Financial Standard Volume 18 Number 14

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20 July 2020 | Volume 18 Number 14

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Simon Carrodus The Fold Legal

AustralianSuper, JBWere, Pinnacle

Superannuation

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MFS Investment Management

Executive appts:

Featurette:

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Custody

Lara Bourguignon AMP

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Simon Carrodus The Fold Legal

AustralianSuper, JBWere, Pinnacle

Superannuation

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MFS Investment Management

Zombie companies on the rise Ally Selby

as they did during the Global Financial JtakenustCrisis, Australia’s listed companies have advantage of the ASX’s capital raising regime to weather the COVID-19 crisis.

In the 12 months to June, $70.2 billion was raised in secondary capital. In June alone, $9.4 billion was raised - up 72% compared to the same time last year.

For companies that entered the downturn with strong balance sheets and little to no debt, a capital raise can provide the financial flexibility to accelerate expansion plans and take advantage of distressed competitors.

For investors, capital raisings provide access to a company at below market value, often resulting in a windfall of gains for new shareholders.

But the same cannot be said for existing shareholders.

“The costs to non-participating shareholders have been significantly higher during the COVID-19 period to date compared to the GFC,” Vesparum Capital founder and manager director Timothy Toner says.

Falling share prices and significant discounts have resulted in a “discount on a discount”, Toner says, diluting shareholder value for those who choose not to participate.

Capital raisings also run the risk of dampening a company’s earnings per share leverage to a cyclical rebound, and keep companies afloat that would have otherwise crumbled.

These companies are in a constant cycle of debt refinancing, with historically low interest rates and unconventional monetary policies like quantitative easing contributing to their growth.

“One of the hallmarks of COVID-19 visà-vis the GFC was the speed at which central banks added liquidity and ensured the efficient functioning of capital markets, allowing companies in need to raise capital,” Crestone Wealth Management head of equities Todd Hoare says.

“For companies with highly cyclical earnings or directly impacted by restricted mobility, or indeed just bloated cost bases, [capital raisings] have allowed these companies to survive.”

This has led to a subset of companies; zombie companies, Hoare explains, which have been able to raise capital to continue operating, but would have been taken over or declared bankruptcy in previous downturns.

KPMG estimates 38% of all ASX-listed companies are close to default, while about

480 (22.5%) fall into its definition of a zombie company.

In March, the average ASX “distance-to-default” or D2D score deteriorated by 46% to 1.01 (where zero is at a high risk of default and five is the furthest from default).

“Ideally the companies you want to own would not need to perform these types of company saving capital raisings,” Collins St Value Fund executive director and portfolio manager Michael Goldberg says.

“However, when they do, we simply attempt to remove the emotion from the equation, assess the value of the business on the basis of the new shares, and if it’s cheap enough, we participate.”

Perhaps the only saving grace then is that the majority of capital raisings seen have been pre-emptive.

“Equity markets are lenders of last resort,” Wilson Asset Management portfolio manager John Ayoub explains.

“What we are seeing today is pre-emptive strikes from a number of companies; Cochlear, Ramsay for example, which saw the impacts of COVID-19 potentially coming their way.”

However, companies with encroaching liability ratios have had to hold emergency raisings with heavily discounted offerings, leading to shareholder dilution over the short term, Ayoub says.

“You can never offset those discounts and you can never offset the short-term pressures,” he says.

This creates a short-term phenomenon, he explains, draining returns of the broader index.

“There’s a finite pool of capital, so if you’re drawing on that capital to help recapitalise individual companies, you’re going to see the selling of other positions to help fund that,” Ayoub says.

“Coupled with outflows from super, you have a lot of selling pressure on other quality companies to help resuscitate and regenerate some of those distressed companies.”

And Goldberg says “zombie companies” are likely much more prevalent outside of the top 200.

However, given the relaxation of reporting standards at the moment it’s hard to tell, he says.

“I suspect that the government and regulator will support the economy and relax reporting requirements for long enough that the vast majority of businesses will make it through,” Goldberg says.

“But if they had to report fully today, and there was no government support, they’d be done.” fs

20 July 2020 | Volume 18 Number 14 www.financialstandard.com.au 20 January 2020 | Volume 18 Number 01

Executive appts:

Featurette:

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Lara Bourguignon AMP

Best performing managed funds Eliza Bavin

Todd Hoare

head of equities Crestone Wealth Management

Funds from IOOF, Vanguard and Fiducian figure among the top-five performers among wholesale funds, in the latest Rainmaker Information tables to May end.

In the growth category, IOOF MultiMix Growth Trust took the top spot with returns of 7.1% pa over three years. This was followed by Vanguard High Growth Index Fund at 6.2% pa as well as its Growth Index Fund at 5.9% pa Two Fiducian funds (growth and ultra growth) capped off the top-five in growth category at 5.7% and 5% returns for the three-year period ending May. Out of the balanced options, Macquarie’s Balanced growth Fund had the best returns over a three year period of 7.2% pa, followed up IOOF MultiMix Balanced Growth Trust with 6.7% pa and BlackRock’s Tactical Growth Fund with 5.7% pa.

JPMorgan led the way in dynamic asset allocation with its Global Macro Opportunities Fund returning 7.8% pa over three years.

Continued on page 4

Vale Ian Perkins Ally Selby

Australian financial services veteran Ian Perkins is being remembered for his warmth, passion and joy for life, after passing away suddenly.

Perkins spent the last six years working with BNP Paribas Securities Services, where he was responsible for its asset owner business across the Asia Pacific region.

He had recently departed BNP Paribas to embark on a new journey, joining Paul Toepfer at start-up consultancy firm KONU. He passed away on June 29 from a heart attack.

In a tribute, his former colleagues remembered him as a well-loved person; admired for his open heart, warmth, passion and joy for life.

“BNP Paribas was lucky enough to have Ian for the last six years of his career and his colleagues who worked with him said he brought fun and joy to everyone,” the tribute said.

“Ian’s success in banking was because he was not a typical banker. He was creative, courageous, innovative, a rule breaker and most happy when he had a white board and would collaborate on Continued on page 4

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www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

Balanced options in the red, but only just

Editorial

Ally Selby

Jamie Williamson

T

Editor

There’s been a lot of talk of late around how COVID-19 will impact ESG investing and the momentum behind the movement.

On one side, proponents are adamant the global pandemic will push ESG considerations to the front of investors’ minds, having exposed some of the worst aspects of humanity, fuelling expectations of an economic recovery underscored by a need to do better.

It’s an opportunity to learn from the past and reset for the future, they say.

On the other side, some are saying that COVID-19 has and will continue for some time to chip away at the progress made in the ESG investing space; the logic being that we must rely on tried and true means of clawing our way back to prosperity.

A crisis is not a time to be testing theories or ignoring proven performers, they say.

While not altogether related to COVID-19, there really does seem to have been a surplus of questionable, risky and downright unethical decision-making by proven performers going on in recent months.

If we look at what Rio Tinto did to Juukan Gorge and the aftermath, things looked promising – several super funds were quick to denounce the miner’s actions and commit to engagement to prevent similar things from happening again.

But those same super funds had little to say just weeks later when Rio appointed a board director with a resume packed full of sacred site destruction.

It was virtue signalling at its best and it doesn’t change the fact that actions speak louder than words.

At the same time, we have seen the Black Lives Matter movement gaining greater prominence. In the US, Franklin Templeton stood down an employee who was filmed acting in a racist manner.

Financial services companies, like so many other sectors, finally have to reckon with making their actions align with their platitudes.

Elsewhere, just last month Australian Ethical divested a $5 million holding in Marsh & McLennan – Mercer’s parent company – because of its ties to mining conglomerate Adani.

There is only so much engagement you can do before you have to make the call, Australian Ethical said.

And the Responsible Investment Association Australasia says ESG indices have outperformed during COVID-19. Australian Ethical has succeeded here too, with its balanced MySuper offering beating out that of AustralianSuper for the 2020 financial year.

Whether any of this will actually have a tangible impact on the world and how it looks postpandemic is anyone’s guess, but these issues are being discussed in the mainstream more than ever before, and that signals that momentum is growing, not fading. fs

The quote

To arrive at the end of the financial year with a positive result given the turmoil we have seen is a very good outcome for members.

he balanced options of the majority of the country’s super funds are only just in the red after suffering through an unprecedented period of market volatility.

Rainmaker Information executive director of research Alex Dunnin argues they have made a remarkable recovery, with Australia’s superannuation system recuperating much of their losses in lighting speed.

“Rainmaker estimates its SelectingSuper MySuper index for FY 2019-20 will come in at -0.7%,” he said.

This is based on Rainmaker’s full sample up to end of May 2020, supplemented with June 2020 returns for a curated sample of 20 not-forprofit MySuper products with funds with daily unit prices.

This is the fourth lowest return in 20 years, and the first negative benchmark return since the GFC, Dunnin said.

Despite the COVID-19 financial crisis savagely impacting fund returns in February and March, the index is effectively back to where it was just 12 months ago, he said.

“Superannuation has come through the COVID-19 financial crisis in remarkably strong shape to finish the FY close to flat,” Dunnin said.

“Given the shock of February and March, to be in this position now is mind-numbingly remarkable.”

And given an 8% fall in the ASX over the full year, the country falling into a recession and a dramatic rise in unemployment, it is undoubtedly so.

One such super fund which has come out of the crisis relatively unharmed is AustralianSuper, which announced on Monday that it had recorded positive returns for its balanced option.

Despite the COVID-19 crash, this MySuper option has lifted 0.52% for the 2020 financial year.

“We have been through an extraordinary health and economic crisis that severely affected domestic and global markets,” AustralianSuper

deputy chief executive and chief investment officer Mark Delaney said.

“To arrive at the end of the financial year with a positive result given the turmoil we have seen is a very good outcome for members.

“Returns were strong in the first half of the year, and financial markets have been buoyed by the enormous amount of monetary and fiscal stimulus from governments in the past three months.”

June was the third consecutive positive month for the country’s super funds, returning 1.1%.

Since February, super funds have returned -3.3%, -9.5%, 3.2%, 2.1%, and 1.1% for a cumulative -6.4%, Dunnin said.

This was driven by a 2.6% return from the ASX in June, Dunnin said, as well as a lift in international shares, emerging markets and corporate bonds.

This “risk on” appetite can particularly be seen in the success of Cbus’s growth option, which has now returned 0.75% for the financial year.

“To see any positive result in such a volatile year is great news for members,” Cbus chief investment officer Kristian Fok said.

Elsewhere, Raiz Invest’s superannuation offering has seen strong returns, with a 45.4% lift in funds under management over the past 12 months.

FUM for the offering has lifted as global markets rebounded – despite drawdowns from the government’s early release scheme. Raiz Super has seen its FUM lift 2.2% in the past month, and 5.3% over a three-month period.

“The June numbers are very encouraging as they were achieved during an economic slowdown, ensuring we end another strong financial year on a high note,” Raiz chief executive George Lucas said.

“The relatively modest increase in superannuation FUM during the month was achieved despite more than $1 million in withdrawals due to COVID-19 Early Release, and the issues associated with SuperMatch.” fs

Super fund satisfaction mixed, SMSFs unhappy Elizabeth McArthur and Jamie Williamson

At a time when many Australians are engaging directly with their superannuation fund for the first time, member satisfaction appears mixed, with two separate surveys producing some opposing views.

That’s according to the latest insights from Roy Morgan, with its Superannuation Satisfaction Report showing an overall satisfaction rating of 63.6% in May. While this is down 0.9% on the previous month, it’s an increase of 2.9% on the same time last year.

The findings are in opposition to those of Investment Trends and its Super Fund Member Sentiment and Communications Report which found satisfaction has dropped by 1% year on year, however still sits at 67% - higher than Roy Morgan’s results.

Those who engaged with their super fund were more likely to be satisfied with their fund, Investment Trends said. Among those who did seek guidance 72% reported being happy with their fund, versus 65% of those who did not seek guidance.

According to Roy Morgan, retail funds saw the biggest increase in ratings, recording a 2.2% rise year on year. However,

it did little to boost the retail sector’s overall score which came in at just 58.7%.

Satisfaction with industry funds also rose, increasing by 1.9% to 64.4%. Public sector funds came out on top, with satisfaction increasing 1.6% to 72.7%.

Interestingly, self-managed super funds were the only sector that saw a decrease in satisfaction, dropping 1.9% to 72.3% when compared to May 2019.

At the fund-level, UniSuper scored highest overall satisfaction of the industry funds, followed by CareSuper, AustralianSuper, Cbus, First State Super, Hostplus, Tasplan, HESTA and Sunsuper.

UniSuper came in second in the Investment Trends survey, pipped at the post by ESSSuper. In third place was Catholic Super followed by Cbus.

For the retail sector, Roy Morgan’s survey saw Colonial First State come out on top, followed by OnePath, MLC, BT and AMP. Roy Morgan chief executive Michelle Levine said the relatively high satisfaction rating is due to the significant bounce-back in the Australian share-markets. fs

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www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

01: Deborah O’Neil

Best performing managed funds

senator

Continued from page 1 Australian equities large cap best performers were: Australian Unity Platypus Australian Equities (three-year return of 13.9% per year), Bennelong Australian Equities Fund (12.2%), Bennelong Concentrated Australian Equities (11.6%), Greencape Broadcap Fund (11.1%) and the Hyperion Australian Griwth Companies Fund (11%).

The report found majority of products fail to outperform the benchmark on an after fees basis.

The Wholesale Managed Funds performance report revealed the top performers across a range of sectors, noting that choosing an active manager is not a “straightforward” task.

“Over the years there have been many different methodologies, including mixing a variety of active managers employing different investment styles,” the report said.

“If each manager was the “best of breed” in that style and they were mixed together the overall result would be a smooth outperformance over time.”

The trick, Rainmaker said, was understanding the difference between truth and marketing.

The report uses the example of examining the results of large cap international equities funds.

The top performing fund over both one and three years is the BetaShares Global Sustainability Leaders ETF, with one year return at 33%, 3-times that of the benchmark MSCI AC World ex AU Index. fs

Vale Ian Perkins Continued from page 1 big ideas and of course gather an audience!”

The tribute described Perkins as honest, caring and full of ideas; “a true gentleman who wore his heart on his sleeve”.

“Ian’s leadership style was humble, authentic and down to earth,” it said.

“He gave people the opportunity and got out of the way. He had your back no matter what.”

The tribute noted his love for his family, music and golf was undeniable.

“Ian always spoke of his family at work and was very proud of them and we all feel like we know them personally,” it said.

“He has gone too soon. For those lucky enough to have worked with him, the precious memories will remain in our hearts. We have lost a gentleman, a friend and a colleague.”

“We will all miss you and remember you forever Perko.”

Perkins began his career in financial services at State Street, where he worked for five years managing its fund operations and client relationships.

He later joined RBC Dexia where he served as its regional director of client services.

In 2005, Perkins co-founded Morse Consulting, where he worked for eight years before it was acquired by Deloitte in 2016.

He would later jump to BNP Paribas as its head of sales.

Before leaving BNP Paribas, Perkins was responsible for all of the firm’s asset owner clients, including pension and sovereign wealth funds, insurance companies and central banks. In this role, he was delivered strategy, P&L, markets and product solutions to these asset owner clients. fs

AMP advisers, BOLR low priority for regulator Elizabeth McArthur

S

The quote

I believe the treatment of AMP financial ad­visers is so egregious that it’s a disincentive to get into the business.

enator Deborah O’Neil 01 has revealed she was told by ASIC that AMP’s Buyer of Last Resort (BOLR) agreements being altered and subsequently slashing the value of advice businesses was not a priority for the regulator.

In a letter to the chair of the Parliamentary Joint Committee on Corporations Senator James Paterson, O’Neil said she would like the committee to look into BOLR agreements being slashed because she was not satisfied ASIC would be taking any action.

“In response to my letter requesting they investigate this issue ASIC has confirmed it does not consider this matter to be a priority for them,” O’Neil said.

“Considering this decision, I now call on this committee to ensure for proper scrutiny of these matters for these hundreds of small businesses.”

O’Neil said that the Australian Small Business and Family Enterprise Ombudsman has received over 100 complaints from the financial advisers affiliated with AMP. Those complaints were about the BOLR changes, AMP applying legislative changes to grandfathered commissions ahead of the legislated timeline and AMP issuing notices of termination to an estimated 205 planners. “[The BOLR] decision has drastically devalued the businesses of many financial advis-

ers. This was also applied retroactively to many planners who had purchased client books in good faith with this guarantee,” O’Neil said.

“AMP has issued Notices of Termination to an estimated 205 planners that were assessed as being of ‘lower profitability’, forcing many to sell their businesses for less than one tenth of what they were worth before these changes.”

At the Senate Parliamentary Joint Committee, Corporations and Financial Services O’Neil asked ASIC chair James Shipton why AMP’s treatment of financial advisers was not a priority for the regulator.

“We believe with the evidence before us that this is a matter that is a commercial dispute between the parties… At this stage we do not have evidence to suggest that it is within our jurisdiction,” Shipton said.

“I believe the treatment of AMP financial advisers is so egregious that it’s a disincentive to get into the business,” O’Neil said.

“One AMP financial planner’s business was devalued by over a third due to BOLR changes…. Another told me ‘I’ll be walking away after five years with nothing but it is better than other planners who will walk away with substantial debt owing to AMP’. That is not a significant issue for you to investigate, Mr Shipton?”

Shipton replied that ASIC holds concerns about the accessibility of financial advice more broadly. fs

Industry funds, Frontier Advisors team up in longevity search Kanika Sood

Nine industry funds are working with Frontier Advisors to probe new longevity risk products for retiree members, which could include tweaking account-based pensions.

The working group, which was put together late last year, is expected to presents its first findings later this month. It also plans to engage with the Treasury.

“Difference to what we are doing is that it is designed by the fund and is something that [funds] collectively support, rather than designed by the product provider trying to understand what the funds and members want from the outside,” Frontier Advisors principle consultant, head of member solutions David Carruthers told Financial Standard.

The working group’s key takeaways for product design of a retirement income solution are: primary goal is a stable income via an accountbased pension (Frontier is not limiting itself to CIPRs’ requirements of guaranteed income), with a longevity element.

Carruthers says currently, retirees are implicitly using about 30% of their account based pension balances as a form of self-insurance/longevity protection by drawing down less when they are in early stages of retirement.

“It’s a bit like not insuring your house and holding money back from your day-to-day budget. And economics tells us self-insurance is an inefficient way for [longevity risk],” he says, likening it to ABP withdrawals where retirees draw less in their early years.

“Current system is that a 90 year old will have higher income than someone who has just retired.

Having longevity risk allow you to bring forward that income.”

Frontier is agnostic on how funds implement the findings. They could either create a collective pool of all their members to manage longevity risk or they could develop specific products.

Carruthers says funds could go down either path. fs

News

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

Spaceship Super takes off

01: Linda Elkins

head of asset and wealth management KPMG

Kanika Sood

Spaceship’s Voyager ended FY20 with stellar returns on both options (its universe portfolio returned 37.39% in the year ending May 31) but also with great customer growth, which Spaceship hopes will transform into growth for its superannuation fund.

The product currently has about 75,000 active users, growing from about 45,000 at the start of this financial year.

July alone has brought 5000 customers to Voyager.

Andrew Moore, who took over as the chief executive in August last year following co-founder Paul Bennetts’ exit is excited by the client acquisition for the year. He sees it as a cross-over opportunity to its superannuation product, which is a bigger contributor to combined revenue.

“Our single strongest growth in super growth is coming via Voyager customers,” Moore said.

“Superannuation remains a very important product for us. One of things that we have come to understand is that we can build a relationship like [through] managed funds,” he said.

The superannuation offering has about 6000 members, of which half also use Voyager. The firm in May added the superannuation product to its Voyager mobile app and, effective July 1, combined their websites with the aim of introducing existing clients in either offering to the other.

Spaceship Super has gone from managing $180 million around last May to about $300 million now. fs

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Generation gap opens up in financial advice Elizabeth McArthur

K The quote

Nearly two-thirds expected to be able to deal with their super provider wholly digitally.

PMG surveyed more than 1500 consumers in May to ask them about their experiences of super, financial advice and life insurance.

The results found 80% of consumers now want digital financial advice rather than traditional face to face offerings.

Meanwhile, 59% of those surveyed want financial advice from their super funds. Over a third of consumers said their super fund needs to improve its advice and education services.

Only 36% of respondents said their super fund does already provide advice services and they had sought these services recently.

The pandemic has seen people’s attitudes to their retirement savings shift, probably influencing the demand for financial advice, with 60% of respondents agreeing they need to review investments to better manage risk.

Separately, 42% said their retirement and fi-

nancial goals had been impacted by COVID-19 with likely downstream consequences.

The report found that nearly half of respondents’ financial positions had declined in the pandemic, and 68% had reduced both their overall and discretionary spend.

But, consumers still expressed optimism with more than two-thirds either confident or neutral to the prospects of a recovery over the next six months.

“Super funds do need to increase engagement with members – the survey shows it is less frequent than in other financial services areas.

Nearly two-thirds expected to be able to deal with their super provider wholly digitally and this is an area which many funds are addressing, but they need to focus on operational improvements even more to meet expectations,” KPMG head of asset and wealth management Linda Elkins 01 said. fs

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www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

AMP hit with credit downgrade Standard & Poor’s has downgraded AMP Limited’s credit rating from BBB+ to BBB, with all AMP Group entities on CreditWatch with negative implications.

The rating assigned to AMP Bank remains unchanged by S&P at BBB+.

The change to the credit rating is a response to the AMP Life Limited sale which settled at the end of June.

In an announcement to the ASX, AMP defended itself against the downgrade.

“AMP continues to have a strong balance sheet and capital position, with Level 3 eligible capital above minimum regulatory requirements of A$2.5 billion at 31 December 2019,” it said.

“All credit ratings assigned to AMP by other ratings agencies remain unchanged.”

In March, AMP Group holdings and AMP Group Finance along with AMP Bank and AMP Life all had credit ratings lowered by Moody’s AMP Group and AMP Bank have A3 credit ratings from Moody’s. fs

ME Bank chief resigns ME Bank chief executive James McPhee has resigned after weathering scrutiny over the bank’s adjusting of redraw facilities for mortgage customers and its relationship with the industry funds that own it.

McPhee, who has been chief executive for 10 years, said he felt it was time to hand over the position to someone else.

An appointment has not yet been announced, with the board commencing a search for the new chief executive.

“In deciding to call time, I know the bank is in a strong position financially and is well placed for the future, but that the industry challenges ahead and resulting need for change, will require a longterm commitment,” McPhee said.

“After 10 and a half years as chief executive, I believe now is the best time to hand over the reins to give ownership of the bank’s post-COVID strategy development and long-term execution to a new chief executive.”

His resignation will be effective from the end of July, at McPhee’s request. The board has approved this.

ME Bank chief financial officer Adam Crane will take on the role of acting chief executive while the search for a permanent replacement is undertaken.

“Jamie has made a significant contribution to the bank over the last 10 and a half years, transforming the scale and extent of ME’s retail offering to customers,” ME Bank chair James Evans said. “ME has increased significantly in size and relevance, growing its customer numbers from 234,000 to 542,000, and its assets by 50% to almost $30 billion. Notably, ME has continued to achieve primacy in customer satisfaction, based on Roy Morgan banking research.”

At the start of June, McPhee appeared before the Standing Committee on Economics where he faced tough questioning from Liberal MP Tim Wilson. fs

01: Stuart Palmer

head of ethics research Australian Ethical

Australian Ethical divests Mercer parent company Ally Selby

A

The quote

Divestment is a powerful signal to the company and others like it.

ustralian Ethical has pulled the plug on a $5 million shareholding in Marsh & McLennan, pointing to the provision of insurance services to a mining conglomerate as grounds for the divestment.

The investment in Marsh & McLennan was held in the firm’s Australian Ethical International Shares Fund and also its super fund.

In addition to Mercer, Marsh & McLennan is the parent company for insurance broking firm Marsh, reinsurance company Guy Carpenter, and strategy consultant Oliver Wyman.

Despite the divestment, Australian Ethical said it continues to have a relationship with Mercer, which provides administration services for the investment manager’s super offering.

“We have an ongoing contract with Mercer and we will continue to use this relationship to encourage stronger climate action and transparency across the Marsh & McLennan group,” Australian Ethical head of ethics research Stuart Palmer 01 said.

“We will be seeking proposals from alternative insurance brokers.”

Palmer noted the divestment comes due to Marsh & McLennan’s ties to Indian mining conglomerate Adani, currently in the process of developing a thermal coalmine in the Queensland’s Galilee Basin.

“We don’t take divestment lightly. Our decision to sell our holding in Marsh & McLennan for ethical reasons came after months of en-

gagement with the company about its policy on climate change,” he said.

“When a company is judged to have acted unethically, we think investors in the company should look for opportunities to influence an appropriate response by the company to remedy errors and ensure they are not repeated.

“But if that can’t be achieved, divestment is a powerful signal to the company and others like it.”

Marsh & McLennan also failed to commit publicly to not providing services to projects like the Adani Carmichael coal mine in the future, Palmer said.

“We acknowledge Marsh & McLennan has made a public statement saying it may refuse work which is not aligned with its commitment to the UN Sustainable Development Goals, including climate change mitigation,” he said.

“However, the statement was vague and lacked meaningful information about how the company would assess alignment with the Paris Agreement.”

Greenwashed, general statements of principal are no longer sufficient, he said, encouraging companies to state clearly what they are doing to align their business to achieve net zero emissions by 2050.

“We need tangible commitments and transparency about how the commitments will be implemented and who will be accountable for that implementation,” Palmer said.

“Divestment is just one way we drive progress as an investor and shareholder.” fs

Research slams ADL definition Elizabeth McArthur

New research from Super Consumers Australia, the superannuation advocacy arm of CHOICE, has highlighted how difficult it is for people to claim total and permanent disability (TPD) insurance under the activities of daily living (ADL) definition.

The research found the use of ADL definitions has declined somewhat, from the definitions being used in about 80% of TPD policies in 2009 to 56.2% now.

The slightly more flexible activities of daily working definition is used in 34% of group policies and both definitions are used in 6.2%.

Super Consumers Australia found that unemployed people and those working limited hours are the most likely to have to claim TPD insurance under ADL definitions.

In fact, the research found 94% of people who were already unemployed when making a claim had to meet the ADL definitions.

In the sample of group insurance policies looked at by Super Consumers Australia, 56% included terms that require unemployed people to claim under a restrictive definition for TPD.

Nearly half of policies (47%) included terms requiring people working less than a specified number of hours per week to claim under restrictive definitions. Super Consumers Australia referred to this as discrimination against those working limited hours.

Suncorp’s insurance in its MySuper product was highlighted as one of the most restrictive, requiring a person to be employed for 15 or more hours per week “on a permanent basis” in order to claim under the standard TPD definition. The definition of permanent basis excludes casual employees who have been employed for less than two years.

Super Consumers Australia also found two policies from IOOF and Asgard that excluded all unskilled workers from claiming under the standard TPD definitions.

In October 2019, ASIC put out research estimating that three people a day are assessed under the ADL definition in Australia, with the regulator highlighting that this is of significant detriment to consumers.

The research from ASIC last year found that ADL type definitions have a declined claim rate of 60%, whereas only 12% of claims were rejected under standard TPD definitions. fs

News

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

US firm enters Australia

01: Anthony Asher

associate professor University of New South Wales

Elizabeth McArthur

New York based ARP Investments has entered the Australian market through a partnership with Axius Partners.

ARP currently manages US$2 billion in assets and describes itself as a boutique technology and innovation driven alternative systematic investment firm.

The manager seeks to generate risk-adjusted returns uncorrelated with equities and bonds.

“The partnership with the well regarded team at Axius allows ARP Investments to continue introducing the firm’s Liquid Alternative products to the Australian investor base,” said ARP founding partner DeWayne Louis.

“ARP’s extensive experience working with some of the largest and most sophisticated investors globally is well-suited for the Australian investment community.

“ARP’s products, particularly the Systematic Alpha Global Macro Fund, have diversification benefits that served the firm’s clients well during the Q1 2020 market disruptions. Working with Axius, ARP looks forward to adding value to Australian investor portfolios.”

Axius - which provides services to institutional, family office, private bank and wealth manager investors – will distribute the ARP offering in Australia.

ARP is currently raising capital from Australian institutional and wholesale investors for its liquid alternative strategies. fs

7

ATO can make cost of advice cheaper: Asher Kanika Sood

I The quote

Modelling shows a 15-30% increase in retirement income by using an appropriate allocation to suitable lifetime income streams.

n a new paper from Actuaries Institute, Anthony Asher 01 argues financial advice can be made cheaper if the Australian Taxation Office (ATO) provides some of the data necessary for good advice.

Asher added that retirement incomes could rise by 15% to 30% if super trustees are forced to at least offer such cover, while help from the ATO could reduce the cost of advice in improving living standards for older Australians.

“It seems clear that more direct government intervention may be required – just like the introduction of the Superannuation Guarantee, MySuper and even Account Based Pensions,” Asher said in the recently-published dialogue paper titled: Developing the Retirement Income Framework.

“While not likely to be popular, there is potentially a case for compulsory partial allocation

of some members’ superannuation to lifetime income stream products in retirement.”

He said retirees’ needs fall into just five categories: a high income, an income that lasts (including for a spouse), a stable annual income, access to enough capital and a desire to leave a bequest.

People may attach different weights to these objectives but it is possible for trustees to cater with products for each these needs and provide advice based on general expectations.

“Members and their beneficiaries are prejudiced by the absence of options to obtain suitable income stream products, and trustees should be at risk if they fail to make such an option salient,” the paper states.

“Modelling shows a 15-30% increase in retirement income by using an appropriate allocation to suitable lifetime income streams.” fs

MOMENTUM

MLC welcomes new independent Chairman Rob Coombe’s recent appointment as independent non-executive Chairman^ marks an important milestone for the new MLC. On his appointment Rob said: “This is a critical time for MLC and its clients.

It’s a privilege to participate in the exciting next chapter of this highly regarded Australian business. I look forward to working with Geoff Lloyd and his highly experienced executive team leading the separation of MLC Wealth.”

For more on the MLC leadership team, visit mlc.com.au

^ Independent non-executive Chairman of MLC Wealth Limited. MLC Wealth Limited (ABN 97 071 514 264), 105 Miller Street, North Sydney NSW 2060, a wholly owned, non-guaranteed member of the National Australia Bank Limited (‘NAB’) Group of Companies (‘NAB Group’). An investment with us is not a deposit with or liability of, and is not guaranteed by, NAB or other members of the NAB Group.

8

News

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

Advisers switch platforms

01: Andrew Gray

director of ESG and stewardship AustralianSuper

Ally Selby

Investment Trends’ 2020 Planner Technology Report found that 29% of financial advisers stopped placing new business on a platform in the past year, with the average adviser using 2.6 platforms each (up from 2.3 in 2018 and 2.1 in 2019).

“Platform relationships are being challenged by the twin headwinds of the Royal Commission and the global pandemic,” Investment Trends research director Recep Peker said.

“Not only has platform switching reached a post-GFC high, planners are also broadening the range of platforms they use.

“In the face of pandemic-induced market volatility, financial planners are relying heavily on platforms for high quality service and support, with minimised service disruptions.”

Despite the rise in platform switching, Investment Trends found that 77% of advisers were generally satisfied with the support provided by platforms during the COVID-19 crisis.

However, 23% of those surveyed said they were dissatisfied, demonstrating there is still room for improvement.

Nonetheless, the COVID-19 crisis has kick started a digital revolution in advice, transforming the way advisers communicate with their clients and accelerating their adoption of digital tools.

“Since the start of the lockdown in early March, planners have significantly expanded their use of online meetings, email campaigns, digital signature tools and social media management systems,” Peker explains.

“Whether by choice or circumstance, planners are adapting their technology stack during these unprecedented times.” fs

Sequoia acquires advice firm Sequoia Financial Group has entered into a purchase of assets agreement with financial advice firm Total Cover Australia, through the company’s subsidiary InterPrac Securities.

It is the fourth acquisition of a retiring InterPrac adviser’s portfolio over the last three years, with Sequoia now looking for similar opportunities in NSW and Queensland where former advisers at banks are looking for employment prospects rather than going out on their own.

“Sequoia sees these opportunities as being beneficial to all parties, as the adviser realizes the value of their asset, their clients retain the personalised service they’ve previously received, and the company is able to absorb these portfolios without significant additional expense, making a strong contribution to our EBITDA,” the company said.

TCA is a corporate authorised representative of Sequoia Group and has generated an average of $800,000 in annual income over the past three years.

It will be absorbed into the 100% owned ‘direct’ client base of InterPrac Securities from July 2020.

Sequoia issued 1.5 million shares as part of the purchase and will provide $900,000 in cash payments over the coming two years. fs

AustralianSuper throws weight behind SDG platform Elizabeth McArthur

A The quote

By collaborating with asset owners from different continents we hope that this SDI AOP will contribute to being a global standard for investors.

ustralianSuper, the nation’s largest superannuation fund, has joined British Columbia Investment Management and PGGM to establish the Sustainable Developments Investments Asset Owner Platform (SDI AOP).

The platform will be driven by artificial intelligence data with the aim of enabling investors to assess companies on their contribution to meeting the UN Sustainable Development Goals (SDGs). The product will be available via distribution partner Qontigo.

“As a founding member of the SDI AOP, AustralianSuper strongly welcomes the opportunity to jointly establish a global standard for investors to identify sustainable development investments,” AustralianSuper director of ESG and stewardship Andrew Gray 01 said.

“The platform will progress how we assess and engage with investee companies on their SDG contribution, measurement and reporting. This will promote real world sustainable outcomes which are vital for creating long-term value for beneficiaries.”

The SDGs aim to achieve better outcomes for people all over the world by addressing issues like healthcare access, clean water scarcity and protecting the environment.

The platform will identify companies whose products and services are in line with the SDGs as Sustainable Development Investments (SDIs). So far it has generated SDI classifications for 8000 companies.

The SDI classifications will be commercially available through Qontigo. The SDI definition and taxonomy are public and equally applicable to private market investments.

“For PGGM this platform is an important next step in a process to mobilise ever more institutional capital around the big challenges of our time, as described in the SDGs,” PGGM chief investment manager Eloy Lindeijer said.

“By collaborating with asset owners from different continents we hope that this SDI AOP will contribute to being a global standard for investors.’’

The standardisation of data, BCI ESG president Jennifer Coulson said, will assist investors that want to make informed ESG decisions.

“For this reason, we are excited to be part of this asset-owner led initiative which sets a global standard on SDG contributions for all investors and brings consistency and comparability to company-level data,” she said.

“This is the type of quality data that BCI relies on when making investment decisions that are required to generate value-added returns for our clients.” fs

Rio Tinto decision exposes limits of superannuation fund engagement A controversial promotion at mining giant Rio Tinto has demonstrated how even the biggest of super funds hold very little sway when it comes to engaging with companies they invest in.

Peter Toth, formerly chief executive of OM Holdings, was promoted to Rio Tinto’s executive board.

His promotion was branded by the Australasian Centre for Corporate Responsibility (ACCR) as “another horrendous Rio decision”, and came just weeks after several super funds invested in Rio Tinto told Financial Standard they were engaging with the company in the hopes of preventing similar events to the destruction of Juukan Gorge from occurring in future.

But OM Holdings has its own history of destroying sacred sites to make way for mines in incidents that happened during Toth’s tenure, including the destruction of an area nearby a sacred site in the Northern Territory known as Two Women Sitting Down.

“This is an appalling error of judgement from Jean-Sébastien Jacques and the Rio Tinto board. To say that it is insensitive doesn’t even begin to capture it,” ACCR executive director Brynn O’Brien said.

“Rio Tinto’s leadership has demonstrated zero accountability for their vandalism of Juukan Gorge and

continues to roll from crisis to crisis. Investors should be circling in on those responsible for this litany of poor decision making.”

QMV partner Jonathan Steffanoni said most big Australian super funds engage with companies in accordance with the Australian Council of Superannuation Investors (ACSI) and this engagement has its limits.

“Such engagements aren’t for ethical reasons per se, but rather as a function to promote better long term financial performance of the companies as investments (ESG risk factors),” Steffanoni said.

He said, in situations like this one, super funds might be worried about reputational damage to Rio Tinto and corresponding economic impacts, fines and penalties, loss of social licence to operate and general confidence and capability in the company’s management – all of which loosely fit within an ESG analysis of the company.

He sees pressure on super funds to get results from their engagement mounting. And, this pressure along with the weight of super assets invested in listed companies growing, could result in super becoming even more politicised than it is now. fs

Opinion

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

9

01: Simon Carrodus

solicitor director The Fold Legal

A tale of two conflicts ’ve always enjoyed irony, so the irony wasn’t IFASEA lost on me when I first read Standard 3 of the Code of Ethics (Standard 3). It’s ironic because Standard 3 purported to eliminate conflicts, but at the same time it brought into existence a brand new one. I’m referring to the conflict between Standard 3 and established law and regulatory policy.

Standard 3 reads: “You must not advise, refer or act in any other manner where you have a conflict of interest or duty.” It’s drafted in a rather absolute, black-and-white manner, which understandably has given rise to a great deal of confusion among financial advisers who use managed accounts. However all is not lost.

Managed accounts Managed accounts have the potential to benefit both clients and advisers. The client benefits by having an investment account managed on a discretionary basis by a professional investment manager. The portfolio can be rebalanced without requiring a Statement of Advice or Record of Advice every time. Managed accounts also offer transparency and the ability to hold assets in the client’s own name, which means they can be managed to create after-tax benefits.

Many, but certainly not all, managed accounts are considered in-house or related party products. In some way, shape or form, the advisers and principals of the advice firm will receive a financial benefit when an adviser recommends a related party managed account to a client.

This creates a conflict of interest.

To manage or avoid?

Conflicts can and do arise between the interests of financial services providers and their clients, and the law and regulatory guidance does not require financial services providers to avoid all such conflicts.

ASIC Regulatory Guide 181 “Managing Conflicts of Interest” states that adequate conflict management arrangements help to minimise the potential impact on clients. This ASIC guidance states that there are three mechanisms for managing conflicts (depending on the circumstances) - controlling the conflict, disclosing the conflict and avoiding the conflict. It states that financial services providers will generally use all the three mechanisms, which clearly indicates that not all conflicts must be avoided.

In contrast, at first blush, Standard 3 appears to impose a blanket ban on servicing a client if a conflict exists. It fails to recognise that an adviser can adequately manage many conflicts that arise in the provision of their services. Standard 3 also seems to go beyond the recommendations of the Banking Royal Commission.

A matter of semantics This is where things get interesting. My newlyformed contention is that the stakeholders may actually in broad agreement with one another without realising it.

In the consultation sessions held in December 2019, and the guidance released subsequent to those sessions, FASEA stressed that Standard 3 only prohibits advisers acting in the face of actual conflicts, as opposed to potential or perceived conflicts. The explanation was that by managing a potential conflict so that it does not influence your advice, you ensure that it does not become an actual conflict. The guidance also put forward a ‘disinterested person test’ - an adviser should consider whether a disinterested or unbiased person would reasonably conclude that the potential conflict could induce the adviser to act other than in their client’s best interests. An arrangement that passes this test should be permitted - irrespective of the specific form or features of the arrangement.

Lamentably, the Code itself contains no such language or explanation, hence the confusion remains.

At its core, a conflict is a divergence of interests between the adviser and their client. If a client pays a fee to an adviser and the adviser provides appropriate advice that is in the client’s best interests, is there really a conflict? Without attempting to speak for FASEA, I believe their position is that, in that situation, the answer is no.

At the other end of the spectrum, RG 181 provides two examples of genuine conflicts i.e. where the adviser’s interests are directly opposed to the client’s interests: Example 1: An adviser has an interest in recommending higher risk product to the client in order to receive a higher commission. This is inconsistent with the client’s desire to obtain a lower risk product.

Example 2: An adviser has an interest in maximising trading volume by the client in order to increase brokerage revenue, which is inconsistent with the client’s objective of minimising investment costs.

These days, when I hear an adviser say “every time you charge a fee there’s a conflict” or “this will shut down the whole industry” I take pause, because I’m no longer convinced it’s true. While it’s not articulated in the Code, FASEA’s subsequent guidance and commentary has stressed importance of advisers managing any potential conflicts.

Client’s best interests Advisers cannot have a one-size fits all approach to recommending managed accounts. They need to look at each client individually to determine whether a managed account is appropri-

The quote

If a cli­ent pays a fee to an adviser and the adviser pro­vides appropriate advice that is in the client’s best interests, is there really a conflict?

ate for that client, having regard to the relative costs, taxation implications and the client’s preference for certain product features.

If an adviser is considering recommending a managed account to a client, the adviser should consider whether it’s likely to meet the client’s needs and whether they’re likely to end up better off.

Advisers must be able to demonstrate that their advice is clearly in the best interests of the client and that it represents value for money for the client. If the adviser cannot do this, they should reassess the advice.

As outlined above, many advisers that use managed accounts have some form of ownership interest in the business that operates the managed account. The FASEA guidance states that an adviser will not breach Standard 3 if they share in profits generated by the provision of ancillary products and services (e.g. managed accounts) to clients, providing that: • The ancillary products and services are merely incidental to the adviser’s dominant purpose in providing advice; and • The ancillary products and services recommended are in the best interests of clients.

However, FASEA states that an adviser will breach Standard 3 if the dominant purpose of providing advice is to derive profits from the ancillary products or services.

A robust advice process Pulling it all together, based on current law, guidance and the Code, advisers can recommend related party managed accounts provided they follow a robust advice process.

• Identify the client’s needs and objectives.

• Research investment solutions that are capable of satisfying the client’s needs, objectives and preferences. Learn about the benefits, risks and costs of each option; • If the client has an existing investment solution, investigate and compare • Ensure that the fees and costs of the managed account are reasonable and represent value for money for the client; • Tailor the advice to the client’s circumstances.

• Explain how it satisfies the client’s needs and objectives and why it is likely to leave the client in a better position; and • Take steps to ensure that the client understands the benefits, costs and risks of each recommendation.

There is no doubt that advisers who recommend related-party managed accounts will, and probably should, attract more regulatory scrutiny going forward. However it would be a bridge too far so suggest that Standard 3 is the death knell for managed accounts. There will always be a place for quality advice and investment solutions that are in the client’s best interests. fs

10

News

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

Industry fund eyes KiwiSavers

01: Christine Lusher

director Lusher Financial Services

Kanika Sood

First Super, which traditionally services the paper and timber industry but is public offer, will now be recommended by NZRelo which provides migration and employment advice to New Zealanders looking to work in Australia.

As a part of NZRelo’s offering, it advertises an Australian superannuation to its 140,000 monthly users, which has been WA Super for the past three years.

The spot will now be taken by First Super under a three-year contract.

“At the moment, [we are expecting] modest growth, because people can’t travel. Once travel opens up again, we expect to see about 3000 new members join the fund a year,” First Super chief executive Bill Watson told Financial Standard.

The fund’s current member base stands at about 45,000 not accounting for future ERS impact. The 3000 a year addition could swell its member base by about 6.7%.

The partnership comes as First Super was approached by NZRelo. There was no tender process.

“We are a medium-sized fund, which allowed us to move quickly and form a significant partnership. There was some cost of setting up [for] their website, then ongoing paid advertising.

In some sense it is not different from advertising in [a] magazine,” Watson said. fs

Super for women under scrutiny Elizabeth McArthur

A The quote

I don’t believe all women can be lumped into two investment options.

Top traded stocks revealed Ally Selby

The top traded stocks for June among Australian investors has been revealed, with punters throwing cash at tech, aviation, automotive and entertainment companies.

Multi-asset platform eToro found that Tesla was its most traded stock for the month, up 709% from May. This was followed by Apple (up 760% from the previous month), and Tesla’s Chinese competitor Nio Inc (up 1018% from the previous month). eToro analyst Josh Gilbert explained Tesla has been one of the most frequently invested stocks on the platform since the COVID-19 crash.

“Tesla’s share price was up more than 22% in June as it went on to breach $1000, smashing its record high,” he said.

“A new stock sale before the pandemic allowed Tesla to raise over $2 billion in cash, which was a key move in hindsight as most of its warehouses worldwide were closed during the fallout of the pandemic.

“A recent email leaked from Tesla chief executive Elon Musk saw the share price surge more than 8% in June, as Musk showed optimism the company could break even in the second quarter.”

Other large cap stocks popular among Aussie investors on the platform include Boeing, with trading activity up 372% during June, Facebook (up 330%), Hertz (up 916%), Amazon (up 602%), Microsoft (up 455%), American Airlines Group (up 545%) and Disney (up 158%). fs

financial adviser has questioned whether superannuation needs to be tailored to women specifically, as female focussed funds – such as Verve and Fairvine – grow in popularity.

Lusher Financial Services director Christine Lusher 01 said she does not think a super product specifically for women is something the market needs – or even something that would suit many women.

“Funds designed specifically for women offer very limited investment options typically with only one to two balanced or growth options. I don’t believe all women can be lumped into two investment options,” she said.

“Choice of super fund is important but equally important is getting the right strategy in place including a well-managed active investment option suited to the individual’s tolerance to risk, debt management and an affordable contributions strategy.”

Verve Super has recently embarked on a social media advertising campaign showcasing its “Support Squad” – which includes a financial coach, divorce expert, career change coach and family focussed financial coach.

Verve chief executive Christina Hobbs said access to the Support Squad is free for members, Verve covers the cost.

“The purpose of the Support Squad is to ensure that every member has someone on their side providing professional insights at key moments: like navigating a career change, re-entering the workforce after taking time out to care, managing a pay negotiation or if they are going through divorce or separation,” Hobbs said.

However, Lusher said consumers should be aware that while they’re not paying out of pocket they are still paying.

Lusher is concerned that coaches may not have the same level of accountability as professional financial advisers when offering guidance that may impact consumer’s finances.

Hobbs said Verve does not charge higher fees to cover its additional services.

Verve offers a single investment strategy, Verve Super Balanced, and does not offer a MySuper product.

The fund charges a $1.80 a week administration fee, amounting to $93.60 a year plus 0.79% per annum. The $93.60 fee is waived for balances below $5000. It also charges a 0.30% per annum investment fee.

Verve invests through Future Super Investment Services, both Verve and Future Super are sub-plans of Diversa. They share an ethical investing ethos – screening out fossil fuels, tobacco, weapons and more.

Hobbs said Verve’s fees are comparable to many industry super funds and that Verve was the sixth top performing fund for the year ending 30 April 2020.

Hobbs and Lusher agree that more needs to be done to create parity in superannuation balances between men and women – they just have different ideas on how to get there.

“We created Verve to support women to build wealth over their lifetimes. We invest womens super ethically but we also focus on supporting women to learn how to build wealth. We do this through free events and learning experiences for members,” Hobbs said. fs

Model portfolio growth up 70% Eliza Bavin

Australia’s model portfolio landscape is growing at a rapid rate, with the number of models available on managed accounts up 70% per annum, according to Rainmaker Information.

Rainmaker research found over the last four years, the number of model portfolios on offer has increased from 865 to 4129.

Meanwhile, Rainmaker said managed accounts are also experiencing significant growth, with funds under administration increasing by 44% last year.

The report said managed accounts hold an aggregate $65 billion as at the end of March 2020.

A review of nearly 100 separately managed account (SMA) platforms revealed there are 1003 discrete model portfolios offered by 193 investment managers, research houses and financial advice groups.

These models are available across four managed accounts and, on average, create 4129 points of presence in the market.

“Model portfolios are offered by investment managers or intermediary groups such as research houses, consultants, platforms themselves and financial advice groups,” Rainmaker executive director of research, Alex Dunnin said.

“Of the 1003 unique models, 12% are ETF or indexed based, but the big surprise is that only 2% have been identified as being explicitly ESG (environmental, social and governance) based.

“We should expect this number to increase given the market’s push for ESG products that is currently underway for managed funds and superannuation products.”

Rainmaker found 41% of managed account models are in equities asset sectors, 49% in diversified offerings and 10% in other asset classes such as property, bonds and alternatives. fs

Product showcase

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

01: Edward Dearing

02: Barnaby Wiener

portfolio manager MFS Investment Management

portfolio manager, head of sustainability and stewardship MFS Investment Management

11

Preservation or creation: Why not both?

In the often black and white world of investing, MFS is adding colour. ypically, when people think about investing T they think in terms of winning or losing it’s always one or the other.

But things aren’t always so black and white and, according to MFS, it’s thinking like this that can very well cost you.

MFS Prudent Capital aims to avoid this by investing in a diversified portfolio of global equity securities, cash, cash equivalents and shortterm government bonds with exposure to fixed income securities.

This is done with the aim of achieving a total return over a full market cycle, without the distraction of constantly tracking a benchmark.

And it’s done by investing in great companies at cheap prices - identified through extensive bottom-up, fundamental research - that meet the strategy’s deliberately steep criteria.

Benefiting from more than 60 years’ combined experience in funds management, the strategy is co-managed by portfolio managers Edward Dearing01, Barnaby Wiener 02 and David Cole.

Here, Dearing and Wiener provide insight as to how their disciplined, yet flexible approach to stockpicking has fared in its three years since inception* and why they’re confident it can stand the test of time.

Why do you believe in taking a prudent approach to investing?

ED: We believe one of the safest ways to generate long-term returns is to seek to avoid losses.

By adhering to this focus, we aim to deliver equity-like returns with less volatility over a full market cycle. Our approach has always been a preference to lag the market in periods of frenzied excitement than risk material losses during abrupt market declines.

BW: In our view, minimising downside risk is critical to preserving capital in the long term. We take a very long-term approach when thinking about security selection and put capital to work only when the risk/return profile warrants it.

How do you decide what to invest in?

BW: Our aim is to navigate the investment path whilst aiming to deliver capital appreciation. We have an absolute return mind-set and our philosophy is reflected in two components.

The first is at the core of the strategy; finding long-term opportunities in equities and credit that we believe have the potential to compound value over time (closer to 10 years than one year), while maintaining the option of not committing if it’s not the right time.

The second is that we invest our clients’ mon-

ey just as we would invest our own. We are very focused on downside risk both in terms of the portfolio’s position – we have a lot of flexibility to manage market exposure – and secondly, in terms of the types of investments we make. We spend more time thinking about what can go wrong with an investment than we do thinking about what could go right.

We put capital at risk only when we believe the potential return warrants it. As we do not think of relative risk versus an index, it frees us to do things differently, namely reduce market exposure when opportunities are not attractive and build an investment portfolio that bears no resemblance to the index.

What does the perfect stock for you look like?

ED: Valuation is a major determinant of our market positioning but there are other factors.

We follow a highly disciplined investment approach and only look to own individual securities where we see a compelling fundamental reason to own a stake in the underlying business. We tend to focus on companies we believe have a genuinely durable franchise, sustainable competitive advantage, strong balance sheet, a management team running the company with a long-term future in mind and, above all, companies trading at a reasonable valuation.

The quote

We are acutely conscious that our clients entrust us with their capital because they want to preserve it and not speculate with it.

How do you look into the near future and prepare your portfolio?

BW: While it is difficult to predict the future, we continue to believe that taking a long-term view, investing in resilient businesses, in companies that have the ability to adapt and thrive, which are trading at attractive valuations – and importantly, with great balance sheets – is the most appropriate strategy for our clients.

It is sometimes tempting to do more when volatility picks up; however, it is precisely at times like this that a disciplined approach to investment is absolutely key and has served our clients well historically.

We believe taking a long-term view with judicious security selection will determine the difference between success and failure, bringing opportunity for the prepared and those with skill and patience. fs

Why has the portfolio been so defensive?

ED: Our approach is a blend of both bottom-up and top-down observations. We are more influenced by what we find at an individual security level. Asset allocation will stem from finding or not finding sufficient investment ideas in which to invest and an overall judgment of the risk/reward in the market as a whole.

Over the last couple of years, the portfolio was defensively positioned and continues to be so. This is because we had a number of concerns which informed our positioning. The greatest concern is a deep misgiving about this essentially 40year monetary experiment of accumulating ever greater debt system wide. We see this as a source of instability and an impediment to growth. Other general concerns include inflated profit margins and disruption risk in a number of industries.

Disclaimer: *01 December 2016. MFS International Australia Pty Ltd (“MFS Australia”) (ABN 68 607 579 537) holds an Australian financial services licence number 485343. This article is directed at investment professionals for general information use only with no consideration given to specific investment objective, financial situation and particular needs or any specific person. Investment involves risk. Past performance is not indicative of future performance. The views expressed in this article are those of the speakers, and are subject to change at any time.

Has the strategy performed as you expected in the market downturn?

BW: Yes, there have been two significant downturns since the strategy was launched. The last quarter of 2018 and the first quarter of 2020.

The strategy outperformed the MSCI World Index in both instances by 9.1% in Q4 2018 and 23.3% in Q1 2020 delivering on our main goal of protecting client’s capital during these market events. However, we do not want to declare victory yet as we probably have a long way to run still.

One thing that we have always been quite conscious of is that there will come a time where we think it is prudent to be much more constructive in terms of our positioning. We are acutely conscious that our clients entrust us with their capital because they want to preserve it and not speculate with it.

We reserve judgement, and wait to see how we perform over an extended period of time and through a range of different market conditions because that is the only way of really evaluating whether we are doing a good job or not.

To this point, we always like to think of things in the long term, if we look back to the life of Prudent Capital, over the last three years to 30 June 2020 it has generated an annualised return of 12.7% vs the MSCI World Index of 10.6% despite only holding approx. 50% in equity through his period.

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12

News

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

ASX delays blockchain go live

01: Ben Hardwick

head of class actions Slater and Gordon

Kanika Sood

ASX has pushed back the planned go-live of its blockchain replacement for legacy CHESS systems by a year to April 2022.

The stock exchange informed stakeholders back in March that it was reviewing the implementation timeline but wouldn’t have a final decision until June.

“With the onset of the COVID-19 pandemic, it became clear that a number of factors, including the pandemic itself, created a need to revise the implementation timetable,” ASX said in a statement.

Now it’s giving stakeholders 12 more months to provide for additional time for COVID-19’s impact, but also to accommodate functionality changes requested by users and give them more timeto get ready for the changes.

So far, thirty-four organisations have connected to the customer development environment CDE, including software providers, brokers and share registries.

It has also released a consultation paper, responses to which are open until July 28.

ASX deputy chief executive Peter Hiom said: “The recent period of record trading activity and volatility, and the prevalence of manual and paperbased processes in many back offices across the industry, have underlined why the implementation of the next generation of technology to support the digitisation of Australia’s equity market is a priority.”

“Regular industry-wide engagement and collaboration are critical to the CHESS replacement project, and we thank users for their ongoing input and support.

“ASX remains committed to the project and to working constructively with all stakeholders to ensure we deliver a solution that balances the interests of the whole market,” he said. fs

CountPlus firm buys back equity Twomeys, which services clients in regional New South Wales towns, paid $1.1 million cash to CountPlus to buy back 38% of its equity. CountPlus will retain 62% of the equity in Twomeys.

Separately, Twomeys will acquire the fees of an outgoing Director of Cultiv8 Accounting Pty Ltd for as an initial cash payment of $0.3 million, with a further deferred payment linked to incentive criteria to be made in 12 months.

“This acquisition provides Twomeys a strategic growth opportunity in Young, NSW, that will complement the firm’s existing client footprint in Cootamundra, Harden and Cowra,” CountPlus said in a statement.

Cultiv8 Accounting Pty continues to operate, with Thomas O’Brien as the founding director.

A director from Cultiv8, Peter Maher, will join Twomeys shareholders alongside Michael Gay, Jenny Officer, Matthew Paterson, Stephen Thurn, Kerrie Walsh, Jenna Fallon and Matthew Moon.

“The CountPlus model works on identifying and investing in quality people and firms. Today’s announcement confirms our commitment to growth by quality acquisition as well as our Owner, Driver - Partner model with key talent in our firms,” CountPlus chief executive Matthew Rowe said. fs

AMP should stop whining: Slater and Gordon Elizabeth McArthur

L The quote

Mr De Ferrari’s whining has actu­ally done a very useful thing: he has revealed the true agenda of corporate Australia.

aw firm Slater and Gordon has slammed AMP chief executive Francesco De Ferrari’s criticism of litigation funding and class actions, as AMP continues to battle lawsuits sparked by the Royal Commission.

Slater and Gordon head of class actions Ben Hardwick01 has labelled AMP “arrogant” and accused its chief executive of having an agenda to make class actions more difficult.

Appearing before the House of Representatives Standing Committee on Economics, De Ferrari was asked how many class actions AMP was currently facing.

After answering that AMP is facing two actions, De Ferrari offered his view of the class action system in Australia. He cited a report from the Menzies Research Centre, which claimed Australia is one of the most desirable jurisdictions in the world for litigation funders.

Litigation funders have been under the spotlight recently, with new legislation requiring them to have an AFSL to operate in Australia.

De Ferrari said he welcomed this new scrutiny of litigation funding, and that he was worried the prevalence of class actions in Australia was

driving up the cost of doing business here and of public indemnity insurance.

“Mr De Ferrari runs an organisation that somehow managed to claim a gold medal for disgrace at the banking Royal Commission in a highly competitive field,” Hardwick said.

“It’s difficult to imagine the arrogance necessary to show up to Parliament, as the boss of AMP, and start whinging about how inconvenient it is for ordinary Australians to want their money back.”

He added that he thinks the Liberal government’s inquiry into class actions is being driven by a business lobby and that big business doesn’t want to have to worry about customers taking them to court.

“AMP charged dead superannuation customers for life insurance, knowing there was no longer any life to insure. Then they were accused of lying to the ASIC. And this was just the tip of the iceberg,” Hardwick said.

“However, Mr De Ferrari’s whining has actually done a very useful thing: he has revealed the true agenda of corporate Australia. He wants litigation funding for class actions cut off so AMP can go back to doing whatever they want without fear of getting sued.” fs

Cbus brings digital assets in-house Eliza Bavin

Cbus is working to bring all of its third party digital assets in-house, with the aim of increasing member engagement.

Cbus chief technology officer Rob Pickering told Financial Standard the fund has been working on the project for over two years now.

“We want to have that real single channel experience and we feel we are the best people to adapt to changing member expectations,” Pickering said.

“We wanted to build a digital environment that matched our member brand promise.”

Pickering said, with its partnership with Mulesoft, the fund has been able to increase member engagement.

The fund has seen a 19% increase in unique users from its old portal to its new portal, as well as a 20% increase in conversion.

“We’ve seen members engaging with the platform more now that we’ve launched,” he said.

“If we’re able to help people get a better experience from the digital assets, they’ll engage more often and make decisions that can improve member outcomes.”

Pickering said the move to bring digital assets under Cbus’ control will not replace administration systems provided by Link Administration.

“It will never replace the back-end administration systems that Link hold on our behalf; it’s not intended to do that,” Pickering said.

“But we want to create a single channel experience so a member can contact us through whatever means they want and the person they are speaking to will have the most current and relevant information available.”

Additionally, Pickering said over the next 18 months the fund will work on bringing all its contact centers in-house as well.

“We want to make sure that regardless of how our members interact with us, on any of our platforms, they have the right information to make the right decisions,” he said.

“So, we’ve taken this journey now, as part of the bigger transformation, so bring everything together and the next phase of that is to bring our assisted channels, like our contact center, into direct control as well.” fs

News

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

13

Executive appointments 01: Tom Garcia

AustralianSuper names financial crime lead The country’s largest superannuation fund has appointed a head of financial crime, security and resilience, reporting to its chief risk officer Paul Schroder.

Tom Garcia 01 is moving into the role after serving as AustralianSuper’s head of product from March 2017 to July 2020, Financial Standard’s sister publication The Sustainability Report first reported.

Garcia was also the chief executive of Australian Institute of Superannuation Trustees (AIST) for about four years, ending in 2017.

As AustralianSuper’s head of financial crime, security and resilience, Garcia will be responsible for compliance with anti-money laundering and counter-terrorism financing, preventing fraud and other financial crime.

He will also work on business continuity, privacy, data governance and fund resilience.

The role reports to Paul Schroder, who moved to chief risk officer role last November after about 12 years with the fund.

Garcia linked his current role to his background as an engineer.

“I saw this role as a way to get in and use that knowledge on systems thinking and process thinking to implement into these functions,” Garcia said in an interview with The Sustainability Report.

“One of the main objectives I have is to create centres of excellence for areas in the department - AML, fraud, business continuity, and will be about working across the fund and understanding how we will relate to different lines of accountability and what processes we need to implement.”

Hostplus exec jumps to First State Hostplus’ executive manager, client relationships and business growth has departed the fund to take up a new position at First State Super.

Hostplus confirmed that Helen Wood, executive manager, client relationships and business growth has recently left the fund.

Wood began a new position as regional manager at First State Super effective July 2020.

Wood joined Hostplus in 2014, initially as NSW state manager, before being appointed head of region in 2015 and was subsequently appointed executive manager, client relationships in mid-2017.

Prior to joining Hostplus Wood spent five years at Commonwealth Bank, working as corporate benefits manager, northern region and corporate benefits client relations and strategy manager.

She has also held roles at Asteron and Plum.

In confirming the departure, Hostplus’ group executive, member experience Paul Watson thanked Wood for her contribution during her time with the fund.

“Throughout her time at Hostplus, Helen made a valued contribution to the fund’s

Advice head leaves ANZ ANZ has confirmed the departure of its head of advice and operations.

Darrel Caulfield 02 took to LinkedIn to farewell ANZ, saying it had been a privilege to work for the company.

“ANZ has been a big part of my life and has provided significant opportunities, travel, learning and education,” he said.

“There are so many great memories that I will take away. I have also made lifelong friendships along the way.”

In March 2020 ANZ told staff it would cut 230 jobs from its private bank and financial advice businesses.

Caulfield thanked everyone he had worked with and said he looked forward to the next chapter in his career.

He had been at ANZ for more than 18 years, starting as an advice practice manager and then moving to the head of ANZ My Advice role in 2009.

He had been head of advice and operations for three years.

Caulfield did not say what his next move would be.

retention and growth strategy and execution efforts, which included her securing, strengthening and maintaining many key business relationships over the past five and a half years,” Watson said.

“While we are sad to see Helen leave, we appreciate and respect that Helen has sought fresh challenges and opportunities, which involves a new regional management role with NSW public sector fund, First State Super.

We wish Helen every success in her future endeavours”.

Hostplus said it is reviewing requirements relating to the key client relationships role which, in the interim, will be managed by the fund’s executive manager, strategic partnerships Arthur Antonellos.

Antonellos has been with Hostplus for over 19 years, working as executive manager, client services and sales, and executive manager strategic partnerships.

JBWere to add 50 to team NAB has announced it is looking to boost its team at JBWere with the recruitment of 50 new bankers and financial advisers.

NAB said the move is part of a strategy to provide high-net -worth clients with a single point of access for their financial needs.

JBWere chief executive and leader for NAB Private Justin Greiner said NAB understands the need to align its ambitions with the growth opportunities of its customers.

“We have an ambition to grow our marketleading business bank by helping our customers grow, and our offering for high-net-worth clients is a core part of our strategy,” Greiner said.

“We understand that our clients are looking for access to a broader suite of advice and investment solutions.”

Greiner said the company wants to invest to provide even more support for clients, bringing together specialists across lending, financial advice, family advisory and philanthropy.

“We are looking to recruit bankers and advisers that have a deep understanding of private wealth and a strong sense of ‘client first’ - which is the ethos at the heart of the JBWere culture helping us to serve families and organisations for 180 years,” he said.

With JBWere, NAB Private and self-directed wealth now coming together under the leadership of Greiner, the team is being tasked with delivering a private wealth offering to its high net wealth clients.

NAB said the new private bankers will also be part of the bank’s new accredited banking career pathway, providing ongoing investment to support their career.

Pinnacle appoints chief financial officer Pinnacle Investment Management has appointed a chief financial officer to support its ongoing growth.

02: Darrel Caulfield

Dan Longan has nabbed the role, following about five years at the company. During this time, Logan was extensively involved in managing the finance and technology functions of the business, and for several years has been leading Pinnacle’s finance and IT functions.

Until now, Alex Ihlenfeldt served as Pinnacle’s chief operating officer and chief financial officer; however, the firm noted it was now appropriate to separate the two roles thanks to the multi-boutique manager’s “ongoing growth”.

Ihlenfeldt will now focus solely on the chief operating officer role, while Logan will take over the reins as chief financial officer.

“Pinnacle is a rapidly growing and hugely diverse organisation and I look forward to assisting in the continued growth of the business, and in particular, our growing family of boutique investment managers, here in Australia and abroad,” Logan said.

Longan has held the role before, serving as Pinnacle’s chief financial officer for two years to January 2013.

Following this period, Longan served as a director at competitor Channel Capital, where he worked for over two and half years.

He has also previously worked with Wyndham Vacation Resorts Asia Pacific as a senior financial accountant and with Price Bailey as a manager, Credit Suisse as head of client accounting for its fund administration business and Ernst & Young as an executive.

Pinnacle’s investment boutiques collectively manage $57 billion across a range of asset classes. It provides distribution and support services to its fifteen investment affiliates.

Australian Unity rejigs executive lineup Australian Unity has appointed a new chief executive for its wealth and capital markets business, as it also launches a new green bond fund backed by Crestone Wealth Management.

Esther Kerr-Smith is moving into the role of chief executive for wealth and capital markets at Australian Unity, as the incumbent David Bryant resigns.

Kerr-Smith joined the company in 2017 as the group executive for finance and strategy, after working at Boston Consulting Group and at Macquarie’s infrastructure division.

Darren Mann, who joined the firm in 2012 and has held roles including group treasurer, has been appointed as Australian Unity’s new group executive for finance and strategy as well as its chief financial officer. “...She [Kerr-Smith] has already demonstrated that she is a passionate leader with a deep capacity for value creation and impact. Esther will be a great asset to Australian Unity as we move into our next phase of growth, especially as we continue to pursue our social infrastructure agenda,” Australian Unity group managing director Rohan Mead said. fs

14

Feature | Custody

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

HIGH STAKES Superannuation fund mergers are tipped to accelerate under regulatory gaze. What will it take for custodians to win? And could it trigger a parallel consolidation among custody players themselves? Kanika Sood writes.

Custody | Feature

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

I

t has been a tough few years for superannuation trustees.

First they were questioned on national television about failed merger attempts during the Royal Commission hearings, and then the Australian Prudential Regulation Authority released two iterations of its heat maps, calling out expensive and/or underperforming funds.

Research reports haven’t helped. KPMG’s latest count from June predicts 217 APRAregulated superannuation funds will shrink to 138 within the next five years, falling 60% over the coming decade.

As the pressure to merge builds, it’s not just trustees that will be pondering their future but also their key vendors, including custodians.

Australia’s $2.7 trillion superannuation pool is the second-largest segment of potential market for custodians, after the traditional managed funds and adviser platforms combined, according to Rainmaker Information as at March end.

However, it is bolstered by legislated compulsory contributions, while managed funds rely on discretionary personal investments.

As super funds merge, what will it take for top custodians to retain their business? And what will it take for the market to still stay competitive and open to new players?

What funds want Mercer Sentinel, which advises superannuation funds on picking custody providers, says the process starts with a request for proposal (RFP) process followed by usually a closed tender, given the small number of players [Figure 1].

After willing custodians submit their due diligence documents, the fund and its consultant establish a shortlist; two or more providers that have been vetted on their financial standing, credit rating, strategic objectives of the alignment and ability to cater to future needs.

Typically the incumbent will also be part of the shortlist and given the benefit of incumbency.

At least two providers go to the closed due diligence session, where they lift the covers and unpack a little bit more. Actual transition can take a couple of years.

01: Tricia Nguyen

02: Jo Leaper

03: David Knights

head Mercer Sentinel Pacific

senior manager operational consulting JANA

general manager strategy and transformation NAB

“Ten to 20 years ago, it was more or less about who you knew rather than what was in the best interest of the members,” Mercer Sentinel principal consultant Ash Moosa says.

Moosa’s colleague and head of Mercer Sentinel, Pacific Tricia Nguyen 01 says the change in mindset is primarily driven by increased pressure on trustees to serve member’s best interests alone, take culture and future requirements into account and look for a provider that can slice and dice data to fit their multiple purposes.

“What our clients are looking for in selecting a custodian is primarily driven by regulatory developments and increasing scrutiny on fund trustees to demonstrate that thorough due diligence has been undertaken as part of the custodian selection process in the best interest of fund members,” she says.

In explaining, Nguyen points to prudential and reporting standards including SPS 530 Investment Governance, SPS 231 Outsourcing and SPS 233 Pandemic Planning.

“There is now obviously a much greater focus and accountability placed on super fund trustees to demonstrate the level of vigilance and thoroughness in terms of due diligence as part of the selection process of a custodian, primarily driven by risk mitigation and enhanced operating efficiency that extends to consideration of future operating requirements,” she says.

The tender process has moved past simple compliance box-ticking, Nguyen adds.

JANA says the process of going to tender for a custodian is time intensive and the firm only takes on two or three contracts a year at most.

JANA also provides ongoing custodian support to clients outside of custody contracts/ tenders/benchmarking. [Both Mercer and JANA are compensated by the fund and don’t receive any payments from custodians].

“When you change a custodian, it can be a long time to true business as usual. It is very expensive and time consuming. It also impacts multiple areas of the business and service providers,” JANA senior manager, operational consulting Jo Leaper02 says.

“We are very focussed on operating models and adding operational alpha.”

15

She adds funds should look closely at decision-making within the custodians, and the strategic impacts of these global decisions on Australian clients.

Further, NAB general manager strategy and transformation David Knights 03 says custodians have been forced to step up on COVID-19 stimulus measures.

“We’ve had the early redemption program facilitated by the government so obviously, [clients expected] a focus on liquidity management,” Knights says.

“They are really, really geared towards ensuring that they’ve got efficiency through all of their investments and particularly in a low rate environment, ensuring that they’re maximising the return for their members.”

Ten to 20 years ago, it was more or less about who you knew rather than what was in the best interest of the members.

Ash Moosa

A shrinking pie?

When two superannuation funds come together, who takes home the custody contract?

Both Mercer Sentinel and JANA say so far superannuation funds have been largely unwilling to pick a new custodian – usually not even conducting a tender process.

“Typically what I find, to keep it simple, is the big party (i.e. in terms of fund size and complexity of requirements) will win at the end of the day in terms of their service providers,” Moosa says.

“It might be that a merger could be a catalyst for tender. It’s not been my experience with successor fund transfers but that’s not to say it can’t happen. It really comes down to determining the needs and requirements of the merged entity.”

At JANA, Leaper’s experience is funds don’t often speak to an outsider custodian, even if they conduct a tender.

“The decision is based on decision-making matrix that considers risk-reward. Usually, the custodian who will come out on top, from a risk perspective, is unlikely to be anyone other than the incumbents,” she says.

If merging superannuation funds continue to stick to their existing custodians, as JANA and Mercer point out, does that mean market share will slowly drift towards custodians who already have large superannuation clients?

16

Feature | Custody 04: Daniel Cheever

05: Angelo Calvitto

06: David Braga

head of global services, Australia State Street

Australia country executive Northern Trust

chief executive BNP Paribas Securities Services for Australia and New Zealand

Custody mandates are already few and far between, running as they do for a minimum of three years and usually much longer.

“Three years ago, they were talked about and not really happening. I think [now] there’s very clear evidence that the merger activity in superannuation funds is accelerating at a significant pace,” State Street head of global services for Australia Daniel Cheever04 says.

And it will be reflected in the business, he adds.

“We would expect we would have a smaller number of large clients than what we have today,” Cheever says, adding the asset management market locally will change as well in the next 10 years as local managers offer their products into international markets.

Northern Trust sees an average of four mandates come to the market each year while BNP Paribas Securities Services says it typically sees about 10, but wouldn’t necessarily always pitch for them all.

Neither custodian is worried about mergers potentially restricting future pipelines.

“We don’t see a concern for our organisation.

Potentially it means we are in a tender process but we see no issue in that,” says Angelo Calvitto05, local country executive for Northern Trust, adding it allows it to prove the value of its global operating model, technology and service-driven culture.

BNP Paribas Securities Services chief executive, Australia and New Zealand David Braga06 says: “We probably have the broadest set of offering. And we’re the only global custodian who can support New Zealand domiciled investment vehicles like Portfolio Investment Entities (PIEs), the mandated investment vehicle for KiwiSaver.”

A point of agreement among all sources is that custodian’s data solutions are top of mind – both for providers and superannuation funds.

As such, each provider is working on something.

State Street is integrating Charles River and building out the State Street Alpha platform which will connect the front, middle and back offices, enabling greater efficiencies and more timely, accurate and complete data.

NAB is focussed on digital delivery, while State Street and Northern Trust are also offering to do outsourced trading for superannuation funds. Many have also touted transition management services for implementing big portfolio changes.

Increased merger activity is the consensus, with the exception of Braga.

“We need to be careful that scale isn’t the only way to achieve great outcomes for members, particularly when you look at topics like insurance and advice,” Braga says.

“So I’m actually wondering if we’ll end up with a bit of a barbell effect similar to what we’ve seen in global asset management, where at one end of the barbell, you have to generate scale and size, and at the other end you can have a specialist capability which is fit-forpurpose.”

We would expect we would have a smaller number of large clients than what we have today.

Daniel Cheever

Consolidation closer to home Late last year RBC Investor & Treasury Services [which focussed on fund manager clients] exited the local market via novating its local clients totaling about $122 billion in assets to Citi Australia.

What investment chiefs want On 9 July 2020, the $54 billion Cbus and $6 billion Media Super started exclusive due diligence, with a view of retaining their brands but merging their investments and administration functions by 2021.

In a separate interview in the weeks preceding the announcement, Cbus chief investment officer Kristian Fok07 shared the broad strokes of where Cbus has asked more of its custodians J.P. Morgan and Pacific Custodians, as the fund’s assets swell.

“An area where they’ve really stepped up is around a more sophisticated securities lending program for the purposes of actually assisting around liquidity management and extracting value from the different securities,” Fok said.

“We are also looking at applying a more sophisticated approach to investing into derivatives. And they are providing further services around that and also special purpose vehicles that we have.”

Last year the fund moved from weekly unit

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

Also last year, NAB offloaded post-trade services and fund data provider Ausmaq to Clearstream, which is owned by the Deutsche Börse Group.

This year, OneVue, which has a fund administration business, accepted an offer to be acquired

by Iress, even though one of its largest shareholders thought the price too low. The acquisition is subject to shareholder vote in September.

About a decade ago, the big four banks offered custody services. Now, only NAB competes in the area, after Commonwealth Bank, ANZ and Westpac exited their businesses, after passing through various owners.

If post-merger mandates beeline to existing custodians, as consultants say will likely be the case, does it mean there are fewer opportunities for smaller players?

Could this trigger consolidation among custodians?

NAB, Northern Trust and the Australian Custodial Services Association declined to talk in detail about the subject. State Street’s Cheever said he personally feels there won’t be significant consolidation despite the recent transaction involving RBC I&TS. Perhaps looking into the history of custodians in Australia can provide some insight as to the future of the industry.

JP Morgan acquired ANZ’s custody services business in 2009/2010, as it looked to get into the direct custody or sub custody market.

It has sat still since.

“It’s something that if the opportunity presents itself, we will evaluate it…from a Securities Services perspective but also from a franchise perspective [it has done so in New Zealand] as well,

Figure 1: Total assets under custody for Australian investors

pricing to daily unit pricing, which allows it to push out its end of the financial year results faster [published on July 3 this year].

“A big area of focus is around getting the data on our securities holdings into our database that we were sort of developing, which gives us a much better and faster insight around the portfolio,” Fok says.

For services like trading and transition management, the fund is either doing it itself or relying on a provider outside custody.

“We can handle this [trading] for domestic okay [and] for international, we have an outsourced arrangements, not with a custodian but with another provider. If we happen to open an office overseas, and it works [building overseas trading desks]...but we wouldn’t open an office for the purposes of building a trading desk.

“We have a panel and we actually have a capacity to do that [transition management] ourselves as well,” he said.

1% 1%

2% 3% 5%

22%

12%

15%

13%

13% 13%

J.P. Morgan

NAB Asset Servicing

HSBC Bank

RBC Investor & Treasury Services

Source: ACSA, Dec. 2019.

Northern Trust* Ausmaq

Citigroup

State Street

Netwealth

BNP Paribas

BNY Mellon

18

Feature | Custody

which is really important,” head of securities services ANZ at J.P. Morgan Nadia Schiavon08 says.

“There are examples of other acquisitions across pockets of the business, but they’re not overly frequent because they have to tick a lot of boxes.”

The long-lasting nature of custody relationships – even though it is changing – may suggest custodians could find value in adding clients via an acquisition. Smaller players may also be able to add an area of specialisation.

But at J.P.Morgan, the latter is of no interest.

“No, we don’t tend to acquire a business to give our clients access to a specialised service, we tend to develop a relationship or an arrangement with them,” J.P. Morgan head of platform sales, ANZ Nick Paparo says.

“But it’s only where we can add value. And if we don’t believe that we can add value within that arrangement, then our clients will tend to go out directly and appoint the providers that they need to provide that service.”

Braga says superannuation funds now review custody mandates more frequently than before, limiting the use of acquisitions to acquire clients.

“There was a period where it was very rare for custodian mandates to change. I think that’s now moved on. Funds are a lot more conscious that as they evolve, potentially what they need from a partner evolves as well,” he says.

“You never say never because you don’t know what the future might hold.

“But there’s nothing that is particularly needed for us in terms of meeting our growth prospects. I’m very comfortable that we can make our forward projections out to 2024 using organic growth.”

The rise of multiple custodians On gauging the impact of super mergers on the custodial services market, it’s fair to make two assumptions: only two funds merge together, and that each merged fund only appoints one custodian.

07: Kristian Fok

08: Nadia Schiavon

09: Rob Brown

chief investment officer Cbus

head of securities services, ANZ J.P. Morgan

chief executive Australian Custodial Services Association

On the assumption of only two funds merging, last year, Tasplan, Statewide Super and WA Super attempted a merger but abandoned it, with Statewide crossing out tripartite merger opportunities, saying it was too complex operationally.

Extended public offer licences were popularised

by Equipsuper last year are gaining traction, having also now caught the eye of Cbus.

The alternative to successor fund transfer allows multiple superannuation funds to combine investments and administration into a single pool while retaining brand identities.

It may also potentially be shrinking the market for vendors who get the boot in the merger.

On the possibility of super funds needing the services of more than one custodian – the Global Custody Survey 2019 polled 250 demandside respondents on their custodian experiences and found only 31% used a single custodian.

This included banks, hedge funds, insurers, mutual funds as well as pension funds but data wasn’t broken down by firm types.

Could multiple custodians be the future among Australian asset owners?

“Some funds may have a custodian and a second custodian on standby, though this is rather rare in the Australian market,” Leaper says.

“It’s very rare to see them [merging funds] keep both [custodians] because the pressure on fees and costs is much higher. It is an expensive proposition and would require a strong riskreward to justify.”

Meanwhile, Braga says multiple custodians feels “inevitable” as investment pools grow — but what exactly could be a trigger is hard to guess.

“The other reality then, is that the funds will be so large that they’ll struggle to maintain the level of [required] risk management and only have a single custodian. I think what we’ll start to see – and we’ve seen this with global asset managers – is when they get to a certain size, they actually start operating with a panel of providers and not a single provider,” he says.

The impact of COVID-19 Australian Custodial Services Association chief executive Rob Brown 09 says COVID-19 and associated lockdowns forced providers to rethink their processes.

The industry association set up a new forum with share and unit registries with weekly meetings.

“Together, we found solutions for the handling of physical documents and cheques impacted by lockdown, and shared key operational escalation contacts for rapid issue resolution,” Brown says.

“We worked with key regulators including ASIC and APRA to share insight and understand priorities. The public guidance provided by ASIC and APRA on regulatory

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

priorities during the Pandemic was of particular value.”

He says attention has now turned to what a return to normal looks like, and planning for the service peak associated with financial year end.

“There have been lessons learned – including a reminder that inefficient processes are exaggerated in a crisis. The industry will continue to drive for more automation, especially those areas that proved challenging during the lock-down and volume spikes,” he says.

In some relief, ASX delayed its blockchain replacement for legacy CHESS system by a year to April 2022.

“They’ve got the ability to switch across if they need to, maintain competitive attention… if someone’s falling behind on a particular corner of the services, you could give that to someone else.

“It’s a little bit speculative to say what the trigger would be that would push people to do it.”

Barriers to entry

There was a period where it was very rare for custodian mandates to change...Funds are a lot more conscious that as they evolve, potentially what they need from a partner evolves as well.

David Braga

While superannuation funds’ tendency to stick to existing custodians may be bad news, the good news is that it is tough for new players to come to Australia and compete for its swelling pool of assets.

“We’ve probably got about five of the top 10 already in Australia. Those that are contemplating will probably look at it as a niche opportunity,” says Mercer Sentinel’s Moosa.

“Custodians like Bank of New York Mellon, Brown Brothers Harriman (BBH) they are all concentrated on Europe, Asia or Americas.

That’s not to say they don’t already have capability — bearing in mind we do have a $2.7 trillion savings pool and growing, and in terms of complexity due to increasing asset diversification and regulatory oversight.”

Newcomers will have to prove they can integrate.

“If you are an offshore provider, such as BBH, that is well set up elsewhere and looking to establish greater presence locally, the ability to integrate their operating model to service the Australian market and address the specific local nuances (eg. tax regime) – and the automation and efficiency that comes with their operating model to best leverage from their global footprint and capabilities – is key to successfully gaining entry to the local market,” Nguyen says.

There is also another possible deterrent.

“The superannuation guarantee rise is attracting custodians to the Australian market, however, the market is quite active already, so the possibility of gaining market share is difficult if you’re a new player. On this basis, I don’t think we will see many new entrants,” Leaper says.

One global custody bank that has been successful in tapping into the superannuation segment is State Street, which has evolved from being focussed on asset managers a decade ago to a 50-50 split between owners and managers.

However, at the end of the day the aim of a business is to achieve sustainability, and a lot hangs on how much a business is willing to fork out in the early days in a market that is clearly dominated by the incumbents.

“All the custodians have invested significant money in their [regulatory reporting] systems in the ongoing changes. Those particular services require significant investment for new entrants to come in,” Cheever says.

“The other barrier is finding an anchor client and [it can be tough], given the long sales cycles.” fs

– SPONSORED POST –

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

19

01: David Braga

chief executive BNP Paribas Securities Services for Australia and New Zealand

COVID-19 is changing the custody landscape COVID-19 is hastening the transformation of securities services ­— what was once impossible pre-COVID has now become possible, notes David Braga, chief executive Securities Services for BNP Paribas in a recent interview. e are already having in-depth discussions W with clients who are considering their new needs to adapt to a post-COVID world. Whilst the industry collectively has done well to adapt to the tremendous operational changes of recent months, clients are now focusing on what the future might look like and how operating models might need to be reconfigured to remain robust and scalable, and which are the new solutions they need to grow in an increasingly challenging market,” Braga said.

This new future reality means custodians have to transform to become even more agile whilst at the same time balancing additional risk.

Transformation was already well underway prior to the global pandemic in some sectors.

Specifically on the sell-side, banks and brokers were already facing pressure in terms of the increased cost of capital, margin pressure, and the rapid evolution of technology. These factors have been driving brokers to look at optimising and simplifying their operating models, but this was happening prior to the current COVID-19 situation.

Both the Australian Securities Exchange and the Hong Kong Stock Exchange have announced the replacement of their post-trade market infrastructure with distributed ledger technology (DLT), and they are giving market participants the option to connect. They can either connect to ISO20022 Swift messages or connect directly to the blockchain and take a node.

The current post-trade process involves a sequential workflow, which means participants wait for one party to instruct them to forward the same instruction to the next party in the intermediary chain. A significant advantage of DLT or a blockchain is that it enables a realtime, multi-party workflow, which speeds up the workflow and the validation process.

“BNP Paribas is going a step further and streamlining election processes in a way that will allow our prime broker and asset manager clients to send their elections only a few minutes before the market deadline. This will be done through smart contracts and blockchain.

We are also leveraging a new generation of cus-

tody platforms being rolled out across AsiaPacific markets that will assist in this respect,” Braga said.

Whilst many forward thinking brokers were already in discussions and were reviewing their operating models, COVID-19 seems to have accelerated the interest to outsource back-office clearing operations.

More partnerships Whilst custodians have taken different approaches to their own transformation, BNP Paribas made a strategic decision to build strong partnerships with specialist technology providers to enable it to roll out new solutions more quickly.

According to Braga: “To remain agile, we are using a co-creation approach, which enables the bank to remain relevant to rapidly changing client needs. We collaborate with and leverage an ecosystem of specialist providers to create solutions and a comprehensive value chain for clients. It is a bit like being a smart phone provider - the apps may be your own or somebody else’s, but what matters is how you bring it all together into one seamless experience for the end user.”

BNP Paribas has announced a range of different partnerships.

“One we signed recently is a partnership with the wealthtech platform Allfunds to develop next-generation fund distribution services - looking at the dealing, settlement, custody and administration of unlisted investments on a multi-jurisdictional basis. And in the context of custody and clearing, there’s our partnership with Digital Asset Holdings which has propelled our blockchain capabilities,” Braga said.

“As a securities services provider, we believe that not everything needs to be done in-house anymore. It is about finding best-inclass partners to co-create solutions, bringing these together into an ecosystem of providers, and harmonising that on behalf of our clients.”

Braga believes the capacity of players to provide a ‘one stop shop’ solution for clients will be key for the future success of the asset servicing industry.

The quote

We collaborate with and leverage an ecosystem of specialist providers to create solutions and a comprehensive value chain for clients.

Despite all this change, some things have not changed. The base requirements in terms of what’s expected from a securities services provider - the core processing of trades, of cash, of corporate actions, the expectations around accuracy, timeliness, high straightthrough-processing rates and value for money - have stayed the same.

However, the disruption seen as a result of the pandemic presses fast forward on the cracks that were already there. Providers with strategic vulnerability - a lack of scale, a poor value proposition or older technology - are likely to be exposed. fs Head over to BNP Paribas Securities Services website to listen to a three-part podcast where Braga discusses the role of people, technology and the future of securities services. securities.bnpparibas.com/insights/podcast-pastpresent-future.html Disclaimer: BNP Paribas Securities Services is incorporated in France as a partnership limited by shares and is authorised and supervised by the European Central Bank (ECB), the ACPR (Autorité de Contrôle Prudentiel et de Résolution) and the AMF (Autorité des Marchés Financiers).

BNP Paribas Securities Services ARBN 149 440 291 (AFSL No: 402467) is registered in Australia as a foreign company under the Corporations Act 2001 (Cth) and is a foreign ADI within the meaning of the Banking Act 1959 (Cth).

The information contained within this document is believed to be reliable but neither BNP Paribas Securities Services nor any of its related entities warrant its completeness or accuracy nor accept any responsibility to the extent that such information is relied upon by any party. Opinions and estimates contained herein constitute BNP Paribas Securities Services’ or its related entities’ judgment at the time of printing and are subject to change without notice. This document is not intended as an offer or solicitation for the purchase or sale of any financial product or service outside of Australia and is intended for ‘wholesale clients’ only (as such term is defined in the Corporations Act 2001 (Cth)). The information contained within this document does not constitute financial advice, is general in nature and does not take into account your individual objectives, financial situation or needs. BNP Paribas Securities Services recommends that you obtain your own independent professional advice before making any decision in relation to this information.

The information contained in this document is confidential and may not be reproduced in any form without the express written consent of BNP Paribas Securities Services. Additional information is available on request.

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20

News

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

Netwealth booms amid pandemic

01: Julia Angrisano

national secretary Finance Sector Union

Ally Selby

Specialist wealth management platform Netwealth has seen its share price soar, after it reported a 35% increase in funds under administration for the financial year.

It comes despite negative market movement wiping $900 million from the platform.

FUA as of June 30 lifted 35% to $31.5 billion, an increase of $8.2 billion for the financial year.

Netwealth saw record net inflows of $9.1 billion during the period, regardless of the $900 million loss.

For the quarter, FUA increased by 13% or $3.6 billion, with net inflows of $1.5 billion alongside a positive market movement of $2.1 billion.

Netwealth had $7.3 billion in funds under management at 30 June, with FUM net inflows for the quarter of $500 million, including inflows of $400 million into managed accounts. As of June 30, the platform had a balance of $5.8 billion held in managed accounts.

This was an increase of $3 billion or 110% for the FY20, including a record year for managed account net inflows of $3.3 billion and negative market movement for the year of $300 million.

Netwealth joint managing director Matt Heine told Financial Standard that managed accounts continues to be a key driver of new business for the platform, as an increasing number of advice firms look to drive efficiency and scalability within their businesses. fs

ATO extends WFH deductions Australians will be able to claim 80 cents for every hour they worked at home due to COVID-19, with the ATO extending its simplified method for workers to claim deductions on their tax until September 30.

Taxpayers will only be required to keep a record of the hours they worked from home from March 1 until the end of September to claim the deduction, rather than needing to calculate specific running expenses.

The ATO’s “shortcut” method covers phone and internet expenses, electricity and gas, and the depreciation in value of equipment and furniture used whilst working from home.

Minister for housing and assistant treasurer Michael Sukkar welcomed the extension of the temporary arrangements, which he said, would make it easier for Australians to claim tax deductions for working from home.

“The short cut deduction method is making it easier for many Australians who are continuing to work from home due to COVID-19 when it comes to accurately completing their tax return,” he said.

Those working from home to fulfil employment duties, not just carrying out occasional tasks like checking emails or taking calls can apply for the “shortcut” method. Taxpayers who have incurred additional running expenses as a result of working from home can also apply.

If they prefer, Australians can choose to claim using the ATO’s “actual cost method” (covering additional running costs incurred as a result of working from home) or “fixed rate method” (taxpayers can claim 52 cents for each hour working at home). fs

FSU secures super pay increases Eliza Bavin

T The quote

In the last 12 months the FSU has negotiated wage increases right across the sector.

he Financial Sector Union (FSU) has confirmed employees at a number of super funds will receive pay increases in a deal that followed 12 months of negotiation.

The FSU said it was pleased to have reached decisions with a number of super funds including AustralianSuper, HESTA, Hostplus and Media Super.

AustralianSuper workers will receive a 14% rise and HESTA will see a 12% rise over the next four years, Hosplus employees will get a 10.5% and Media Super will receive 7.2% over three years.

“In the last 12 months the FSU has negotiated wage increases right across the sector. In many cases, pay increases of more than 3% were achieved,” the FSU said.

“We have also secured millions of dollars in back pay for FSU members who were underpaid.”

National secretary of the FSU, Julia Angrisano 01, said she was pleased with the result and the increases reflect the hard work and contribution made by employees across banking insurance and super funds.

“Rewarding employees for the important contribution that they make towards the positive outcomes for customers and members

means that employees are properly and fairly remunerated,” she said.

“Our negations with Hostplus is an example of this. Salary outcomes have resulted in greater pay parity across the sector.”

Speaking to Financial Standard a spokesperson from Hostplus confirmed the news and said the deal has been approved by the Fair Work Commission.

“As well as delivering for its staff a market competitive 3.5% salary increase year on year for the life of the agreement, it also provides for other employer-of-choice benefits such as materially increased caregiver, parental, compassionate and domestic violence leave entitlements in addition to paid community service leave,” Hostplus said.

“We routinely benchmark and monitor our compensation arrangements relative to the market.”

Angrisano said the FSU do not have any concerns at the moment about underpayments.

“Like all financial services entities we expect compliance with the Act and the industrial instruments that apply,” she said.

The FSU also negotiated pay rises of 6% over two years for NAB employees and 9% over three years for Bendigo Bank. fs

LGS certified carbon neutral Local Government Super (LGS) announced it has been certified carbon neutral through Climate Active.

LGS said the certification means it is one of only five Australian super funds to achieve carbon neutral status.

The fund said it was awarded the certification after it met all the requirements of the Climate Active Carbon Neutral Standard (formerly the National Carbon Offset Standard).

LGS closely measured emissions, reducing them where possible, offsetting emissions and publicly reporting on the results.

The certification includes all LGS employees, the Sydney head office, and the fund’s seven regional offices.

LGS chief executive Phil Stockwell said: “Sustainability has always been a core value for LGS and becoming carbon neutral underlines our long-standing commitment to reducing emissions and contributing to a low-carbon economy.”

“It demonstrates to our members and the wider community that it is possible to effectively reduce emissions through targeted action.”

The funds head of responsible investment, Moya Yip, said LGS supports a number of carbon offset projects, including a re-forestation project in New South Wales, the Rimba Raya biodiversity reserve project in Indonesia, and a wind power project in Rajasthan, India.

“These projects reflect our local and global outlook and they generate environmental, social and economic co-benefits,” Yip said.

“The carbon offset projects align with the United Nations Sustainable Development Goals and the values of our membership base.”

Yip added that the projects deliver community benefits in the form of employment opportunities for the local population, especially for women in enterprise.

“They also raise living standards through clean water and solar energy as well as introducing innovations into local agriculture,” Yip said.

LGS’ head office, situated in Sydney, is part of its property portfolio which was the first to be certified carbon neutral by Climate Active for all the NABERS-rated buildings in the portfolio. fs

Keep up to date with Financial Standard’s latest news and events on LinkedIn

Products

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

21

Products 01: Andrew Lockhart

New private debt fund Pinnacle boutique Metrics Credit Partners has launched a new fund-of-funds that will invest in direct loans to Australian corporates, with the minimum investment size set at $1000.

The Metrics Direct Income Fund is targeting 3.25% per year above the Reserve Bank of Australia cash rate, with monthly income.

The new fund, which has a minimum investment size of $1000, will act as a wholesale investor in a sub-trust that invests in other wholesale funds managed by Metrics, including its diversified Australian senior loan fund (DASLF), the secured private debt fund II (SPDF II) and the real estate debt fund (REDF) and one of its two ASX-listed funds, the master income trust (MXT).

Total management costs are set at 0.69% per year of the fund’s NAV. More than 80% of the borrowers that the fundof-fund lends to will be Australian domiciled. The fund will diversify its lending by industry sectors (excluding banks), across projects in both public and private sector.

“The Australian corporate loan market is an attractive opportunity that should be considered by investors, seeking to provide superior riskadjusted returns compared to asset classes such as bonds,” Metrics Credit Partners managing partner Andrew Lockhart01 said.

“Like all fixed income, it helps to provide portfolio diversification, along with a stable cash yield with low risk of capital loss compared to equities.”

It had about 150 individual investments as at July 1. The boutique manages over $5 billion across seven unlisted strategies and two ASXlisted funds.

Powerwrap to merge with Praemium Praemium advanced a $55.6 million bid to acquire Powerwrap in an off-market conditional takeover priced at about 26.55 cents per share.

The two parties have entered a bid implementation agreement dated July 9. The bid has been unanimously supported by the board of directors at Powerwrap.

Praemium will split the $55.6 million purchase price as 7.5 cents per share in cash and one Praemium share for every two Powerwrap shares.

“The merger is an exciting opportunity for Powerwrap and Praemium shareholders alike.

For many years, Praemium has been on a growth trajectory with a recent history of generating steadily growing profitability,” Praemium chair Barry Lewin said.

“This merger adds increased scale and significant synergies,” Lewin said with the company adding it expects to achieve full year EBITDA operating cost synergies (on a preliminary basis) to total $6 million by FY2022.

Praemium has $140 billion in funds globally with over 1000 clients. It’s virtual managed accounts service has been a strong area of growth for the past year. It will pay for the acquisition via a recently-entered $15 million term loan facility.

ETF Securities introduces new ETFs ETF Securities is set to launch new ETFs based on the NASDAQ 100 – one that provides a leveraged long exposure and another that provides geared short exposure.

The level of leverage in the two ETFs is between 200% to 275% of the net asset value, and is actively managed by the firm.

ETF Securities co-head of sales Kanish Chugh says he expects the ETFs to be used more as trading tools by investors who are looking to take a view on the volatility, than as traditional buy-and-hold allocations.. “[What] we have seen in the past four months, short and leveraged products have been used by investors, when there is here more volatility,” Chugh told Financial Standard.

“This space in Australian market has traditionally been underdeveloped. A lot of work has been done already on what a short product is or what a geared product is. The markets have really evolved and there is a lot more that will happen in this space.”

The July 13 launch of ETFS Ultra Long Nasdaq 100 Hedge Fund (LNAS) and ETFS Ultra Short Nasdaq 100 (SNAS) comes on the heels of BetaShares’ geared, shorting ETFs catching investor attention during COVID-19 volatility.

BetaShares’ BBOZ and BBUS, which track ASX 200 and S&P 500 respectively with leverage, had tallied up $250 million in inflows (with BBUS) from January to mid-March.

It is also the largest shareholder in Powerwrap, owning 15.1% of its stock. As a result, the larger company thinks the possibility of a competing bid emerging is low.

For Powerwrap, the bid comes at a time when it has struggled to boost its share price to the levels it originally listed on the ASX in May 2019.

“The board of Powerwrap believes the offer presents an excellent opportunity for Powerwrap shareholders to participate in the upside of the merged group that stands to benefit from significant potential synergies,” Powerwrap chair Anthony Wamsteker said.

“With Powerwrap’s strong customer base and Praemium’s track record of profitability and cutting-edge technology, the benefits to Powerwrap shareholders are clear to the board and we encourage Powerwrap shareholders to take the next step in the company’s journey.”

SG Hiscock, Morgan Stanley partner Boutique fund manager SG Hiscock has partnered with Morgan Stanley to exclusively distribute their global equity funds in Australia.

The SGH Partnership Program has been launched with the Morgan Stanley Global Quality fund (hedged and unhedged) and the Morgan Stanley Global Sustain fund (hedged and unhedged).

The Global Quality fund aims to invest in high quality companies that have the ability to consistently compound shareholder returns over time, and the Global Sustain fund aims to emphasise the low carbon footprint, and excludes tobacco, gaming, adult entertainment, weapons, bulk commodities, fossil fuels, and gas/electrical utilities from the portfolio.

SGH managing director Stephen Hiscock02 said: “We are particularly pleased to launch the SGH Partnership Program with Morgan Stanley, acting as their sole partner in Australia to distribute two of their global equity funds to the noninstitutional market.”

“Morgan Stanley is one of the world’s largest and most respected fund managers, and both funds have a strong track record of delivering resilient, above-market returns to investors.”

Morgan Stanley Investment Management Australia managing director Daniel Vanden Boom said SGH has strong existing relationships among dealer groups and independent financial advisers which the Partnership Program aims to build upon.

“Our firm manages in excess of $10 billion for Australian institutional investors, across investment strategies in global equities, emerging markets equities, global fixed interest, global REITs, unlisted property and unlisted infrastructure,” Vanden Boom said.

“This includes an established client base in our Global Quality and Global Sustain strategies which we’ve been eager to offer to retail investors for some time. Partnering with SGH means we can benefit from the longstanding experience of their business development team and their relationships with advisers.”

02: Stephen Hiscock

The two funds aim to offer retail investors access to high-quality global equity strategies that have a track record of meeting investment needs such as capital growth, earnings visibility and reduced downside participation.

Vanden Boom said inherent to the investment approach is the belief that considering ESG factors is essential to compounding performance returns.

“The result is a high-conviction global equity portfolio that is strong on engagement, low on carbon and built on quality,” he said.

“These considerations are increasingly valued by investors, particularly in Australia.”

Equity Trustees Limited has been appointed Responsible Entity (RE) of the two Partnership Program funds.

Equity Trustees’ head of global fund services and executive general manager corporate trust services Harvey Kalman said the business is proud to be continuing its longstanding partnership with SGH, and now with Morgan Stanley.

“SGH was one of our foundation clients when we were established 20 years ago,” Kalman said.

“Enabling access to these funds provides the Australian public with access to a quality global manager via the distribution expertise of SGH, and we’re pleased to be appointed as RE as a result of this new partnership.”

State Street cuts fees on equities funds State Street is dropping the fees on its flagship actively-managed equities funds by nine to 13bps for Australian investors effective July 1.

The State Street Australian Equity Fund will go from charging 79bps per year in management costs to 70bps. It currently has about $299 million in total funds under management, as at June end.

Meanwhile the $230 million State Street Global Equity Fund will drop by 13bps, going to 85bps per year in management costs from 98bps.

Both funds sit under its quantitative equities team led by Olivia Engel and consist of 43 investors.

“Both funds seek to deliver strong total returns whilst also managing total risk. These objectives are especially relevant in the current uncertain economic environment,” State Street said in a statement.

“The fee change comes after State Street reduced the fee of the State Street Multi-Asset Builder Fund 12 months ago and highlights the firm’s continuous focus on offering value to investors.”

State Street Global Advisors is also the largest asset manager in Australia with a 6.4% slice of the $2.5 trillion market at March end, according to data from Rainmaker Information.

Earlier this year, State Street finally dropped the fees on its Aussie equities indexed ETF, SPDR S&P/ASX200 ETF (STW), pushing its cost down from 0.19% p.a. to 0.13% p.a, as its competitors made equivalent products cheaper.

The fund, which was the first ETF to launch in Australia and at various points in time has been the largest and the most liquid, had charged about 28 bps until 2015 when it dropped to 19bps. fs

22

Roundtable| Superannuation Featurette

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

Surviving ERS and EOFY When the government announced the Early Release of Superannuation scheme to help those affected by COVID-19 it was assumed there would be a rush to access the money as we rung in the new financial year but, as Eliza Bavin writes, the logistics behind it were more difficult than expected.

The ever rising ERS statistics have been a cause of concern for super funds since the scheme was announced back in April.

The COVID-19 pandemic has wreaked havoc on financial markets around the world and the global economy has all but come to a halt as the world tries to contain the deadly virus.

The ERS scheme, announced by the Morrison government as part of a broader stimulus package, has given Australians access to finances at a time when they may be in desperate need of the money.

However, since the moment it was announced funds were put in the spotlight with claims of liquidity issues and logistical problems.

Fears were first sparked in late March when funds began revaluing their unlisted assets after markets suffered their worst crashes since the Global Financial Crisis.

Many feared the culmination of both a drop in markets and fall in the value of unlisted assets would see super funds struggle to pay out members who were preparing to withdraw up to $20,000 over two years.

By the end of March, the House of Representatives Standing Committee on Economics chair, Tim Wilson, was calling out

the nation’s super funds that said they were experiencing liquidity issues, saying it was inconsistent with evidence they had provided to the committee.

It was also inconsistent with what some had told the press.

“In the last round of hearings, the superannuation sector dismissed the committee’s concerns about liquidity associated with the structure of their funds,” Wilson said.

“Considering the super funds are now claiming liquidity issues which is inconsistent with the spirit of evidence they had previously submitted, the committee is reserving its right to hold a hearing with APRA, and the superannuation sector in the interests of financial stability.”

As the industry was gearing up to start making the first payments, even APRA was questioned over funds’ abilities to meet the liquidity requirements.

Senator Andrew Bragg issued a letter to APRA putting the regulator on notice to answer a number of questions related to super funds.

“I have sought reassurance from APRA that all the super funds have their houses in order as they have publicly stated,” Bragg said.

“Superannuation is so opaque. We need to know how issues will be handled if any arise.”

The first files for the second wave of applications were given to us on Friday (July 3) and it was about triple the volume of any previous day.

Stephen Blood

Prior to applications being processed over 800,000 Australians had registered their interest in the scheme, further adding pressure on the super industry to keep up with the incoming flow of applications.

Just when it seemed tensions were highest, APRA announced funds would be given only five business days to complete the request once they have received it.

The pressure being put on the super industry was immense, and everyone was watching with baited breath to see how and if funds would be able to cope.

But, the day came and went and, as OneVue executive general manager, superannuation services Stephen Blood says besides some teething issues things were running perfectly fine.

“In the very first week there were some teething problems from the ATO’s perspective in receiving files and other parties which had to adapt,” Blood explains.

While it is understandable issues would arise as the scheme was rolled out so quickly, Blood says he is pleased with how quickly the industry was able to adapt.

“Everything happened in such a rush, I think the whole industry struggled with it but we managed

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

it pretty well, albeit not perfectly in the first week,” he says.

“APRA only gave us very short notice about the requirements for the weekly reporting, and a couple of weeks ago they announced they want an additional two sets of reports on top of the weekly report.”

Blood says again there was no advance warning from the regulator, noting the additional reporting requirements are quite in-depth.

“I can understand why APRA needs all this information, so it’s not a criticism of APRA, but it is certainly a large imposition on us at a difficult time to be able to comply with that additional reporting without much time to prepare for it,” Blood says.

An APRA spokesperson told Financial Standard that while it understands there is increased pressure on funds and administrators, it still expects all reporting standards be met.

APRA’s expectations of the superannuation industry with respect to processing and reporting of the early release of superannuation scheme have remained consistent,” the regulator said. “[APRA] notes that processing timeframes may extend slightly where an RSE licensee experiences a high volume of applications at any particular time.”

The regulator said trustees should be working closely with their administrators to identify critical business activities and the extent to which they can continue where the administrator experiences material disruption “In APRA’s view, critical activities include the day-to-day payment of benefits, processing rollover requests, investment switches and early release payments. Trustees must ensure their administrator has in place contingency plans for those activities,” it said.

What has also made matters more complex is the end of financial year.

Over the EOFY period many super funds enter what is known as a “blackout period” where they cease reporting, halt successor fund transfers and the like to focus on their accounting needs.

However, this year, with ERS applications continuing to flow in, many funds have not been able to take that time and administrators have felt the pressure.

“The first files for the second wave of applications were given to us on Friday (July 3) and it was about triple the volume of any previous day,” Blood says.

“Due to all the system enhancements and everything else we have been able to do; we expect to be able to process everything within the five day period set by APRA.” Blood says administrators, like OneVue, generally start preparing for EOFY around 10 months in advance. Basically, as soon as one season ends preparation for the next begins.

“Obviously a lot of planning goes into it, and we are now in full swing of executing the plans we started making some months ago and they are going according to plan,” he says.

Superannuation | Featurette

23

01: Stephen Blood

02: Alex Dunnin

executive general manager, superannuation services OneVue

executive director, research and compliance Rainmaker Information

“The COVID-19 impact has been very much a ‘learning and adapting quickly’ situation.”

Super funds have had to deal with short times frames from APRA, and little assistance from the ATO besides receiving members’ applications.

When asked by Financial Standard an ATO spokesperson explained that in terms of the super fund blackout period it is simply not in their remit.

“In terms of a super fund “blackout period” and the impact it has on their processing of early release of super payments, it would not be appropriate for the ATO to comment on this,” the spokesperson said.

“This is a matter for the funds and APRA.” Given the hurried nature of the ERS scheme, the ATO itself had to make very fast arrangements for how it was going to work, and unfortunately this has also caused some confusion.

While the ATO has repeatedly told funds it will be responsible for verifying the validity of early release requests, this is not always the case as the ATO works with administrators to determine cases of fraud.

“We get two separate files; one with requests that have been given the green light in terms of being certain they are who they say they are and they have the funds available and the other file has flags for possible fraud,” Blood explains.

“It is then incumbent on us to actually review that and request further verification documents from those members to prove they’re bona fide.”

The ATO has been working closely with those in the industry on a regular basis where they are providing up to date information but the nature of the organisation means they are not able to assist funds further.

“The ATO is working closely with super funds and industry associations to implement the COVID-19 early release of superannuation measure,” the ATO spokesperson said.

“Our role is to receive and process applications from individuals for early release of super and to advise super funds of the determinations that we make.

“We do not give direction to funds on how they process their early release of super payments.”

So, without guidance from APRA and the ATO’s hands tied, how were funds meant to navigate the EOFY period?

Take for example if a person put an application in on June 30, that wasn’t processed by the ATO until July 1 and then received by the fund on July 3 – does this application count as being part of the first tranche of ERS or the second?

These are the questions funds were facing as the anticipated a second spike in applications loomed.

The ATO said in the above scenario it would count as being in the first tranche and the individual would be able to apply for the second, but the logistical gymnastics is easy to see.

OneVue decided to take a proactive approach and, prior to the second wave hitting funds, reached out to APRA to put forward potential solutions.

Most people applying for this round of ERS are likely to be older because the younger folks who dominated the first round have probably cleaned out their accounts.

Alex Dunnin

As Blood explains, super funds with managed funds often require more tax works to determine a unit price and determine how to treat distributions.

“In case there was a delay in getting unit prices in early June we had a contingency plan for those funds, and their customers who were going to fully exit the fund due to ERS payments, we are going to give them 80% of their payment straight up and then 20% when the price comes through,” Blood says.

“That way they would get the bulk of the money quickly when they need it, and then the remaining balance once the unit price is struck.”

This 80/20 system was raised with APRA in the months leading up to the end of financial year and was agreed to by the fund’s trustees.

“It was our initiative because a lot of people out there really needed that money quickly, so we tried to think of the best solution.”

“As it has turned out, we have not had to implement that contingency plan and everyone is getting 100% of their approved release funds on time,” Blood says.

As is now public knowledge the July 1 deadline hit, and with it a surge in fresh ERS applications.

Prior to the new financial year, funds were paying out around $1 billion each week – whereas in the first three days of the new financial year $7 billion was wiped from super.

Without the months of prior planning, learning and improving, super funds could have been easily overwhelmed by that number.

But now that we have reached the second wave, and surpassed Treasury’s estimate, Rainmaker executive director of research and compliance Alex Dunnin says while the numbers are startling it may not be as bad as it seems.

Rainmaker Information data shows this spike is close to the initial spike seen when applications opened back on April 20.

“The larger point is that most people applying for this round of ERS are likely to be older because the younger folks who dominated the first round have probably cleaned out their accounts,” Dunnin says.

“For example, those who took out $6000 because that is all they had available certainly don’t have another $10,000 waiting for them.”

Dunnin says it is likely the total ERS payments in the second tranche will peter out after this initial surge.

Additionally, concerns over funds liquidity and ability to keep up with applications have also subdued.

In fact, the balanced options of the majority of the country’s super funds are only just in the red after suffering through that unprecedented period of market volatility we saw earlier in the year.

Dunnin argues they have made a remarkable recovery, with Australia’s superannuation system recuperating much of their losses in lighting speed.

“Rainmaker estimates its SelectingSuper MySuper index for FY 2019-20 will come in at -0.7%,” he says.

“Superannuation has come through the COVID19 financial crisis in remarkably strong shape to finish the financial year close to flat.” fs

24

Between the lines

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

MSC Trustees wins mandate

01: Michael Clancy

chief executive Qantas Super

Jamie Williamson

MSC Trustees was appointed trustee for the $1 billion ASX-listed notes of Spark Infrastructure.

The notes form part of Spark’s stapled security capital structure, first listed in 2005.

In taking on the mandate, MSC Trustees replaces Australian Executor Trustees.

MSC Trustees took over the note/debenture book of Sandhurst Trustees, then owned by Bendigo and Adelaide Bank, in 2016. It also provides note trustee services to Australian Unity, among others.

MSC Trustees managing director Matt Fletcher said the firm is delighted with the appointment.

“MSC continues to be providing trustee services for selective Australian companies issuing notes, bonds and debentures,” he said.

“We believe trustees have a considerable role to play in facilitating these types of capital structures which are critical to the Australian corporate landscape and provide worthwhile opportunities for investors.”

MSC also provides trustee services to retail and wholesale managed funds, fintech providers, and debt, security and escrow services.

Spark has interests in about $18 billion worth of electricity infrastructure across Victoria, New South Wales, South Australia and Australian Capital Territory.

MSC was founded in 2012, then Melbourne Securities Corporations. It also provides advisory, fund registry and accounting services. fs

Qantas Super selects new life insurer Eliza Bavin

The quote

When compared, MetLife’s pricing, product, and service offering were determined to be in the best interests of our members going forward.

Q

antas Super announced MetLife has been awarded the insurance mandate, effective 1 July 2020. The fund said it was pleased to welcome the global insurer, saying the COVID-19 pandemic in part led to the decision.

“With the COVID-19 pandemic leading many insurers to review their premium rates, we have been negotiating with insurers to minimise any premium increases for our members,” Qantas Super said.

“When compared, MetLife’s pricing, product, and service offering were determined to be in the best interests of our members going forward.”

Qantas Super chief executive Michael Clancy01 said MetLife’s experience in the aviation industry made it a top candidate.

“MetLife’s global strength and stability, and experience in insuring aviation employer groups makes them well positioned to be our insurance partner,” Clancy said.

Rainmaker Mandate Top 20

“We’re excited to work with MetLife to support our members through this challenging period and help them look forward to better times.”

MetLife has taken over from Qantas Super’s previous insurance partner, MLC Life Insurance.

“We thank MLC for its service to Qantas Super members over the past nine years,” the fund said.

Additionally, Qantas Super announced there will be changes to insurance premiums for standard/basic cover and voluntary cover from 1 August 2020.

The fund added there will also be changes to income protection cover while members are on leave without pay from 1 August 2020.

In December last year, Qantas Super said it has mandated Zurich’s OnePath Life for death, total and permanent disablement, and income protection in a change that was expected to come into effect on 1 July 2020. fs

Note: Latest investment mandate appointments in last two quarters.

Appointed by

Asset consultant

Investment manager

Mandate type

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

IFM Investors Pty Ltd

Fixed Interest

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

Macquarie Investment Management Australia Limited

Australian Equities

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

Ashmore Investment Management Limited

Emerging Markets Fixed Interest

26

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

IFM Investors Pty Ltd

International Fixed Interest

13

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

PGIM, Inc.

International Fixed Interest Emerging Markets

28

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

Perennial Value Management Limited

Australian Equities

10

AvSuper Fund

Frontier Advisors

WaveStone Capital Pty Ltd

Australian Equities

86

Care Super

JANA Investment Advisers

Siguler Guff & Company, LP

Private Equity

Construction & Building Unions Superannuation

Frontier Advisors

Wellington Management Australia Pty Ltd

Other

208

Health Employees Superannuation Trust Australia

Frontier Advisors

Other

Cash

29

Hostplus Superannuation Fund

JANA Investment Advisers

Other

Alternative Investments

Hostplus Superannuation Fund

JANA Investment Advisers

Other

Australian Private Equity

9

Hostplus Superannuation Fund

JANA Investment Advisers

ROC Capital Pty Limited

International Private Equity

7

Hostplus Superannuation Fund

JANA Investment Advisers

Other

International Private Equity

10

Labour Union Co-operative Retirement Fund

Frontier Advisors

Other

International Equities

Labour Union Co-operative Retirement Fund

Frontier Advisors

Oaktree Capital Management, LLC

International Fixed Interest

Maritime Super

JANA Investment Advisers ; Quentin Ayers

Ardea Investment Management Pty Limited

Alternative Investments

Maritime Super

JANA Investment Advisers; Quentin Ayers

Other

Australian Equities

86

Mirae Asset Global Investments (Australia) Pty Ltd

Other

Australian Equities

446

WA Local Government Superannuation Plan

Putnam Investments Australia Pty Limited

Fixed Interest

Willis Towers Watson

Amount ($m) 1

6

113

129

26 Source: Rainmaker Information

International

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

Debt to reach 101.5% of GDP The International Monetary Fund has predicted global public debt will rise to its highest levels in history as a result of the economic fallout from the COVID-19 pandemic.

In the face of a sharp decline in global output, a massive fiscal response has been necessary to increase health capacity, replace lost household income and prevent large-scale bankruptcies.

However, the IMF said, the policy response has also contributed to global public debt reaching its highest level in recorded history, at over 100 percent of global GDP, in excess of post-World War II peaks.

“The ongoing COVID-19 pandemic has already prompted an unprecedented fiscal policy response of close to $11 trillion worldwide,” The IMF said.

“But with confirmed cases and fatalities still rising fast, policymakers will have to keep the public health response their No. 1 priority while retaining supportive and flexible fiscal policies and preparing for transformational economic change.”

The IMF’s fiscal monitor database revealed the total global fiscal support so far has been split almost evenly between above-the-line – measures with a direct effect on revenue and expenditure such as deferral of taxes and cash transfers– and belowthe-line support, which includes public sector loans, equity injections and government guarantees.

“The need for fiscal action does not end here, as we are not out of the woods. Even as many countries tentatively exit the Great Lockdown, in the absence of a solution to the health crisis, huge uncertainties remain about the path of the recovery,” the IMF said. fs

US HNWIs surpass APAC Elizabeth McArthur

HNWI wealth and population grew by almost 9% globally in 2019 despite a global economic slowdown, international trade wars and geopolitical tensions, according to Capgemini.

North America and Europe took the lead with around 11% and 9% growth respectively, surpassing Asia Pacific with 8% for the first time since 2012.

Breaking down the HNWI population by net wealth, it was actually those at the very top - with more than US$30 million in investable assets who continued to thrive. The ultra-HNWI segment increased most in terms of population, by 9.1% and their wealth grew by 8.2%.

There are 1.75 million mid-tier millionaires with between US$5 million and US$30 million in investable assets in the world and 17.6 million “millionaires next door” with between US$1 million and US$5 million in investable assets. While the ultra-HNWIs are a tiny population, they account for a third of the total wealth of all HNWIs. However, even the exceptionally wealthy did not manage to avoid the impacts of the COVID-19 pandemic.

The World Federation of Exchanges estimates that COVID-19 erased more than $18 trillion from markets in February and March 2020 before a slight recovery. Capgemini projected a decline of between 6% and 8% in global wealth until the end of April 2020. fs

25

01: Johan Florén

head of communications and ownership AP7

Pension fund in fossil fuel divestment hoax Jamie Williamson

G The quote

We sent the press release that AP7 should have sent.

lobal climate change activist group Extinction Rebellion has come under fire after it posed as Sweden’s largest pension fund and claimed it was divesting from all companies with operations in fossil fuels.

On June 29 a website purporting to be that of AP7 published a statement saying the decision was based on market analysis and risk estimation and resonates with a growing climate awareness and demand for sustainable fund investments among AP7’s clients.

According to Extinction Rebellion, AP7 invests about $3 billion in fossil fuels.

The hoax release said the pension fund planned to start divesting immediately with a goal of reaching overall carbon neutrality by 2030.

The release was picked up by a number of major European news outlets before the fund’s

head of communications and ownership Johan Florén01 – who was named as a spokesperson in the hoax release – contacted them to confirm it was fake.

According to IPE, AP7 began an investigation and was considering reporting the hoax to police.

Extinction Rebellion came forward on July 1 to claim responsibility, saying: “In this release we claimed that AP7 was to divest ownership in all companies with operations in fossil fuel. Unfortunately, that is not true. We sent the press release that AP7 should have sent.”

“We understand that we have caused some confusion and we are very sorry if any of you have felt cheated. We do have all the respect for journalism and we never intended to undermine the trust in media.” fs

Institution charged over Epstein scandal Eliza Bavin

The US Department of Financial Services (DFS) has hit Deutsche Bank with a US$150 million penalty for the banks relationship with disgraced financier Jeffery Epstein.

This marks the first enforcement action by a regulator against a financial institution for dealings with the convicted pedophile.

DFS superintendent of financial services Linda Lacewell announced that Deutsche Bank, its New York branch, and Deutsche Bank Trust Company America have agreed to pay the penalties as part of a consent order for “significant compliance failures” in connection with the bank’s relationship with Epstein and correspondent banking relationships with Danske Bank Estonia and FBME Bank.

“Banks are the first line of defense with respect to preventing the facilitation of crime through the financial system, and it is fundamental that banks tailor the monitoring of their customers’ activity based upon the types of risk that are posed by a particular customer,” Lacewell said.

“In each of the cases that are being resolved today, Deutsche Bank failed to adequately monitor the activity of customers that the bank itself deemed to be high risk.

Lacewell said despite knowing Epstein’s criminal history, the bank “inexcusably” failed to detect or prevent millions of dollars of suspicious transactions.

The DFS said the bank failed to properly monitor account activity conducted on behalf of the registered sex offender despite ample information that was publicly available concerning the circumstances surrounding Epstein’s earlier criminal misconduct.

“The result was that the bank processed hundreds of transactions totaling millions of dollars that, at the very least, should have prompted additional scrutiny in light of Epstein’s history,” the DFS said.

Deutsche Bank agreed to pay the fine, and DFS said it allowed a number of transactions, including:

• payments to individuals who were publicly alleged to have been Epstein’s co-conspirators in sexually abusing young women; • settlement payments totaling over US$7 million, as well as dozens of payments to law firms totaling over US$6 million for what appear to have been the legal expenses of Epstein and his co-conspirators; • payments to Russian models, payments for women’s school tuition, hotel and rent expenses, and (consistent with public allegations of prior wrongdoing) payments directly to numerous women with Eastern European surnames; and • periodic suspicious cash withdrawals — in total, more than US$800,000 over approximately four years.

“This substantive failure was compounded by a series of procedural failures, mistakes, and sloppiness in how the Bank managed and oversaw the Epstein accounts,” DFS said.

The regulator said the bank failed to follow certain conditions imposed upon Epstein’s accounts buy its risk committee, which if followed might have detected and prevented many suspicious transactions.

The department also concluded that Danske Estonia and FBME failed to properly monitor the activities of foreign bank clients with respect to their correspondent and dollar clearing business.

“Danske Estonia, which is at the center of one of the world’s largest money laundering scandals, suffered from inherent control failures that resulted in large quantities of money being moved on behalf of Russian oligarchs,” the department said.

“Over the course of the years-long relationship between Deutsche Bank and Danske Estonia, Deutsche Bank was repeatedly put on notice of these failings and of the fact that few improvements were undertaken by Danske Estonia.”

The DFS said despite the fact that Deutsche Bank assigned Danske Estonia its highest possible risk rating, it failed to take appropriate action to prevent Danske Estonia from transferring billions of dollars of suspicious transactions through Deutsche Bank accounts in New York. fs

26

Managed funds

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14 PERIOD ENDING – 31 MAY 2020

Size 1 year 3 years 5 years

Size 1 year 3 years 5 years

Fund name

Fund name

Managed Funds

$m

% p.a. Rank

% p.a. Rank

% p.a. Rank

GROWTH IOOF MultiMix Growth Trust

$m

% p.a. Rank

% p.a. Rank

% p.a. Rank

CAPITAL STABLE 618

4.2

1

7.1

1

6.7

1

Macquarie Capital Stable Fund

31

8.7

4

6.1

1

4.9

3

Vanguard High Growth Index Fund

2949

2.3

3

6.2

2

5.9

3

IOOF MultiMix Moderate Trust

576

3.0

2

5.3

2

5.2

1

Vanguard Growth Index Fund

5762

3.2

2

5.9

3

5.7

5

Vanguard Conservative Index Fund

2486

4.3

3

4.9

3

4.7

4

Fiducian Growth Fund

135

1.5

4

5.7

4

6.1

2

IOOF MultiMix Conservative Trust

661

3.2

5

4.4

4

4.4

5

Fiducian Ultra Growth Fund

185

0.3

5

5.0

5

5.8

4

Fiducian Capital Stable Fund

303

2.7

10

4.1

5

4.0

7

11

-1.3

9

5.0

6

5.1

7

Dimensional World Allocation 50/50 Trust

510

0.9

8

3.9

6

4.3

6

242

-1.9

12

4.9

7

5.2

6

Perpetual Conservative Growth Fund

335

1.7

6

3.8

7

3.7

8

BT Multi-Manager High Growth Fund MLC Wholesale Horizon 6 Share BT Multi-Manager Growth Fund MLC Wholesale Horizon 5 Growth Pendal Active High Growth Fund Sector average

40

-1.1

8

4.5

8

4.7

8

UBS Tactical Beta Fund - Conservative

93

2.2

11

3.6

8

3.2

12

503

-1.5

10

4.2

9

4.4

10

BT Multi-Manager Conservative Fund

33

0.6

14

3.3

9

3.2

11

20

-2.1

15

4.0

Allan Gray Australia Stable Fund

324

0.1

13

3.3

10

5.1

2

Sector average

391

1.5

3.5

3.7

4.9

599

-0.9

10

4.0

4.2

BALANCED IOOF MultiMix Balanced Growth Trust BlackRock Tactical Growth Fund SSGA Passive Balanced Trust Fiducian Balanced Fund Vanguard Balanced Index Fund Ausbil Balanced Fund

CREDIT 720

7.7

1

7.2

1

6.6

1

Metrics Credit Partners Div. Aust. Senior Loan Fund

2313

4.8

1

5.1

1

1769

4.4

3

6.7

2

6.2

3

VanEck Vectors Australian Corporate Bond Plus ETF

229

3.3

7

4.9

2

475

1.6

8

5.7

3

4.3

12

Pendal Enhanced Credit Fund

409

4.3

2

4.8

3

4.5

3

81

0.5

11

5.6

4

5.4

5

Vanguard Australian Corp Fixed Interest Index

169

3.6

5

4.7

4

4.5

4

336

2.0

7

5.6

5

5.8

4

Vanguard Aust Corporate Fixed Interest Index ETF

327

3.4

6

4.4

5

5129

4.0

4

5.5

6

5.3

6

Yarra Enhanced Income Fund

110

-0.9

20

5.2

7

4.6

8

PIMCO Global Credit Fund

Vanguard Managed Payout Fund

19

3.6

5

4.8

8

6.6

2

Responsible Investment Leaders Bal

28

0.5

12

4.6

Zurich Managed Growth Fund

936

0.7

10

4.6

Sector average

774

0.5

Affluence Investment Fund

1

76

-0.1

23

3.9

6

4.8

2

1208

3.8

4

3.4

7

4.0

5

PIMCO Australian Short-Term Bond Fund

327

2.9

8

3.4

8

3.2

13

9

Franklin Australian Absolute Return Bond

543

2.3

10

3.4

9

3.6

8

10

Janus Henderson Diversified Credit Fund

544

2.2

11

3.0

10

3.6

9

Sector average

771

1.9

3.0

3.4

4.0

4.2

Note: The performance figures for diversified funds are net of fees, performance figures for sector specific funds are adjusted for fees.

Source: Rainmaker Information

Could MMT save us from the virus? he hottest and most important economic topic being debated in recent weeks is ModT ern Monetary Theory, or MMT.

Dial tones

By John Dyall john.dyall@ financialstandard .com.au www.twitter.com /JohnDyall

What was once a fringe theory has been brought closer to the mainstream. This was not through the force and logic of its arguments (although these exist), but by the failure of other economic orthodoxies, particularly the austerity programs and budget surpluses that were imposed following the Global Financial Crisis.

The fear was that massive budget deficits and the resulting debt – even when that debt was bought by the central bank – would drive inflation and increase interest rates by crowding out private debt. It didn’t happen. What happened instead was that interest rates fell to near zero and there was massive asset price inflation.

Consumer inflation was non-existent, as was real wages growth. Yet still governments (hello “Back in Black”) thought that having a budget surplus was the way to build a strong economy.

And now, this. The immediate response to the COVID-19 crisis was massive budget deficits with central banks stepping in to purchase of large amounts of new government debt that is, in effect, funding the deficits. Hmmm, something changed and quickly. Where did the government get the money, how will it be paid back,

by whom, with what and why haven’t interest rates increased?

MMT has the answers to these questions.

Its major spokesperson, Stephanie Kelton, just released a book on the topic called “The Deficit Myth” which at the time of writing was number 10 on the New York Times bestseller list (nonfiction).

But like a lot of theories that have been formulated, researched and thought about deeply, it gets criticised on a regular basis by people who … just like to criticise?

Alan Kohler from the ABC was recently attacked for treating MMT seriously by no less than the Australian Financial Review and by Liberal MP Tim Wilson.

Wilson tweeted: “Quick question: is that how @AlanKohler runs his personal finances?

Doesn’t worry about deficits and just increases his access to cash through personal loans?”

Unknowingly, Wilson unearthed the core of the misunderstanding about MMT, and that is that Alan Kohler does have to worry about these things. He’s a person and cannot create his own money (at least not in the sense that anyone would accept it as payment for anything).

It’s the federal government that does not have to worry. Why? Because the federal govern-

ment creates money and, in doing so can pay for goods, services without the need to collect money in the form of taxes or debt instruments first. Alan Kohler can’t do that.

If the government doesn’t need taxation to spend on things, what does it need taxation for?

In fact, it’s a way of withdrawing money from the economy (just as rebates add money to the economy). Withdrawing money from the economy slows the economy, so increasing taxation slows the economy. Another way of slowing the economy is to have a budget surplus because that reduces the amount of money in the private sector.

The main criticism of MMT – that I can see – is the risk of inflation. The fear in this scenario is that the government won’t be able to pull the chain on popular spending when the time comes. That is, frankly, a weird argument.

To quote AMP chief economist Shane Oliver in the AFR: “On balance I would prefer to avoid going down the MMT path because I am sceptical about politicians. It is hard to know where it would end.”

That is some heavy scepticism. I guess it means he would go down the MMT path if he wasn’t sceptical. So the answer is not to ignore MMT, it is to work for a political system where politicians can be trusted to do the right thing. fs

Super funds

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14 PERIOD ENDING – 31 MAY 2020

Workplace Super Products

1 year % p.a. Rank

3 years

5 years

SS

% p.a. Rank % p.a. Rank Quality*

GROWTH INVESTMENT OPTIONS UniSuper - Sustainable High Growth

27

* SelectingSuper [SS] quality assessment

Retirement Products

1 year % p.a. Rank

3 years

5 years

SS

% p.a. Rank % p.a. Rank Quality*

GROWTH INVESTMENT OPTIONS

10.1

1

9.0

1

7.7

1

AAA

UniSuper Pension - Sustainable High Growth

11.2

1

10.0

1

8.7

1

AAA

Equip MyFuture - Growth Plus

2.9

7

6.8

2

6.2

11

AAA

Equip Pensions - Growth Plus

2.7

7

7.7

2

6.7

14

AAA

First State Super Employer - High Growth

2.6

10

6.5

3

6.2

10

AAA

Australian Ethical Super Pension - Growth

2.7

8

7.2

3

6.5

19

AAA

Australian Ethical Super Employer - Growth

2.3

13

6.4

4

5.9

20

AAA

Equip MyPension - Growth

2.8

5

7.0

4

6.2

25

AAA

AustralianSuper - High Growth

2.3

12

6.4

5

6.6

5

AAA

AustralianSuper Choice Income - High Growth

2.6

11

7.0

5

7.3

4

AAA

-0.3

84

6.1

6

6.6

6

AAA

Cbus Super Income Stream - High Growth

1.8

17

6.9

6

7.7

3

AAA

HESTA - Shares Plus

1.4

34

6.1

7

5.9

18

AAA

Vision Income Streams - Growth

2.1

15

6.8

7

6.8

13

AAA

Equip MyFuture - Growth

3.0

6

6.1

8

5.7

22

AAA

TASPLAN Tasplan Pension - Growth

3.6

2

6.8

8

6.6

16

AAA

Virgin Money SED - LifeStage Tracker 2009-2013

2.0

20

6.1

9

AAA

Vision Income Streams - Just Shares

2.1

13

6.8

9

6.8

12

AAA

Vision Super Saver - Just Shares

2.1

16

6.0

AAA

First State Super Pension - High Growth

2.5

12

6.7

10

6.6

15

AAA

SelectingSuper Growth Index

-4.3

SelectingSuper Growth Index

-4.1

Club Plus Industry Division - High Growth

10

3.6

6.1

13

4.3

BALANCED INVESTMENT OPTIONS

4.1

4.8

BALANCED INVESTMENT OPTIONS

UniSuper - Sustainable Balanced

8.1

1

7.5

1

6.5

2

AAA

UniSuper Pension - Sustainable Balanced

9.1

1

8.6

1

7.5

2

AAA

HESTA - Eco-Pool

5.2

2

7.2

2

7.9

1

AAA

HESTA Income Stream - Eco

5.3

3

7.8

2

8.5

1

AAA

Australian Ethical Super Employer - Balanced (accumulation)

3.5

5

6.3

3

5.9

11

AAA

Media Super Pension - Growth

1.3

58

7.1

3

7.1

4

AAA

WA Super - Sustainable Future

2.6

14

6.1

4

5.2

36

AAA

Australian Catholic Super RetireChoice - Socially Responsible

4.6

4

6.8

4

5.6

35

AAA

Media Super - Growth

1.2

46

6.1

5

6.2

6

AAA

AustralianSuper Choice Income - Balanced

2.0

37

6.6

5

6.9

5

AAA

AustralianSuper - Balanced

1.9

28

6.0

6

6.4

3

AAA

TASPLAN Tasplan Pension - Balanced

4.2

5

6.5

6

6.3

16

AAA

Australian Catholic Super Employer - Socially Responsible

4.3

3

6.0

7

4.7

46

AAA

Cbus Super Income Stream - Growth (Cbus Choice)

2.4

26

6.4

7

7.3

3

AAA

CareSuper - Sustainable Balanced

3.0

9

5.8

8

5.8

16

AAA

AustralianSuper Choice Income - Indexed Diversified

3.9

7

6.4

8

5.9

29

AAA

State Super (NSW) SASS - Growth

2.8

12

5.7

9

5.8

17 Not Rated

Media Super Pension - Balanced

1.6

42

6.4

9

6.7

10

AAA

TASPLAN - OnTrack Sustain

4.0

4

5.7

Australian Ethical Super Pension - Balanced (pension)

4.2

6

6.4

10

6.1

22

AAA

SelectingSuper Balanced Index

-2.1

SelectingSuper Balanced Index

-2.2

10

3.5

AAA

4.1

CAPITAL STABLE INVESTMENT OPTIONS

4.5

CAPITAL STABLE INVESTMENT OPTIONS

VicSuper FutureSaver - Socially Conscious

5.8

1

6.0

1

3

AAA

Cbus Super Income Stream - Conservative Growth

3.7

4

6.1

1

6.5

1

AAA

TASPLAN - OnTrack Control

3.7

5

5.2

2

AAA

AustralianSuper Choice Income - Conservative Balanced

2.6

12

5.7

2

6.1

3

AAA

AustralianSuper - Conservative Balanced

2.2

18

5.1

3

5.4

2

AAA

QSuper Income - QSuper Balanced

1.4

46

5.7

3

6.5

2

AAA

QSuper Accumulation - QSuper Balanced

1.0

71

5.0

4

5.7

1

AAA

TASPLAN Tasplan Pension - Moderate

4.2

2

5.4

4

AAA

StatewideSuper - Conservative Balanced

1.6

38

4.9

5

5.3

4

AAA

UniSuper Pension - Conservative Balanced

2.8

8

5.3

5

5.7

5

AAA

First State Super Employer - Balanced Growth

1.5

39

4.8

6

5.0

6

AAA

StatewideSuper Pension - Conservative Balanced

1.7

33

5.3

6

5.8

4

AAA

State Super (NSW) SASS - Balanced

3.7

4

4.8

7

5.0

5 Not Rated

Cbus Super Income Stream - Conservative

4.0

3

5.2

7

5.3

9

AAA

HESTA - Conservative Pool

2.7

12

4.8

8

4.8

10

AAA

NGS Income Stream - Balanced

1.4

45

5.1

8

5.3

8

AAA

TASPLAN - OnTrack Maintain

3.7

6

4.8

9

AAA

First State Super Pension - Balanced Growth

1.5

41

5.1

9

5.3

10

AAA

NGS Super - Balanced

1.2

55

4.7

AAA

Equip Pensions - Balanced

2.1

20

5.1

10

4.8

19

AAA

SelectingSuper Capital Stable Index

-0.3

3.0

10

5.4

3.9

4.9

8

3.2

SelectingSuper Capital Stable Index

Notes: Please note that all figures reflect net investment performance, i.e. net of investment tax, investment management fees and the maximum applicable ongoing management and membership fees.

WORKPLACE SUPER | PERSONAL SUPER | RETIREMENT PRODUCTS

Compare superannuation returns across asset classes using over 27 years of industry insights and research with SelectingSuper’s performance tables.

Simply visit selectingsuper.com.au/tools/performance_tables

-0.3

3.1

3.4

Source: SelectingSuper www.selectingsuper.com.au

28

Economics

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

Victoria’s secret Ben Ong

I

n Fist of Fury, it is a sign stating “No dogs or Chinese” that draws the ire of the legendary Bruce Lee. But Australians are not seeing Victorians punching, kicking and screaming when the nation’s five states and two territories put up the “No Victorians allowed” signs - even threatening fines and/or imprisonment.

The second wave has come to Victoria. In response state premier Dan Andrews has reimposed lockdowns in Greater Melbourne as infections rise by the hundreds each day.

COVID-19 has made a comeback in Victoria –the state which makes up roughly about 25% of the Australian economy.

Deloitte Access Economics’ latest quarter business outlook report predicts that, Victoria’s gross state product will contract 1.6 per cent in real terms this financial year, the worst of all the states.

We’re all in this together. What happens in Victoria, unlike in Vegas, won’t remain in Victoria.

Victoria accounts for the big, big bulk in the increased case of coronavirus infections in Australia as at July 13.

Australia had registered 9797 infected cases and 108 deaths. Not a good look when compared with Jacinda Ardern’s country (New Zealand) which only has only 1544 cases and 22 deaths.

Still, this is way better compared with the top three infected countries in the world.

To date, the US has recorded total infections of 3.29 million and 137,000 deaths; Brazil’s got 1.86 million total infection cases and 72,100 deaths; India’s total infection now stands at 850,000 with 22,674 deaths.

Adjusting for population, Australia’s total cases of coronavirus infection is not that far from New Zealand’s but is much healthier than America’s or Brazil’s or Spain’s or the UK and Italy’s or India’s.

But I digress.

Whether or not Australia has more, or less, cases of infection relative to the rest of the world is moot … so is the increasing likelihood that, starting with Victoria, the rest of the nation will be forced to reimpose lockdown restrictions.

Hope not.

The lead from other countries experiencing a second wave of the pandemic doesn’t instil optimism.

Several US states have either deferred reopening or reimposed lockdown restrictions.

China, Germany, South Korea, Iran, Saudi Arabia and more recently, Spain (among others), have re-imposed shutdown measures in certain coronavirus hotspots.

The first wave has already sent Australia’s unemployment rate surging from 5.2% in March to 6.4% in April to 7.1% in May – and according to the Australian Bureau of Statistics (ABS), had it not been for the decline in the participation rate, the jobless rate would have risen to around 8.1% to 11.3%.

For sure and for certain, Victoria’s second wave would put upward pressure on unemployment, downward pressure on consumer spending, and overall domestic growth, and that’s not even thinking about the few new cases that have now popped up in other states.

China’s nascent recovery would help. Getting rid of the White House’s current occupant would help much more. fs

Monthly Indicators

Jun-20

May-20

Apr-20

Mar-20 Feb-20

Consumption Retail Sales (%m/m)

-

16.86

-17.67

8.47

Retail Sales (%y/y)

-

5.79

-9.18

10.07

1.83

-6.44

-35.29

-48.48

-17.85

-8.22

Sales of New Motor Vehicles (%y/y)

0.60

Employment Employed, Persons (Chg, 000’s, sa) Job Advertisements (%m/m, sa) Unemployment Rate (sa)

-

-227.71

-607.40

-3.14

41.96

-0.34

-53.69

-9.73

19.30 1.65

-

7.09

6.37

5.23

5.09

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

-

-4.37

2.65

-0.68

-0.10

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

-

-16.42

-2.08

-1.64

18.90

Housing Finance Commitments, Number (%m/m, sa) - Housing Finance Commitments, Value (%m/m, sa)

-

Survey Data Consumer Sentiment Index

93.65

88.10

75.64

91.94

95.52

AiG Manufacturing PMI Index

51.50

41.60

35.80

41.60

44.30

NAB Business Conditions Index

-

-23.76

-33.65

-21.99

0.16

NAB Business Confidence Index

-

-19.97

-45.48

-65.19

-2.15

Trade Trade Balance (Mil. AUD)

-

8025.00

7830.00

10439.00

Exports (%y/y)

-

-15.12

-6.88

7.13

-9.10

Imports (%y/y)

-

-22.79

-16.44

-8.79

-7.16

Jun-20

Mar-20

Dec-19

Sep-19

Quarterly Indicators

3968.00

Jun-19

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

-

8.40

1.72

7.26

4.87

% of GDP

-

1.66

0.34

1.44

0.98

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

-

1.11

-3.47

-1.15

5.20

Employment Average Weekly Earnings (%y/y)

-

-

3.24

-

3.02

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

-

0.53

0.53

0.53

0.54

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

-

0.38

0.45

0.92

0.38

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

-

0.45

0.45

0.83

0.46

Inflation CPI (%y/y) headline

-

2.19

1.84

1.67

1.59

CPI (%y/y) trimmed mean

-

1.80

1.60

1.60

1.60

CPI (%y/y) weighted median

-

1.70

1.30

1.30

1.30

Output

News bites

China PMI The Chinese government’s draconian measures to contain the coronavirus pandemic has worked, allowing the economy to recover sooner, and stronger, than most other nations. This is underscored by the latest Caixin China PMI surveys that show the composite index continuing to improve from 47.6% (contraction) in April to 54.5 in May and 55.7 in June (increasing rate of expansion) – the fastest since November 2010 – as both its manufacturing and services sectors improved significantly. The manufacturing PMI extended it move higher into expansion to 51.2 in June from 50.7 in May and April’s contractionary reading of 49.7. Even better, the services PMI soared to a reading of 58.4 in June – the highest in more than five years – from 55.0 in May and after recording three consecutive months of below 50 readings.

RBA holds As widely expected, the Reserve Bank of Australia (RBA) kept domestic monetary policy settings unchanged – the official cash rate at a record low 0.25% and the target yield on three-year Australian government bonds at 25 basis points – at its July 7 meeting. RBA Governor Lowe pledged: “The Board is committed to do what it can to support jobs, incomes and businesses and to make sure that Australia is well placed for the recovery … This accommodative approach will be maintained as long as it is required. The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3% target band.”

Japan household spending Business closures and lockdowns due to COVID-19 sent Australia’s unemployment rate to its highest level since October 2001 – up to 7.1% in May from 6.4% in the previous month. It would have been worse had, according to the ABS: “The increase in the number of people who were not in the labour force between April and May (142,000) … (that is, if they had been actively looking for work and been available to work) then the number of unemployed people would have increased to around 1.1 million people (and an unemployment rate of around (8.1%).” fs

Real GDP Growth (%q/q, sa)

-

-0.31

0.52

0.55

0.61

Real GDP Growth (%y/y, sa)

-

1.39

2.16

1.80

1.56

Industrial Production (%q/q, sa)

-

-0.09

1.25

0.39

1.07

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

Financial Indicators

-

03-Jul

-1.65

-2.58

-0.55

-1.43

Mth ago 3 mths ago 1 yr ago 3 yrs ago

Interest rates RBA Cash Rate

0.25

0.25

0.25

1.25

1.50

Australian 10Y Government Bond Yield

0.91

0.97

0.76

1.28

2.61

Australian 10Y Corporate Bond Yield

1.78

1.95

2.16

2.14

3.27

Stockmarket All Ordinaries Index

6163.7

1.63%

20.69%

-8.96%

7.62%

S&P/ASX 300 Index

6018.0

1.79%

19.85%

-9.28%

6.86%

S&P/ASX 200 Index

6057.9

1.96%

19.54%

-9.39%

6.57%

S&P/ASX 100 Index

5008.4

2.25%

19.03%

-9.50%

6.22%

Small Ordinaries

2661.6

-1.67%

27.05%

-7.37%

13.05%

Exchange rates A$ trade weighted index

60.00

A$/US$

0.6939 0.6934 0.6012 0.7032 0.7648

58.80

54.70

60.10

65.50

A$/Euro

0.6172 0.6180 0.5567 0.6233 0.6728

A$/Yen

74.61 75.45 65.23 75.78 86.66

Commodity Prices S&P GSCI - commodity index

332.86

313.91

275.44

421.00

377.72

Iron ore

98.20

100.40

82.38

123.16

62.80

Gold WTI oil

1772.90 1705.35 1613.10 1413.50 1229.25 40.58

37.33

28.36

57.06

Source: Rainmaker /

46.024

Sector reviews

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

Australian equities

Figure 1: Central Bank Target Rates 3.0

Figure 2: Australian stockmarket indices 110

RATE %

2.5

Fed

100

RBA

2.0

BOE

1.5

90

ECB BOJ

1.0

80 All Ordinaries

70

0.5

Prepared by: Rainmaker Information Source: Thompson Reuters /

INDEX (JAN 2020 = 100)

S&P/ASX 100

60

0.0 before COVID-19

-0.5 2018

2019

S&P/ASX Small Ords

50

2020

2018

2019

2020

The All Ords’ up, down and up Ben Ong

I

t seemed so long ago and far away now but it’s only been a year since the All Ordinaries index broke above its all-time high recorded in 2007 before climbing to a new peak in February this year.

The mood was good: The US and China have reached a trade deal; Brexit’s settled; the Fed succeeded in turning the US inverted yield curve – which presaged a recession – after it cut the fed funds rate three times (in July, September and October) while at the same time, and along with other major world central banks, offering forward guidance that monetary policy would remain accommodative going forward.

So much so, that the IMF forecasts global growth to rise from 2.9% in 2019 to 3.3% in 2020 and the World Bank projects growth of 2.5% in 2020 from 2.4%.

What could be better for the Australian equity market? What’s better was that the Reserve

International equities

Bank of Australia (RBA) has also lowered interest rates – it cut three times in 2019 (June, July and October) taking the official cash rate to a fresh record low of 0.75% and was expected to cut rates by at least another 25 bps in 2020.

Increased fiscal spending - intended to provide relief and help in the recovery of the communities and businesses devastated by the bushfires that burned Australia in late December 2019/early January 2020 and as penance for the Prime Minister’s hanging loose in Hawaii while Australia burned – provided additional impetus for Aussie equity market investors.

This year was set to be a good year - until COVID-19 hit.

Efforts to contain the coronavirus pandemic have prompted governments everywhere – except Sweden – to impose social isolation and business lockdown measures, effectively freezing economic activity, resulting in almost equivalent sell-offs in the Australian equity

Figure 1: Markit composite PMI

Figure 2: Euro Stoxx 50 index

55

4

50

3

ANNUAL RATE %

45

2

40

1

30

-1

Composite Manufacturing

-2

25

2017

Headline inflation Core inflation (ex-food)

-3

20 2018

2019

2020

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

This rebound is brought to you by the letter V Ben Ong

he gradual easing of restrictions has unfroT zen social and business activity in almost every nation that decided to do so.

Central banks and governments can flood the system with all the money it has, or it can print, but with consumers not allowed out and/ or businesses shuttered, the deluge of liquidity amounts to … not much.

The reopening of businesses and the relaxation of social restrictions has re-started the engine of commerce.

China led the way — the first to shut down and the first to ease restrictions. But it was the Eurozone that suffered the most – underscored by the sharper drop in the IHS/Markit Eurozone PMI from an expansion reading of 51.6 in February 2020 to a record low 13.6 two months later.

The harder they fall, the stronger they bounce back. So much so, that as at end-June, the Euro Stoxx-50 index surged by 35.6% from the eight-year

low it plumbed in the middle of March this year.

Latest forecasts by the Organisation for Economic Cooperation and the Development (OECD) and the International Monetary Fund (IMF) tells the same story.

The ‘OECD Economic Outlook, June 2020’ report shows the Eurozone economy contracting by more than the OECD group nations this year – minus 9.1% versus minus 7.5% (under a single-hit scenario) and minus 11.5% versus minus 9.3% (under a double-hit scenario).

Similarly, the IMF’s ‘World Economic Outlook, June 2020’ report has the Eurozone contracting by more (-10.2%) this year relative to advanced economies (-8.0%).

But stock markets are forward looking. And if they believe the OECD and the IMF’s latest projections, the Eurozone will come out on top in the year 2021.

The OECD expects the single currency region’s GDP growth to advance by 6.5% (single-

The Financial Standard CPD Program has been developed for professionals governed by the Corporations Act 2001 and hold an AFS Licence which provides an obligation to undertake continuous professional development (CPD). Test your knowledge with the following questions.

[See next page for instructions on how to submit your answers].

Australian equities CPD Questions 1–3

1. How many times did the RBA cut interest rates in 2019? a) One b) Two c) Three d) Four 2. How many times did the Fed cut interest rates in 2019? a) One b) Two c) Three d) Four 3. The All Ordinaries index performed better in the March 2020 quarter than in the June 2020 quarter. a) True b) False

CPD Questions 4–6

0 Services

CPD Program Instructions

International equities

INDEX

35

Prepared by: FSIU Sources: Factset Prepared by: Rainmaker Information Source:

market and in developed and emerging markets.

The All Ordinaries index dropped by 36.8% from its February 2020 peak to its March 2020 low after Australia’s shutdown.

Aggressive monetary and fiscal policy responses and the gradual easing of restrictions sparked a 31.5% rally in the benchmark index form its February low, and reversing the March quarter’s 24.9% loss into a 17.4% gain in the June quarter, although it’s still 11.8% down this year to date.

However, recent reports of increasing cases of infection in Victoria – Australia’s second biggest state – has forced the Andrews government to again lockdown 39 suburbs and New South Wales closing its border with Victoria.

The Victorian experience brings home the risk of a second wave that threatens the RBA’s recent assessment that “the economic downturn will not be severe as earlier thought”.

But with both Australian monetary and fiscal authorities on the case, we’ll be right mate! fs

29

hit scenario) or by 3.5% (double-hit) – outperforming the OECD’s growth average of 4.8% (singel-hit) or 2.2% (doubel-hit).

The IMF’s projections sends the same message. It expects Eurozone GDP growth to bounce back by 6.0% in 2021, stronger than the 4.8% recovery in advanced economies.

Like all other central banks and governments around the world, Eurozone authorities will be doing everything they could to get on top of the pandemic.

But assuming they do, and the virus burns out or fades away or a vaccine is discovered, Eurozone authorities will next have to contend next with a trade war with Trump. America threatened to impose additional tariffs worth around US$3.1 billion of exports from France, Germany, Spain and the UK. That, or they could wait until saner minds prevail at the November 2020 US presidential elections. fs

4. Which country dropped the most based on their respective composite PMI readings? a) US b) Eurozone c) China d) Japan 5. Which institution forecast an expansion in the Eurozone economy in 2020? a) International Monetary Fund b) Organisation for Economic Development and Cooperation c) Both a and b d) Neither a nor b 6. The IMF and the OECD expects Eurozone GDP to bounce back in 2021. a) True b) False

30

Sector reviews

Fixed interest

Fixed interest

CPD Questions 7–9

7. Which Japan PMI index remained in contraction in June? a) Composite PMI b) Manufacturing PMI c) Services PMI d) All of the above 8. Which Japanese CPI inflation measure remained in deflation in May? a) Headline inflation b) Core inflation c) Both a and b d) Neither a nor b 9. Japan’s state of emergency was lifted in late May. a) True b) False Alternatives CPD Questions 10–12

10. When did India imposed lockdown restrictions on its economy? a) January 2020 b) February 2020 c) March 2020 d) April 2020

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

Figure 1: au Jibun Bank Japan PMI

Figure 2: Japanese CPI inflation

55

4 ANNUAL RATE %

50

3 INDEX

45

2

40

1

35

0 Services

30

-1

Composite Manufacturing

Prepared by: Rainmaker Information Prepared by: FSIU Source: Trading Economics Sources: Factset

25

-2

20

-3

2017

2018

2019

2020

Headline inflation Core inflation (ex-food)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Abe and the BOJ remains at the ready Ben Ong

J

apanese Prime Minister Shinzo Abe’s lifting of the state of emergency in the country on May 25 had been rewarded with encouraging indications of recovery in the economy.

This is highlighted by the improvement in the au Jibun Bank Japan PMI surveys. Preliminary estimates show the composite index rising to a reading of 37.9 in June from May’s final reading of 27.8 and the all-time low reading of 25.8 recorded in April. The flash services PMI jumped to 42.3 in June from 26.5 in the previous month – an indication of the improvement in domestic activity -- but the manufacturing PMI fell to a preliminary score of 37.8 from 38.4 in May – as most international borders remain closed.

The positive spin is that these green shoots could provide positive momentum to economic activity going forward. Then again, the risk of a second wave could force the government to declare a state of emergency part deux.

11. What was India’s GDP growth rate in the year to the March 2020 quarter? a) 5.7% b) 4.1% c) 3.1% d) -5.7%

Alternatives

Not to mention, despite the improvement in Japan’s purchasing managers’ surveys, both the services and manufacturing PMI remain in contraction (below 50).

This would keep the Bank of Japan (BOJ) from achieving its 2% inflation target. Latest stats show that Japanese headline CPI inflation remained barely above zero (0.1%) in the year to May while core inflation lingered in deflation (-0.2%) over the same period.

Thus, although both the Bank of Japan (BOJ) and the Abe government are optimistic about the economic outlook, they’re not leaving this to hope.

While it kept interest rate settings unchanged at its June 16 monetary policy meeting, the BOJ increased the size of its lending packages to around US$1 trillion from May’s US$700 billion.

The Japanese government was also waxing optimistic – noting in its June report that although the economy presently remains in an

extremely severe situation, it’s stabilising (from May’s assessment of rapid deterioration).

Nevertheless, after “having rolled out a combined $2.2 trillion in two stimulus packages to avert a deeper recession” (Reuters), Japan’s former economy minister and the head of the Liberal Democratic Party’s (LDP) tax panel, Akira Amari, had recently been quoted announcing that: “The government is expected to compile a full-scale economic stimulus package to support growth this fall as the previous two were to protect lives, jobs and firms. In that sense, comprehensive steps to boost the economy are not in place yet.”

Both the government and the central bank have to stand ready to provide more support if they are to avoid (or at least mitigate) the OECD’s latest prediction for a 6.0% contraction in GDP growth this year (assuming no second wave) to a fall of 7.3% (under a double-hit scenario). fs

Figure 1: : RBI policy rates

Figure 2: IHS/Markit India PMI

10

60 INDEX

RATE %

9

50

8

40

7

Manufacturing

30

12. India has the highest tally of total COVID-19 infection among Asian countries. a) True b) False

Prepared by: Rainmaker Information Prepared by: FSIU Source: Sources: Factset

All answers can be submitted to our website.

Reverse Repo

10 0

3 2008

2010

2012

2014

2016

2018

2020

2015

2016

2017

2018

2019

2020

Easing in India costs lives, rupiahs I

Submit

Repo

4

2006

Composite

20

5

Ben Ong

Go to our website to

Services

6

t was one of the first movers in the fight against containing the spread of infection from the coronavirus pandemic.

On March 24, Indian Prime Minister Narendra Modi ordered one of the strictest lockdowns of any country in the world, warning that: “If we don’t manage these 21 days, the country will be set back by 21 years.”

The total number of infection cases in the country was only 500 at the time.

The government announced an economic stimulus package – worth around 1.7 trillion rupees ($22.5 billion) two days later to support families and workers affected by the virtual of nearly all social and business activities.

The government topped this up with Rupiah 20 lakh crore (trillion) – USD 260 billion – equivalent to 10% of Indian GDP, on May 12.

The Reserve Bank of India (RBI) also went to work, cutting its benchmark repo rate and

the reverse repo rate by 75 bps each to 4.4% and 4.15%, respectively, while at the same time reducing the reserve ratio by 100 bps to 3.0% to boost liquidity on March 27.

This was followed by more stimulus measures.

On April 1, the RBI announced it would defer the implementation of counter-cyclical capital buffer, review of limits of Way and Means advances of States/UTs and an extension of realisation period of export proceeds; on the 27th of the same month, the RBI launched a special liquidity facility for mutual funds (SLF-MF) of 500 billion rupees (USD 6.56 billion) to ease pressure due to the coronavirus pandemic; and, on May 22, it unexpectedly cut the repo and reverse repo rate by 40 bps – to 4.0% and 3.35%, respectively.

India’s stringent lockdown measures has taken its toll on the already slowing economy – GDP growth slowed from 5.7% in March 2019 to 4.1% in December – before the pan-

demic to 3.1% in the year to the March quarter of 2020.

The easing of restrictions in late May has turned around economic activity in the country.

The IHS/Markit India composite PMI rebounded to a reading of 37.8 in June from 14.8 in May and the record low single-digit reading of 7.2 in April.

However, the reopening has also lifted the cases of coronavirus infections.

India now has the third highest case of infection in the world and the highest among Asian countries.

This could force another lockdown, compelling greater stimulus measures.

According to ManMohan S Sodhi, professor of operations and supply chain management, University of London, India’s infections will peak in mid-August. At this point, new daily cases will be more than three times higher than currently, he wrote in a piece for The Conversation. fs

Sector reviews

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

31

Property

Property

CPD Questions 13–15

Prepared by: Rainmaker Information Source: NSW Review of Federal Financial Relations

he NSW Review of Federal Financial RelaT tions draft report says there is a strong case for reforming GST and reducing the nation’s reliance on more harmful taxes, while re-directing a portion of revenue to lower income households so they do not bear the burden of reform.

This would include scaling back inefficient taxes, including stamp duty on property transactions.

According to the report, at the height of the property boom in 2017-18, NSW raised almost 28% of taxation revenue from transfer duty before dropping by 14% the following year, showing volatility of revenue collections presents a challenge to governments when it comes to budgeting.

“A discussion spanning close to two decades through a series of tax reviews has laid the groundwork for broad community understanding of the advantages of recurrent land value taxation over taxation of property transfers,” the report reads.

“These reviews have generally recommended abolition of transfer duty and replacement via a broad-based tax on land.”

This is typically down to the economic inefficiency of transfer duty compared to land tax,

Land tax, not stamp duty Jamie Williamson

but there are important equity implications too, the report states.

As it stands, transfer duty is used to shift the cost of infrastructure and essential services, like schools, hospitals and roads that everyone benefits from, onto those who buy or sell a house or business more often.

“Transactions are an arbitrary basis for taxation, and this way of distributing the tax burden is poorly justified on equity grounds. While a progressive scale means that wealthier property buyers generally pay higher duty, which supports vertical equity, this rationale only applies in the case of residential property,” the report reads.

Of the 2.8 million properties in NSW in 2018-19, less than 200,000 owners contributed to the funding of essential services via transfer duty, and only one in 20 helped to pay for the schools, roads, hospitals and other services that added to the value of all properties.

The Henry Review, published in 2010, estimated about 26% of owner-occupiers have remained in the same property for at least 20 years.

“Most of these people have benefitted not

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only from the services provided by the state over that time but also from a once-in-a-generation land price windfall. In exchange for these gains, they have contributed very little towards essential services and critical infrastructure via property taxation,” the draft report reads.

Others who have moved more frequently have picked up the tab, in what the report says “just doesn’t seem fair”.

Therefore, a tax on land would be the more equitable approach to funding government services, ensuring the beneficiary pays.

The Real Estate Institute of Australia welcomed the call for reform, saying: “Taxes are one of the factors determining investment in housing and thus housing supply and housing affordability. The housing sector is one of the most heavily taxed sectors of the Australian economy, both in absolute and relative terms.”

“Economic analysis shows that economic activity in Australia can be lifted by shifting the composition of taxes from high economic cost state taxes to lower cost Australia-wide taxes, without changing the overall level of tax revenues.” fs

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14. Of the 2.8 million NSW properties in 2018/19, how many owners contributed to the funding of essential services via transfer duty? a) 300,000 b) 200,000 c) 100,000 d) 20,000 15. The housing sector is one of the most heavily taxed sectors of the Australian economy. a) True b) False

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13. Which statement reflects the NSW Review of Federal Financial Relations report? a) Reviews have largely recommended against the abolition of transfer duty b) There is a strong case against reforming the GST c) Reviews have generally recommended the abolition of transfer duty d) In general, reviews have recommended against a broad-based land tax

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Profile

www.financialstandard.com.au 20 July 2020 | Volume 18 Number 14

FINDING THE BALANCE From a starry eyed student to managing director superannuation, retirements and platforms at AMP Australia, Lara Bourguignon explains how important it is to find balance in everything you do. Eliza Bavin writes.

hen Lara Bourguignon speaks about her W job it’s always in reference to the people around her, and when she speaks about home it’s always about her husband and kids.

Even when asked about her childhood, she speaks only of her sister’s many talents.

It’s easy to see why she entered an industry that is so people-centric.

She credits the very unlikely combination of both her mother and former Lendlease chief executive Stuart Hornery with her interest in entering finance.

“My mother was a research librarian and she had been keeping me across what had been happening in different organisations,” she explains.

“I had become a little bit besotted with Stuart Hornery. He was really leading the way in Australia around creating a nexus between the employee value proposition and the client value proposition.

“He was one of the first to have employee share plans.”

So, when the big firms began their scouting process for final year business students Bourguignon interviewed for Lendlease and was accepted as part of their graduate program.

“I went in as a finance graduate, but was able to work across all different parts of their business over the coming years, which is what set my path into financial services,” she says.

The lessons she was taught from Hornery have stayed with her throughout her career.

“It was this concept of investing in and developing your people in order to better deliver to clients,” Bourguignon says.

Ending up in superannuation from a building company was more of a happy accident for Bourguignon.

During her graduate rotation she had been through MLC, but left to pursue a different path a Merrill Lynch.

She would stay there for three years as an institutional marketer before returning to MLC just before the turn of the millennium.

She would spend the next decade there, working her way up to head of investment control.

Again though, Bourguignon says she somewhat fell into staying with MLC. “When I got back to MLC after my stint at Merrill Lynch, I was there when NAB acquired it, so I went with the deal,” she explains.

“I was on that side of the bridge when it was sold so that’s how I ended up in superannuation.”

Today, her focus is on empowerment, diversity and collaboration.

She encourages everyone to be themselves at work, because she says: “You’re here too much to pretend to be someone else.”

“Diversity brings much better decisions and if you can tap into everyone’s strengths and really critique a decision you will always end up with a better result.”

Figuring out how to find balance is not without its challenges though, Bourguignon says.

“Leveraging peoples strengths and building the capabilities of those around you will deliver better outcomes to clients and shareholders,” she says.

“So, I think it was that balancing act that I have been conscious of for my whole career, around employee/client/shareholders and how you drive alignment across all three.”

In the changing world of how businesses are run, from offices and cubicles to hot desks and beanbags, Bourguignon still believes there is a balance to be found there as well.

“It is really important that you still have clear roles and responsibilities,” she explains.

“For many years, I think I wrestled with finding the difference between collaboration and cooperation.”

In big companies, the idea of collaboration can often mean sitting in meetings and including as many people as possible. A practice that Bourguignon says can stifle decision making.

“When there is too much noise, it can sometimes lead to a lack of clarity about accountability to deliver an outcome,” Bourguignon says.

“On the flip side, it is important not to get locked down in a bubble of like-minded people.”

The current COVID-19 pandemic has given Bourguignon time to reflect on what is best for her customers and her team.

“COVID has clearly been a challenging and highly unusual time and I’m extremely proud of how our people, particularly our client facing teams, have adapted and worked to support our clients,” she says.

“It’s in times of crisis when organisations like AMP can make a huge difference to the wellbeing of so many Australians, and we need to be there for our clients.”

While she says face to face time in the office will always remain vitally important, Bourguignon says we cannot afford not to learn from this experience.

“Technology has allowed us to stay connected and out people are using their commute time to exercise, spend time with family or even to work, which is providing a great balance to their lives,” she says.

“Personally, I’ve really valued the additional time I’ve had with family.”

The balancing act for Bourguignon does not end at home. Her husband worked as a paramedic for 25 years, something which Bourguignon says has been one of the biggest influences on her career.

“Perspective is something he has brought to my life,” she says.

“Whenever I get stressed he always has something that can help me remember that there are very few decisions in financial services that some very smart people can’t sit down and work out.”

The only downside to having a husband who saves people’s lives, Bourguignon jokes, is that no one wants to hear her stories at dinner parties.

Still, while she may have been

When there is too much noise, it can sometimes lead to a lack of clarity about accountability to deliver an outcome...On the flip side, it is important not to get locked down in a bubble of like-minded people.

Lara Bourguignon

besotted with Stuart Horney back in the day, he plays second-fiddle to her husband today.

“Without a doubt there have been times where we have both been stressed, but I have always felt a great sense of comfort that he has such a unique perspective on any problem I might be facing,” Bourguignon says.

It is clear that Bourguignon likes to observe those around her, and absorbs the traits that she feels are positive into her own life.

Speaking of her parents, Bourguignon says some of her fondest memories are of time spent together at the end of each day.

“We had family dinners every night and we would talk about our days, my friends actually used to love coming over because it was lively and fun,” she says.

“It’s probably one of the biggest things I have taken into raising my own children because it is a great way of being able to understand each other.”

Having closeness, understanding and unconditional love is clearly of great importance to Bourguignon, who says her relationship with her family was transformational.

“As a leader now, I am always making sure that my team knows they have my unconditional support,” she says.

“So long as we are all in the same boat, rowing in the same direction, they can try and fail and they can think of new ways of doing things and test new ideas without ever worrying they will receive judgment.” fs

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