vol18 n17 31 August

www.financialstandard.com.au

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Trilogy

Global equities

CAPE ratio

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Sean Cookson FRT

Schroders, Synchron, Moelis

Arian Neiron VanEck

Publisher’s forum:

Opinion:

MMT debate enters mainstream Elizabeth McArthur

s the COVID-19 pandemic continues to A wreak havoc on economies around the globe, Modern Monetary Theory (MMT) is having its moment in the sun, with many questioning its relevance to the situation the world finds itself in.

Spurring the discussion, Stephanie Kelton’s The Deficit Myth imagines a world where government spending isn’t limited by tax revenue, where nations can essentially print money.

It’s made such an impact on the popular zeitgeist, Reserve Bank of Australia governor Philip Lowe was forced to comment.

“The central bank, unlike any other institution, is able to create money and the resource cost of creating that money is negligible. So the argument goes, if the government needs money to stimulate the economy, the central bank should simply create it in the public interest,” Lowe said during a speech in July.

“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.”

He said the community would pay for the “free lunch” MMT offers as inflation rose.

Lowe argued that while central banks can change how and when spending is paid for, it is not possible to put aside the government’s budget constraints entirely. Somebody always pays.

At an Australia Institute event called ‘Economics of a Pandemic’ Kelton said while MMT sounds, and kind of is, radical – it’s not that far away from what’s already happening in response to the COVID-19 pandemic.

“The Republicans passed very big tax cuts in the US at the end of 2017… A lot of people, including many economists, said if Republicans were successful in passing these tax cuts it would so increase the deficit and the debt that no future congress would have any fiscal capacity…. Two years later here we are. The coronavirus pandemic started and what did we see?” Kelton said.

“We saw congress immediately spring into action…Nobody paused for a moment to argue and fight who would pay, where to find the money or how it would affect the deficit.”

She argues the stimulus response to COVID-19 across the world proves that where there’s a will there’s a way.

Kelton wants to see a rebalancing of income and wealth through progressive tax policies and she

argues that the traditional way of thinking about government budgets “holds the progressive agenda hostage” to the idea that every dollar of spending needs to be matched by a dollar of tax income.

Macquarie Business School specialised lecturer and senior research Hamid Yahyaei says the MMT thought experiment is worth having but he stresses he is not an advocate or an opponent of MMT. Yahyaei says in theory, Western central banks could undertake MMT policies without inducing Zimbabwe-style economic chaos and sky high inflation.

“But, we are a little in the dark about how the market would actually react if a country were to suddenly undertake MMT,” he says.

“We already know what happens to a certain extent when we print a lot of money by selling bonds to the central bank, from the government. What tends to happen to the currency is that it depreciates on a relative level because you’re effectively bringing the interest rate environments lower.”

However, Yahyaei says MMT isn’t overly concerned with international currency markets. Instead, it’s about a nation not relying on international markets but having faith in its own currency.

Commonwealth Bank chief economist Stephen Halmarick says the devaluation of currency in MMT theory could be a good thing, making the nation more attractive to trade partners.

“MMT is having its moment in the sun because every major central bank in the world has got interest rates at extremely low levels, every major central bank in the world is buying government bonds through a quantitative easing program – so we’re already quite a long way along the spectrum of monetary policy towards MMT,” he says.

“The next step from where central banks are now to MMT is not that large.”

Proponents of MMT argue if there’s any moment to see whether MMT works, the current pandemic is it.

The central bank of Indonesia has already agreed to make new money to cover part of the nation’s deficit.

“Years ago the idea that the RBA would have interest rates at 0.25% or be actively participating in the bond market… People would have never thought that would happen,” Halmarick says. fs

31 August 2020 | Volume 18 Number 17 www.financialstandard.com.au 20 January 2020 | Volume 18 Number 01

Feature:

Executive appts:

News:

Profile:

Advisers bolt to cash, gold Annabelle Dickson

Stephen Halmarick

chief economist Commonwealth Bank

Advisers seeking to de-risk portfolios have sparked mass inflows to defensive assets and an almost equal amount in outflows of riskier assets, namely Australian equities.

The BetaShares Australian High Interest Cash ETF (AAA) and ETF Securities Physical Gold (GOLD) were the top two ETFs receiving $166 million and $133 million respectively in July, according to the latest BetaShares Australian ETF Review.

Interestingly there was almost the same figure flowing out of the BlackRock iShares Core S&P/ASX 200 ETF and the State Street SPRDR S&P/ASX 200 month at $159 million and $131 million respectively.

The total outflow for Australian equities in July was just shy of $193 million while the total inflow for cash was $151 million and over $200 million for commodities.

For the year to date, GOLD has recorded $606.2 million flowing in, followed by AAA at $517 million.

AAA has been gaining popularity particularly in ending June 30 where it took out the number one Continued on page 4

MySuper winners, losers revealed Ally Selby

In a survey of 40 MySuper strategies and products, an $80 billion super fund has outperformed its peers to return 7% per annum in the three years to June.

According to Rainmaker’s June 2020 RiskMetrics report, UniSuper achieved the highest three-year return (but with the third highest volatility of 9.1% per annum) while REI Super was the lowest returning product (3.6% per annum returns, and median volatility of 7.5% per annum).

The median MySuper single strategy product returned 5.5% per annum, with a median volatility of 7.6%.

While UniSuper had the best returning product over the period, WA Super achieved the highest risk-adjusted return and also had the lowest volatility of any MySuper offering.

WA Super returned 5.6% per annum, and was ranked first for the Sharpe ratio (returns per unit of risk), third for the Sortino ratio (returns per unit of downside risk) and first for the Omega ratio (the Continued on page 4

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News

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

Boe Pahari steps down

Editorial

Eliza Bavin

B

Jamie Williamson

Editor

Well, it finally happened. Just as AMP appeared to be digging its heels in on the Boe Pahari matter by announcing it would release the report that resulted from a third-party investigation into the allegations, the group instead announced Pahari would be stepping down with immediate effect.

Given he was ultimately accountable for Pahari’s promotion, David Murray also resigned from his role as chair of AMP – but not before defending the decision one last time.

“The board has made it clear that it has always treated the complaint against Pahari seriously. My view remains that it was dealt with appropriately in 2017 and Pahari was penalised accordingly,” he said.

And AMP chose to publish those comments in its press release announcing the leadership changes, proving there is little remorse.

Pahari then publicly apologised to Julia Szlakowski, the subject of his sexual harassment, who later told media that neither she nor her lawyers had actually received the apology, only the media.

Again, it shows how little respect AMP and its leadership – including Pahari – actually has for the situation, Szlakowski and every other woman working within the group.

It’s only fanned the flames of the PR firestorm and added several more nails to what is one bloody large coffin. And a day later more allegations came out.

In 2016, Murray was quoted as saying the distinctive culture of an organisation is part of its competitive advantage. But the group’s culture hasn’t served it too well, nor does it look likely to actually change anytime soon.

AMP’s new chair is Debra Hazelton; someone who was part of the unanimous decision to promote Pahari to lead AMP Capital. She’s also the only woman on the AMP board, so make of that what you will.

And, just weeks ago AMP chief executive Francesco De Ferrari said driving cultural change would be his priority for the second half of this year – an enormous job, made tougher by the added responsibility of now serving as interim chief of AMP Capital.

On a social media post of mine, someone commented how brave Szlakowski is for going public and I couldn’t agree more. In the same post they wrote of how she had ‘won’, and I couldn’t disagree more.

She was subjected to prolonged, unwanted attention and lecherous advances from someone who was in a position to destroy her career, in speaking up she was forced out of her job and has now had to relive it all in the public eye.

On the flip side, Pahari was fined a quarter of his $2 million annual bonus, was determined leadership material and handed the top job, before agreeing to step back down to the role which he held previously – the same role in which he harassed Szlakowski.

People often say that nobody wins in a situation like this, but Pahari sure seems to have landed on his feet, albeit his ego perhaps a little worse for wear. fs

The quote

I am determined to restore the trust and confidence of our clients, shareholders and employees.

oe Pahari has stepped down as chief executive of AMP Capital and AMP chair David Murray has resigned. The chair of AMP Capital will also depart.

On August 24 AMP announced that Pahari would step down as AMP Capital chief executive, effective immediately, and resume work at his previous level with a focus on AMP Capital’s infrastructure equity business.

AMP chief executive Francesco De Ferrari assumed direct leadership of the AMP Capital business on an interim basis while a search process is conducted for a new chief executive of AMP Capital.

In addition, AMP chair David Murray resigned and stepped down from the board with Debra Hazelton stepping into the role, effective immediately.

In light of Murray’s resignation, AMP announced John Fraser also resigned as a nonexecutive director on the AMP board and as chair and non-executive director on the AMP Capital board.

AMP said the changes are in response to feedback expressed by major shareholders regarding the appointment of Pahari as AMP Capital chief executive on 1 July 2020.

Murray said AMP needs to continue its “transformation” under the leadership of De Ferrari with the confidence of investors, institutional clients, employees, partners and clients.

“The board has made it clear that it has always treated the complaint against Pahari seriously. My view remains that it was dealt with appropriately in 2017 and Pahari was penalised accordingly,” Murray said.

“However, it is clear to me that, although there is considerable support for our strategy,

some shareholders did not consider Pahari’s promotion to AMP Capital chief executive to be appropriate.”

“Although the board’s decision on the appointment was unanimous, my decision to leave reflects my role and accountability as chair of the board and the need to protect continuity of management, the strategy and, to the extent possible, the board.”

“On behalf of the board, I would like to acknowledge David Murray’s leadership of the AMP board over the past two years as the business has tackled critical and highly complex challenges in AMP’s transformation program,” Hazelton said.

“Under my leadership, the board will focus on working with Francesco and his leadership team to deliver long term value for our shareholders and clients by executing the transformation strategy. I am determined to restore the trust and confidence of our clients, shareholders and employees.”

Hazelton has over 30 years experience in global financial services, including as the local chief executive of Mizuho Bank in Australia and Commonwealth Bank (CBA) in Japan.

The Australian Council of Superannuation Investors (ACSI) welcomed the announcement of Pahari’s removal as chief executive of AMP Capital and the changes to the AMP board.

“Today’s announcements are an acknowledgement by the company that significant change needs to occur. This is an important step in addressing concerns raised by investors’ and resetting company culture.” ACSI chief executive Louise Davidson said.

“The company must now get on with job of rebuilding public confidence, and in particular, the trust of their staff.” fs

ESG crisis returns overcooked: Research Kanika Sood

ESG funds tallied up record inflows and touted better-thanmarket returns in the COVID-19 downturn but new academic research says there is no evidence that ESG scores contributed anything beyond traditional models.

In ESG Didn’t Immunize Stocks Against the Covid-19 Market Crash, published this month, four academics led by Elizabeth Demers from University of Waterloo, investigated the claim that ESG scores indicated share price resilience during the COVID-19 crisis.

Among firms that have made the claim are Morningstar, BlackRock and MSCI. The researchers found, once the firm’s industry affiliation and risk measures (accounting and market based) have been properly controlled for, ESG scores can’t explain the returns during COVID-19.

“Specifically, ESG is insignificant in fully specified returns regressions for the first quarter of 2020 COVID crisis period, and it is weakly negatively associated with returns during the market’s “recovery” period in the second quarter of 2020,” Demers et al wrote in a pre-print and pre-peer review copy of the research.

“Industry affiliation, market-based measures of risk, and accounting-based variables that capture the firm’s financial flexibility (liquidity and leverage) and their investments in internally-developed intangible assets together dominate the explanatory power of the COVID returns models.”

The researchers also used GFC data to explain winners (top decile performers) and losers (bottom decile). They then used it to predict COVID-19 losers and winners.

They found accounting- and market-based models performed well, both for GFC and COVID-19 periods. But ESG did not meaningfully add to the combined model’s performance.

In a third test, they developed hedge strategies that go long/short in stocks during COVID-19 based on their predicted winners/losers from GFC-based models. The predictions yielded abnormal returns and again, ESG offered no enhancement.

“We conclude that celebrations of ESG as an important resilience factor in times of crisis are, at best, premature,” they said.

In August, Morningstar’s Global Sustainable Fund Flows report examined 3432 sustainable open-end funds and exchange-traded funds (ETFs) across the globe in the second quarter of 2020, and found that sustainable funds outperformed following the March market sell-off.

Assets in Australasian sustainable funds increased substantially during the second quarter, up 18% from $14.9 billion (US$10.6 billion) at the close of the first quarter to $17.7 billion (US$12.6 billion).

At the end of June, sustainable assets recorded one of their highest levels, only outpaced by their peak at December 2019. fs

News

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

Crestone awards new mandate

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01: Sam Henderson

former financial adviser

Kanika Sood

Crestone Wealth Management has allocated to a Melbourne boutique’s real assets fund that targets 7-11% per year in returns while aiming for a measurable social impact.

The HNW advice firm will use Conscious Investment Management’s impact fund, which invests in property and infrastructure like specialist disability accommodation, affordable housing, community rooftop solar and social impact bonds.

Crestone said it expects 7-11% per year in returns from the fund.

“At Crestone, we are committed to providing value-aligned investment solutions for our clients that deliver truly competitive returns.

We are excited to be partnering with Conscious Investment Management, a leader in impact investing, and we believe our partnership will unlock investment opportunities for our investors that can deliver real social impact,” Crestone chief investment officer Scott Haslem said.

Conscious was started by former Goldman Sachs investor Matthew Tominc late last year, with Channel Capital as its distribution partner.

The Crestone allocation comes on the heels of the Conscious tie up with a consortium of investors including the influential Ramsay Foundation to pour $48 million into 60 disability accommodation apartments. fs

Sam Henderson pleads guilty Elizabeth McArthur

F The quote

We are excited to be partnering with Conscious Investment Management, a leader in impact investing.

ormer celebrity financial adviser Sam Henderson01 has plead guilty to three charges of dishonest conduct.

Henderson plead guilty to one “rolled up” charge of dishonest conduct along with two counts of making a disclosure document available to a person knowing it to be defective.

ASIC alleged that Henderson engaged in dishonest conduct while chief executive, director and senior financial adviser of Henderson Maxwell by claiming that he had a Master of Commerce when he did not.

The regulator found 115 PowerPoint presentations he gave to clients between 2010 and 2016 which it alleged contained false claims that Henderson had the degree.

Further, ASIC said the Master of Commerce claim was mentioned on the Henderson Maxwell website between 2012 and 2016 and in Henderson Maxwell brochures distributed be-

tween 2013 and 2017 as well as in an information memorandum dated May 2011.

The dishonest conduct offence Henderson has plead guilty to carries a maximum penalty of two years’ imprisonment or a fine.

Henderson has also plead guilty to two counts of making a disclosure document available to a person knowing it to be defective. ASIC claims Henderson gave two clients a Financial Services Guide claiming that he held a Master of Commerce when he did not.

Each count of making a defective disclosure document available could carry a maximum penalty of 12 months in jail or a fine.

ASIC said that Henderson also made the false claim about his qualifications publicly.

Henderson’s book One-Page Financial Plan: Everything you need to successfully manage your money and invest for wealth creation allegedly contains the false claim about his degree. fs

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News

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

01: John McMurdo

Advisers bolt to cash, gold

chief executive and managing director Australian Ethical

Continued from page 1 spot again after receiving flows of $130 million.

BetaShares chief executive Alex Vynokur said the $2 billion cash ETF is popular with advisers that are de-risking portfolios and allocating more towards ETFs as the fund has a long track record of providing returns which are superior to bank returns and those that are available on platforms.

While Vynokur said he does not have the visibility to see what clients are selling out of, hypothetically speaking he knows that clients are de-risking which is why BetaShares has seen higher allocation towards AAA. The best performance from ETFs in July came from precious metals, particularly gold and silver, along with gold miners.

ETF Securities chief executive Kris Walesby said: “Precious metals continue to hold appeal as a hedge against market volatility. Gold pushed through the all-time high mark recently and is likely to maintain value for some time due to quantitative easing programs across the globe and ongoing risks from COVID-19.”

“Silver has traditionally followed gold closely and may be set for market interest as investors look for alternatives to gold,” he said. fs

Australian Ethical benefits from seismic cultural shift Ally Selby

A The quote

The results show that fund managers are very efficient at running Australian equities, exceeding the index on a regular and reliable basis.

MySuper winners, losers revealed Continued from page 1 ratio of gains compared to losses).

Energy Super was the worst performing product on a risk-adjusted basis, returning 3.8% over the period with a Sharpe ratio of 0.3, Sortino Ratio of 0.2, and a Omega ratio of 1.5. Meantime, Australian Ethical was the second highest performing product but had median volatility.

With a 70% weighting to growth assets, Australian Ethical’s MySuper offering returned 6.8% per annum over the three-year period, while it ranked 20th of the 40 products in terms of volatility.

It had the second highest gains to losses ratio, with a sum of 18% negative monthly returns and 48% positive monthly returns over the three years to June. This compares with UniSuper’s MySuper offering, which recorded 21% total monthly losses and 55% total monthly gains.

Rainmaker Information’s head of investment research John Dyall said a focus on risk was increasingly important in the current environment.

“The RiskMetrics approach focuses on the distribution of monthly returns over time, not just the headline return,” he said.

“It’s the shape of the distribution of those returns that is the best indicator of the risks taken to achieve those returns.

“The volatility already shown in 2020 shows the importance of understanding how super funds manage the risks inherent in investing.”

Skewness and kurtosis are also important considerations.

Rainmaker found there to be a near-zero correlation between returns and volatility over the three year period, with the correlation between returns and skewness coming in at 0.3.

Hostplus had the lowest minimum monthly return out of the 40 MySuper offerings (-12.6%), followed by AMG Super (-12%) and Energy Super (-10.7%). fs

ustralian Ethical saw almost 10,000 new members invest in its super and managed funds offerings last financial year, revealing that institutional players – including other super funds – have also been knocking at the door.

“We are fielding calls right now – there has been quite a big shake up,” chief executive and managing director John McMurdo 01 told Financial Standard.

“You will have no doubt seen certain other substantial institutions have been losing mandates in this space and so our phones have been starting to ring.”

He believes institutional investment in the manager’s funds is a growth opportunity for Australian Ethical, with super funds and other institutional players currently making up only 5-6% of its total investor base.

“It’s not something that we have put a lot of energy into because our direct to consumer offer is going so well,” he said.

“We have had a significant number of advisers look to us for solutions so our energy has been going into supporting that increased growth.”

It comes as the $4.05 billion ethical investment manager reports a stellar full year financial result, including a record 46% lift in NPAT to $9.5 million, as well as record net inflows up 100% to $660 million.

“These are excellent full year results but they only tell part of the story,” McMurdo said.

“Underpinning them are share investments that produced 75% less carbon than the benchmark and five times more investments in renewable power generation than the global share market.

“This is on top of the market-leading returns we delivered for our customers this financial year.”

Despite a year of unprecedented volatility, Australian Ethical saw its MySuper Balanced option come in as one of the top three performing MySuper products over the FY20 – and it was also one of only 15 options to finish the financial year in the green.

Notably, it’s Australian shares option was also the top performing product over a five year, seven year and 10 year period.

Australian Ethical’s managed fund investors and super membership grew by 16% and 20%, respectively. fs

40% of ERS applicants not eligible: illion Eliza Bavin

New research released by illion found that 38% Early Release of Super (ERS) applicants saw no drop in their income during the COVID-19 crisis, as withdrawals surpass $31 billion.

The research found that the scheme has continues to drive a huge spending boom and that the program has not been used as intended by many Australians.

“The analysis of de-identified, aggregated information from more than 10,000 Australians who withdrew superannuation early continues to find some disturbing facts about what it was spent on,” illion said.

“Many people may not have needed to access their super early at all.”

“In fact, 38% of people who accessed superannuation saw no drop in their income during the COVID crisis. 21% saw an increase in their income of more than 10%.”

The research blamed the large number on the fact that the Australians Taxation Office (ATO) does not require any documentation to prove income loss during the application process.

“The money was spent quickly: almost half of the total money withdrawn was spent on purchases in the first fortnight,” it said.

“On average, Australians withdrew around $7495 and spent an extra $3618 in the first fortnight, compared with what they spent in a normal fortnight before receiving early super.”

Illion said, as with the first round of ERS applications, the money was used to increase spending and not maintain it.

“Almost two-thirds (64%) of this additional spending was on

discretionary items such as clothing, furniture, restaurants and alcohol,” illion said.

“Spending on debt repayments has dropped slightly since the first round of early super withdrawal (14% to 12%), and there has been an increase in essential spending (22% to 24%).”

The research found the second tranche of super withdrawal and spending follows the same trend as the first round, but at greater levels of spending.

“While this policy was aimed as a lifeline, more than half the people that withdrew the second amount had no change in income,” it said.

“These short-term decisions will have a major impact on the retirement incomes of those who withdrew their super.”

This comes as APRA released the updated ERS figures for the week ending August 9. Over $31.1 billion has been removed from retirement savings since the scheme’s inception.

Over the week to August 9, 88,000 applications were received by funds of which 44,000 were initial applications and 44,000 were repeat applications.

This brought the total number of initial applications to three million and repeat applications to 1.1 million since the inception of the scheme.

Over the week super funds made payments to 95,000 members, bringing the total number of payments by funds to their members to four million since inception.

The total value of payments during the week was $710 million, with $31.1 billion paid since inception. fs

News

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

ATO clarifies part disposal rules

01: Philip Lowe

governor Reserve Bank of Australia

Annabelle Dickson

Fractional investment platform DomaCom has received confirmation from the tax office that a part disposal of a home can work for downsizer contributions for SMSF trustees to allow them to stay in their home.

The ATO’s Administrative Binding Advice confirms that SMSF members are able to sell a part of their property under DomaCom’s Senior Equity Release platform and be eligible to make a downsizer contribution.

DomCom chief executive Arthur Naoumidis said: “The ability for retirees to help themselves by modifying their personal balance sheets and moving some of their financial resources tied up in their home to their super will enable them to enjoy a better retirement.”

There are no upper age limits or contribution caps on the contributions however; the contributions can only be made when the trustee is over 65 years old.

It was previously considered that a person had to sell or dispose their entire interest in a property to be eligible for the contribution.

The ATO confirmation on a part disposal now means SMSF trustees can sell a part of their home while remaining in the property.

A residential property cannot be sold to an SMSF but a part interest can be sold to DomaCom’s Senior Equity Release giving cash to the superannuation member whether it be SMSF, industry or retail funds.

“For investors, DomaCom’s Senior Equity Release delivers 3% income plus capital growth and may suit SMSFs in accumulation mode as well as institutions seeking reliable long-term income and growth,” Naoumidis said. fs

Mayfair 101 in damage control Embattled Mayfair 101 has attempted to set the record straight, hitting out at claims chief executive James Mawhinney may attempt to flee the country and at Vasco Trustees over its handling of the IPO Wealth Fund.

ASIC asked the Federal Court to freeze some Mayfair 101 assets and expressed concerns Mawhinney may be a flight risk.

These details emerged in media reports after what Mayfair 101 claims was a court bungle.

It said the court mistakenly listed the matter on the public register when it should have been listed as private, allowing journalists to call in.

Mayfair 101 wants the Federal Attorney-General and ASIC chair James Shipton to require each ASIC staff member involved with the Mayfair 101 matter to provide a statutory declaration.

“The Mayfair 101 Group believes that as a Government regulator with enormous powers, ASIC of all entities, should be required to speak with the media on the record only,” Mayfair 101 said in a statement.

“The Mayfair 101 Group calls for ASIC to adopt an immediate policy where all ASIC employees, agents and representatives must only speak to the media through official press-releases or in on the record interviews.” fs

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SG increase will impact wage growth: Lowe Eliza Bavin

R

The quote

There will be an offset in terms of current income. Some people say that’s perfectly fine because people will have a higher future in­come.

eserve Bank of Australia governor Philip Lowe 01 said the legislated increase to the superannuation guarantee will impact wage growth and the government will need to weigh up the impacts of that.

Speaking at the House of Representatives Standing Committee on Economics Lowe said the SG increase will be offset by lower wage growth.

“It will certainly have a negative effect on wages growth. If this increase goes ahead, I would expect wage growth to be even lower than it otherwise would be,” Lowe said.

“There will be an offset in terms of current income. Some people say that’s perfectly fine because people will have a higher future income.”

“So, there’s a trade-off here. Do we want people to have the income now or do we want them to have it later on?”

Lowe said he did not want to be involved in debating the options because it has the potential to be politically controversial.

Additionally, Lowe said wage growth would remain low, averaging around 1.5% over the next two years.

Lowe said despite the negative effects of the COVID-19 pandemic the Australian economy is suffering the worst contraction in many decades.

“We do not yet have the GDP data for the June quarter, but it will show the biggest economic contraction in many decades, likely to be around 7%,” he said.

“If there is any good news to be found here, it is that this decline is not as large as initially feared. Similarly, while the labour market outcomes have been poor, they have not been as bad as expected.”

Looking forward, the RBA governor said there is a high degree of uncertainty about the outlook and Australia’s economic recovery depends upon how successful it is in containing the virus.

“In our baseline scenario, we are expecting the Australian economy to contract by around 6% this year, and then grow by 5% next year and 4% in 2022,” Lowe said.

“It is possible that we will do better than this if there is near-term success in containing the virus or there are medical breakthroughs. On the other hand, if we were to see further setbacks in containing the virus, the recovery would be delayed even further.”

Lowe said given the uncertain outlook, the nation should be prepared for a recovery that is uneven and bumpy.

“The recovery is also likely to be more drawn out than was initially expected despite the downturn being less severe than expected,” he said. fs

iProsperity labelled a Ponzi scheme Elizabeth McArthur

Cor Cordis has released a damning creditors’ report which includes accusations of Ponzi scheme style payments.

The report suggests investor money was misappropriated by iProsperity for various purposes including repaying other investors. The administrators found evidence that money from new investors was used to pay older investors, in what seems like a crude Ponzi scheme.

Substantial amounts of money were paid to “related parties” – in particular to Michael Gu, the founder of iProsperity.

Cor Cordis also found that the directors of iProsperity took loans from the company of $83 million with apparent receipts of $63 million. It is alleged that the directors received a net benefit of about $19 million since July 2018 as a result of these loans.

Further evidence of director loans showed that Gu was paid $21 million since July 2018.

A luxury Rolls Royce was seized by Cor Cordis and is being held, with the suggestion company money may have been used to purchase it.

Former iProsperity director Harry Huang advised the group, which is a complex set of more than 60 related entities, failed due to the impact of COVID-19 and negative media articles as well as tightening of regulation on funds coming out of china and delays on some key property projects.

But, Cor Cordis said it found that iProsperity was likely starting to go under around a year before they were appointed.

The directors may have propped up iProsperity in appearance alone by doing things like paying old investors with money from new investors.

Cor Cordis has asked Gu and Huang to hand over their laptops and phones so that the administrators can review emails and files not found in the iProsperity group’s Sydney offices, but the two have not complied.

In terms of the director’s ability to pay, Gu owns a $10 million home in Mosman in Sydney. He’s a shareholder in a number of companies, though the bulk of his shareholdings are in the iProsperity Capital Group.

Meanwhile, Huang has an $11 million property in Mosman and a $1 million property in Ultimo in inner-Sydney. fs

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News

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

New law backs choice of fund

01: Alex Dunnin

executive director, research Rainmaker Information

Karren Vergara

The Treasury Laws Amendment (Your Superannuation, Your Choice) Bill 2019 passed on August 25, giving about 800,000 employees the choice which superannuation fund their retirement savings should be invested.

New workers who were previously restricted to a super fund as a result of an enterprise agreement for example, now have the opportunity to choose their own superannuation fund.

An employee will be able to choose their own superannuation fund where they are employed under a workplace determination or enterprise agreement that is made on or after 1 July 2020, the explanatory memorandum reads.

New employees must now be provided with a standard choice form; if they do not choose a fund then the default fund arrangements apply.

“An employer does not have to provide existing employees with a form unless requested once a new determination or agreement is made. Where there is no chosen fund for an existing employee, an employer that continues to make compulsory contributions for that employee with the same fund, in accordance with the previous determination or agreement, will comply with the choice of fund requirements,” the memorandum said.

The bill addresses the findings of the Financial System Inquiry and the Productivity Commission Inquiry into superannuation, which found that denying choice of fund can discourage member engagement and lead to paying higher fees. fs

Top performing Aussie equity funds unveiled Annabelle Dickson

A

ustralian Unity, Lakehouse and Plato were among the Australian equity wholesale managed funds that managed to outperform the index in the latest Rainmaker Information analysis to June end.

Australian Unity Platypus Australian Equities came out on top in the large cap category and returned 14.4% per annum over three years against the ASX 200 index of 5.2% over the same period. This was followed by Hyperion Australian Growth Companies at 12.5% and Bennelong Australian Equities Fund at 12.1%.

From the small cap sector, Lake House Companies Fund returned 23.5% per annum over three years against the ASX 200 Small Ordinaries index of $6.1%.

SGH Emerging Companies Fund came in second at 16.7% and the Lincoln Wholesale Australian Growth Fund at 16.6%.

Rainmaker executive director, research and compliance Alex Dunnin01 said: “The results show that fund managers are very efficient at running Australian equities, exceeding the index on a regular and reliable basis.”

Former Synchron adviser banned An Adelaide-based financial adviser has been banned from financial services for five years, after ASIC found he had failed to provide financial advice that was in the best interests of his clients.

The corporate watchdog also claimed he had engaged in misleading or deceptive conduct, also finding he was not “a fit and proper person to provide financial services”.

Francesco Antonino Romano has been banned from providing financial services and from being involved in financial services business for the five year period.

He was previously an authorised representative of Synchronised Business Services from April 2016 until April 2018, and was previously authorised by ANZ Group from October 2003 to March 2016.

The banning comes after ASIC found Romano had not made reasonable enquiries to obtain up-to-date information about his clients, and also failed to consider his client’s investment needs and objectives when giving advice.

Notably, Romano recommended that clients make no changes to their investment portfolios despite clients being invested outside of their risk profile or SMSF strategy, ASIC said.

“This exposed his clients to having an inappropriate high growth asset allocation,” the corporate watchdog said.

ASIC also found Romano had made “misleading and deceptive statements in an email to clients in which he falsely claimed that prior to leaving ANZ his files were audited and found to be exemplary”. fs

The income focused Australian equities suffered with the Plato Australian Shares Income Fund coming first in the category with 6.8% per annum over three years, managing to outperform the ASX 200 index by 1.6%.

The Legg Mason Martin Currie Real Income Fund returned 1.6% followed by Vanguard Australian Shares High Yield Fund at 1.1%.

From the growth sector, IOOF MultiMix Growth Trust took out the first spot with 7.4% per annum over three years against the sector median of 3.8%. Two Vanguard funds followed behind - high growth and growth, at 6.9% and 6.6% respectively.

From the balanced sector Macquarie Balanced Growth Fund returned 7.5% per annum over three years, IOOF MultiMix Balanced Growth Trust returned 6.9% and BlackRock Tactical Growth Fund returned 6.2% against the sector median of 4.6%.

Legg Mason Martin Currie Tactical Allocation Fund led the dynamic asset allocation sector with 7.2% over a three year period against the sector median of 2.5%. BMO Pyrford Global Absolute Return came in second at 5.1%. fs

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TRUE TO LABEL ETHICAL SOLUTIONS Melbourne boutique deepens Canadian ties Kanika Sood

The quote

Our partnership with CI Financial aims to bring the best of Canadian investments to the Australian market.

Munro Partners is introducing a global equities strategy to Canadian retail investors, after raising $1.5 billion in Canada since January 2019.

The CI Munro Global Growth Equity strategy was launched to Canadian institutional investors in January 2019 and has beat its benchmark in the time since.

Now, CI Financial is adding three new series of the CI Munro Global Growth Equity Fund to retail investors, with plans including ETFs. Munro is owned 75% by its staff, which includes Nick Griffin, formerly of K2 Advisors as the chief investment officer. A quarter of its equity is owned

by GSFM. The Canadian connection comes via GSFM’S Canadian investor CI, which took an 80% stake in the Aussie multi-boutique in 2016.

About $500 million of Munro’s FUM is in Australia, with the rest ($1.5 billion) now raised in Canada.

“Our partnership with CI Financial aims to bring the best of Canadian investments to the Australian market, as well as providing the opportunity for our local Australian fund manager partners to export their investment talent to the Canadian market,” GSFM chief executive Damien McIntyre said.

“Nick Griffin and the team at Munro Partners have had a very successful launch of the CI Global Growth Equity Fund, with keen interest shown by institutional investors in Canada over the past 18 months. Canadian retail investors will now also be able to benefit from the expertise and performance of the Munro fund.”

“Munro has an impressive track record of recognising and capitalising on key areas of growth in the global economy for the benefit of investors,” said CI head of distribution Roy Ratnavel said. fs

News

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

Contributions rise despite ERS

7

01: Deborah O’Neill

senator

Eliza Bavin

Contributions to superannuation in the June quarter were mildly greater than the amount removed due to the government’s early release scheme, according to the latest figures published

by APRA. Contributions in the June 2020 quarter were $33.6 billion, while lump sum payments out totaled $26.8 billion for the June quarter, up 77.7% from the March quarter due to ERS. Total contributions marked an increase of 17% from the March 2020 quarter ($28.7 billion) but 1.4% less than in the June 2019 quarter.

Personal contributions for the June 2020 quarter ($7.8 billion) were particularly soft, recording the lowest June quarter figure since June 2016.

Total contributions for the year ending June 2020 were $120.6 billion, while there were $37.4 billion in total benefit payments in the June 2020 quarter.

The increase reflected a spike in lump sum payments caused by the ERS scheme that commenced on 20 April 2020.

Quarterly net contribution flows to the industry were negative (down $2.3 million) for the first time since compulsory superannuation was introduced.

Net contribution flows for the year ending June 2020 were $23.5 billion.

Total superannuation assets totalled $2.9 trillion at the end of the June 2020 quarter, down 0.6% compared to June 2019.

Total assets in MySuper products were $731.3 billion at the end of the June 2020 quarter; this is also down 3.3% compared to the same period last year. fs

AMP hit with fresh harassment allegations Elizabeth McArthur

A The quote

The perpetrators, including those who swept me under the rug, have gone on to thrive.

new whistleblower has come forward, recounting what amounts to a campaign of harassment and a derailing of her career at AMP, leading several other former employees to do the same.

The account from the whistleblower was read to the Senate by Senator Deborah O’Neill 01, with parliamentary privilege shielding the whistleblower legally.

A spokesperson for O’Neill told Financial Standard that several other former AMP employees have since reached out this morning with similar stories.

O’Neill read the words of the unnamed whistleblower, saying she “deserves a medal for bravery and resilience”.

“My time at AMP has destroyed my life,” O’Neill said, reading the whistleblower’s written words.

“The perpetrators, including those who swept me under the rug, have gone on to thrive.”

The whistleblower described multiple instances of sexual harassment she said she endured at AMP. She said she raised formal complaints with

the company, including via external legal representation and two of her cases were escalated.

Of those escalated cases the whistleblower said one perpetrator, her manager, was repeatedly promoted and another was given a warning and allowed to remain. She said she was aware of a colleague also being harassed by the man who was given a warning and that colleague had left the industry as a result.

The harassment included sexually explicit photos and emails expressing a desire to have sex with the employee, constant and public propositioning, and her direct manager threatening to end her career unless she fulfilled his wishes.

The whistleblower said an internal lawyer subsequently undertook a “so-called independent” review.

“Over the next several months I was placed on medical leave and was directly discouraged from lodging a worker’s compensation request by a member of the executive leadership team,” she said.

A spokesperson for AMP said the behaviour and conduct described in O’Neill’s speech is “distressing and unacceptable” to AMP. fs

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BetaShares Ethical ETFs EQT rejigs two leadership roles Kanika Sood

Harvey Kalman is moving into a new role at Equity Trustees after starting its corporate trustee services business over 20 years ago.

Kalman will now be the global head of business development, fund services and managing director for UK and Europe.

Russell Beasley has been promoted to Kalman’s old role of executive general manager, corporate trustee services, Australia.

Beasley joined EQT in 2005 from MLC Investment Management. He was initially a relationship and product manager, then the national manager for corporate fiduciary services, then the general manager - relationships and oversight.

Equity Trustees said the appointments aligned the two of its key leaders to target markets of Australia and Europe. fs

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8

News

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

Hostplus ups IP premiums

01: Angela Murphy

chief executive of distribution, product and marketing Challenger

Elizabeth McArthur

Non-default salary continuance insurance cover for Hostplus members will increase from 1 October 2020. Salary continuance will also be renamed income protection at the start of October.

The biggest increase will hit those with non-default salary continuance policies with a ‘to age 65’ benefit period – these premiums will increase by 73.7%.

Non-default salary continuance premium rates for a two year benefit period will increase by 22.3%.

Hostplus said in a significant event notice to members that the changes to premiums were necessary because the Putting Members Interests First and Protecting Your Super reforms had reduced the number of members with insurance.

“The introduction of these reforms has resulted in a significant decrease in the number of members covered by our group insurance policy,” the fund said.

“Considering the reforms, changes to membership demographics and an increase in disability claim volumes, we have had to increase the cost of our nondefault Salary Continuance insurance.”

Death and total and permanent disability premiums did not change.

Hostplus’ group insurer is MetLife and the super fund had an arrangement that includes a Premium Adjustment Mechanism. It utilised this mechanism in setting the premium rates that will apply from October.

“The use of this payment has enabled us to maintain the current death and TPD premium rates and limit the increases to the non-default salary continuance premiums as much as possible,” it said.

The fund will also introduce a Salary Continuance five-year benefit period from October 1. fs

New Cashwerkz offering Ally Selby

Cashwerkz has announced it will launch a funds incubator to assist new entrants into the market establish their funds.

The assistance provided by Cashwerkz via incubator Fund Income will include appropriate licences using the responsible entity infrastructure of Trustees Australia – but also extends to distribution to some of the world’s financial services leaders.

The ASX-listed company said it has been working with multiple suppliers of custody, compliance, finance and technology to package up a “very attractive” proposition to fund manager entrants.

These aspiring fund managers will leverage Cashwerkz technology, talent and infrastructure assets to establish their fund, with the business taking an equity position in each fund to create asset value for Cashwerkz.

Cashwerkz said it will begin marketing the new capability immediately, and has also announced the appointment of a new chief operating officer and head of distribution, as well as marketing and administration roles as part of the new initiative.

The business also announced it had launched a new bond income business, set to provide bond and fixed income solutions to wholesale investors and financial advisers. fs

Challenger introduces new lifetime annuity Kanika Sood

C rate.

The quote

It is an Australian first for a retirement income stream to deliver the combination of income certainty with a variable component linked to the RBA interest rate.

hallenger has launched a new lifetime annuity with payments linked to the cash

The RBA Cash Linked option is the first lifetime annuity in Australia to be linked to the cash rate, according to the firm. Challenger also offers lifetime annuities that have no index, are indexed to the CPI or partially indexed to it.

“The innovative new RBA Cash Linked option allows customers to receive higher annuity payments as the RBA cash rate increases.

Challenger’s lifetime annuity provides customers with peace of mind and enables them to look forward with confidence by having certainty of income for life. Payments will move in line with rises and falls in the cash rate,” Challenger chief executive of distribution, product and marketing Angela Murphy01.

“It is an Australian first for a retirement income stream to deliver the combination of income certainty with a variable component linked to the RBA interest rate. The option maintains substantial estate and withdrawal

benefits, and for asset test affected clients it could improve Age Pension eligibility and outcomes.

“This is a smart new defensive solution for providing income certainty, particularly given current global market volatility and can be combined with other products, such as account-based pensions to build comprehensive retirement solutions.”

The product runs of the entire life time of the annuity buyer, and has guaranteed death benefits, and flexibility to withdraw and be paid a lump sum if a client’s circumstances change within the withdrawal period.

Challenger also said it will deliver an immediate increase in age pension for certain asset tested retirees.

In its FY20 results reported on August 13, Challenger Life - which includes annuities as well as other life products - saw total sales rise 13% to $5.2 billion.

But total annuity sales were down about 12% to just $3.1 billion. Domestic annuity sales were -$0.9 billion and Japan sales were up $0.5 billion. Other life sales doubled to $2 billion. fs

Global fund manager enters Australian market Karren Vergara

A global investment manager is expanding to Australia and New Zealand with the help of thirdparty distribution firm 3PD. Boston-based, active fund manager Promethos Capital operates purely in the ESG space, offering global, multi-cap equity strategies focused on addressing United Nations Sustainable Development Goals (SDG). It has offices in New York, Boston and Toronto.

Promethos’s investment strategies include investing in companies committed to promoting gender diversity and women to leadership positions, as well as mitigating climate change and ecological damage.

Having set up shop in March 2019, Promethos’s assets under management has grown to about US$30million ($41.9m).

Sydney-based Robert Harrison and Steven Larkin co-founded and recently launched 3PD. Harrison commented the fledging company is keen to represent “pure play” managers with specialised expertise in underserved, in-demand Australian investment segments.

“Promethos’s approach really does reflect client values in ESG and has strong comparative advantages in this space,” he said.

Harrison spent nearly 15 years at BNP Paribas Asset Management, working extensively across relationship management and business development management, before establishing 3PD with Larkin.

“3PD’s knowledge and experience bring institutional investors the capabilities that suit their investment programs,” he added.

In establishing a presence in Australia, Promethos’s president John Linnehan said: “We are seeing an uptick in the global emergence of deploying capital to generate an impact while also earning a return. Promethos’s ESG investment experience is uniquely positioned to amplify the results clients are seeking.”

Ivka Kalus, Promethos chief investment officer, believes Australian investors align to the firm’s values on ESG metrics.

“Our investment process ensures that we stay true to client values while seeking to generate market-beating returns through a disciplined, systematic, high-conviction investment process that targets market inefficiencies. Over the last 20 years, I’ve observed the focus of Australian investors on ESG metrics and I believe our investment strategies align to their values,” she said. fs

Publisher’s forum

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

01: Philip Ryan managing director Trilogy

Mortgage trusts a compelling option for investors

Financial advisers on the hunt for income products for their clients should consider taking a look at mortgage trusts. While the sector can’t match the pizzazz of a technology fund or the familiarity of an equities fund, it provides plenty of appeal for investors who want a stable and regular income in a low-rate environment. In fact, according to researcher SQM, mortgage trusts have seen funds under management rise from over $10 billion in June last year to more than $15 billion to date.

To explain more about the topic, we interviewed Phil Ryan, managing director of Trilogy Funds Management.

Ryan was there during the inception of Trilogy in 1998 and has a wealth of knowledge on how financial advisers might use mortgage trusts as part of a client’s balanced portfolio.

Michelle Baltazar Director of Media & Publishing

• Does it have a diversified loan portfolio?

• What are the Trust’s lending criteria and valuation policy?

• Can the investor accept the risks involved?

Independent research reports such as those offered by Australia Ratings or SQM Research can also be helpful for licensed advisers.

In a low rate environment, many advisers may consider mortgage trusts as part of a client’s balanced portfolio. ustralia’s $15 billion mortgage trust sector A has long been popular with investors looking for competitive investment income as part of a diversified portfolio.

In 2020, as economic uncertainty has soared and returns from investments such as dividends and bank savings have continued to shrink, the sector has provided a genuine alternative.

At the same time the industry provides an essential service to property developers, who are finding it harder than ever to get support from their banks.

The mortgage trust sector has enjoyed substantial growth in recent times according to SQM Research’s 2020 Mortgage Trust Sector Review and at this time is managing the impacts of COVID-19 well, thanks to continued investor support and the underlying strength of the Australian property sector.

While past performance should not be taken as an indicator of future returns, a number of mortgage trusts continue to deliver competitive returns to investors.

The top-performing trust in SQM’s July 2020 update, the Trilogy Monthly Income Trust recently reported a monthly distribution equivalent to 6.55%p.a.* for July 2020.

The Trust currently has over 85 loans in its portfolio as at 31 July 2020, stretching across Queensland, New South Wales and Victoria and mainly comprising residential property development loans consisting of land, townhouses, units and houses.

Why advisers include mortgage trusts in their client’s portfolio

The quote

Also referred to as mortgage funds, mortgage trusts pool investor money to lend to borrowers while taking a mortgage over the underlying property. Loans may be for land subdivision projects or to finance construction and property development.

Mortgage trusts aim to provide investors with a regular income called a distribution from the interest paid by borrowers, as well as cash and other investments held by the trust.

In today’s historically low-rate environment, many advisers may consider an exposure to mortgage trusts as part of their client’s balanced portfolio.

However, as is always the case when investing there is no return without risk so please consider and understand the risks in this type of investment. When assessing mortgage trusts for their client’s portfolio, financial advisers should consider asking questions such as: • Does the Trust have an established track record?

• Does management have the necessary expertise and experience?

• What is the Trust’s withdrawal policy?

While past performance should not be taken as an indicator of future returns, a number of mortgage trusts continue to deliver competitive returns to investors.

CONTRIBUTORY

Your investment is diversified across a range of mortgages.

You decide which mortgage you invest in.

Income from the pool of mortgages is distributed to all investors equally.

The mortgage you invest in might generate a different return from other individual mortgage investment options.

Investors share the risk associated with each of the mortgages in the pool.

You’re exposed to the risk of only that mortgage.

You can withdraw some or all of your capital subject to the trust’s liquidity (a notice period is usually required).

You can only receive your capital when the loan is repaid.

This may be in tranches or in one lump sum.

Source: Trilogy

The impacts of COVID-19 on the sector

While all investments carry risk, the Trilogy Monthly Income Trust is professionally and proactively managed by the experienced Trilogy team and backed by first mortgages secured over Australian property.

POOLED

9

Assessing the potential future impacts of the COVID-19 health crisis on Australia’s mortgage trust sector, SQM notes that the long-term trajectory of the pandemic and the economy is unclear. Some mortgage trusts may experience slowing or negative fund inflows, and some may become more conservative in their lending standards.

However, SQM notes that “the mortgage funds sector entered into this crisis in a healthier condition as compared to pre-GFC, including better lending standards and a better liquidity match’’.

At Trilogy, we continue to monitor market changes and any potential impacts, and we work closely with our borrowers to manage risk.

We’re optimistic given the strength of the construction industry over the previous lockdown period, and at this time continue to see no evidence of supply breakdown for any projects.

In addition, sales of completed stock continue to perform as expected.

We’re taking a proactive approach to investment management, with our primary focus being mitigating risk, protecting capital and continuing to pay monthly distributions. fs For more info, visit trilogyfunds.com.au/investing or call 1800 230 099. *Distribution rate for the month ending 31 July 2020 annualised was equivalent to 6.55% per annum for the Trilogy Monthly Income Trust ARSN 121 846 722.

Distribution rates are calculated daily, paid monthly in arrears and are net of management fees and costs, and assume no reinvestments. Distributions for the Trust are variable each month and depend on the performance of the underlying assets.

This article was prepared in partnership with Trilogy Funds Management Limited ACN 080 383 679 AFSL 261425 (Trilogy) and does not take into account your objectives, personal circumstances or needs nor is it an offer of securities. Application for investment can only be made on the application form accompanying the Product Disclosure Statement (PDS) dated 17 December 2018 for the Trilogy Monthly Income Trust and available from www.trilogyfunds.com.au.

The PDS contains full details of the terms and conditions of investment and should be read in full, particularly the risk section, prior to lodging any application or making a further investment. All investments, including those with Trilogy, involve risk which can lead to loss of part of or all your capital or diminished returns.

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News

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

Clients value advice in COVID

01: Michael Wyrsch

chief investment officer Vision Super

Karren Vergara

Many advised clients are sticking with their financial planners as COVID-19 tests the resilience of practices, according to Investment Trends.

The latest study from the research house surveyed nearly 700 financial advisers in May at the height of the global pandemic and found that while advisers have minimised client attrition, this unfortunately has not translated to maintaining profitability.

A record high of 41% advisers said their practice was less profitable compared to last year (38%). In 2018, only a minimal number of advisers (18%) grappled with remaining profitable, the report showed.

The pandemic has fueled a number of challenges advisers were facing, including meeting compliance obligations, which is a bugbear for the majority (67%), and providing affordable advice, which almost half of advisers struggle with (46%).

The advice practices that were able to rise above these challenges and stay afloat in terms net profit, and client and profitability growth were more adept at handling compliance-related obligations via technological efficiency.

“These high performing practices were also far more likely to be prepared for COVID-19 related disruptions from a technology and operations perspective, highlighting the importance for all planners to optimise their technology stack for operational and client-facing benefits,” research director at Investment Trends Recep Peker said.

Interestingly, the report found a growing cohort of self-licensed planners. fs

Vision Super revises investment strategy Eliza Bavin

V

The quote

Low rates mean that returns for fixed interest look like they will continue to be very low, even out to 10 and 20 years.

HUB24 reports record results Ally Selby

HUB24 revealed it signed 105 new licensee agreements during last financial year, as it reports an underlying NPAT of $10.1 million, up 49% on FY19.

It also reported that its revenue had lifted 37% compared to the previous financial year, to hit $74.3 million, while it reported an underlying EBITDA for the group of $24.7 million, up 60% on FY19.

HUB24 had $18.5 billion in funds under administration as of August 21, with volatility and negative market movement during the 2H20 impacting $1.1 billion of FUA. The annual impact of market volatility was $600 million.

It also maintained that while lower interest rates have impacted revenue, the loss was offset by higher trading volumes.

Commenting on the results, HUB24 managing director Andrew Alcock said the group remained focused on investing for future growth.

“HUB24 has delivered strong results in FY20 with record annual net inflows of $4.95 billion, a 60% increase in group underlying EBITDA to $24.7 million and a fully franked final dividend of 3.5c per share,” he said in an ASX announcement.

The platform also added another 108 managed portfolios to the platform during the year. fs

ision Super has revised its investment strategy as a result of significant changes in the economic and fixed interest environment.

The $10 billion super fund said it reviews its investment strategy annually and changes have been made this year to adjust for the effects of the COVID-19 pandemic.

“The global economy is experiencing one of its sharpest slowdowns in history and the dampening of consumer demand is not expected to rebound to pre-pandemic levels for some time,” the fund said.

“This has driven interest rates to historic lows and they are expected to stay that way for years.

This has in turn had an impact on the expected returns and risks for bonds, and as such any investment options that contain a high proportion of bonds.”

For Vision Super, the effected options are the conservative, balanced and diversified bonds options.

It has also introduced some investment objectives to allow for historically low interest rates.

For accumulation and NCAP members, Vision’s conservative and balanced options will have a new objective of CPI + 1.5% down from CPI + 2.5%.

For pension members in a conservative option, the objective has been changed to CPI + 2%, down from CPI +3.5%. For the balanced option, the objective has been scaled down said CPI + 4% to CPI + 3.25%.

Vision also changed its strategic asset allocations (SAA) for some of its premixed options, particularly the conservative and balanced SAA.

Vision said this was done to better meet the new objectives and maintain a low probability of negative returns.

“We’ve also introduced gold as a new asset class for some of our premixed investment options. Gold may be a valuable source of diversification and provide some downside protection during market downtrends and in circumstances when currencies are depreciating,” Vision said.

In its balanced option, Vision will reduce its holding in Australian equities (from 20% to 15%), international equities (from 24% to 20%) and diversified bonds (from 20% to 15%).

It will also increase SAA in infrastructure (from 9% to 10%), property (rom 9% to 10%), alternative debt (from 13% to 15%) and cash (from 5% to 15%).

Vison Super chief investment officer Michael Wyrsch01 told Financial Standard the fund focused on what it could do to combat super low interest rates.

“When Vision Super reviewed our strategy this year we took into account the extremely low rates of interest around the world,” Wyrsch said.

“Low rates mean that returns for fixed interest look like they will continue to be very low, even out to 10 and 20 years. So the possibility of getting a negative return has increased significantly and expected returns have dropped for options with a significant weighting to fixed interest.”

He said Vision Super has adapted by reducing its allocations to fixed interest and reduced expectations for returns from its more defensive options and increased expectations of negative returns. fs

Macquarie introduces new wrap cash fee Elizabeth McArthur

Macquarie Wrap cash account holders have been hit with a cash administration fee, to be deducted from the interest accrued, which is higher than the interest rate.

The changes impact users of Macquarie Wrap, which has a cash account through which all transactions including super contributions, pension payments, fees and charges are processed.

The cash account already had an investment fee of 0.44% per annum, which will continue to apply until December.

But from 25 September 2020 customers will be hit with a new cash administration fee on top of that investment fee of 0.29% per annum. Macquarie said the new cash administration fee can be up to 1.23%.

The cash administration fee will be deducted from interest before it is credited to cash accounts each quarter – but the interest rate for the cash accounts is only 0.25% per annum.

Over the last three months, interest rates were as low as 0.17% for Macquarie Wrap cash accounts.

And, in a note to wrap users, Macquarie flagged future fee increases.

It said the new cash administration fee would increase from the 0.29% that will be charged in September to 0.73% in December. However, Macquarie will cut the cash investment fee of 0.44% when it introduces that increase.

Macquarie used to manage the money held in cash accounts through a managed investment scheme which invested in a deposit with Macquarie Bank. From December, cash accounts will be moved to a direct deposit with Macquarie Bank.

Wrap users have to keep at least $1000 in their cash account at all times to cover fees and transactions have to be administered through the cash account. However, the cash account is not sold as a cash investment feature and it is not suggested that clients hold large balances in the cash account.

Macquarie has other cash investments on its wrap platform. fs

Opinion

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

11

01: Sean Cookson

vice president and managing director APAC Financial Recovery Technologies

Why class actions are important for Australian investors and consumers

Class action litigation has become a media topic in recent months. As new legislation related to litigation funding comes in, what does the current landscape mean for investors? utside the US, Australia has one of the O more progressive approaches to litigation, although it is a mechanism that largely remains opaque. Despite this, class actions cases have been able to very effectively return more than $1.86 billion to Australian investors in recent years.

In the first half of 2020, there were 26 class actions filed globally outside the US, and with seven lodged in Australia – against businesses like Treasury Wines, Boral and Freedom Foods Group – this makes Australia the second most active country for class action cases.

This may well change as a result of multiple governmental interventions to the current class action landscape, starting with the High Court decision on common fund orders. In December of 2019, the High Court of Australia prohibited common fund orders at the start of class actions. Common fund orders require all potential members of a class action group to pay a shared commission to litigation funders from the proceeds of the claim.

The High Court decision meant that a system that supported more and open-class cases was replaced with a system that would support fewer cases, and ones that are filed on a closed class basis.

As an almost immediate response, on 18 June 2020 in a 22-16 vote, Victoria’s lawmakers passed a bill lifting the ban on contingency fees allowing lawyers to take a percentage of the amount recovered in a class action, as opposed to the time-costed billing model.

The Victoria decision is a step in the right direction back to the way things were prior to the High Court’s December 2019 decision invalidating common fund orders. It’s not a hard reversal, but a good start.

This decision allows lawyers to charge contingency fees for cases, thus eliminating the need of a litigation funder (only in the state of Victoria) and will also allow lawyers to file more cases on an open-class basis.

Easing the complex requirements for bringing a class action against a company has support from the Victorian Attorney-General, Jill Hennessy.

“We’re improving access to justice for ordinary Victorians by making it easier to bring

class actions for silicosis, wage theft, consumer harm and other forms of corporate wrongdoing,” Hennessy told The Age. This positioning resulted in a wave of corporate opposition, including from AMP. “Ultimately, that will result in a higher cost of doing business which will result in job losses and higher costs being passed onto consumers,” AMP chief executive Francesco De Ferrari said.

AMP is currently defending a class action being organised by Maurice Blackburn, as part of the fallout of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – and on July 29 it was announced another class action was being filed against AMP and its ‘buyer of last resort’ scheme.

It is unsurprising that this opposition position was adopted.

The reality is that investors we have spoken to – including some of Australia’s best known super funds – have said that the mechanism is not only a way of implementing their objectives and rights as ‘active investors’, but it is also an effective governance tool.

Litigation against corporate issuers should not be a process whereby lawyers spruik their cases to the public for months before either reaching a critical mass through an opt-in model or choosing not to proceed with the case.

This means some cases will not proceed because lawyers need funders due to the capital needs of large-scale litigation.

Also not being able to recoup costs across all potential class members on a contingency basis means that legitimate cases against corporate wrongdoing or a failure to communicate activity, as per ASX regulations, may die on the vine as a result of there not being enough institutional investors agreeing to participate and signing joining documents.

Institutional and retail investors deserve the right to be able to hold large companies to account through a legal mechanism that otherwise would inhibit an individual’s ability to be reimbursed for damages related to corporate wrongdoing.

As we stare into the void of a potentially sustained recession, any mechanism to ensure in-

The quote

As we stare into the void of a potentially sus­tained recession, any mechanism to ensure in­vestors are protected from misconduct by their providers or companies that they have invested their hard-earned money in is warranted.

vestors are protected from misconduct by their providers or companies that they have invested their hard-earned money in is warranted.

This remains a critical point. If the mechanisms to proceed with class actions are gummed up through regulation and other government-led interventions, what does that mean for the future of corporate activity?

Associate professor Sean Foley at Macquarie Business School highlighted this recently, when he wrote: “The question is how much worse our market would be in the absence of private enforcement actions. ASIC has been quick to hand out ‘please explain’ letters, but has been reluctant or unable to follow up with any meaningful enforcement actions. If company directors know that private enforcement actions were not possible, what would stop them from committing even more egregious acts of deception on an unsuspecting shareholder base?”

What this means for investors Investors should be concerned by government moves to curtail access to class actions.

Open-class or opt-out actions provide investors access to recovery against corporate wrong-doers for their alleged fraud.

These investors suffered an economic impact as a result of this alleged fraud, and more inclusive actions provide a greater access to justice.

Any mechanism that makes it easier for an investor to participate in class actions in which they are legitimate claimants should be encouraged.

These actions proceed to the courts because they are believed to have merit and often bridge the gap where other processes fail – such as where unions may be reluctant to litigate against large employers over failure to pay agreed wages.

The Victorian law change will likely see meritorious cases filed in that state that may otherwise fail to proceed elsewhere, and will result in better protection of investors’ best interests as well as ensuring easier access to litigation.

Ideally though, protection of investors and access to appropriate litigation should be led at the federal level. fs

12

News

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

Platform business in administration

01: Ross McEwan

chief executive NAB

Kanika Sood

Olvera Advisors’ Damien Hodgkinson and Kate Barnet were appointed as joint and several voluntary administrators to Spitfire Corporation and operating subsidiaries (Spitfire Asset Management, Spitfire Operations, Spitfire Machines).

They are also acting as liquidators to Aspiro.

Operations of Investar and Spitfire QP were unaffected.

“Our first task is to transfer the remaining financial planners and their clients off Spitfire Assets Managers platforms to new advisory software as quickly as possible. Company management had already undertaken much of this work as part of the unwinding of operations as a result of the sale of Wealthtrac to its original founders,” Damien Hodgkinson of Olvera said.

“We want to create as little disruption as possible, as we enter into discussions with creditors and shareholders.”

The shareholder who failed to meet its obligations under a subscription agreement was not named.

Last year, Spitfire acquired platform and wrap provider Wealthtrac, which at the time was used by 6000 advisers with $2 billion in funds under management, as it set its sights on an initial public offering.

Wealthtrac’s chief executive Matthew Johnson joined Spitfire as group chief executive in June 2019, before moving to a general manager, distribution role in October 2019 as the company brought in former BT general manager, platforms and investments John Shuttleworth as the chief executive. fs

Cash earnings fall, MLC sale pending: NAB Ally Selby

N The quote

NAB will take a disciplined approach to the exit of MLC Wealth and will execute a transac­tion at the appropriate time having regard for the interests of all stakeholders.

Super fees hit record lows Jamie Williamson

Fees across all super fund types dropped to record lows last financial year, according to a recent study conducted by Rainmaker.

The key finding of a review of 2720 products offered by 169 super funds, super fees came in at a total of $29.6 billion in 2019-20 – down 5% year on year. If we consider super assets as a share of gross domestic product, this converts to 1.6% of GDP. Looking at 93 not-for-profit funds, 68 retail offerings and seven eligible rollover funds, the average fee charged to members now sits at 1.04%. In 2018-19, the average was 1.12%.

Not-for-profits came out on top as the lowest cost strategies. Responsible for 52% of total super savings, fees paid by NFP fund members account for the same amount in fee revenue.

In contrast, retail fund members are paying 29% of total fee revenue despite only representing 23% of the system’s funds under management.

That said, NFP funds have an average 0.32% administration fee while the retail segment has a 0.09% investment fee advantage. Rainmaker also said retail fund fees are on their way down and have been since 2015, largely as a result of the FoFA reforms.

The remaining 25% of super assets are held by self-managed super fund members who have it quite good, paying just 19% of fee revenue. fs

ational Australia Bank has reported a 7% fall in cash earnings to $1.55 billion for the third quarter, as the bank confirms it is still “actively exploring” options for the sale of its wealth management business.

While a public market exit for the bank’s subsidiary MLC Wealth is still on the cards, NAB noted it was also exploring alternative transaction structures - including a private sale of the business.

Effectively separating the operational functions of the wealth management business in July, NAB said it was now focused on customer remediation and enhancing long-term business sustainability to assist with the exit.

“NAB will take a disciplined approach to the exit of MLC Wealth and will execute a transaction at the appropriate time having regard for the interests of all stakeholders,” it said.

Any transaction, be it a public float or private sale of the business, remains subject to market conditions and regulatory approval, NAB said.

“We have a clear plan for NAB and we are getting on with it, including quickly embedding our new operating model and creating clear accountabilities,” NAB chief executive Ross McEwan01 said.

“We are investing in our colleagues and executing fewer, more important projects. This will make a real difference to how well we serve customers and drive sustainable performance.”

The third quarter results, including slightly higher expenses as well as a 5% lift in credit impairment charges, were buoyed by “decisive ac-

tions” taken by the bank in April to strengthen its balance sheet, McEwan said.

“Our 3Q20 result is reflective of the current operating environment, characterised by volatile markets, subdued credit demand, low interest rates, cost pressures and deteriorating asset quality,” he said.

“In navigating these near-term challenges, we have not lost sight of the need to invest for NAB’s long term future.”

Compared with quarterly averages from the first half of the year (and excluding “large notable items”), cash earnings increased by 24% in the quarter, while cash earnings before credit impairment charges increased by 17%.

As of June 30, the bank had more than $3 billion reserved for credit provisions, with the bank writing off $208 million in credit losses over the three months to end of June.

“Compared with the 1H20 quarterly average credit impairment charges fell 2% to $570 million,” NAB said.

“This reflects non-repeat of the COVID-19 Economic Adjustment top-up at March, partly offset by higher collective charges given deteriorating retail asset quality and re-ratings across non-retail exposures, combined with higher specific charges relating to a small number of single name exposures.”

The ratio of collective provisions to credit risk weighted assets lifted to 1.28% in June, NAB said, with increased home loan delinquencies seeing the ratio of 90+ days impaired assets increased. increase by 9bps to 1.06%. fs

Wealthy Aussies panic buy life insurance Annabelle Dickson

High net worth investors have resorted to panic buying life insurance products as a result of the COVID-19 pandemic despite low trust in the providers, according to the latest research from GlobalData.

The analytics and data firm’s 2020 Global Wealth Managers Survey revealed 88% of wealth managers reported heightened demand for life insurance products which was the highest among the 19 countries surveyed.

It comes as GlobalData’s COVID-19 Tracker Survey highlighted that 83% of Australians were quite or extremely concerned about the outbreak of the pandemic, with only 5% who were not concerned.

GlobalData senior wealth management analyst Heike van den Hoevel said: “Panic buying does not end with food. In the face of growing concerns surrounding infections, Australian HNW investors are looking for ways to care for their families.”

Despite the panic buying, 96% of wealth managers agree that customers have lost confidence in the life insurance industry as a result of the COVID-19 pandemic.

“This is a worrying statistic – the reputation of insurers has taken a battering amidst COVID-19 and HNW investors will be more likely to buy insurance products via a third party they already have a well-established relationship and trust. This means now is clearly the time for wealth managers to review their life insurance proposition,” he said.

In addition, 61.5% of Australian believed that the COVID-19 situation will get ‘a bit’ or ‘a lot worse’ over the next month.

This compares to only 28.7%, who expected the situation to deteriorate at the beginning of May. van den Hoevel said negative sentiment will continue to support the demand for life insurance products with nearly half of wealth managers surveyed expect an increase and almost none expect demand to fall.

“However, the lack of trust in insurance providers continues to have a significant effect on the provider selection. The crisis has been a double-edged sword – COVID-19 is driving demand but has also had a negative impact on the insurance providers’ image.” fs

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Subscribe now at www.fssustainability.com.au

14

Feature | Global equities

PAST THE PANDEMIC From trade wars and the Hong Kong protests to a global pandemic and the upcoming US election, the Asia Pacific region is facing its fair share of headwinds.

But, as Eliza Bavin explains, that doesn’t mean opportunity has dried up.

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

Global equities | Feature

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

W

hen US President Donald Trump was elected he made no secret of the hard stance he would be taking on China. It practically dominated the headlines, and while opinions of him are wide-ranging, he certainly followed through on his promise to crackdown on the King in APAC. The trade war has carried on for Trump’s entire presidency, with only fleeting moments of progress as both sides signed Phase 1 and 2; touted by many as simply agreements to come to an agreement in the future.

Global markets were in constant reaction mode as bits and bobs were revealed, many traders believing the trade war would be the catalyst to disaster. Hindsight though, much like this year, is 20/20 and the global market reckoning was not brought about from a trade war with China, but instead a pandemic originating there.

But there have been so many issues plaguing the APAC region in the last few years; including, of course, the Hong Kong protests.

Hong Kong has long been the financial hub in the APAC region, providing investors a western system with a leg-up into accessing the Chinese market.

The protests rocked the region; starting in March 2019 and only pausing as COVID-19 started its spread around the globe.

15

01: Stephen Miller

02: Kris Walesby

03: Nikki Thomas

advisor GSFM

chief executive ETF Securities

portfolio manager Alphinity Investment Management

The protests were triggered by the introduction of the Fugitive Offenders amendment bill by the Hong Kong government.

The bill, which has since been aborted, would have allowed extradition to jurisdictions with which Hong Kong did not have extradition agreements, including mainland China and Taiwan.

The severe effect of these protests, along with the ongoing US-China tensions and the effects of the pandemic, have threatened Hong Kong’s place as the region’s financial hub.

Since the bill was introduced in February 2019, the HSI Index has fallen 12% against the MSCI World’s 16% increase.

More telling, from the March COVID-19 lows, the MSCI World Index has regained 47% while the HSI has rebounded just 13% (se Figure 1).

It has many investors wondering which country may be next to take over in the region, and what effects that will have on markets around the world.

The end for Hong Kong?

GSFM advisor Stephen Miller01 believes it is almost inevitable that Hong Kong will lose its status as a financial hub.

“I suspect it will increasingly migrate to Singapore. I still think there will be an incentive for a number of financial firms to continue to have a fairly significant presence in Hong Kong but I think it is inevitable that it will lose its status as a financial centre,” Miller says.

“Hong Kong will still be an important centre, because the Chinese market is probably, at the

Figure 1. HSI Index performance

INDEX PERFROMANCE - GROSS RETURNS (%) (31 JULY, 2020) ANNUALISED

1 Mo

3 Mo

1 Yr

YTD

3 Yr

5 Yr

10 Yr

Since 31 Dec, 1987

MSCI Hong Kong

-0.74

1.01

-12.42

-10.42

-0.53

2.78

6.72

10.62

MSCI World

4.82

12.91

7.82

-0.93

8.12

8.13

10.22

7.89

MSCI ACWI

5.33

13.54

7.76

-0.98

7.56

7.96

9.45

7.83

Source: MSCI

Hong Kong will still be an important centre, because the Chinese market is probably, at the end of the day, too big for any firm with global aspirations to ignore.

Stephen Miller

end of the day, too big for any firm with global aspirations to ignore.”

Likewise, Kris Walesby02 , chief executive of ETF Securities thinks the current political turmoil is going to change investing in the region for good and agrees Singapore is the logical next hub.

“China is sending a strong message to the world, not just to Hong Kong. How global businesses use and access financial markets in Hong Kong will change and there will be a transition period to establish the extent of Chinese control and how strictly national security measures will be enforced,” Walesby says.

“The outcome of this will determine next steps for the city but will also create opportunities for other countries to fill the gaps. Singapore is likely to benefit from the transition, but we may also see other financial hubs rise.”

Walesby says India is a good example. Despite the challenges it has faced in the COVID-19 pandemic, he says, India is otherwise well positioned for future growth with business-friendly policies.

“With many countries increasingly wary of their trade dependencies on China, India is becoming a sought-after alternative, and its financial markets and position as a financial hub may follow,” Walesby says.

Many considerations come into play; sovereign risk, location, time zone, language, education all play into the choices.

These factors combined point to Singapore also, according to Nikki Thomas03 , portfolio manager at Alphinity Investment Management.

“It is difficult to make major changes to financial flows quickly. Over the longer term it is harder to be confident of the exact place Hong Kong will have,” Thomas says.

“It is an important hub for China and China’s financial scale continues to expand. For western companies however, its accepted governance, rule of law and low sovereign risk are becoming more debateable.”

Recently, Australian Senator Andrew Bragg commented that: “The political upheaval in Hong Kong has created an opportunity for Australia and Sydney to become a stronger regional financial centre.”

Crestone Wealth Management head of equi-

Can I find a firm whose long-term approach is designed to endure bear markets?

Since 1934, our equity-focused strategies have outpaced their market indices two thirds of the time. With Capital Group, I can.

Capitalgroup.com/au FOR PROFESSIONAL INVESTORS ONLY. This material is of a general nature, and not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

In Australia, this communication is issued by Capital Group Investment Management Limited (ACN 164 174 501 AFSL No. 443 118), a member of Capital Group. © 2020 Capital Group. All rights reserved.

16

Feature | Global equities

ties Todd Hoare 04 thinks Hong Kong will keep its position but also agrees that if the current issues boil over, Singapore seems next in line and Australia would not be considered a leading contender.

“As is the case with Japan, Australia lacks the tax competitiveness of Hong Kong whilst language barriers in Japan and South Korea would need to be overcome to take over Hong Kong,” Hoare says.

“Taiwan remains politically sensitive. Singapore is a likely beneficiary given similarly low levels of corporate tax and a business friendly environment.”

Ironically, Hoare says, China itself could stand to benefit the most. Prior to 1949, Shanghai held the mantle as Asia’s capital markets hub.

“Shenzen, just across from the Hong Kong border, possesses population, economic growth and gateway status,” Hoare explains.

“The key will be whether employees and foreign capital find these locations attractive enough to usurp Hong Kong.”

Taking a different approach - and even before the unrest in Hong Kong - Flavia Cheong05, head of equities for Asia Pacific at Aberdeen Standard Investments, began reducing exposure in Hong Kong, reallocating capital to structural growth opportunities in mainland China.

“Unrest in Hong Kong has had little effect on investor appetite or sentiment in mainland China. Revenues from Hong Kong are not that significant for most mainland Chinese companies,” Cheong says.

“What’s more, most of the trading volume in the China A-share market is driven by domestic investors, not international ones.”

From May 31 last year to 12 August 2020, the MSCI Hong Kong index has underperformed the MSCI China A Onshore benchmark by more than 40%.

The start of the period marks the point at which protests in Hong Kong intensified.

This bifurcation of performance, Cheong says, reflects the vastly different outlook for the two markets: on mainland China, structural growth and relative stability; in Hong Kong, a mature economy and social unrest.

Xiaoyu Liu, emerging market and Asia Pacific equities fund manager at Aviva Investors, thinks that Hong Kong is much too important to China to allow it to lose its place.

“We expect Hong Kong to remain one of the most important financial hubs in Asia. The geo-political tensions between China and the US have reinforced Hong Kong’s role as China’s offshore financial centre,” Liu says.

“Chinese companies will need Hong Kong now more than ever if the US ceases to be a listing option to attract external capital.”

Concerns over the relationship between the US and China are almost more prevalent now than ever before after Trump signed an

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

04: Todd Hoare

05: Flavia Cheong

06: Brian Kersmanc

head of equities Crestone Wealth Management

head of equities - Asia Pacific Aberdeen Standard Investments

senior investment analyst and portfolio manager for international equities GQG Partners

executive order to ban US companies buying Chinese companies in the wake of the TikTok national security scandal.

“Many well-known Chinese technology giants, including Alibaba, NetEase, Ctrip and JD.com, which are currently listed in the US are coming to Hong Kong with a secondary listing,” Liu explains.

“Recently, Ant Financial, an affiliate of Alibaba, announced its listing on both the Hong Kong Stock Exchange and the Shanghai Star board, skipping the US.”

It’s all about tech When Trump cited national security concerns and announced heavy handed restrictions on Chinese tech behemoths, TikTok and WeChat, the tech sector was rightly concerned.

The executive orders barred any transactions with either company by any person or involving any property subject to the jurisdiction of the US. This created a major hurdle for US companies hoping to gain access into the Chinese market through already established local brands.

Eaton Vance director of country research and portfolio manager, global income Marshall Stocker believes that this tension between the US and China is precisely why Hong Kong will remain relevant.

“China is the world’s second largest economy and Hong Kong is its financial nexus for interfacing with the world. There is no comparable onshore alternative for China, particularly in the absence of an open capital account,” Stocker says.

“There are arguably forces, some geo-political in nature, which will reduce onshore China’s need or ability to interface with global financial markets, but these same forces may bring China-related financial market activity from the US and UK capital markets back to Hong Kong.

“One such example would be the delisting of Chinese tech stocks in the US in favour of a Hong Kong listing.”

As Miller explains, most big global companies have aspirations to crack China, whether it’s in tech, finance or even manufacturing.

“All big tech and financial firms want to crack China because it is such a huge and growing market,” he says.

“To the extent that relations aren’t good between China and the West, and we have this regulatory tit-for-tat dispute, it is going to cut the capacity for US tech firms to grow in China and Chinese tech firms to grow in the US.” In the current scenario, Miller explains, everyone loses.

But Brian Kersmanc 06 , senior investment analyst and portfolio manager for international equities at GQG Partners based in the US, says the fact that it is a lose-lose situation is exactly what is acting as a protective force.

Taiwan remains politically sensitive.

Singapore is a likely beneficiary given similarly low levels of corporate tax and a business-friendly environment.

Todd Hoare

“The one thing that protects you against that slippery slope is the fact that it would be a mutually assured destruction,” Kersmanc says.

“The truth is both the US and China rely on each other to sustain their supply chains.

China is heavily reliant on the US for their high IP technology, and the US is heavily reliant on China to put together the hardware side of things.”

But there are other opportunities, and perhaps despite the big tech firms missing out it is simply giving way for other tech to thrive.

Capital Group’s investment director for Australia and New Zealand Matt Reynolds 07 says that technology trends are accelerating in 2020 and the consequent behavioural changes seen during the pandemic are likely to persist.

For example, low penetration rates of mobile wallet transactions indicate a long growth runway for mobile payments companies in, for example, China (35% penetration rate), India (30%), the US (9%) and UK (7%).

“What’s helping drive our analysis, and what doesn’t get distinguished often enough perhaps, is that technology is not a homogeneous category; there is a wealth of diversity within broader technology sub-sectors,” he says.

“As a bottom-up investor in multinational companies of the future, we believe it is important that investors understand the drivers and dynamics of technology sub-sectors and analyse each company individually to assess the durability and permanence of a company’s competitive advantage in that sub-sector.”

And the big thing to pay attention to as the world keeps changing is 5G, which Reynolds believes is going to be a huge driving force in the future.

“Early identification of the companies that will be long-term beneficiaries of the shifts that 5G will usher in is critical to maximizing investment gains. In this sense, investing in early adopters has big consequences,” Reynolds explains.

“We look at the 5G opportunity set on three levels: 5G providers, like telecommunications companies; 5G enablers, like infrastructure companies such as tower providers and semiconductors; and 5G users, such as financial services, media and entertainment and transport logistics companies.

“For investable opportunities right now, we think the 5G enablers are among the candidates with the most attractive growth potential in terms of 5G exposure.”

Cheong agrees that 5G is likely going to have big potential in the region, but the ongoing tensions may serve as sobering.

“We continue to like the technology sector, which remains underpinned by structural growth drivers such as cloud computing, data centres, 5G and digital interconnectivity,” she says.

“However, we are mindful that tech is becoming a politically sensitive issue in the run-up to

18

Feature | Global equities

the US election, amid disruptive pressure on Huawei and increasing friction between the US and China.

Main Street Financial principal Charles Badenach08 has been telling his clients to add some extra protection to their portfolios given the current global climate.

“Investors are currently relying on COVID-19’s impact, reducing, fiscal and monetary support continuing at the scale required which is a concern in itself, while the US share market, and its IT sector in particular, continuing to outperform,” Badenach says.

“This may or may not transpire but we have been recommending clients add some extra protection to their portfolios through diversification, more defensive equity sectoral allocations and ensuring their defensive exposure is sufficient to meet their day-to-day cash requirements for the medium term.”

Badenach says he works closely with an asset consultant to help build, adjust and review their portfolios.

“This proactive approach to asset allocation has worked well in this unsettling period for investors,” he says.

“We have been adopting an increasingly cautious approach particularly with new monies, adopting a dollar cost averaging approach when investing and using a dynamic asset allocation approach.

“This has enabled us to be strategic in how these monies have been invested.”

The ripple effect Generally speaking however, political uncertainty and geopolitical risks have seemingly risen over recent years with effects more consequential to investment strategies.

JANA senior consultant Justin Tay09 says this is as much a general rise in populism particular to western countries as a function of North Asian regional dynamics.

“To this end, the Trump administration’s policies and communications have been a destabilising factor that have had a disproportional effect on emerging markets,” Tay explains.

“The US’s harder line approach on re-cutting trade deals and mitigation of China’s technological development and influence has led to uncertainty to capital allocation decisions, for investors and companies alike.”

Tay says an example of this is the acceleration of the trend of western company offshore manufacturing moving from China to other countries, which could result in a growth in business, and direct and indirect investment activity in these countries.

Conversely, a tougher stance by the US regulators on the auditing of company accounts is expected to see the repatriation of US Chinese company ADR listings to the Hong Kong exchange.

And the global pandemic has only served to

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

07: Matt Reynolds

08: Charles Badenach

09: Justin Tay

investment director for Australia and New Zealand Capital Group

principal Main Street Financial

senior consultant JANA

complicate issues facing investors, particularly when it comes to investing offshore.

Hoare says it is often very difficult to isolate global issues – such as COVID-19, US dollar strength or weakness, trade frictions, interest rates – from an individual investment.

“It is possible that the world is becoming less cohesive, rather than more, it is highly unlikely that investors can base a locally-domiciled investment without having an eye to global issues,” he says.

“However, the significant amount of both fiscal and monetary stimulus has resulted in global equities trading with around 3% of their all-time highs, in spite of the significant loss of economic output and higher unemployment.

Asian equities, led by China, have performed even more strongly, surpassing their preCOVID peaks.”

Tay says geopolitics remains a key consideration within global investing today and he holds the view that COVID-19 has exacerbated preexisting tensions.

“We would also highlight broader global issues, such as an unwinding of globalisation and rising populism, as key considerations for the global outlook,” Tay says.

“In aggregate, JANA believes these global forces are likely to result in heightened periods of economic and market volatility, due to increased uncertainty about the outlook for the global economy and politics, specifically, company regulation.”

Tay says this will likely result in greater scrutiny of the large US technology companies within China.

“COVID-19 is accelerating a number of structural trends in the global economy, such as the growth of e-commerce, the structure of supply chains and on-shoring of production, that is likely to have material but differential long-term impacts on individual countries, industries and individual companies.”

“JANA believes these global issues present both opportunities and risks for investors.”

And greater uncertainty has limited the extent to which companies, that have the flexibility to do so, can seek to capitalise on opportunities presented by the crisis.

“It is perhaps a different story for companies that have been clear beneficiaries of the COVID-19 - induced crisis, where some trends have been brought forward by a number of years, including greater structural adoption of e-commerce and working from home infrastructure,” Tay says.

“It is likely that for these companies, planned capital expenditure from the future can be brought forward to meet the increasing demand today and capture market share.”

Cheong says Asia Pacific equities have done surprisingly well since Q1, buoyed by stimulus measures, but the constant threat of a second wave is keeping global markets stagnated.

Low interest rates will be here for a long time, so growth and cash flows will be critical to future returns and global equities is the best asset class to find those.

Nikki Thomas

“In July, markets cheered the European Union’s agreement on a €750 billion recovery fund and the US government’s proposal of another US$1 trillion in stimulus. Rising vaccine hopes further lifted sentiment,” she explains.

“Nevertheless, a resurgence in COVID-19 infections in several countries near month-end raised concern that the fragile economic recovery could stall.”

Thomas agrees, but she says Alphinity’s belief is that the pandemic will impact both good investments and future public policy significantly.

“But I don’t think it changes the desire for people to want to invest globally. The opportunity remains compelling when thinking about wealth creation over the long term,” she says.

“Low interest rates will be here for a long time, so growth and cash flows will be critical to future returns and global equities is the best asset class to find those.”

Internationally share prices are responding to the changes in expectations for future earnings and cash flows and this is expected to continue for some time, as COVID-19 remains the prime influence on the global investment outlook.

“Unfortunately, the latest developments have been largely on the downside and until there is a degree of certainty on what the new normal is for businesses it will remain a challenging environment for investors,” Badenach says.

“To fully recoup the COVID-19 induced losses will still take some time, particularly if restrictions are reintroduced in key pockets of the global economy and supply chains during the coming weeks and months.”

Badenach says many of his clients are expressing concerns given the global climate.

“For many it does feel as though we are stepping into the unknown, and in my view I feel many have underestimated the impact which the ‘new normal’ will have on the economy globally,” he says.

There is, however, opportunities in the current COVID-19 environment, Badenach says, in areas such energy, financials, the UK market and emerging markets that many investors have so far avoided.

“Much of the uncertainty in these areas has already been considered in the price, meaning that a little good news will lift investor perceptions,” he explains.

The other important broader issue, Thomas says, is sustainability; directing capital to places which support and drive positive change in the way we operate as a society is crucial and it is accelerating.

“I expect having a competitive capability in sustainability and ESG will become a ticket to play for any global asset manager, not a ‘nice to have’,” Thomas says.

“Global equities is a key asset class to help drive change in corporate actions.” fs

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www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

19

01: Paul Hennessy

senior vice president and managing director Capital Group Australia

Time, not timing, might be more important than ever At Capital Group, we believe that portfolios with downside resilience and lower volatility can help protect investors and help them meet their retirement objectives. he coronavirus pandemic continues to preT sent challenges all around the globe and for many investors, there is a completely understandable heightened sense of anxiety about not only the short-term financial consequences, but also what it might mean for the retirement that many have imagined is ahead of them.

Purely from an investment sense, this is what market volatility can do. In some, it creates doubt, in others it creates panic and for nearly all, volatility creates anxiety.

At the same time, the coronavirus pandemic has educated all of us on the notion of ‘herd immunity’. While governments and health experts debate the efficacy of herd immunity as a public health strategy, it is perhaps useful and reassuring to extrapolate this to the investment notion of ‘herd mentality’; remembering that for investors, this argument goes that it is precisely the wrong time to buy and sell investment securities when the ‘herd’ is doing the same thing.

When investors see the value of their portfolios diminishing, their aversion to losses can compel them to sell into a falling market. And once they have sold, many then stay out of the market, feeling burnt by the experience. But that very reaction can cost investors dearly, as those who sit on the sidelines risk losing out on periods of meaningful price appreciation that follow market downturns. Even just miss-

ing out on a few trading days can take a toll.

It is a great reminder that time itself is, essentially, one of the best investment defences to keeping the retirement picture intact.

For example, a hypothetical investment of US$1000 in the global equity MSCI ACWI index made in 2010 would have grown to US$2060 by the end of 2019. But if an investor missed the 30 best trading days of that period, they would have lost 99% of that return; and missing the 40 best trading days in that period would have seen the investor with a smaller amount than their original investment.

Unfortunately, previous market downturns have shown that for many investors, avoiding the investing herd mentality can prove to be irresistible. Selling into falling markets, and subsequently staying on the sidelines, can have major financial ramifications on retirement incomes and threaten the retirement that many have imagined, and deserve.

At Capital Group, it is our belief that portfolios with downside resilience and lower volatility can help protect investors and help them meet their retirement objectives. Seeking out investment strategies with a track record of doing well, not only in up markets but also in down markets, can be very reassuring. Calm analysis and long-term thinking can be an investor’s best friend in disruptive periods.

The quote

Calm analysis and long-term thinking can be an investor’s best friend in disruptive periods.

ABOUT CAPITAL GROUP Capital Group is one of the oldest and largest asset management companies in the world, managing multi-asset, equity and fixed income investment strategies for different types of investors. Since 1931, Capital Group has been singularly focused on delivering superior, consistent results for long-term investors using high-conviction portfolios, rigorous research and individual accountability. Today, Capital Group works with financial intermediaries and institutions to manage more than US$2.1 trillion in long-term assets for investors around the world. Capital Group has an integrated global research network of more than 400 investment professionals and its portfolio managers have an average of 28 years investment experience.

Data as at 31 December 2019. Source: Capital Group FOR PROFESSIONAL INVESTORS ONLY The information provided is neither an offer nor a solicitation to buy or sell any securities or to provide any investment service. Statements attributed to an individual represent the opinions of that individual as of the date published and may not necessarily reflect the view of Capital Group or its affiliates.

Figure 1. Missing just a few best days in the market can hurt your investment returns.

Missing just a few best days in the market can hurt your investment returns.

Value of hypothetical $1000 investment in the MSCI ACWI, excluding dividends, from 1/1/10 to 31/12/19

The information provided is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.

$2060 $1539

$1000 original investment

Invested entire period

Lost 49% of return

$1224 Lost 79% of return

Missed 10 best days

Missed 20 best days

$1007 Lost 99% of return

Missed 30 best days

Past results are not a guarantee of future results. For illustrative purposes only. Investors cannot invest directly in an index.

Past results are not a MSCI. guarantee of future results.

For illustrative Sources: RIMES, As of 12/31/19.

Values in USD.purposes only. Investors cannot invest directly in an index.

Data as at 31 December 2019 in USD. Source: RIMES, MSCI

Global markets and economies around the world, by and large, are now relatively acclimatised to the extraordinary conditions that the COVID-19 pandemic has presented. For now, at least.

But to imagine markets and economies have reached some sort of new equilibrium would be premature, as circumstances continue to evolve and markets and economies continue to search for their next phase of co-existence, post-pandemic.

It is not easy riding the rollercoaster that investment markets occasionally throw up, and even more so when whole societies are challenged by unknowns that a pandemic like this one continues to present.

But to ensure that investors can keep on track for the retirement that many of them have imagined, and worked towards, it is critical to stay invested over the long term, through the highs and lows. fs

$845 Lost 15% of original value

This communication has been prepared by Capital International, Inc., a member of Capital Group, a company incorporated in California, United States of America.

The liability of members is limited. In Australia, this communication is issued

by Capital Group Investment Management Limited (ACN 164 174 501 AFSL No. 443 118), a member of Capital Group, located at Level 18, 56 Pitt Street, Sydney NSW 2000 Australia.

All Capital Group trademarks are owned by The Capital Group Companies, Inc. or an affiliated company in the US, Australia and other countries. All other company and product names mentioned are the trademarks or registered trademarks of their respective companies. © 2020 Capital Group. All rights reserved.

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News

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

Praemium shows growth in crisis

01: Michael Pillemer

chief executive PPS Mutual

Eliza Bavin

Praemium has posted a positive full-year result despite the impacts of global headwinds caused by the COVID-19 pandemic.

The platform provider saw a 26% increase in global funds under administration to $20.3 billion, a 14% increase in revenue to $51.2 million and a 25% increase in underlying EBITDA to $14.2 million.

Praemium said it had record gross platform inflows of $3.3 billion, a 9% rise, and it posted a net profit after tax of $4.9 million which was a 91% increase from FY19.

“Praemium has reported improve financial results despite a number of challenges across the 2020 financial year,” it said.

“These include a global market downturn following the COVID-19 pandemic, the transmission of a major Australian platform client and outflows from the run-off of the Smartfund 80% Protected range of funds.”

The platform provider said it is now focused on completing the conditional takeover of Powerwrap, announced in July.

It said the acquisition will complement the existing business’ growth strategy and product suite, with the merger set to increase FUA to over $28 billion.

Chief executive Michael Ohanessian said despite ongoing challenges in 2020 it has also been a very productive year for the company.

“Several key strategic initiatives introduced in 2019 began to deliver results in 2020. Having launched a highly competitive full-service platform, we took the next logical step with a significant uplift in sales and marketing,” Ohanessian said.

“While still early, having a larger sales team to cover the global markets that we address showed promising results in FY20.” fs

Fiducian posts $10.5m in FY20 ASX-listed Fiducian Group doubled its net inflows to $217 million in FY20, as it posts $10.5 million in statutory net profit for the year.

Net profit for the group – which includes funds management, financial planning, corporate and platform administration – was mostly flat, rising only about 1% from FY19’s $10,350. Group gross revenue was $54.9 million.

The biggest contributor, funds management ended June 30 with $2.79 billion in total funds under management, across 15 strategies.

Revenue for the segment was $14.95 million (up 7.9% over previous year) and net profit was $9.377 million (up about 9.4%).

Fiducian’s financial planning business now has 41 practices and 74 representatives, with about $3.05 billion in funds under advice (about $412 million of which came from acquisitions in FY20).

The financial planning segment grew revenue by about 23% to $20.78 million. However, its contribution to the net profit tumbled from a loss of $729,000 last year to a loss of $1.69 million this year.

The third segment, corporate and platform administration grew revenue by about 11% to $19.17 million. The corresponding profit for the segment was up 4.6% to $7.2 million. fs

Front loaded discounts lead to worse outcomes Annabelle Dickson

F The quote

All too often it is financial advisers that bear the brunt of these poor insurer practices.

ront loaded discounts in the retail life insurance market reel in clients but are found to be more costly over the long term and leads to lapses in policies, according to Rice Warner.

New research, commissioned by PPS Mutual, found that front loaded discount policies draw in clients with lower premiums in the first year but have higher premiums from the third year onwards, leading to financial advisers copping the brunt of lapses.

PPS Mutual chief executive Michael Pillemer01 said that a customer of an insurer who was offered a 25% discount up front could face 50% more in premiums once the account aged-based increases and indexation is added in the second year.

“The effect that these sharp premium increases have psychologically on a client, and the increased likelihood the client will lapse as a result, should not be underestimated,” he said.

In addition, the discounted policies are more likely to lapse due clients wanting to continually switch to a lower first year premium.

“In 2019, life insurers lost $1.3bn, lapse rates for traditional life insurers remained stubbornly high at about 17% and policyholders have had to endure significant and repeated increases in premiums (in some cases by more than 35% year on year),” Pillemer said.

“We must also not allow the inevitable criticism for poor risk management and product design to be sheeted back to advisers. All too often it is financial advisers that bear the brunt of these poor insurer practices.”

The retail life insurance industry has adopted these discounts to gain market share but the research demonstrates how over five to 20 years, policies with front loaded discounts have significantly higher premium increases relative to the first policy year.

PPS Mutual asserts that the poor outcomes are a result of the life insurance industry grappling with issues based on the macro socioeconomic environment which has led to an aggressive chase for market share by various insurers.

The report also demonstrated the difference between non-true level premiums and true-level premiums in medium and longterm cost. The premiums are very similar for the first five policy years, but by the eleventh policy year the most affordable non-true level premium is higher than the least affordable true level premium.

Pillemer said: “We recommend the findings of Rice Warner’s study to financial advisers and their licensees to assist in providing advice that is in the best long-term interest of the client.” fs

Young-old wealth gap worst on record Kanika Sood

Counting on your children’s lives being better than yours? It’s not a given as new Actuaries Institute report finds the relative wealth and wellbeing of 25 to 34 year olds is the lowest in 18 years.

The Actuaries Institute’s publication Mind the Gap – The Australian Actuaries Intergenerational Equity Index (AAIEI) tracked 24 indicators across six domains relating to wealth and wellbeing from 2000-2018 across different age groups.

The intergenerational wealth gap has widened particularly since 2012, according to the researchers including Hugh Miller, Ramona Meyricke and Laura Dixie who have Phds in statistics, financial economics and physics respectively.

“We are all very used to the idea our children will live better lives than we do,” Dr Miller said.

“We expect continuous improvements in government services, better products, higher incomes, and improved health. But an increasing majority of parents fear that as today’s children grow up, they will be worse off financially than their parents.

There are a broad range of economic, housing and

environmental issues that appear to be worsening.”

The researchers found that while younger people have better health, education and social outcomes than other cohorts, they have faced lower wage growth, masked underutilisation and lower levels of home ownership.

Another driver is the skew of government spending towards older Australians – it rose from 3.7% of the GDP to 4.5% for 65-74 year old but was flat for 25-34, 45-54 age groups.

“It is very important to understand how equity is changing between generations over time,” said Actuaries Institute chief executive Elayne Grace said.

“It helps inform public debate, and government policy, to deliver the best and fairest outcomes for all Australians. We need policy and outcomes that are sustainable.”

As a solution, the paper suggests reviewing the rate of unemployment benefits, tightening superannuation tax concessions (also a call from Grattan Institute, as superannuation industry awaits the Retirement Income Review’s final report) and greater action to mitigate climate change. fs

News

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

21

Executive appointments 01: Nicole Kidd

Schroders appoints head of private debt Schroders has hired from RBC to appoint a head of private debt for Australia, as it builds out a private assets offering for local investors.

Nicole Kidd01 was previously RBC’s head of corporate banking Australia and institutional client management Asia Pacific and a managing director.

She starts at Schroders on September 1 and will work on its Australian private debt function, which sits within the broader fixed income and multi-asset team reporting to the team’s head Simon Doyle.

She also reports into George Wunderlin, who was appointed global head of private assets (reporting directly to group chief executive Peter Harrison) last year.

Schroders’ private assets and alternatives business manages $81 billion across private equity, securitised credit, infrastructure finance, insurancelinked securities, impact investing and real estate.

It began building out its private assets offering locally this year, with a private equity fund of funds launched last month, first reported by Financial Standard in January. Plans for a private debt offering with ANZ focus were also underway.

Kidd has 25 years of investment banking and asset management experience.

“Nicole brings a depth of experience in private debt to Schroders. She is an investor of extremely high calibre and experience, and has a proven track record with a strong client focus. These qualities will serve our clients well as she strives to deliver high quality outcomes for their portfolios,” Schroders chief executive for Australia Chris Durack said.

A key strategic priority for the Schroders business is to continually develop and evolve its Australian investment teams and capabilities, he added.

“The developing fixed income landscape provides us with an opportunity to invest in our private debt capability, and over time we aim to build solutions to provide our clients with greater access to these attractive markets,” Durack said.

“The bank debt market in Australia is becoming increasing disintermediated, providing opportunity for institutional investors to gain access to favourable risk-adjusted returns. This is a result of both increasing bank regulation (where traditional bank returns are more difficult to achieve with higher capital imposts), and desire for banks to hold lower concentrations of single asset exposures on their balance sheets than they previously were, meaning the door is open for so-called ‘non-traditional’ lenders.”

Synchron compliance lead moves to AMP Synchron’s former general manager of legal, risk and compliance has a new role at AMP. Michael Jones started as head of risk and control, advice at AMP on August 17 after four years with Synchron.

Earlier in his career, Jones was director, compliance at UBS Wealth Management Australia for six years and spent two years as a compliance manager at IFM Investors.

Synchron said it chose not to fill the role vacated

Super fund deputy chief departs Graeme Arnott left the position as deputy chief executive of First State Super last month.

A First State spokesperson confirmed the news, saying Arnott’s contract was scheduled to finish on 30 June 2020, but he stayed on in the role until July 31 as the fund finalised its plans to merge with WA Super.

“I can confirm that Graeme Arnott retired at the end of July, so has left First State Super,” the spokesperson said.

“The deputy chief executive role is not being replaced and we are not expecting any new executive announcements when our brand changes to Aware Super next month.”

First State said Arnott had signalled his intention to leave at the conclusion of his contract back in April.

Arnott held the role of deputy chief executive since the integration of financial planning and advice business, StatePlus, into the First State organisation in 2019.

Prior to that, he was chief executive officer of StatePlus after First State Super acquired the organisation in 2016.

by Jones but instead to promote both heads of compliance so that they report directly to the Synchron board.

According to Rainmaker data from June, AMP is the largest advice AFSL in Australia with 1025 registered advisers, a 4.7% market share.

The second largest is the SMSF Adviser Network, an AFSL designed for accountants that want to be able to provide SMSF and superannuation advice to clients with 858 advisers registered.

Synchron is the third largest AFSL in the country with 519 advisers registered, giving it a 2.4% market share.

“We thank Michael for the valuable contribution he made to Synchron during his time with us.

He leaves with our very best wishes,” Synchron director Don Trapnell said of Jones’ departure.

New chair at Platinum Asset Management Platinum has appointed a new chair as Michael Cole gets ready to retire after 13 years in the position. The firm also announced the departure of Kerr Neilson from the investment team.

Cole will retire both as a non-executive director and the chair on November 20 after the annual general meeting. He has been the chair since Platinum’s ASX listing in 2007.

Taking his place on the board is Guy Strapp 02, who will be a non-executive director from August 27 and become chair from November 21 when Cole retires.

Strapp has 35 years of experience – both on the investment and distribution side – and was most recently the chief executive and chief investment officer of Eastspring Investments (formerly Prudential Asset Management) in Hong Kong.

He has worked across Australia and abroad with Bank of America, JP Morgan Investment Management, Citigroup Asset Management and BT Financial Group.

He is currently also the chair of local wealth manager First Samuel.

“An important discipline in any company is planning for the transition at both management and board levels. It is a testament to the founders of Platinum that a strong succession plan has been put in place to ensure that Platinum remains relevant and continues to acquire the skills required to successfully adapt to these everychanging markets,” Cole said.

In another change, Platinum’s billionaire co-founder Kerr Neilson will leave the investment team, where he has worked as an analyst after stepping aside from the chief executive role in 2018.

At August end, Neilson will leave the investment team but will continue on the board, now as a non-executive director. He is still the largest co-shareholder of PTM. “Kerr’s experience and knowledge of global markets ad companies, as well as his valuable insights on strategy and business development, will therefore remain an accessible avenue of support for the CIO and [chief executive], Andrew Clifford and Platinum’s wider team,” the company said in ASX filings.

02: Guy Strapp

“The trouble with high performance investing is that it requires total immersion; it is all consuming of one’s time,” Neilson said.

“Working from home has softened me up and caused me to ponder wider social issues. Having seen the team grow and mature over the years, I am confident in their ability to meet clients’ high expectations.”

Platinum Asset Management has $21.38 billion in funds under management at July end, after experiencing $146 million in outflows in the month.

Moelis adds to board Moelis Australia has announced the appointment of two non-executive directors to its board, effective immediately.

Alexandra Goodfellow and Kate Pilcher Ciafone have joined the previously all-male board, as Moelis chief financial officer Joseph Simon steps down.

Goodfellow joins the board as an independent non-executive director, and will also chair its remuneration and nomination committee, while Pilcher Ciafone will replace Simon as a nonexecutive director.

Moelis Australia chair Jeffrey Browne said he was delighted to welcome Pilcher Ciafone and Goodfellow to the asset manager’s board.

“These two appointments add valuable skills, diversity and independence to our board,” he said.

“Alexandra’s leadership and expertise in people, culture and governance will be significantly additive to this business in which people are our most valuable asset.

“Kate brings global, sector and operating experience to our board and we look forward to Kate’s contribution in continuing to strengthen and optimise our global corporate advisory strategic alliance with Moelis & Company.”

Browne also thanked Simon for his contribution to the Moelis & Company’s board over the last four years since it had been listed.

Simon has worked with Moelis since July 2010 as its chief financial officer (and remains in the role), having worked previously with Financial Security Assurance, IntraLinks, Cantor Fitzgerald, and Morgan Stanley.

Goodfellow is currently the vice chair of Korn Ferry Australasia, and also serves on the advisory board of the Westmead Children’s Hospital Grace Ward and is a non-executive director of the Sydney Swans.

Previously, she was a partner at executive talent consulting firm Heidrick & Struggles. In her role at Korn Ferry, Goodfellow works with clients at a board, chief executive and c-suite level assisting with search and succession assignments.

Moelis said Goodfellow has 30 years’ experience in executive search and consulting, spanning Asia, Europe and Australia (as well as executing key mandates in other major global regions).

Pilcher Ciafone joined Moelis & Company as a founding member in 2007, and is currently its chief operating officer of investment banking.

Prior to joining the asset manager, she worked with UBS as an associate director. fs

22

International

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

Pension fund loses $30bn

01: Michael Rees

managing director and head Dyal Capital Partners

Jamie Williamson

Norway’s Government Pension Fund Global returned -3.4% in the first half of the year – equivalent to $30 billion.

Owing to COVID-19 volatility, the fund’s overall return came in 11 basis points below the benchmark index return. Return on equity investment was -6.8% and unlisted real estate saw a return of -1.6% while fixed income investments returned 5.1%.

In total, the fund lost $29.36 billion in the first half.

Norges Bank Investment Management deputy chief executive Trond Grande said there were major fluctuations in the equity market over the period.

“The year started with optimism, but the outlook of the equity market quickly turned when the Coronavirus started to spread globally,” he said.

“However, the sharp stock market decline of the first quarter was limited by a massive monetary and financial policy response.

“Even though markets recovered well in the second quarter, we are still witnessing considerable uncertainty.”

The fund said its equity investments in the APAC region accounted for 23% of its equities portfolio and returned -4.6%.

The fund remains the largest pension fund in the world with total funds under management of $2.3 trillion. fs

Presidents don’t move markets Elizabeth McArthur

With the US election fast approaching, S&P took a look at how elections typically influence the S&P 500. And, it turns out presidents might not be as influential as Donald Trump would like to think.

Looking at data from 1928 to 2016, the S&P 500 rose in the vast majority of election years. Of course, market crashes in 1932, 1940, 2000 and 2008 did coincide with election years.

“It is important to recognise that the performance of the S&P 500 during election years has typically been similar to its performance during other years,” S&P Dow Jones Indices associate director Hamish Preston said.

However, while presidents don’t move markets much, Preston noted that there does seem to be an impact at a sector level.

By looking at the monthly S&P 500 sector returns range, calculated as the best-performing sector minus the worst performing sector, Preston found that the highest average range was observed during November of election years.

“Notwithstanding the relatively small sample size [1990-2019], this suggests that election impacts were typically observed when investors priced-in the anticipated impact of the election winner’s policies on different market segments,” Preston said.

One recent example of this, Preston said, could be found in the data from the 2016 election where the best-performing sector was financials and the worst-performing sector was utilities. The difference between the two was 19.34%.

The gamble investors took on financials in 2016 could be seen to be correctly identifying who would win the presidential election, with Trump’s policies favourable to the sector. fs

Navigator takes stake in investment portfolio Annabelle Dickson

N The quote

We have long targeted high-quality opportunities to grow and diversify our holdings to generate strong long term shareholder returns.

avigator Global Investments has entered into an agreement with Neuberger Berman subsidiary Dyal Capital Partners to acquire minority ownership interests in six of its funds.

The ASX-listed parent of US-based Lighthouse Investment Partners will take minority ownership interests in Bardin Hill Investment Partners, Capstone Investment Advisors, CFM, MKP Capital Management, Pinnacle Asset Management and Waterfall Asset Management.

The firms collectively have $35 million in assets under management across 26 diversified investment strategies.

Navigator chair Michael Shepherd said: “We believe this is a compelling transaction with strong commercial logic. The acquisition is an important development in the evolution if Navigator. We have long targeted high-quality opportunities to grow and diversify our holdings to generate strong long term shareholder returns.”

Navigator will acquire the portfolio in two parts. The first being that it is entitled to receive the first $17 million of cash distributions

annually and indexed at 3% plus 20% of any cash distributions in excess of this amount.

In exchange, Navigator will issue the Dyal funds a 40% economic interest at closing through a combination of ordinary shares and convertible notes.

Following 2025, Navigator will acquire the remainder of the Dyal funds’ interests in the cash distributions for a single redemption payment based on the portfolio’s performance.

The portfolio will be housed separately and operate independently of Navigator’s investment in Lighthouse Investment Partners.

Managing director and head of Dyal Capital Michael Rees 01 said Dyal looks forward to its ongoing involvement and partnership with Navigator.

“We are happy these six managers will remain part of the Dyal eco-system and view our indirect interest in the Lighthouse business as an attractive addition which is expected to contribute positively to our investment in the years to come,” he said.

The transaction is expected to be completed

by January 2021 and is subject to shareholder and the Foreign Investment Review Board approval. fs

Bloomberg launches ESG ratings Ally Selby

Bloomberg has launched proprietary environmental, social and governance (ESG) ratings, which it says will help to provide transparent, data driven insights into company performance.

Initially, Bloomberg will offer environmental and social scores for 252 oil and gas companies, as well as board composition scores for 4300 companies across multiple industries.

Bloomberg global head of sustainable finance solutions Patricia Torres said Bloomberg saw and took advantage of an opportunity to provide transparent scoring methodologies along with underlying data to help finance professionals making informed investment decisions.

“ESG data is critical to the investment process,” she said.

“By providing transparent ESG data and scores, we are helping investors decode raw data that is otherwise hard to compare across companies. For corporates, these scores offer a valuable, quantitative and normalised benchmark that will easily highlight their ESG performance.”

While the “ES” scores will focus on those companies that account for 15% of global energy-related greenhouse gas emissions; oil

and gas companies, the governance scores will focus on the role of corporate boards in providing leadership and oversight through the analysis of their long-term strategic performance.

“The Board Composition scores enable investors to assess how well a board is positioned to provide diverse perspectives and supervision of management, as well as to assess potential risks in the current board structure,” Bloomberg said.

Using a quantitative model and management level data, the scores will rank relative performance across diversity, tenure, overboarding and independence.

Meantime, Bloomberg said the ES scores will provide a “data-driven measure of corporate environmental and social performance that investors can use to quickly evaluate performance across a range of financially material, businessrelevant and industry-specific key issues”.

These include climate change, health, and safety, with investors also able to assess a company’s activities relative to their peers.

The scores will be fully transparent, Bloomberg said, with investors able to examine both the scoring methodology as well as the company reporting data underlying each rating. fs

News

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

23

Products 01: Charlie Jamieson

New sovereign bond fund Jamieson Coote Bonds has launched an absolute return fixed income fund aiming to deliver 2.5% above cash rate while investing only in sovereign debt.

The CC JCB Dynamic Alpha fund will hold high-grade sovereign bonds from G7 nations and Australia, with an average credit rating of AA+.

The ‘cash plus’ style fund is promising higher than cash returns with daily liquidity and low volatility, with co-portfolio manager Charlie Jamieson 01 saying the strategy did not suffer in the March drawdowns faced by credit-heavy ‘cash plus’ funds.

The fund was incepted in December 2019 but is now starting to attract adviser money totaling $24 million currently.

It has returned 3.97% since then after fees.

Three month returns at July end stood at 1.35%.

“The fund has no natural index (RBA plus 2.5%), in technical terms we’ve removed the beta allocation to make a more absolute return style, lower volatility offering with no credit [exposure],” Jamieson said.

“It is hedged back to AUD and we are very tight to hedge. [We are] not expecting to utilise the foreign exchange as a primary return driver because that would add volatility.”

He said the government-backed instruments the fund invests in are highly liquid, and held up well in March and April’s illiquidity.

“This is only sovereign debt, not using corporate credit instruments at all. Its low risk returns and low volatility returns. Cash has become so uninvestable as an asset class, it [the fund] should provide a defensive alternative to investors,” he said.

JCB started in 2014 managing Australian government bond portfolios. It added global sovereign debt capability in 2017. It now has $4.4 billion in total assets under management and is distributed by Sydney multi-boutique Channel Capital.

The new fund is currently awaiting ratings but has been raising money via financial advisers with a past relationship with the boutique through its other strategies.

Magellan readies lower-cost funds Magellan is readying a new low-cost lineup of its strategies for retail investors, as it reports 5% higher net profit after tax of $395.2 million for FY20.

The Magellan Core series will kick off as openended funds on Chi-X (so far its ETFs use ASX as the primary listing venue) by the end of the year.

The inaugural set of three includes the MFG Core International Fund, MFG Core ESG Fund and the MFG Core Infrastructure Fund - all for 50bps a year, which is almost half of what Magellan charges.

But the new lineup will be different to Magellan’s existing actively managed strategies. They use Magellan’s research but have a less active management involvement.

“Some people don’t really want to pay for full

Kogan Super reports growth Kogan’s super offering launched last year has seen a 40% rise in funds under management, according to the online retailer’s financial results.

Kogan said in its results that the launch of its superannuation offering had been successful.

Kogan Super launched in the first half of the 2019/2020 financial year and according to the company’s results growth has been steady.

While the company did not disclose the total funds under management for Kogan Super, it showed that the amount had increased by 40% from the first half of the financial year to the second half.

Kogan describes its super product as “in partnership” with Mercer – the fund is a Mercer Super Trust and Mercer Superannuation is the trustee.

It also sells its super offering as having very low fees. It has a 0.24% per annum investment fee in the enhanced indexed growth option and an admin fee of 0.33% per annum.

active management, nevertheless they want some exposure to research and so we tried to build something lower cost...we are very mindful there is an audience we are not addressing,” Magellan Financial Group chief executive Brett Cairns02 said.

While the Core International Fund and Core ESG are new additions, Magellan has already offered the core infrastructure strategy to institutional investors since December 2009. It is now $8.2 billion in size and has beat its benchmark by wide margin on all time horizons since inception.

Additionally, Magellan will introduce its global sustainable strategy to retail investors by the end of the year.

In an update on Magellan’s in-the-works retirement income product, the firm said it has received a private binding ruling from the ATO (that gives it an idea of the taxation) and is in talks with other regulators.

Magellan Financial Group’s NPAT for FY20 stood at $396.2 million, up 5% from previous year.

Adjusted NPTA was $438.3 million, up 20%.

In total, Magellan attracted $5.7 billion of net inflows in 12 months. Its average funds under management as at June 2020 was $95.5 million, up 26% from previous year.

This yielded $587 million in management fees (up 26%) and $81 million in performance fees (down 3%) as about 34% of its funds under management earned performance fees (33%).

Expenses rose 15% to $116.8 million. Guidance for FY21 expenses is $110 to $115 million, as a result of no bonus deferral for FY20 and outstanding deferred bonuses paid out in FY20.

Retail institutional split of its total FUM was mostly unchanged at 28% to 72%. By base fee, it is 46% to 54%.

Its ETFs, which kicked off in 2015, now have 42,000 individual unitholders and $2.6 billion of FUM. They are attracting an average of 55 new unitholders each day.

Ninety One launches China A-shares fund Ninety One, formerly known as Investec Asset Management, is touting a new China A-shares fund to local institutional and wholesale investors.

Its China A-shares fund holds a portfolio of 30-50 stocks, with at least two thirds of the assets in mainland China stocks with the rest in H shares or ADRs (a trust structure than allow foreign investors to hold mainland shares indirectly).

The fund’s goal is to beat the MSCI China A index by 3-5% p.a. on a rolling three-year basis.

The underlying fund, which launched in July, is a Luxembourg domiciled vehicle. Australian investors will have access through an AUD denominated share class, priced at 85bps per year in management fees and minimum investment size set at $5 million (negotiable for wholesale investors).

Investec has a long history in managing China share portfolios. In 2015, it had the first UCITs fund in the word to connect in onshore China stocks via Stock Connect.

02: Brett Cairns

The new launch builds from Ninety One’s 2014 launch of the 4Factor All China Equity strategy (in USD), which delivered 11.5% p.a. over three years compared to benchmark’s 2.2%. The carve out for A share contribution in this was even higher at 22.6% relative to benchmark’s -1.4%.

Ninety One head of institutional for Asia Pacific and Middle East Justin Cowper said the fund will have a small to mid-cap bias, as it looks to hone in on opportunities usually missed by other managers in Chinese stocks. However, it will stay away from microcaps, investing in companies with market cap over $500 million.

“This portfolio is very different to the index and it is very different form the china exposure in an emerging market portfolio as well. When you get a Chinese allocation through an EM manager, they don’t have specific expertise in mainland [China] stocks [and] end up buying large caps,” he said.

The research team includes nine people (six in Hong Kong and three in London), with six Mandarin speakers across the team.

The launch comes at a time when investors are showing greater appetite for China but 80% still rely on broader EM funds to get the exposure, and A-shares exposures also become available via ETFs. Northern Trust launches ESG capability Global custodian Northern Trust announced it has redeveloped its environmental, social and governance analytics capabilities to now include key environmental data categories.

Northern Trust’s clients, many of which are asset owners such as pension and super funds, will now be able to analyse specific environmental risk indicators for their investments.

A Northern Trust spokesperson confirmed the capability will be available for the custodian’s Australian clients.

Asset owners and institutions can use the information to engage with various investment managers and stakeholders around the environmental impact of their portfolio, and will also be able to generate data and analytics to add to their annual disclosures.

The information would support client in determining if they are meeting sustainable investment goals and satisfying regulatory requirements, Northern Trust said.

Northern Trust product lead of investment accounting and analytic solutions Serge Boccassini said the new categories highlight the custodian’s commitment to environmental risk.

“Environmental factors are the driver behind a number of initiatives requiring greater monitoring of material risks and increased disclosures,” he said.

“Our enhanced capabilities support clients in both areas – and can help them more closely incorporate the ‘E’ of ‘ESG’ into their decisionmaking.

“Northern Trust is committed to providing clients with deep analytical insights as they strive to meet their ESG responsibilities.” fs

24

Between the lines

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

HESTA reappoints administrator HESTA has awarded a three -year mandate to an administrator following a competitive tender process.

Link Group has been reappointed to provide the $53 billion super fund with retirement and superannuation solutions.

The mandate is for an initial three years with the option for HESTA to extend the terms for a further two years.

HESTA chief executive Debby Blakey said Link would deliver the best outcome for members.

“We are very pleased to continue our strong working partnership with Link Group as our fund administrator, and collaborating to produce great outcomes for our members including improves service and technology offerings,” Blakey said.

“We look forward to working together to continue to deliver for our members and employers positive, technology driven experiences and outcomes.”

Link retirement and superannuation solutions chief executive Dee McGrath said the Link team was excited to continue its work with HESTA. “We are delighted to have been reappointed by HESTA as its fund administrator, and to continue our partnership delivering superior outcomes for its members and employers,” she said.

“HESTA and its members in the health and community services sector play such an important role in our community, especially during the COVID-19 pandemic, and we are thrilled to be tasked with continuing to provide support to its 850,000 members.” fs

01: Suzanne Branton

chief investment officer CareSuper

CareSuper ends 20-year custody relationship Ally Selby

The quote

We wanted a custodian that could demonstrate how it could align both culturally and with the strategic growth initiatives of our fund.

C

areSuper has appointed J.P. Morgan as custodian of the $16 billion fund, having proven itself to be “the most suitable custodian partner for the future of the fund and its members”.

NAB Asset Servicing was first appointed custodian of the fund in 1998.

The financial services giant will provide both custody and funds administration services to the super fund, including investment reporting, with a transition set for the first half of 2021.

“As part of our tender process, we wanted a custodian that could demonstrate how it could align both culturally and with the strategic growth initiatives of our fund,” CareSuper chief executive Julie Lander said.

“We have enjoyed a close partnership with NAB Asset Servicing to date and thank the team for their dedication to our fund over the past 20 years.”

Rainmaker Mandate Top 20

J.P. Morgan would provide world-class technology and reporting solutions to CareSuper, she said.

“J.P. Morgan’s global scale and data-driven approach to securities services are particularly well placed to support our evolving investment program,” CareSuper chief investment officer Suzanne Branton01 said.

“The increasing sophistication of the program, including its diversification into private assets across international markets, means J.P. Morgan’s capabilities will support our service needs.”

J.P. Morgan Australia and New Zealand head of securities services Nadia Schiavon said the firm was thrilled to be appointed as the custodian of the fund.

“We are excited to start a new partnership with CareSuper and utilise our vast experience within the superannuation industry, combined with our technology solutions, to help support the fund’s strategic goals,” Schiavon said. fs

Note: Largest alterntatives investment mandate appointments FY19/20

Appointed by

Asset consultant

Investment manager

Mandate type

AustralianSuper

Frontier Advisors Pty Ltd; JANA Investment Advisers Pty Ltd

Brookfield Australia Investments Limited

Infrastructure

569

AustralianSuper

Frontier Advisors Pty Ltd; JANA Investment Advisers Pty Ltd

Other

Alternative Investments

418

Energy Super

JANA Investment Advisers Pty Limited

Oaktree Capital Management, LLC

Alternative Investments

337

First State Superannuation Scheme

Willis Towers Watson

Schroder Investment Management Australia Limited

Other

652

First State Superannuation Scheme

Willis Towers Watson

Maple-Brown Abbott Limited

Infrastructure

354

GSFM Pty Limited

Redpoint Investment Management Pty Ltd

Various

Health Employees Superannuation Trust Australia

Frontier Advisors Pty Ltd

Russell Investments Group, LLC

Currency Overlay

225

Hostplus Superannuation Fund

JANA Investment Advisers Pty Limited

Other

Alternative Investments

301

Hostplus Superannuation Fund

JANA Investment Advisers Pty Limited

Global Infrastructure Partners

International Infrastructure

280

LGIAsuper

JANA Investment Advisers Pty Limited

Maple-Brown Abbott Limited

Infrastructure

285

Retail Employees Superannuation Trust

JANA Investment Advisers Pty Limited

Payden & Rygel

Hedge Fund

663

Retail Employees Superannuation Trust

JANA Investment Advisers Pty Limited

Ardea Investment Management Pty Limited

Hedged Investments

459

State Super (NSW)

Frontier Advisors Pty Ltd

K2 Asset Management Ltd

Other

734

Sunsuper Superannuation Fund

Aksia, JANA; Mercer, StepStone

PineBridge Investments

Alternative Investments

530

Sunsuper Superannuation Fund

Aksia, JANA; Mercer, StepStone

Nephila Capital Limited

Hedge Fund

338

Sunsuper Superannuation Fund

Aksia, JANA; Mercer, StepStone

M.H. Carnegie & Co. Pty Ltd

Various

273

Sunsuper Superannuation Fund

Aksia, JANA; Mercer, StepStone

EIG Global Energy (Australia) Pty. Ltd.

Hedge Fund

260

Sunsuper Superannuation Fund

Aksia, JANA; Mercer, StepStone

Varde Partners

Hedge Fund

226

Sunsuper Superannuation Fund

Aksia, JANA; Mercer, StepStone

Other

Private Equity

217

Sunsuper Superannuation Fund

Aksia, JANA; Mercer, StepStone

Taconic Capital Advisors LP

Hedge Fund

214

Amount ($m)

8,956

Source: Rainmaker Information

Super funds

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17 PERIOD ENDING – 30 JUNE 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

25

* SelectingSuper [SS] quality assessment

1 year % p.a. Rank

3 years

5 years

SS

% p.a. Rank % p.a. Rank Quality*

PROPERTY INVESTMENT OPTIONS

UniSuper - Balanced

0.7

10

6.8

1

7.1

2

AAA

Telstra Super Corporate Plus - Property

1.1

3

7.5

1

9.1

3

AAA

AustralianSuper - Balanced

0.3

12

6.4

2

7.1

1

AAA

Prime Super (Prime Division) - Property

-3.4

12

7.2

2

14.0

1

AAA

TASPLAN - OnTrack Build

0.0

17

6.4

3

AAA

CareSuper - Direct Property

1.3

2

7.2

3

9.4

2

AAA

-0.9

32

6.4

4

AAA

Rest Super - Property

0.4

5

6.6

4

8.8

4

AAA

Australian Ethical Super Employer - Balanced (accumulation)

2.2

2

6.3

5

6.3

13

AAA

HOSTPLUS - Property

0.9

4

6.4

5

7.5

6

AAA

FES Super - Smoothed Option (Hybrid)

2.5

1

6.3

6

5.6

29

AAA

Acumen - Property

-0.2

6

6.1

6

8.2

5

AAA

Vision Super Saver - Balanced Growth

1.6

5

6.2

7

6.4

6

AAA

TASPLAN - Property

1.4

1

5.9

7

AAA

First State Super Employer - Growth

1.1

7

6.1

8

6.3

12

AAA

Catholic Super - Property

-0.6

7

5.6

8

7.4

7

AAA

-0.4

22

6.0

9

6.4

9

AAA

Sunsuper Super Savings - Property

-1.9

8

4.5

9

5.9

13

AAA

Cbus Industry Super - Growth (Cbus MySuper)

0.5

11

5.9

10

6.9

3

AAA

Equip MyFuture - Property

-3.1

10

4.3

10

6.7

8

AAA

Rainmaker MySuper/Default Option Index

-0.9

Rainmaker Property Index

-10.9

Virgin Money SED - LifeStage Tracker 1974-1978

Media Super - Balanced

5.0

5.6

AUSTRALIAN EQUITIES INVESTMENT OPTIONS UniSuper - Australian Shares

2.2

4.6

FIXED INTEREST INVESTMENT OPTIONS

-2.9

6

8.0

1

7.1

4

AAA

Australian Catholic Super Employer - Bonds

5.5

1

5.6

1

4.6

2

AAA

0.6

1

7.2

2

7.4

1

AAA

UniSuper - Australian Bond

3.6

8

4.8

2

4.0

4

AAA

ESSSuper Beneficiary Account - Shares Only

-0.3

3

6.6

3

6.7

11

AAA

AMG Corporate Super - AMG Australian Fixed Interest

4.3

4

4.7

3

3.7

10

AAA

AustralianSuper - Australian Shares

-5.3

18

5.9

4

6.8

8

AAA

Mine Super - Bonds

3.5

12

4.6

4

3.8

8

AAA

Virgin Money SED - Indexed Australian Shares

-5.7

21

5.7

5

AAA

First State Super Employer - Australian Fixed Interest

3.5

13

4.6

5

3.9

6

AAA

Prime Super (Prime Division) - Australian Shares

-3.8

7

5.7

6

6.8

AAA

Vision Super Saver - Diversified Bonds

4.7

2

4.5

6

4.0

5

AAA

First State Super Employer - Australian Equities

-5.9

24

5.7

7

6.4

15

AAA

Sunsuper Super Savings - Diversified Bonds Index

3.8

7

4.1

7

4.0

3

AAA

Vision Super Saver - Australian Equities

-4.4

10

5.7

8

5.7

31

AAA

GESB Super - Mix Your Plan Fixed Interest

3.6

10

4.1

8

3.4

20

AAA

StatewideSuper - Australian Shares

-6.0

25

5.6

9

7.3

2

AAA

Intrust Core Super - Bonds (Fixed Interest)

2.8

23

4.1

9

3.8

7

AAA

Intrust Core Super - Australian Shares

-2.1

4

5.6

10

7.2

3

AAA

HOSTPLUS - Diversified Fixed Interest

3.0

22

4.0

10

4.6

1

AAA

Rainmaker Australian Equities Index

-6.4

Rainmaker Australian Fixed Interest Index

2.9

Media Super - Australian Small Companies

4.6

7

5.6

INTERNATIONAL EQUITIES INVESTMENT OPTIONS AustralianSuper - International Shares

3.8

3.4

AUSTRALIAN CASH INVESTMENT OPTIONS

10.4

1

11.7

1

9.9

1

AAA

AMG Corporate Super - Vanguard Cash Plus Fund

1.2

6

1.8

1

1.9

1

AAA

WA Super - Global Shares

6.3

7

10.8

2

9.7

2

AAA

Intrust Core Super - Cash

1.2

2

1.6

2

1.8

2

AAA

Equip MyFuture - Overseas Shares

6.8

4

10.3

3

8.5

8

AAA

AMG Corporate Super - AMG Cash

1.2

4

1.6

3

1.8

3

AAA

Media Super - Passive International Shares

4.4

13

10.2

4

8.4

11

AAA

NGS Super - Cash & Term Deposits

1.2

3

1.6

4

1.7

4

AAA

First State Super Employer - International Equities

4.7

11

10.2

5

8.5

9

AAA

Sunsuper Super Savings - Cash

1.0

8

1.5

5

1.6

5

AAA

Virgin Money SED - Indexed Overseas Shares

4.9

8

10.1

6

AAA

Virgin Money SED - Cash Option

1.0

11

1.5

6

AAA

FES Super - International Share Option

3.4

22

9.9

7

AAA

Energy Super - Cash Enhanced

0.9

14

1.5

7

1.6

7

AAA

LUCRF Super - International Shares

7.2

3

9.7

8

7.4

21

AAA

Media Super - Cash

1.1

7

1.5

8

1.6

12

AAA

Intrust Core Super - International Shares

4.8

9

9.7

9

8.3

13

AAA

First State Super Employer - Cash

0.9

15

1.5

9

1.6

16

AAA

UniSuper - International Shares

7.9

2

9.6

10

9.4

3

AAA

Rest Super - Cash

1.0

10

1.5

10

1.6

13

AAA

Rainmaker International Equities Index

1.0

6.8

6.7

Rainmaker Cash Index

Notes: T ables include Australia’s top performing superannuation products that also have a AAA SelectingSuper Quality Assessment rating.

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

0.7

1.2

1.4 Source: Rainmaker Information www. rainmakerlive.com.au

26

Managed funds

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17 PERIOD ENDING – 30 JUNE 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

$m

% p.a. Rank

% p.a. Rank

% p.a. Rank

COMBINED PROPERTY

Australian Unity Platypus Aust Equities Hyperion Australian Growth Companies Fund Bennelong Australian Equities Fund

137

11.6

2

14.4

1,203 562

1

18.6

1

12.5

2

7.1

5

12.1

3

13.7

2

Australian Unity Diversified Property Fund

12.5

3

Investa Commercial Property Fund

12.3

4

Lend Lease Aust Prime Property Industrial

297

13.8

1

15.1

1

17.2

1

5,950

6.9

1,089

12.3

3

12.6

2

13.7

2

2

12.3

3

11.5

4

Greencape Broadcap Fund

686

4.7

6

11.1

4

11.1

7

Lend Lease Aust Prime Property Commercial

5,154

5.2

4

11.4

4

12.7

3

Bennelong Concentrated Aust Equities

863

9.0

3

10.7

5

15.5

1

DEXUS Property Fund

10,284

-0.3

7

8.2

5

10.9

5

Alphinity Sustainable Share Fund

152

-4.1

27

10.4

6

9.3

13

ISPT Core Fund

15,979

1.3

6

7.0

6

9.7

6

14

1.0

12

10.0

7

7.8

23

Resolution Cap. Global Prop. Sec. Series II

336

-4.2

9

6.7

7

7.2

12

AMP Listed Property Trusts Fund

117

-15.5

20

6.7

8

7.5

10

Australian Unity Property Income Fund

258

-4.0

8

6.3

9

9.1

7

Quay Global Real Estate Fund

165

-9.8

11

6.2

10

7.5

9

AMP Sustainable Share Fund Greencape High Conviction Fund

380

3.0

9

9.8

8

9.6

11

AB Managed Volatility Equities Fund

964

-1.0

14

8.4

9

10.0

9

46

-2.8

19

8.2

10

8.5

18

Aberdeen Standard Australian Equities Fund Sector average

407

-6.4

4.6

6.5

Sector average

1,275

-14.4

2.4

5.1

S&P ASX 200 Accum Index

-7.7

5.2

6.0

S&P ASX200 A-REIT Index

-21.3

2.0

4.4

INTERNATIONAL EQUITIES

FIXED INTEREST

Zurich Concentrated Global Growth BetaShares Global Sustainability Leaders ETF Loftus Peak Global Disruption Fund

29

15.4

7

21.7

1

Macquarie True Index Sovereign Bond Fund

261

4.2

39

6.2

1

5.1

12

705

26.3

2

21.5

2

Pendal Government Bond Fund

933

5.0

16

6.2

2

5.3

5

98

27.7

1

21.5

3

Macquarie Australian Fixed Interest Fund

209

5.0

18

6.1

3

5.4

3

3,830

20.9

5

19.9

4

15.7

2

Nikko AM Australian Bond Fund

184

4.6

28

6.1

4

5.2

8

Franklin Global Growth Fund

301

24.4

3

19.0

5

16.0

1

Schroder Fixed Income Fund

2,354

4.8

26

6.0

5

4.9

25

Nikko AM Global Share Fund

99

11.0

18

17.2

6

13.6

4

Pendal Fixed Interest Fund

1,028

5.7

8

6.0

6

4.8

32

979

13.5

11

16.9

7

12.1

11

AMP Capital Wholesale Australian Bond Fund

971

4.5

30

5.9

7

5.1

9

58

9.9

20

16.9

8

15.2

3

CC JCB Active Bond Fund

707

4.5

31

5.9

8

T. Rowe Price Global Equity Fund

Apostle Dundas Global Equity Fund Evans and Partners International Fund Zurich Unhedged Global Growth Share Fund

367

9.8

21

16.3

9

12.4

8

QIC Australian Fixed Interest Fund

1,595

4.8

27

5.9

9

5.1

13

Zurich Global Growth Share Fund

198

10.0

19

16.2

10

12.4

7

Macquarie Enhanced Australian Fixed Interest

1,597

4.6

29

5.9

10

5.0

15

Sector average

663

4.6

5.3

10.6

MSCI AC World ex AU Index

4.9

10.7

9.5

Note: The performance figures for diversified funds are net of fees, performance figures for sector specific funds are adjusted for fees.

Sector average

921

3.3

4.1

4.1

Bloomberg Barclays Australia Breakeven

4.3

6.4

5.4

Source: Rainmaker Information

What active managers should be managing or the longest time financial advisers have FThey used risk profiling to build portfolios. would ask their prospective clients a

Dial tones

By John Dyall john.dyall@ financialstandard .com.au www.twitter.com /JohnDyall

series of questions meant to indicate aversion to losses and appetite for high returns and then place them in one of five risk profiles.

And then the adviser would show the client a table of likely outcomes from each of the profiles, including things like expected returns and historic returns. As if the future would look exactly like the past.

Working for a licensee at the time, I produced these tables, but used historical volatility and expected returns to calculate the probabilities of these events happening. Were they useful? Only from a marketing perspective. They gave a false assurance of certainty, particularly when the results were published to two decimal places.

The underlying assumption in my calculations was that returns were “normally” distributed.

That is, returns followed the classic bell-shaped curve that was defined by a mean (average) return and a standard deviation (volatility). If you divided it down the middle one side of the curve would be the mirror image of the other. Returns at the extreme ends of the curve (also know as the tails) were “extremely unlikely”.

And then when the “extremely unlikely” hap-

pened everyone breathed a sigh of relief and said: “Well at least that won’t happen again for a thousand years”. And then 10 years later it happened again, and then 10 years after that, and so on.

Clearly the tools we were using to describe reality were insufficient for the job at hand. Was there anything in our toolbox that could do the job?

Well it just so happened there were two tools that helped explain what a distribution looked like that was sort of but not really normally distributed.

As Tony Montana might say: “Say hello to my little friends, skewness and kurtosis.” [Ed. Note: Really John? That was your best segue?]

And they can be your friends too, because they explain a lot, particularly in times when returns are distinctly non-normal. In fact, lately skewness and kurtosis have been doing a better job in explaining returns of your favourite actively managed funds than volatility.

The first thing to remember is that skewness and kurtosis are focused on the tails of the distribution, both to the extreme left and extreme right of the average. They are not “easy” concepts to understand, but they are worth thinking about.

Skew measures the frequency of returns above or below the average. The average return does not have to be made up of an equal number of returns that are less than the average and an

equal number of returns that are above the average. There can be a few large returns (above the average) and many smaller returns (below the average) that can give you the same average.

What I have seen lately are a lot of products with negative skew, that is, there are many smaller positive returns and a few large negative returns.

This is to be expected since the benchmarks themselves show negative skew. But what was surprising is the relationship between outperformance and skew. If you take actively managed equities funds (both Australian and international) it is those funds with less negative skew than the benchmark that are most likely to outperform.

There’s a similar story with kurtosis, which measures the “fatness” of the tails. When high kurtosis is coupled with negative skewness it becomes more difficult to outperform the benchmark.

In the three years to June this year 20 funds out of 59 outperformed the benchmark (after fees).

For skewness and kurtosis around two thirds of each were more normal than the benchmark.

Of the 20 funds that outperformed 19 had less skew than the benchmark, that’s 95%, which makes it almost a prerequisite. The funds with the lowest returns also had the highest kurtosis.

Managers and investors should be paying more attention to these important variables. fs

News

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

01: Russel Chesler

02: Aidan Geysen

director of investment VanEck

senior investment strategist Vanguard Australia

27

Always take your CAPE ratio with a grain of salt: Experts arlier this month, for the fourth time in E its history, Robert Shiller’s CAPE ratio which tracks market value by measuring earnings data over a 10-year period - surpassed 31.

Other times Shiller’s ratio has exceeded 31 include the months prior to Black Tuesday in 1929 (often considered the prelude to the Great Depression), from June 1997 until August 2001 (the tech boom and bust), and at the end of 2017 until October 2018 - after which Wall Street posted its worst yearly performance since the Global Financial Crisis.

And while the CAPE ratio is not ‘the be all and end all’, it does show how earnings and price have moved together over the past 40 years – giving investors a general sense of confidence or foreboding on the long-term potential of their investment portfolio.

Rainmaker Information’s head of investment research John Dyall said that while the ratio cannot be used to forecast market downturns - “at least not in a way that you could reliably profit from” – surpassing the 31 “makes sense” in the current environment.

“We are going through an unprecedented period of government and central bank intervention with extremely low interest rates and high levels of liquidity,” he said.

“Under normal conditions investors would seek out the best investment opportunities. It’s hard to do that when the economy is in recession with a possible depression just around the corner.”

VanEck director of investment Russel Chesler 01 agrees, arguing all measures of value at the moment – including P/E ratios – are at high points.

“I don’t think the CAPE Shiller ratio is any different,” he said.

“The environment we’re in at the moment is very uncertain - so even though the CAPE ratio may have surpassed 31 that doesn’t mean the market’s going to come crashing down in the next six months or even in the next year.”

Similarly, other industry leaders argue the ratio’s new high should be taken with a grain of salt – urging investors to steer clear from using Shiller’s ratio for decision making.

“Definitely do not use the CAPE ratio to time the market, it really does not tell you anything about future returns for the next one to three years,” Lazard Asset Management Australian equity portfolio manager Aaron Binsted told Financial Standard.

“It’s an effective measure of value at a very simple headline level. You have to take it for what it is: a really long-term metric.”

And then there’s Moelis Australia managing director John Garrett, who takes it one step further, saying he wouldn’t recommend using the CAPE ratio to inform any of his investment decisions.

“I think it’s very dangerous to use one metric to determine how you are going to invest your funds; I haven’t heard of anyone who has been a successful long-term investor by taking direction from the CAPE ratio,” he said.

Investors risk being caught out by using one metric to inform their judgements, he said.

“Markets evolve, things change, and the type of businesses within the market change.

So to rely on a simple static measure is just lazy,” he said.

Meantime, Vanguard Australia senior investment strategist Aidan Geysen 02 said investors should question why the CAPE ratio is currently at a high point.

“Anything that is backward looking in nature is going to be imperfect when forecasting future returns, but having said that, the CAPE ratio has been a reasonable indicator of both over and under valuation,” he said.

He argues it would be a mistake to use a set threshold like 31 as a trigger for extreme levels of valuation.

“To assess fair value, the CAPE should be adjusted for other conditions such as real interest rates and inflation expectations, and both are well anchored at present,” Geysen said.

“On the other hand, earnings growth in the US has expanded rapidly since the Financial Crisis, and the multiple that people are willing to pay for those elevated earnings is high as well.”

Using Vanguard’s “fair value” CAPE model – which is adjusted for inflation expectations, real interest rates, and volatility – Geysen believes the US is actually not in extreme territory.

“With our measure, the US is currently within a plus or minus standard error,” he said.

“Given the low interest rate environment and given expectations for inflation are also low, people are willing to pay an elevated price for earnings.”

Garrett agrees, arguing the tech titans; the likes of Facebook, Google, Amazon and Netflix, are growing significantly faster than their value peers.

“So it makes sense that the CAPE ratio is higher,” he said.

“I don’t think there’s a bubble, but instead an ‘anti-bubble’ where a lot of these very

The quote

Anything that is backward looking in nature is going to be imperfect when forecasting future returns, but having said that, the CAPE ratio has been a reasonable indicator of both over and under valuation.

deep value-oriented businesses are being disrupted, while these tech giants have grown exponentially.

“Their company earnings are unlikely to mean revert so relying on the CAPE ratio is likely to be problematic.”

Chesler argues that without the FAANGS, the ratio wouldn’t be flashing red.

“If you take out the FAANGS and even Microsoft out of the returns of the S&P 500 it has actually been negative; so you’ve got that one sector doing particularly well but not the rest of the market in terms of return,” he said.

“So there are definitely parts of the market that you could consider to be overvalued, but at the same time, there are still little pockets of value out there in the market.”

Australia’s CAPE, on the other hand, is currently “bang-on” its long-term average since the 1970s, Binsted said.

“The Australian market actually looks very standard and that’s very different to what you see in the US; the US CAPE is currently very elevated,” he said.

“So, on that basis, you could say the Australian market looks quite a bit more attractive than the US market.”

Similar to its American counterpart, there are huge dispersions of value within the Australian market, with some sectors more attractively priced than others, he said.

Because of this, Binsted recommends people “look underneath the hood” and take a more active view when investing on the ASX. And while he believes valuations, whether it’s the CAPE ratio or any other metric, have value in terms of containing information for future expectations of price – he maintains they are not a timing signal.

“People have to be realistic in terms of the kind of timeframe that those measures can help you reach,” Binsted said.

“If you want to work out what’s going to happen in the next six to 12 months, we would say there is nothing that can really help frame those expectations with any kind of accuracy.”

Likewise, Chesler notes that while markets do seem to be fully valued – investors should refrain from succumbing to confirmation bias.

“Ratios are at high points and markets do seem to be fully valued at the moment, but these are unprecedented times,” he said.

“There are optimists and there are pessimists, and if people have a particular view then they will seek out information that backs up their view.” fs

28

Economics

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

COVID-19 cycle Ben Ong

this the new normal cycle? The cycle of Iandscoronavirus cycling its way around the world infection, containment through social distancing and lockdowns, easing of restrictions, and back to infection...

This cycle hit home when the outbreak broke out again in Victoria, forcing the state government to impose Stage 4 restrictions, and the country’s other states to close their borders with Australia’s second largest state. Queensland even went further by shutting its borders with New South Wales (NSW) and the Australian Capital Territory (ACT).

The cycle hit our next-door neighbour New Zealand as well. Just a few days after the world was celebrating and praising New Zealanders for recording 100 days of zero infection – 102 to be exact – came reports of four new infections, prompting Prime Minister Jacinda Ardern to impose Stage 3 restrictions.

Despite Ardern’s swift and tough action, four has become 78 (as at August 17), and has prompted Ardern to delay the New Zealand elections from from September 19 to October 17.

COVID-19 is also having a second bite in Asian countries. It’s doing the rounds (again) in Japan, Hong Kong, Malaysia, Vietnam and South Korea after restrictions were eased. They’ve all reimposed restrictions in one form or another.

Recent reports suggest that COVID-19 has also returned to Europe.

According to FactSet, case-growth across major Eurozone economies, is raising worries about a second wave derailing the bloc’s recovery hopes. Germany recorded its biggest daily spike in cases in more than three months with officials citing returning travelers as the cause.

France marked its highest daily rise since May

and placed red alerts on Paris and Marseille.

Spain continued to face the worst coronavirus infection rate in Western Europe, with some 675 active outbreaks in the country, forcing neighbor states to continue placing restrictions on outbound and inbound travel, hurting its tourism sector further.

Hopefully, we won’t see the sharp slump in economic activity that resulted from the first wave of infections. Still, the reimposition of social and business restrictions that’s again making its way around the globe could prolong the current global recession, wherein which, an improvement in one country/continent is negated by renewed disaster in another.

Consumers concerned about employment would save rather than spend the dollars governments are handing out, much less borrow even on zero interest rates.

So too would businesses. While those in the travel, tourism, leisure and hospitality sectors are hardest hit, these industries have multiplier effects on the rest of the economy. Banking, insurance, farming (to name a few) and the personnel they employ would be affected.

It then becomes a vicious circle where consumers, fearing loss of income and/or lower wages, save rather than spend. Less consumer spending leads to reduced business revenues and profits that, in turn, removes all business’ raison d’etre, hindering them from investing in structures and machinery and staff.

So far, so good. The reimposition of restrictions are again having their desired effect, cases of infections are (again) heading lower.

This begs the question, when is it time to relax restrictions anew?

As New Zealand’s experience proved, 100 days is not enough to wave COVID-19 bye-bye. fs

Monthly Indicators

Jul-20

Jun-20

May-20 Apr-20 Mar-20

Consumption Retail Sales (%m/m)

-

2.72

16.86

-17.67

8.47

Retail Sales (%y/y)

-

8.52

5.79

-9.18

10.07

-12.84

-6.44

-35.29

-48.48

-17.85

Sales of New Motor Vehicles (%y/y)

Employment Employed, Persons (Chg, 000’s, sa)

114.72

228.38

-264.14

-607.40

-3.14

Job Advertisements (%m/m, sa)

16.75

41.38

-0.09

-53.32

-9.20

Unemployment Rate (sa)

7.49

7.45

7.08

6.37

5.23

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

-

-5.68

-4.05

2.42

-0.58

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

-

-4.94

-15.76

-2.36

-1.39

Housing Finance Commitments, Number (%m/m, sa) - Housing Finance Commitments, Value (%m/m, sa)

-

Survey Data Consumer Sentiment Index

87.92

93.65

88.10

75.64

AiG Manufacturing PMI Index

53.50

51.50

41.60

35.80

91.94 41.60

NAB Business Conditions Index

0.26

-7.70

-24.50

-33.97

-21.93

NAB Business Confidence Index

-13.93

0.48

-21.38

-45.99

-65.63

Trade Trade Balance (Mil. AUD)

-

8202.00

7341.00

7864.00

Exports (%y/y)

-

-14.90

-16.93

-6.28

6.99

Imports (%y/y)

-

-19.31

-23.22

-16.15

-9.52

Jun-20

Mar-20

Dec-19

Sep-19

Quarterly Indicators

10631.00

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)

0.08

0.53

0.53

0.53

0.54

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

-0.08

0.38

0.45

0.92

0.38

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

0.00

0.45

0.45

0.83

0.46

Inflation CPI (%y/y) headline

-0.35

2.19

1.84

1.67

1.59

CPI (%y/y) trimmed mean

1.20

1.80

1.60

1.60

1.50

CPI (%y/y) weighted median

1.30

1.60

1.20

1.20

1.20

Output

News bites

NAB Business Survey The business confidence index dropped to a reading of -14 in July from zero the previous month.

“Confidence fell in all industries led by mining which saw a sharp decline. Confidence is now weakest in retail and construction.” Business conditions improved to a reading of 0 from -8 in June, but as NAB chief economist Alan Oster explains, “it may reflect activity coming off a low base”. The survey was conducted July 22-31 – before a state of disaster was declared in Victoria and imposed Stage 4 restrictions on Melbourne and Stage 3 on regional Victoria, and before infections started to grow in New South Wales.

Australia consumer sentiment The Westpac-Melbourne Institute Index of Consumer Sentiment fell 9.5% to 79.5 in August from 87.9 in July– close to the 75.6 reading recorded in April 2020

(the lowest in the survey’s 47-year history). All five of the index’s components fell in August, led by the 19% drop in the ‘economy, next 12mths’ sub-index from a reading of 66.4 in July to 53.6 in August (lower than April’s 53.7 reading). The Unemployment Expectations Index soared to a cycle high of 163.4 points – a jump of 14.6% from the previous month and 22.6% from a year ago. The survey was conducted from August 3-8.

US employment The US Bureau of Labor Statistics (BLS) reported that total non-farm payrolls rose by 1.8 million in July – more than market expectations for an increase of 1.4 million jobs – and the unemployment rate declined to 10.2% from 11.1% in June. As the BLS explained: “These improvements in the labor market reflected the continued resumption of economic activity that had been curtailed due to the coronavirus (COVID-19) pandemic and efforts to contain it. In July, notable job gains occurred in leisure and hospitality, government, retail trade, professional and business services, other services, and healthcare.” This is backed up by the improvement in both big and small business activity and optimism. The Institute for Supply Management (ISM) manufacturing and non-manufacturing indices continued to improve after dropping to the 11-year lows in April while the NFIB Small Business Optimism index rose to a reading of 100.6 in June – the highest reading since February (before the coronavirus crisis) – from 94.4 in May. 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

-

-1.65

-2.58

-0.55

-1.433

14-Aug Mth ago 3 mths ago 1 yr ago 3 yrs ago

Interest rates RBA Cash Rate

0.25

0.25

0.25

1.00

1.50

Australian 10Y Government Bond Yield

0.94

0.91

0.90

0.94

2.57

Australian 10Y Corporate Bond Yield

1.64

1.73

2.01

1.80

3.12

Stockmarket All Ordinaries Index

6261.7

3.58%

15.57%

-6.23%

S&P/ASX 300 Index

6089.2

3.18%

14.94%

-7.03%

8.36% 7.22%

S&P/ASX 200 Index

6126.2

3.12%

14.97%

-7.12%

6.91%

S&P/ASX 100 Index

5064.1

3.01%

15.16%

-7.22%

6.57%

Small Ordinaries

2707.9

4.50%

13.28%

-5.48%

13.50%

Exchange rates A$ trade weighted index

61.90

A$/US$

0.7173 0.6967 0.6423 0.6751 0.7867

60.00

57.80

59.50

67.30

A$/Euro

0.6063 0.6112 0.5939 0.6054 0.6676

A$/Yen

76.35 74.72 68.75 71.42 86.11

Commodity Prices S&P GSCI - commodity index

352.17

335.75

279.94

398.07

378.02

Iron ore

120.14

107.45

88.74

95.71

74.30

Gold

1944.75 1801.90 1731.60 1513.25 1282.30

WTI oil

42.05

40.30

27.40

55.16

Source: Rainmaker /

47.59

Sector reviews

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

Australian equities

Figure 1: Underemployment rate and wages 14.5

RATE %

ANNUAL CHANGE %

12.5

Underemployment rate (leading by 1 qtr) Wages - INVERTED RHS

11.5 10.5 9.5 8.5

Prepared by: Rainmaker Information Source:

-3.0

3.0

-2.0

2.5

-1.0

2.0

0.0

1.5

1.0

1.0

2.0

0.5

7.5

3.0

0.0

6.5

4.0

-0.5

5.0

-1.0

5.5 2002

2004

2006

2008

2010

2012

2014

2016

2018

CPD Program Instructions

Figure 2: Real Wage Price Index

13.5

2020

ANNUAL CHANGE %

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

The wages of COVID-19 Ben Ong

A

fter a steady period of wage growth over the previous 12 months, wages recorded the lowest annual growth in the 22-year history of the WPI.” “The June 2020 quarter was the first full period in which COVID-19 social and business restrictions were captured in the WPI.” These two sentences from head of price statistics at the ABS Andrew Tomadini just about sum up the coronavirus pandemic’s impact on Australian wages (those fortunate enough to keep their jobs anyway).

But before you wail, “the sky is falling”, it is not!

Sure, many of us, Australians all, have seen lower dollar figures on their pay slips over the past quarter (cough, cough), but generally – and as the ABS wage price index report shows – our pay packets have still grown from a year ago. It’s only the rate of growth in wages that has slowed.

Total wages “growth” slowed to 1.8% in the

International equities

year to the June 2020 quarter from 2.2% in the previous one. Private sector wages growth slowed from 2.2% to 1.7%. Public sector wages slowed from 2.4% to 2.1%.

Better still, as the ABS notes, “JobKeeper payments to eligible employees falls out of scope of the Wage Price Index”.

Our employers have done good by us!

Well ok, JobKeeper has also helped. This is because without it, the lagged negative correlation between wages growth and the underemployment rate indicate that we would have seen a 1.8% drop in wages by this time instead.

That’s not all. Wages growth might be the lowest in 22 years but real wages growth – wages less headline inflation – is the highest in eight years (see Figure 1).

The annual growth in real total wages jumped to 2.16% in the June quarter from only 0.03% in the March quarter.

However, more “real” dollars to spend is ne-

Figure 1: ISM & NFIB 115

INDEX

110

60

105

55

100

50

5000

RATE %

MONTHLY CHANGE ''000 PERSONS

0

45

90

NFIB Small Business optimism ISM manufacturing -RHS

85

ISM non-manufacturing -RHS

80 2004

2006

2008

2010

2012

2014

2016

2018

15.0 13.0 11.0

-5000

95

Prepared by: FSIU Sources: Factset Prepared by: Rainmaker Information Source:

gated by the renewed consumer pessimism (see Figure 2).

The Westpac-Melbourne Institute Index of Consumer Sentiment fell 9.5% to 79.5 in August from 87.9 in July – close to the 75.6 reading recorded in April 2020 (the lowest in the survey’s 47-year history).

The latest survey doesn’t bear good tidings for wages with the Unemployment Expectations Index soaring to a cycle high of 163.4 points – a jump of 14.6% from the previous month and 22.6% from a year ago.

This is hardly surprising given the continued rise in the unemployment rate – up from 7.4% in June to 7.5% in July – the highest level since November 1998.

Pessimistic consumers expecting job losses isn’t a recipe for increased spending (unless hoarding toilet papers and other doomsday essentials).

Whatever is left from their panic purchases, they will save … just in case, slowing wages growth become NO income. fs

Figure 2: US employment and unemployment rate 65

Employment change

-10000

9.0

Unemployment rate -RHS

-15000

7.0

35

-20000

5.0

30

-25000

40

2020

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

3.0

Good US employment news is not so good Ben Ong

T

here’s good news and bad news in the US labour market report for July.

First, the good news.

The US Bureau of Labor Statistics (BLS) reported that total non-farm payrolls rose by 1.8 million in July – more than market expectations for an increase of 1.4 million jobs – and the unemployment rate declined to 10.2%.

As the BLS explained, “These improvements in the labor market reflected the continued resumption of economic activity that had been curtailed due to the coronavirus (COVID-19) pandemic and efforts to contain it.”

This is backed up by the improvement in both big and small business activity and optimism.

The Institute for Supply Management (ISM) manufacturing and non-manufacturing indices continued to improve after dropping to the 11year lows in April (Figure 1).

The ISM manufacturing index rose to a

reading of 54.2 in July from 52.6 in June and 43.1 on May. The ISM non-manufacturing index increased to 58.1 from 57.1 in June and 45.4 in May. Small businesses are faring better too. The NFIB Small Business Optimism index rose to a reading of 100.6 in June – the highest reading since February (before the coronavirus crisis) – from 94.4 in May and April’s seven-year low reading of 90.9.

The bad news: The rate of job creation in July has slowed sharply from the 4.8 million workers added to the economy in the previous month. In addition, while the unemployment rate has sequentially fallen from the 14.7% peak in April, at 10.2% the rate of joblessness remains worryingly high – higher than the 10.0% peak recorded during the great financial crisis (Figure 2).

This is concerning and shows that the US economy has lost a total of 12.4 mil-

29

lion jobs between January and July this year.

This may be optimistic given the resurgence of cases of infections that have already prompted several states to reimpose restrictions, closures and disruptions in the economy.

Latest data from worldometer.com shows the US with the most number of cases of infections in the world (5.2 million), second to India in new cases (47,849), and most total deaths (165,617).

The continued impasse on the passing of the fifth coronavirus stimulus bill in Congress puts another question mark to the recovery in the US economy … threatening Trump’s reelection campaign.

So much so, that, according to FactSet, “Trump authorized states to pay $400 per week in additional benefits with 75% of the funding coming from the federal government and 25% from states. He also suspended payroll tax collection and extended the federal eviction moratorium that expired last month.” fs

The Financial Standard CPD Program has been developed for professionals governed by the Corporations Act 2001 and hold an AFS Licence which provides an obligation to undertake continuous professional development (CPD). Test your knowledge with the following questions.

[See next page for instructions on how to submit your answers].

Australian equities CPD Questions 1–3

1. In the latest WPI report, which measure of wages slowed in the June 2020 quarter from the first quarter? a) Total wages b) Private sector wages c) Public sector wages d) All of the above 2. Based on the negative correlation between wages growth and the underemployment rate, what would have been the growth in wages in the year to the June quarter? a) -1.8% b) +1.7% c) +1.8% d) +2.1% 3. Australian consumer sentiment picked in August due to the easing of restrictions that started in June. a) True b) False

International equities CPD Questions 4–6

4. Which US indicator/s improved based on latest figures? a) ISM manufacturing index b) ISM non-manufacturing index c) NFIB small business optimism index d) All of the above 5. What was the peak rate of US unemployment during the GFC? a) 10% b) 11% c) 12% d) 13% 6. The rate of additional US employment slowed in July from June. a) True b) False

30

Sector reviews

Fixed interest CPD Questions 7–9

7. When did New Zealand record its 100th day of no coronavirus infection? a) 10 June 2020 b) 10 July 2020 c) 10 August 2020 d) 10 September 2020 8. How much did the RBNZ raise its LSAP to at its August board meeting? a) NZ$60 billion b) NZ$80 billion c) NZ$100 billion d) NZ$200 billion 9. The RBNZ lowered interest rates at its August meeting. a) True b) False Alternatives CPD Questions 10–12

10. What factor/s contributed to the rise in crude oil prices in the June 2020 quarter? a) Increased demand due to easing of restrictions b) OPEC+ production cuts c) Both a and b d) Neither a nor b 11. What could derail further increases in crude oil prices? a) Reduced demand due to second wave b) OPEC+ members’ noncompliance to agreed quotas c) Both a and b d) Neither a nor b 12. The IEA has downgraded its world oil demand forecast. a) True b) False

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

Fixed interest

Prepared by: Rainmaker Information Prepared by: FSIU Source: Sources: Factset

All answers can be submitted to our website.

4.0

PERCENT

4

3.5

3

3.0

2

2.5

1

2.0

0

1.5

PERCENT

1.0 Quarterly change

-2

0.5

Annual change

0.0

-3 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

2014

2015

2016

2017

2018

2019

2020

Coronavirus spoils NZ celebration Ben Ong

“Anything that can go wrong will go wrong.” t was supposed to be a celebration, for as at 10 Ia single August 2020, New Zealand hadn’t recorded new case of COVID-19 for 100 days.

Prime Minister Jacinda Ardern’s tough measures worked and our Kiwi brethren must also be congratulated for not invoking their “human and civil rights” to party when Ardern on March 25.

New Zealanders’ general compliance allowed the government to remove restrictions – except border controls – less than three months later (from June 8).

However, just a few days after the world celebrated, praised and envied New Zealanders and their prime minister, came reports of four new infections that prompted the government to reimpose Stage 3 restrictions.

Despite Ardern’s swift and tough action, the

Alternatives

original four cases of infection had grown to 78 (as at August 17), compelling the Prime Minister to delay the New Zealand elections scheduled to be held on September 19.

The second wave has put a question market over what was turning to be a positive narrative for the country. The unemployment rate declined to 4.0% in the June quarter after reaching only a one-year high of 4.2% in the March quarter. Further easing of restrictions would have energised business activity and reverse the 1.3% quarter-on-quarter contraction in GDP in the March quarter (Figure 1).

So much so, that the majority of economists expected the Reserve Bank of New Zealand (RBNZ) to keep monetary policy settings on hold at its August 12 meeting – a day after the re-emergence of the virus and the announcement of Stage 3 restrictions.

The news enabled the RBNZ to respond just as swiftly. While it maintained the official

cash rate at a record low 0.25%, “the Monetary Policy Committee agreed to expand the Large Scale Asset Purchase (LSAP) programme up to $100 billion so as to further lower retail interest rates in order to achieve its remit”, and is prepared to do more (Figure 2).

“Reflecting a possible need for further monetary stimulus, the Committee also agreed that a package of additional monetary instruments must remain in active preparation” including, “a negative OCR supported by funding retail banks directly at near-OCR (a Funding for Lending Programme)” and “purchases of foreign assets”.

But as with anything and everything during these pandemic days, “Any significant change in the global and domestic economic outlook remains dependent on the containment of the virus, which is highly uncertain as evidenced today by the return to social restrictions in New Zealand”. fs

Figure 2: World oil demand and supply and the oil price

Figure 1: Crude oil prices 100

20

US$/BARREL

ANNUAL CHANGE %

ANNUAL CHANGE %

15

80 60

5

40

0 West Texas Intermediate

0 -20 -40

-15 -20

-20

-25

-60 Demand less supply (12mth moving average)

-80

Brent oil price -RHS

-30

-40 2016

20

-10

0

Prepared by: Rainmaker Information Prepared by: FSIU Source: IEA / Sources: Factset

40

-5

Brent

20

2017

2018

2019

2020

2011

80 60

IEA forecast

10

-100 2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Second wave threatens an oil slide M

Submit

Figure 2: RBNZ Cash Rate Target

-1

Ben Ong

Go to our website to

Figure 1: New Zealand GDP growth 5

ost things appeared to be going hunkydory for the oil market in the second quarter of this year.

OPEC+ production cuts plus the easing of social distancing and the re-opening of many businesses in an increasing number of countries around the world prompted a reversal in crude oil prices.

WTI oil prices soared by 37.0% to an average price of US$38.21 per barrel in the June quarter from US$27.96/barrel in the first three months of 2020. The price of Brent oil jumped by 36.6% to an average of US$40.27/ barrel in the second quarter from US$29.49 a barrel in the previous quarter (Figure 1).

The agreement by OPEC+ at the 10th (Extraordinary) OPEC and non-OPEC Ministerial Meeting on 12 April 2020 to adjust downwards overall crude oil production by 9.7 million barrels per day – equivalent to

10% of global supply – along with, according to OPEC, a “conformity level of 95% in June 2020, the highest since the inception of the Declaration of Compliance in January 2017, tilted crude oil’s supply/demand equation in favour of higher prices (at best) or stable prices at current prices (at worst).

So far so good…

Partial third quarter results show crude oil prices have stabilised – WTI oil at an average of US$40.99/barrel and Brent at US$43.59. …but not if the coronavirus pandemic could help it.

The second waves doing the rounds in many countries – notably, close to home in the state of Victoria and very recently, New Zealand – have prompted renewed social distancing restrictions and business shutdowns.

While OPEC+ has adjusted (cut) the oil supply to maintain current prices, COVID-19’s second bite at the global economy

threatens to weaken demand even more.

Planes, trains and automobiles – and cruise liners – are or would be put back in garages. Shuttered businesses, especially factories, would have no need for oil, reducing overall global demand and therefore, the price of oil (Figure 2).

But don’t take my word for it. In its August Oil Market Report, the International Energy Agency (IEA) downgraded its 2020 oil demand forecast by 8.1 million barrels per day (mpd) and revising lower its 2020 prediction by 240 kilo barrels per day.

At the end of the day, it will be that microscopic bug that’ll dictate where crude oil prices go.

Just as the IEA concludes: “Ongoing uncertainty around demand caused by COVID-19 and the possibility of higher output means that the oil market’s re-balancing remains delicate.” fs

Sector reviews

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

31

Property

Property

CPD Questions 13–15

Prepared by: Rainmaker Information Source: Revenue New South Wales

he New South Wales state government T has increased the threshold above which stamp duty is charged on new homes for first home buyers to $800,000 – up from $650,000.

The concession will reduce on higher values before phasing out at $1 million.

The stamp duty threshold on vacant land has also been increased from $350,000 to $400,000, phasing out at $500,000.

The changes come as part of the government’s COVID-19 recovery plan to entice buyers and will be in place from August 1 to 31 July 2021. The government forecasts more than 6000 first home buyers will benefit from the scheme.

The government said the move is designed to support the building and construction industry which employs a quarter of those living in New South Wales.

“Thousands of people will see their bank balances benefit from this change - it will help get more keys into more front doors of more new homes,” New South Wales premier Gladys Berejiklian said.

State government halts stamp duty to aid recovery Jamie Williamson

“It will also boost housing construction across NSW and support jobs in the building industry at a time when we need them more than ever before.”

Treasurer Dominic Perrottet said the changes would save first home buyers stamp duty of up to $31,335 on a new $800,000 home.

“The current scheme has already helped over 93,000 first home buyers since July 2017 and this will give the construction industry extra support as we face the challenges of COVID-19,” Perrottet said.

“We need to ensure our building sites keep ringing with hammers and saws as that means more people working, and first home owners will save money in the process.”

The government will also continue to offer the $10,000 First Home Owner Grant to people purchasing homes worth no more than $600,000 or buying land and building a home worth no more than $750,000.

The maximum benefit a first home buyer would be entitled to is $32,335, the government said.

AMP Capital chief economist Shane Oliver said

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the changes are good news in the short-term but run the risk of creating a long-term oversupply.

“Immigration is a significant factor in the property market, and it has plummeted with the advent of international border closures. If it doesn’t pick up at all or for a long time, there may be more properties being built for the number of people who require them,” Oliver said.

“For now, that’s a problem for down the track, and we can hope the measures from the NSW government fulfil their intended impact.”

The Thodey report recently found a broadbased land tax in NSW would be more efficient and equitable than transfer duty.

“Since the last major cycle of tax reform two decades ago, property markets have boomed and transfer duty (stamp duty on conveyances) has assumed a new order of importance in state budgets,” the report notes.

“The NSW government raised around $7 billion, or 24%, of annual tax revenue from transfer duty in 2018-19, making it the state’s second largest source of tax revenue. Only Victoria raises more as a share of state taxation. fs

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14. What is the new threshold for stamp duty on new homes for first home buyers in NSW? a) Decreased from $800,000 to $650,000 b) Increased from $500,000 to $650,000 c) Increased from $650,000 to $800,000 d) Decreased from $450,000 to $350,000 15. While the changes are good in the shortterm, some believe there is a risk of long-term oversupply. a) True b) False

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13. Which statement reflects the findings of the Thodey report? a) A broad-based land tax would work well in other states, but not in NSW b) A broad-based land tax in NSW would be more equitable and efficient than transfer duty c) The current transfer duty arrangements are efficient and equitable d) A broad-based land tax in NSW is less efficient and equitable than transfer duty

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32

Profile

www.financialstandard.com.au 31 August 2020 | Volume 18 Number 17

A FIGHTING SPIRIT Born in Germany from Israeli parents, Arian Neiron has always had fighting spirit in his blood.

Now, leading one of Australia’s most successful ETF issuers, he reflects on his journey to success. Ally Selby writes.

anEck managing director and head of Asia V Pacific Arian Neiron was a newlywed with his first baby on the way when he left his job at Perpetual for a role with an offshore asset manager … which subsequently fell through.

Jobless and with so much at stake, Neiron reached out to his former group executive of strategy Eric Wang, once the chief operating officer of Perpetual, to set up a management consulting business.

Within two weeks he was consulting for asset managers, including one of the biggest ETF providers in the world. But for Neiron, freshfaced and surviving on an average of five hours sleep a night, it wasn’t enough.

“I was always ambitious in the sense that I wanted to run a funds management business, but also wanted to make sure that it wasn’t a bureaucracy, that our people and the business were assessed on their merit and values,” Neiron says.

Ever hungry for his next challenge, Neiron began looking into starting his own ETF shop but found there to be substantial barriers to entry in the Australian market.

Neiron was initially interested in buying into a private equity firm but backed out. Van Eck ultimately swooped in to acquire a large stake in the firm.

“What ended up happening was I came on board and we recalibrated the entire business,” he says.

A few months later, VanEck got its Australian financial services licence. Just two months after that, it launched four different sector ETFs. Since then, VanEck has grown to become one of the largest ETF providers in Australia, with $4.7 billion in funds under management and 21 innovative products, ranging from local and international equities strategies to income ETFs and gold equities. It also has a range of new ETFs set to launch before the end of the year.

The business, Neiron says, does not “proliferate products” nor does it do “fads” like its peers.

“You have to be really contrarian, stand your guard, and stay the course and say: ‘This is what we believe in, this is our investment philosophy’,” he says.

And now, the ETP market has truly come into its own, with the industry going from “strength to strength” since the COVID-19 crash.

“March showed the Australian investment and superannuation industry that not only are ETFs great investment tools in terms of price discovery and liquidity, but it was also a major inflection point because everyone previously thought ETFs would exacerbate volatility and contribute to inefficiencies,” Neiron says “A few large institutional fund managers have capitulated and I think many more aren’t going to be able to survive.

“We’re demonstrating that a lot of alpha is actually smart beta, and we are able to offer that at a cheaper cost and with 100% transparency.”

Neiron dubs it “the age of disruption”, which

he says will continue to see the ETP industry soar to new highs.

But, it hasn’t been an easy journey to the success he enjoys today, with Neiron admitting there have been several bumps - sometimes potholes - along the road.

“Funds management is not an easy business, the industry is hyper competitive, and there are lots of complexities around the regulatory side … Nepotism is rife, and it does become more of a political gauntlet,” Neiron says.

“I think the biggest challenge for me in funds management - when you are an outsider and you don’t have a common name – you do have to prove yourself even more and I think that lit the fire and kept the fire burning in me to persevere and to be driven.”

He believes it is this stamina and determination, his insistence to let his “actions speak louder than words,” that has helped him get to where he is today.

“I believe in divine fortune, but sometimes you’ve got to make your own luck; you’ve only got one life and it’s not a dress rehearsal,” Neiron says.

This fighting spirit was inherited from his parents, he says, who fought in both the SixDay War and the Yom Kippur War. “I think, having a mother that grew up in postHolocaust Germany and parents that were fighters in the Israeli Defense Force, you grow up with a mentality that life is a fight, and you have to be prepared for the fight every day,” Neiron says.

While his drive and endurance was passed down from his parents, Neiron’s love of financial markets was gifted by his grandfather.

“My grandfather loved trading and I mean anything; commodities, he was obsessed with the US dollar, trading currencies,” he recollects.

His grandfather, a budding electronic goods entrepreneur, re-established the local Jewish community in Munich, Germany.

Neiron has fond memories of spending his Australian summers in Europe with his grandfather, eagerly watching him work away on his exporting business and trading with his friends.

“He was a real mentor to me; we were very similar. We both laughed at our own jokes and he was always there for me when I needed advice, whether it was on relationships or business,” Neiron says.

And although his parents pushed for him to follow a more “noble” career path (read: medicine or law), this time with his grandfather saw him drawn to financial services like a moth to a flame.

“Being brought up listening to the dynamics of markets – the sheer amount of information moving at such a fierce pace – it was just a natural chemistry,” he says.

His passion for markets would see him land a graduate role at MLC, and later work with Perpetual as a senior product manager of platforms and wholesale funds, before moving to Credit Suisse as a senior manager of product and investment solutions.

I believe in divine fortune, but sometimes you’ve got to make your own luck; you’ve only got one life and it’s not a dress rehearsal.

Arian Neiron

“I always liked the idea of being a custodian of someone’s wealth; I am there to help better people and fulfil their dreams and aspirations,” he says.

“The biggest reward is seeing people happy.”

During his eight years with VanEck, Neiron has also been studying the traditional Chinese martial art of Shaolin Kung Fu. Amid his other commitments and raising two young daughters he somehow found the time to train to become a teacher himself.

“When you meet Shaolin monks and you ask them where they are on their journey, they point to the bottom, because life is a learning journey,” Neiron says.

The practice involves hard qigong which is the more dynamic ‘yang’ component, as well as a ‘yin’ component which is typically softer, he explains.

“In business as well, you need to know when to push all the levers and when to pull back, you need to be able to clear your thoughts and focus, you need to learn from your failures and try again” Neiron says.

It’s the values of Shaolin Kung Fu – honesty, humility and discipline – that Neiron takes to all that he does. And it’s these principles that he believes should shape the future of the financial services industry in Australia.

“I am hopeful that we will get to a point where there won’t be this debate on active versus passive … and we focus instead on what we are delivering for our clients; our fiduciary duty,” he says.

“It might be a bit utopian, but the closer we get to that principal, the better the industry we will have.” fs