Financial Standard Volume 18 Number 15

www.financialstandard.com.au

3 August 2020 | Volume 18 Number 15

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Martin Morris Praemium

State Street, Perpetual, Milliman

Advisers Big Day Out

Executive appts:

Feature:

Profile:

Opinion:

13

Media Super, Six Park, Yarra Capital

Products:

16

Small caps

Events:

32

David Neal IFM Investors

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11

15

21

Martin Morris Praemium

State Street, Perpetual, Milliman

Advisers Big Day Out

Executive appts:

Feature:

Profile:

Opinion:

13

Media Super, Six Park, Yarra Capital

Extension renews retirement debate Eliza Bavin

elivering its recent Economic and FisD cal Update, the Federal government announced a surprise extension to its early release of super (ERS) scheme, prompting fears the real number will far outweigh initial estimates made by Industry Super Australia (ISA).

As COVID-19 continues to wreak havoc, the figures that have come out of ERS data have been startling; already well exceeding Treasury estimates that $27 billion would be wiped from super. As at July 19, $28 billion had already been withdrawn.

At the beginning of the scheme, ISA estimated that about 480,000 Australians across all age groups would have wiped out their super, even before the second tranche opened in July.

However, fresh ISA estimates found as many as 560,000 accounts have been wiped clean and closed as a result.

The body’s initial modelling, which was criticised, found a 20-year-old, who removed $20,000 from their superannuation could lose more than $120,000 from their retirement balance.

For 30-year-old members and 40-year-olds, the loss in retirement savings will be about $100,000 and $63,000, respectively.

The research followed calls from, what ISA described as, “a noisy group of backbench MPs” to dump the incremental and legislated increase to the super rate from 9.5% to 12% by 2025.

“If those MPs get their way more workers would be more reliant on the age pension - a bill everyone pays through higher taxes,” ISA chief executive Bernie Dean says.

“The ISA analysis is based on ATO data on the proportions by age of those with accounts below $10,000 and Treasury statistics on the age distribution of early release.”

ISA confirmed it did not receive any heads up from the government that the scheme would be extended.

Dean said the extension of the scheme highlights how vital sticking to the legislated super rate rise will be for Australians to help rebuild their retirement balances.

“We support the policy intent of this scheme to deliver money to those in need but we’ve also seen how it can be misused – through troubling reports of fraud, significant amounts of ineligible applicants and evidence super is being used

for highly discretionary spending – so it is critical this is only a one-off extension in the deadline to make a claim,” Dean says.

However, not all groups agree the extension of the scheme will have a significant effect.

Grattan Institute program director Brendan Coates says the government is simply extending the time period that Australians can access the scheme, so those who are dealing with financial hardship can gain access to financial help.

“The rules are clear, everyone knows they should only be accessing those funds if they qualify,” Coates said.

“There has been a lot of moral outrage over the early access scheme but we need to remember these provisions already existed.”

Australians have always been able to access their super accounts early under financial hardship provisions, so Coates says, while the ERS scheme has made it a simpler process, should it end sooner those same people would still be able to access their funds anyway.

He adds that while speed was the most important factor at the outbreak of the pandemic to help those who were impacted very suddenly, that is no longer the case and the attention should turn to verifying claims.

“We’re slowing the march, so for those who are suffering financially it is no longer that shock aspect as when the virus first hit,” he says.

“We needed to prioritise speed at the outset, but the world and circumstances are different now and the government can afford to take the time to verify.”

Regardless, Coates still doesn’t believe accessing $20,000 super savings is likely to impact retirement savings to the extent the likes of ISA have predicted.

“We shouldn’t exaggerate the hit this will be to Australian retirement balances, many people can still expect a good outcome even if they do remove the full amount,” Coates says.

“The hit will be much smaller than expected, so for a 35-year-old our modelling suggests that if they removed the $20,000 it will reduce their balance by around $85,000 later.”

Coates says despite the ERS scheme the evidence shows that the vast bulk of retired Australians have an adequate income and can look forward to a standard of living in retirement at least equal to their standard of living while working. fs

3 August 2020 | Volume 18 Number 15 www.financialstandard.com.au 20 January 2020 | Volume 18 Number 01

Products:

16

Small caps

Events:

32

David Neal IFM Investors

ETP market winners revealed Elizabeth McArthur

Bernie Dean

chief executive Industry Super Australia

New research from Rainmaker Information has revealed the winners in the exchange traded product (ETP) market.

Comparing data from the end of the June quarter to the same time last year, Vanguard remains the largest ETP manager in Australia with $20.5 billion. BlackRock is the second largest manager in ETPs with $15.3 billion.

BetaShares is third with $10.9 billion in ETP FUM and State Street is fourth largest with over $6 billion.

However, BetaShares remains the dominant player in the ESG ETP space, with 73% of the funds under management, 71% of 12 month net funds flow and 72% of the 12 months revenue.

In the last three years, the ESG ETP market has tripled to represent 3% of the total ETP market or $1.8 billion.

Assets managed in the ETP market increased by 15% or $8.7 billion to reach $65.5 billion by the end of June 2020 quarter.

Continued on page 4

Aussie investors dissatisfied Annabelle Dickson

Australian investors are considerably more dissatisfied with portfolio performance than their global peers, according to bfinance’s mid-year Asset Owner Survey.

Over 40% of super fund respondents in Australia have been dissatisfied with the performance of their direct property portfolios relative to stated benchmarks and targets, whereas this figure is noticeably lower for global respondents with just 23% dissatisfied.

The global consultancy received responses from 368 investors with combined assets of approximately US$11 trillion. There were more than 30 responses from Australian investors from superannuation funds as well as some insurance companies and endowment trusts.

Performance is optimistic on a global level with 82% of global investors were satisfied with performance during the pandemic.

In addition, the vast majority of investors Continued on page 4

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News

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

Super to lose $3tn by 2040

Editorial

Jamie Williamson

A

Jamie Williamson

Editor

What’s in a name?

This past fortnight saw the rebranding of First State Super following its merger with VicSuper, which was finalised on July 1.

From September on, the fund will be known as Aware Super; a name chosen to signal the fund’s purpose and intent, it said.

However, it wasn’t long before a member made clear their dissatisfaction with the way in which First State had communicated the change.

Reaching out to one of our journalists, the member brought attention to the fact that First State had not presented the information in a way that was accessible to all members. That is, its video presentation lacked closed captions for hearing impaired members.

It’s something that would likely only stand out to someone who is hearing impaired, which is probably why when pressed, First State acknowledged it as a mere oversight.

The fund stopped short of offering an apology, and why should it?

We found video communication from other funds with similar issues.

But does this constitute a breach of any laws on part of the superannuation fund?

We would love to know as much as you do, especially in a time where regulatory changes like the early release of super scheme and major insurance changes have seen funds increasingly communicating with members.

We reached out to four law firms and one consultant, but to no avail.

“Our lawyers haven’t come across this situation before and don’t have time at the moment to research it,” one law firm we contacted said.

Meanwhile, a significant event notice would provide the solution, but First State’s rebrand doesn’t come into effect until September and they weren’t set to be sent out until after the public announcement.

A reader, who works in the super industry, took issue with a follow-up story by Kanika Sood regarding the oversight and, commenting on the article, said we were “trying to make out like it’s a significant issue”.

According to the Hearing Care Industry Association, about 3.95 million Australians are hearing impaired, to some extent.

In the next five years, this number is expected to grow to 4.4 million and, by 2066, Deloitte Access Economics has predicted it will have almost doubled to 7.8 million.

That means that currently over 15% of the population is hearing impaired – half of which are younger than 65, Connect Hearing says.

That is a substantial cohort of super fund members whose needs aren’t consistently being met.

So yeah, we think that’s a rather significant issue. And, if those numbers are anything to go by, it’s one that’s only going to gain significance in the years to come. fs

The quote

This lower projected outlook for superannuation savings outlook could have significant economic consequences on Australia if it is not carefully managed.

ustralia’s superannuation industry will have foregone $3 trillion in growth by 2040 as a result of COVID-19, according to new analysis.

The super industry was projected to hit $10 trillion over the next two decades, but Rainmaker Information has now revised this down to $7 trillion.

This follows the news that more than $30 billion has so far been withdrawn from the system as part of the early release of super scheme, with more anticipated to be withdrawn over the next six months after the government’s announcement yesterday that the scheme has been extended to December 31.

MySuper products are also expected to demonstrate an average return of -0.5% for last financial year – the lowest returns since the Global Financial Crisis.

The projection of a $3 trillion hit was reached after Rainmaker’s Superannuation Projection Model compared two strategic scenarios: prepandemic growth expectations with post-pandemic expectations.

The modelling factors in Australia’s recession, rising unemployment, lowering super contribution levels, lower long-run super fund earnings expectations and reduced population growth on the back of COVID-19 travel restrictions.

Rainmaker executive director of research and compliance Alex Dunnin said the removal

of $3 trillion worth of capital could have major ramifications.

“This lower projected outlook for superannuation savings outlook could have significant economic consequences on Australia if it is not carefully managed,” he said.

“Super funds are major investors into Australia’s economy with their investments spanning infrastructure, property, purchase of government bonds, company shares, agribusiness, seeding start-ups and energy projects.”

Other shifts anticipated to occur over the next two decades include the increased dominance of the not-for-profit super sector and the amount of super savings attributable to retirees continuing to rise.

“The contracting role of retail offerings in proportional terms is a transition that could fundamentally reset Australia’s superannuation sector, wealth management and financial advice marketplace,” Dunnin said.

“We are already seeing this playout with these sectors working hard to become much more efficient, lower their fees, develop new lines of business, new channels and platforms”.

Meanwhile, retirees are anticipated to own up to 44% of all super savings by 2040 – they currently own about 30%.

“This will fuel pressure for continued reform of Australia’s superannuation policy,” he added. fs

European robo-adviser eyes Australia, taps Westpac exec Ally Selby

With its Asia Pacific operations led by Tim Smith and former KPMG partner Adrian Fisk, wealthtech provider InvestSuite launched into the Australian market on July 1.

“As a wealth tech firm in its first two years we have focused our suite of solutions solely on the B2B space, targeting established wealth managers, platforms and industry funds,” Smith told Financial Standard.

“Our goal here is quite simple; provide the latest open architecture available in the world to accelerate these business transformation journey and customer connectivity and experience.”

InvestSuite will launch four white-label products into the Australian market, including its Portfolio Optimizer (quantitative downside protection for investors), Self Investor (an online investment platform), StoryTeller (an automated reporting solution) and Robo Advisor offerings.

With major structural shifts underway in the Australian wealth management industry, Smith believes the industry is ripe for (digital) disruption.

“Clearly automated advice in Australia has been a challenging space since the early 2010s; I don’t think anyone has nailed it and definitely no one has nailed it from a larger institution perspective,” he said.

“I think as we see the major banks move away from wealth – and we are seeing that accelerating now – the ability to capture clients in those businesses and provide them with a lower cost solution is something that everyone is focused on.”

Software that enables better connectivity and client experience, as well as helping more Australians access financial advice, will continue

to gain momentum as advisers depart the industry, Smith said.

“These products make it easier for traditional providers of wealth management solutions to move into the 21st Century,” he said.

“And that’s really the DNA of the business.”

Its StoryTeller module in particular, which inspired by Disney and Pixar, automates the reporting and analysis of portfolios in a visual and understandable way for consumers, has got people talking, Smith said.

“People from large industry super funds, through to the major banks, broking businesses and dealer groups; it’s really the whole wealth market that could benefit from our suite of products,” he said.

Industry super funds were particularly well placed to take advantage of automated advice technologies, he said.

“Keeping people interested in the funds that they’re accumulating is really important and the ability for us to come in and assist some of the industry funds with our StoryTeller product is one of the biggest opportunities for us, because that engagement, that customer experience is what is missing,” Smith said.

“Having run large teams for a long time in this market, and especially with the Royal Commission, the disconnect between Australians and anything to do with advice and financial services means that we need to have a different way of looking at the market and therefore we need to respond using all the latest technologies.”

While the wealthtech plans to keep a low profile in Australia in 2020, it will focus on utilising Smith and Fisk’s connections to leverage opportunities within the domestic market. fs

News

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

IFM pledges to kickstart recovery The $140 billion investment manager owned by 27 industry funds has proposed the Building Australia Model as a means of job creation and economic stimulus.

The model aims to reduce the risk of cost blowout and delays on major infrastructure projects, align the interests of long term investors with the public interest, ensure a competitive and transparent tender process, avoid risks being shifted back to governments and increase the ability of local medium-sized contractors to compete with the largest contractors.

“Our Building Australia Model will help us build back better – it would create jobs, boost the economy as we recover from COVID-19, and protect and grow the retirement savings of millions of working Australians,” IFM chief executive David Neal said.

“IFM Investors is ready to invest billions of dollars in job-creating Australian infrastructure projects – we are putting forward this constructive proposal to help us do just that.”

Under the plan major projects will be broken up into smaller packages, enabling them to be shovel-ready faster and allowing mid-tier contractors to compete in bidding processes, which IFM claims will stimulate job creation and the construction sector.

More active management of infrastructure projects with a long term equity partner, IFM said, could result in less risk to the taxpayer and more effective risk transfer to the private sector. fs

3

01: Scott Morrison

Prime Minister

JobKeeper, JobSeeker extended Eliza Bavin

The quote

We would anticipate there would need to be some continuation of the COVID-supplement payment postDecember.

J

obKeeper is set to be extended until March 2021 and has been reduced to $1200 per fortnight, down from $1500, and restructured into a two-tier system.

The JobSeeker program will also be extended at a lower rate and until December, when it will be revised again.

However, the Prime Minister emphasised when questioned about revising the JobSeeker payment around the holiday period that it will likely be extended again.

“I am leaning heavily into the notion, and we would anticipate there would need to be some continuation of the COVID-supplement payment post-December,” Prime Minister Scott Morrison01 said.

The extension of the JobSeeker program will cost the federal government an extra $3.8 billion, bringing the total cost of the program to $16.8 billion.

The JobKeeper wage subsidy scheme had been providing eligible businesses with $1500 per fortnight for each staff member kept employed during the pandemic.

The changes to the scheme are set to come into effect in October this year and will provide a two-tier payment of $1200 for full-time workers and $750 for those working less than 20 hours per week.

After December the full-time JobKeeper payment will fall below $1000 per fortnight.

The Prime Minister and Treasurer said this change is due to the number of Australianswho hold multiple jobs, making it easier for them to receive the payments from both employers.

“Over 900,000 Australians being paid more on JobKeeper than they were before from a single employer,” Morrison said.

“The scope of that needs to be diminished.” fs

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www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

01: Deanne Stewart

ETP market winners revealed

chief executive First State Super

Continued from page 1 At the end of the quarter, the annual increase in the ETP market was 30% or $15 billion.

Around half of the quarter’s increase in FUM in ETPs came from net flows, which at $4.4 billion were the second highest ever recorded.

The highest net flows to ETPs occurred in the December quarter of 2019 which saw $4.8 billion in inflows.

Equities as an asset class within ETPs though, had the highest net flows on record at $2.1 billion. International equities remain the largest ETP asset class with 42% of the market or $27.4 billion.

Australian equities ETPs were the winners from the June quarter in terms of asset growth, with a 26% increase in FUM. Gold surged during the period, and as investors wanted in on the action flows to commodities ETPs increased by 200%. During the quarter commodities ETPs went from making up 2.2% of the total market to 4.5%.

Six new ETPs launched during the period, but as UBS Asset Management exited the ETP market in Australia there was a net result of 11 fewer products available for Australian investors.

Over the past 12 months, BetaShares alone has launched 11 products. Pinnacle, iShares and VanEck have launched two each. fs

Aussie investors dissatisfied Continued from page 1 were satisfied with the performance of their risk management processes but 35% are making changes to risk as a result of COVID-19.

On the other hand, 33% of investors already invested in distressed or opportunistic strategies that seek to benefit from the pandemic fallout. A further 22% have not yet done this but plan to in the coming months. bfinance found only 25% of respondents are changing their strategic asset allocation this year with most happy with the results of actively managed strategies across asset classes.

In Australia, this was much higher as 37% of super funds indicated they had already changed their strategic asset allocation since the pandemic or plan to do so by the end of 2020. bfinance Australian senior director Frithjof van Zyp said: “The sudden introduction of the super early release scheme will have likely further contributed to super fundshaving to rethink their strategic asset allocations.” bfinance head of investment content Kathryn Saklatvala said: “It is great to see the majority of investors reporting satisfaction with overall portfolio performance, risk management and active management results across the majority of asset classes, although there are important changes underway on all fronts.”

“While such periods are uncomfortable, they are also crucially informative for investors seeking to understand the diversification and resilience of portfolios, the discipline and skill of asset managers, and the weak-points in risk management capabilities or processes.”

In June bfinance said investors were increasingly turning to dedicated China equity strategies. fs

Merged First State Super reveals new brand Kanika Sood

T

The quote

We felt it was important to have a name that was clear, recognisable and best represented who we are and our intent.

he $120 billion fund has picked a new name, with First Super name expected to be dropped from September. Meanwhile VicSuper’s brand name will be retained for the interim.

Both First State Super and StatePlus brand names will be replaced by “Aware Super” effective.

The VicSuper brand name will be retained and soon-to-be Aware Super will review it in future.

First State Super chief executive Deanne Stewart 01 said the rebranding exercise is driven by differentiating the fund from other similarsounding funds, reduce costs of maintain multiple brands and showcasing the fund’s “commitment to action and impact”.

“As we continue to grow and expand our footprint, we have thought deeply about the need to create a single brand that not only unifies our member base, but clearly signals our purpose and our intent,” Stewart said.

By consolidating First State Super and StatePlus under a single brand, we can amplify our impact and reduce costs associated with managing multiple brands in market.

“In addition, many of our members have spoken to us about the confusion of First State Super with many other brands that sound similar.

We felt it was important to have a name that was clear, recognisable and best represented who we are and our intent. After careful consideration we concluded that shifting to a new brand name was the best option.”

She said the decision was not taken lightly and the fund consulted members and stakeholders throughout the process.

However, it did come with some backlash, with the fund failing to disseminate the information in formats accessible to all members.

A First State Super member, who has a hearing impairment, wrote a letter to Stewart asking why the video did not have any closed-captions. “…You are clearly “unaware” of disabled members,” the member said.

The member said she had not received any direct communication from the fund regarding the brand change.

Upon reading about it in the news, she tried to look for more information on it from the fund and came upon a video posted on Vimeo, which she could not access owing to its lack of closedcaptions or an Auslan interpreter.

In response, the fund told Financial Standard it “strives to communicate in an inclusive way” and follows a “multi-channel approach” but could not answer how many of its members have a hearing, visual or speech impairment.

“This is not information we specifically collect about our members however we do offer a number of services to support members with a disability including access to the National Relay Service for members with visual, hearing or speech impairments,” a spokesperson for the fund said in an emailed response. fs

Cbus appoints chief executive Jamie Williamson

Cbus has named its new chief executive, hiring a former VFMC chief executive to fill the role.

Justin Arter will take over as chief executive of the $50 billion fund in late August, replacing David Atkins.

Arter is currently working as a consultant to ANZ’s institutional arm in its dealings with industry super funds. Prior to this he has served as country head of Australia for BlackRock and was chief executive of VFMC from 2009 to 2012.

He also spent 18 years at Goldman Sachs JBWere as an analyst and market strategist.

“Justin Arter is an executive with a global reputation. Given the growing sophistication of Cbus’ investments and leading position in providing products and services to improve the retirement outcomes of our members, Mr Arter is well placed to build on our strong foundations

to guide the next period of Cbus’ journey,” Cbus chair Steve Bracks said.

“I am absolutely confident Mr Arter will continue our 35-year-old tradition of outperformance based on our unshakeable determination to keep members at the centre of everything that we do.”

Bracks also paid tribute to Atkins, saying: “David’s stewardship of Cbus has been a remarkable achievement. Everyone at the fund wishes him the very best and congratulates him on his highly successful leadership over a sustained period of time.”

Arter said he is looking forward to starting work at Cbus.

“Cbus has a proud history and strong member focus as a leading industry super fund. I am incredibly excited about leading the fund into the next stage of its journey and to continue its success in maximising the retirement futures of its 750,000 hard-working fund members,” he said. fs

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www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

FASEA confirms 2021 exams

01: Brian Parker

chief economist Sunsuper

Elizabeth McArthur

FASEA has confirmed the exam schedule for 2021, after the extension was passed.

The authority will run six exam sittings in 2021 at metropolitan and regional locations around Australia.

“We have seen a strong performance by most advisers sitting the exam, with 86% of candidates on average passing each exam on the first sitting,” FASEA chief executive Stephen Glenfield said.

“So nearly nine out of 10 of the existing advisers who have sat the exam have prepared well and demonstrated they have the skill to apply their knowledge of advice construction, ethics and legal requirements to the practical scenarios tested in the exam.”

The exact locations of each FASEA exam in 2021 are yet to be confirmed but there will be sittings on 28 January to 2 February 2021, 25 March to 30 March 2021, 20 May to 25 May 2021, 15 July to 20 July 2021, 9 September to 14 September 2021 and 4 November to 9 November 2021.

“The 2021 exam schedule together with the three remaining exams scheduled for 2020 in August, October and November provide advisers who have yet to pass the exam the choice of a broad range of sitting dates,” Glenfield said.

Registrations for the first 2021 exam will open on 5 October 2020 and close on 8 January 2021. fs

Xinja dabbles in US stocks Annabelle Dickson

Neobank Xinja has announced plans to launch a US share trading platform Dabble, giving investors access to over 3000 stocks and exchange traded funds (ETFs).

Xinja claims Dabble will make names like Tesla, Facebook, Google and Amazon accessible and affordable to all investors with zero brokerage fees, $8 monthly subscription fee for unlimited trades and 1% FX fee.

Interestingly, one of Dabble’s key features is its ability to offer ‘fractionalised trading’ where investors will be able to buy whole shares, or a portion of a share depending on how much money they have and how much they want to invest.

Xinja founder and chief executive Eric Wilson said Dabble offers investors an alternative option in a time when interest rates remains low.

“We are offering low cost, easy access via the Dabble platform, and the option to buy a portion of a share, which we hope opens up markets and investing to people who want to grow their wealth over the long term,” he said.

“Many US-listed companies’ shares trade at very high prices, which locks a lot of people out of the market. So while brand recognition for leading US companies is very high, few people invest directly. And entering the market hasn’t been easy.

We want to lower the cost and make it simpler to bring those opportunities to Australians.”

Dabble will sit alongside Xinja’s savings account Stash and customers will be able to purchase shares using the funds in their account as well as monitoring their investments, ETF and share prices in Australian dollars and US dollars in the app.

The orders will be automated and executed. fs

Financial services jobs show signs of recovery Eliza Bavin

T

The quote

Permanent job opportunities rose by just 5.2% in May and a more encouraging 10.5% in June, yet the recovery in contingent demand has been stronger.

he financial services industry saw a significant boost to online job advertisements after suffering a major blow due to COVID-19, according to the latest Sunsuper Australian Job Index report.

The financial services industry suffered an early, and extreme, contraction in financial and insurance services opportunities of 57.2%, but has staged a bounce back of 38% in June.

Overall however the results show that despite gains in May and June, the index remains 40.3% below its January 2020 level.

Sunsuper chief economist Brian Parker01 said that while the improvements in job vacancies in May and June were a promising sign, the ongoing impacts of COVID-19, including renewed shutdowns, caused concerns for employers.

“The reintroduction of restrictions in Victoria and the risk of renewed restrictions elsewhere means the recovery in the labour market remains fragile,” Parker said.

“Opportunities for both permanent and contingent employment still remain well below pre-COVID peaks; however, the recovery over May and June has been somewhat stronger for contingent work.

“Permanent job opportunities rose by just 5.2% in May and a more encouraging 10.5% in June, yet the recovery in contingent demand has been stronger, with gains of 19.5% in May and 9% in June.”

Parker highlighted that when split by job type, unsurprisingly one of the better performing occupational categories was community and personal services.

“Demand fell just 3.7% over the quarter, driven by a remarkably bullish 37.7% rise in June,

which coincided with the recommencement of elective surgery and the reopening of allied medical businesses,” he said.

“Contingent opportunities for machine operators and drivers and labourers reported net gains over the quarter, while sales roles were the worst hit, down a massive 44.1% over the quarter.”

The research showed that machinery operators and drivers were the only occupational group to experience a rise in permanent job opportunities in the quarter, at 19.4%.

“All industry groups reported declining opportunities over the June quarter. The strongest performing sector was mining, construction and utilities, reporting a decline of just 3.2% over the quarter with commodity prices and demand remaining strong,” Parker said.

“Opportunities in healthcare and public administration and safety also reported relatively modest declines of around 14% over the June quarter, and retail and wholesale job opportunities reported the largest decline (down 45.9%).

June also saw quite a significant bounce back in financial and insurance services opportunities (38%).

The Sunsuper Australian Job Index also found that New South Wales has seen the most significant decline in permanent job opportunities, down 32.4%, while Victoria had the highest fall in contingent job vacancies of 33.8%.

“With such a strong focus on tourism, one might have expected Queensland’s falls to have been above the national norm. But this has not been the case,” Parker said.

“This may be because of the time of year that the virus spread. Queensland’s strength in the resources sector may also have helped soften the impact.” fs

NULIS calls for clearer regulatory definitions NULIS said it intends to explore opportunities to enhance its intra-fund advice offering, but requires more concise regulatory definitions before it can proceed.

In a written response submitted to the House of Representatives Standing Committee on Economics, the MLC Super trustee said it needs regulators to differentiate advice offerings.

“NULIS recognises that phone-based / face-to-face intrafund advice is an important aspect in helping super members access specific advice at a reasonable cost,” it said.

“NULIS intends to explore opportunities to enhance its intra-fund advice offering and the channels through which it is delivered.

“Clearer regulatory definition of the scope of intra-fund advice with a clear distinction between general advice and comprehensive personal advice would support enhanced intrafund advice offerings to members.”

NULIS said its current practice is to have face-to-face advice arrangements that are conducted on the basis of the member’s direct engagement with a financial adviser of their choice.

“…in certain circumstances members can request NULIS to deduct amounts from their account to pay fees for their financial adviser,” it explained.

“The facilitation of fee payment does not constitute NULIS providing advice or an outsourcing arrangement by NULIS, and the adviser’s relevant licensee is responsible for the conduct of the adviser and the costs associated with operating the licensee’s business.”

NULIS said the cost of intra-fund advice provided to members via online digital tools is paid for out of fee revenue and does not involve additional costs to members.

“There is a higher administration fee where members choose to invest in managed investment schemes that are issued by unrelated parties to NULIS,” it said.

“There are two fee structures available. Members that access the Full Investment List (which provides access to a broader range of funds) are charged a higher administration fee compared to Members that access the Core Investment List (which provides access to a smaller range of investment products offered by related parties).” fs

We’ve launched a new Core Investment List for your clients.

You asked for it. And here it is. The new MLC Core Investment List is now available on our Series 2 Wrap. It provides access to a focused range of investments from our MLC Inflation Plus, Horizon and Index Plus portfolios, with a simpler fee structure and competitive admin fee.

Rethink your investment platform.

To find out more, speak to your BDM or visit mlc.com.au/adviser/platforms

Important information: The information on MLC Wrap Super Series 2 and MLC Navigator Retirement Plan Series 2 is provided by NULIS Nominees (Australia) Limited ABN 80 008 515 633, AFSL 236465 (NULIS), part of the MLC Superannuation Fund ABN 40 022 701 955. The information on MLC Wrap Investments Series 2 and MLC Navigator Investment Plan Series 2 is provided by Navigator Australia Limited ABN 45 006 302 987, AFSL 236466 (NAL). The information on the MLC Horizon, MLC Inflation Plus, and MLC Index Plus Portfolios is provided

by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705). The information is a summary only and should not be relied on for decision making and is provided solely for the use of authorised financial advisers and is not intended for distribution to investors and potential clients. To find out more, please refer to the relevant Product Disclosure Statements and the Financial Services Guide at mlc.com.au. The information is correct as at 9 March 2020, but may change in the future.

A155560-0720

8

News

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

PSK acquires wealth firm

01: Philip Lowe

governor Reserve Bank of Australia

Elizabeth McArthur

Financial advice firm PSK Financial Services has acquired Sydney-based Socius Wealth Management as part of its growth plans.

Socius founder and partner John D’Alessandri said that completing the acquisition amid COVID19 was challenging.

“What became obvious in the time we were spending with PSK during the process, was that our two businesses were actually very much alike, we hold similar beliefs in many things, and this helped us overcome the obstacles that came up,” D’Alessandri said.

“We know we have found a very good home for our clients - equally we are also pleased that all of our staff will be coming across and joining the PSK group which will open a wide range of new opportunities for them - we are all very excited about the move.”

PSK managing director Paul Aspros said that part of PSK’s growth strategy is to partner with firms that need assistance in the current challenging operating environment for financial advice.

“These are the most difficult times we have ever had to face… it’s more important than ever that advisers are able have the best support available to support their clients,” he said.

“By joining PSK, we help take away the day to day complexity of running a business, we solve the advisers’ succession issues, and with the help of our in-house support services, business development, marketing, paraplanning and investment team, we find advisers and their business’ flourish.”

Aspros added that PSK is delighted to welcome the founders of Socius on board. fs

No such thing as a free lunch: Lowe Eliza Bavin

R The quote

It certainly is possible for the central bank to change when and how the spending is paid for, but it is not possible to put aside the government’s budget constraint permanently.

Class launches Xplan integration Class has completed its integration with Iress’ financial software solution Xplan, with the offering now available for new Class Super and Class Portfolio customers as a public pilot.

The data feed will enable financial advisers and accountants to seamlessly share a single, consistent and up to date view of their client’s wealth, across both SMSF and non-SMSF entities.

Class believes the integration will save advisers and accountants up to four hours on each report review and up to eight hours on advice documents per client.

The feed includes all investments held within Class, including unlisted assets such as direct property. This will allow customers to maintain a consistent portfolio position, while reducing double-data entry into both systems, Class said.

“We know that the provision of automation is a key issue for our current and future customers, as reflected in the recent Industry Trends SMSF Accountant Report,” Class chief executive Andrew Russell said.

“We aim to remove significant technical complexity and the use of time while solving real customer problems such as removing manual entry through feed automation.

“Time is our customers’ most valuable resource and we remain focused on helping them save that by providing even more value for money from their Class subscription.” fs

eserve Bank of Australia governor Philip Lowe 01 has said the government will likely need to borrow more money, but warned the central bank will not directly provide funding.

Giving his annual address to the Anika Foundation, Lowe stressed that while the subject of the RBA using its balance sheet to create money for the federal government comes up a lot, it is not an option the bank will ever take.

Lowe said he has also been questioned as to why the RBA doesn’t deposit money into the individual accounts of Australians.

“This is sometimes known as ‘helicopter money’ because, before we had an electronic payments system the idea was that banknotes could simply be dropped by helicopter,” Lowe said.

“The reality, though, is there is no free lunch.

The tab always has to be paid and it is paid out of taxes and government revenues in one form or another. I would like to explain why.”

Lowe said that while the bank has considered many methods of quantitative easing, he dismissed the concept of the bank having the ability to provide any direct funding.

“The message here is that somebody always pays. It certainly is possible for the central bank to change when and how the spending is paid for, but it is not possible to put aside the government’s budget constraint permanently,” Lowe said.

“Where countries have, in the past, sought to put aside this constraint the result has been high inflation.”

Lowe noted that a number of high profile economists, including former Bank of Israel governor Stanley Fischer, have said central bank financing of government spending may be appropriate in some circumstances.

Lowe said those circumstances include when conventional monetary policy has been exhausted, the central bank is falling short of its goals and, crucially, when public debt is high and the government cannot borrow in financial markets on reasonable terms.

“They argue that under these particular circumstances, central bank financing may be welfare enhancing, provided that there are strong safeguards to avoid the inflation problem,” Lowe said.

“The main safeguard proposed is that the amount of monetary financing and the conditions under which it is provided, are determined solely by the independent central bank, not by the government. It is envisaged that the central bank provides finance up until the point that its goals for inflation and perhaps unemployment are met.”

Lowe said that while the idea has attracted a lot of attention, many have pointed out significant challenges in maintaining those safeguards, and Australia is not in the circumstances where it might be seen as acceptable.

“I want to make it very clear that monetary financing of fiscal policy is not an option under consideration in Australia, nor does it need to be,” Lowe said.

“The Australian government is able to finance itself in the bond market, and it can do so on very favourable terms. There is strong demand for government debt and the Australian government can borrow for five years at just 0.4% and for 10 years at just 0.9%. These are the lowest borrowing costs since Federation.”

While Lowe stressed monetary financing is not an option in Australia, he said the RBA continues to review overseas experience with other monetary options. fs

HESTA doubles down on climate action Ally Selby

In a submission to the government’s Technology Investment Roadmap discussion paper, HESTA said climate change presents a very real financial risk to its portfolio, arguing if they fail to consider it in investment decision-making it would negatively impact the retirement outcomes of its members.

HESTA encouraged the government to provide a clear pathway towards transitioning the economy to a low-carbon future, warning that without one, global investors will be increasingly unwilling to invest in Australia.

“We are at a critical juncture – the time to choose and commit to a low-carbon economy is now,” HESTA chief executive Debby Blakey said.

“We don’t want to see a carbon-led recovery that locks in longterm emissions and increases the risk of assets becoming stranded.”

Domestic opportunities with scale and long-term contractual

appeal are relatively rare, she said.

“While we want to invest more here, for every $1 we have invested in Australian renewables, we have $3 committed to equivalent assets overseas,” Blakey said.

“These assets are in countries that provide stable, predictable policy settings, which have given us the confidence to make long-term investments.”

She argued there is opportunity for local and global green capital investment on Australian soil.

“In Australia alone we have an incredible opportunity to attract not only global investment but to draw on the almost $3 trillion pool of superannuation savings to power a green-led recovery from COVID-19,” Blakey said.

“But there is growing global consensus from investors and business leaders about the urgent need to set long-term emission reduction targets. fs

News

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

WAM makes alternatives play

9

01: Jason Falinksi

MP

Ally Selby

Geoff Wilson’s $3 billion Wilson Asset Management has acquired the management rights for embattled alternatives investment company Blue Sky. On May 20 last year, Blue Sky Alternative Investments announced it had been forced into receivership, with Oaktree Capital Partners appointing KordaMentha as receivers and managers of the company.

It came after the investment company breached the covenant on a $50 million convertible note from Oaktree Capital, bleeding $25.7 million (after tax) during Q1 2019, with $36.8 million in expenses and $82.4 million in liabilities.

Blue Sky has entered into a deed of termination with BSAAF Management, its existing manager, and will transition to WAM subject to shareholder approval. The investment company will hold an EGM for its approximately 3300 shareholders to vote on the termination and transition arrangements in September this year.

If approved, Blue Sky will be rebranded as WAM Alternative Assets.

Blue Sky chair Michael Cottier said the agreement signaled the beginning of a brighter future for the investment company’s shareholders.

“The BAF board once again thanks shareholders for their patience,” he said.

“The directors are delighted to have commenced this important transition, which, if approved by shareholders, will provide new and existing investors with access to a high-quality investment manager with significant expertise in managing listed investment companies (LICS).”

WAM chair Geoff Wilson welcomed the company’s shareholders to a new era of management.

“We believe the renewed alternative assetfocused LIC has great potential in the Australian market and we look forward to welcoming over 3300 BAF shareholders into the Wilson Asset Management family.” fs

Industry super accused of misleading consumers Elizabeth McArthur

L

The quote

Why is it that industry super is allowed to use key terms in their advertising such as ‘retail super’?

iberal MP Jason Falinski01 has accused industry super funds of using the Google AdWords term ‘retail super’ after BT was fined for using the term ‘industry super’.

The subject arose as Falinski questioned ASIC on its litigation against Mayfair 101.

Part of ASIC’s case against Mayfair 101 is the allegation that it used Google Ad Words like “term deposit” to advertise debenture products with a vastly different risk profile than term deposits.

“At a previous hearing in November last year, I asked you why it was that ASIC had issued a penalty to BT for misleading statements online which were to do with them using the key term ‘industry super’ when people Googled. You issued them a penalty totally $20,400, is that right?” Falinski said.

ASIC chair James Shipton said he would have to take the question about BT’s fine on notice.

Falinski pushed ahead with the line of questioning, saying:“As part of our enquiry into industry super, we have asked them to provide us with the search terms they use in their advertising. With the exception of Tasplan, industry super has refused to do so.”

“Could it be that it’s because when you type in ‘retail super’ you find a lot of industry super funds come up in those search terms.”

Shipton declined to comment.

“Why is it that industry super is allowed to use key terms in their advertising such as ‘retail super’ and that has not prompted an investigation however other funds that are not industry funds receive enquiries from ASIC?” Falinski asked.

Shipton did not provide an answer.

When Googling the term ‘retail super’ the paid advertisements that appear is for the Retail Employees Superannuation Trust (Rest), HESTA, Cbus and First State appear.

Googling ‘retail superannuation’ advertisements for HESTA and First State appear again as well as ads for Dixon Advisory and ING. In 2015, BT was fined $20,400 by ASIC for two infringement notices. One of the notices (carrying a $10,200 fine) was issued for the inclusion of the words ‘Industry Super Australia’ in headlines of BT advertisements published on search result pages in 2014.

“ASIC was concerned that BT misled consumers into believing that BT had an affiliation with Industry Super Australia (ISA), an organisation which manages collective projects on behalf of fifteen industry super funds. BT has never had an affiliation with ISA,” ASIC said at the time.

The matter did not specifically relate to the purchasing of AdWords.

The second infringement notice at the time related to BT claiming in advertising material that it had outperformed industry funds. fs

Charter Hall buys warehouse

Morrison’s legacy will be retirement poverty: ACTU

A Sydney-based glass manufacturing facility and warehouse, located at 130-170 Andrews Road, Penrith has been added to Charter Hall’s Direct Industry Fund No. 4. The investment manager paid OIA $88 million for the asset.

The sale and lease back agreement on the property will run for a 20 year triple net lease, the property manager said, with fixed 3% annual rent reviews.

OIA recently divested its Australian operations to packaging and resource recovery company Visy. A subsidiary of Visy will be the tenant once the deal has been completed in July.

Charter Hall has also acquired two other properties as part of the deal, one in Melbourne and one in Adelaide, for a total of $126 million.

Charter Hall chief executive Steven Bennett said the acquisition highlights the fund’s ability to provide investors with exposures to diverse property assets.

“DIF4 continues to grow and meet investor demand for high quality exposure to the resilient industrial property market,” he said. fs

The Australian Council of Trade Unions has slammed the government’s early release of superannuation program, saying that Prime Minister Scott Morrison’s legacy will be a wave of retirement poverty.

Following the second round of early release withdrawals commencing on 1 July 2020 and the value of applications topping $23 billion, the ACTU is concerned the policy will decimate Australia’s super system.

“No one should have to access their superannuation to pay bills or rent. This scheme shows that the Morrison government has not done enough to support working people and has instead decided to force people to sacrifice their retirements to save the budget bottom line,” ACTU assistant secretary Scott Connolly said.

“This scheme is having a disastrous impact on the retirement savings of women and young people, but is being used as a tax minimisation tool by the wealthy.”

He said that the reason 2.5 million Australians have accessed their super to pay bills was

because government had not done enough to support workers through the COVID-19 crisis.

“A 25-30 year old who withdraws $20,000 over these two years will be $79,000- $95,000 worse off by retirement,” Connolly said.

“The Morrison government seems content to let women, young people and low paid workers rip the heart out of their retirement savings based on their fanatical hatred of a system which provides for millions of people every year.”

He added that he thinks this will be the ultimate legacy of Morrison’s government.

“The generational hole in retirement savings which will be left by the scheme will be the greatest legacy of this government. It will cause untold hardship for hundreds of thousands of people,” Connolly said.

The scheme has now been extended to December 31 this year, having originally been slated to wrap up on September 24.

The ERS extension will cost the government $2.22 billion over the forward estimates, it said. fs

10

News

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

Hume calls out ERS fake news

01: Rob Adams

chief executive Perpetual

Elizabeth McArthur

At the Financial Services Council Life Insurance Summit Senator Jane Hume has said “fake news” about consumers losing life insurance due to the early release of super has irritated her.

Hume said consumers would not lose life insurance policies held through their superannuation if their balances dipped below $6000, they’d only lose the insurance if their balance dipped so low that they couldn’t pay the premiums.

“A piece of fake news that I’ve heard repeated too many times is that if a person’s balance dips below $6000 as a result of accessing their super funds will have to cancel their insurance as a result of the government’s Putting Members Interests First legislation,” Hume said.

“This simply is not true. If an account doesn’t have enough money to cover premiums then coverage won’t continue and super funds may have their own rules about the cancellation of insurance on accounts where balances are too low.”

Hume also suggested that she’d like to see some reform in the way mental health claims are handled by life insurers, acknowledging that COVID-19 was likely to have a serious mental health impact over the short and long term.

“Rather than having lump sum TPD claims, maybe there is a way life insurers could pay out for treatment rather than a lump sum? I have heard someone say that handing a lump sum to some people with mental illness is like handing a 16-yearold the car keys and a slab of beer,” she said.

She added that she particularly wants to see the group insurance sector innovate to make sure consumers are getting value from the policies they pay for out of their retirement savings. fs

Perpetual takes stake in US asset manager Jamie Williamson, Kanika Sood

P The quote

It provides Perpetual with world-class investment teams, diversifies our client base by sector and geography, and presents us with significant growth opportunities.

$184bn deficit announced Eliza Bavin

Treasurer Josh Frydenberg has announced the country’s biggest ever peace-time budget deficit as the economic effects of COVID-19 are realised.

Frydenberg and Minister for Finance, Senator Mathias Cormann revealed the economic toll while giving an economic and fiscal update.

“The government has acted swiftly and decisively to provide economic support for workers, households and businesses of around $289 billion or the equivalent of 14.6% of GDP,” they said.

“This necessary and unprecedented level of economic support, coupled with declines in taxation receipts of $31.7 billion in 2019-20 and $63.9 billion in 2020-21, has significantly impacted the budget position.”

Australia’s underlying cash balance is forecast to decrease from balance in 2018-19 to an $85.8 billion deficit in 2019-20 and a $184.5 billion deficit in 2020-21.

Frydenberg and Cormann said they support the government’s fiscal measures, saying it shows strong management.

“We returned the budget to balance for the first time in 11 years which underpinned the capacity to respond to this unprecedented shock,” they said. fs

erpetual has acquired a 75% interest in a US-based asset manager.

Perpetual has entered an agreement with BrightSphere Investment Group to acquire its stake in $64 billion Barrow, Hanley, Mewhinney & Strauss (Barrow Hanley); a global manager based in the US that invests across US, global and emerging market equities and fixed income.

The remaining 25% interest is owned by Barrow Hanley’s investment and management personnel.

Perpetual will pay about $465 million for the acquisition, funded via a $265 million equity raise (39.5% of the total cost), a new $284 million debt facility (nearly 50%) and cash (10.6%).

The acquisition is expected to more than triple Perpetual’s funds under management from $28.4 billion to $92.3 billion.

“This is a compelling acquisition. It provides Perpetual with world-class investment teams, diversifies our client base by sector and geography, and presents us with significant growth opportunities in the Australian market and a formidable platform to scale our business internationally,” Perpetual chief executive and managing director Rob Adams 01 said.

Barrow Hanley currently has 95 staff, including 54 investment professionals, across its Dallas, Hong Kong and London offices. It will

retain its brand and continue to operate as usual with no changes to its investment process or people expected.

The acquisition comes as Perpetual’s investment management business reported $400 million in net outflows in the June quarter, which also saw the company curb variable remuneration across the board.

Barrow Hanley is well known to Perpetual, as the latter already uses Barrow Hanley’s expertise in its multi-manager portfolios offered to Perpetual Private clients.

Perpetual is handing over all Garry Laurence-led global shares strategies to the investors at its US acquisition Barrow Hanley.

The funds include Perpetual Global Shares Fund and the Perpetual International Share Fund.

Its internal global equity team led by Laurence will assist with the transition over the next six to eight weeks, with the management shifting to Barrow Hanley in September.

Perpetual said it decided to change the managers after an extensive review of its global equities capability.

Following the manager transition, Perpetual will drop the fees to 0.99% and get rid of performance fees. While the buy/sell spread will increase, the firm is estimating a reduction on transaction costs. fs

AustralianSuper partners with greenhouse gas giants for decarbonisation Ally Selby

Australia’s largest superannuation fund has partnered with the country’s major greenhouse gas emitters in a new initiative which will see them work towards a decarbonised future.

AustralianSuper, joined by NAB and Schneider Electric, has partnered with BHP, Woodside, BlueScope Steel, BP Australia, Orica, APA Group, Australian Gas Infrastructure Group and Wesfarmers Chemicals, Energy and Fertilisers as signatories of the Australian industry Energy Transitions Initiative.

Independent charitable organisations ClimateWorks Australia and Climate-KIC Australia, in collaboration with the Energy Transitions Commission, are conveners of the initiative.

The initiative will focus on opportunities across the five supply chains which together contribute to more than a quarter of Australia’s annual greenhouse gas emissions. These supply chains include steel, aluminium, liquified natural gas, and other metals (lithium, copper and nickel) and chemicals (explosives and fertiliser), which together generate around $160 billion in exports.

Its chair, former CSIRO chair and Australian of the Year Simon McKeon said collaboration and experimentation would be at the heart of the new multi-industry initiative.

“We know that we can find solutions more quickly, and start implementing them, if we’re encouraging collaborative learning

and knowledge sharing, especially when it comes to new technology,” McKeon said.

“This initiative provides a platform to generate knowledge and test action through on-the-ground projects that support industry to realise the opportunities of a decarbonising global economy.”

AustralianSuper director of ESG & stewardship Andrew Gray said the initiative would help the industry super fund to have greater oversight into some of its investment’s pathway to net zero emissions.

“An effective low carbon economic transition is necessary to manage the investment risks from climate change and is therefore important for AustralianSuper to deliver the best investment outcomes for our members,” he said.

“We undertake comprehensive engagement with the companies in which we invest to encourage and support the necessary business transition to achieve this. ”We are therefore excited to join the Australian Industry Energy Transitions Initiative to work alongside some of Australian industry’s biggest companies, including those in which we are directly invested, to identify the pathways they have to net zero emissions.”

Joining the initiative would keep AustralianSuper accountable to push for real change among the companies which it invests in, he said. fs

Opinion

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

11

01: Martin Morris

head of distribution Praemium

Busting the myths of managed accounts and client size ecent research has shown there is a comR monly held view that managed accounts are more suited to high-net-worth clients. However, with more advisers starting to embrace managed accounts as a whole-of-practice solution, these myths are now being disproved.

Myth 1: Managed accounts are too expensive for low-balance clients

Managed accounts have the potential to offer a costefficient solution for all clients, but it will depend on the combination of the chosen model manager and the managed account platform used to deploy the model. Overall portfolio management fees are typically lower with a managed account, due to the reduced trade execution, netting benefits, and custody costs inherent within the model structure.

This is why we are seeing traditional managed fund providers shift their focus to SMAs due to the outsourced custody and trading benefits leading to a reduced portfolio management expense ratio (MER).

Therefore, portfolio costs alone can make the overall proposition very compelling.

When it comes to cost, not all platforms are the same. In addition to the cost of platform administration fees, it is important to understand the impact that trading costs and netting has on returns.

There can be wide variances in the cost of trading between platforms that could erode the cost benefits to smaller clients. Platforms adopt different approaches to passing on the netting benefit to investors. For example, Praemium nets trades at a scheme level and passes these benefits directly to the client in the form of reduced costs. Undertaking some further research will help identify the true cost of the SMA. Myth 2: Too complicated to explain to less sophisticated clients

While managed accounts may not be as commonly known by retail investors as managed funds are, the process for recommending this solution is not dissimilar. Many SMA models are also fully diversified with either a goal (CPI) or risk-based strategy, allowing advisers to recommend one model rather than a suite of individual managed funds, making it much simpler for clients to understand.

Managed account portfolios can also include ETFs or managed funds which can simplify the portfolio construction or stock selection recommendation discussion with clients.

Focusing on the benefits of managed accounts; diversification of investments, beneficial ownership and transparency are things that all investors appreciate and are relatively easy to explain in the context of a managed account.

Using managed accounts offers a great opportunity to engage with your clients and demonstrate the value you add as their adviser. Presenting them with a new investment opportunity and explaining the benefits managed accounts offer, can showcase your expertise and give your clients an insight into the higher levels of engagement they can receive through a managed accounts approach.

Myth 3: Detailed reporting is overwhelming for the average investor

Choosing the right technology partner will allow you to tailor reporting to your client’s information needs, whether that is via highly detailed reports or a more visual summary of their portfolio’s highlights. With growth in client-focused technology providers and platforms developing more client engagement tools, it is now much easier for advisers to build different engagement experiences across different segments of a client base.

Younger investors in particular are becoming more discerning about the stocks held in their portfolio, demonstrated by the marked increase in ESG investing by this generation. Being able to provide reporting with this level of detail and transparency will become increasingly important to this client segment.

Regardless of whether your client has basic investment knowledge or is a sophisticated investor, reports can be customised to deliver the level of information most suited to their requirements and level of understanding. Investor Portals, like Praemium’s, can give investors 24/7 access to see their portfolio and the reports you publish directly to their account login. This transparency of information is highly valued by investors and often cited as a key benefit to clients using managed accounts. It also allows your client meetings to be-

Proportion of clients invested in managed accounts Profit per principal

Profit uplift

Do not use managed accounts

$252,573

–

Less than 10%

$276,359

+9%

Between 51%-75%

$408,171

+62%

More than 75%

$467,884

+85%

Source: The real truth about managed accounts, September 2019, Business Health and Praemium

come more focused on strategy and goal achievement, rather than providing a portfolio update.

Myth 4: Managed accounts is a one-size-fitsall approach that isn’t right for all my clients

The quote

Firms using managed accounts for more than 75% of their clients saw a profit uplift of over 85%, compared to firms who don’t use managed accounts at all.

While a managed account solution effectively outsources stock selection and many time-consuming administrative duties, that doesn’t put an end to the value an adviser can add to their clients’ portfolios.

Using account customisations, a portfolio can be tailored specifically for a client by: • removing, substituting or holding particular securities • screening for ethical considerations, and • adding additional single investments to the portfolio to create a more individually managed account (IMA) experience.

Therefore, it is possible to for a practice to have an underlying investment philosophy and execute that philosophy using a set of managed account model portfolios. Dependent on the complexity of the client’s needs or their desire to have a more bespoke experience, the adviser can use account customisation functionality to create a more personalised portfolio whilst still minimising portfolio administration.

With a range of managed accounts covering custody and non-custody investments and the functionality to screen stocks based on ethical considerations, advisers can create a managed account solution to suit a range of client types and portfolio sizes.

Reaping the benefits with a whole of practice approach

Research shows that advice firms who are embracing managed accounts as a whole of practice solution are really seeing the benefits.

Almost a third (31%) of the managed account firms surveyed by Business Health, now manage all of their clients’ portfolios through a managed account structure. These firms demonstrated that embedding managed accounts as a whole of practice solution, rather than discriminating based on portfolio size, delivered a significant improvement in profitability. Firms using managed accounts for more than 75% of their clients saw a profit uplift of over 85%, compared to firms who don’t use managed accounts at all.

Managed accounts offer many benefits that make them suitable to a wide range of investors, regardless of their portfolio’s market value. Making the decision to embrace managed accounts as a whole of practice solution can enhance client engagement, help to provide a tailored service to all clients and deliver a significant profitability boost to practices. fs

12

News

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

Insurers must prove value

01: Neil Macdonald

chief executive The Advisers Association

Annabelle Dickson

Life insurance claims paid out billions of dollars to Australians last year. However, the industry needs to focus on creating awareness for its members as it is faced with negative sentiment, specifically around group insurance, the FSC Life Insurance Summit has heard.

KPMG, on behalf of the Financial Services Council (FSC), revealed there was more than $12 billion in claims paid to more than 100,000 Australians during 2019.

FSC senior policy manager Nick Kirwan said: “Life insurance companies pay out almost $33 million to 279 Australians and their families every single day, 365 days a year. Payments are made to people who have lost a partner, a parent or a loved one, or to help people support themselves and their family when they are too ill to work, after a critical illness or who are not expected to be able to work ever again.”

Speaking at the event, First State Super’s head of insurance David Evans said the industry needs to focus on maintaining cover for members at an affordable cost and building awareness so that members value their cover.

“There is a lot of negative sentiment around life insurance in super. This is undermining member confidence and that is leading members to choose to opt out when it’s not in their best interest,” Evans said.

For death cover there were 13.4 million covers in force, 97% of lodged claims were paid with the highest cause of claim was cancer at 43%.

For total and permanent disability there were 11.1 million covers, 90% of lodged claims were paid and the highest cause of claim was mental health at 25%.

For income protection/disability income there were 5.8 million covers in force, 95% of lodged claims were paid and the highest cause of claim was accidents at 33%. fs

Advisers file class action against AMP Jamie Williamson

A The quote

They’re confident they’re right, we’re confident they’re wrong.

The law will decide.

Hobart adviser cops ban Ally Selby

Former Meritum Financial Group authorised representative David Horton has been banned after ASIC found he had failed to provide financial advice that was appropriate and in the best interests of his clients, and also failed to keep proper records.

The corporate watchdog said Horton was “not competent and was not adequately trained to provide financial services”.

“Horton provided a number of clients with inappropriate advice to double gear their investments,” ASIC said.

“In providing this advice, Mr Horton had no regard to the clients’ relevant personal circumstances, their cash flow position or their ability to cover margin calls.”

Horton moved from Meritum to an administrative role at FF Planning Solutions in 2017, where he provided unlicensed advice to some clients but was not an authorised representative.

Horton is the director of D & M Horton Holdings, previously known as Fort Financial Group. The latter was an authorised representative of Meritum from February 2012 to February 2017.

Horton has the right to appeal ASIC’s decision with the Administrative Appeals Tribunal. fs

class action has been filed against AMP by its own advisers in relation to the institution’s decision to slash Buyer of Last Resort valuations last year.

Almost one year on from the news BOLR valuations would be cut from 4x recurring revenue to a maximum of 2.5x, Corrs Chambers Westgarth filed an open class action against the wealth giant in the Federal Court of Australia on behalf of AMP Financial Planning advisers.

The action was initially expected to be filed late last year, but was delayed due to new regulation relating to how class actions are funded.

It comes as the Australian Small Business and Family Enterprise Ombudsman refers numerous BOLR-related cases for mediation on the back of more than 100 complaints, and calls for a review of AMP’s behaviour by ALP Senator Deborah O’Neill.

It also follows recent comments by AMP chief executive Francesco De Ferrari that the prevalence of class actions in Australia is driving up the cost of public indemnity insurance and of doing business here. AMP is currently facing two other class actions.

Speaking to Financial Standard, The Advisers Association (TAA) chief executive Neil Macdonald 01 said its AMPFP members are relieved the action has been filed.

“A lot of our members are just shattered, essentially. It’s taken a long time, they were hoping that the Small Business Ombudsman would be able to assist and that AMP would be reasonable,” he said.

“For many of them, it’s been both physically and emotionally exhausting.

“Unfortunately, the reality is any legal action takes time and that’s problematic for small business owners.”

He said, best case scenario, the class action will take 12-18 months but TAA members are prepared for the fact it could stretch anywhere up to two years or more.

Unfortunately, for those currently going through the exit process or were given their notice last August or September, what happens to them while the action is ongoing depends on their individual exit process and documents required by AMP, which can change from adviser to adviser.

“As a result they will need to get their own legal advice to understand if they can continue to be part of the class action or not when they sign their release documents,” Macdonald said.

He reinforced that the TAA and its members view the class action as a last resort, saying the preference is always to negotiate fair and reasonable outcomes which, so far as the BOLR changes go, AMP has not been open to.

However, having met with AMP regularly since November last year, Macdonald said the group has recently been open to discussing the “slow and protracted” exit process that advisers are required to go through and prepared to look at ways to improve it to ensure it’s fair and efficient for everyone.

Responding to the action, AMP said it is confident in the actions it took in 2019 and will defend the proceeding accordingly.

“They’re confident they’re right, we’re confident they’re wrong. The law will decide,” Macdonald said.

“You don’t take legal action unless you think you can win.” fs

Super to tip into negative cashflows: Research Elizabeth McArthur

Right Lane predicts that 54 of 90 super funds could be in negative cash flows by the end of the 2020 financial year.

Across the board, Right Lane believes, excluding investment performance, most funds will deliver modest or no growth in assets and all funds in Australia will experience a decline in revenue during the financial year.

“Australia’s superannuation system is confronting its biggest challenge ever as it attempts to manage the impact of ongoing rising costs while cashflows and revenues decline rapidly. These competing forces are not sustainable for short to medium term and the result will be additional pressure on funds to merge or cut costs,” Right Lane associate principal Abhishek Chhikara said.

“Our research has found that increased withdrawals from the ‘early release’ scheme alone could put 14 additional funds

at risk of falling into a negative cashflow position in FY20. That comes on top of the 40 funds who were already cash flow negative going into the COVID-19 crisis.”

He added that the next three years are likely to be critical for funds as they attempt to recover from COVID-19.

“Decreasing funds under management as cash outflows take hold will have a significant impact on revenues, with the disproportionate impact being felt by the smaller funds. That is where the pressure will be hardest felt,” Chhikara said.

Right Lane predicts a significant consolidation of funds in the coming years and has stated that the optimal number of super funds in Australia is around 15, compared to the 90 that currently operate.

Rainmaker research also found that the COVID-19 hit to the superannuation sector is likely to be significant, predicting the long-run size of the super sector will reduce by $3 trillion over the next two decades. fs

News

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

13

Executive appointments 01: Carmel Hourigan

Media Super names chief operating officer The $6 billion fund has appointed Elise van der Heyde as chief operating officer ahead of the proposed merger with Cbus.

Van der Heyde joins from Link Group where she was head of product and strategy, and has extensive experience in transformation and change consulting within the superannuation sector.

She has also previously served as a senior change management consultant at Cbus, prior to which she was head of transformation and change at Kinetic Super where she was responsible for improving productivity, redesigning and improving business processes and services across the organisation.

She also spent over 10 years at VicSuper and was an administration services coordinator at Mercer, administering the Foster’s Group super fund.

Van der Heyde started her career in superannuation at UniSuper as an account executive.

The appointment comes as Cbus and Media Super signed a memorandum of understanding and commenced due diligence late last month.

The two industry funds are aiming for the joint agreement to be in operation in 2021, conditional on due diligence to establish the move will benefit members from both parties.

Media Super chair Gerard Noonan said: “By increasing our size, we can provide access to a greater range of investment opportunities and provide a better deal through cost savings, potentially reducing the investment fees.”

“Cbus has a strong offering with 30% of its investments internalised and ownership of its market-leading developer, Cbus Property.

“We believe that the merger will also continue to build on our leading responsible investment approach and have a much stronger voice with the companies with which we engage.”

Cbus chair Steve Bracks said Cbus understood the importance of maintaining a strong connection with members.

“This affinity with our members has built a strong level of trust in the fund. Media Super has a very similar history and connection with their members. This is an exciting opportunity for both of our funds and I am very pleased to see this proposal progressing,” he said.

AMP Capital revamps leadership team AMP Capital has announced a raft of changes to its leadership team, including several departures, as it looks to drive its next phase of growth.

The fund manager has expanded its leadership team to ensure representation of both clients and investment expertise, it said.

AMP Capital global head of real estate Carmel Hourigan 01 has resigned after five years, taking up a new role as chief executive of Charter Hall Office.

A search for her replacement has commenced and she will remain throughout a sufficient handover period, AMP Capital said.

Director, people, culture and corporate ESG Madeleine Mac Mahon has also resigned, with AMP

BNP Paribas adds to custody team BNP Paribas has announced the appointment of Sam Meares as head of banking services operations Australia and New Zealand.

Reporting to chief operating officer, David Banks, Meares will be responsible for managing the operations teams of the bank’s services to banks and brokers, including custody and settlement.

Banks said Meares brings extensive experience of the custody industry, across both product and operations.

“With his deep knowledge of the local and international markets, Sam will help deliver a high quality service to our clients and helps them adapt to the latest developments in the custody industry,” Banks said.

Meares has over 20 years’ experience within the securities services industry, including operations, product development, and global network management.

Prior to joining BNP Paribas Meares was director of operations at HSBC, where he spent 13 years holding a number of senior roles across Australia, the Philippines and Hong Kong.

While at HSBC Meares also worked as head of operations, head of service delivery and head of sub custody and broker outsourcing operations.

Capital people and culture business partners Lisa Hurley and Lauren Crystal joining the leadership group as co-heads of people and culture.

Meanwhile, head of finance Aideen O’Donovan has been promoted to chief financial officer, as Adrian Williams steps down from his dual role of chief operating officer and acting chief financial officer for personal reasons. Simon Joiner, currently chief operating officer in the North West region will take on the lead operations role and Williams will slip into the role of global transition manager, overseeing the separation of the functions until the end of the year.

Elsewhere, Tim Smith has been appointed head of international distribution. He is currently head of American and European distribution. And Patrick Trears has been named global head of infrastructure debt, succeeding Andrew Jones who is departing the business.

Finally, new head of Americas has been appointed in Simon Ellis, while Matt Evans and Ruben Bhagobati have been appointed co-heads of Europe.

AMP Capital thanked all those departing for their contribution to the business over the years.

Six Park eyes advisers, appoints head Six Park has hired a former AustralianSuper and BT Financial Group business development and partnerships team member, as it looks to tap into adviser groups, platforms and other B2B channels.

Ha-Dieu Ford 02 has joined its management team as the head of partnerships in a newlycreated role.

She has over 20 years of experience in the financial services sector and has worked across AustralianSuper, BT Financial Group, Westpac and Mariner Funds Management.

“More and more adviser groups and wealth management firms are seeking efficient ways to implement digital investment solutions, so the timing of Ms Ford’s appointment is crucial,” Six Park co-founder and co-chief executive Pat Garrett said.

Meanwhile, current director of business development Ted Richards will move into a new position as head of distribution.

“Ted has done an exceptional job developing our business, and his new role reflects our increased focus on a new phase of distribution both direct to clients (B2C) and through adviser groups, platforms and other B2B partnerships,” Six Park co chief executive Nuvan Aranwela said.

Richards said the firm is seeing an increasing number of advisers and wealth managers accelerating their plans for digital offerings. “…the cost of doing business is going up and, at a time when more people than ever could benefit from some kind of financial advice, many advisers and wealth businesses are struggling to serve the available market in a cost-effective way,” he said.

Former CFSGAM chief joins Yarra Capital The former chief executive of Colonial First State Global Asset Management has joined the Yarra Capital Management board as a non-executive director.

02: Ha-Dieu Ford

Yarra Capital announced that Mark Lazberger has joined its board after running CFSGAM for 10 years between 2008 and 2018.

Yarra Capital said Lazberger is one of the country’s most accomplished investment management executives, with more than 35 years’ experience working with large and successful organisations across Australia, Europe and South-East Asia.

Most recently Lazberger was chief executive of CFS and First State Investments (now First Sentier Investors).

He held that role for 10 years until December 2018 prior to its acquisition by Japanese bank MUFG in 2019.

Prior to that Lazberger spent 17 years with State Street in a range of senior positions in Australia, Japan, Hong Kong and the UK. Before his resignation in 2008 to join CFS, Lazberger led State Street Global Advisors’ International business in all markets (ex USA).

At Yarra Capital, Lazberger will work closely with the board and executive management to achieve the firm’s growth objectives.

Corporate super plan appoints chair A corporate superannuation plan has appointed a newchair from Frontier Advisors, as the incumbent retires after 16 years.

Gabriel Szondy will chair the Alcoa of AustraliaRetirement Plan, which manages retirement savings for the employees of Alcoa World Alumina and had $2.2 billion in total assets at June 2019, according to its annual report.

Szondy’s appointment comes as current chair Anthony (Tom) Adams retires after 16 years of service to the plan.

“Tom applied his vast knowledge and experience as a director, committee chairman and chairman of the plan board. His contributions to the plan were in addition to his 35-year career with Alcoa and were characterised by diligence and hard work,” the fund said in a statement.

“Tom will be remembered for his enduring personal commitment to achieving the best retirement outcomes for members. In the words of a fellow director he was “an inspiration to us all.”

Szondy has over 35 years of experience in superannuation and taxation. He was a senior partner with PricewaterhouseCoopers for over a decade.

He currently chairs the board of asset consultant Frontier Advisors, and chairs the Centre for Institutional Investors (CII). He is also a member of CareSuper’s investment committee. In the past, he has held directorships at Commonwealth Superannuation Scheme and Military Super.

He has also chaired Association of Superannuation Funds in Australia’s (ASFA)’s national taxation policy committee.

Alcoa of Australia Limited is owned 60% by Alcoa Corporation and 40% by Alumina Limited.

It owns bauxite mines, alumina refineries, one alumina smelter, port facilities and farmland sites that support about 4250 direct jobs, according to its website. fs

14

News

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

Changes to advice incoming: Bragg

01: Eva Scheerlinck

chief executive Australian Institute of Superannuation Trustees

Eliza Bavin

Senator Andrew Bragg has confirmed legislative changes to advice are around the corner, telling Michael Rice the Corporations Act needs to be updated.

Bragg, in conversation with Rice for a Financial Services Council webinar, said he is an avid user of advice himself and believes it has become inaccessible to many due to its high cost.

“I agree that the cost of advice is too high, but it is a difficult issue. We want to make it accessible and affordable for Australians,” Bragg said.

“It is a heavily regulated area, for various reasons, and I think it needs to be but there must be ways we can improve the system.”

Bragg said the government is looking at a “tech-neutrality” approach, discussing updating the Corporations Act to allow for more digitisation.

“The Corporations Act was written in 2001, so there is no longer a need for a wet signature or physical AGMs,” he said.

“We should be able to do away with those things, especially given the changes we have had to make due to the COVID-19 pandemic.”

Bragg said allowing for more tech-neutrality in the advice space will help lower the cost of advice and said changes of that nature will be made public by the government soon.

Bragg also discussed his thoughts on the superannuation system, saying the government should have a larger role in regulating the industry.

“The idea that we cannot intervene in a government-established superannuation market is ridiculous,” Bragg said.

“We need radical market surgery to get better results for members; we need to stop having an opaque system.” fs

Aussies lacking confidence Research from State Street found Australian savers have been more likely to check their super and change investment strategies during the COVID-19 crisis.

Around 42% of Australian savers have been negatively impacted financially by COVID-19, according to the research.

State Street head of investments Australia Jonathan Shead said that while the short-term financial implications of the pandemic are front of mind for many, State Street were interested to see whether those worries changed long-term savings behaviour.

“Of the Australian savers in our survey, 42% said they have been negatively impacted financially by COVID-19. The crisis has seen an impact on jobs and wages through such areas as reduced pay or reduced hours in a much higher proportion compared with the United States, the United Kingdom and the Netherlands,” Shead said.

“Although not a direct result of COVID-19, we continue to see a lack of retirement confidence in Australia. The crisis has only exacerbated long-standing issues around lack of savings and uncertainty of retirement outcomes.” fs

Domestic violence super reforms stall Ally Selby

epresentatives from industry super and a leR gal body have called on the Federal Government to deliver on a promised scheme that would

The quote

The current process of uncovering non-disclosed super in a family law dispute needs an overhaul.

have stopped domestic violence perpetrators from hiding their super assets from their spouses.

Womens Legal Service Victoria (WLSV), Women in Super (WIS), the Australian Institute of Superannuation Trustees (AIST) and HESTA have called on the ATO, Treasury and ministerial staff to implement the $3.3 million scheme, which was due to begin on July 1 but has not yet been delivered.

The scheme, announced as part of the Women’s Economic Security Statement, aimed to give women a better chance of accessing their share of superannuation assets after a separation.

Two-thirds of women experience problems with superannuation non-disclosure by the other party during a separation. In 21% of these cases, superannuation was the only significant asset held by the couple.

“Deliberate non-disclosure of financial assets is a form of emotional and economic abuse and it can lead to women walking away from their entitlements or to protracted and costly legal battles,” WLSV manager of policy and campaigns Tania Clarke said.

AIST chief executive Eva Scheerlinck01 agreed, arguing the government urgently needed to improve the visibility of super assets in family law disputes.

“The current process of uncovering nondisclosed super in a family law dispute needs an overhaul,” she said.

“In many cases, enquiries need to be made to a multitude of funds leading to many women simply giving up the search.

“Allowing the courts to access ATO data is a simple measure that will make the process far more efficient, fair and cost-effective both for the individuals concerned and the super industry.”

WIS chief executive Sandra Buckley said the implementation of the scheme would create more equitable and just outcomes for those involved in relationship breakdowns.

“The scheme will reduce the complexity, cost and time it takes to have full oversight of superannuation balances and prevent the deliberate stalling of court proceedings and non-disclosure of assets by former partners,” she said.

Industry super fund HESTA partnered with WLSV late last year, with chief executive Debby Blakey arguing the current family law system is unnecessarily complex and expensive. fs

Value to be found in childcare stocks Annabelle Dickson

The government’s ongoing fiscal support to the childcare industry throughout the pandemic has led to an undervaluation of childcare stock prices despite the COVID-19 surge in Victoria, according to latest research from Morningstar.

Morningstar equity strategist Gareth James believes the government support provided during the COVID-19 pandemic sets a precedent for future support of the sector and the capital raisings undertaken by childcare providers earlier in the year provide appropriate insulation from near-term risks.

“We expect the increased regulation, quality, and government funding of the childcare sector in recent years have been significant factors in the government’s decision to support the sector, and deem childcare to be an essential service, during the COVID-19 crisis,” he said.

Childcare centres in Victoria, which make up about 20% of the sector, remain open and will continue to receive the Child Care Subsidy which equates to 50% of revenue even if there is no attendance.

“This is important for two reasons. First, it means centres continue to generate revenue, and second, it maintains the customer relationship between the centre and the child’s family,” James said.

“In addition, childcare centres nationally will receive Transition Payments from the federal government until October 4, which account to around 25% of normal revenue. We expect these

measures will support the childcare sector through the six-week lockdown in Victoria until August 19.

“The federal government’s actions also set a precedent for the future and we expect the childcare sector will now always be considered “too important to fail.” The provision of “free” childcare during the recent crisis also sets a precedent which is likely to support calls for further long-term government support of the childcare sector.”

Childcare landlords are unlikely to be exposed to the volatility as they will continue to generate rental income from the centres irrespective of the occupancy rate of the childcare centre.

Therefore, the operators are at risk of volatile occupancy rates as it is the key determinant of profitability. Landlords will only be impacted if the operator becomes bankrupt.

Despite this, James said bankruptcies are unlikely particularly for large landlords such as Arena REIT and Charter Hall Social Infrastructure Trust for three reasons.

“First, the federal government appears determined to support the sector during the COVID-19 pandemic and particularly to avoid bankruptcies,” he said.

“Second, Arena REIT and Charter Hall Social Infrastructure Trust have a high exposure to Goodstart Early Learning, which is the largest operator of childcare centres in the country, is owned by a consortium of charities, and very conservatively financed and third, because both REITS are exposed to relatively large and high-quality ECEC operators.” fs

Products

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

15

Products 01: Meaghan Victor

State Street to launch ESG ETF State Street Global Advisors is expecting to launch a new low-cost environmental, social and governance (ESG) ETF on the ASX on August 5, with a similar risk-return to the ASX 200.

The SPDR S&P/ASX 200 ESG Fund will go by the ticker E200 and is the first ETF to track the ASX 200 ESG Index, a broad-based, marketcap-weighted index designed to measure the performance of securities meeting sustainability criteria, while maintaining similar overall industry group weights as the ASX 200 Index.

The securities are market cap weighted so they represent 75% of the market capitalisation of each industry group in the index, allowing it to be a sustainable alternative with a similar risk-return profile the broader index.

Head of SPDR ETF Asia Pacific Distribution Meaghan Victor 01 said: “Today, high profile issues such as climate change, diversity, executive remuneration and corporate culture mean more investors are looking to align their investment strategies with their values.”

E200 incorporates exclusionary screening criteria which remove companies involved in tobacco and controversial weapons, as well as companies with low ESG scores and incorporates best in class ESG screening to include companies that are in the top 75% of their industry group.

“Australian investors are drawn to ETFs for their transparency and ability to offer diversification through a basket of securities in one single trade.

They have proven to be a highly popular way to access core asset allocations for Australians - totaling more than $65.6 billion as at 30 June 2020,” she said.

The management costs are 0.13% annually which is the same as its non-ESG fund and makes it one of the lowest cost ESG ETFs on the Australian market. The fund will provide quarterly distributions and rebalance the index annually.

New global funds added to platforms Neuberger Berman has had two of its global strategy funds added to both HUB24 and Netwealth platforms.

The Neuberger Berman Emerging Markets Equity Select Fund and Neuberger Berman Strategic Income Fund were launched in Australia 12 months ago, with the global manager looking to grow its footprint in the Australian intermediary market.

Neuberger Berman said the addition of its managed funds to the platforms reflects its ongoing commitment to further its offering and broaden Australian investors’ access to global investment capabilities.

In addition to HUB24 and Netwealth, Neuberger Berman head of intermediary distribution at Matthew Thompson said it expects its funds to be added to other major investment platforms in the coming months.

Perpetual slashes management fees The $28.4 billion investment manager will slash fees on nine of its fixed income funds and investment offerings, effective from October this year.

Five of the investment manager’s wholesale funds will see fee reductions

by October, including Perpetual’s Wholesale Diversified Income Fund, its Ethical SRI Credit Fund, its Wholesale Dynamic Fixed Income Fund and its Wholesale Active Fixed Interest Fund.

Fees on these funds will be reduced by 11bps, 11bps, 10bps and 5bps respectively.

Perpetual will also reduce management fees on its Perpetual WealthFocus Diversified Income fund by 9bps, as well as its WealthFocus Advantage Diversified Income and Dynamic Fixed Income funds by 9bps and 8bps respectively.

“We’ve seen an increased interest in Neuberger Berman’s funds as the Australian adviser community recognises our global reach, in-depth market capabilities and strong experience across multiple asset classes,” Thompson said.

On the Strategic Income Fund, Thompson said it is suited investors seeking alternative income sources.

“Many investors looking for income have historically relied on term deposits or equity dividends. With cash rates at historic lows and equity dividends challenged, investors are seeking alternative sources of income, and a multi-fixed income solution fulfils this need,” he said.

“With COVID-19 and ongoing trade tensions affecting global equities markets, there are companies in emerging markets now trading at attractive valuations, presenting opportunities as these economies gradually recover.”

Diversity screening option launched Nucleus Wealth has introduced a diversity screening option for investors to strike companies from their portfolio that do not have gender diversity in their management.

The wealth manager introduced the screen off the back of diversity issues that have emerged in the last few months, specifically AMP’s lack of gender diversity on its board and management committee and its decision to appoint an executive with a verbal sexual harassment record to lead AMP Capital.

Head of Nucleus Wealth Damien Klassen 02 said: “Increasingly, we are finding that for some clients a lack of diversity in companies is important and consequently we have added ‘diversity’ as an ethical exclusion.”

Diversity in a company is seen as a marker of good governance as it increases networks, resources, creativity, and, importantly, innovation.

However, Klassen said more diversity can lead to less communication, increase group conflict, lower satisfaction and increased staff turnover.

“From a quantitative perspective, corporate governance is a factor that outperforms, that is, companies with good corporate governance tend to perform better than those with weak corporate governance,” he said.

“For governance scores however, we use them as a negative screen rather than a positive one.

That is, bad governance can make a quality score worse and therefore the company needs to be cheaper before we buy it.

“But we are not choosing to buy a company with 42% gender diversity over the one with 39% on that measure alone. Many of the governance scores are like that - there is a definite ‘bad’ option, but we believe there is little sense trying to rate the difference between two good options.”

Saxo Markets adds options to platform Multi-asset trading and investment platform provider Saxo Markets has added exchange traded options to its platform, giving clients the

02: Damien Klassen

ability to gain exposure to ASX-listed shares without having to purchase the shares directly.

Options allow investors to hedge against possible falls in value ahead of expiry in order to take a profit or limit loss; particularly helpful in a volatile environment to manage risk.

This helps to provide diversification to an investor’s portfolio, helping them manage and enhance their exposures throughout uncertain times.

The addition of ETOs to the platform would provide Saxo clients with greater diversification and risk management during the current unprecedented period, Saxo Markets Australia chief executive Adam Smith said.

“We are incredibly excited to be able to provide our clients with even more choice on the platform now via the addition of ASX-listed single stock options, which complements our international stock options offering,” he said.

“With the current market volatility and general mood of uncertainty with the economy and society, we have not only seen an increased level of client activity as well as trading volumes, but also a demand for more content and choices to help them make more informed decisions.

“For traders and investors who are looking for enhanced risk management and equity portfolio strategies, ETOs serve as a powerful tool for hedging risk and generating income on ASX shares.”

The ETOs, available over stocks ranging from BHP to WOW, will allow clients to build a diversified equity portfolio for a lower initial outlay than would be the case if they purchase shares directly, Saxo said.

Netwealth adds Milliman SmartShield Global consulting and actuarial firm Milliman has formed a partnership with platform provider Netwealth to widen the distribution of its first range of managed accounts that aim to dampen the effects of market volatility.

Milliman’s first managed account offering, SmartShield, launched exclusively on HUB24 back in March.

The series leverages the company’s global risk management expertise to shield clients from market risk and presenting a portfolio with greater strength and stability.

The SmartShield is described as “best-of-breed, low-cost ETFs” which invest across Australian and international equities and fixed income, property and cash.

The offer consists of four portfolios: moderate, balanced, growth and high growth. Each portfolio is designed to meet the needs and risk profiles of investors who are seeking greater investment certainty as they are low cost, flexible and liquid and protect against market declines.

In addition, the built-in risk protection overlay reduces volatility and capital losses during a downturn and can be switched on or off by advisers when required. fs

16

Feature | Small caps

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

ALPHA IN THE STORM

Small caps are more volatile than the biggest listed names. So right now, as the world weathers the COVID-19 pandemic and so much is uncertain, why would anyone want to be invested in this asset class?

The answer is easy: Alpha. Elizabeth McArthur writes.

Small caps | Feature

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

01: James Gerrard

02: Michael Glenane

03: Jim Copland

financial planner FinancialAdvisor.com.au

executive director Fairview

executive director, small caps IFM Investors

T

he COVID-19 pandemic has seen billions wiped off stock exchanges internationally. In Australia, it’s also seen about $30 billion yanked from the superannuation sector in the form of hardship early release.

Businesses in many sectors are reeling and there is, of course, a knock-on effect in the investment world.

Morningstar recently reviewed the ways asset classes have performed across the last two decades (Figure 1) and found that when there’s a crash, small caps tend to nosedive faster than any other asset class.

There are a few reasons why. Morningstar senior manager research analyst Ross Macmillan explains it comes down to the liquidity of small companies - they simply don’t have the buffer zone to withstand market shocks the way bigger businesses and multinational corporations do.

They’re also likely to be more diversified across sectors, especially in Australia where the S&P Small Ordinaries is a much more diverse index than the ASX100 which is stacked with banks and mining companies.

As COVID-19 hit, a lot of companies in small caps indexes were exposed. Sectors like aviation, accommodation, tourism and hospitality saw revenue dry up completely overnight.

But, small caps managers aren’t focussed on the flops. They understand the flip side of that as Macmillian points out: “There’s more risk, but there’s more potential for upside too.”

The high risk, high reward nature of small caps means that at times like this - when the market is volatile - any good small caps manager knows it’s the perfect opportunity to pick the winners and generate alpha.

FinancialAdvisor.com.au financial planner James Gerrard 01 has seen this over his career too.

Clients who can accept more swings in investment values and who require a lower level of dividend are the ones for whom a specific investment in small caps is appropriate, he says.

And for these clients there can be huge benefits.

Adjusting to the new world

We miss looking management in the eye.

Michael Glenane

The move to working from home as social distancing measures were enforced was challenging for a lot of people. For active small caps managers, it really threw a spanner in the works.

Fairview executive director Michael Glenane 02 misses face to face meetings. In a business-asusual environment he’d be on the road for much of the year meeting company management and viewing their premises to inform his investment decisions.

Figure 1. Annual Asset Class Returns - Financial Year

Annual Asset Class Returns - Financial Year 2007

2008

2009

2019

2020

13.9% 15.1% 12.5% 26.8% 27.4% 25.5% 44.4%

2001

2002

2003

2004

2005

2006

7.9%

10.8% 20.3% 16.4% 12.4% 33.1% 20.4% 25.2% 24.6% 14.7% 24.2% 19.4%

2010

2011

2012

2013

2014

2015

2016

2017

2018

5.2%

12.0%

8.7%

12.2% 21.6% 26.4% 23.9% 28.7%

7.3%

10.0% 13.1% 11.7% 11.6% 24.0% 17.4% 20.2% 14.4% 14.1% 15.4% 11.9%

5.2%

9.1%

6.2%

9.8%

19.4% 18.4% 19.9% 26.3%

4.4%

4.8%

7.4%

4.6%

4.8%

17.2%

8.6%

5.8%

-1.7%

3.7%

5.3%

-3.2%

-4.7%

-1.7%

11.5%

6.9%

11.0% 22.8% 13.1%

5.7%

9.3%

7.0%

13.2% 11.5%

4.2%

18.1%

7.8% -13.4% -16.2% 11.2%

5.9%

4.4%

4.6%

11.1%

5.6%

7.0%

1.8%

13.0%

9.6%

0.7%

7.8%

5.7%

6.3% -20.5% -20.1% 7.9%

5.5%

-0.5%

3.2%

7.8%

5.6%

2.2%

0.5%

3.1%

7.2%

-5.7%

4.1%

5.5%

3.4%

5.7% -21.3% -28.6% 5.2%

4.9%

-6.7%

2.8%

6.1%

2.5%

0.6%

0.2%

1.9%

1.9%

-7.7%

-6.0% -23.5% -18.5% 2.3%

0.1%

2.2%

4.0% -37.7% -42.1% 4.0%

2.7% -14.6% -5.3%

2.6%

0.4%

0.4%

-5.6%

1.8%

1.8% -20.7%

2001

2005

2006

2007

2011

2014

2015

2016

2017

2018

2002

Cash

2003

2004

Australian Fixed Interest

2008

Int' Fixed Interest (Hedged)

2009

2010

Australian Listed Property

2012

2013

Australian Equity

Small Caps

2019

2020

International Equity

Cash- RBA Bank accepted Bills 90 Days; Aust. Fixed Interest - Bloomberg Ausbond Composite 0+ Yr TR AUD; Intl. Fixed Interest ) - BBgBarc (H Global Aggregate TR Hdg AUD; -REITs A - S&P/ASX 300 A -REIT TR; Global REITs (H) - FTSE EPRA Nareit Dv REITS TRHdg AUD; Aust. Equity - S&P/ASX 200 TR; Small Caps - S&P/ASX Small Ordinaries TR; Intl. Equity - MSCI pro the viders content guarantee the data or content contained herein to be accurate, complete or timely nor will they have itsany use liability or distribution. for Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd World Ex Australia NR AUD © 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor .com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, withoutourobjectives, reference to y financial situation or needs. Refer to our Financial Services Guide (FSG) for more information at www.morningstar Disclosure Statement before making any decision to invest. Our publications, ratings and products should be viewed tional investment as an addiresource, not as your sole source of information. Past performance does not necessarily indicate a financial roduct’s future performance. p To obtain advice tailored to your situation, contact a professional financial adviser.

Cash -RBA Bank accepted Bills 90 Days; Aust. Fixed Interest -Bloomberg Ausbond Composite 0+ Yr TR AUD; Intl. Fixed Interest (H) -BBgBarc Global Aggregate TR Hdg AUD; A-REITs -S&P/ASX 300 A-REIT TR; Global REITs (H) -FTSE EPRA Nareit DvREITS TR Hdg AUD; Aust. Equity -S&P/ASX 200 TR; Small Caps -S&P/ASX Small Ordinaries TR; Intl. Equity -MSCI World Ex Australia NR AUD © 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability forits use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to yourobjectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser.

Source: Morningstar

17

While the “Zoom boom” has been great for some businesses, Glenane says it’s just not the same as the real deal.

“There’s so much you can tell about a business by seeing their premises,” Glenane says.

“For example, I personally hate to see expensive signed sporting paraphernalia on walls. I can’t help but think that’s something the company’s shareholders, and therefore potentially Fairview unit holders, have paid for with no real benefit to them.”

Video conferencing over services like Zoom certainly saves a lot of time, Glenane acknowledges. Without losing time to travel, meetings are becoming more frequent and management seem to have more time in their calendars.

But, it’s the intangible that is being missed, Glenane says.

“We miss looking management in the eye.

When someone is the size of a postage stamp on your screen it’s harder to tell how they’re reacting and whether they’re comfortable,” he says.

“So because of COVID-19, I think the quantity of meetings has increased but the quality has decreased.”

IFM executive director, small caps Jim Copland 03 agrees. IFM currently manages approximately $500 million in its small caps strategy on behalf of industry super funds and has capacity for that to increase to $1.5 billion.

Like so many of us, Copland and his team have faced all the usual hurdles of working from home.

In a time of incredible volatility and with so many capital raisings to keep an eye on, he sums it up as being: “A clunkier working environment with more to do.”

Covering resources, Copland says there’s nothing better than going to see the asset in person and video chats aren’t quite the same – though, Copland did say he had one Zoom call from the edge of the super pit in Kalgoorlie.

“It’s not quite the same as being there. We are struggling with missing those meetings. Face to face meetings are much better than Zoom meetings,” he says.

“But, the frequency of those meetings has increased. There’s been more availability, less travel time, more accessibility.”

Copland is sure that as soon as things can get back to normal, they will get back to normal. He agrees with Glenane that there are some things you just can’t get through a screen.

“It’s very much a people business still. I do think people will need to reconnect physically at some point. There is body language and unspoken things you can get out of a face to face meeting,” he says.

However, Ausbil portfolio manager Tobias Bucks 04 sees the upside of everything going digital.

COVID-19 has not drastically changed the way he works day to day. As he works on a global fund, he’s used to being on the clock at unusual hours.

18

Feature | Small caps

“We’ve always done a lot of work from home and I actually think everyone working at home gives you more time to focus without any distractions,” he says.

“It’s actually been a real pleasure to do a lot more research.”

Bucks would usually do about 100 face to face meetings with companies internationally a year and conduct about another 50 meetings with companies in Australia. Since the COVID-19 shutdowns in March, he’s already clocked up more than a third of his usual annual total for company meetings.

He has a relentlessly positive view on working from home, but he does admit there are some things the internet can’t replace.

“You can’t go see a factory. You can’t kick tires. You can’t see how people operate,” he says.

“But, it’s worth noting that on most site visits investors go on you are not really seeing how a company operates but it’s offset by being able to do an amount of meetings with customers and suppliers and other companies to get a performance picture.”

Time to find the winners A global pandemic wasn’t on anyone’s wish list for 2020. It has caused an immense amount of suffering the world over.

But, amid this pain there is opportunity for investors. And small caps managers are especially attuned to this.

“We are looking for industries that will benefit from the greatest internal migration we’ve witnessed in history – from the office to home,” Glenane says.

Highlighting some of the companies Fairview holds that stand to benefit from the societal change brought about by COVID-19, Glenane mentions Data#3, Fineos, Megaport, PushPay, Appen, Vocus and Redbubble. He also points to COVID-based class actions as an area of growth and says he thinks Omni Bridgeway could do well.

Aberdeen Standard investment director Natalie Tam 05 is also focussed on finding the winners.

“From a portfolio positioning perspective, we have maintained exposure to companies that we think will be long term beneficiaries of COVID-19, such as Fisher & Paykel Healthcare,” she says.

“We’ve also kept a deliberate amount of exposure to companies that will benefit from restrictions easing, such as IDP Education.”

She also isn’t ruling out a sharper downside to the current situation, or that things might get worse before they get better.

For that reason, Tam and her team are looking to companies with strong balance sheets and defensive earnings - she highlights Spark New Zealand as one of these.

When the COVID-19 shutdowns started to spread from China to the rest of the world

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

04: Tobias Bucks

05: Natalie Tam

06: John Garrett

portfolio manager, global small caps Ausbil

investment director Aberdeen Standard

managing director Moelis

in March, the ASX small caps index fell 42% from its February high and the emerging companies index fell 54%.

“When there’s uncertainty and people don’t know what to do they panic. For a while, the market was actually ignoring COVID-19 as the S&P 500 hit new highs,” Moelis managing director John Garrett 06 says.

“Then all of a sudden the market panicked and some stocks dropped 20% in a day… when markets behave like that, there’s not much that provides protection.”

Garrett sees COVID-19 as accelerating some trends that were already happening - like eCommerce.

He describes the shift in consumer behaviour as an “incredible opportunity” that will be taken advantage of by the right businesses.

Copland agrees.

“We got into stocks like Marley Spoon and Kogan which were probably net beneficiaries through the COVID-19 pandemic,” he says.

IFM has been invested in Marley Spoon since its IPO, but Copland thinks COVID-19 accelerated the company’s business plan – and its share price reflected that. The stock was 26 cents in March and hit $2.20 in June.

However, he also says IFM went defensive “early on” and got close to its maximum strategic cash allocation of 10%.

For Bucks too, COVID-19 has accelerated some of the themes he was already monitoring.

People are spending more time online, getting more comfortable with technology and ecommerce. Further, ESG themes show no sign of becoming less important - in fact he says the ESG issues facing big social media and technology companies have become more important as people show a renewed interest in how their data is used.

“We put a lot of cash to work from March 1923 when the market was oversold,” Bucks says.

“But I think we always focus on unrecognised growth businesses that can create great value for shareholders through initiatives on cost, growing through new products and new geographies and expanding into other segments and improving their ESG.” AustralianSuper, which is responsible for more than $180 billion in retirement savings on behalf of 2.2 million members, moved all of its small caps management in-house about five years ago. Portfolio manager Luke Smith 07 has his eyes on the opportunities right now too.

“The business and economic cycle in Australia and overseas is in a state of flux currently due to COVID-19, the uncertainty provides investment opportunities in quality business that don’t often come along,” Smith says.

The super fund uses the market uncertainty to invest selectively in a select few quality, listed businesses that it previously hadn’t been invested in due to valuation.

“Companies with an asset that is viewed as a relative monopoly or operating in a segment with significant barriers to entry, remain our focus for investment,” Smith says.

An enhanced index

You can’t go see a factory.

You can’t kick tires.You can’t see how people operate.

Tobias Bucks

In 2019, a paper called Small caps: Old questions, new answers delved into why alpha seems so easy to come by in the small caps space.

The paper references research by eVestment which found that 100% of active small cap managers in the eVestment database had outperformed the MSCI Australia Small Cap index over 10 years and the median performer generated average outperformance of 7.4% per year.

“Around the globe we do see quite strong performance of small cap managers relative to the relevant small cap benchmarks, but it is important to recognise that this outperformance varies considerably by region,” bfinance director of public markets Robert Doyle says.

“In Australia, for example, the small cap index is more resource-heavy – more dominated by industrials and materials – than small cap indices in other developed markets, meaning that simply underweighting those sectors during a prolonged period of underperformance has been very beneficial.”

S&P Dow Jones Indices head of global index research and design, APAC Priscilla Luk08 has also observed this phenomenon.

In the SPIVA Australia Scorecard, small caps managers do tend to be more likely to outperform their benchmark compared to large cap peers.

“You can avoid junky stuff in the small caps space if you spend time and invest in research,” Luk says.

“And in small caps, a smaller bundle of investors are doing that research than in large caps.”

Luk says S&P found that smaller small caps funds outperform larger funds. Luk says that’s because when the fund size increases, the selec-

Figure 2. ASX 200 sector rallies

Source: J.P. Morgan estimates. Bloomberg.

Small caps | Feature

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

tion constraints can mean they cannot allocate to the small caps stars because they need to prioritise liquidity.

“Because your fund size is now bigger you cannot allocate so much of your weighting into very small stocks that have a good value that can be unlocked by investors,” she says.

In response, S&P have innovated around this observation to develop what it calls “Select Indexes”.

“We have launched a select version of a lot of our small caps indices called S&P Global Small Caps Select Index,” Luk says.

“Basically, we try and include earnings criteria in the small caps index as an intention to improve their return while maintaining a very low tracking error to the underlying index.”

In Australia the ASX Small Ordinaries Select Index has the earnings screen applied and has outperformed the ASX Small Ordinaries on a 10-year basis.

“We have looked at a few things we learned from the US. We looked at the S&P 600 and found the index outperforms their peers,” Luk explains.

The advantage that active managers have in the small caps space has seen ETFs adapt too.

In Australia, BetaShares’ SMLL ETF is an active strategy.

BetaShares doesn’t offer a passive small caps strategy at all and never has. Chief executive Alex Vynokur09 says this is because the market has inefficiencies.

To keep management costs low, the BetaShares SMLL ETF uses simple screens to exclude companies that aren’t profitable. With these screens alone, it has managed to outperform the index.

“Screening out the bad alone gives you a lot of edge in this space,” Vynokur says.

“Not all indices are designed to be investable by nature. The small caps indices are in that category.”

For this reason, Gerrard is cautious about which clients he puts into small caps ETFs - especially those that track the Australian Small Ordinaries.

“We use small caps ETFs where appropriate to give our clients that extra bit of spice when investing in Australian equities,” he says.

07: Luke Smith

08: Priscilla Luk

09: Alex Vynokur

portfolio manager AustralianSuper

head of global index research and design, APAC S&P Dow Jones Indices

chief executive BetaShares

“We would favour investing in small caps when markets are undervalued on a P/E basis rather than at normal levels given the potential for small caps to outperform in rising markets.”

However, there are some ETFs in the small caps space with a pure passive strategy. Luk says these strategies are prone to more tracking error than large caps ETFs. Luk says this is, again, because of the relatively low liquidity of small caps companies – it takes longer to execute buys and sells.

“It takes them a longer time to execute a trade to replicate a rebalance and, on the other hand, we know there is higher volatility. So when the trade is executed there might be a bigger difference in price. These two things add to the tracking error,” Luk says.

Uncovering opportunities Over Glenane’s career, he’s seen a sharp contraction in the number of sell-side brokers covering small companies - but this too, he says, is where opportunity lies.

“We feel like our job is more important than ever because the number of broking analysts covering small caps has gone down by 30% in the last three years,” he says.

“And, because of increasing compliance burdens, the remaining broking analysts undertake a lot less coverage of individual stocks.

If, for instance, they materially change their earnings forecasts they often must go through an investment committee, for some brokers these committees are based in another country and time zone.”

Having started his career on the sell side in 1999, in the years since Copland has observed the breadth and depth of coverage of small caps decrease.

“There are fewer people and fewer senior people. They do a great job, but they have to do more with less these days. Where that manifests itself is the quality of the coverage and the quality of the numbers from the sell side,” he says.

“This is the opportunity for bottom up investors like us, because we do our own analysis so we get to take advantage of opportunities where there are mispricing.”

For Tam, the lack of coverage creates an advantageous situation that can generate alpha.

Screening out the bad alone gives you a lot of edge in this space.

Alex Vynokur

19

“As an active manager, it is actually to our benefit if small cap broker coverage reduces over time because it increases the information asymmetry in the market and allows us to generate more alpha and uncover more gems before the rest of the market catches on,” she says.

This lack of coverage makes the experience of an investment team all the more important, Smith says.

“We don’t see this as a barrier or hurdle to investing in small caps,” he says.

“We have a team which has substantial prior knowledge in covering small cap companies along with funds management experience.”

By combining these skill sets the team is able to undertake the detailed research necessary in the small caps space and only augment where warranted with sell side research.

And it’s this research that will really allow investors to find the silver lining to the world’s recovery from the COVID-19 pandemic.

Luk says small caps managers are - in some ways - better positioned than their large cap peers to find the COVID-19 winners.

“There is a lot of emerging technology that is not actually captured in the large cap companies; they are in the small caps space. A lot of investors are interested in that,” she says.

As a financial adviser, Gerrard knows it’s important for his clients that even when volatility is high, a level head is maintained.

“Good companies with strong products and service propositions will rise to the service as we recover from COVID-19 and outperform the broader market,” he says.

“The key is to think about trends that will stick post COVID-19 (such as cloud computing and online retailing) and finding the right investment opportunities to capitalise.”

For Glenane one of the strangest things about investing through COVID-19 has been the speculative action that’s gone on. He points to a chart from J.P. Morgan (Figure 2) which shows that almost each week in February and March saw a different sector experience big boosts.

This was driven, he says, not by real investors but by people essentially gambling during isolation.

Meanwhile, real investors are getting on with the research. fs

20

News

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

Queenslanders drain super: ISA

01: Josh Mennen

insurance and financial services law principal Maurice Blackburn

Eliza Bavin

Industry Super Australia (ISA) claims 27% of Queenslanders with a super account have accessed the Early Release of Super (ERS) scheme; the highest proportion in the nation.

ISA said over 145,000 Queenslanders have wiped out their retirement savings all together, with the association pushing for the legislated super rate increase.

“If the government backflips on its legislated promise to lift the super rate to 12%, billions more will be drained from Queenslanders’ retirement – a bill they cannot afford,” ISA said.

ISA estimates Brisbane’s average payment was $7659 with 8693 individuals emptied their balance, while Griffith’s average payment was $7754 with 7469 accounts wiped out and in Moncrieff, an average of $7829 was withdrawn and 6408 people hollowed out their accounts.

“To help fix the hole early release has blasted into the retirement savings of hundreds of thousands of Queenslanders the government must stick to its legislated promise to lift the super rate to 12%,” ISA said.

The super rate is legislated to rise from 9.5% to 12% by 2025, with the first 0.5% increase to occur in the middle of next year.

“But a noisy mob of Coalition backbench MPs want to take workers’ increases away,” ISA said.

“Ditching the increase would have a dire impact on the savings of those who have accessed early release – especially the 145,000 Queenslanders who have wiped out their super and will need to start again.”

ISA chief executive Bernie Dean said the numbers from Queensland are concerning and described the 145,000 wiping out their super as a “tragedy waiting to happen” for the state.

“The only way to repair the retirement savings of Queenslanders is to lift the super rate,” Dean said. fs

Admin appointed to iProsperity Elizabeth McArthur

Real estate investment manager iProsperity has taken a hit from COVID-19, resulting in administrators being appointed to the group.

Cor Cordis has been appointed voluntary administrator to the companies in the iProsperity Group but their appointment does not extend to the underlying investment of funds managed by the various iProsperity entities.

“Our urgent focus is on stabilising the iProsperity Group and commencing a full and thorough investigation into its affairs, including certain court proceedings that remain on foot,” Cor Cordis partner Barry Wight said.

“It remains too early to determine whether a viable restructure plan can be developed, but we look forward to working closely with the iProsperity Group’s stakeholders over the coming weeks.”

In 2019, iProsperity acquired AccorInvest’s portfolio of Australian hotels. It also made a US $477 million expansion into US hotels.

With the hotel industry one of the hardest hit by the COVID-19 travel bans, iProsperity’s investments in the sector also suffered. fs

COVID-19 insurance response slammed Elizabeth McArthur

A The quote

It’s only after JobKeeper ends that we will see the full impact of unemployment as a result of COVID-19.

n announcement from the Financial Services Council (FSC) that life insurers would keep their COVID-19 support measures in place until the end of the year doesn’t go nearly far enough, a lawyer has said.

Currently, those who lose their jobs or move from permanent positions to casual work during the crisis will not have their level of insurance changed. Originally, this moratorium was in place until September but it has now been extended until the end of 2020.

But, Maurice Blackburn insurance and financial services law principal Josh Mennen 01 said the FSC’s extension doesn’t go far enough.

“It’s only after JobKeeper ends that we will see the full impact of unemployment as a result of COVID-19,” Mennen said.

He said it doesn’t make sense for insurers to have this initiative in place,but not extend it beyond the life of the JobKeeper program.

“JobKeeper is softening the claims experience for insurers because more people are still employed as a result of it,” he said.

“We’re critical of the FSC’s extension because we think it should be extended until at

least the end of JobKeeper, but really it should be extended beyond that.”

Consumer advocates, he said, have identified that a lot of people will likely be forced into less secure employment because of COVID-19 – a consequence of this could be that they are “shunted” into a form of limited insurance coverage.

These consumers that find themselves with limited cover in group insurance policies and being assessed against ADLs are likely to be paying the same premiums as their full time, permanently employed peers who are fully covered.

“The type of disability insurance people get depends on their employment status – if they’re a full time, permanent employee they’re likely to be fully covered but casuals are likely to receive limited cover. That limited cover involves assessing claims against the limited Activities of Daily Living (ADL) definition,” Mennen said.

Mennen described insurance policies that use ADL as “abhorrent, substandard products”.

“It only pays out if a claimant is unable to perform the activities of daily living – which are basic things like feeding, washing and clothing themselves,” he said. fs

Top equities managers revealed Ally Selby

Former Ausbil microcap managers Tony Waters and Chris Prunty have come out on top of Mercer’s Australian Shares Investment Manager Performance ranking, after their QVG Capital Long Short fund returned 29.3% for the year.

Hyperion Australian Growth and Collins St Value Fund took out the second and third spots respectively, returning 19% and 13% over the 12 months ending June.

Mercer head of portfolio management in the Pacific Ronan McCabe said active managers with quality and growth biases outperformed their peers.

“Quality characteristics such as companies focusing on the efficient use of capital and strong sales momentum have performed relatively well in this tough period, and has benefited portfolios with an emphasis on these themes,” he said.

“Investment styles often explain a large part of the relative performance of investment managers, and this was the case in this recent period.

“We have seen time and time again that the benefits of active management are most evident in more challenging markets and this continues to be the case.”

Managers with exposures to healthcare and IT also outperformed, McCabe said.

“The COVID-19 pandemic and market reaction has been unprecedented,” he said.

“While many stocks in some sectors have been adversely affected, stocks in healthcare and IT have performed very well as the market has focused on healthcare solutions, and a favourable view towards online and remote working products and services.”

High performing managers with healthcare or IT exposures (or both) include fund’s Bennelong Concentrated Equities (9% return over one year), ECP Asset Management All Cap (7.1% return over one year), Hyperion Australian Growth (19% return over one year) and Platypus Australian Equities (11.9% return over one year).

Value managers tended to underperform over the past 12 months, with fund’s Allan Gray Australian Equity, Dimensional Australian Value, Lazard Select Australian Equity, Martin Currie Australia Real Income and Nikko AM Australian Share lagging the market.

Mercer also found that for the full financial year, the median manager outperformed the S&P/ ASX 300 Index, with the top quartile of managers outperforming by over 3%. fs

Advisers Big Day Out | Events

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

Peter Gardner

Martyn Simpson

Michael Angwin

21

Gavin Peacock

Advisers Big Day Out 2020 With COVID-19 putting the brakes on the annual Advisers Big Day Out regional roadshow, the event is now available online, delivered as a video on demand series for all to enjoy.

War versus pandemic Jumping right in, advisers and investors need to be aware of the impact war and pandemics can have on the natural rate of interest.

This is according to PineBridge Investments senior vice president of multi-asset Mary Nicola 01, who said that in the years following a war, the focus is on rebuilding as wars destroy both capital stock and labour as factories often readjust to support the war effort.

“After a war rebuilding means more investment, stronger growth and the potential of an overheating economy. Eventually, you get higher inflation,” she said.

Nicola explained after a pandemic people save more in fear of something like this happening again. In turn, this results in lower investment demand and the recovery of natural interest rates takes two decades to return to pre-pandemic levels.

“The key takeaway here is that after a pandemic we wind up with lower interest rates because people save more, pay down debt and replenish wealth. The mindset of saving for a rainy day becomes a perpetual concept that can last many decades,” she said.

PineBridge looked at research that highlighted that in the US most people who save are higher income earners while nearly 60% of people who

earn less than $60,000 don’t have $1000 readily available (Figure 1).

“If someone becomes ill with COVID-19 and has unexpected hospital bills, they may be expected to borrow which means they end up with negative savings,” Nicola said.

As higher earners save more, we end up with an even wider income gap which can lead to issues in markets and economies as it puts pressure on governments to remedy the impact of inequality.

“As governments try to address rising inequalities they need to spend more on welfare programs. More spending requires higher debt which translates into lower rates for longer to help finance these mounting debt loads,” she said.

“Not only will central banks keep interest rates low but they will likely need to keep printing more money.”

According to Nicola, fiscal stimulus and major projects like infrastructure spending will be promised by politicians in an effort to win votes but this time it may be hard to stop the debt binge.

The impact of wars and pandemics affects the natural rate of interest; where interest rates should be when the economy is at full employment and keeping inflation constant at the 2% target.

PineBridge Investments vice president, institutional and intermediary sales Michael Bowen02

Diversification alone fails to protect a portfolio from periods of extreme stress.

Wide asset class ranges and a governance structure adds material value as well.

Michael Bowen

said the best way to protect clients from extreme periods of volatility is by having a dynamic asset allocation strategy as it will remain aligned to a client’s objectives from a behaviourial aspect and risk and return.

Dynamic asset allocation funds analyse and research all major and sub asset classes. It’s done across a periodic basis providing investors with insights that can help build conviction and or offer access to markets that may not be widely available via products.

“Diversification alone fails to protect a portfolio from periods of extreme stress. Wide asset class ranges and a governance structure adds material value as well,” he explained.

“We have seen evidence of this in the GFC and most recently in March 2020 that a dedicated dynamic asset allocation program that incorporates wide asset class ranges can act on your client’s behalf to avoid significant portions of a drawdown.”

While not all dynamic solutions are cut from the same cloth, with some styles more growth orientated, others are more income focused and some have no or limited exposure to domestic asset classes, Bowen said identifying the core style of a dynamic asset allocation fund will ensure outcomes are best funded, blended and aligned with the investor’s risk profile.

22

Roundtable Events | Advisers Big Day Out

01: Mary Nicola

02: Michael Bowen

03: John Owen

Multi-asset in a pandemic The future of the economy as a result of the pandemic is anyone’s guess.

MLC Investment Management portfolio specialist John Owen 03 said, adding that one thing is certain and that is that advisers should have robust portfolios that prepare for a range of outcomes as that is vital for clients.

“As if we needed to be reminded over the last few months how quickly and how dramatically market and economic circumstances can change. The future is highly uncertain and what appears to be good today could be a very different economic environment in six months’ time,” he said.

Advisers should be casting the net as widely as possible and imagine that there are many possible futures for clients in the not too distant future.

“In looking at market behavior we see so many times that investors assume what happened in the past is a reliable guide for the future. No one would have known five months ago that a global pandemic would have emerged and had such an effect on markets and the economy,” Owen explained.

He argues that advisers can’t just look at a handful of market and economic circumstances when considering how to position a client’s portfolio but instead think broadly about the circumstances that are approaching or could occur in the future and try and develop and understand portfolio performance in light of these.

Scenarios include financial collapse, global growth, productivity boom, stagflation, speculative bubble, rise in risk premiums, credit expansion, geopolitical risk, oil price shock, deflation and resource boom.

Owen said that all of these scenarios have happened before and doing good analysis to see how a diversified portfolio can perform in any of those environments is a sensible approach to asset allocation.

“Quite frankly if you’re waiting for one of these situations to occur it’s too late to do anything Theme One: A Widening Wealth Gap

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

04: Steven Glass

about it. A good process should anticipate change and understand what change could occur and take portfolio decisions today to better position them when those scenarios actually unfold,” he said.

When it comes to investing in an uncertain world, Owen said the fewer constraints that are applied to asset allocation the better.

“Because if you can diversify your portfolio widely and that includes investing in unconventional asset classes or managers, means you in a portfolio sense have more levers to pull to better manage an uncertain future,” he said.

However, for clients in retirement or nearing retirement, there should be a focus on downside risk management rather than adding risk to gain extra returns.

Owen considers the best way to do this is through active management as it provides the scope to protect clients on the downside but does necessitate a higher fee duty.

Embracing volatility The industry is too fixated on one part of the investment returns paradigm – the return between two points of time, according to Pengana International Equities fund partner and portfolio manager Steven Glass 04.

Instead, he argued that there are three main things to consider: making money, minimising losses and importantly, minimising volatility.

“There have been periods of mass volatility when you feel the market decline, virtually always by definition periods of real stability where everything seems ok, suck people in and makes them want to take risk and that is where the problems occur,” Glass said.

“Volatility shouldn’t be feared. It should be embraced when structuring portfolios.”

In order to have a well-diversified portfolio that can ride through periods of volatility, Glass said it should be divided into three buckets: core, cyclical and opportunistic with each having a different weighting and a different role to play in a portfolio.

Figure 1. A widening wealth gap

Percentage of US Adults With No Emergency Savings Account, By Income

90% 80% 78%

70%

67%

60% 50%

59% 53% 47%

40%

38%

30%

35%

20%

25%

10% 0% Total Source: HSBC, Bloomberg, as of 31 March 2020

<$20k

Source: HSBC, Bloomberg, as of 31 March 2020

PAGE 7

$20k-$39k

$40k-$59k

$60k-$75k

$75k-$99k

$100k-$149k

>$150k

05: Dushko Bajic

The future is highly uncertain and what appears to be good today could be a very different economic environment in six months’ time.

John Owen

06: Bruce Campbell

07: Michael Angwin

The “core” allocation is the most stable companies that generate stable cash flow and have strong long-term growth prospects. These stocks should make up 60% to 80% of a portfolio.

“They may not be the most exciting businesses but they are high quality at the right price, delivering services that the world really needs with excellent ESG and strong balance sheets.

If you hold these companies the valuation is very stable over time so you will have a stable portfolio,” Glass explained.

The stability creates an environment that will be able to ride through periods of volatility. However, if the entire portfolio was invested in core it would still be imbalanced as these stocks can drop.

Glass recommends investors have 0% to 30% of cyclical stocks in a portfolio. Because they are riskier stocks, risk controls are required such as small position sizes and greater return requirements.

“You can make a lot of money from them but you can also lose a lot of money from them so you have to know when to invest in them, which is at the bottom of a cycle and divest in them at the top of a cycle.”

Opportunistic stocks are neither core nor cyclical. They are rapidly growing stocks that are too expensive to fit in the core bucket and make up 0% to 20% of a portfolio.

“When you bring these buckets together it achieves a diversified portfolio that you can hold for the long term and will deliver over the long term but recognises the risks inherent in the different buckets,” he said.

Delivering alpha in all markets First Sentier Investors stressed the importance of keeping an open mind amid periods of market volatility, arguing these insights can often provide the conviction to buy into complex companies and benefit in both bull and bear markets.

First Sentier head of Australian equities growth Dushko Bajic 05 said investment philosophy is paramount in turbulent markets.

“I always preference facts over opinions,” he said.

“What are the facts of the matter as it relates to stocks that are high quality and high growth; stocks that are growing their earnings faster than the market and stocks that have a higher return on invested capital compared to the rest of the market?”

Median high growth, high quality stocks have compounded 15.5% per annum over the last 16 years, while the benchmark S&P/ASX 300 has returned 7.6% per annum.

Meanwhile, median low growth, low quality stocks in comparison, have actually compounded -7.6% per annum in share price over the same time period, Bajic explained.

“This is clearly a factor signal in a portfolio, but it’s a point of evidence which shows that when you are investing in equities markets and taking on an equity risk premium,” he said.

Advisers Big Day Out | Events

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

“What’s really important is that you earn an extra return from taking on that equity risk premium, otherwise you should just go and hold a bond until its maturity, take on the credit risk, and hopefully get your principal back with no price appreciation but some kind of running yield.”

He challenged the “myth” that Australia does not have any high growth, technology stocks.

He pointed to the growth of biotechnology firm CSL as an example, as well as REA Group.

“Back in 1995 technology stocks made up less than 1% of the Australian equities sector. Fast forward to today we have a 16% weighting for this collection of stocks in the ASX 300,” he said.

Some of the contemporary technology stocks are in the software as a service sector (SaaS).

Domestically these include Xero, Wisetech and the global leaders are Salesforce.com, Adobe and Atlassian (Figure 2).

“The profitability for these companies share a remarkably similar trait which is that early on in their life they are barely profitable because of tremendously high product development and customer acquisition costs,” he said.

“Their value can often be hidden early on in their life as their costs and revenues can be very similar and there is not a lot of profitability.

The key point is to find winners in each sector because they often dominate and take 80% market share in their respective sectors.”

Salesforce.com earnings per share in 2004 were just two cents, today they sit around $3.20. Back in 2004 this was not necessarily obvious but you had to forecast the future cash flow, Bajic explained.

He pointed to another sector that is achieving high return on investment – iron ore, in the Pilbara region.

China is the dominant consumer of iron ore, at over 1.1 billion tonnes and almost of this comes into China from Australia and Brazil.

“BHP, Rio Tinto and Fortescue are in the bottom quartile for the cost curve in the iron ore market. They generate very high return on invested capital (ROIC) through all sorts of iron ore prices,” he said.

“These companies generate super returns of about 60% on ROIC when iron ore prices are $100 a tonne and strong returns of around 20-30% on ROIC when the iron ore price is around $55-60 per tonne.”

First Sentier’s research process has helped it identify “barbells” such as the low cost producers in the Pilbara and hidden opportunities in SaaS like Xero where its ultimate profitability is much higher than its early profitability.

“Its fundamental bottom up analysis that shines through periods like this because we lifted the bonnet, took apart all the pieces and put it back together so we know what the real drivers of a business are and how it might perform in different stressed environments,” Bajic said.

COVID-19 and beyond Pyrford International strategic investment advisor Bruce Campbell 06 said we are in a period of balance because the pre-COVID global economic scenario was part of a long-term trend of steadily declining growth.

“We have had gradually slowing population growth and work force growth. Leverage has done its work but the law of diminishing returns has set in. Debt accumulation is now, again, accelerating,” he said.

“Central banks crashed interest rates into the floor and flooded the world economy with their own money bought bonds, municipal bonds and mortgage backed securities.”

Central banks have increased assets in the last few months and none is bigger than the Federal

Figure 2. Ongoing growth opportunities through next tech generation... SaaS

Leading Global and Australian SaaS Stocks Aggregated Revenue versus Implied Costs

$80,000 $70,000 $60,000

Aggregated Revenue Implied Costs

Gain CPD hours by watching the ABDO videos.

Register here to receive your login details:

$USM

$50,000 $40,000 $30,000

www.financialstandard. com.au/abdo_regional

$20,000 $10,000 $0

Source: FactSet, Aggregated Data from Salesforce.com, Veeva Systems, Adobe, Workday, Atlassian, Xero, Wisetech, Autodesk, ServiceNow, Zendesk and Shopify Revenue and cost forecasts are based on FacetSet consensus estimates and are not guaranteed to occur.

Source: FactSet, Aggregated Data from Salesforce.com, Veeva Systems, , Adobe, Workday, Atlassian, Xero, Wisetech, Autodesk, ServiceNow, Zendesk and Shopify.

Revenue and cost forecasts are based on FactSet consensus estimates and are not guaranteed to occur.

PROUDLY SPONSORED BY

11

23

Reserve. Back in October 2019, the Fed balance sheet was under $4 trillion – today it is in excess of $7 trillion.

As a result bond yields have continued to sit on the floor and equity markets have risen, Campbell explained.

“Is it actually assisting real economic activity? No we have shut the world economy down so it is hard to assist demand when supply has been shut down. The money benefits a narrow set of the economy namely financial markets.”

Campbell said the recovery will take longer than many anticipate because the damage to the global economy is massive – and, without precedence.

“We are in a very deep crater. Central to the recovery is a rapid lifting of restrictions and a focus on productive long-term capital investment plans. Sadly, this is not the focus of financial markets or many corporates as, typically, they seek quick financial rewards,” he said.

Campbell’s recovery investment strategy is simple – don’t buy bonds. Rather, equities are the only long-term solution from this start-point, he said.

“Government bonds offer little value. However, volatility will continue and a second down-wave in markets is possible. A very gradual increase in equity weightings is the appropriate strategy,” he added.

“At the beginning of 2020 equity markets were overvalued. COVID-19 has changed the valuation picture but the striking rebound in markets since the trough in March is not based on fundamentals it has been reliant on the liquidity infusions by central banks.”

Campbell said to emphasise geographies with a demographic tailwind and seek value enhancement though carefully targeted foreign currency exposure.

BMO Global Asset Management director, intermediary business Michael Angwin 07 said Pyrford’s Global Absolute Return Strategy has three goals: preserve capital, beat inflation by a significant margin and deliver returns characterised by low absolute volatility.

To achieve these goals Angwin said the team realised they needed to invest in high quality global equities, the highest quality of sovereign bonds and cash and an overarching currency program that helps to identify currencies that are either expensive, fair value or cheap.

“From time to time we also take exposure to assets like property, infrastructure, commodities and also inflation-linked bonds but always through listed vehicles or through direct bond holdings only because liquidity is one of the key concerns in this portfolio,” he said.

As a result, the fund has delivered over 7% per annum since inception in April 1994 and has only had two negative calendar years in the last 25. fs You can catch all the presentations from the year’s second Advisers Big Day Out event series by registering at: www.financialstandard.com.au/abdo_regional.

24

Between the lines

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

Iress wins mandate

01: Nadia Schiavon

Quest Asset Partners has picked Iress’s portfolio system for its high-conviction Australian equities funds.

It will use Iress’s portfolio system which allows fund managers to construct, review, analyse and configure client portfolios while providing administration, performance analysis, tax impacts and risk controls. The offering also integrates with Iress’s order system.

“We wished to raise the bar with a more comprehensive solution than our current processes for managing portfolios. We needed to automate our compliance function and take the risks associated with human error out of the process as much as possible. Iress’ Portfolio System has delivered that for us,” Quest Asset Partners founding director Chris Cahill said.

“The Iress team has been very responsive and patient in helping us get up and running in the best way possible. Despite the restrictions of COVID-19 we were able to fully implement the system, and conduct team training, while operating remotely.

It’s been a great experience.”

Iress reported $65.1 million in net profit after tax and operating revenue of $508.9 million for the twelve months ending December 2019.

Earlier this month, the company announced its group executive for product will step down from his executive role in August but continue in a non-executive position. Aaron Knowles’s new role will be finalised in the coming months, Iress chief executive Andrew Walsh said. fs

head of securities services Australia and New Zealand J.P. Morgan

J.P. Morgan appointed super fund custodian Kanika Sood

The quote

We have a long and successful partnership, and look forward to further developing this relationship over the next five years.

A

$21 billion superannuation fund has renewed J.P. Morgan as its custodian for another five years.

TelstraSuper renewed the contract after a market assessment. TelstraSuper head of investment operations Miles Mallick said J.P. Morgan’s emphasis on delivering a consistent data model and focus on service delivery were driving factors in their reappointment.

“J.P. Morgan has been a trusted partner during our five year relationship, supporting our strategic growth agenda and investment priorities,” TelstraSuper chief financial officer Paul Curtin said.

J.P. Morgan is the biggest custodian in Australia, with about $866 billion in assets under custody for Australian investors as at December 2019, according to statistics published by the Australian Custodial Services Association (ACSA).

It has a 22% share of the total market at most

Rainmaker Mandate Top 20

recent count, after toppling NAB Asset Servicing from the #1 spot in first half of 2016. NAB now has 15% slice of the market followed by fast growing Northern Trust (13%).

“We are delighted that TelstraSuper has reappointed J.P. Morgan as its custodian. We have a long and successful partnership, and look forward to further developing this relationship over the next five years,” said said J.P. Morgan head of securities services Australia and New Zealand Nadia Schiavon01.

TelstraSuper renewal is J.P. Morgan’s second custody win this year, after it was appointed by ASX-listed platform and superannuation provider Xplore Wealth.

Last year, it was renewed as the custodian for Local Government Super, extended its partnership with Neuberger Berman but lost the custodian contract for Funds SA to Northern Trust after a tender process. fs

Note: Largest international equities mandate appointments in 2019-20

Appointed by

Asset consultant

Investment manager

Mandate type

Australian Meat Industry Superannuation Trust

Cambridge Associates Limited

GQG Partners (Australia) Pty Ltd

International Equities

218

AustralianSuper

Frontier Advisors Pty Ltd; JANA Investment Advisers Pty Limited

Dimensional Fund Advisors

International Equities

1,114

AustralianSuper

Frontier Advisors Pty Ltd; JANA Investment Advisers Pty Limited

UBS Asset Management (Australia) Ltd

International Equities

254

Construction & Building Unions Superannuation

Frontier Advisors Pty Ltd

Realindex Investments Pty Limited

Emerging Markets Equities

313

Construction & Building Unions Superannuation

Frontier Advisors Pty Ltd

GQG Partners (Australia) Pty Ltd

Emerging Markets Equities

312

Construction & Building Unions Superannuation

Frontier Advisors Pty Ltd

Self

Emerging Markets Equities

272

Energy Super

JANA Investment Advisers Pty Limited

Robeco Hong Kong Limited

Enhanced Indexed Global Equities

544

First State Superannuation Scheme

Willis Towers Watson

Sanders Capital, LLC

International Equities

2,767

First State Superannuation Scheme

Willis Towers Watson

HSBC Global Asset Management Limited

International Equities

522

First State Superannuation Scheme

Willis Towers Watson

Sustainable Growth Advisers, LP

International Equities

293

Hostplus Superannuation Fund

JANA Investment Advisers Pty Limited

Other

International Equities

165

LGIAsuper

JANA Investment Advisers Pty Limited

GQG Partners (Australia) Pty Ltd

International Equities

723

LGIAsuper

JANA Investment Advisers Pty Limited

River and Mercantile Asset Management LLP

International Equities

388

State Super (NSW)

Frontier Advisors Pty Ltd

BlackRock Investment Management (Australia) Limited

Emerging Markets Equities

414

State Super (NSW)

Frontier Advisors Pty Ltd

Schroder Investment Management Australia Limited

Emerging Markets Equities

401

State Super (NSW)

Frontier Advisors Pty Ltd

AQR Capital Management, LLC

International Equities

387

State Super (NSW)

Frontier Advisors Pty Ltd

Investec Australia Limited

Emerging Markets Equities

345

State Super (NSW)

Frontier Advisors Pty Ltd

State Street Global Advisors Australia Limited

Ethical/SRI International Equities

316

State Super (NSW)

Frontier Advisors Pty Ltd

Northcape Capital Pty Ltd

Emerging Markets Equities

174

WA Local Government Superannuation Plan

Willis Towers Watson

River and Mercantile Asset Management LLP

International Equities

179

Amount ($m)

Source: Rainmaker Information

International

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

BlackRock on stewardship BlackRock has offered its first major update on investment stewardship since it said it would dump thermal coal from active portfolios.

The investment giant’s voting efforts increased in 2020, with the number of company engagements increasing by 47% in 2019-2020 compared to 2018-2019.

Looking at environmental engagement, BlackRock engaged 289% more frequently with the number of engagements on environmental issues increasing from 316 to 1230.

There was a huge increase in social engagements too, up 146% from 353 in 2018-2019 to 870 in 2019-2020.

Governance remains the ESG issue that BlackRock engages on the most though. In 20182019 BlackRock engaged on governance issues 1931 times and in 2019-2020 that increased to 2835 times (up 47%).

“Our approach employs a natural escalation process. If we are not satisfied with a company’s disclosures, we typically put it ‘on watch’ and give the company 12 to 18 months to meet our expectations,” BlackRock said.

“During the 2020 proxy season, we took voting action against 53 companies for their failure to make sufficient progress regarding climate risk disclosure or management.”

That action meant BlackRock voted against the re-election of one or more members of a company’s board, voted against the discharge of directors or the entire board, or voted for one or more climate-related shareholder proposals.

BlackRock provided some examples of the companies it engaged with as part of the report. It voted against directors of ExxonMobil due to significant concerns about climate risk management. fs

Billionaires targeted in scam Eliza Bavin

Billionaires such as Elon Musk, Jeff Bezos and Bill Gates had their Twitter accounts hacked to promote a bitcoin scam.

The official Twitter accounts of many notable people, including former President Barrack Obama, were hacked to promote a bitcoin scam to their millions of followers.

The tweets were all incredibly similar and read: “I am giving back to the community. All Bitcoin sent to the address below will be sent back doubled! If you send $1000, I will send you back $2000. Only doing this for 30 minutes. Enjoy!”

The UK’s National Cyber Security Centre said it reached out to Twitter in the midst of the attack, which it said was targeted at the firm and not the individual accounts.

“While this appears to be an attack on the company rather than individual users, we would urge people to treat requests for money or sensitive information on social media with extreme caution,” the NCSC said.

“Twitter have said that they detected what they believe to be a coordinated social engineering attack by people who successfully targeted some of their employees with access to internal systems and tools.” fs

25

01: Lesley Duncan

deputy head of UK equities Aberdeen Standard Investments

Underpayment scandal costs fast fashion giant Jamie Williamson

A The quote

We view their response as inadequate in scope, timeliness and gravity.

n investigation by the Sunday Times found workers in a UK factory making clothes for online retail giant Boohoo are being paid as little as $6.30 an hour, leading a number of fund managers to divest their holdings in the group.

The newspaper, which had a reporter go undercover as a worker, also claimed to find the factory was operating during a COVID-19 lockdown without additional hygiene or social distancing measures in place.

The reporter was told he would be paid just $6.30 an hour, despite the minimum wage in Britain for those over 25 years of age being $15.71.

Boohoo, which also owns other brands including PrettyLittleThing, Nasty Gal and Karen Millen, distanced itself from the factory, saying it is not a declared supplier and is taking action to find out why the factory had its garments.

“As one of a number of retailers that source products in the area, Boohoo wants to reiterate that it does not and will not condone any incidence of mistreatment of employees and of non-compliance with our strict supplier code of conduct,” the group said.

Aberdeen Standard Investments divested the majority of its holdings in the company, which it held in a number of its ESG funds. Prior to the scandal, the fund manager was Boohoo’s sixth largest shareholder.

“Having spoken to Boohoo’s management team a number of times this week in light of recent concerning allegations, we view their response as inadequate in scope, timeliness and gravity,” ASI deputy head of UK equities Lesley Duncan01 said.

“We strive to use our influence as significant investors to achieve progress. In instances where our standards have not been met, divestment is both appropriate as responsible stewards of our clients’ capital and aligned to our goal of investing for better outcomes.”

Boohoo’s share price dove on the back of the investigation, which was reported on July 5 falling from £387.50 to £255 as at July 24. At its lowest, Boohoo shares were trading at £210.

The company had an equally swift rise too however, with its share price having climbed high and fast throughout the height of COVID-19, peaking at £415 on June 17.

Boohoo said it was undertaking its own investigation into the matter. fs

US considers banning ESG from pensions Elizabeth McArthur

The US Department of Labor (DOL) is considering imposing strict rules on how pension funds invest, which could see the scope for ethical and responsible investing limited.

The DOL has proposed an amendment to the Employee Retirement Income Security Act 1974 (ERISA) “to confirm that ERISA requires plan fiduciaries to select investments and investment courses of action based solely on financial considerations relevant to the risk adjusted economic value of a particular investment or investment course of action.”

The proposal appears to be similar to the sole purpose test which is in place for Australian superannuation funds.

The sole purpose test requires each trustee of a super fund to ensure the fund is maintained solely for the provision of benefits for each member for their retirement.

However, in the explanatory background to the proposal the US DOL addresses environmental, social and governance (ESG) investing of pension fund assets specifically.

It referred back to findings the DOL made in 2018 on the relationship between ESG considerations and investment considerations.

Fiduciaries “must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision,” the DOL said.

“It does not ineluctably follow from the fact that an investment promotes ESG factors, or that it arguably promotes

positive general market trends or industry growth, that the investment is a prudent choice for retirement or other investors.”

Now, the DOL proposes that under ERISA fiduciaries must always put the economic interests of the pension plan first in providing retirement benefits.

“As ESG investing has increased, it has engendered important and substantial questions and inconsistencies, with numerous observers identifying a lack of precision and rigor in the ESG investment marketplace,” the DOL said.

“There is no consensus about what constitutes a genuine ESG investment, and ESG rating systems are often vague and inconsistent, despite featuring prominently in marketing efforts.”

Further, the DOL expressed fears that ESG investment managers may charge higher fees and that this could not be in the best interests of retirement plan members. It’s also worried that pension fund fiduciaries are being marketed ESG funds by managers on the basis of goals unrelated to financial performance.

“This proposed regulation is designed in part to make clear that ERISA plan fiduciaries may not invest in ESG vehicles when they understand an underlying investment strategy of the vehicle is to subordinate return or increase risk for the purpose of nonpecuniary objectives,” the DOL said.

The department is requesting comment from the public on the proposed change. fs

26

Managed funds

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15 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

AUSTRALIAN EQUITIES Australian Unity Platypus Aust Equities

$m

% p.a. Rank

% p.a. Rank

% p.a. Rank

COMBINED PROPERTY 137

11.0

3

13.9

1

11.5

2

Australian Unity Diversified Property Fund

284

11.4

3

14.5

1

16.4

1

Bennelong Australian Equities Fund

562

9.4

5

12.2

2

10.7

3

Investa Commercial Property Fund

6,010

12.0

2

14.3

2

14.1

2

Bennelong Concentrated Aust Equities

863

12.1

2

11.6

3

14.0

1

Lend Lease Aust Prime Property Commercial

5,188

9.6

4

13.0

3

13.6

3

Greencape Broadcap Fund

686

5.3

6

11.1

4

9.4

7

Lend Lease Aust Prime Property Industrial

1,094

13.1

1

12.6

4

11.9

4

1,203

15.2

1

11.0

5

10.0

6

DEXUS Property Fund

10,790

1.9

5

9.0

5

11.5

5

152

-1.2

18

10.0

6

7.8

12

ISPT Core Fund

15,813

1.0

6

7.4

6

9.9

6

Resolution Capital Global Prop. Sec. Fund Series II

343

-3.8

9

6.1

7

6.4

13

Australian Unity Property Income Fund

256

-3.7

8

6.1

8

8.9

7

Cromwell Direct Property Fund

347

0.2

7

5.9

9

7.6

8

Quay Global Real Estate Fund

164

-9.0

11

5.7

10

6.9

10

Hyperion Australian Growth Companies Fund Alphinity Sustainable Share Fund Greencape High Conviction Fund

380

2.8

9

9.8

7

7.9

10

AB Managed Volatility Equities Fund

964

2.5

10

8.5

8

8.8

8

Pendal Focus Australian Share Fund

683

-1.8

23

8.1

9

7.1

17

53

3.8

7

7.9

Chester High Conviction Fund Sector average

10

436

-5.8

4.1

4.9

Sector average

1,271

-12.4

1.9

4.6

S&P ASX 200 Accum Index

-6.7

4.3

4.3

S&P ASX200 A-REIT Index

-16.8

0.8

3.8

INTERNATIONAL EQUITIES BetaShares Global Sustainability Leaders ETF Loftus Peak Global Disruption Fund T. Rowe Price Global Equity Fund Franklin Global Growth Fund Evans and Partners International Fund Nikko AM Global Share Fund

FIXED INTEREST 665

33.0

1

19.8

1

Macquarie True Index Sovereign Bond Fund

261

5.2

28

5.8

1

4.8

9

95

32.5

2

18.6

2

Pendal Government Bond Fund

933

6.0

13

5.7

2

4.9

8

3,608

24.2

5

18.4

3

14.7

2

Macquarie Australian Fixed Interest Fund

209

5.7

16

5.7

3

5.1

2

296

30.7

3

17.8

4

15.3

1

Nikko AM Australian Bond Fund

184

5.3

26

5.6

4

4.9

7

60

18.0

13

16.1

5

14.6

3

Pendal Fixed Interest Fund

1,028

6.9

8

5.5

5

4.5

36

Macquarie Enhanced Australian Fixed Interest

1,597

5.3

23

5.5

6

4.8

14

700

5.3

25

5.4

7

4.7

17

91

15.4

22

16.0

6

12.7

6

Apostle Dundas Global Equity Fund

980

22.4

7

15.9

7

11.4

13

Zurich Global Growth Share Fund

203

16.6

17

15.4

8

12.1

8

AMP Capital Wholesale Australian Bond Fund

971

5.0

32

5.4

8

4.8

13

Zurich Unhedged Global Growth Share Fund

371

16.3

19

15.3

9

12.1

9

Schroder Fixed Income Fund

2,354

5.0

31

5.4

9

4.6

20

Intermede Global Equities Fund

129

21.9

8

15.1

10

12.8

4

QIC Australian Fixed Interest Fund

1,595

5.3

24

5.4

10

4.8

15

Sector average

746

10.6

9.4

8.6

MSCI AC World ex AU Index

11.0

10.0

9.0

Note: The performance figures for diversified funds are net of fees, performance figures for sector specific funds are adjusted for fees.

Vanguard Australian Gov Bond Index Fund

Sector average

929

3.6

3.8

3.9

Bloomberg Barclays Australia Breakeven

5.6

6.0

5.1

Source: Rainmaker Information

NEWS

Hearts and Minds but no ratings Ally Selby

Listed impact investment vehicle Hearts and Minds Investments has returned more than 26% on a 12-month basis, while also donating $4.1 million to medical research.

Yet, the fund has faced major roadblocks when it comes to receiving a rating.

The investment company offers shareholders the opportunity to benefit from the highest conviction ideas from prominent fund managers on a pro bono basis, including Caledonia Investments, Cooper Investors, Magellan Financial Group, Paradice Investment Management, Regal Funds Management and TDM Growth Partners.

It seems to be working; since its listing on the ASX in November 2018 the fund has returned 51.3%. Over the past six months alone it has returned 15.9%. In comparison, the MSCI World Net Total Return Index has returned 18.2% and -3.8% over the same periods.

Hearts and Minds also provides significant support to some of the country’s leading medical research organisations, with 1.5% of its net tangible assets donated to beneficiaries such as the Victor Chang Cardiac Research Institute, the Black Dog Institute, the Charlie Teo Foundation and Westmead Children’s Hospital.

Yet, the investment company has struggled to get a rating, resulting in little awareness of the investment vehicle since its IPO launch.

Perhaps, this can be chalked up to advisers only being

able to recommend financial products that are on their licensee’s approved product list. These products often require a rating from an agency such as Zenith, Morningstar or Lonsec, as well as a three year track record.

Independent research house Zenith, in particular, cannot rate the listed investment company, as its founder is also Hearts and Minds’ chair; a clear conflict of interest.

“I’ve got a little bit of a bugbear that to get on approved list for financial advisers you’ve got to have particular reviews done of you,” Hearts and Minds Investments chief investment officer Rory Lucas told Financial Standard.

“When we spoke to some of these ratings agencies, we said ‘Look, we don’t have a three-year track record, but Caledonia do, Magellan do, Paradice do, and we’ve just got their best ideas’ – but they struggled to look at it like that.

“Perhaps it’s just a square peg in a round hole and we just have to wait.”

Ratings agencies are not charities; they will either charge investment funds fees in return for a rating (often upwards of $50,000), charge licensing fees to use their logo in marketing collateral, or charge fees for funds to be featured in their industry database.

Hearts and Minds do not want to fork out for a rating, Lucas said, as he believes this money would be better spent by the company’s beneficiaries.

Another roadblock faced by the fund is that its portfolio construction does not meet the typical investment “mould” for research houses to rate.

While 65% of the portfolio features the best ideas from prominent fund managers, the remaining 35% of the portfolio is made up of Australian and global stock picks from “conference” managers.

Every year, this portion of the portfolio is replaced by eligible long recommendations from the next conference.

“Because of this, it’s not a replicable portfolio; so a lot of the research houses struggle to see that it has a longterm track record because it’s not a fund that has been around for long enough and its fundamental investment construction sits outside their usual cookie cutter framework,” Lucas said.

“It doesn’t fit into the current mould; it’s sort of an outlier when it comes to how they review funds, so that has been a challenge for us.”

Even so, the average stock recommended during the conference will rally 50% within 12 months, he said.

“But it is difficult to communicate that to ratings houses,” Lucas said.

“We are now putting together a list of financial planners just to go and talk to them about it; just to say, this is what we do, this is how it works, this is how the portfolio is constructed, this is how it has performed so far.”

Otherwise it’s just a waiting game, he said.

Hearts and Minds does have one rating from Independent Investment Research. It was assigned a recommended plus rating both pre-IPO in 2018 as well as the subsequent year. fs

Super funds

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15 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*

MYSUPER / DEFAULT INVESTMENT OPTIONS

27

* SelectingSuper [SS] quality assessment

1 year % p.a. Rank

3 years

5 years

SS

% p.a. Rank % p.a. Rank Quality*

PROPERTY INVESTMENT OPTIONS

Australian Ethical Super Employer - Balanced (accumulation)

3.5

2

6.3

1

5.9

6

AAA

Prime Super (Prime Division) - Property

-1.3

6

12.0

1

16.9

1

AAA

UniSuper - Balanced

3.4

5

6.3

2

6.2

3

AAA

Telstra Super Corporate Plus - Property

2.4

1

7.5

2

9.4

2

AAA

AustralianSuper - Balanced

1.9

14

6.0

3

6.4

1

AAA

Rest Super - Property

1.3

2

7.2

3

8.4

4

AAA

Virgin Money SED - LifeStage Tracker 1974-1978

1.6

16

5.9

4

AAA

CareSuper - Direct Property

0.8

3

7.1

4

9.3

3

AAA

TASPLAN - OnTrack Build

3.4

4

5.9

5

AAA

Acumen - Property

0.7

4

6.6

5

7.9

5

AAA

Media Super - Balanced

1.5

17

5.8

6

5.9

8

AAA

TASPLAN - Property

0.0

5

6.1

6

AAA

State Super (NSW) SASS - Growth

2.8

6

5.7

7

5.8

11

-

Intrust Core Super - Property

-9.1

19

4.8

7

6.9

6

AAA

First State Super Employer - Growth

2.1

12

5.6

8

5.6

19

AAA

Catholic Super - Property

-3.8

11

4.7

8

6.8

7

AAA

Vision Super Saver - Balanced Growth

2.0

13

5.5

9

5.6

18

AAA

Australian Catholic Super Employer - Property

-1.8

9

4.7

9

5.5

13

AAA

Mercy Super - MySuper Balanced

1.3

22

5.5

10

5.8

9

AAA

Sunsuper Super Savings - Property

-2.6

10

4.5

10

4.9

15

AAA

SelectingSuper Property Index

-11.3

SelectingSuper MySuper/Default Option Index

-2.5

3.9

4.6

AUSTRALIAN EQUITIES INVESTMENT OPTIONS

1.1

3.6

FIXED INTEREST INVESTMENT OPTIONS

Media Super - Australian Small Companies

2.6

1

8.1

1

6.2

1

AAA

Australian Catholic Super Employer - Bonds

5.6

2

5.2

1

4.4

2

AAA

UniSuper - Australian Shares

-1.5

4

7.4

2

5.3

8

AAA

GESB West State Super - Mix Your Plan Fixed Interest

4.9

4

4.7

2

4.0

3

-

1.7

2

6.0

3

5.6

4

AAA

UniSuper - Australian Bond

4.4

11

4.4

3

3.8

5

AAA

StatewideSuper - Australian Shares

-4.6

22

5.5

4

6.0

2

AAA

Mine Super - Bonds

4.3

12

4.4

4

3.6

8

AAA

Intrust Core Super - Australian Shares

-1.6

5

5.5

5

5.9

3

AAA

AMG Corporate Super - AMG Australian Fixed Interest

4.3

13

4.3

5

3.4

12

AAA

Integra Super CD - OnePath Emerging Companies

0.7

3

5.4

6

4.0

44

-

First State Super Employer - Australian Fixed Interest

4.1

16

4.2

6

3.7

6

AAA

Vision Super Saver - Diversified Bonds

4.7

6

4.1

7

3.6

7

AAA

Sunsuper Super Savings - Diversified Bonds Index

4.5

7

3.8

8

3.8

4

AAA

HOSTPLUS - Diversified Fixed Interest

3.5

20

3.8

9

4.6

1

AAA

Intrust Core Super - Bonds (Fixed Interest)

3.2

28

3.6

10

3.5

10

AAA

SelectingSuper Australian Fixed Interest Index

2.1

ESSSuper Beneficiary Account - Shares Only

Prime Super (Prime Division) - Australian Shares

-2.5

6

5.4

7

5.4

6

AAA

AMP SignatureSuper - RIL Australian Share

-3.2

10

5.3

8

4.1

37

-

Media Super - Australian Shares

-4.8

26

5.2

9

4.8

17

AAA

AustralianSuper - Australian Shares

-5.1

34

5.1

10

5.1

11

SelectingSuper Australian Equities Index

-8.6

1.8

3.2

INTERNATIONAL EQUITIES INVESTMENT OPTIONS

3.2

3.7

AUSTRALIAN CASH INVESTMENT OPTIONS

AustralianSuper - International Shares

15.7

1

10.9

1

9.3

2

AAA

Integra Super CD - OnePath Global Shares

12.2

2

10.3

2

10.1

1

-

GESB West State Super - Cash

1.2

5

1.7

1

1.9

1

-

Intrust Core Super - Cash

1.3

1

1.7

2

1.8

2

AAA

First State Super Employer - International Equities

10.8

6

9.9

3

8.1

6

AAA

NGS Super - Cash & Term Deposits

1.3

2

1.6

3

1.8

4

AAA

Media Super - Passive International Shares

10.6

7

9.7

4

8.0

9

AAA

AMG Corporate Super - AMG Cash

1.3

3

1.6

4

1.8

3

AAA

Virgin Money SED - Indexed Overseas Shares

11.1

5

9.6

5

AAA

Virgin Money SED - Cash Option

1.1

10

1.6

5

AAA

WA Super - Global Shares

9.9

16

9.4

6

3

AAA

Sunsuper Super Savings - Cash

1.1

7

1.5

6

1.6

8

AAA

FES Super - International Share Option

8.5

25

9.2

7

AAA

Energy Super - Cash Enhanced

1.0

14

1.5

7

1.7

6

AAA

UniSuper - International Shares

12.0

4

9.0

8

8.5

4

AAA

State Super (NSW) SASS - Cash

0.9

20

1.5

8

1.6

10

-

LUCRF Super - International Shares

12.2

3

9.0

9

6.7

25

AAA

Media Super - Cash

1.1

9

1.5

9

1.6

16

AAA

Mercer CS - Mercer Passive International Shares

10.5

8

8.9

10

7.8

10

AAA

First State Super Employer - Cash

1.0

15

1.5

10

1.6

17

AAA

SelectingSuper International Equities Index

-2.2

5.7

8.8

5.7

SelectingSuper Cash Index

Notes: Investment options are sorted by their three year net performance results. All performance figures are net of maximum 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

0.8

1.2

1.4 Source: SelectingSuper www.selectingsuper.com.au

28

Economics

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

Victoria the pariah state Ben Ong

P

rime Minister Scott Morrison’s recent declaration referring to the bounce back in the Australian labour market wouldn’t have rung hollow had it not been for the second wave in Victoria – the country’s second largest state that accounts for around a quarter of national output.

You too would be exclaiming the hallelujah when you see the Australian Bureau of Statistics’ (ABS) ‘Labour Force’ report, the details of which all point to a “fight back”.

The economy added 210,000 jobs in June – the biggest monthly increase on record and nearly making up for the 227,700 lost in the previous month. Sure, the unemployment rate jumped higher to a 22-year high of 7.4% in June from 7.1% in May, but this is due to the sharp increase in the participation rate to 64.0 in June from 62.7% in the previous month – itself a positive indicator, as jobseekers re-enter the labour force amid optimism in finding employment.

And why not? Total hours worked have increased – “Total hours worked increased by over 64 million hours between May and June, which was around a third (35%) of the 186 million decrease between March and May.” (ABS) Even the underemployment rate has improved big-time – down to 11.7% in June from 13.1% in May. The economy is fighting back, supported by the easing of restrictions and the reopening of businesses.

But along comes what comedian Ross Noble calls ‘the Spice Girls paradigm’ – “Everyone’s trying really hard, but Victoria’s ruining it!”

And like Posh Spice, Victoria – the state not the Beckham – has thrown a big question mark over the depth and length of the country’s economic contraction and the timing of its return to expansion.

Victoria’s still “The Garden State” – easier to cultivate the coronavirus; where COVID-19 is “On the Move”; it’s “The Place to Be” … infected.

But jokes aside, the resurgence of the coronavirus in Victoria is bad news for the overall Australian economy. Victoria is now a pariah state, with the country’s five other states and two territories closing their borders to Victorians. Not only that, Geelong and Ballarat – both in Victoria – had closed their borders to Melburnians.

The multiplying number of cases of infection has already forced the Andrews administration to reimpose Stage 3 lockdown restrictions, with the government not ruling out further tightening and going into Stage 4 restrictions.

For sure and for certain, the greatest impact would be felt in Victoria. But unlike in Vegas, what happens in Victoria will not remain in Victoria.

For one, it’ll have a negative impact on intrastate trade and commerce. For two, the Victorian outbreak has already jumped the border across to New South Wales – prompting NSW premier Gladys Berejiklian to issue restrictions on pubs and clubs. It has also prompted the state of Queensland to shut its borders to 77 Sydney suburbs and South Australia to defer its July 20 planned border opening with NSW and the ACT. That’s more intra-state trade activity lessened.

While Berejiklian has ruled out following Victoria’s lead and send Sydney back into lockdown, she’ll be left with no other option if infections get out of control in her state.

This begs the question, would Australia be experiencing a second wave – and therefore, a reimposition of lockdown restrictions – had it not rushed to reopen and followed its original prescription for a six-month lockdown?

“Stop right now, thank you very much.” 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)

210.83

-264.14

-607.40

-3.14

Job Advertisements (%m/m, sa)

41.96

-0.34

-53.69

-9.73

19.30 1.65

Unemployment Rate (sa)

7.45

7.08

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

-7.48

-24.14

-33.84

-21.99

0.22

NAB Business Confidence Index

1.47

-20.33

-45.76

-65.36

-2.23

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

US activity & employment The Institute for Supply Management (ISM) surveys show the manufacturing and services sectors bouncing back into expansion territory (above 50).

The ISM manufacturing index rose to 52.6 in June – the second straight month of improvement – after dropping to an 11-year low reading of 41.5 in April. The ISM non-manufacturing index’s rebound was stronger – up to 57.1 in June from 45.4 in May and April’s 11-year low reading of 41.8. The labour market has also improved with the economy adding 2.7 million jobs in May and 4.8 million in June after shedding 1.3 million jobs in March and 20.5 million in April. The unemployment rate has declined to 11.1% in June from 13.3% in May and 14.7% in April – a record high.

China rebound The unfreezing of the economy has lifted

indicators of economic activity in the country led by the 3.2% expansion in GDP in the year to the June quarter following the previous quarter’s 6.8% contraction. Although still in contraction, the annual rate of decline in retail sales had steadily eased to -1.8% in June from the sharp 20.5% (yoy) drop in February. Fixed asset investment growth followed the same path of progressive improvement – down by just 3.1% in the year to June from February’s -24.5% dive. The same goes for industrial production, but with much more positive results – up by 4.8% in the year to June, an acceleration from the previous month’s 4.4% annual growth rate and February’s 13.5% decline.

Australia employment The economy added 210,000 jobs in June – the biggest monthly increase on record and nearly making up for the 227,700 lost in the previous month. Sure, the unemployment rate jumped higher to a 22-year high of 7.4% in June from 7.1% in May, but this is due to the sharp increase in the participation rate to 64.0 in June from 62.7% in the previous month – itself a positive indicator, as jobseekers re-enter the labour force on optimism in finding employment. Further, “Total hoursworked increased by over 64 million hours between May and June, which was around a third (35%) of the 186 million decrease between March and May”, according to the ABS. 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

-

17-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

0.87

0.92

0.85

1.40

2.68

Australian 10Y Corporate Bond Yield

1.69

1.84

2.18

2.14

3.24

Stockmarket All Ordinaries Index

6144.9

0.59%

10.82%

-9.15%

S&P/ASX 300 Index

5994.3

0.58%

10.09%

-9.50%

5.93% 5.11%

S&P/ASX 200 Index

6033.6

0.70%

9.95%

-9.59%

4.83%

S&P/ASX 100 Index

4991.3

0.89%

9.84%

-9.60%

4.57%

Small Ordinaries

2639.9

-1.69%

12.32%

-8.66%

10.49%

Exchange rates A$ trade weighted index

60.00

A$/US$

0.6985 0.6915 0.6362 0.7007 0.7817

58.80

54.70

60.10

65.50

A$/Euro

0.6115 0.6161 0.5842 0.6242 0.6815

A$/Yen

74.84 74.15 68.40 75.73 88.19

Commodity Prices S&P GSCI - commodity index

337.46

321.63

270.57

419.89

371.90

Iron ore

107.22

103.18

84.17

121.14

66.80

Gold

1807.35 1724.35 1692.55 1410.35 1234.10

WTI oil

40.56

37.91

18.31

56.50

Source: Rainmaker /

46.02

Sector reviews

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

Australian equities

Figure 1: Business conditions & confidence 30

CPD Program Instructions

Figure 2:WMI Index of Consumer Sentiment 130

INDEX

INDEX

20

120

10 0

110

-10 100

-20 -30

Prepared by: Rainmaker Information Source: Thompson Reuters /

-40

Business conditions

-50

Business confidence

90 80

-60 70

-70 04

05

06

07

08

09

10

11

12

13

14

15

16

17

18

19

20

2004

2006

2008

2010

2012

2014

2016

2018

2020

Second wave flattens the rebound Ben Ong

T

he earlier than expected easing of restrictions in Australia that defrosted social and commercial activity has had both the desired effect and the feared one – a second wave.

The NAB monthly business survey showed that business conditions surged by 17 points in June to -7 index points – the second straight month of increase – due to broad-based improvements across industries and sharp rebounds in its components: trading (-7 in June from -19 in May); profitability (-8 from -19); employment (-11 from -31).

Australian business confidence is much brighter, rising by 21 points to +1 index points – the third consecutive month of improvement after dropping to a record low reading of -66 points in March.

Then again, as NAB’s Alan Oster said:“The survey was conducted just prior to the reintroduction of lockdowns in Victoria…”

Cast your minds back a few weeks. The state

International equities

of Victoria was primed and pumped for the second stage of looser COVID-19 restrictions after the clock strikes 12 on the midnight of June 22.

Instead, Stage 3 restrictions have now been reimposed in Metropolitan Melbourne as infections continued to multiply, prompting all of Australia’s other states and territories to close their borders with Victoria. Australia’s second most populated state is reportedly planning to impose tighter Stage 4 restrictions.

But that didn’t stop the coronavirus from migrating to New South Wales – the country’s most populated state. The resurgence of infections there has forced the state government to announce new restrictions on pubs and clubs and others to implement travel bans.

While NSW premier Gladys Berejiklian has ruled out following Victoria’s lead and send Sydney back into lockdown, she’ll be left with no other option if infections get out of control like in Melbourne.

Figure 1: IHS/CIPS UK PMI 60 55

The forward view in these all is reflected in the renewed drop in consumer confidence.

The Westpac-Melbourne Institute index of consumer sentiment fell by 6.1% to a reading of 87.9 in July, nearly reversing all of the previous month’s 6.3% increase.

As Westpac put it. “The timing of the survey is relevant.

It covered the week in which the lock down was announced for Melbourne but the survey closed before the news of a significant cluster was reported for Sydney.”

Apart from the reimposition of lockdown restrictions in Victoria, restrictions on pubs and clubs in NSW and closed interstate border policies, Westpac points out that, “the renewed outbreak points to a slower and more difficult path ahead for the foreign education, hospitality and tourism sectors all of which may see longer lasting restrictions even if the latest outbreak is successfully contained.” fs

6900

40

6600

35

6300

1. Which NAB Business Survey indicator improved in June from May? a) Trading b) Profitability c) Employment d) All of the above 2. How many Australian states and territories closed their borders to Victorians? a) Two b) Three c) Four d) All 3. Australian consumer confidence continued to recover in July. a) True b) False

Manufacturing Composite Services

15 10

CPD Questions 4–6

6000 5700 5400 5100 4800 4500 2017

2018

2019

2020

UK plans for jobs On March 23, the government imposed strict lockdown measures, giving “bobbies” power to fine people leaving their homes for “nonessential” reasons. These restrictions were then gradually eased in stages.

The relaxation of restrictions (aided by monetary and fiscal stimulus measures) – like in most other nations – sparked a recovery in economic activity, underscored by the rebound in the IHS/ CIPS purchasing managers indices (PMI).

The manufacturing PMI rose to a reading of 50.3 in June (indicating expansion), the second straight month of increase after dropping to a record low 32.6 in April. While still in contraction, both the services PMI (47.1) and the composite PMI (47.7) have also recovered from their April lows.

CPD Questions 1–3

International equities

7200

45

20

INDEX

7500

JAN17 APR17 JUL17 OCT17 JAN18 APR18 JUL18 OCT18 JAN19 APR19 JUL19 OCT19 JAN20 APR20 JUL20

he United Kingdom has followed the script T dictated by the coronavirus pandemic in much of the world.

Australian equities

Figure 2: FTSE-100 Index 7800

50

25

Ben Ong

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].

8100 INDEX

30

Prepared by: FSIU Sources: Factset Prepared by: Rainmaker Information Source:

29

Not surprisingly, the FTSE-100 has also recovered. The benchmark index has rallied by 23.3% from the nine-month low recorded in March.

However, the index remains 18.4% lower this year to date, reflecting investors’ continued sense of caution amid the lingering uncertainty surrounding the pandemic so much so that the Bank of England (BOE) and the Exchequer remain on their toes.

While the BOE kept the Bank Rate unchanged at a record low 0.1% at its latest meeting in June, it increased its GILT purchases by £100 billion – taking the total stock of asset purchases to £745 billion – and declared that it stands ready to take further actions if necessary.

And there was a package of measures announced to support the labour market.

“A Plan for Jobs” contained three basic initiatives: Supporting jobs: “UK Employers will receive a one-off bonus of £1,000 for each furloughed

employee who is still employed as of 31 January 2021.”

Creating jobs:“The plan will also create tens of thousands of jobs through bringing forward work on £8.8 billion of new infrastructure, decarbonisation and maintenance projects.”

Protecting jobs: “…the Government’s new Eat Out to Help Out discount scheme will provide a 50% reduction for sit-down meals in cafes, restaurants and pubs across the UK from Monday to Wednesday every week throughout August 2020.”

“The rate of VAT applied on most tourism and hospitality-related activities will also be cut from 20% to 5%.” “…we’re introducing a temporary increase to the Nil Rate Band of Residential SDLT (Stamp Duty) from £125,000 to £500,000 until 31 March 2021.”

This would go a long way towards supporting the labour market and the overall economy. fs

4. Which UK PMI measure rose to expansion territory in June? a) Composite PMI b) Manufacturing PMI c) Services PMI d) All of the above 5. What are the basic initiatives contained in the British Chancellor’s ‘Plan for Jobs’? a) Supporting jobs b) Creating jobs c) Protecting jobs d) All of the above 6. The FTSE-100 index has risen above its 2020 opening level to date. a) True b) False

30

Sector reviews

Fixed interest CPD Questions 7–9

7. What did Fed chair Powell note as indication/s reflecting the resumption of economic activity? a) Businesses are opening their doors b) Hiring is picking up c) Spending is increasing d) All of the above 8. Which ISM index rose to expansion levels – above 50 – in June? a) ISM manufacturing index b) ISM non-manufacturing index c) Both a and b d) Neither a nor b 9. According to Goldman Sachs, more than 70% of the country have deferred or reversed further reopening plans. a) True b) False Alternatives CPD Questions 10–12

10. Which country is the biggest iron ore importer? a) USA b) China c) Japan d) Australia 11. What was/were behind iron ore’s rally since April this year? a) China’s lifting of lockdown restrictions b) Increased steel production in China c) Both and b d) Neither a nor b 12. Iron ore’s demand and supply equation points to continued price strength. a) True b) False

Go to our website to

Submit

All answers can be submitted to our website.

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

Fixed interest

Prepared by: Rainmaker Information Prepared by: FSIU Source: Trading Economics Sources: Factset

Figure 1: US ISM index

Figure 2: US employment and unemployment rate

65

10000 INDEX

RATE %

MONTHLY CHANGE ''000 PERSONS

60

15.0

5000

55

0

50

-5000

45

-10000

12.0

Employment change

40

Manufacturing

-15000

35

Non-manufacturing

-20000

30

9.0

Unemployment rate -RHS

6.0

-25000

2005

2007

2009

2011

2013

2015

2017

2019

2015

2016

2017

2018

2019

2020

3.0

Not easy easing restrictions Ben Ong

“As the economy reopens, incoming data is beginning to reflect a resumption of economic activity: Many businesses are opening their doors, hiring is picking up, and spending is increasing. Employment moved higher, and consumer spending rebounded strongly in May. We have entered an important new phase and have done so sooner than expected.” his was what US Federal Reserve chair JeT rome Powell declared before the Committee on Financial Services of the House of Representatives on June 30.

True that.

The Institute for Supply Management (ISM) surveys show the manufacturing and services sectors bouncing back into expansion territory (above 50).

The ISM manufacturing index rose to 52.6 in June – the second straight month of improve-

Alternatives

ment – after dropping to an 11-year low reading of 41.5 in April. The ISM non-manufacturing index’s rebound was stronger – up to 57.1 in June from 45.4 in May and April’s 11-year low reading of 41.8.

The US economy has added 2.7 million jobs in May and 4.8 million in June after shedding 1.3 million jobs in March and 20.5 million in April.

The unemployment rate has declined to 11.1% in June from 13.3% in May and 14.7% in April – a record high.

US retail sales soared by 17.7% in the month of May, more than reversing the record 14.7% slump in the previous month as businesses reopened and workers went back to work.

Consumer confidence has also improved.

The Conference Board and the University of Michigan’s consumer sentiment index have risen sequentially in May and June from the sevenyear lows plumbed in April.

Figure 2: Iron ore & Chinese steel production

Figure 1: Iron ore price 130

But as Powell warned in his testimony: “While this bounceback in economic activity is welcome, it also presents new challenges— notably, the need to keep the virus in check.”

Rising cases of infection are being recorded notably in Florida, Arizona, California, and Texas.

As a result, more than 70% of the country have deferred or reversed further reopening plans, according to Goldman Sachs.

This should stall the fledgling recovery at best … and it may already be underway.

According to Factset, Bloomberg recently highlighted five indicators of the slump. These included a decline in hours worked in TexasFlorida-Arizona; a leveling off in the percentage of Americans who are working; a drop in restaurant reservations on Open Table (particularly in areas with rising infections); a slowdown in the New York Fed’s real-time economic index following a big rebound in May and early June; and stress on the housing market. fs

160 US$/MT

20 ANNUAL CHANGE %

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120

16

140

110

12

120

100 90

8

100

4

80 80

70 60

Prepared by: Rainmaker Information Prepared by: FSIU Source: Sources: Factset

-4 Iron ore price

40

40

China steel production -RHS

30 2016

0

60

50

20 2017

2018

2019

2020

2013

-8 -12

2014

2015

2016

2017

2018

2019

2020

As good as gold Ben Ong

T

he coronavirus pandemic has affected lives, livelihoods and financial markets around the world.

Commodity markets were no exception.

S&P GSCI commodity price index dropped by 48.7% to a 17-year low of 228.24 points in April from this year’s high of 444.63 points recorded in February.

Even gold fell by 11.3% between February and March before re-asserting its safe-haven quality and rallying by 18.6%. In comparison, the commodity price index remains 22.5% lower so far this year.

Surprising as it may be, gold’s expected outperformance is nearly matched by that of iron ore – an industrial metal whose price positively correlates with economic activity, or more accurately, with Chinese economic activity – the world’s biggest iron ore buyer.

According to statista.com, “China accumulated

a majority of the global iron ore imports in 2019, with a 69.1% share of total global imports.”

Thus, iron ore prices dropped by 17.4% from a high of US$94.83/tonne in January to US$78.33/tonne in February soon after China locked down Wuhan and other cities in Hubei, before rebounding strongly following central government’s decision to lift the lockdown on the 8th of April.

To date, iron ore prices have rallied by 38.4% from this year’s low and are 15.4% higher compared with 2020’s opening trade of US$92.58/ tonne.

China’s return to normality – plus accommodative monetary and fiscal policies – should underpin improved activity with a consequent rise in steel production, and therefore demand for iron ore.

Annual Chinese steel production growth has accelerated by 0.2% in April and by 4.2% in May, after dropping by 1.7% in March.

This comes amid recent statistics highlighting the recovery in business activity: industrial production grew by 4.4% in the year to May – the third straight month of improvement after a 13.5% fall in February; the contraction in retail sales has slowed to -2.8% from February’s -20.5%; so with fixed asset investment whose annual rate of decline sequentially eased to 6.3% in May from 24.5% three months before.

Forward indications are also positive. The Caixin China PMI surveys have returned to readings indicating expansion – composite (55.7 in June from a record low 27.5 in February); manufacturing (51.2 from 40.26); services (58.4 from 26.5).

The supply side of the equation also provides a positive underpinning for iron ore prices.

While a number of economies have started to re-open and loosen restrictions, disruptions to supply chains could continue to linger until the COVID-19 pandemic is totally contained. fs

Sector reviews

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

31

Property

Property

CPD Questions 13–15

Prepared by: Rainmaker Information Source: CoreLogic

egional property markets are expected R to rise over the long-term on the back of COVID-19, as workplaces shift to more flexible arrangements.

As employers and employees adapt to remote working conditions, physical proximity to a workplace is less likely to factor in to home purchases, according to CoreLogic.

The June quarter saw higher capital growth in regional centres than in capital cities, data shows.

Looking at rolling quarterly changes in dwelling values in New South Wales, Illawarra and Newcastle saw improvements. The same can be said for Geelong and Ballarat in Victoria, and the Gold Coast and Sunshine Coast in Queensland.

However, the change seen is short-term and more likely tied to cyclical patterns, CoreLogic said.

Regional growth rates – which peaked in late 2019 – could still nudge into negative territory if the Australian economy doesn’t significantly improve before the end of the year or there is no demonstrated shift in demand side factors like population growth, the research house said.

COVID-19 tipped to boost regional property Jamie Williamson

But, regional areas are not expected to experience as deep a downswing as capital cities and, over the long-term, things are looking even brighter.

Already considered attractive due to its relatively low density, less congestion and typically cheaper properties, analysis of Australian Bureau of Statistics data shows there was already a trend of people moving out of the city and its surroundings and into regional areas.

Over the 2018-19 financial years an estimated 1453 residents from the Sydney – Eastern Suburbs region departed for areas such as the Central Coast, Richmond-Tweed and the Gold Coast.

By net internal migration, the NSW Capital Region attracted the most inter-state migrants in the same period, with the bulk coming from the Australian Capital Territory.

This is followed by the Sunshine Coast which attracted a significant number of homebuyers from Wide Bay; while the Gold Coast gained a high number of residents that moved from Logan-Beaudesert.

Rounding out the top five, Melbourne West saw the most inter-state migrants come from in-

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ner Melbourne and Ipswich attracted thousands from Brisbane South. However, Melbourne West and Ipswich are technically still within greater capital city limits.

“This may reflect both availability of developable land transitioning to large greenfield housing estates as well as cohorts such as inner-city renters and first home buyers making the transition to buy in more affordable areas that are still commutable to the CBD,” CoreLogic said.

This is an important trend to consider, as it suggests a scenario where past migration may have been driven by affordability instead of preference for a regional lifestyle, CoreLogic said.

If so, a mitigating factor may be that, in the wake of COVID-19, dwellings closer to the city are also becoming cheaper, which could slow migration. However, CoreLogic said lower density will also prove attractive in a post-COVID world.

The normalisation of remote work amid COVID-19 is more likely to bolster regional migration than slow it. But in the wake of the pandemic, the return to an office environment may still be desirable for some employees and employers. fs

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14. Recent CoreLogic data indicates which of the following? a) The June quarter saw lower capital growth in regional centres than in capital cities b) Regional property markets are expected to fall over the long-term following COVID-19 c) The June quarter saw higher capital growth in regional centres than in capital cities d) Regional areas are expected to see a deeper downswing than capital cities 15. As people adapt to remote working conditions, the need to be close to the workplace is less likely to factor in to home purchase decisions. a) True b) False

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13. ABS data has indicated which of the following migration trends? a) Before the pandemic there was less migration to regional areas b) People were tending to move out of city areas and into regional areas c) No clear trends were showing before the pandemic started d) People were tending to move away from regional areas and into cities

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Profile

www.financialstandard.com.au 3 August 2020 | Volume 18 Number 15

THE NEXT INNINGS David Neal is one of the most influential investment executives, not just in Australia but across the world.

Here, the new IFM Investors chief reflects on the journey so far. Kanika Sood writes.

avid Neal had been at Future Fund for D about 12 years when IFM Investors’ longstanding chief executive Brett Himbury tendered a surprise resignation in September 2019.

The $156 billion investing behemoth kicked off a global search for its next chief. Five months later, Neal would secure the role.

“I was aware that Brett had announced that he was going to retire and so [I] probably started to sort of think a little bit about whether that might be an opportunity for me,” Neal says.

“But then I got the call — which I used to get a lot of — from the recruitment consultant saying, ‘Do you know anybody who might be good for this job?’ I kind of went, ‘You know, I think I might’.”

From there, he met with IFM chair and former Labour politician Greg Combet, then a panel of the board, then the full board and towards the end of process, Himbury himself.

Neal finally reported to his first day at IFM in March, at a time when IFM was sending its staff to work from home.

At the time of this chat, he was two months into his new role and hadn’t still met his new colleagues in person.

Reflecting on his previous role as chief executive of Future Fund, Neal describes it as the “best job in the world”, saying its chair Peter Costello was supportive and understanding of his decision.

“I just felt that it was time for me to take on a new challenge, think about a new set of problems and opportunities, lead a new set of people…It was nothing other than a time for change.”

IFM and Future Fund’s clarity of purpose was a strong pull for Neal.

But he didn’t rule out working for a large for-profit fund manager like Wellington Asset Management that fit the bill of aligning inherent conflicts between serving themselves and serving their investors.

“Did I say I [would] never do a commercial?

No…but it would have needed to have been a pretty special type of organisation,” he says.

The IFM role also ticked other boxes.

Based out of Melbourne, it allowed him to keep his family’s status quo.

“It’s like lots of things are aligning…I’ve got kids in year 11 and 12 and one in year six. This wasn’t a great time to be moving family somewhere and I wasn’t particularly keen on doing that,” he says, adding that his wife is about to commence a bachelor of arts in international relations.

Neal has climbed to the highest echelons of investment management in Australia, sitting atop first the $162 billion Future Fund and now at IFM Investors.

He has also gained international recognition, topping the Sovereign Wealth Fund Institute (SWFI)’s annual list of the 100-most influential executives working across sovereign funds,

endowments, foundations, pensions and central banks in 2019.

In doing so, he beat out the likes of former European Central Bank president Mario Draghi, Bank of Korea governor Lee Ju-yeol and a number of super fund investment chiefs.

His current life is a long way from his early years in Warrick, England.

Neal describes his childhood as “traditional, middle England” that included his father, who worked as a building surveyor, driving the kids to hockey and cricket games.

He moved to Australia 21 years ago with Willis Towers Watson (then called Watson Wyatt) to set up its Australian consulting business before joining Future Fund in 2007 as its inaugural chief investment officer.

He counts both his former bosses as his mentors: Watson Wyatt’s Roger Urwin and Future Fund’s former chief executive Paul Costello, who passed away in 2018. “...He taught me a lot about leadership, a lot about values, a lot about respect for the kind of people and cultures and those sorts of things.

[He] taught me a lot of technical stuff too but I always found him inspirational,” he says of Urwin.

“And someone that I would turn to quite regularly, when I had a business problem and still do. He’s a lovely and very, very smart guy.”

His career in consulting brought other lessons, including the value of being a generalist over a specialist, on which subject he is also a reading a book, Range: Why Generalists Triumph in a Specialised World by David Epstein.

“The thesis is that a generalist ends up being more successful than a specialist. And yet our system is geared towards encouraging people to specialise really, really early…increasingly early,” he says.

“I came to institutional investing from consulting and consulting by nature requires you to be a generalist, you have to be across a lot of things.”

It’s something he used to worry about quite a lot, he says. “…But as you rise up, as you become more experienced, that ability to bring in that broader set of experiences is incredibly powerful,” he says.

And he will have every opportunity to draw on them in the coming years.

IFM is increasingly investing as well as raising money offshore, it is trying to enter new geographies and go deeper into asset classes, such as infrastructure and debt where it has established a stronghold among local non-profit allocators.

Neal admits he hasn’t had to flex the capitalraising muscle in his 13 years at Future Fund, which received allocations from the federal government’s budget surplus or sale of assets such as Telstra shares.

But that doesn’t mean he’s lost his touch.

“I think I had one of the most demanding cli-

I’ve always been quite intent on trying to stick to what I’m good at, which I think is being a longterm investor and running a team of long-term investors.

David Neal

ents you could have... My client meetings used to occur in the public, in front of the senate estimates committee,” he says.

“And of course at Future Fund, I was a client so I’ve got a pretty good understanding of what a large, sophisticated client thinks and what they need from their service provider.”

And that’s the direction that most investors will soon be heading in, Neal predicts; “They will all begin to look a lot more like the Future Fund in terms of their sophistication.”

Looking ahead, top of Neal’s to-do list will be to execute a smooth leadership transition at IFM, prove himself as an “authentic” leader and listen closely.

“I think that’s one of the most important characteristics of being a leader — not to try and be someone else. Just by me being me, [explaining] what makes me work and doing a lot of listening to them,” he says.

He is someone who has now worked in two of the arguably most politicised roles in investment management: leading the sovereign wealth fund with a former Liberal treasurer as chair, and now leading industry super-owned IFM. “I’ve always been quite intent on trying to stick to what I’m good at, which I think is being a long-term investor and running a team of long-term investors,” he says.

“Politics, I’ll leave to the politicians.” fs

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