’ Union of Australia and the Australian Municipal, Administrative, Clerical and Services Union which both cross-appealed.

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Letty Chen, TaxBanter Chen is a technical tax writer at TaxBanter. Her experience includes business services and tax advisory roles in various public practice firms, and as a senior specialist at a tax professional association. Chen is a chartered accountant and a chartered tax adviser.

In this paper, the appellants are collectively referred to as ‘Qantas’ and the respondents as ‘the unions’. The issue

Qantas regularly paid overtime amounts to employees in arrears during JobKeeper fortnights that commenced after the work was performed. The core issue in this case can be set out in this very simplistic example (this is not based on actual facts but is merely illustrative): Qantas owed $500 of overtime payments to an employee, Sally, for overtime work that she performed in February 2020. In mid-March, Qantas stood down Sally indefinitely due to flight cancellations. Sally agreed to be an eligible employee of Qantas for JobKeeper purposes commencing 30 March 2020. In accordance with its pay cycle, Qantas paid the $500 to Sally during the JobKeeper fortnight commencing 30 March 2020. Sally did not perform any employment duties during that fortnight. There is no suggestion that the payment in arrears breached the terms of any applicable employment contract or award. The question before the court concerned the meaning to be given to the words “amount payable” in the phrase “the amounts payable to the employee in relation to the performance of work during the fortnight” in section 789GDA(2)(b) of the FW Act.

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Qantas’s position

Qantas contended that the above expression meant the amount that would ordinarily be payable to the employee during the fortnight in relation to the performance of work. In the example, this meant that the $500 payment for work performed in February 2020 counted towards the minimum payment guarantee for Sally. Qantas would have been required to make a ‘top-up’ payment of only $1,000 to Sally to satisfy the minimum amount of $1,500 for the fortnight commencing 30 March 2020. The unions’ position

The unions contended that the expression meant the amount that was earned by the employee in relation to the performance of work during the fortnight. In the example, this meant that the $500 payment in arrears did not count towards the minimum payment guarantee. Qantas should have made a ‘top-up’ payment of $1,500 to satisfy the JobKeeper rules—on top of the $500 for work performed prior to 30 March 2020. The primary judge [Justice Flick], in a Federal Court judgment Qantas Airways Limited v Flight Attendants’ Association of Australia (The JobKeeper Case) [2020] FCA 1365, dated 24 September 2020 and later subject to appeal in Qantas Airways Limited v Flight Attendants’ Association of Australia [2020] FCAFC 227, concluded

Lee-Ann Hayes, TaxBanter Hayes has over 19 years’ tax training experience and is well regarded as an enthusiastic, approachable and engaging presenter. Her strong technical knowledge was developed at the Australian Taxation Office, where she held various technical, auditing and training roles.

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that it meant the amount that was both payable to and earned by the employee in relation to the performance of work during the fortnight. The Full Court’s decision

The majority of the Full Court allowed Qantas’s appeal. Justices Jagot and Wheelahan held that there was ambiguity but preferred Qantas’s construction of section 789GDA(2) for reasons including: • The word ‘payable’ takes its ordinary meaning of liable or required to be paid. The source of the obligation was in the contract or industrial instrument. • The ‘manipulation’ suggested by the unions (i.e. overtime being payable in arrears) was in accordance with Qantas’s obligations under the applicable industrial instruments and reflected its ordinary pay cycle. • The fact that section 789GDA(2)(b) was copied from section 323(1) of the FW Act indicated that Parliament did not intend the same phrase in two sections to have different meanings. The phrase in section 323(1) meant only that the employer was liable to pay the amounts to the employee. • Note 2 in section 789GDA referred to incentive-based payments, allowances and leave payments, none of which were necessarily related to work performed. This suggests that the focus of the provision is not the work performed by the employee during the fortnight, but the amount which was payable by the employer. • The purpose of the JobKeeper scheme was to provide a wage subsidy and not to impose a new obligation on employers to pay what the employee had earned in the fortnight irrespective of whether or not that amount would be payable under the contract or industrial instrument. Justice Bromberg, dissenting, preferred the unions’ construction—that is, ‘amounts payable’ is concerned with liability in a JobKeeper fortnight for performance of work in that fortnight. Implications

The Full Court’s decision meant that Qantas will not be required to backpay hundreds of workers, as payments in arrears counted towards the minimum payment requirement. Under the overturned decision of the single judge, Qantas would not have been able to count these amounts and would therefore have had to make larger top-up payments to reach the minimum JobKeeper amount per fortnight. The overturned decision had also meant that if an employee was not paid for work performed in a fortnight in the same fortnight, then those amounts would not count towards the minimum payment guarantee in any fortnight. This decision will potentially have implications for other businesses which, like Qantas, had furloughed or significantly reduced the work hours of its employees and were therefore liable to pay a top-up JobKeeper amount for a fortnight, and—critically—were also making payments in arrears for work actually performed prior to the relevant fortnight. Such businesses, which may have been preparing to back pay workers extra top-up payments in light of the Federal Court decision in September, may now no longer have to do so (but check the application of the JobKeeper and Fair Work rules to each business’s specific circumstances). On 14 January 2021, the unions lodged an application for special leave to appeal to the High Court against the decision of the Full Federal Court.

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The Apted case The ABN condition: JobKeeper eligibility Section 11 of the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Rules) contains the JobKeeper scheme eligibility criteria for an entity, including the following integrity rule:

Section 11(6) of the Rules Integrity rule (6) An entity is not entitled to a jobkeeper payment under this section unless the entity had an ABN on 12 March 2020 (or a later time allowed by the Commissioner), …

The facts

The Taxpayer—Mr Apted—operated a business as a sole trader. He retired in 2018 and cancelled his ABN registration. In mid-2019, he came out of retirement and resumed his business. However, he did not reactivate his ABN at that time due to a misunderstanding of the no-ABN withholding rules. On 31 March 2020, the Taxpayer successfully applied to reinstate the ABN with an effective date of 31 March 2020. In April 2020, the Taxpayer lodged a JobKeeper application for himself as a business participant in relation to his business. The Commissioner advised the Taxpayer he was not eligible for Jobkeeper as he: • did not register for an ABN on or before 12 March 2020, or • registered for an ABN on or before 12 March 2020 and applied a later start date. The Taxpayer subsequently applied for the Commissioner to exercise his discretion to allow an entity further time to meet the requirement to have had an ABN on 12 March 2020. The Commissioner did not grant the request because the ABN was not active as at 12 March 2020 and the reactivation had occurred after that date. In June 2020, the Registrar of the Australian Business Register (ABR) agreed to adjust the ABR to amend the effective date of the reactivated ABN to 1 July 2019 (when the Taxpayer resumed his business). However, the Commissioner maintained his position that the Taxpayer was ineligible for JobKeeper as he did not hold an active ABN on 12 March 2020, but rather, had reactivated a dormant ABN after that date. The Tribunal’s decision

The Tribunal found that the Taxpayer did have an active ABN on 12 March 2020 for the purposes of section 11 of the Rules. The integrity rule assumes a level of confidence in the integrity of the ABN registration process. That process includes a determination by the Registrar of the date of effect, including one which predates the application. The Tribunal was not provided with any evidence to suggest the ABN registration process lacked integrity or rigour. The Tribunal also found that it was within its jurisdiction to review the Commissioner’s exercise of the discretion to allow a later date. While it was not necessary for it to determine this issue, the Tribunal addressed the question because this was a test case to provide guidance on the administration of the ABN rule. The

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Tribunal further concluded that if its decision that the Taxpayer had an active ABN on 12 March 2020 was wrong, then the discretion should be exercised in the Taxpayer’s favour. The Tribunal observed that most entities in the Taxpayer’s position would not require the Commissioner to consider exercising the discretion, and instead would be more appropriately dealt with by engaging with the established ABN registration process. Provided the ABN had a date of effect that pre-dates 12 March 2020, even if the registration or re-registration was granted retrospectively after that date, the integrity rule will be satisfied. In other cases, entities which have to rely upon the exercise of the discretion have access to Tribunal review. The ATO’s position

The ATO published an interim Decision Impact Statement (DIS) on the Apted case. The DIS stated that the decision was inconsistent with the Commissioner’s view. In particular, the Commissioner considered that: • whether an entity had an ABN was to be determined by reference to whether an entity had an active ABN on 12 March 2020 (i.e. this was a point-in-time test and a backdated ABN would not meet the requirement) • his discretion was not reviewable by the Tribunal, although judicial review may be sought, and • a favourable exercise of the discretion was not appropriate. The Commissioner’s view on when the discretion would be appropriately exercised is outlined in PS LA 2020/1. The Commissioner filed an appeal to the Full Federal Court in respect of the Tribunal decision. The Commissioner’s view was that: • where an entity’s eligibility can otherwise be resolved in a manner favourable to them, those decisions will continue to be made, and • the ATO would postpone finalising decisions in circumstances where eligibility might depend on the view of the Full Court. However, if the entity would like a decision to be made over this time, the ATO would do so in line with PS LA 2020/1. The Cash Flow Boost [a federal government measure “to provide temporary cash flow support to small and medium businesses and not-for-profit (NFP) organisations that employed staff during the economic downturn associated with COVID-19 …”] rules contain an identical requirement to have an ABN on 12 March 2020 (or a later time allowed by the Commissioner). The Commissioner intended to apply the same approach as outlined here to the Cash Flow Boost. Commissioner loses Apted appeal

The Full Federal Court dismissed the Commissioner’s appeal against the decision of the Tribunal, albeit for different reasons to the Tribunal.

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In its reasoning, the Full Court made the following conclusions in relation to three issues. Issue 1: Having an ABN on 12 March 2020

The Taxpayer contended that an entity has an ABN on 12 March 2020 if the entity has an ABN on the ABR with a date of effect which covers 12 March 2020. The Commissioner contended that section 11(6) directs attention to what the ABR showed on that day. The Full Court—overturning the Tribunal’s decision in respect of this issue—held that the Commissioner’s construction was to be preferred. Therefore, the Taxpayer did not have an ABN on 12 March 2020 within the meaning of section 11(6). Issue 2: The ‘later time’ discretion

The Full Court held that the ‘later time’ discretion formed part of the reviewable decision. Accordingly, the Tribunal had jurisdiction to exercise the discretion. Even if the discretion did not form part of the reviewable decision, the Tribunal had jurisdiction to exercise the discretion by reason of section 43(1) of the Administrative Appeals Tribunal Act 1975. Section 43(1) provides that: For the purpose of reviewing a decision, the Tribunal may exercise all the powers and discretions that are conferred by any relevant enactment on the person who made the decision … Issue 3: Whether the Tribunal erred

The Full Court held that the Commissioner did not establish that the Tribunal relevantly erred in exercising the discretion to allow a ‘later time’. The key reasons included the following: 1. The Commissioner submitted that the discretion could only be exercised in ‘limited circumstances’. However, the Treasurer enacted a broad discretion and did not identify any matters by which it was to be limited. 2. It was clear that the real reason for the Commissioner’s refusal to exercise the discretion was the lack of ABN registration on 12 March 2020. But this was the very thing which lay the foundation for the exercise of the discretion and, of itself, it was not a proper basis to refuse to exercise the discretion. ATO response to the Apted decision

On 29 April 2021, the ATO updated its Decision Impact Statement in relation to the Full Court decision. It stated that the Commissioner: • accepted the Court’s views regarding the ability for the discretion to allow a later time for having an ABN to be reviewed as part of a review of a decision on entitlement to JobKeeper payments • accepted the court’s view that the discretion to allow a later time to have an ABN allowed for the consideration of a broad range of circumstances, and that this approach also applied to the discretions to allow a later time to provide notice of assessable business income/taxable supplies • considered that it was not the intention of section 11(6) that the discretion was to be exercised in every case in which there was business activity prior to 12 March 2020. The discretion will be exercised on a case-by-case basis. If the business is operating without visibility to the Commissioner as at 12 March 2020 (deliber-

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ately or otherwise), that would weigh against the exercise of discretion; • considered that the court’s decision and the Commissioner’s view of the decision would apply equally to the identical requirements for the Cash Flow Boost • considered the Court’s decision applied to discretions contained in the integrity rules in the Cash Flow Boost and JobKeeper legislation but does not affect any other discretions that the Commissioner may exercise. The ATO has also updated PS LA 2020/1 in response to the court’s decision. ATO to automatically review JobKeeper and Cash Flow Boost decisions affected by Apted

The ATO has also released a new fact sheet titled JobKeeper Payment and the ‘later time’ discretion in its response to the Full Court decision. The ATO confirmed that it does not intend to appeal the decision. As a consequence of the Full Court’s decision, the Commissioner will be revisiting decisions where the ATO considers the outcome may have been different if the court’s reasoning was applied. Where eligibility will still not be established (because one or more other eligibility criteria has not been satisfied) even if the Commissioner’s discretion was exercised, the Commissioner will not revisit his previous decision. If a taxpayer declines to have a decision which declines to exercise the Commissioner’s discretion, the Commissioner will automatically review the taxpayer’s circumstances and whether his discretion should be applied. There is no need to contact the ATO at this time. The ATO will contact the taxpayer upon completion of the review or to request further information. The ATO aims to have the process completed by the end of June 2021. It is taking a similar approach in relation to eligibility for the Cash Flow Boost. The factsheet also contains some handy eligibility checklists. fs This paper was prepared by tax experts from TaxBanter, an organisation which provides technical tax training to organisations across Australia. TaxBanter currently provides online training options in the areas of: • tax updates • superannuation training • bookkeeper training • fundamentals/graduate training • JobKeeper training • tailored private training. You can read further blogs and view all of TaxBanter’s training opportunities on its website.

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. What does the outcome of the Full Court’s decision mean for Qantas? a) Qantas does not have to make annual leave payments to its employees b) Qantas does not have to provide backpay to workers as payments in arrears c) Qantas does not have to make overtime payments to its employees d) Qantas does have to provide backpay to workers as payments in arrears 2. In the Qantas case, the meaning of what wording from section 789GDA of the Fair Work Act was disputed? a) ‘Work performed’ b) ‘Eligible overtime’ c) ‘Amounts payable’ d)‘JobKeeper fortnight’ 3. The ATO originally advised Mr Apted that he was not eligible for JobKeeper because: a) he did not register for an ABN on or before 12 March 2020 b) he had retired from work in 2018 c) he operated his business as a sole trader d) he did not apply to the Australian Business Register before 30 March 2020 4. The Full Court’s decision on the Apted case means that the ATO will need to revisit other decisions where: a) access to JobKeeper was granted after 12 March 2020 b) business owners were denied access to JobKeeper c) an ABN request was not granted d) applicants were denied access to JobSeeker 5. Qantas’s position was that it could offset its JobKeeper obligations to employees, against any overtime payments in arrears which were due to them. a) True b) False 6. The Commissioner of Taxation and the Registrar of the ABR were in agreement as to the status of Mr Apted’s ABN on 12 March 2020. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Specific gifts and collectables in Wills carry unforeseen CGT implications, particularly when valuation criteria come into play. Moreover, the implications can be substantial for larger-value assets and an estate overall. However, there are estate-equalisation strategies and remedies. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

CGT on a deceased’s assets Why specific gifts in a Will are not a good idea

S Brett Davies

Is a wedding ring a ‘collectable’?

ometimes people make the mistake of putting specific gifts in their Will. For example, ‘I leave my wedding ring to my daughter’. The result of such a gift is that capital gains tax (CGT) death duty will be payable on that wedding ring. At death, your Will is lodged with the probate office at which point it becomes a public document. Both the Australian Taxation Office (ATO) and the press can gain access to a copy of your Will. Because the wedding ring was specifically mentioned in the Will, the ATO watches what the daughter does with your ring. Does she give it to her own daughter when she gets married? Does she give it away to a friend? Either way, the ATO will require CGT to be paid on the daughter’s ‘disposal’ of the ring. This is the case even though the ‘disposal’ relates to a gift received from her mother.

Section 108-10(2)(a) states: A collectable is [an] artwork, jewellery, an antique, or a coin or medallion … A wedding ring therefore falls under this section, so if its value is greater than $500, it will be subject to CGT death duty.

Why is CGT death duty payable on specific gifts, like a wedding ring? Under section 118-10(1) of the Income Tax Assessment Act, 1997 (ITAA 1997) which deals with collectables and personal use assets, CGT will be payable if the ring is valued at more than $500. It states: A capital gain or capital loss you make from a collectable is disregarded if the first element of its cost base, or the first element of its cost if it is a depreciating asset, is $500 or less.

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How much CGT death duty will be payable on a wedding ring? You will only be required to pay CGT on the ‘gain’. When you buy a capital item for, say, $100, and then sell it for $300, the capital gain or profit is $200. You will need to disclose the $200 in your tax return as a capital gain, and you will pay tax accordingly. In some instances, an item of jewellery can devalue by as much as 90% the moment after it is purchased. A $20,000 engagement ring could therefore be worth around $2,000. In this case, a spouse has ‘acquired’ the ring for $2,000 and this becomes their cost base. When the spouse dies, the person whom she leaves the ring to inherits the spouse’s cost base of $2,000. So, if the daughter inherits the ring through the Will, she will have acquired the ring for $2,000. Now, assume the daughter later decides to give the ring away to a friend, for free. Sadly, at this point, she must calculate CGT on the ring’s ‘market value’. The ‘market value’ is not the inherited cost base amount of $2,000. Rather, the ‘market value’ is the value of the ring on the day that the daughter gives it away. Let us say that this particular piece of jewellery has appreciated in value and is now worth

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$10,000. The daughter has made an $8,000 capital gain from ‘disposing’ of the ring, which needs to be included in her tax return.

Can the profit be reduced by the Will maker’s holding costs? What if the deceased wife and her husband had borrowed money to pay for the ring? Is the interest deductible from the ‘profit’? Usually, but not in this instance. Government officials care little for the romance of marriage. There is a special little rule in section 108-17 of the ITAA 1997 which states that you cannot deduct the cost of the interest repayments from the cost base of a collectable. But surely, the cost of insuring the ring all these years by both the mother and then the daughter can be deducted from the profit? Again, sadly, no.

What is the ‘market value’ of the ring? As we have seen, the deceased mother received the ring for a deemed amount of $2,000. When she died, her daughter inherited the ring’s $2,000 cost base. However, by the time the daughter hands the ring over to her friend the ‘market value’ of the wedding ring has shot up to $10,000. So, why does ‘market value’ apply when she gave the ring to her friend? Section 112-20 of the ITAA 1997 tells us that the first element of the cost base and reduced cost base of a CGT asset someone acquires from another entity is its market value at the time of acquisition if: (a) you did not incur expenditure to acquire it, except where your acquisition of the asset resulted from …

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(c) [a transaction in which] you did not deal at arm’s length with the other entity in connection with the acquisition. So, in this scenario, the gift to the friend was made on a non-arm’s length’ basis (‘love’ is not commercial). The deemed ‘disposal’ value is therefore the market value of $10,000 at the time the gift was given to the friend, and the daughter’s profit (gain) was $8,000.

Specific gifts in Wills are not a good idea Specific gifts, like jewellery, cars, and cash, in Wills are generally a bad idea, and can have unintended outcomes. No-one knows what they will own at the date of their death. Therefore, specific gifts often lead to unexpected results. Further, by documenting assets in their Will, a person alerts the government and the public as to what they owned. Instead, it is often better to leave everything as a percentage to residuary beneficiaries, for example: (a) I leave everything to my spouse, (b) but if my spouse dies before me then, I leave everything to my children equally. In this way, you leave it up to your spouse and children to work out what to do with your jewellery, Lladro statues, favourite car, and other items. The residuary beneficiary pays the tax on the specific gifts in Wills

In another scenario, assume you have assets worth $3 million. In your Will, you leave your son the factory premises which are worth $1.5 million, and the terms of the Will require that the factory must be sold. You

Brett Davies, Legal Consolidated Barristers and Solicitors Davies is adjunct professor at The University of Western Australia Law School, and adjunct reader at Curtin Business School lecturing in estate planning and superannuation. He has sat on the Tax Institutes’ national Education Committee and the Law Society’s and Law Council’s Tax Committee.

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Taxation & Estate Planning

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. After a Will is admitted to probate, which of the following applies? a) It becomes a public document b) It becomes accessible to the ATO only c) It becomes a registered document d) It becomes accessible to the executor only 2. CGT death duty may be payable on specific gifts, such as a valuable item of jewellery because: a) It falls under the definition of a personal use asset b) It falls under the definition of an exempt asset c) It falls under the definition of a collectable d) Its market value has fallen since it was originally acquired 3. Janet purchased a diamond ring for $50,000 which she left to her daughter Emma in her Will. What is Emma’s cost base? a) Emma will inherit her mother’s cost-base of $50,000 b) Emma’s cost base will be the market value of the ring at the time she acquires it c) Emma’s cost base will be the market value of the ring when she disposes of it d) Emma’s cost base will be the insured value of the ring at the time she acquires it 4. What is the objective of hotchpot clause in a Will? a) To ensure fairness by converting any outstanding loans to advancements b) To ensure fairness by excluding any beneficiaries who have already received an advancement c) To ensure fairness by forgiving any loans outstanding at the time of death d) To ensure fairness by taking account of any advancements the beneficiaries have already received 5. A capital gain or loss you make from a collectable can be disregarded if the item was acquired for $500 or less. a) True b) False 6. When calculating CGT liability on a collectable item, interest is an allowable deduction. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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leave your daughter the residuary estate which is also worth $1.5 million. You die a few months later content in the belief that your children have been provided for equally. However, it transpires that there is a CGT liability on the factory of $700,000. Who pays the CGT? In this situation, the estate will be liable for the CGT. Therefore, your son walks away with $1.5 million clear, while your daughter, as the residuary beneficiary, ends up receiving only $800,000. This could occur because the asset, that is, the factory, was sold before the estate was fully administrated, and the proceeds of the sale were not distributed until this was carried out.

Estate equalisation in Wills: risks of a ‘hotchpot clause’ It is common to want to treat our children equally. A ‘hotchpot clause’ in a Will aims to ensure fairness to family members and loved ones, by equalising the assets they will inherit, taking account of any benefits they have already received as advances during the Will maker’s (or testator’s) lifetime. Any such advances will be considered when calculating the final amount due to each beneficiary under the terms of the Will. Hotchpot clauses can be used in both Wills and Trusts as a mean of estate equalisation. These clauses originated hundreds of years ago but are less frequently seen these days. According to Re Cosier (1897) 1 Ch. 325 (C.A.), the object of every hotchpot clause is: … simply to prevent a person to whom a testator has left a share of his estate, and who has been advanced in the testator’s lifetime, from obtaining, by the combined effect of the bequest and the advance, more of the testator’s property than he intended the legatee should have. Examples where this may apply include: • your eldest son has already been given one of your properties during your lifetime • you have given one of your children a loan • you have given $100,000 to each grandchild, but more grandchildren are likely to be born after your death. Black’s Law Dictionary further defines “hotchpot” as: … the blending and mixing [of] property belonging to different persons, in order to divide it equally. In an Australian Will this could include: • a mixture of property • a mixture of property and other assets • property you currently own but may not own in the future. For fairness, the Will maker may refer to: • property already transferred to the one child that is brought into account by hotchpot • a debt owing at death which is, in turn, converted into an advancement by way of a loan and brought into account by hotchpot. A hotchpot clause adds up all the Will maker’s assets including amounts the beneficiaries already received to ensure an equal division between the beneficiaries at the Will maker’s death. Advances to a beneficiary are taken into account, and their share under your Will is reduced accordingly. Hotchpot clauses can add ambiguity and complexity to your Will. For example, advances can be difficult to prove, so it is important that good records are kept and better strategies to achieve estate equalisation should also be explored. fs

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Technology:

The ABCs of NFTs and art

By Lisette Aguilar, Keystone Law

Technology

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Investing in digital art is by no means a fringe pursuit. This paper discusses the key features and perceived advantages of purchasing non-fungible tokens (NFTs) compared with traditional artworks, outlines the process to mint and trade NFTs, and evaluates NFTs’ ‘non-fungibility’ or ‘uniqueness’. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

The ABCs of NFTs and art

N Lisette Aguilar

FTs are currently the talk of the art world, but what exactly are they? ‘NFT’ stands for ‘nonfungible token’, but this still leaves many of us none the wiser. In short, however, an NFT is a unique (non-fungible) code which is linked to a digital asset, such as a piece of digital art which exists on the internet. As a starting point for understanding, almost everything about an NFT exists in or is linked to the digital world and is intangible. In the case of art, therefore, it is the opposite to what has traditionally been understood and accepted in the art world. NFTs bring their own set of considerations for anyone who wants to be involved with them, including new and unprecedented legal questions.

A is for artist and authenticity If an artist creates a piece of digital art (there does not have to be any underlying physical work of art), they can choose to ‘mint’ it or ‘tokenise’ it on a digital marketplace and thus sell it directly as an NFT on that marketplace. To do this, an artist can upload their work onto the marketplace and specify details such as a starting price or the number of limited editions. NFTs have ‘smart contracts’ built into them which means the artist automatically receives a percentage of the sale price each time their work is subsequently traded on that digital marketplace. The artist might even be able to choose how much this percentage cut will be. Each digital marketplace has its own terms, and it is worthwhile for an artist to read these to understand what their different advan-

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tages might be, especially because the smart contract cannot subsequently be amended. By contrast, artists who create art works in any physical media are usually linked to a gallery who might charge them a set commission of 50% on the sale of their work. A digital artist could thus be seen as having more control over their work if they mint it as an NFT, since they can go directly to a digital market to sell their work and choose their own terms. It appears, however, that there is currently nothing to stop someone else creating a digital image of an artist’s work and then minting that image as an NFT to sell it for their own financial gain. The duplicate digital image might not be considered authentic if it is not the original artist who has minted it, and indeed puts into question the notion of ‘non-fungibility’ or ‘uniqueness’. Further, there are already instances of digital artists whose works have been commissioned by, for instance, online game developers who have found that those artworks have now been turned into NFTs without their consent being sought. For example, game developer Jason Rohrer launched an NFT auction in March comprising 155 works he had commissioned from a range of artists in 2012 for one of his online games. This issue may therefore arise if NFTs did not exist at the time of the original commission, and so could not have been anticipated in any contractual wording, assuming that the commission was documented in a contract in the first place. Some may view this as part of the democratisation of digital art, but artists may prefer to think about having wording in agreements to set conditions on how or if their art may be turned into NFTs, either to prevent this completely, or to ensure that they are remunerat-

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ed fairly and that the NFTs are sold with their approval. Indeed, this would apply not just to digital artists but could also be something that contemporary artists creating physical works, or artists’ estates should think about, or even, for instance, owners of art works who are sending digital images of them to prospective buyers.

B is for buyer, blockchain, Banksy and Beeple NFTs are supported by blockchain technology and each creation and sale of an NFT is recorded on the blockchain. Blockchain activity leaves a permanent chronological record. As a buyer this means that you can track all previous sales and prices of NFTs. This transparency is often contrasted with the records of art sold through auction houses or dealers, where some believe there is a lack of transparency and that, for instance, past sales or prices are not always cited. However, this is in some ways a misplaced comparison. If any art is sold through the open market (as opposed to privately), such as at auction, then the previous sale history should be publicly accessible even if it may at times be up to a buyer to find it through their own due diligence. Further, transaction history may be incomplete for understandable reasons such as the fate of works during a war, the fact that opinions as to the attribution of a work may have changed over time, or simply that due to the age of a work, not all records have been kept. None of these factors apply to NFTs which are effectively

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starting with a clean slate. Nevertheless, the transparency of the blockchain record may well appeal to NFT buyers. But what are buyers getting when they purchase an NFT? In short, buyers acquire the token, which is a distinct code of letters and numbers, which is linked to the digital artwork and allows them to access it, look at it for their personal use and trade it. They are therefore not acquiring the right to commercialise the digital artwork. Copyright should remain with the original artist. While blockchain seemingly provides a complete and open record, buyers would be advised to check that the address on the blockchain record is that of the original creator of the digital artwork who ‘minted’ the token or is by the artist they believe it to be. For example, NFTs of artworks which looked like those of the street artist Banksy, minted by someone calling themselves Pest Supply (Banksy’s works are officially authenticated through Pest Control), have been sold for significant sums on digital marketplaces, but Pest Control has said that there is no connection between these NFTs and Banksy. Perhaps more disturbingly, on 3 March 2021, an art collective burnt an authentic limited edition screen print by Banksy, and videoed this event, having first created a digital image of the screen print which they then sold as an NFT. The reason they gave for this act of destruction was that “if we had the NFT and the physical piece, the value would be primarily in the physical piece”. This may have been a one-off stunt, possibly inspired by Banksy’s own transformation of one of his works by shred-

Lisette Aguilar, Keystone Law Aguilar is a partner at Keystone Law, specialising in art-related disputes and transactions. She also has a general commercial litigation background. During her 12 years as a senior in-house lawyer at Sotheby’s, Aguilar worked on some of the most high-profile cases in the art world.

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Technology

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. The key, distinguishing feature of a non-fungible token (NFT) is: a) it is unique b) it is easy to replicate c) it is created using Bitcoin d) it must be linked to a physical asset 2. NFTs have ‘smart contracts’ built into them, which means: a) the digital artist has less control over their work than a traditional artist b) the artist can automatically get a percentage of the sale price each time their work is subsequently traded c) the artist’s work can never be viewed by anyone other than the owner of the NFT d) the gallery will receive a set commission of 50% each time the work is subsequently traded 3. NFTs are supported by blockchain technology. The key advantage of this is: a) buyers will not be required to pay capital gains tax b) purchases can be made using cryptocurrency or any fiat currency c) there is a permanent, chronological record of all previous sales and prices d) previous sales and prices are only visible to the owner of the NFT 4. NFT marketplaces typically operate using which currency platform? a) US dollar b) Bitcoin c) Dogecoin d) Ethereum 5. NFTs are available to buy on a digital marketplace, however, traditional auction houses, such as Christies, have recently commenced NFT auctions. a) True b) False 6. Cryptocurrency is accepted for the purchase of physical artworks through auction houses and galleries. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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ding it at a Sotheby’s auction in October 2018, but both these Banksyrelated examples challenge the notion of value in relation to NFTs. It is undeniable that NFTs of digital artworks are currently selling for record prices. NFTs are most commonly available to buy on a digital marketplace but recently auction houses have also been getting in on the act. In March 2021, Christie’s offered a digital artwork by the artist known as Beeple, comprising every digital image he had posted since 1 May 2007 (Everydays: The First 5000 Days), with an accompanying NFT. This was minted exclusively for Christie’s and it sold for a staggering US$69,346,250. Now Sotheby’s have offered The Fungible Collection by digital artist Pak, released from 12 to 14 April 2021 and auctioned exclusively on the Nifty Gateway digital marketplace. Interestingly, this sale included a collection called Open Editions which Sotheby’s described as “a set of NFTs that can be bought infinitely by collectors during the time of the sale, questioning the relationship between scarcity and value”.

C is for cryptocurrency and collectors At the heart of the NFT phenomenon is cryptocurrency. NFTs are traded in cryptocurrency and even to mint an NFT an artist first must buy into Ethereum. The Beeple’s work sold by Christie’s was payable in Ethereum, including ultimately Christie’s buyer’s premium (originally only payable in US dollars). NFTs are therefore one way for holders of this cryptocurrency to spend it—as yet, cryptocurrency is not accepted for the purchase of physical paintings, sculptures or works of art through auction houses, galleries or dealers. NFTs may appeal in particular to technologically savvy buyers who may not have any existing links to what has been described as the ‘analogue’ art world. Thus, NFTs are creating new art markets. Nevertheless, there is no reason why the two cannot coexist alongside each other, and some are already finding ways for them to combine and even challenge each other. The art historian Ben Lewis has minted an NFT of a digital version of the controversial [due to questions raised over its authenticity] painting Salvator Mundi [by Leonardo da Vinci] which sold at auction at Christie’s for $450 million, but which had been sold [that is, the digital version] by its original owners for just $1,175 in 2005. He is hoping to split the proceeds from the sale of his NFT-linked Salvator Metaversi with those original owners. While Ben Lewis is clearly making a specific point about fairness in the art world, it is conceivable that collectors may consider minting NFTs of their artworks as an alternative way of recording them for posterity and indeed raising money from them while still enjoying the physical experience of having the art on their walls—if indeed it is not kept unseen in a warehouse.

D is for David Hockney Not everyone is convinced by NFTs. One of the greatest living artists, David Hockney, who ironically was ahead of the curve in producing digital art on his iPad, recently used a rather derogatory alternative acronym (which shall not be printed here) to describe his views on NFTs. Hockney prefers to print out his digital art so that it can be displayed physically. That being said, there are many who are excited about the possibilities of NFTs and art, and there is no doubt that new legal conundrums will emerge as the developments continue. fs

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Philanthropy:

When is the best time to share your wealth?

By Shamal Dass, JBWere

Philanthropy

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Deciding how to share wealth for a philanthropic purpose requires a genuine understanding of what is needed to maximise the effectiveness of one’s intentions from the outset. This may differ from a favoured structure and necessitate a realignment of priorities and timelines. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

When is the best time to share your wealth?

W Shamal Dass

hen you choose to contribute your wealth to society, you want to make sure it has the greatest possible impact. Deciding when and how to pass it on is a huge part of that. When the current pandemic becomes but a vague, distant memory, there will be many Australians who are still hurting from its social and economic effects. “The most disadvantaged will remain the most disadvantaged— the negative impact will be deeper, and it will last longer,” JBWere’s head of family advisory and philanthropic services Shamal Dass said. Meanwhile, there will be an entire younger generation who will have to disproportionately shoulder COVID’s heavy debt burden, at the same time as they work to address the mounting challenges of climate change, among other things. If you are planning to leave your wealth to family at some point— either now or after death—this intergenerational inequality and societal inequity may give pause for thought. But how best to address it? While it might be tempting to bequeath the majority of your money to the youngest family members to help with the tougher times ahead, it is worth considering some other approaches. Helping society as a whole may help still more, Dass argued.

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Philanthropy

“What’s the point of your children prospering if the world around them is fractured?” he said. “There is no individual that stands outside the community.”

The limitations of a Will However, Dass pointed out that bequeathing a large part of your wealth to a worthy cause may also miss the mark. One reason is that it is putting off until tomorrow what could be done more effectively today. “If you’re someone with wealth and you’re thinking about making a difference, why would you wait 30 more years to address problems that are very apparent and worsening right now?” he said. It is not just the lack of immediacy that is an issue. There is also the fact that a Will is generally very final— it is impossible to alter once you are not around. In contrast, choosing to share your wealth in life by way of philanthropy, gives the opportunity to actively engage in the process, evolving your approach over time in order to become more effective. “That’s the wonderful thing about being a philanthropist,” Dass said. “You have the opportunity to learn; you get to understand what works, [and] what doesn’t.” A Will does not offer this same flexibility.

A meaningful approach Ambiguity can also be an issue when it comes to final wishes. However, a great deal of philanthropy suffers too from this issue, according to Dass. “A problem we see often is when you write a state-

ment so vague and open that you could fund anything at any time for anyone,” he said. This is why it is recommended that clients focus on what they want to achieve. “You could spend a hundred million dollars and not change a thing, so you need to be targeted but also thoughtful about what you do,” Dass said. Thus, prospective philanthropists need to educate themselves first. “Having made a lot of wealth [does not] infer some sort of superior knowledge and understanding of complex social or environmental problems. It’s something you have to learn,” Dass explained. It also requires considerable forethought if you are to take any meaningful steps towards solving the issue. “That’s what philanthropy is. Philanthropy is not charity,” Dass said. “A charity helps the person in the immediacy of the problem, whereas philanthropy tries to solve the problem. It tries to understand why the problem exists and address the core causes.”

The who, what, why before the how The first move is to work out what you want to achieve and who you are trying to help. “In a sense, this will help define the ecosystem you’re playing in,” Dass said. For example, if you wish to help the disadvantaged, you need to decide whether these are young or old people; women or men; people in urban, regional, or rural settings. Clearly, each group’s needs are quite different.

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Shamal Dass, JBWere Dass is JBWere’s head of philanthropic services and family advisory, and provides tailored advice to for-purpose organisations and private clients. He is also adjunct associate professor at UNSW Business School’s Centre for Social Impact.

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Philanthropy

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. According to the author, helping society as a whole is an approach that should be considered rather than: a) investing in selected social impact projects. b) leaving most of your assets to your preferred charities. c) leaving most of your assets to your younger family members d) making lump sum donations during your lifetime. 2. What are the limitations of bequeathing a large part of your wealth via your Will? a) Lack of immediacy—problems need to be addressed right now b) The terms of the Will can never be altered (once the testator has died) c) It does not allow you to actively engage in the philanthropic process d) All of the above 3. How does philanthropy differ from charity? a) Philanthropy is about giving away money, whereas charity delivers targeted outcomes for beneficiaries b) Charity helps a person in need immediately, whereas philanthropy aims to solve the core problem c) Acts of charity provide more allowable tax deductions than philanthropic donations d) Charities are legally allowed to make a profit, whereas philanthropic enterprises are not 4. According to the author, the first step in planning your philanthropic venture is: a) determining who you want to help and what you want to achieve b) working out a strategy to tackle the problem. c) discussing your philanthropic goals with your family. d) defining the problem based on research and evidence 5. Typically, philanthropists are better placed to understand complex social and environmental problems. a) True b) False

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The next step is to define the problem—based on research and evidence—and to work out a strategy for helping tackle that problem. It is only then that you can work out an appropriate way to become involved in efforts to solve it. Communication is an essential part of all this. You cannot hope to devise a solution, or a strategy, without input from relevant organisations. As Dass noted, at its core, philanthropy is not so much about giving away money, but efficiently and effectively partnering with a for-purpose organisation so it can help deliver the outcomes beneficiaries need and want. “What you then have to do is to meet them, to engage and know them,” Dass said.

A family affair At the same time, it is critical to discuss your philanthropic goals with family—so they can all understand where you want to go together. “When you’re dealing with things like inequity and inequality, you’re really investing in changes that will benefit you and your children,” Dass said. “So, it’s very important they understand not only what you as an individual are trying to achieve, but what it is that, together, the family wealth can achieve.” Governance is not about compliance, as some people imagine. Rather, it is about providing the means to have those necessary conversations. “Governance is about enabling you to engage, communicate and be more effective,” Dass said. “It’s that engagement and dialogue which actually everyone learns from—because underpinning that is knowledge and values and morality. It actually reveals more about your family members than anything else.”

For all time … or all at once? When involving family and future generations in philanthropy, it is tempting to set up a foundation that can last in perpetuity. That is a great idea if it suits your cause, but a lump sum might work better in certain circumstances. “If you want to deal with rural health or intergenerational poverty, you have to invest the amount of money that’s needed at the time to actually break that cycle—[rather than, for example,] 4% of your private fund forever,” Dass explained. It’s the difference between servicing homelessness and trying to eradicate homelessness.” Ultimately, it comes back to genuinely understanding what is required. “It’s not about philanthropists sitting at the big desk and writing out cheques based on what they think,” Dass said. “You must engage with those you are partnering with and learn what they need from you to successfully help the beneficiary. That should decide your strategy.” fs

6. Establishing a foundation which will last in perpetuity is not necessarily more effective than giving a lump sum. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Investment:

Meeting unique investments needs of not-for-profits

By Grant Mundell, Equity Trustees

Energy investments in a zero carbon world

By Pzena Investment Management

Investment

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: When investing, not-for-profits (NFPs) must balance the associated risks against their concessional tax status and stakeholders’ interests. This paper examines the suitability of various assets classes against NFPs’ fiduciary duties, and the challenges posed by today’s low interest rate environment. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Meeting the unique investment needs of not-for-profits

Grant Mundell

n today’s low-interest-rate environment, finding ways for not-for-profits (NFPs) and charitable trusts to meet the needs of their beneficiaries while managing risk requires a specialist approach. The NFP sector plays a crucial role in Australia, providing a much-needed contribution to the social and cultural fabric of our society. Social Ventures Australia’s Taken for granted? Charities’ role in our economic recovery report of 2020 found that charities’ total economic contribution was 8.5% of GDP and today the sector employs over 1.3 million people— around 10% of Australia’s workforce.

Investment challenges for NFPs When it comes to investing there is no ‘one-size-fits-all’ and the needs of non-profits may differ widely. Charities, charitable trusts and public and private ancillary funds run by workplaces and individuals must set clear investment objectives in order to continue to meet their long-term commitments. However, as a specialist adviser and manager of hundreds of charitable trusts and foundations, we do see some commonalities with regard to the investment objectives and requirements of NFPs. Often, NFPs must balance the inherent risks of investing, their concessional tax status and the interests of stakeholders, including fundraisers, donors and recipients of their grants and funding.

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In terms of total return, keeping pace with inflation is important and many seek regular income, with low volatility around that income. NFPs also have unique sets of challenges. Boards are often conservative, so we still see some investing the majority of their investable assets in low-risk assets such as term deposits, despite the low-interest-rate environment. NFPs have a core social skillset rather than an investment skillset, so many require assistance with both investment strategy setting to meet their investment objectives and investing to meet their fiduciary duties in order to create a more sustainable and impactful organisation.

Building a resilient portfolio Contending with strained resources

In an era of growing needs and shrinking government resources, many of today’s NFPs are being asked to do more with less, placing additional strain on their limited resources. For many NFPs, it is therefore important to have an investment strategy in place that is flexible enough to adjust to the changing needs of both the organisation, and society more broadly. Following the onset of the COVID-19 pandemic, for example, many NFPs suffered operational disruption as well as a fall in essential sources of funding. As a result, they were forced to seek ways to find capital to ‘keep the lights’ on and ensure their organisations remained viable into the future.

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Creating the right investment strategy

When creating an investment strategy for an NFP, we consider a number of factors. Generally, the investment strategy (or strategic asset allocation) should not be overly complicated. NFPs are often resource poor, with high turnover in their boards and investment teams, so it is important that they understand what they are investing in. Some deliberately opt to exclude alternative assets such as private equity, commodities and hedge funds from their investment policies because they are viewed as too complex and also because liquidity around these assets can be low. Many NFPs also wish to exclude investment in certain sectors to reflect the values of their organisation. NFPs also need to avoid investments that cause a permanent loss of capital, hence we look to diversify investments within an asset class to avoid overexposure to a single company or credit risk. Choosing suitable assets classes in today’s environment

As outlined, the needs of NFPs can differ widely. However, there are specific asset classes that may be preferred. Historically, there has been a bias towards Australian equities, which have offered strong long-term performance, capital growth to offset inflation, have been easier to access than international equities and offer attractive income yields supplemented by franking

Grant Mundell, Equity Trustees Mundell is investment specialist, philanthropy and asset management, at Equity Trustees. He has more than 20 years’ experience in the finance industry, predominantly in the institutional equities market.

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. According to data cited, the contribution of NFPs to the economy in 2020 was: a) 8.5% of GPD b) 20% of GPD c) 2.5% of GPD d) 4% of GDP 2. Many NFPs require assistance with setting their investment strategy because: a) they are experiencing increased strain on their resources b) their boards often opt to exclude alternative assets c) their core skillset is social d) they often have high staff turnover 3. According to the author, there has been a bias towards Australian large-cap equities because: a) they are acceptable to NFP boards who are typically riskaverse b) they offer greater stability and higher income c) they offer lower risk than other assets d) they tend to outperform global equities 4. The author expects that some NFPs will need to move higher up the risk curve to find alternative sources of income because: a) low returns from fixed income are forecast to continue b) Australia comprises only 2% of the global equities market c) they are seeking regular income with lower volatility d) they are affected by shrinking government resources 5. In developing an investment strategy, NFPs must balance a number of factors including: a) the inherent risks of investing b) their concessional tax status c) the interests of fundraisers, donors, and grant recipients d) All of the above 6. According to research cited, the NFP sector employs about 10% of Australia’s workforce. a) True b) False

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credits. A number of those benefits still exist today, especially in the current low-income yield environment. It is, however, important that NFPs do not become overly focused on the highest-yielding companies, which can lead to overexposure to one sector, such as banks, or even investing in value traps. We therefore prefer to focus on investing in high-quality securities that can sustainably grow their dividends over time. Within this asset class, we tend to focus on larger-cap stocks, which offer greater stability than small caps and higher income. International equities

Given Australia only makes up 2% of the global equities market, there is also a case for some international equities exposure in most cases. International equities offer the benefits of capital growth and diversity through geography and industry. Over time, this asset class has become a lot more accessible to local investors. Real-estate investment trusts (REITs)

REITs are also a popular addition to an NFP’s portfolio, given they are lower down on the risk curve than equities overall and typically offer good income. However, the global pandemic has led to some structural changes in this market, so we are taking a cautious approach to sectors such as the office market, which has been impacted as more people work from home. Fixed income

Another asset class that has been a mainstay for NFP portfolios is fixed income, which has historically generated annualised returns of around 5–6%. Yet in an environment where monetary policy continues to be accommodative, we expect lower returns from fixed income, looking forward. As a result, we expect to see a rotation away from the asset class, with some NFPs moving higher up the risk curve to find alternative sources of income.

Achieving best outcomes The experience of 2020, which saw both the fastest bear market and the fastest bull market on record, highlighted that both diversification and taking a medium to long view are important for investors. This is particularly the case for those who help to support and give a voice to the most vulnerable members of our society. Working with an advisory or consulting firm which can take on the task of selecting and monitoring investments is a key success factor for many NFPs. Regardless of the size of their portfolio or their goals, non-profits should not settle for basic cookie-cutter advice and support, but seek out a partner that can help them to meet their individual fiduciary needs and philanthropic goals. fs

7. Currently, REITs are being viewed with caution due to the impact of the COVID-19 pandemic on the sector. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: While it is easy to think the move to renewable energy will leave traditional energy companies with stranded assets, incumbents can use their existing capabilities to target carbon emission goals. This paper examines global, integrated energy companies’ transition plans to a zero carbon world. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Energy investments in a zero carbon world

Pzena Investment Management

he energy sector is controversial. It faces a perfect storm due to the short-term demand shock caused by the COVID-19 pandemic and the longer-term risk from the reduction in society’s carbon footprint to combat climate change. Considering this uncertainty and the collapse in valuations in the sector, we are confronted with dual scenarios: whether the sector presents an exceptional investment opportunity or is destined for obsolescence. We believe the key questions are: 1. What is the risk that energy companies will be left with material stranded assets in a carbon-neutral world? 2. How will the coming energy transition impact the sustainability of energy companies?

This note focuses on the risks and opportunities presented by the upcoming transition for the energy sector. We address company-specific issues as part of our research framework that is bottom-up and fully integrates ESG concerns unique to each company. The details of Pzena’s integrated ESG framework are available upon request.

Asset liquidation values and risk of stranded assets In all resource extraction businesses, metrics such as price to earn-

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ings are misleading because they do not account for the natural depletion of the underlying assets, i.e., oil and gas reserves. Instead, it makes sense to price these companies based on the liquidation of their reserves given their limited franchise value. We know a great deal about how to make such an estimate. We know the total quantity of reserves. We know the future production and cost profiles. We can therefore compute the value of the company’s reserves at a given oil price. If the future price of oil that is embedded in the market’s current value of reserves is irrational, we can buy or sell the stock. For a company’s reserves to become stranded or obsolete, either i) the total supply of reserves must exceed likely future demand, or ii) new competition with a significant cost advantage makes the exploitation of this incumbent’s reserves uneconomical. We see both the following scenarios as unlikely: • Publicly traded oil and gas companies have reserves that can typically be produced in a matter of years (usually in the single to low double digits), whereas iron-ore and copper reserves are often measured in decades or even centuries. This means that at current production rates, under all scenarios for future oil demand, it is impossible for upstream reserves to become obsolete due to inadequate demand for oil. • With respect to new competitors, US shale has emerged as a powerful new supply source over the past few years. But we estimate that US shale production requires an oil price of $60 per barrel or more to be economical, underscoring the limits as to how much disruption shale can cause.

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Figure 1. There will be demand for oil and gas for many decades to come, demand through 2040

Source: International Energy Agency; BP p.l.c. Measured in millions of barrels per day

Figure 2. New production needed even in a rapid transition scenario, demand to far exceed supply

Source: International Energy Agency; BP p.l.c. Measured in millions of barrels per day

Figure 3. Near double-digit returns despite a tough landscape, Shell and Exxon maintaining returns

Source: Company reports

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Multi-decade demand for oil and gas It bears repeating that there is no scenario under which the demand for oil and gas will disappear in the next few decades. We see overall demand peaking in about 10 years and declining only slowly after that. Consider the long-range scenarios run by the International Energy Agency (IEA) and BP p.l.c., to limit the rise in global temperatures to materially below 2°C by 2040 (Figure 1). These show overall demand for oil and gas to be lower than 2018 by 21% (IEA) or 11% (BP). Meeting these long-range scenarios will be challenging without a significant shift in energy policies around the world. The gravity of the supply shortfall is illustrated in Figure 2. The broken line reflects current and estimated future demand levels under today’s policy regime, whereas the middle line illustrates the BP scenario, which is among the most aggressive. However, with no new investment and the 5% –8% drop-off in the natural rate of production, supply is unlikely to meet demand under all scenarios as shown by the dashed line. So, material new investment will be needed to meet future oil and gas demand; BP estimates that somewhere between $9 trillion and $20 trillion will be necessary to meet demand through 2050. This need for investment implies that oil prices must be sufficient to allow companies to fund this investment and earn an adequate rate of return. We believe that such a level needs to be between $50 and $70 per barrel in today’s dollars. Interestingly, the average oil price over the last 50 years has been right in the middle of this range ($60), despite sharp, periodic, short-term volatility. The current share prices of oil and gas producers underestimate the future investments required to meet global demand.

Downstream refining and petrochemicals With useful lives of 30–40 years, downstream asset values are more sensitive to long-term demand changes. On the refining side, the rapid transition to electric vehicles in Europe leaves a considerable risk of stranded assets. In petrochemicals, concerns over single-use plastics present a modest headwind to demand growth over time. However, assets should remain valuable depending on their cost advantages and value-added product portfolios. This segment is serving global end markets and continues to enter new growth areas. (Plastic has been a key component of innovation.) Energy companies have been pivoting their downstream investments to reflect these trends. For example, European refineries account for only 30% –35% of the refining capacity of both Exxon and Shell. And motor gasoline composes only around 23% of the oil products sold in Europe for Exxon compared to 58% in North America. Notwithstanding the challenging environment for these businesses over the past few years, their returns on investment remain relatively robust as illustrated in Figure 3.

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Oil service

To reiterate, even the most conservative oil demand forecasts require over $9 trillion dollars of spending to extract hydrocarbons over the coming decades. This is driven by the need to replenish and develop reserves to offset the natural rate of decline in oil and gas production. And because the current reserves of oil and gas companies support only 10-12 years of production, oil services will be needed for decades to support this effort. But because there will be differences in the sustainability of business models in the sector, investment selectivity is key. Rystad Energy, a leading energy consulting firm, believes that industry capital expenditures have bottomed in 2020 and are poised for significant growth over the coming decade (See Figure 4.) Asset intensity in oil services varies widely. For example, offshore drillships are long-duration assets and highly susceptible to stranded asset risk; pressure-pumping trucks wear down in just a few years, so their asset base and profits adjust to shifting demand very quickly. Moreover, most of the oil service companies have relatively flexible cost structures that they can adjust to varying demand conditions quickly to preserve profitability. (See Figure 5.) Halliburton has exhibited this kind of resiliency and maintained margins in the high single digits amid sharply lower revenues in the current downturn. Despite meaningful differences in oil service business models, asset and customer bases, there is little differentiation in valuations. For the select few franchises that have been able to manage their profitability and cashflow in the downturn, the coming activity increase should offer significant opportunities. Even after the recent stock price recovery, valuations still do not reflect the extent of the rebound in activity needed to meet ongoing energy demand over the next few decades.

Some transition plans are sound— others are not As demand declines for traditional fossil fuels and increases for renewables, arithmetic suggests that the long-term investment outcome depends less on when oil demand will peak (whether in 2025 or 2035) and more on what companies are doing in response. How are they deploying the massive cashflow generated from their current reserves? What are the prospects for generating good returns from the new plans or investments? We answer these questions by making three observations: 1. Not all transition plans are created equal 2. Opportunity is not priced in 3. Engage, do not divest

For example, European and US integrated oil companies have reacted differently to the transition, with those in Europe favouring renewables and those in the US focusing on short-cycle shale or conventional projects. Returns in new energy sources are likely to lag those of traditional sources, given lower technological and scale barriers to entry (localised competition, less challenging geology, etc.) and a perceived lower cost of capital. The goal of the energy transition can be more easily met when capital flows to technological innovations that lower the cost of new energy sources and, thus, accelerate adoption. In some cases, traditional energy companies create transition plans that slow the pace of innovation by misallocating capital to projects where they do not have a competitive advantage. In these circumstances, shareholders would be better served to receive the enormous cashflow generated by the liquidation of fossil fuel reserves and reallocate it themselves. Investors should be given the choice to fund the best innovator in new energy

The quote

While the market is fixated on renewable energy as disruptive, we see opportunities for traditional energy players to monetise historical strengths and leverage them in the transition.

Figure 4. The coming capex recovery; a boon for oil services? Estimating spending to double by 2030

Source: Rystad

Figure 5. Halliburton’s robust and flexible business model, margin resiliency

1. Not all transition plans are created equal

The opportunity to select from multiple energy sources (e.g., oil, natural gas, wind, solar, etc.) for reinvestment contrasts sharply with the last century when coal, then oil, dominated the landscape. As a result, meaningful strategy differences are emerging among companies.

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Source: Company reports and Citi Research

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source development rather than rely on the discretion of incumbent managements that lack expertise in such emerging areas. 2. Opportunity is not priced in

Closing the gap between current activity and carbon emission goals will require a wide range of solutions. We see the chance for incumbents to advance these efforts by leveraging their existing capabilities. These opportunities are not reflected in today’s valuations: • Offshore wind: Installation of scaled offshore wind projects play to the expertise of existing offshore oilfield service providers. • Blue hydrogen and carbon capture: Large-scale, complex engineering projects are the natural domain of oil and gas majors. Engineering and constructionfocused oil services companies can design and construct facilities. • Advanced biofuels: Advanced chemistry along with design and installation of scale facilities is synergistic to oil major and service company expertise. • Deep-sea mining: Potential for offshore-focused oil services companies to leverage existing operational expertise in a deep-water environment. • Geothermal: Exploiting deep geothermal opportunities are a natural fit for oil and gas majors and oil service companies.

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Integrated gas at Shell Global Investing in opportunities where the current energy players have a competitive advantage could add value. Royal Dutch Shell is building an effective business geared towards energy transition in its integrated gas business. Natural gas is an important transition fuel aimed at converting coal-fired electricity generation to cleaner, gas-fired solutions. Shell is the largest player in the liquified natural gas (LNG) value chain, and its integrated gas business leverages the unique strengths of the broader franchise through its access to natural gas production, operation of complex production and supply chains, and commodity trading expertise that creates a differentiated well-to-customer value chain for a broad global client base. Shell’s investments in LNG, coupled with its longer-term ambition to be net-neutral by 2050, map out a path for the transition that is reasonable and economically sound. Figure 6 below illustrates this point by showing the segment’s solid return on capital. Figure 6. Generating solid returns and growing its LNG business, Shell’s integrated gas segment-return on capital

Source: Company reports and Pzena estimates

ENEOS—good intentions gone awry Sometimes the pursuit of green credentials come at the expense of capital discipline and long-term franchise sustainability. ENEOS, an energy and mining conglomerate in Japan, recently unveiled its medium-term business plan that proposed spending 85% of its ¥980 billion of discretionary free cash flow on new strategic investments—including ¥200 billion on environmentally conscious businesses and services. We were concerned both by the size of the investment and by management’s track record of investing in projects that generated weak returns on investment and in which they had little expertise. Even a well-intentioned ESG strategy should not become disconnected from business strategy; in ENEOS’s case, too many of the proposed investments sat outside its operational core competencies. We believe that when a corporation deviates too far from the pursuit of long-term and sustainable shareholder returns, the results are usually negative, not just for shareholders but for all stakeholders. That is not to say we are opposed to all investments that capitalise on the needs of the energy transition. Instead, we engaged with management, expressing our preference for targeted high-return investment in green technology that leverages existing operating expertise. Our engagement with ENEOS is ongoing and focuses on improving capital allocation and corporate governance.

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A variety of energy companies are currently valued as if oil and gas demand is already declining rapidly and that the companies have no plans to adjust in the future. While the market is fixated on renewable energy as disruptive, we see opportunities for traditional energy players to monetise historical strengths and leverage them in the transition. For the integrated majors, areas such as carbon capture, geothermal, and hydrogen play to these strengths. For example, Exxon has accounted for 40% of all carbon captured to date and is a clear leader in this technology. The better oil service companies have responded to revenue declines with investments in digital and remote technologies to protect and improve margins even at existing low activity levels. Underscoring the importance of selectivity, some of these companies will also benefit from growth in offshore wind, geothermal, deep-sea mining, or hydrogen. Some are already taking advantage of the opportunities presented in the energy transition by leveraging their engineering talent and industrial bases. Baker Hughes for instance has over a 90% market share in the supply of liquefaction units for LNG. Wood Group has an established business in engineering and construction services to renewable energy players. 3. Engage, do not divest

Shareholder engagement helps investors determine which transition plans are sound (and which are not). More importantly, it gives them a voice to ensure that companies allocate capital efficiently to projects that make sense. With the transition to a lower carbon economy underway, starving economically critical businesses of capital because they are more carbon intensive will only make the monumental task of the transition that much harder. Remember, the economic criticality of a business does not vanish because the industry needs to find a way to decarbonise. Walking away, i.e., divesting from these companies, achieves nothing and may drive them to other less-accountable sources of capital than the public markets. Decarbonisation in the auto industry was not about pulling capital out but rather finding better ways to put capital to work. The same should be true of energy investments. Through engagement, market participants can select which energy players are putting capital to work more effectively and allocate their investments accordingly. As value investors, we capitalise on valuation dislocations while understanding the long-term sustainability of company-specific actions. Similarly, environmental issues provide a window for investment in the energy sector, when a company addresses transition risk in a way that is beneficial to long-term franchise value, management can improve returns and differentiate its corporate strategy. The controversy in energy today provides an opportunity to both underpay and invest in companies with sustainable strategies. fs

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. What is the minimum oil price per barrel? a) $65 per barrel b) $60 per barrel c) $55 per barrel d) $70 per barrel 2. T he paper forecasts that overall demand for oil and gas will: a) peak in five years and slowly decline thereafter b) continue to grow due to lack of investment in renewables c) peak in 10 years and slowly decline thereafter d) phase out all together in approximately 15 years 3. W hich of the following does the paper cite as a modest headwind to demand-growth in petrochemicals? a) Concerns about single-use plastics b) Concerns about commercial fertilisers c) Concerns about soaps and detergents d) Concerns about building materials 4. W hat existing capabilities can energy companies leverage to aid the transition to renewables? a) Their expertise in chemistry to pivot to advanced biofuels b) Their operational expertise in deep-sea environments c) Their expertise in offshore oilfields to develop offshore wind facilities d) All of the above 5. According to the paper, there is no scenario under which the demand for oil and gas will disappear in the next few decades. a) True b) False 6. The International Energy Agency (IEA) predicts that demand for oil and gas in 2040, will be 21% higher than in 2018. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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LOOK DEEPER

By looking deeper into the global commercial property market you discover real gems. And that’s exactly what we do. The APN Global REIT Income Fund is an income focused property securities Fund that delivers monthly income from an underlying portfolio of high quality listed commercial property in North America, Asia Pacific and Europe. Why not take a look today.

apngroup.com.au/look-deeper In considering an investment in the APN Global REIT Income Fund, you should read the Product Disclosure Statement (PDS) in it’s entirety. A copy of the PDS and application form is available from APN Funds Management Limited (APNFM) (ACN 080 674 479, AFSL No. 237500), Level 30, 101 Collins Street, Melbourne, Victoria 3000 or by visiting www.apngroup. com.au or by contacting APNFM on 1800 996 456. APNFM recommends that you obtain financial, legal and taxation advice before making any financial investment decision.

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