Financial Standard volume 18 number 20

www.financialstandard.com.au

12 October 2020 | Volume 18 Number 20

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T. Rowe Price

Federal Budget 2020

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Managed accounts roundtable

Max Cappetta Redpoint IM

Global macros

Publisher’s forum:

Opinion:

Special coverage:

Feature:

Event:

32 Profile:

Chris Durack Schroders

www.financialstandard.com.au

07

10

22

T. Rowe Price

Federal Budget 2020

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14

Managed accounts roundtable

Max Cappetta Redpoint IM

Global macros

Publisher’s forum:

Opinion:

Super funds commit to carbon neutrality Eliza Bavin

number of super funds recently commitA ted to becoming carbon neutral by 2050.

At the same time mining giant BHP also committed to the same goal, with many seeing this push as the final stretch to a green future.

The move comes as little surprise, with ESG becoming a louder and more prominent discussion point in the last few years as societal expectations evolve.

Though, the news that Australian mining giant BHP was going to divest its coal assets was a major move.

Rainmaker data shows that out of the nation’s biggest super funds Aware Super (formerly First State Super), Rest, Sunsuper and HESTA had the most significant holdings in BHP. When asked about the move from BHP, Aware Super’s head of responsible investments Liza McDonald said: “Aware Super has engaged directly and collaboratively with the board of BHP over a number of years on climate change and their strategy to managing these risks.”

“We welcome any organisations that are taking active steps to prepare to transition to a low-carbon economy. These organisations are likely to be more sustainable in the long-term.”

For those who have been pushing for a more sustainable future, the push from super funds on a company like BHP to ‘go green’ is a huge step.

In fact, Aware released a Climate Change Portfolio Transition Plan in July this year which set targets for investments in renewable energy and new technologies across its portfolios.

“We think this is one critical way that we will achieve our target of reducing emissions in our listed equities by a minimum of 30% by 2023, and support an economy-wide 45% reduction in greenhouse gas emissions by 2030,” McDonald says.

In addition, much like BHP, Aware also announced it would be divesting from thermal coal mining. It would appear that the push from consumers is starting to make its way to the C-suites.

“With the increasing reliance on more renewable or clean energy, we believe these assets posed a significant stranded asset risk, and therefore a risk to our members’ long-term retirement outcomes,” McDonald says.

Elsewhere, HESTA recently called on all ASX 200 companies to set Paris-aligned netzero by 2050 targets.

“We also outlined that we expect companies to clearly demonstrate indicators of board accountability, alignment of targets with executive remuneration and adequate disclosure aligned with the Task Force on Climate-related Financial Disclosures (TCFD),” HESTA chief executive Debby Blakey told Financial Standard.

“As an investor, we’re also considering how companies are positioning to take advantage of opportunities arising from a low-carbon economy.”

Blakey says the fund welcomes the recent step by BHP, as well as Shell and BP; both of which have made similar steps to manage the risk of climate change.

She said climate change has become a defining factor in companies’ long term prospects and is recognised as a risk to both the finance industry and global economy.

“To manage the risk of climate change to our members’ investments we have set a total portfolio carbon reduction target aligned to the Paris Agreement goal of ‘Net Zero by 2050’,” she says.

“We continue to engage with companies and use share voting to push for action on climate change.”

Principal adviser at Ethical Investment Advisers Karen McLeod says the trend towards a more sustainable future is growing, and not just in talk but in practice.

“There is an ever growing trend to divest from fossil fuels and focus business practices on our global transformation to a low carbon future,” McLeod says.

“This is driven from a financial perspective in many cases as carbon emitters are increasingly penalised globally.”

As an ethical investor, McLeod applauds these moves, but said the transformation of business practices must not stop at carbon when thinking of the environment.

“To achieve a sustainable future for all, businesses need to enhance their focus on closing loop to eliminate waste, minimise water use and reduce our encroaching footprint on nature,” she says.

“Smart businesses are doing this already.” fs

12 October 2020 | Volume 18 Number 20 www.financialstandard.com.au 20 January 2020 | Volume 18 Number 01

Special coverage:

Feature:

Event:

32 Profile:

Chris Durack Schroders

MySuper redeems performance Karren Vergara

Liza McDonald

head of responsible investment Aware Super

MySuper funds continue to recoup coronavirusinduced losses, as the latest Rainmaker research finds default products have on average gained three out of every four dollars lost in February and March.

The 2021 financial year kicked off in positive territory, recording two consecutive months of gains to August, Rainmaker’s latest super performance tables show.

MySuper products offered by not-for-profit superannuation funds outperformed their retail counterparts in the year to August by 0.6 percentage points.

In the month of August however, default retail funds edged out NFP funds according to Rainmaker’s index: 2.1% versus 1.7%.

The research house named Vision Super as the top-performing MySuper product based on a single strategy. Its Super Saver balanced growth option returned 4.1% in the 12 months to August. BUSSQ (3.8%) and FES Super (3.6%) recorded solid results.

Continued on page 4

Calls for aged care overhaul Eliza Bavin

Australia’s aged care system is failing and needs to be overhauled, according to the Grattan Institute.

Grattan health program director Stephen Duckett said the care and support of older Australians must come before the profits of private providers.

“Ageism is part of the problem, and emphasising the rights of older Australians in need of care and support is the start of the solution,” Duckett said.

“The horror stories from the Royal Commission into aged care and from the COVID-19 aged care crisis have to stop.”

Duckett called for an increase in spending and an overhaul in regulation to fix the sector, but said the most important factor is changing the culture of the aged care system.

“Over the past few decades the sector has become a ‘market’. As for-profit providers moved Continued on page 4

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News

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

Superannuation funds lag on disclosure

Editorial

Jamie Williamson

Jamie Williamson

D

Editor

And just like that, another federal budget has come and gone – albeit a few months behind schedule.

As with most years, there were few surprises, with Treasurer Josh Frydenberg and the rest of his Treasury team revealing several key elements in the weeks preceding October 6.

Frydenberg did, however, keep one trick up his sleeve in the form of superannuation reforms.

While largely unexpected, it wouldn’t be a federal budget without at least one change to the super system, would it? Never mind the fact that some of the reforms from the last few years have barely been implemented, let alone been in effect long enough to see any tangible impact.

Perhaps the most significant reform flagged by Frydenberg is a move to prohibit underperforming super funds from welcoming new members into their MySuper products.

The Morrison government is proposing a new annual test, to be administered by APRA, which would see the net investment performance of MySuper products benchmarked. Those that fail two years in a row will be barred from accepting new members until they’ve turned their performance around.

The test will be implemented from July 2021 and extended to all trustee-directed accumulation products from July 2022.

The strange thing about this is that the benchmarking will be calculated over eight years to account for longer-term returns. It’s strange because, despite MySuper legislation being introduced in 2013, many super funds didn’t establish a MySuper option until years later in some instances.

And what does this mean for APRA’s heatmaps? They’ve not even been around for 12 months and it would seem the government’s already gone cold on them, citing this new assessment as its “primary method”.

It’s an odd move, given the heatmaps – for all intents and purposes – appeared to be doing what they were designed to. With the first iteration coming out last December, by June 30 this year APRA considered itself responsible for mass fee cuts to the tune of about $100 million across super funds.

Arguably, yes – designed to help consumers make more informed decisions around their super savings, the heatmaps have failed to some extent. But I would put that down, in large part, to the fact that an Excel spreadsheet with funds marked red or slightly less red isn’t exactly an easy read.

We also still have the Retirement Income Review to come. While the review panel handed its final report to the government on July 24, no one can say whether this latest round of reform draws on that.

Even still, the review’s terms of reference were far wider than the above, meaning it’s only a matter of time before the super sector is subjected to further upheaval. fs

The quote

A super fund either believes in transparency or it doesn’t.

espite growing demand for it, Australia’s superannuation funds are dragging their feet when it comes to portfolio holdings disclosure.

A recent study by Rainmaker found just 27 major super funds publish holdings data; about one quarter of all funds.

Of those that do disclose, most are not-for-profit funds, though some retail funds such as Australian Ethical and Future Super are in the mix.

However, the extent to which super funds disclose their holdings differs from fund to fund, with some disclosing their entire holdings while most choose to disclose just their top 10, 20 or 50 holdings.

Overwhelmingly, super funds are more likely to disclose just the top 20 holdings and are increasingly disclosing property, infrastructure, fixed interest and cash holdings, Rainmaker found.

“Two-thirds of funds practicing holdings disclosures were also found to disclose fund-wide or asset class wide holdings with a smaller number disclosing their holdings at option level,” Rainmaker said.

On the equities front, super funds’ top holdings are remarkably consistent, with CSL, Commonwealth Bank, NAB, Westpac, BHP Group, Macquarie, ANZ, Woolworths, Rio Tinto and Telstra appearing among the top 10 holdings of almost all super funds. Here, the top 10 stocks account for about 35% of each funds’ value in the asset class.

Super funds own about 20% of the banking sector, Rainmaker estimates.

Among global equities, top picks were also similar with eight of the top 10 of most funds being technology stocks like Amazon and Facebook. Still, in Australia, super funds have 60% more capital invested in resources than in technology, the research house said.

Funds are also increasingly disclosing their holdings on a six-month basis, as opposed to the traditional 12 months, while others are doing it quarterly.

“A super fund either believes in transparency or it doesn’t,” Rainmaker executive director of research and compliance Alex Dunnin said.

“Disclosure of the 20 major holdings is a good start, but it is only a start.”

Speaking with Financial Standard’s sister publication, FS Sustainability, Responsible Investment Association of Australasia chief executive Simon O’Connor said the clock is ticking as we head towards mandatory disclosure.

“We encourage funds to be on the front foot in bringing that forward,” he said.

“In the context of an emerging conversation around greenwashing, one of the strongest ways of responding to that is being really clear on who we’re investing in.”

He said RIAA strongly advocates for transparency around engagement and voting practices.

“We do believe there are more was to influence in a responsible investment portfolio than just what you’re invested in and not investing in,” he said.

“Divestment is not the only tool available.” fs

Vanguard to cull insto mandates Kanika Sood

The investing giant will wind up a number of mandates with local institutional investors, as it pivots away from the lower-fee business line to retail, adviser and its in-house super offering.

Vanguard will discontinue special mandates but still allow local instos in its pooled funds.

“This is an ambitious plan and it requires us to focus our long-term efforts on opportunities that enable us to better serve direct investors and their advisers. As a result, Vanguard has taken the business decision to no longer offer Segregated Mandate Accounts (SMA) or customised solutions as an investment vehicle to institutional investors in Australia and New Zealand,” a spokesperson said in a statement.

“Vanguard will continue to offer pooled fund solutions to institutional clients and will work closely with our existing institutional SMA clients to ensure a smooth transition program is put in place and find the best possible solution to their existing mandates.”

It signals a pivot away from lower-fee business lines such as institutional mandates to relatively higher-fee offerings. The latter include its activelymanaged unlisted funds launched in September 2019, and the November 2019 announcement of plans for a superannuation offering and a portal for direct investors.

Vanguard was the second largest investment manager in Australia (behind State Street) with $140 billion in assets under management at March end, according to Rainmaker data. At June end, it had about $153 billion in Australian-sourced assets.

In superannuation, Vanguard manages money for at least three funds, including AustralianSuper (until this December) and State Super (until 2023). The AustralianSuper and State Super mandates totaled about $1 billion, according to Rainmaker data.

Last November, it revealed plans to launch its own superannuation offering, saying both direct members and advisers would be involved in the product’s distribution – though it did not comment on its launch timeline. It has since built its superannuation team and gotten an APRA licence. Vanguard’s head of corporate affairs Robin Bowerman also sits on the board of SMSF Association.

Also since 2019, it has push towards direct investors (via an online portal) and has launched its first set of fundamentally-managed active funds.

In exchange traded funds (ETFs), Vanguard holds a 31% share with roughly $31 billion of the total $70.7 billion of assets in ASX-listed ETFs, according to August end numbers published by the ASX. fs

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News

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

01: John Smith

MySuper redeems performance

chair LGIAsuper

Continued from page 1 In terms of the top-performing investment option, UniSuper offered the best returns at 34% thanks to its Global Environmental Opportunities strategy, beating out several options in the ESG equities category. Trailing behind were: Nationwide Super’s Employer - Responsible Global Shares (7.3%) and Mercer’s Super Trust Corporate Super Division - Mercer Socially Responsible Global Shares Unhedged (5.2%).

In the personal or balanced category, the topthree performers were: MLC MasterKey Super Fundamentals - BlackRock Global Allocation Fund (10.8%), WA Personal Super - Sustainable Future (7.5%) and UniSuper Personal Accounts Sustainable Balanced (6.6%).

Rainmaker noted that international equities (7.3%), international bonds (2.5%), Australian bonds (0.4%), and cash (0.5%), drove its MySuper index to positive territory.

Its direct property index showed listed property (-17.7%) and unlisted property (-3.5%) struggled during the period. fs

Calls for aged care overhaul Continued from page 1 in, residential facilities got bigger. Regulation has not kept pace with the increasingly privatised market. Government focus has been on constraining costs rather than ensuring quality,” Duckett said.

“The government’s poor commitment to the care and support of older Australians reflects society’s disdainful attitude to the aged.

“Older Australians are often seen as a burden and no longer valuable or contributing members of society. They are pushed out of sight and out of mind.”

Duckett said Australia’s top-down, provider centric aged care system is “a shameful mess” that lacks funding and is poorly regulated.

“Merely adding further Band-Aids to a broken system is not enough. Australia needs to start again with a new Act that puts the rights of older Australians at the heart,” he said.

In the federal budget, released on October 6, the government committed more than $1.6 billion to further support ageing Aussies.

The Treasurer announced the record funding would go towards an additional 23,000 at-home care packages, with further investment set to be announced following the final recommendations of the Royal Commission into Aged Care Quality and Safety in February next year.

“This brings the total to more than 180,000 places, three times the number of home care packages than when we came to government,” he said.

“99% of all those seeking an in-home aged care package now have access to some form of in-home support.”

But Aged Care Gurus principal Rachel Lane told Financial Standard it just isn’t good enough.

“Only 2000 of the new packages are at level four, which is the highest level of care and the level that’s needed to keep people out of residential aged care,” she said. fs

Queensland super funds explore merger Kanika Sood

T The quote

The opportunity to grow through a merger like this could help us create even better member outcomes through enhanced services and broader investment opportunities, while continuing to ensure competitive fees.

wo Queensland industry funds have signed a memorandum of understanding to explore a merger which could create a $20 billion superannuation fund.

Energy Super and LGIAsuper will commence due diligence on an exclusive basis, to vet if a merger will be in the best interest of both funds’ members.

The MoU was signed after a high-level assessment and discussion at both funds.

“LGIAsuper’s strategy over the past three years has been to look for opportunities to achieve the size and scale to continue to deliver excellent financial outcomes and outstanding service for our 75,000 members long into the future,” LGIAsuper chair John Smith 01 said.

“While the process with Energy Super is in the early stages, the areas of alignment are encouraging and warrant further exploration to see if we could better de-

liver for all members as a combined fund.”

“Energy Super is proud of its success in developing leading products and services for our members over many years. The opportunity to grow through a merger like this could help us create even better member outcomes through enhanced services and broader investment opportunities, while continuing to ensure competitive fees,” Energy Super chair Richard Flanagan said.

Flanagan was appointed the chair in September, as Energy Super’s then chair Scott Wilson moved to a director role.

LGIAsuper has $12 billion in total assets for 75,000 members as at June end.

It has already been through a merger in 2011 when it (then known as LGsuper) merged with City Super to create one fund for all local government employees in Queensland. The 55-year-old fund has been public offer since 2017. fs

Superhero sets eyes on managed accounts Ally Selby

Newly launched trading platform Superhero has revealed it has the functionality to offer managed accounts to investors, and would be looking into developing this and an APL further in the future.

The platform, which launched at the beginning of September, has already seen more than 10,000 investors sign up, drawn by Superhero’s $5 brokerage fee and $100 minimum investment.

Superhero, unlike its trading platform peers, is effectively a custodian, co-founder and chief executive John Winters said, and uses an “omnibus account” structure and regulatory regime (RG133 and RG148) typically imposed upon big banks and global custodians.

“It’s a single structure that holds all of the assets pooled, but we’re holding it through a HIN on CHESS, so you get all of the security that CHESS brings and then we use our platform to run the individual accounts,” Winters told Financial Standard.

Investor’s funds are held in a pooled account by NAB, which generates zero interest for Superhero, Winters said. He noted that a number of the platform’s competitors hold cash the same way.

And while Australian investors may have been “fixated on having an individual HIN” in the past, he argues this is just a mindset – and one ripe for disruption, too.

“The ASX is actively trying to replace the CHESS system, its 25 years old, so I think our competitors use it because it’s very easy; you just plug your website into OpenMarkets for example and away you go,” Winters said.

“There’s not a lot of tech; there’s not a lot of IP development there.”

Instead, Winters and his team spent two and a half years developing the technology to set it apart from its competitors.

“We have developed quite an extensive technology platform that I think to make a direct comparison to someone else in the market, we’re probably closer to likes of HUB24 and Netwealth, but we’ve removed the advice intermediary and made it direct to consumer,” he said.

And while the platform already has the functionality to rival the likes of HUB24 and Netwealth’s managed account offering, it has not yet developed its own APL. “But watch this space,” Winters said.

It comes as the new entrant continues to shake-up the investment arena, announcing it will drop brokerage fees on ETFs to zero; making it the cheapest trading platform in the market.

“Investors are extremely fee conscious these days and fees in general are often a detractor from making responsible long term investment decisions,” Winters said.

“Market commentators, including the likes of Scott Pape are famous for championing low fees and we’ve now made the cost to enter the market totally free.”

Winters argues that Superhero has helped commoditise the trading arena, following in the footsteps of significant players in the United States.

“It’s very hard to justify a stockbroker charging 1% to put a trade through (execution only without advice) when we can do it at Superhero for free,” he said.

This free brokerage has the platform’s partnership with OpenMarkets to thank, Winters said, which enables its direct market access, supports its CHESS-based nominee structure and offers an Australian-first pricing model.

“Our partnership with OpenMarkets and the technology platform we have built allows significant efficiency, and ensures asset and regulatory security for our customers,” he said. fs

News

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

Adviser charged with stealing super

5

01: Susan Ryan

former Labor senator

Elizabeth McArthur

A West Australian financial adviser who has worked across some of Australia’s largest licensees could face 15 years in jail after being charged with four counts of dishonest conduct in relation to hardship superannuation requests.

Rahul Goel is an authorised representative of Australian Financial Directions and committed the alleged offences under his business AR Wealth and Finance. Previously, Goel was licensed by two of Australia’s largest licensees, Synchron (2016-2018) and AMP (2013-2016).

Goel’s behaviour was uncovered when AustralianSuper handed ASIC a report in 2019 containing concerns the fund held. Goel had submitted numerous applications to AustralianSuper for the early release of members’ funds on the grounds of hardship.

The report raised concerns that in the course of procuring early release, Goel or someone he worked with had misrepresented themselves to AustralianSuper as being the members in question.

AustralianSuper identified up to 67 members impacted by Goel’s alleged conduct.

Several of these members, ASIC alleges, were residents of remote communities and Aboriginal people.

“Further inquiries that ASIC made of fund members suggest that in most instances, the email addresses given on the forms were Gmail addresses that were not email addresses used by the members,” the interim judgement on the matter said.

If convicted, each offence carries a maximum penalty of 15 years’ imprisonment. fs

Most advisers pass August exam FASEA has released the results of the August exam, with 82% passing. The results mean 46% of advisers on the ASIC Financial Adviser Register have now passed the compulsory exam.

A total of 1521 advisers sat the exam. FASEA did not reveal how many advisers were sitting the exam for a second time but said that 65% of those re-taking the exam passed on the second attempt.

Overall, the pass rate for the FASEA exam in general is 89%. Over 11,000 advisers in total have now passed.

“FASEA is pleased to present the outcomes of the seventh exam and congratulates successful candidates on completing an important component of their education requirements under the Corporations Act during the current extraordinary circumstances,” FASEA chief executive Stephen Glenfield said.

“Over 11,180 advisers have sat the exam with nine in 10 demonstrating they have the skills to apply their knowledge of advice construction, ethics and legal requirements to the practical scenarios tested in the exam.”

FASEA said advisers underperformed in a few areas including demonstrating an understanding of the differences between personal advice, general advice and factual information, assessing best interests and assessing the impacts of conflicts that may arise from recommendations. fs

Remembering Susan Ryan Jamie Williamson

T The quote

The best way we honour her is to rekindle reforms to prevent discrimination and to equalise the situation of women workers, who overall are behind their male counterparts.

ributes are flowing for the superannuation industry pioneer and former politician who passed away.

The superannuation industry is in mourning for Susan Ryan01, former Association of Superannuation Funds of Australia chief executive and Australian Institute of Superannuation Trustees president, who passed away suddenly on September 27.

Ryan is being remembered as one of the great minds behind the modern superannuation system, as well as a great politician and feminist. Ryan was a champion of women, known for her commitment to improving women’s retirement outcomes.

Ryan contributed significantly to the super industry over the years, leading ASFA from 1993 to 1997, and served as AIST president for seven years to 2007, building it into what it is today. She was also a member of the Australian Council of Superannuation Investors (ACSI) for six years and a member of the ASX Corporate Governance Council from 2003 to 2007. Ryan also held the role of independent chair at IAG & NRMA Superannuation Plan until 2011.

ACSI chief executive Louise Davidson said she is terribly saddened by Ryan’s death, saying Australia has lost an important leader.

“Susan spent her career improving the lives of working Australians and their retirement…

Susan leaves behind a legacy that her family and all Australians can be proud of,” Davidson said.

Prior to her time in superannuation, and what she is best known for, Ryan enjoyed a successful career in politics as a key member of the Hawke government and the first woman to hold a Cabinet post in a Labor government.

Over the years, Ryan also served as Minister for Education and Youth Affairs, Minister Assisting the Prime Minister on the Status of Women and Special Minister of State.

It was during this time that Ryan fought to end sex discrimination, sponsoring the Sex Discrimination Act, which was passed in 1984, and the Affirmative Action Act 1986; the impact of which has and will continue to benefit generations of Australian women.

A steadfast advocate of equal opportunity, in 2011 Ryan was appointed Australia’s first Age Discrimination Commissioner – a title she held for five years, in addition to that of Disability Discrimination Commissioner.

In a tribute, Prime Minister Scott Morrison said Ryan will be remembered as “someone who sought to make our country bigger and more open to every citizen” and for her abiding passion for opening doors for women in national life.

In a statement, ASFA chair Michael Easson said: “Her legacy includes improvements in the lives and financial well-being of millions of Australians. But she would hate anyone to be complacent. There’s more to be done.”

“The best way we honour her is to rekindle reforms to prevent discrimination and to equalise the situation of women workers, who overall are behind their male counterparts.”

Equally, AIST chief executive Eva Scheerlinck described Ryan as a true pioneer and a champion of the people and a dignified retirement for all.

“Her work in the human rights sphere spanned women’s rights, the rights of elderly Australians and those living with a disability,” she said.

“She was caring, collegiate and a trailblazer.” fs

AMP confirms redundancies Karren Vergara

AMP has confirmed that redundancies are on the horizon as the group makes transformational changes to its business and culture.

The firm is currently undertaking changes to its global workforce in a bid to centralise some business services.

“Our focus is on continuing to reshape the organisation to drive efficiency and support the delivery of AMP’s strategy to become a simpler, client-led organisation,” an AMP spokesperson said.

AMP declined to provide more details about which business units and how many employees are affected.

The AFR reported that 20% of AMP’s local wealth management and AMP Capital’s asset management workforce are at risk.

The move comes off the back of the embattled wealth firm announcing it is open to “unsolicited interest” in selling off its businesses and assets, along with massive efforts to overhaul its culture, which was put under the spotlight following the controversial demotion of Boe Pahari and the departure of Alex Wade.

The group’s chief executive Francesco De Ferrari said he is sticking to his three-year strategy to turnaround the business. This started with offloading AMP Life to Resolution Life in order to simplify its superannuation business.

De Ferrari is also reshaping the advice network and capitalising on the success of AMP Capital and its platform.

In dollar terms, De Ferrari expects his strategy to realise cost savings of $300 million by 2022. fs

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News

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

CountPlus makes acquisition CountPlus has continued its goal to generate scale with one of its member firms completing a tuck-in acquisition of a separate member firm.

Brisbane-based Cooper Reeves has acquired the financial advice services of CBD Wealth Solutions.

Key members of CBD Wealth will transition to Cooper Reeves as part of an agreed succession plan and a seamless transition for CBD wealth clients.

Cooper Reeves will pay $600,000 for the acquisition with an initial payment on completion and the balance dependent on recurring revenues 12 months post completion.

CountPlus chief executive Matthew Rowe said there is a natural alignment between the two firms.

“Not only close geographically, each business has a strong reputation in their respective community. The firm’s share similar values based on delivering exceptional client-focused advice,” he said.

Cooper Reeves managing director Christine Robinson said the acquisition will be a positive outcome for CBD Wealth clients.

“The Cooper Reeves business is focused on creating exceptional client outcomes and we are excited to introduce the CBD Wealth clients to our firm and its strong client-first culture,” she said.

“We believe the purpose, resources and experience at Cooper Reeves will deliver very positive and enduring client outcomes.”

CountPlus has undertaken several tuck-in acquisitions and last month its subsidiary AdviceCo made a tuck-in acquisition of Arch Capital’s accounting revenues. fs

Another MLC advice firm exits Queensland-based Designing Financial Solutions (DFS), led by principal and financial planner Kevin Redfearn, is now operating under the AFSL of independent group FYG Planners, which has over $3 billion in funds under management.

DFS was licensed with GWM Advisers, which was part of MLC. Redfearn has been in the financial advice industry since 2001 and founded DFS in 2014. Simone Halse works with Redfearn as client services manager.

FYG Planners general manager Andrew Wootton welcomed Redfearn, saying he shares a common alignment in terms of providing goalsbased advice with FYG Planners.

“Interestingly, Designing Financial Solutions have joined us from an MLC entity, which is a clear theme we’re seeing right now, [as] we’re in discussions with several advisers looking at their options,” he said.

In early September, HFM & Partners announced it is leaving MLC-owned GWM Adviser Services in light of the acquisition by IOOF. Managing director Scott Haywood said being part of the biggest group of advisers was one of the main reasons he decided to change licensees to Sequoia Financial subsidiary InterPrac.

FYG managing director Peter Mancell commented: “In discussions with Kevin we found him aligned with us philosophically, along with being the type of personality we want in FYG.” fs

01: Helen Rowell deputy chair APRA

Trustees cutting corners, Rowell says Karren Vergara

T The quote

Often it wasn’t clear to us why certain peer groups for choice products had been selected.

he prudential regulator has lambasted superannuation funds for not taking underperformance seriously and failing to compare themselves accurately against their peers.

APRA deputy chair Helen Rowell 01 said that many superannuation funds are overlooking many of the regulator’s guidance and refusing its requirements without “equal gusto”.

Rowell highlighted a number of poor practices at the recent AIST Trustees Forum, starting with substandard peer reviews, in which many super funds are pitting themselves against a narrow field and failing to include all of their MySuper products in the assessment.

“Often it wasn’t clear to us why certain peer groups for choice products had been selected.

Trustees should document how and why they have determined the peer products to be used for their choice product assessments. This will also assist the trustee to satisfy the publication requirements under the SIS Act,” she said.

Trustees are also ignoring several factors that are critical in conducting the outcomes assessment. Some are using “questionable benchmarks”, and vaguely describing their

fees charged as “not top quartile fees”, she said.

In assessing options, benefits and facilities provided, trustees do not clearly link how these affect the financial interests of members.

Some did not consider the appropriateness of insurance strategies or if insurance fees charged in relation to the product inappropriately erode the retirement income of beneficiaries, Rowell said.

Several trustees didn’t appear to have considered the appropriateness of their fee structures, including the way they split fees between flat and variable charges, when assessing the impact on the members invested in the relevant product.

Rowell said that some approach implementing SPS 515 Strategic Planning and Member Outcomes as a “tick-a-box compliance exercise” after reviewing the varied quality of documentation Trustees can expect further engagement from APRA as they approach the December 31 deadline for undertaking their first BPR and the February 28 timeline for the first outcomes assessment, Rowell warned. fs

Pandemic proves value of advice: FPA Annabelle Dickon

The pandemic has been integral in highlighting the value of financial advice, according to new research.

The Financial Planning Association of Australia’s (FPA) inaugural Money & Life Tracker: COVID Edition reveals Australians with financial advisers were not financially impacted by the pandemic compared to those without an adviser.

Furthermore, 87% of respondents who have engaged a financial adviser did not access their superannuation early while half of advised Australians believe they would not have done anything differently financially.

As a result, 13% are now considering financial advice to strengthen their financial position coming out of COVID-19.

FPA chief executive Dante De Gori said those who had a financial planner by their side were able to cope more confidently than those who didn’t.

“The value of a financial plan has never been more important due to the experience of the pandemic and now that Australia is officially in recession after 29 years,” he said.

“Those who are in receipt of professional financial advice are, well-guided and well-engaged

with their money and will make better decisions and get better results for themselves and their loved ones.”

But almost a third of unadvised Australians believe they are able to ‘do-it-themselves’ with help from family, friends and the internet while 20% are holding back because they believe they don’t have enough wealth to engage one.

The research showed 70% of respondents believe they could have done better or taken a different approach to improve their financial position with a further quarter revealing high levels of financial stress.

The biggest stress factors were depletion of savings, job insecurity and loss of superannuation.

One in five said they could have improved their situation by putting cash aside for a rainy day while 17% said they could have controlled impulse buying.

“The Money & Life Tracker has shown us two distinct groups of Australians: those who lost income and were forced to dip into savings to get by; and those who were able to save money either because they felt in control of their financial position or were cautious of what the future holds,” De Gori said. fs

Publisher’s forum

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

01: Randal Jenneke portfolio manager and head of Australian equities T. Rowe Price

Big government, low growth and inflation: The new normal for markets he COVID-19 pandemic is a very unusual T event, and the recession Australia is currently experiencing is caused by the government shutdown due to the pandemic. It’s not a recession caused by an asset bubble, or high interest rates or high inflation. As a result, it really falls back on government to step into the breach and support the economy until it can stand on its own two feet.

We are currently in a context where monetary policy has run its course and government will play a more supportive role through fiscal policy. Central banks including the Reserve Bank of Australia (RBA) have been supporting the economy through monetary policy, but having reached the limits of monetary policy, the RBA has a choice – do they go down an unconventional policy path with quantitative easing, or do they ask the government to do more?

The end of monetary policy influence The RBA had been banging the table prepandemic for a fiscal policy response. We were already set up for monetary policy to run its course, and the RBA did not want to go down the unconventional path. COVID-19 has merely sped this process up.

The response to the COVID-19-driven recession in Australia has resulted in fiscal policy and government support - JobKeeper, JobSeeker, and a Team Australia approach to the crisis where banks and landlords are part of the strategy, and we’ve also had changes to bankruptcy laws to support the economy.

But the question going forward is, what is going to continue to be the policy to manage the cycle, and how this will influence markets?

We believe what comes next is a fiscal policy-driven approach to managing the economy, which we haven’t seen in a long time. There are calls for government to manage income inequality, and other societal issues. A bigger role for government means government driving a bigger percentage of GDP, with the potential for more regulation and more intrusion into corporate lives.

Most economists would say that big government is associated with slower growth. If you have a bigger government that is going to crowd out the private sector, or even just slow down its ability to hire effectively and innovate, and this is one of the things that we’re trying to grapple with.

It is undoubtedly true that we are in uncharted waters for markets and economies. Having reached the limits of what monetary policy can achieve in keeping the economic juices flowing, governments will have to employ fiscal policy to counteract the effects of the COVID-19-induced recession.

Randal Jenneke of T. Rowe Price identifies the three “Ps” that shape markets – profitability, policy and positioning. Governments will turn on the fiscal policy taps, which will impact corporate profitability, and investors need to seek new positioning to find value in unfamiliar territory.

With all this as backdrop, Jenneke explores how to identify the sectors that are likely to continue to perform well, and the well governed companies that will continue to chart a course through these waters.

Michelle Baltazar Director of Media & Publishing

A new era of big government If you’re thinking about what drives markets, it’s three things - profitability, policy and positioning. How does a policy of government support affect profitability, and how do we position ourselves as a result of that.

Government taking a bigger position of GDP growth is a headwind to profitability, and more interventionist government will impact markets.

We are seeing that not only in regulation, but in other areas, such as Treasurer Josh Frydenberg’s call that the next chief executive of Rio Tinto be Australian, along with a majority of the board. This wouldn’t have happened 10 to 20 years ago. That will make business more cautious, and from a corporate profitability perspective, we have to watch that very carefully.

From our perspective, you want to be invested in companies that continue to grow irrespective of the broader growth backdrop. This environment is still one that favours structural growth sectors such as healthcare and technology, for example. But we also believe cyclical growth stocks will do well as we recover from the pandemic.

There are other considerations from our perspective as well. We look at the state of supply chains, where a company has its manufacturing base, is it going to be close to key markets and key consumers. We are moving away from a supply chain that is “just in time” to one that is “just in case,” and that will also impact growth.

As governments around the world try to look after their own citizens, there is definitely the risk of increased economic nationalism with more frictional costs, which translates to lower growth or lower economic outcomes.

The quote

We are in a world of big government response, and we think both growth and inflation rates, while likely to improve somewhat, are going to be on the lower side compared to historic levels.

nies, the risks to valuations and the investment value. If we’re looking at the energy sector, long term, our view is negative, so therefore you’d expect our portfolios to be underweight the sector. Coal is a sector that has largely disappeared from listed markets, and that will only accelerate going forward.

There is no doubt that there is real investment risk around these factors, which is why we have a big ESG team in London who work closely with our analysts and portfolio managers, in order to assess these risks. Governance in particular is an area we spend time analysing, and it reinforces the point that we think we are in a world of bigger government and that is a very different environment for corporate governance.

Growth, not value, to dominate We think you want to be in the growth part of the market, but you want to hedge the bets a little bit away from structural and towards cyclical growth. As we recover from the pandemic, our employment rates should increase, and that will help. The housing market will recover. We’ve seen indications that car sales are recovering.

This favours growth companies, but more cyclical growth companies.

Pulling all of these strands together, we think we are in a very different environment. We are in a world of big government response, and we think both growth and inflation rates, while likely to improve somewhat are going to be on the lower side compared to historic levels. With that as the backdrop, and being mindful of where valuations are, we believe cyclical growth will outperform, while value will continue to struggle. fs For Wholesale Clients only. Not for retail distribution.

Important Information This material is being furnished for informational and/or marketing purposes only and does not constitute an investment advice. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision.

Past performance is not a reliable indicator of future performance. Capital at risk.

The current Information and opinions may differ from those of other T. Rowe Price group companies and/or associates. © 2020 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.

The implicit role of ESG Much like other trends, the focus on environmental, social and governance issues has only accelerated through the pandemic, and the heightened focus of ESG will also impact markets. There will be winners and losers. On the climate, we know that as we transition away from fossil fuels, we have to have the conversation about what is the long term value of an oil and gas company going forward? It’s hard to see anything but value going down.

The strategy which we run is not an ESG strategy per se – ESG is integrated in the process. We’re thinking about the risks to compa-

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News

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

New chair of CPA Australia

01: Andrew Bragg

senator

Elizabeth McArthur

CPA Australia, the nation’s leading accounting body with more than 166,000 members, has appointed a new president and chair. Two deputy presidents have also been appointed.

Merran Kelsall has been elected president and chair of CPA Australia, succeeding Peter Wilson who has completed his maximum term of three consecutive years.

Ric De Santi and Dale Pinto have also been elected as deputy presidents.

Kelsall served as deputy president for three years and currently has a number of other directorships. She is on the board of CareSuper, Melbourne Water Corporation and the RACV as well as TarraWarra Museum of Art. “Merran has considerable expertise in corporate governance, finance, audit, risk and compliance.

She is particularly focused on aligning performance management with strategy, and in financial and non-financial external reporting to include strategy and risk management. Her main interest is organisations with a strong focus on outcomes for members, stakeholders and the public interest,” CPA Australia said.

“She operated in public practice for 20 years, including 10 years as a partner at BDO. Her industry experience includes financial and professional services, insurance, health, retail, education, contract management and major infrastructure projects.”

Chin Aik Wong retired from the CPA Australia board at the end of September after a three year term. Rosemary Sinclair and Helen Lorigan were re-elected for second three year terms. fs

Super funds squander member money: Bragg Karren Vergara

S

The quote

The system should evolve to cater to diverse needs.

Integrity Life raises $43m Institutional funds managers have pumped $43 million into life insurance startup Integrity Life to help it expand and build out its digital offering.

The majority of the capital came from Schroders Investment Management based in Switzerland, Leadenhall Capital Partners and Daido Life.

Smaller parcels came from Australian and international sophisticated investors in a recent series B round of funding.

Integrity Insurance Group chair Eric Dodd said: “We are on a growth trajectory, despite the backdrop of COVID-19 and a possible global recession, our low-cost operating model and flexible technology systems give us a significant advantage to adapt and pivot to keep pace with change. We are very excited about the future and what we’ll be bringing to market.”

Schroders portfolio manager for life insurance linked securities Scott Mitchell said the investment provides Schroders’ investors with a rare opportunity to support a digital-focused business that provides access to diversifying life insurance risks, such as mortality, critical illness and disability.

Integrity Life opened its doors in mid-2018, led by Chris Powell, who has now retired. The life insurer protects more than 60,000 customers across both their group and retail books.

In 2019, Integrity Life won the Australian Good Design Award for its adviser portal. fs

enator Andrew Bragg01 is calling for greater scrutiny of how superannuation funds spend members’ money, slamming the system that has enjoyed three decades of unquestioned opacity.

Appearing at an Association of Superannuation Funds of Australia event, in which he engaged in a political debate with Labor member Daniel Mulino, Bragg criticised the level of self-interest both retail and industry funds have exhibited over the last 28 years or so under a system that has operated as “one big silo”.

The Hayne Royal Commission exposed retail funds acting in their best interest, while the COVID-19 crisis showed industry funds acting and furthering in their own self-interest, he said.

The New South Wales Senator proposed a roadmap to fix the system in three ways by: setting a clear objective of what superannuation wants to achieve; improving transparency of how members’ money is spent; and lowering fees.

He slammed super funds for not disclosing related-party payments made to trade unions for example, which are set to profit $31 million over a decade. He was particularly critical of Industry Super Australia spending $40 million last year on advertising.

ISA told Financial Standard in the past that it has not increased its marketing budget over the years (as at 18 March 2019) and declined to disclose what that exact figure was.

Bragg wants to see better governance in how members’ money is spent, pointing to how such conduct is failing the Sole Purpose Test.

While Bragg insists that he does not want to upend or abolish the entire system, he would rather see members get “more bang for their buck”, fees lowered by at least half and transparency improved.

These are the bigger questions the industry should focus on rather than increasing the contribution rate, he added.

Bragg recently released a book, Bad Egg: How to Fix Super, outlining many of these points, one of which is allowing members, especially those who earn lower incomes, to use their super to purchase their first home.

Mulino said that such a proposal “takes away the integrity of the scheme” and, together with the early release of super scheme, denies the benefits of compound interest, particularly for young members.

“Invariably it is going [to be young people] who will potentially get the benefit of earlier access to their first home, but the price they pay in terms of missing out on a lifetime of compound interest is just too high,” Mulino said.

“The system should evolve to cater to diverse needs. Almost no other sector works with a static set of laws from three decades ago and the industry ought to look at reform as an opportunity to become sustainable,” Bragg wrote. fs

Clarity on life insurance BID needed Eliza Bavin

An Actuaries Institute Taskforce has made sweeping recommendations for broad changes to Australia’s retail disability income insurance market, including providing examples of Best Interest Duty in life insurance.

The report said ASIC included in RG 175 examples of the application of the BID in various circumstances, but there are no “useful examples” for life insurance.

The report said the Taskforce considers this omission to be an important factor in the way BID is implemented in practice.

“The Taskforce believes that the interpretation of BID for life insurance has evolved over time and advisers tend to recommend the most feature rich policies and rely on rating houses to identify those products,” the report said.

“Various interviewees mentioned this as a concern. Amongst other things, this practice tends to drive insurers to add features (and therefore complexity) to their products – in effect an ‘arms race’.”

The report said these additions are not necessarily driven by customer needs and in many circumstances customers have only a superficial understanding of the full product when they buy it.

“Adviser interviewees felt strongly that advisers do address

the trade-off between benefits and price appropriately.

Furthermore, adviser interviewees felt strongly that the lack of examples in RG 175 was not an issue of concern,” it said.

“The Taskforce notes this position but feels that there is no-downside and potential real benefit to be gained by including such examples.”

Taskforce convenor Ian Laughlin said without an overhaul of the system as a whole, those who need cover may not be able to afford it in the future and life insurance companies selling individual disability income insurance policies will continue to suffer large losses.

Laughlin said the sector must offer products that provide more certain outcomes, are more easily understood by consumers with features and prices that better meet their needs.

Taskforce recommendations include a review of the law around life insurance and issued a warning that regulators will continue to intervene until the sector shows sustainable improvements in practices and outcomes.

The review determined that the market is at risk of failure, despite 850,000 individual disability income insurance policies currently on issue, indicating the importance of the market. fs

Opinion

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

9

01: Max Cappetta

chief executive and senior portfolio management Redpoint Investment Management

Why tax matters in portfolios he case is clear – tax is the largest single T cost to investors, and tax matters. Investors should seek to achieve the best possible after-tax return. After all, our future consumption needs can only be met with the after-tax proceeds of our investments.

A focus on after-tax returns is not only of benefit to investors but is increasingly becoming an important government policy consideration.

The Productivity Commission, when reviewing public offer superannuation funds, noted that “how [super] funds manage tax is important because it can make considerable differences to the net returns credited to a member’s account”.

The report only related to public offer superannuation funds, but for investors at higher tax rates, the stakes are much higher.

Equity investment management, by its very nature, involves a complex trade-off between uncertain information: forecasts of stock return, risk and cost of trading. Thus, it makes clear investment sense that tax information also be considered in any investment approach.

A tax aware approach should consider how each action in a portfolio will impact the tax position of the portfolio. Often there will be simple decisions that can make a material difference to the after-tax return of the portfolio.

In many cases, slightly different trading decisions will make negligible difference to the overall portfolio positioning or approach but the after-tax implications can be quite different. Leaking unintended tax cost out of a portfolio ultimately leaves less capital for compounding over the long term and delivers an overall small after-tax return.

Investment process challenges When considering a tax aware investment approach, there are a range of simple measures which can be employed.

The sale of securities gives rise to either a gain, or loss, depending on the cost base of the specific share lots sold. A tax aware approach will be cognisant of the vintage of each tax lot and may hold off realising a gain until it has been held for more than 12 months. This will be important to individuals and super funds who pay less tax on long term gains.

Similarly, new inflows to a portfolio can be invested in a subset of portfolio holdings. Not investing new capital into some stock acts to reduce their portfolio of weight. This can be a preferable way to trim a position without realising a taxable gain via selling some of the shares, allowing for new stock selection information to be embedded in the portfolio in a more a tax effective way.

Tax credits associated with dividends are certainly valuable to domestic investors. Any in-

vestor will want to ensure that they do not contravene the 45-day rule to ensure the franking credits on relevant dividends are not lost. Off market share buybacks usually contain a high franked income component and a low capital price, therefore such transactions can be extremely attractive when assessed on a post-tax basis but detrimental to pre-tax performance.

These measures are not necessarily to be set as hard and fast rules but as additional inputs into the portfolio construction process. Being able to consider more information: the uncertain and the certain, will mean that a better trade off can be achieved.

After holding a position for eleven months is it preferable to sell in favour of another, more attractive, security or what are the implications of holding that trade for another month?

Do other trading opportunities exist in the portfolio which better reflect my stock selection views and at the same time realise some positions currently in a loss position to match off against other gains?

Having a stock selection perspective on every stock in one’s investible universe also allows for a more considered investment trade-off between risk, return and after-tax outcomes. Combining this knowledge with the tax position of the portfolio provides an information edge which can deliver better long-term outcomes.

Within a passive investing approach, the benefits of being tax aware are limited but still evident.

Indexed portfolios incur turnover when implemented in the real world and this has tax implications. At the same time a passive approach has limited scope to make the necessary trade-offs to be truly tax aware in its implementation.

Adding tax awareness to an active equity approach can certainly add value (versus an aftertax benchmark). Importantly, this additional benefit is uncorrelated with the traditional stock selection approaches and does not necessarily increase active risk.

Performance measurement Calculating manager and relevant benchmark performance on an after-tax basis is often cited as a key reason for why tax awareness is failing to become a mainstream concern. Such concerns are increasingly unfounded due to service provider and index vendor innovation.

Calculation of a manager-specific benchmark return will directly incorporate the tax events of the benchmark in the similar way in which they are considered in the manager’s own portfolio.

Changes in the positions of the underlying index need to be reflected as buys and sells resulting in taxable gains/losses. Capital flows (due to investor applications and redemptions) also need to be reflected as buys and sells. There are

no trades necessary for the after-tax benchmark when a manager makes changes to their portfolio for stock selection reasons; those trades are the decision of the manager and only impact their portfolio’s after-tax performance.

Aggregate portfolio structure

The quote

At the end of the day, the after-tax outcome is the only outcome of true relevance to investors.

It is common practice, especially for institutional asset owners, to construct equity portfolios consisting of individual accounts with a range of investment managers.

Even the appointment of two managers is likely to greatly impact the tax efficiency of the aggregate portfolio if not done with due care and consideration of tax. Neither manager knows the positions, intentions or trades of the other manager(s) and is not expected to take that information into account. Each manager could be very tax efficient individually, but when aggregated with the actions of other managers, franking credits may be lost, long term gains can become short term gains.

However, there are ways to mitigate this problem, including the use of a Centralised Portfolio Management (CPM) system, whereby instead of each underlying manager executing trades based on their view of optimality for their slice of the total account they manage, each underlying manager hands their optimal view to another independent firm (the CPM), who will do the trading.

Another approach is the adoption of a Tax Efficient Multi-Strategy Core, which involves the appointment of a single manager who can blend several investment styles and integrate the relevant tax management features.

Of the two, the CPM approach is the most holistic approach. Unfortunately, however, it can be complex to implement and requires the coordination of many participants: investment managers, custodians, executing brokers.

Are we doing all we can?

Incorporating considerations of tax into an equity investment process is thought to be complex and technically difficult. Such thinking should be relegated to the past since none of these barriers are insurmountable. There is scope for improved outcomes for all tax paying investors notwithstanding that different investors and investment structures will be better placed to embrace a more tax-aware approach.

Being tax aware is a natural extension of a cost reducing mind-set. Tax awareness will lead to better management resulting in improved investment outcomes for the long term. At the end of the day, the after-tax outcome is the only outcome of true relevance to investors. fs

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Budget 2020

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

Federal Budget 2020 After celebrating a projected surplus last year, Treasurer Josh Frydenberg has delivered his second federal budget, including major tax cuts and superannuation reform - and a $200 billion deficit.

The Morrison government handed down its 2020 federal budget on October 6, confirming Australia’s largest ever deficit, sweeping tax cuts for close to half of the population and, in perhaps the only surprise to come out of the night, major changes to superannuation.

As was largely anticipated, Treasurer Josh Frydenberg revealed a record deficit of more than $213.7 billion which is expected to fall to $66.9 billion by 2023-24.

Frydenberg said net debt will increase to $703 billion, or 36% of gross domestic product, this year. This will peak at $966 billion or 44% of GDP in June 2024, he said.

“This is a heavy burden, but a necessary one to responsibly deal with the greatest challenge of our time,” Frydenberg said.

“By comparison, Australia’s net debt as a share of the economy will peak at half of that in the United Kingdom, around a third of that in the United States and around a quarter of that in Japan today.”

Sweeping tax cuts Over 99% of businesses will be able to write off the full value of any eligible depreciable asset up to $150,000 in the first year they are installed or used from 6 October 2020 until 30 June 2022.

The incentive will apply to small to medium businesses with turnover of up to $5 billion and is expected to apply to around $200 billion of

investment and deliver $26.7 billion in tax relief.

Frydenberg said the tax incentives are a game changer and will unlock investment.

“It will dramatically expand the productive capacity of the nation and create tens of thousands of jobs,” he said.

Furthermore, the government has provided $4.9 billion of relief for temporary loss carry-back for companies with the same criteria (turnover up to $5 billion) to offset tax losses that have been paid to generate a profit.

Businesses will receive a tax refund until 2022 against losses incurred in 2018 and 2019 to assist companies that were profitable prior to the pandemic.

This measure will help companies that were profitable and tax-paying but now find themselves in a loss position due to the COVID-19 pandemic.

A further measure is cutting red tape for businesses by allowing employers to use existing corporate records to complete their fringe benefits tax (FBT) return. Employers providing retraining activities will also be exempt from FBT. Further, small to medium businesses like financial advice firms will be able to access up to 10 tax concessions as the aggregated annual turnover threshold has lifted to $50 million from $10 million.

The government has brought forward $17.8 billion of the personal tax cuts to over 11 million individuals and backdated them to July 1.

The stage two tax cuts increases the low

income tax offset from $455 to $700, increases the 19% tax bracket from $37,000 to $45,000 and lifts the 32.5% threshold from $90,000 to $120,000.

“Australians will have more of their own money to spend on what matters to them, generating billions of dollars of economic activity and creating 50,000 new jobs,” Frydenberg said.

Furthermore, the low and middle income tax offset has been retained for another year for individuals earning between $48,000 and $90,000 with relief up to $1080 for individuals or $2160 for dual income couples.

The second stage of tax cuts will see tax relief up to $2745 for singles, and up to $5490 for dual income families compared with 2017/18.

The third stage of the Personal Income Tax Plan is slated for 2024/25 with 95% of tax payers facing a tax rate of 30% of less.

Australians will have more of their own money to spend on what matters to them, generating billions of dollars of economic activity and creating 50,000 new jobs. Jobs, jobs, jobs Josh Frydenberg

The government estimates that in 2020-2021 $227.5 billion will be spent on social security and welfare - up 15.4% in real terms from the $196 billion spend last year.

The social security spending is largely in response to the COVID-19 crisis, with the government predicting that spending will decrease to the $200 billion level in 2021-2022.

The government’s economic modelling expects unemployment to peak at around 8% in the December quarter of this year, before falling over

Budget 2020

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

the next few years as the economy recovers.

Without support like the JobKeeper program, the government forecasted that unemployment would be between 11% and 13%. The JobKeeper program will continue at a cost to the budget of $101 billion, supporting 3.5 million people.

By the June 2022 quarter, the government is anticipating an unemployment rate of 6.5%.

“There is no recovery without a jobs recovery, and this budget is all about jobs,” Treasurer Josh Frydenberg said.

The already announced JobMaker program is estimated to cost $4 billion and create 450,000 jobs for young people. It is a hiring credit to employers of $200 a week for each eligible employee hired between ages 16 and 29 and $100 a week for every worker between 30 and 35.

To be eligible, the workers must have been on JobSeeker, Youth Allowance or the Parenting Payment before being hired.

On top of that, Frydenberg committed to the JobTrainer Fund which will provide 340,700 places in courses, $2.8 billion to support apprentices and trainees and a subsidy for businesses hiring apprentices and short courses to reskill and upskill people.

The economic response to COVID-19 was the most expensive item in the budget at $88.4 billion followed by revenue assistance to states and territories at $61 billion and then two social security measures – income support for seniors was estimated at $53.5 billion and JobSeeker income support was $34 billion.

The $34 billion for the unemployed will not be the largest social security expense, though. The largest expense in social security is assistance to the aged at $77.9 billion. Supporting the elderly was also the largest expense last year and is predicted to become a greater expense as the population ages, with the government currently predicting assistance to the aged will cost more than $82 million by 2024.

There was an extra boost to support the elderly through the COVID-19 recovery with $2.6 billion for two additional economic support payments of $250 to pensioners and other eligible recipients.

Superannuation reform Frydenberg announced that any MySuper product that fails a new APRA-administered annual test twice in a row will not be allowed to receive new members until it improves performance.

The prudential regulator will conduct benchmarking tests on the net investment performance of MySuper products, he said, with products that have underperformed over two consecutive annual tests prohibited from receiving new members until a further annual test that shows they are no longer underperforming.

The measure will kick into action from July 2021 andthe test will extend to all accumulation products outside of MySuper (also called Choice products from 1 July 2022.

The government is planning to fund this by increasing the levies paid by regulated financial institutions.

The government said it will provide $159.6 million over four years from FY21 to implement the reforms to superannuation.

Three other measures announced include: an ATOrun portal for selecting MySuper accounts, stapling accounts and members, and a greater obligation of transparency and accountability on members.

ATO will develop a YourSuper portal to allow a new employee to pick their superannuation product from a list of MySuper products.

the start of the crisis, measures in this Budget will see $14 billion in new and accelerated infrastructure projects support a further 40,000 jobs.”

Over the next two years, Frydenberg will allocate $2 billion to the Road Safety Program.

“Funding for these shovel ready projects will be provided on a use it or lose it basis. If a state drags its feet, another state will get the money,” he said.

An additional $1 billion was given to the recently established Local Roads and Community Infrastructure Program, taking the size of the program to $1.5 billion to upgrade local roads, footpaths and street lighting.

“The government is also delivering the 2020 update of the $1.9 billion Research Infrastructure Investment Plan which will ensure that investment in national research infrastructure is being maintained to support world leading research and attract international collaboration,” Frydenberg said.

Frydenberg also said the government is increasing its commitment to improve the nation’s water infrastructure through the National Water Grid, allocating $2 billion to the National Water Infrastructure Development Fund, which in total will reach $3.5 billion.

Existing superannuation accounts will be “stapled” to member accounts to avoid mushrooming of duplicate accounts. This has been panned by Industry Super Australia in the past, which said it may encourage errant behavior from funds as they look to attract first-time super entrants, and will potentially worsen the problem for people currently in an underperforming fund.

Lastly, superannuation trustees will have higher obligations towards members’ best interests. The budget did not go into details on this.

Despite expectations, there was no reference to extending the early release of super scheme, or any mention of the retirement income review or Comprehensive Income Products for Retirement.

However, Frydenberg did say the legislation for the closure of eligible rollover funds has been extended, moving to a 30 June 2021 date for moving sub-$6000 accounts to ATO, with funds given another year to transfer the accounts with more than $6000 in balance.

Boosting female participation Frydenberg is looking to ensure women are not left behind in the budget, promising $240 million to ensure their workforce participation reverts to its pre-COVID-19 record high.

Australian women made up the majority of those who lost their jobs during this crisis, he said, noting that females and young workers suffered most acutely in the earlier stages of the pandemic.

Between May and August around 270,000 females regained employment compared to 190,000 males.

“As the health restrictions have eased, these jobs have started to come back, with 60% of the 458,000 jobs created since May filled by women,” Frydenberg said.

Some of the $240.4 million budgeted over the next five years via the Women’s Economic Security Statement will support new cadetships and apprenticeships for women in science, technology, engineering and mathematics (STEM).

The government will also create jobs, encourage entrepreneurialism, and ensure the safety of women at work and at home.

“The 2020 Women’s Economic Security Statement will create more opportunities and choices for women, not just for the recovery but for generations ahead.”

The measures include giving Women@ Work Plan $50 million to scale up the Women’s Leadership and Development Program to support women’s job creation, particularly in maledominated industries; establishing a Respect@ Work Council to help address sexual harassment in the workplace; and providing $25.1 million over five years to assist 500 women into STEM careers through the STEM Industry Cadetship or Advanced Apprenticeship.

Growing infrastructure spending An additional $10 billion will help rebuild the nation’s ageing infrastructure and ultimately create more jobs to stabilise the flailing economy, according to the Treasurer.

Frydenberg is hoping the infrastructure spent on roads, rail and bridges will lead to more jobs and a swifter economic recovery, taking the total pipeline from $100 billion to $110 billion over the next decade.

“In this budget, we will expand our record 10-year infrastructure pipeline which is already supporting 100,000 jobs on worksites across the country today,” he said.

“Together with what we have announced since

11

Industry responds

Overall, the budget was a missed opportunity to improve retirement outcomes for low income earners and women.

Eva Scheerlinck

Responses to the budget came in thick and fast, with some cautious of certain measures.

Australian Institute of Superannuation Trustees (AIST) chief executive Eva Scheerlinck was a little more cautious in her response to the budget, with more superannuation reform.

“We will need to see the stapling scheme in more detail, but we do have a number of concerns. There is the danger of people being mis-sold or stapled to an underperforming fund outside the default system. It is also a concern that there may be individuals who find themselves uninsurable because they are stapled to a fund whose insurance does not cover their occupation,” Scheerlinck said.

“There is no place for underperformance in defaults but the government has failed to address the greatest area of consumer harm in super which is outside the default system.”

However, she added: “Overall, the budget was a missed opportunity to improve retirement outcomes for low income earners and women.”

BetaShares chief economist David Bassanese agreed that the budget’s initiatives seemed “well designed” in providing a boost to household and corporate spending.

“If a vaccine is also made widely available by early next year, the economy would be set up to truly boom in 2021 – raising the prospect of interest rates increases, rather than further cuts,” Bassanese said.

“As it stands, the strong near-term fiscal stimulus provided in this week’s budget appears to reduce the risk of the RBA cutting interest rates as early as next month. There is now a greater chance that the RBA leaves interest rates untouched for the foreseeable future – which ultimately should be welcomed to avoid the risk of housing and share market bubbles.”

Business NSW said the budget was likely to be broadly supported by many in the business community.

“The focus on job creation and investment is the right one for these times and the government should be commended for listening to the legitimate concerns of the business community when preparing this financial blueprint,” Business NSW chief executive Nola Watson said. fs

12

News

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

Advisers shift to ETFs from active

01: Kate Howitt

portfolio manager Fidelity International

Eliza Bavin

VanEck’s fifth annual smart beta survey revealed 87% of advisers use ETFs in client portfolios, up from 83% in 2016.

Additionally, almost half of the advisers (46%) use smart beta strategies in asset allocation, up from 37% in 2016.

VanEck’s managing director and head of Asia Pacific, Arian Neiron said: “We are seeing a sharp rise in ETF use in Australia, with the majority of respondents, or 73%, having increased their use of ETFs in the last year. The main driver of this move to ETFs has been the desire to reduce portfolio costs, with most respondents (58%) motivated by this.”

Neiron said the survey also revealed the majority of advisers plan to increase their use of smart beta strategies in 2021 in response to concerns over actively managed funds.

“The underperformance by active fund managers is contributing to the shift to ETFs, as well an increased awareness of ETFs in the financial services community,” Neiron said.

“At the same time, we are seeing financial advisers turn away from more expensive actively managed funds.”

The survey found the 57% of respondents use smart beta ETFs as a substitute or replacement for active management while 47% use it instead of passively managed funds. In addition, 94% are familiar with smart beta strategies, an increase from 81% in 2016.

“We are also seeing very high levels of satisfaction, with 99% of advisers using smart beta strategies satisfied with their smart beta investments,” Neiron said. fs

Mawhinney lashes out at regulator Elizabeth McArthur

Mayfair 101 founder James Mawhinney has accused ASIC of a witch hunt, saying a provisional liquidators’ report proves M101 Nominees had no “smoking gun” – but the report actually refers to the company’s business model as unsustainable.

A provisional liquidators’ report filed with the court by Grant Thornton found that the business model of M101 Nominees was not sustainable on the basis that M Core noteholders were investing for periods of six or 12 months while the company’s loan agreement (with Eleuthera, another company controlled by Mawhinney) had a term of 10 years.

“On this basis, the company would not have adequate funds to repay any contributions as they fell due and as such the company has been insolvent since inception and remains insolvent as at the date of this report,” the liquidator said.

The report also contained findings that parts of Mayfair 101’s business essentially operated as a Ponzi scheme.

“It is my opinion that distributions and redemptions paid to M Core noteholders were funded out of funds raised from other M Core noteholders or to a lesser extent M+ noteholders,” the liquidator said.

The M Core notes were marketed as extremely low risk fixed income debentures with dollar-fordollar security. ASIC has continued to allege this marketing was misleading. fs

Aussie fundie receives global recognition Karren Vergara

A

The quote

It frustrates me that we don’t have more female portfolio managers because it means women are missing out on such a great job - and clients are missing out on more diverse perspectives.

n Australian fund manager has made the best female global fund managers list for the second year in a row.

Fidelity International portfolio manager Kate Howitt 01 was ranked 11th on UK publication Citywire’s list of the top 30 female fund managers in the world.

She has been running the Fidelity Australian Opportunities Fund since 2012, which during that time has delivered 11.09% per annum net of fees, beating its benchmark return of 9.06%.

Before Fidelity, Howitt worked at AMP Capital and the Boston Consulting Group.

Other fund managers who made the list include: BlackRock’s Erin Xie, PineBridge Investments’ Elizabeth Soon, HSBC GAM’s Elina Fung, and JP Morgan Asset Management’s Aisa Ogoshi, and Joanna Kwok.

Howitt said: “Fund management is a challenging and absorbing profession that plays an

increasingly important role in contributing to the retirement outcomes of Australians and the efficient allocation of capital in the economy. In the current economic uncertainty, this is more crucial than ever.”

Citywire analysed 1762 female active managers working across all asset classes, monitoring their ratings on a monthly basis.

Every month a manager earning a AAA-rating received six points, while an AA rating was worth five points and so on and tallied for five years. Howitt scored 286 points. Citywire also found that only 7% of funds domiciled in Australia are run by women.

“Currently, only 11% of the asset management teams in the Citywire database are being led by women,” Howitt said.

“It frustrates me that we don’t have more female portfolio managers because it means women are missing out on such a great job - and clients are missing out on more diverse perspectives.” fs

BOQ expects to back pay $11m in SG The Bank of Queensland has failed to pay several workers their superannuation benefits, in a failure that could potentially blow out to $11 million in back payments.

The bank has already accounted for $2.4 million of superannuation owed to employees that has been forwarded to the Australian Taxation Office.

BOQ told the ASX that it made an additional $8.6 million provision as the matter is still under investigation and “further work to be done to determine the full impact.”

BOQ uncovered irregularities after an internal review of its superannuation payment process.

It identified other potential issues that affect workers covered under an enterprise agreement.

Employees covered under the 2010, 2014 and 2018 enterprise agreements are potentially impacted.

BOQ said it will ensure employees are “remediated fully as a matter of priority as it completes a broader external wage analysis and review for enterprise agreement employees.”

It has advised the Fair Work Ombudsman and the Financial Services Union of the errors, and engaged external third parties to assist with the analysis and remediation process.

The FSU raised concerns with the bank about unpaid superannuation 18 months ago. While that issue was resolved, the bank failed to follow through and properly audit its payroll at the time.

FSU national secretary Julia Angrisano said 750 workers have been under paid as BOQ failed to pay workers their correct base rates, overtime, penalty rates and full superannuation entitlements.

“We have been urging all the banks to review and audit their payrolls and we are not surprised that another bank has been underpaying workers,” Angrisano said.

The bank’s chief executive George Frazis said: “We will get this right and we will make sure our people, past and present receive every cent they are owed. This is an absolute priority.”

The bank also announced that its revised collective provision for FY20 includes a loan impairment expense of $175 million (pre-tax), of which $133 million is COVID-19 related.

BOQ continues to see reductions in customers accessing financial assistance through the banking relief package, Frazis said As at 31 August 2020, BOQ had 12% of housing customers on the banking relief package and 16% of SME customers (based on gross loans and advances).

The news follows that of industry super fund Australian Catholic Superannuation and Retirement Fund taking advantage of the government’s recent Superannuation Amnesty.

As exclusively reported by Financial Standard, ACSRF underpaid its staff’s superannuation guarantee entitlements to the tune of $76,921 between 2009 and 2018. It also paid $46,821 of interest.

The error was the result of a failure to include annual leave loading paid in November of each year in the base for calculating SG. The fund undertook the remediation as part of the Superannuation Guarantee, which ended in September, and so does not incur a penalty for the oversight. fs

News

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

13

Executive appointments 01: Tim Macready

MLC appoints distribution lead MLC Asset Management has appointed a head of institutional distribution, a new role that has been created as the business transitions following the sale to IOOF. Read Taylor Price steps into the role, joining MLC from Fisher Investments where he has been since 2007.

He was most recently head of Australasia at Fisher Investments and established the Australian subsidiary of the organisation.

Price was previously based in the US, before joining Fisher he worked at Merrill Lynch and at Liberty Mutual Insurance.

“We are pleased to welcome Mr Price to MLC,” MLC general manager asset management distribution Mandy Mannix said.

“With extensive and deep relationships in the global institutional market, Mr Price is a valuable addition to the distribution leadership team.”

The creation of the head of institutional distribution role was needed as part of the ongoing transition of the MLC business as it separates from NAB, a spokesperson confirmed.

MLC Wealth, including the asset management business, was acquired by IOOF in a deal worth $1.4 billion in August.

NAB made the decision to exit wealth in 2018 as part of a strategy to simplify the business.

New role for former CIO Former Christian Super chief investment officer Tim Macready01 has stepped into a new role.

He has joined the investment committee of Paua Wealth Management, a boutique wealth advisory firm.

Macready has been recognised as an industry leader in impact investing, bolstering Christian Super’s impact strategy during his time as chief investment officer.

He departed the $1.5 billion fund recently to focus on the impact investment firm he founded, Brightlight, where he is still chief investment officer.

“I believe in the integrity and independence of advice and the disruption Paua is creating in the market,” Macready said.

“The more I get to know the team, the more excited I am by their desire to align values and portfolios with integrity.”

Paua Wealth Management is based in New Zealand and provides wealth management advisory services to wholesale investor clients including high net worth individuals, family offices, select not-for-profit foundations and trusts.

Paua chief executive and founder Donna Nicolof welcomed Macready to the investment committee, saying it is a significant appointment for the firm.

“Given our focus on environmental, social and governance factors in how we manage money, we are absolutely delighted to have someone

Challenger loses CFO Challenger has commenced the search for a chief financial officer after its longstanding executive resigned.

Andrew Tobin has provided six months’ notice of his resignation after being with the company for over 13 years.

He joined in 2007 as deputy chief financial officer before joining the leadership team in 2012 as chief financial officer has been responsible for leading Challenger’s Business Services division including finance, investor relations, treasury, operations and information technology.

Prior to joining Challenger, Tobin was general manager, finance for the premium business services division of the Commonwealth Bank and chief financial officer at MLC in Hong Kong.

Challenger chief executive Richard Howes thanked Tobin for his time with the company.

of Tim’s calibre and pedigree joining the Paua team,” Nicolof said.

“It’s a real coup for us and we couldn’t be more excited about the opportunity this creates.”

VFMC adds to leadership team Victorian Funds Management Corporation has welcomed a head of client and market development to its executive team.

Sarah Dunn 02 has been appointed to the role, effective this month, responsible for client and stakeholder management, market development, performance and communications.

Dunn replaces current head of client services Geoff Diamond who is set to retire next week, a spokesperson confirmed. In recruiting Dunn, the role has also been expanded to encompass additional responsibilities.

“Sarah has extensive experience in client and stakeholder management, commercial and operational leadership, governance and communication,” VFMC said.

“She is passionate about supporting people to grow through change and transformation and delivering great client outcomes.”

Dunn brings about 25 years’ experience in financial services and investment management, and joins from Latitude Financial where she served as general manager, transformation, conduct and remediation for the past seven months.

Prior to that, she worked at ANZ, leading the ANZ Group Services business and the group’s transformation portfolio. Other roles she held during her time at ANZ include managing director of ANZ Trustees, country chief executive of Cook Islands and chief operating officer of the bank’s Taiwan business.

In total, Dunn spent close to a decade at ANZ. She joined the big four bank after 18 years with HSBC, during which time she worked across Canada, Monaco, Greece, Switzerland and London.

Commenting on the appointment, VFMC chief executive Lisa Gray said: “We are delighted for a leader of Sarah’s depth and breadth in financial services to be joining our strong and talented team at VFMC.” “Sarah’s expertise adds to the evolution of our client and stakeholder management service.”

Ares names chair Ares Management Corporation has appointed a new chair for Australia and New Zealand for its Ares SSG business, hiring Credit Suisse Australia’s former chief executive.

John Knox will chair Ares SSG, with the goal of helping drive expansion opportunities in the two countries and brings experience, knowledge and relationships, the company said.

In his most recent role, Knox was the chief executive of Credit Suisse Australia for over three years, as a part of a 25 year-long run at the investment bank.

02: Sarah Dunn

Ares SSG is a credit-focussed alternative manager, with investments in credit, private equity and special situation assets in the AsiaPacific region for institutional clients.

It had $6.9 billion assets under management and 120 direct institutional investors as at June end.

“As a proven leader in the Australian market for the past two decades, John will provide the local knowledge, experience and relationships to further expand the opportunity set for Ares through our Ares SSG platform,” said Ares chief executive and president Michael Arougheti.

“We believe John can help us [capitalise] on our recent transactions, secure compelling new opportunities and enhance our offering for our investor base.”

Knox will work closely with Ares SSG chief executive Edwin Wong and head of strategy Eric Vimont. He will also work with Ares’ global leadership.

ETF Securities chief exits The ETF issuer is restructuring its management, which will see its chief Kris Walesby exit and founder and chair Graham Tuckwell increase his involvement in the business.

Graham Tuckwell, who spent a decade in Jersey and returned to Australia in 2019, will increase his involvement in the business and move to an executive chair role.

Current chief Kris Walesby will exit the business, while Kanish Chugh will move to head of distribution, Evan Metcalf to head of product and Cliff Man to head of portfolio management – all three reporting to Tuckwell.

“As such, Mr Tuckwell will play a more active strategic role in defining the future direction of the business, applying his decades of experience in building the international ETF businesses,” the company said in a statement.

“As part of this new business structure, the role of Australian CEO is no longer required and the incumbent, Kris Walesby is leaving with immediate effect.”

“I am pleased and excited to be back in Australia and look forward to a more active and strategic involvement in defining the future direction of this strong firm,” Tuckwell said.”

Today, ETF Securities has surpassed $3 billion in funds under management, doubling assets in just under two years. Kris has played an important role in leading the Australian business for the last five years and we wish him every success in his future endeavours.

“With the Australian ETF industry touching an all-time high of $70 billion in funds under management we believe that there are great opportunities in Australia for the business to accelerate and capitalise on its recent growth.

We are committed to the Australian ETF market, excited for its potential and the role we have in making this a reality.” fs

14

Feature | Global macros

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

STATE OF PLAY After a year of unthinkable turbulence, global markets are still in disarray. To top it all off, a chaotic US election is imminent.

But on a macro level, will the votes move markets?

Annabelle Dickson writes.

Global macros | Feature

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

W

ith a US Presidential Election a mere three weeks away, investors are already speculating the possible outcomes and their impending effects on

markets and global trade.

But this year is different to previous elections amidst a global pandemic and the highest levels of fiscal deficits in history.

The US government spent over US$6 trillion in the financial year in an effort to support the impact of the pandemic, swelling its deficit to 98% of its own gross domestic product.

Against this backdrop, investment managers looking to generate returns may be fearful of volatility. In turn, it is opportunistic for a class of investors specialising in a top down approach.

Global macro managers using macroeconomic trends such as government and geopolitical policy are more relevant than ever generating risk-adjusted returns throughout challenging market conditions.

One of the most notable managers of the investment style is George Soros who has gone down in history as “the man who broke the Bank of England” after shorting the Pound Sterling and making $1 billion in profits in 1992.

But global macro strategy is more of a style than a prescriptive strategy that investors might see in equity strategies.

Shrenick Shah01, head of the macro strategies team at J.P. Morgan Asset Management, runs the JPMorgan Global Macro Opportunities Fund and believes global macro can be a complicated asset class.

To Shah, global macro is a ‘catch-all term’ and the funds that operate in the space have different investment processes.

For instance, Darling Macro principal and co-chief investment officer Mark Beardow02 takes a systematic approach to the firm’s fund.

The fund dynamically allocates long and short exposure across liquid markets within equities, bonds, commodities and currencies and shifts between asset classes depending on the relative performance.

“We take the aggregate of all those investor forecasts and as they start to react to news ei-

01: Shrenick Shah

02: Mark Beardow

03: Simon Duckett

head of the macro strategies team J.P. Morgan Asset Management

principal and co-chief investment officer Darling Macro

partner and adviser Koda Capital

ther buying or selling we make judgements on the relativity of their assets,” Beardow explains.

“The way we see it is it extends a typical fund with a strategic asset allocation and their existing operation.

“Global macro funds will typically use leveraged shorting for portfolio efficiency, and then there'll be different styles within global macro."

These are typically systematic or discretionary rather than quantitative, he says.

However, Shah approaches the JPMorgan Global Macro Opportunities Fund differently.

“The fund not only takes into account the cyclical views that we have through our five themes but also the secular views versus the peer group which is pretty heterogeneous,” he says.

The fund is focusing on the secular themes of climate change, widespread technology adoption, global policy evolution and emerging market consumer demand.

“We tend to have more equity risk than our peers; we potentially have slightly more concentrated positions. We have a pretty free remit to seek to generate returns across asset classes and across different themes.”

The fund had high levels of risk exposure in January and February before Shah and his team quickly hedged parts of the portfolio, resulting in positive returns in March.

“We were getting increasingly concerned about the COVID-19 stories and the spread in Asia,” he says.

“And that was concerning so a pretty simple action that we took to equalise those two views was to add some hedging to protect to the portfolio.

“It was a result of the forward looking element of assessing the risks to the outlook that really helped us in this case.”

He explains that a feature of the asset class is to be aware of the distribution of outcomes and have a cushion built into the investment process to alleviate market swings.

Shah and his team are flexible in their allocation and shift investments to themes that have the strongest fundamental drivers and the biggest rate of change while considering valuation.

This has led the fund to have lower correlation than its peers.

“It's our process that's inherently looking at

It started before coronavirus but we think there's going to be a continued move from globalisation towards status or protectionism.

Pieter Stolz

15

things in a slightly different way, which yields different outcomes which is important because that means that this is persistent, inherent and innate to what we do,” Shah says.

But Koda Capital partner and adviser Simon Duckett 03 describes the ‘black box’ nature of global macro strategies difficult to model in relation to Modern Portfolio Theory and for inclusion in a diversified multi asset portfolio.

However, it is the performance profile that Duckett finds most difficult explaining to clients, saying: “They love it when the strategy works and then without warning, all of a sudden it doesn’t.”

“Clients are then questioning why you put them into a ‘black box’ strategy.”

His focus, Duckett says, is the simplicity of genuine alternative assets where there is an alpha rich environment and consistent returns.

A deglobalised world The emergence of deglobalisation as a macro theme has been intensified in recent months and has hampered the flexibility of the global economy with likely limitations on global growth.

The pandemic has halted tourism, keeping entire fleets of planes on the tarmac and impacting global logistics with imports and exports delayed.

It calls into question whether global supply chains have been spread too thin as countries scrambled to access vital medical supplies.

UBS equity strategist Pieter Stoltz identifies deglobalisation as one of the megatrends that is being accelerated by COVID-19.

“It started before coronavirus but we think there's going to be a continued move from globalisation towards status or protectionism,” he says.

“Domestic consumption is going to matter a lot and we've seen an increase possibly due to substitution effects where people can't travel so they tend to spend more domestically.”

Inevitably, moving manufacturing back to domestic shores will increase the cost of goods.

Schroders head of fixed income and multiasset Simon Doyle 04 agrees.

The pandemic, he says, has been a severe stress test on supply chains as the shift in manufacturing offshore has made us reliant on a few lost cost manufacturers.

“There was an assumption that direction

16

Feature |Global macros

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

04: Simon Doyle

05: Brian Parker

06: Philip Naylor

head of fixed income and multi-asset Schroders

chief economist Sunsuper

principal consultant Frontier Advisors

wouldn’t break and now we’ve seen a severe stress test and realise that supply chains need to be rethought somewhat to make them more durable and balanced,” Doyle says.

Sunsuper chief economist Brian Parker05 also cautions against the world becoming too deglobalised.

“The pandemic has been the obvious example with the imports of surgical masks and ventilators. I think we will see some more towards encouraging domestic manufacturing capacity,” he says.

But Aberdeen Standard Investments chief economist Jeremy Lawson warns this is just the beginning.

“Our research suggests that the pace of globalisation is likely to slow further during the post-COVID recovery, as policymakers and companies focus on shortening and simplifying supply chains, particularly in strategically important sectors,” he says.

US and global trade Donald Trump’s ‘America First’ foreign policy and subsequent withdrawal from the TransPacific Partnership marked a thematic shift towards protectionism and furthered the uncoupling of the US and China.

The outcomes of either a Republican or Democrat administration are likely to have unwavering impacts on global trade, throwing supply chains into further chaos.

“The issues between the US and China are a broad structural geopolitical reconditioning,” Doyle says.

Trump’s stance on foreign policy is to take aggressive action against China to protect American workers and reduce the imbalance in the trade of goods between the two countries.

Frontier Advisors principal consultant Philip Naylor06 says markets have been focused on the pandemic and have forgotten about the US and China tensions.

“It was just a year ago that markets were very much focused on US and China trade tensions.

Looking forward, it's possible that that comes back into focus,” he says.

For instance, public opinion in the US towards China has become increasingly unfavourable across party lines.

“There really does seem to be a bit of a shift going on with an anti-China sentiment. That is likely to mean regardless of who wins the election that they will keep a fairly hardline approach on interactions with China,” Naylor says.

Furthermore, Lawson notes that apart from the COVID-19 crisis, Trump’s presidency has been a significant headwind to global trade.

“Between the end of 2017, when Trump first began to ramp up the conflict with China, until the end of 2019, there was no growth in global trade volumes,” he says.

That’s because one of the main reasons for weakness in global trade is Trump’s protectionist

policies in terms of higher tariff and non-tariff barriers to trade, along with China’s retaliation.

“The second is the chilling effect the conflict has had in confidence in the rules based international trading system, and hence the willingness of firms to invest in global supply chains and other activities dependent on the maintenance of the liberal trading order,” Lawson says.

On the other hand, T.Rowe Price Washington analyst Katie Deal07 believes the weakness in global trade goes deeper and won’t simply end with a Joe Biden victory.

“Both political parties have embraced the message of “bringing back jobs”, particularly as income inequality has deepened social divisions and limited access to economic mobility — leading to bipartisan rhetoric supporting more insular supply chains,” she says.

If Biden wins the election, he has pledged to spend $700 billion on American-made products and industrial research which will provide around five million jobs.

Furthermore, the former vice president says he will work with the nation’s global allies to put pressure on China rather than adopt Trump’s stance. Parker believes this is the best approach.

“I think Trump's major failing in foreign policy is that even a country as powerful as the US cannot go it alone, you're far more powerful when you work with allies,” he says.

But Natixis Investment Manager’s head of global thematics and macro research Esty Dwek08 notes that Chinese exports have continued to do well throughout the pandemic with the manufacturing of medical equipment and masks.

This, she says, will continue regardless of who the president is.

“With Biden, there will likely be a move back to multilateralism and a challenge between west, Europe and China and how to navigate and control the rise of China and it might not be done,” Dwek says.

The election policy effect It is often contested whether or not a US election has a direct impact on market movements [Figure 1].

In fact, research conducted by S&P shows the S&P 500 typically rose during US election years with the benchmark returning positively in 17 of the last 23 elections.

S&P associate director, U.S. equity indices S&P Dow Jones Indices Hamish Preston says it is important to recognise the performance of the S&P 500 during election years has been similar to the performance during other years.

“Although it can be difficult to identify a clear impact of US Presidential elections at a market level, there appears to have been considerable impact at a sector level,” he says.

Preston noted the 2016 election revealed the best-performing sector was financials and the worst-performing sector was utilities with the difference between the two at 19.34%.

It is likely that any electiontriggered volatility will be highly impactful for maybe only two or three weeks.

Nigel Green

Furthermore, a poll carried out by deVere group shows global investors are panicking over a contested election. deVere Group chief executives and founder Nigel Green said the election volatility is set to be short lived.

“It is likely that any election-triggered volatility will be highly impactful for maybe only two or three weeks,” he said.

Frontier Advisors’ view is that Presidential elections should not be ignored as the policy differences are important in understanding an ever-shifting macroeconomic landscape.

“Elections are still worth paying attention to as they involve the different details about policy changes and the underlying political changes that may be occurring that do have big impacts on the investment landscape,” Naylor says.

Shah agrees and says US elections can potentially throw up market moving outcomes and part of his job is to understand some of the outcomes.

“If they become more likely or if they are significant to the portfolio sometimes we hedge out the risk of these but we have not made an assessment on that yet. That could be something that we do in the coming weeks,” he says.

And as the two presidential candidates have opposing policies, there are implications for either outcome.

Biden pledges to reverse some of Trump’s 2017 tax cuts to fund programs by raising the marginal tax rate on the highest income earners back to 39.6% from 37% and, most controversially, increasing the corporate tax rate to 28% from 21%.

Deal notes that the increase in corporate tax rates could have an adverse effect on markets.

“We estimate the rate increases would collectively reduce S&P 500 company profits by 9% to 11%. However, some industries could see fewer adverse effects, like utilities,” she says.

Part of Biden’s policy is to spend around US$2 trillion creating jobs, modernising infrastructure and supporting the growth of green technologies.

He noted in the first presidential debate that analysis from Wall Street firms shows his proposals would create seven million new jobs and add US$1 trillion in economic growth.

Deal expects this investment and new regulatory regime to be negative for US oil and gas operators but positive for the electric vehicle industry.

And as markets have a forward looking bias, Biden’s clean energy proposal is already being priced in, Shah explains.

“Some of the clean energy stocks in US markets had a really good run over the last couple of months as the probability of Biden winning the election has increased,” he says.

This might be an opportunity for Shah who says that while the fund initiated the clean energy theme a while ago, when opportunities arise in the industry with capital shifting

18

Feature |Global macros

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

07: Katie Deal

08: Esty Dwek

09: Stephen Miller

Washington analyst, US equity division T. Rowe Price

head of global thematics and macro research Natixis Investment Managers

advisor GSFM

to profitable projects, the team will invest.

But GSFM advisor Stephen Miller09 thinks equity markets will feel the brunt of a Biden administration.

“The immediate reaction is likely to be constraining for equity performance and supportive for government bonds although given how low yields are already, it is difficult to be confident of large capital gains on government bonds,” he says.

“Indeed, it is not difficult to see bonds perform indifferently if changes to the tax system are accompanied by large increases in government expenditure.”

Stoltz disagrees and considers the increased fiscal stimulus to be beneficial for value stocks.

“If there is a Biden victory in a democratic sweep, it could be a catalyst for factor rotation so we would be more optimistic on value stocks,” Stoltz says.

However, Naylor believes that given that the US economy is in a recession, it is not clear whether markets would necessarily see one outcome over the other as positive or negative.

“It is possible that markets could focus on Biden’s plan to increase spending more than his proposals on the tax side and it could be net positive for markets,” he says.

Parker shares similar sentiments and says it's not altogether clear that a democrat would necessarily be bad for the stock market over the long term.

“I think that's mostly a myth. I don't think that investors should automatically assume that a democrat administration is somehow bad in the stock markets,” he says.

In terms of a Trump victory, Miller says it would just be a continuation of a “chaotic and unpredictable approach to policy formation”.

However, Dwek isn’t convinced that a Trump administration would be such a terrible outcome.

“Trump is better for business and equity markets and it might be a surprise but as we

get closer, the polls will narrow a little further, so I wouldn’t underestimate Trump’s ability to get re-elected,” she says.

Miller notes that the overarching message to investors is to diversify and focus on assets that deliver returns uncorrelated with equity and bond beta.

“This is not to decry exposures to equity and bonds but to augment those exposures with asset returns uncorrelated with those asset betas,” he says.

These assets include gold, absolute return/unconstrained bonds, active equity, including equity income, long/short equity and hedge funds.

“The assumed inverse correlation between bond and equity returns might well become ‘obsolete wisdom’ in an environment of extreme monetary accommodation, intractable fiscal deficits and deglobalisation and re-regulation as inflation once again takes route,” Miller says.

A blip in markets, Naylor says, isn’t on the radar for long-term institutional investors like superannuation funds.

“In this climate investors need to be looking at the overall size and composition of their fixed income portfolio. This could include looking at the greater role of inflation-linked bonds,” he says.

Speculating the outcomes The national polls for the presidential election have Biden in the lead but that doesn’t necessarily secure his victory.

Parker says the polls are some guide, but given the vagaries of the Electoral College, it is anyone’s game.

“As we saw last time, you can win a majority of the popular vote and still crash and burn at the Electoral College,” Parker says.

Despite this, Shah says the race for the White House is pretty close but the bigger set of outcomes is who controls the three arms of government.

Figure 1: US Stock market returns since 1900

50 40 30 20 %PA

10 0 -10 -20 -30 -40 REPUBLICAN

DEMOCRAT

Upper quartile Source: Frontier Advisors

ELECTION YEAR 2nd quartile

1ST YEAR 3rd quartile

2ND YEAR

3RD YEAR Lower quartile

The worst outcome is a contested election that drags on and we don’t have a clear answer for days or weeks that will upset markets quite a bit.

Esty Dwek

“I think it really matters for markets who is in charge of the White House but also who controls the two chambers of Congress.

Those outcomes are also going to be quite important,” he says.

He explains the first of three likely scenarios as a status quo outcome with Trump, the incumbent, holding the White House while Republicans keep the Senate and the Democrats keep the house.

“The outcome that is gaining a bit more attention is a democratic sweep of both the White House and Congress. That outcome is likely to lead to the biggest change to the status quo,” he says.

The third outcome is where Biden wins but the Republicans retain the Senate.

“Each one of those scenarios has different implications for the performance of equities, regulation and outlook,” Stoltz adds.

Adding to the complicated political environment is the death of US Supreme Court Justice Ruth Bader Ginsburg which has opened a rare vacancy and called into question whether Trump or the winner of the election should fill her seat.

A contested outcome is set to be the most disruptive scenario for markets if Trump decides to dispute the mail-in ballots.

Dwek says: “The worst outcome is a contested election that drags on and we don’t have a clear answer for days or weeks - that will upset markets quite a bit.”

Whatever the outcome is, market participants remain on edge, particularly in the US with Trump’s recent COVID-19 diagnosis and his refusal to sign into law a bill providing further stimulus until after the election.

However, as deglobalisation tightens its grip and businesses reassess supply chains and move onshore, the cost of goods will increase and the flow on effect could be significant.

Fund managers will continue to be tested as multiple factors coincide, creating greater uncertainty and investor anxiety in a challenging environment.

A top down, global macro strategy may prove fruitful in an investment portfolio and can provide robustness and diversification through a multi-asset approach.

It is the awareness of outcomes, Shah says, that adds a further level of difference to the risk profiles and returns.

“By virtue of the different ways to look at markets and analyse these trends and the outcomes, what’s created is sufficiently different when compared to a regular equity asset class or fixed income asset class,” he says.

But ultimately, no one has all the answers, nor a crystal ball.

Investors and fund managers alike have no option but to wait and see which way the chips fall; all the while holding onto their hats and hoping for a smoother ride ahead. fs

20

International

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

BlackRock targets office romances BlackRock is urging its employees to disclose their involvement in office romances, as well as intimate relationships with anyone associated with the US$7.4 trillion asset manager in a bid to crack down on conflicts of interest.

BlackRock staff members were recently told to tell their superiors about romantic relationships with anyone connected to the group, not just personal relationships with colleagues.

The new rules extend existing workplace policies to encompass the global fund manager’s vast network.

Several news outlets such as the BBC and The Times have reported the new company policies were introduced.

It also follows two BlackRock executives who were reportedly let go last year for having inappropriate relationships and consequently breaching company policy.

In December 2019, BlackRock’s global head of active equities Mark Wiseman left the firm amid reports he failed to disclose an affair with a colleague.

Wiseman joined BlackRock in September 2016 after spending more than a decade at CPP Investments, a Canadian fund manager, where he served as president and chief executive for four of those years.

Wiseman is married to Marcia Moffat, the chief executive of BlackRock Asset Management Canada. fs

Bank makes major blunder One of Japan’s largest providers of shareholder services has admitted to a major operational blunder, after it failed to count 3.4 million postal votes for nearly 1000 companies ahead of their annual general meetings.

Sumitomo Mitsui Trust Bank (SuMi TRUST Bank) admitted to the major miscount after its client Toshiba Corporation called for an investigation into a voting bungle at its shareholder meeting in July.

The bank had outsourced its tallying operations to its equity-method affiliate Japan Stockholders Data Service Company (JaSt), which it noted, conducts tallying of a large volume of voting rights exercise forms during the months of March, May and June each year.

JaST also is responsible for tallying operations from Tokyo Securities Transfer Agent and Japan Securities Agents, both consolidated subsidiaries of SuMI TRUST Bank.

The company uses a tallying system dubbed forward processing, in which a postal office will issue a “certificate of delivery” on the date that votes are delivered, with JaSt tallying votes with respect to the date indicated on the certificate.

Forward processing was implemented in July as well, SuMi TRUST Bank said, after a substantial number of companies postponed their general meetings to July.

This miscount impacts 975 companies that entrust its tallying operations to JaST, SuMi TRUST Bank said, which calculated the ratio of the total number of voting rights that were miscounted for all the companies at 0.31%.

After conducting a recount of exercised voting rights, SuMi TRUST Bank said that it believed there to be no cases in which the final result of votes - whether approval or rejection - had been impacted. fs

01: Brian Benczkowski

assistant attorney general US Justice Department

J.P. Morgan set to cough up $1.3 billion penalty Ally Selby

J

The quote

These charges should leave no doubt that the department is committed to prosecuting those who undermine the investing public’s trust in the integrity of our commodities markets.

.P. Morgan Chase & Co is set to cough up about $1 billion to shut down regulatory and government agency probes into market manipulation allegations on its precious metals and treasuries trading desk.

The settlement squashes investigations by the US Justice Department, the Commodity Futures Trading Commission and the Securities and Exchange Commission into whether traders rigged markets.

This would be a record penalty for spoofing, an illegal form of market manipulation in which a trader places large orders to either buy or sell an asset, with no intention of executing the trade.

This creates artificial demand for the asset, which the trader then profits off by placing smaller orders for the asset and profiting on the increase in price brought about by the large phony order.

The practice was made illegal in the US in 2010, following the financial crisis.

The settlement follows two precious metals traders and one former trader in the New York office of the bank being charged over their alleged participation in the manipulation scandal in September 2019.

The conduct, the US Department of Justice alleged, spanned over eight years and involved thousands of unlawful trades for precious metals futures contracts.

Those charged included Michael Nowak, a

former managing director at J.P. Morgan who ran the banks global precious metals desk, as well as Gregg Smith, an executive director and traded on the desk, and Christopher Jordan, also an executive director and trader on the desk.

“The defendants and others allegedly engaged in a massive, multi-year scheme to manipulate the market for precious metals futures contracts and defraud market participants,” Assistant Attorney General Brian Benczkowski01 said at the time.

“These charges should leave no doubt that the department is committed to prosecuting those who undermine the investing public’s trust in the integrity of our commodities markets.”

FBI assistant director in charge William Sweeney said the conduct negatively impacted the bank’s clients as well as the bank itself.

“Smith, Nowak, Jordan, and their co-conspirators allegedly engaged in a complex scheme to trade precious metals in a way that negatively affected the natural balance of supply-and-demand,” he said “Not only did their alleged behavior affect the markets for precious metals, but also correlated markets and the clients of the bank they represented.

“For as long as we continue to see this type of illegal activity in the marketplace, we’ll remain dedicated to investigating and bringing to justice those who perpetrate these crimes.”

The agency also identified two former traders, John Edmonds and Christian Trunz, as being co-conspirators in the case. fs

Pension funds sue Allianz Global Investors Karren Vergara

Several pension funds are suing hedge funds managed by Allianz Global Investors for allegedly engaging in risk-taking behaviour and losing billions of dollars in retirement savings.

The Arkansas Teacher Retirement System (ATRS) was the first pension fund to file a complaint in July, alleging that Allianz GI failed its stewardship over the now-defunct Structured Alpha Funds portfolio.

Now, the Teamster Members Retirement Plan, and the pension schemes for New York’s Metropolitan Transportation Authority and Blue Cross Blue Shield Association, have also filed similar lawsuits. Reuters reports that around US$4 billion has been lost from members’ savings.

Lawyers for ATRS, Bernstein Litowitz Berger & Grossmann, claim the Structured Alpha Funds used an investment strategy designed to provide stable returns and protection during a market downturn. However, the lawyers’ analysis found Allianz deviated dramatically from this market-neutral strategy and lacked any meaningful protection against a market downturn.

Once the funds began incurring losses in February 2020, Allianz took a series of actions in contravention of its contractual

and fiduciary duties that exacerbated the Alpha Funds' losses, and may have engaged in market manipulation in a desperate attempt to mitigate those losses, the law firm said.

Interestingly, the funds’ strategy contradicted the warnings of the global firm’s chief economist Mohamed El-Erian.

In early February, El-Erian cautioned that the thenburgeoning pandemic would have substantial market ramifications, and urged investors to "resist our inclination to buy the dip."

The funds however, did the opposite by selling short equity put options worth US$117 million, while purchasing long equity put options worth only US$67 million.

Essentially, the Structured Alpha 250 Fund was not "marketneutral" but was in fact betting on an increase in equity prices, the law firm said.

On March 25, Allianz GI told investors it was forced to liquidate more funds in the Structured Alpha Funds portfolio (the Structured Alpha 1000 and Structured Alpha 1000 Plus) because of insurmountable losses. Two days later, it said it will liquidate Structured Alpha 1000 and Structured Alpha 1000 Plus.

Munich-based Allianz GI was reached for comment. fs

News

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

21

New products 01: Stephen Rowe

Multi-strategy fund launches A boutique Australian investment manager has launched a fund that uses sophisticated quantitative and foreign-exchange trading strategies.

The Ferguson Hyams Multi-Strategy Fund was made available in mid-August and managed by Bermuda-registered Incu Capital Management.

The first month achieved a 1.1% return.

The fund has active strategies that trade across three foreign exchange and two global equalities. It aims to generate returns of 10-15% per annum based on a screening system, which includes filtering highly liquid markets, consistent risk-weighted returns and low correlation to the S&P500.

It has a minimum investment of US$100,000 and offers daily liquidity without any lock-ins, redemption penalties or bid-offer spread.

Management and performance fees are 1.5% and 20% respectively.

Ferguson Hyams Investment Management (FHIM) is run by former UBS director Gideon Hyams and Luke Ferguson.

Ferguson, who previously held executive roles at MGMT Futures and Drashta Capital, is the chief executive. Hyams serves as the Brisbane-based boutique's chief investment officer.

"The fund aims to take advantage of choppy markets, which I expect to persist for the foreseeable future, and hope that we are able to continue exploiting them as we did in March when the return was 5.66%," Hyams said.

"With deposit rates expected to stay at extremely low levels for the long-term, we saw the need for liquid alternative products within an easy to access investment vehicle that can deliver solid risk-weighted returns in volatile markets."

Ferguson Hyams has been offering managed accounts since 2016. It recently moved to a dailypriced fund offering to offer insight into its liquid trading strategies, which have a low or negative correlation to equities.

Lazard launches new fund Lazard Asset Management has launched a new registered managed investment scheme, offering Australian investors access to a US$500 billion asset class.

The Lazard Global Convertibles Fund offers exposure to a global portfolio of convertible bonds, with a maximum 10% equity position reflecting bond conversions.

Lazard said the fund typically holds between 60 and 80 securities, selected from a universe of 900-1000 convertible bonds.

The fund seeks to achieve total returns in excess of the Thomson Reuters Global Focus Hedged (AUD) Convertible Bond Index (net interest reinvested) over rolling five-year periods.

The fund will be managed by Arnaud Brillois and an investment team based in New York and Paris.

Lazard said the fund employs a fundamental,

Ratings deteriorate at AMP Group AMP has suffered a further blow this week, after Moody's downgraded its ratings of the embattled wealth management giant.

The ratings house lowered its ratings on AMP Group Holdings, AMP Group Finance Services and AMP Bank from A3 to Baa2.

However, it shifted its outlook of the group from review for downgrade to stable.

AMP responded to the downgrade, noting that its credit ratings assigned by other agencies remained unchanged.

"AMP continues to have a strong balance sheet and capital position, with surplus capital (above the board target capital level) of $1.4 billion at 30 June 2020," it said.

Moody's said the downgrade reflects the weaker operating results of the group and its ongoing challenges within its wealth management business with respect to net cash outflows.

It also reflects the group's governance weaknesses, Moody's said, which have resulted in "sustained reputational damage which continues to affect its business and operations".

"Moody's regards AMP Group's corporate governance weakness as a governance risk under its environmental, social and governance (ESG) framework, given its implications for the company's compliance and reporting," it said.

The downgrade considers the impact of AMP Group's governance on its credit profile, it said.

"We expect the uncertain economic outlook and coronavirus-related early withdrawal of superannuation funds will continue to constrain the group's ability to attract new funds and grow assets under management," Moody's said.

bottom-up approach that uses rigorous qualitative and quantitative analysis to drive security selection, complemented by a top-down process that "guides tactical positioning".

"Investors have been faced with minimal fixed income returns, late-stage equity valuations, and the prospect of growing market volatility this year," Brillois said.

"At the same time, convertible bond issuances have reached their highest levels since 2007, reaching US$101.8 billion for the year to date."

Brillois added that the dual nature of convertible bonds gives them an advantage over conventional investments.

He said they tend to exhibit bond-like characteristics in declining equity markets, and equity-like characteristics in rising equity markets.

Lazard said convertible bonds are a traditionally lesser-known asset class, but are similar to corporate bonds, as they're issues with a call option giving the holder a right to convert the bond into equity shares.

"Convertible bonds have started to earn dedicated allocations in institutional portfolios and, as such, we believe these securities are beginning to be viewed as a distinct asset class," Brillois said.

"We expect inflows into the asset class to continue as convertible bonds become especially relevant in volatile markets, and we are pleased to offer a solution for Australian investors seeking access to this asset class."

Industry fund doubles down on fee cuts An industry super fund has announced another fee reduction for members, marking the third cut in two years.

Vision Super chief executive Stephen Rowe 01 said the fund’s focus on cost reductions has allowed it to steadily reduce member fees over the last few years.

Rowe said as a result of these measures over $150 million in costs has been taken out of the business.

The total fees on a $50,000 balance have been cut from $488 to $463 for default Super Saver members.

In September 2017, total fees were $538 so Vision Super said reducing that to $463 in just three years represents a substantial achievement.

The total fees on a $50,000 balance for Vision Personal – Sustainable balanced option - the lowest cost sustainable balanced product - have been cut from $238 to $223 on a $50,000 balance.

Vision Personal’s low cost, low carbon Sustainable balanced option was the winner of Financial Standard sister publication Money magazine’s ‘Best of the best’ award for the lowest cost superannuation platform.

The total fees on a $50,000 pension balance have been cut from $515 to $490.

“At Vision Super, we’re always focused on getting the best possible retirement outcome for our members,” Rowe said.

“Our focus on cost reduction hasn’t come at

02: Brett Jollie

the expense of investment returns – our MySuper default Balanced growth option is top three over the last financial year, and top ten over all periods up to ten years.

Rowe added that in addition to the fee cuts, the majority of the funds other options are top quartile.

“We’re delighted to announce this further reduction in fees, which means more money for members’ retirements,” Rowe said.

“We’re charging substantially less than some of the biggest funds in the country charge, and our returns speak for themselves.”

Vision also recently updated its investment strategy as a result of significant changed in the economic and fixed income environment.

Vision said it reviews its investment strategy annually and changes were made this year as an adjustment to volatility caused by the COVID-19 pandemic.

ASI bolsters SMA service Aberdeen Standard Investments has added two financial planning firms to its separately managed accounts (SMA) service.

Futuro Financial Services and Profusion Planning have joined the SMA service, which has goals-based models and manages 18 multiasset, Australian equities and ETF portfolios, aiming to give time back to advisers.

Aberdeen Standard Investments head of wholesale sales Con Koromilas said ASI’s SMA service also supports advice firms to reduce the cost, complexity and compliance burdens in efficiently servicing clients.

“After a decade of structural change, increased regulation and industry reform, many financial planners are finding it difficult to balance an increased compliance burden and still give their entire book of clients the individual attention they deserve,” he said.

Profusion Planning director Brad Dudumas said: “The implementation of ASI’s goal-based models enables closer alignment to our client’s individual objectives as well as greater flexibility when managing downside investment risk. In addition, we have been able to strip back cost for our clients which was a key focus for us.”

Futuro Financial Services managing director Paul Kelly agrees: “Partnering with ASI to deliver bespoke SMA solutions will make recent and future periods of market instability far more manageable for our member firms and independent financial adviser partners.”

ASI Australia managing director Brett Jollie 02 said the SMA market has been a growth opportunity for ASI. “We’re expecting very strong growth in both the number of SMA portfolios we offer and our SMA funds under management because of our ability to provide wholesale advice firms with institutional-grade resources, risk management frameworks, and capabilities at institutional prices,” he said. fs

22

Roundtable | MLC

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

FS Roundtable: Call to action COVID-19 has presented opportunities for active fund managers to add value in managed account portfolios that many passive strategies cannot equal.

Karren Vergara writes.

As the global health and economic crises continue to roil equity markets, adviser-led investment strategies need to be actively monitored and managed not only to survive – but to thrive – in a post-COVID-19 world.

The recent Managed Accounts Roundtable hosted by MLC and Financial Standard discussed critical issues wealth managers face as COVID-19 deeply disrupts and rattles clients’ portfolios and peace of mind.

After a healthy debate about which strategies can best optimise investment performance, one overarching consensus emerged among the panelists: The role that active management plays in managed accounts is vital to help financial advice practices and their clients face these turbulent times.

It’s not to say that passive investment strategies should be shunned altogether. Many voices from the panel of experts provided valid points on why passive strategies should not be ignored.

In attendance from MLC Asset Management were: director of managed accounts Jason Komadina; general manager of distribution Mandy Mannix; and portfolio manager John Woods.

Fund managers who shared their expertise included: Antares Equities investment manager John Guadagnuolo; and Banyantree Investment Group investment manager and director Max Riaz.

On the research side, SQM Research head of research Rob da Silva; Lonsec chief investment officer Lukasz de Pourbaix; Zenith Investment Partners head of research Bronwen Moncrieff; Morningstar Australasia director of manager research for APAC Tim Murphy; IOOF head of research and retirement income Matt Olsen; and Rainmaker’s managing director Christopher Page and head of investment research John Dyall were in attendance.

Voices from consulting, investment solutions

and platforms rounded up the panel: Praemium head of investment managers and governance Damian Cilmi; Quilla director Andrew Connors; Douglas Funds Consulting chief executive Nigel Douglas; and InvestSense director Jonathan Ramsay.

Ramsay says the COVID-19 experience has provided an opportunity to engage with clients, meaning that it increased the frequency (via Zoom for example) and breadth of communication, as well as productivity.

“It was a very energising period,” he says.

The overall feedback from advisers and their clients, Douglas says, is the “great comfort” they were receiving from someone who has the ability to oversee their portfolio and provide that level of active management during the crises.

Crisis management The managed accounts industry has experienced phenomenal growth in recent years.

Rainmaker research estimates that nearly $70 billion of funds under administration, provided by 100 managed accounts products, represents just 10% of the overall platform sector. Pitted against its equivalent investment wrap IDPS segment, its share takes up a larger portion of 40%. If it keeps growing at its current trajectory, Rainmaker predicts that within six years managed accounts will engulf the segment.

It was clear that the events of the last six months or so brought the many benefits of managed accounts to the surface.

The value and benefit managed accounts can bring to a financial advice practice in terms of efficiency, helping clients achieve their goals and speed to implementation, according to Komadina, is more important than ever:“This is a great time to have this conversation.”

The numbers

$70 billion How much Rainmaker estimates is held in managed accounts in Australia.

Mannix agrees, saying that the “rich and rewarding conversation” discussed at the event goes beyond the active versus passive debate.

In her extensive experience working for global financial services firms, among her many conversations with clients all over the world, Mannix says it’s rarely about whether active is better than passive.

“It is about helping clients solve a problem that they have,” she says.

While she has been a passionate supporter of active management since she began working in finance, it does not mean that there isn’t a place for passive strategies. But the beauty about managed accounts with an active strategy, Mannix says, is that it can “solve far greater needs for clients than you would otherwise get”.

Komadina adds that one key aspect managed accounts is solving for advisers and clients is the ability to implement advice more effectively and efficiently, and most importantly in a timely manner – all within an active management framework – whether it’s at the asset allocation or security level.

“Active management is fantastic for our clients to have the transparency as to what we were holding for them through this volatile period,” Guadagnuolo says.

“It gives clients a different perspective when they are able to see the shares that you own rather than unit trusts. There is nothing like a bit of transparency.”

On the downside, volatile periods are conducive to a flurry of corporate actions that keeps everyone in the value chain from fund managers to backoffice administrators on their toes.

Guadagnuolo says corporate actions are much more difficult during volatile periods and many are conducted via placements rather than rights issues.

“As such, it is nearly impossible for SMAs to

MLC | Roundtable

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

participate in these as many platforms don’t have the capability to address large scale placements in the volumes being provided. And secondly, they unbalance portfolios given the size of associated share purchase plans relative to most investors’ portfolios.”

Even with technological advancement, some platforms are incapable of implementing institutional execution.

“That forces you as a fund manager when managing an SMA to think a little longer term; to think the opportunity through. It is not just a quick turn. It is a discipline that works equally as well when taking it to the [unit] trust as well. It is a helpful thing for clients, particularly in the last six to 12 months,” Guadagnuolo says.

Olsen says managed accounts are a good tool for risk management in times of heightened volatility.

“You can quickly change the asset class weights.

It provides efficiency in manager changes; takes away time lag; the accuracy of implementation is better… [Additionally] rebalancing can be set to an automated timeframe; thresholds set above target weights, and implement DAA changes to promote a top-down view,” he explains.

The inclusive approach When constructing SMAs, Cilmi is cognisant of how many stocks it can hold and how it can be replicated for clients with smaller investment amounts of about $25,000, $50,000 and up to $100,000. Being able to design a concentrated strategy has been the focus of it, he says.

The issue of using passive instruments in active ways prompted interesting perspectives. Cilmi is seeing some growing trends in this area over the last few years. One example is the breaking up of the MSCI World into three or four ETFs, and further into classifications like country or emerging markets, he says. Another is breaking up bond indices into sovereigns, high yield and so forth.

Trying to replicate a full index using a quantitative tool for instance, is essentially bringing to the portfolio unrewarded alpha through that tracking error, Woods says. “It is not intentional alpha. The index approach without full replication is bringing in risk for I am not sure for what rewards.”

Da Silva pointed out the limitations and difficulties in deploying active management across all the asset classes.

“That is because there are opportunities like private equity, real estate and distressed debt that aren't suited to this approach. Even large-cap equities and fixed credit can have visibility and liquidity issues," he says.

The broader solution, da Silva he says, is to bring in managed funds, LICs and ETFs, even if it means losing some visibility.

“I don’t think we will see ETFs and managed funds disappear as they play a role and provide liquidity.”

One other aspect of constructing portfolios, Murphy points out is cost sensitivity.

Taking fee budgets into account inevitably leads to using passive investments to make up components of the portfolio to meet budgets, he says.

This is one trend Murphy seeing: combining investment perspectives and bringing the best ideas to life and implementing them to meet constraints like budgets in mind.

In constructing managed accounts at Zenith, Moncrieff and her team buy and sell funds and not stocks.

What active management means for Moncrieff and her team is embedded in the decisions they make in terms of strategic asset allocation and rebalancing.

“While we don’t rebalance all the time, we have risk tolerances that we [continuously] monitor, so that is another active side of it,” she says.

Moncrieff explains that Zenith’s clients (and ultimately the underlying clients) essentially benefit not just from efficiency gains, but also from the team of experts – researchers and managers and the like – who undertake the continuous monitoring.

List of attendees Damian Cilmi

head of investment managers and governance Praemium Andrew Connors

Lightbulb moments Switching to managed accounts can be transformative for many practices.

Quilla did not offer managed accounts during its early years. Connors recalls attending a few investment committee meetings with one client and making timely recommendations about tilting asset allocations.

“Because the client wasn’t utilising managed accounts, they held up the stop sign and said we couldn’t implement the changes as they were still trying to implement the recommendations we had made from earlier meetings,” he shares.

“We either had to change the way we managed advisers’ portfolios and move to a more static approach, which we didn’t believe was best practice, or we could look at an alternative legal structure, like managed accounts, to enable us to actively manage portfolios.”

For Connors, the managed accounts structure has facilitated the democratisation of active management, and the associated benefits, for advisers and their clients. “It’s also enhanced operational efficiencies for advice practices and enhanced the client experience.”

For Douglas, active management in a typical multi-asset portfolio starts with the governance and commercial structure of an advice group and their client proposition.

“If this is well understood, then the investment philosophy, investment process design (SAA and TAA) and implementation choices (such as listed direct investments, funds, ETFs and platform selection) should flow from that framework,” Douglas says.

“It is noticeable that some groups are more active than others at different stages of the process but compared to a multi-asset fund there are common restrictions such as the use of derivatives and currency management.”

Riaz highlighted the benefits of being involved in active strategies, particularly how this affects clients.

This “deep dive” is how the investment manager approaches its relationships with clients, by actively working with them from the top or at the asset allocation level right down to which securities are selected.

“We approach our relationships with clients by looking at their individual needs and [not as a mass scale].”

Managed accounts has undoubtedly brought and expanded the toolkit for financial-advice firms that had traditional backgrounds in model portfolios, according to de Pourbaix, providing the “levers” to help with asset allocation and underlying investment selection.

Participants agreed that managed accounts have given advisers the tools to make active decisions, particularly as technology and platform providers continue to advance functionalities and make execution and implementation potentially seamless.

The “institutionalisation of the model portfolio world” is a positive thing, de Pourbaix says.

“We will see it evolve further as technology and platforms also evolve.” fs

director Quilla Rob da Silva

head of research SQM Research Lukasz de Pourbaix

chief investment officer Lonsec Nigel Douglas

chief executive officer Douglas Funds Consulting John Dyall

head of investment research Rainmaker Information John Guadagnuolo

investment manager Antares Equities

There is nothing like a bit of transparency.

John Guadagnuolo

Jason Komadina

director, managed accounts MLC Asset Management Mandy Mannix

general manager, distribution MLC Asset Management Bronwen Moncrieff

head of research Zenith Investment Partners Tim Murphy

director of manager research, APAC Morningstar Australasia Matt Olsen

head of research and retirement income IOOF Christopher Page

managing director Rainmaker Group Jonathan Ramsay

director InvestSense Max Riaz

investment manager / director Banyan Tree Investment Group John Woods

portfolio manager MLC Asset Management

In association with

23

24

Between the lines

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

AMP Capital loses mandate

01: Matt Heine

joint managing director Netwealth

Elizabeth McArthur

ESSSuper, the $30 billion government fund for the emergency services, terminated AMP Capital Ethical Leaders Balanced Fund as the sole manager of its “Ethically Minded” investment option.

The move was effective from 15 September 2020 and a new ethical manager is yet to be appointed.

“ESSSuper felt that it was in members’ best interests to end the relationship after carefully considering the appropriateness of the investment and taking into account recent organisational changes at AMP which have increased investment risks for members in our Ethically Minded option,” ESSSuper said.

The fund said the board is still considering alternative investment managers with a strong focus on ethical investing, and in the meantime members in the Ethically Minded option will have their super reinvested in a portfolio that very closely matches the risk and return objectives of that option.

As a result, from 16 September 2020 investment fees for members in the ESSSuper Ethically Minded Option have been temporarily decreased from 0.73% per annum to 0.47% per annum while a new investment manager search is underway.

“The temporary investment will be made in accordance with ESSSuper’s Responsible Investment Policy. This excludes tobacco and controversial weapons investments but has fewer ethical exclusions than the Ethically Minded option’s investment with AMP,” the fund said. fs

Netwealth appoints international custodian Kanika Sood

The quote

We know our clients want greater access to international markets both directly, via funds and also via our managed account, and Citi was able to provide unparalleled exposure for our team.

N

etwealth has appointed a global custodian, who will also provide global and domestic equities execution and fund administration.

Citi, which is the third largest custodian in Australia, will provide the services to Netwealth.

It also makes Netwealth the first local wealth platform to sign up for Citi’s Execution to Custody (E2C) platform, which combines in a single portal global execution, settlement and custody services, the custodian said.

“We know our clients want greater access to international markets both directly, via funds and also via our managed account, and Citi was able to provide unparalleled exposure for our team.

Following a seamless onboarding experience, we look forward to leveraging Citi’s strengths to help in our aim to be the most comprehensive wealth platform in Australia,” Netwealth joint managing director Matt Heine01 said.

Rainmaker Mandate Top 20

Citi Australia said it is looking to add over 20 custody clients and employees in the next 12 months, as Royal Bank of Canada (RBC’s) March client transfer agreement with Citi comes into effect.

“Citi is particularly well placed to facilitate Netwealth’s growth plans, whether that is combining our leading Markets and Securities Services products together like we have with E2C, or providing a full suite of fund administration services that will support their new global specialist series offering [from Magellan Financial Group]. Our international access is unparalleled in the Australian market,” Citi Australia head of equities Daniel Young said.

Citi is the third largest custodian locally with $561.5 billion in total assets under custody for Australian investors, after J.P. Morgan and Northern Trust. Citi overtook NAB Asset Servicing in the six months ending June. fs

Note: Select alternatives investment mandate appointments

Appointed by

Asset consultant

Investment manager

Mandate type

ANZ Australian Staff Superannuation Scheme

Willis Towers Watson

Other

Infrastructure

Care Super

JANA Investment Advisers

Coolabah Capital Institional Investments Pty Limited

Alternative Investments

Care Super

JANA Investment Advisers

Siguler Guff & Company, LP

Private Equity

Construction & Building Unions Superannuation

Frontier Advisors

Wellington Management Australia Pty Ltd

Other

Energy Industries Superannuation Scheme

Cambridge Associates Limited; JANA Investment Advisers

IFM Investors Pty Ltd

Alternative Investments

Hostplus Superannuation Fund

JANA Investment Advisers

ROC Capital Pty Limited

International Private Equity

7

Hostplus Superannuation Fund

JANA Investment Advisers

Other

International Private Equity

10

Hostplus Superannuation Fund

JANA Investment Advisers

Other

Alternative Investments

113

Hostplus Superannuation Fund

JANA Investment Advisers

Kayne Anderson Capital Advisors, L.P.

Alternative Investments

25

Hostplus Superannuation Fund

JANA Investment Advisers

Other

Australian Private Equity

9

Ironbark Asset Management Pty Limited

Other

Other

13

Ironbark Asset Management Pty Limited

Australian Unity Investments

Other

5

Ironbark Asset Management Pty Limited

Other

Other

4

Maritime Super

JANA Investment Advisers; Quentin Ayers

Ardea Investment Management Pty Limited

Alternative Investments

Meat Industry Employees Superannuation Fund

Internal

IFM Investors Pty Ltd

Global Infrastructure

40

MTAA Superannuation Fund

Whitehelm Capital

State Street Global Markets

Currency Overlay

90

MTAA Superannuation Fund

Whitehelm Capital

Perennial Value Management Limited

Other

16

VanEck Australia Pty Ltd

Self

Other

18

WA Local Government Superannuation Plan

Willis Towers Watson

BlueBay Asset Management

Alternative Investments

21

Zurich Financial Services (Australia) Limited

Mercer Investment Consulting

AllianceBernstein Australia Limited

Various

73

Amount ($m) 17 152 6 208 46

129

Source: Rainmaker Information

Super funds

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20 PERIOD ENDING – 31 AUGUST 2020

Workplace Super Products

1 year % p.a. Rank

3 years

5 years

SS

% p.a. Rank % p.a. Rank Quality*

GROWTH INVESTMENT OPTIONS

25

* SelectingSuper [SS] quality assessment

Retirement Products

1 year % p.a. Rank

3 years

5 years

SS

% p.a. Rank % p.a. Rank Quality*

GROWTH INVESTMENT OPTIONS

UniSuper - Sustainable High Growth

8.9

1

11.7

1

10.3

1

AAA

UniSuper Pension - Sustainable High Growth

Vision Super Saver - Just Shares

7.2

2

8.8

2

9.4

2

AAA

Equip MyFuture - Growth Plus

4.4

7

8.6

3

8.5

8

UniSuper - Growth

5.5

4

8.6

4

8.7

AustralianSuper - High Growth

3.7

10

8.2

5

HESTA - Eco-Pool

3.2

14

8.1

Cbus Industry Super - High Growth

4.6

6

Aware Super Employer - High Growth

4.0

Vision Super Saver - Growth Australian Ethical Super Employer - Growth Rainmaker Growth Index

10.2

1

13.0

1

11.5

1

AAA

Vision Income Streams - Just Shares

6.8

2

9.5

2

10.2

4

AAA

AAA

Equip Pensions - Growth Plus

4.3

6

9.3

3

9.2

7

AAA

6

AAA

Cbus Super Income Stream - High Growth

4.9

4

9.2

4

10.3

3

AAA

8.6

7

AAA

AustralianSuper Choice Income - High Growth

4.1

9

9.1

5

9.5

6

AAA

6

9.1

5

AAA

HESTA Income Stream - Eco

3.7

13

8.8

6

9.9

5

AAA

8.1

7

9.1

4

AAA

smartMonday PENSION - High Growth Index

1.1

50

8.7

7

8.7

11

AAA

9

7.9

8

8.2

10

AAA

WA Super Retirement - Diversified High Growth

4.2

7

8.5

8

8.1

30

AAA

4.7

5

7.9

9

8.3

9

AAA

HESTA Income Stream - Active

3.1

18

8.4

9

8.6

12

AAA

0.9

60

7.7

10

7.4

27

AAA

Lutheran Super Pension - High Growth

2.7

21

8.4

10

8.4

20

AAA

-3.0

5.3

5.1

Rainmaker Growth Index

BALANCED INVESTMENT OPTIONS

-3.0

5.9

5.7

BALANCED INVESTMENT OPTIONS

UniSuper - Sustainable Balanced

6.6

2

9.4

1

8.3

2

AAA

UniSuper Pension - Sustainable Balanced

7.7

2

10.8

1

9.5

1

AAA

WA Super - Sustainable Future

7.5

1

8.4

2

8.6

1

AAA

Australian Catholic Super RetireChoice - Socially Responsible

3.2

12

8.5

2

7.0

32

AAA

Australian Ethical Super Employer - Balanced (accumulation)

2.5

21

7.6

3

7.2

9

AAA

WA Super Retirement - Sustainable Future

8.0

1

8.4

3

9.0

3

AAA

Australian Catholic Super Employer - Socially Responsible

2.9

13

7.5

4

6.0

49

AAA

AustralianSuper Choice Income - Indexed Diversified

3.7

7

8.1

4

7.7

10

AAA

AustralianSuper - Balanced

2.6

19

7.5

5

8.0

3

AAA

ESSSuper Income Streams - Basic Growth

2.7

20

8.0

5

AAA

CareSuper - Sustainable Balanced

4.3

3

7.3

6

6.9

15

AAA

Cbus Super Income Stream - Growth (Cbus Choice)

3.6

8

7.9

6

9.0

2

AAA

FES Super - Smoothed Option (Hybrid)

3.6

7

7.1

7

6.2

41

AAA

CareSuper Pension - Sustainable Balanced

3.4

9

7.7

7

7.5

19

AAA

AustralianSuper - Indexed Diversified

3.2

9

7.1

8

6.7

25

AAA

Sunsuper Income Account - Balanced Index

2.9

14

7.7

8

7.4

20

AAA

Vision Super Saver - Balanced Growth

4.1

4

6.9

9

7.3

8

AAA

Vision Income Streams - Balanced Growth

4.3

3

7.7

9

8.0

7

AAA

ESSSuper Beneficiary Account - Basic Growth

2.2

28

6.9

10

AAA

TASPLAN Tasplan Pension - Balanced

2.1

33

7.6

10

7.6

16

AAA

Rainmaker Balanced Index

-1.4

4.8

4.7

Rainmaker Balanced Index

CAPITAL STABLE INVESTMENT OPTIONS QSuper Accumulation - Lifetime Aspire 2

-1.4

5.4

5.1

CAPITAL STABLE INVESTMENT OPTIONS

-0.6

90

6.5

1

6.6

2

AAA

Suncorp Brighter Super pension - Multi-Manager Balanced

4.3

1

7.5

1

AAA

VicSuper FutureSaver - Socially Conscious

3.8

1

6.4

2

7.1

1

AAA

VicSuper Flexible Income - Socially Conscious

4.2

2

7.3

2

7.7

1

AAA

AustralianSuper - Conservative Balanced

2.1

7

6.1

3

6.6

3

AAA

Cbus Super Income Stream - Conservative Growth

3.5

3

7.1

3

7.7

2

AAA

TASPLAN - OnTrack Control

1.6

18

5.9

4

AAA

AustralianSuper Choice Income - Conservative Balanced

2.5

12

6.9

4

7.4

3

AAA

Cbus Industry Super - Conservative Growth

2.8

3

5.8

5

AAA

Energy Super Income Stream - SRI Balanced

1.9

29

6.6

5

5.9

15

AAA

Energy Super - SRI Balanced

1.5

27

5.7

6

5.2

13

AAA

QSuper Income - QSuper Balanced

-1.1 157

6.3

6

7.3

4

AAA

VicSuper FutureSaver - Balanced

1.8

12

5.6

7

6.2

4

AAA

VicSuper Flexible Income - Balanced

1.9

27

6.2

7

6.9

5

AAA

StatewideSuper - Conservative Balanced

1.6

16

5.3

8

6.0

5

AAA

Suncorp Brighter Super pension - Multi-Manager Conservative

3.2

5

6.2

8

AAA

HESTA - Conservative Pool

2.1

8

5.2

9

5.4

8

AAA

Aware Super Pension - Balanced Growth

1.6

41

6.0

9

6.5

7

AAA

TASPLAN - OnTrack Maintain

1.6

19

5.2

10

AAA

UniSuper Pension - Conservative Balanced

0.3 110

6.0

10

6.4

8

AAA

Rainmaker Capital Stable Index

-0.1

4.1

Rainmaker Capital Stable Index

-0.1

3.8

3.6

Notes: P lease note that all figures reflect net investment performance, i.e. net of investment tax, investment management fees and the maximum applicable ongoing management and membership fees.

WORKPLACE SUPER | PERSONAL SUPER | RETIREMENT PRODUCTS

Compare superannuation returns across asset classes using over 27 years of industry insights and research with SelectingSuper’s performance tables.

Simply visit selectingsuper.com.au/tools/performance_tables

3.9 Source: Rainmaker Information www. rainmakerlive.com.au

26

Managed funds

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20 PERIOD ENDING – 31 AUGUST 2020

Size 1 year 3 years 5 years

Size 1 year 3 years 5 years

Fund name

Fund name

Managed Funds

$m

% p.a. Rank

% p.a. Rank

% p.a. Rank

GROWTH IOOF MultiMix Growth Trust Vanguard High Growth Index Fund Fiducian Growth Fund Vanguard Growth Index Fund Fiducian Ultra Growth Fund

$m

% p.a. Rank

% p.a. Rank

% p.a. Rank

CAPITAL STABLE 613

2.6

2

8.4

1

8.0

3

Macquarie Capital Stable Fund

29

7.3

1

6.7

1

5.8

3

3056

2.4

5

8.3

2

8.0

4

IOOF MultiMix Moderate Trust

573

1.7

6

6.1

2

6.0

1

142

2.5

4

8.0

3

8.1

2

Vanguard Conservative Index Fund

2584

2.4

2

5.7

3

5.4

4

5388

2.5

3

7.6

4

7.3

5

Fiducian Capital Stable Fund

318

2.2

4

5.1

4

4.8

7

191

3.3

1

7.4

5

8.2

1

IOOF MultiMix Conservative Trust

647

2.4

3

4.9

5

5.0

5

84

1.5

7

4.5

6

4.5

8

BT Multi-Manager High Growth Fund

11

-0.2

8

7.0

6

7.2

6

UBS Tactical Beta Fund - Conservative

BT Multi-Manager Growth Fund

40

-0.2

7

6.3

7

6.6

7

Perpetual Diversified Growth Fund

103

-1.0

13

4.3

7

4.5

9

UBS Tactical Beta Fund - Growth

143

1.2

6

5.2

8

6.1

8

Perpetual Conservative Growth Fund

337

-0.3

9

4.1

8

4.0

11

U Ethical Growth Portfolio

187

-2.7

11

5.1

9

4.4

11

BT Multi-Manager Conservative Fund

33

-0.3

10

4.0

9

4.0

12

20

-2.1

10

4.9

AMS Moderately Conservative Fund

220

2.1

5

3.8

10

4.9

6

Sector average

380

0.5

4.1

4.5

6.4

Pendal Active High Growth Fund Sector average

821

0.1

10

6.2

6.7

CREDIT

BALANCED 725

5.6

1

7.9

1

8.1

1

Principal Global Credit Opportunities Fund

184

10.1

1

6.6

1

1751

2.9

3

7.7

2

7.2

4

VanEck Vectors Aust. Corp. Bond Plus ETF

234

2.3

12

5.7

2

Ausbil Balanced Fund

112

-0.7

12

7.6

3

6.6

6

Metrics Credit Div. Aust. Sen. Loan Fund

2172

4.9

2

5.1

3

Fiducian Balanced Fund

358

2.7

4

7.5

4

7.5

2

Vanguard Australian Corp Fixed Interest Index

169

2.3

13

5.1

397

2.5

7

5.1

Macquarie Balanced Growth Fund IOOF MultiMix Balanced Growth Trust

1

5.0

3

4

4.6

5

5

4.5

6

462

0.8

9

7.2

5

6.2

8

Pendal Enhanced Credit Fund

80

-1.1

15

7.0

6

6.7

5

Vanguard Aust Corp. Fixed Interest Index ETF

347

2.3

11

5.0

6

5304

2.5

5

6.8

7

6.5

7

Janus Henderson Diversified Credit Fund

645

4.6

3

4.0

7

4.5

7

606

1.6

7

6.5

8

5.9

11

79

-0.2

25

4.0

8

5.4

2

BT Multi-Manager Balanced Fund

84

-0.3

11

5.8

9

6.0

9

PIMCO Global Credit Fund

543

3.4

5

4.0

9

4.7

4

Zurich Managed Growth Fund

75

-0.7

13

5.7

10

10

Franklin Australian Absolute Return Bond

544

2.5

8

3.9

10

3.8

11

Sector average

732

2.3

3.5

3.7

BlackRock Tactical Growth Fund SSGA Passive Balanced Trust Vanguard Balanced Index Fund Responsible Investment Leaders Bal

Sector average

572

0.2

5.3

5.9

Note: The performance figures for diversified funds are net of fees, performance figures for sector specific funds are adjusted for fees.

Yarra Enhanced Income Fund

Source: Rainmaker Information

Super versus housing? ustralia is about to have a serious policy deA bate about whether young people should be allowed to divert their compulsory superannua-

Brumbie

By Alex Dunnin alex.dunnin@ financialstandard .com.au www.twitter.com /alexdunnin

tion contributions towards a home deposit.

For this we have two backbench parliamentarians to thank: Tim Wilson MP and Senator Andrew Bragg.

Firstly, they believe young people have been squeezed out of buying their own home because they have to put so much of their money into superannuation. Secondly, owning your own home should be a de facto forth pillar of the retirement policy matrix.

Their critics have accused them of promoting this idea simply because they are chasing votes. Research released as part of the Australian Electoral Survey has revealed that 46% of home owners vote Liberal, 33% vote Labor and just 6% vote Greens.

But their belief in the idea of home ownership is a much deeper tenet of faith. Wilson recently said he believes the family (whatever you define it to be) is the bedrock of Australian society and the central focus of any family is their home.

His argument is not so much against super, but that he believes policymakers need to actively minimise any obstacle that gets in the way of home ownership.

It’s hard to imagine any serious person refusing the right of anyone to save for and purchase their own home, let alone disputing that it should be part of their retirement plan.

Nevertheless, before policymakers get to work devising ways to implement such a major policy shift, we should look at the evidence, lest we end up fixing the wrong problem. Trouble is, when we do we find the story isn’t as cut and dry as some might think.

People advocating that young people should be able to divert their super contributions towards a home deposit often cite the fact that home ownership rates are not only falling, for young people they’re plummeting.

By comparing 2006 and 2016 Australian Bureau of Statistics (ABS) home ownership data for people aged 25-34 years they found it had fallen from 58% to 47%, for people aged 35-44 years it had fallen from 70% to 62% and for people aged 45-54 years it had fallen from 78% to 72%. Grattan projected that home ownership among retirees could drop one-quarter from its 2016 high watermark of 76% to just 58% by mid-century.

Unchecked, this could see the super system implode. Remember that policy settings were designed to boost retirement incomes on the as-

sumption most people would have paid off their home by retirement.

Other ABS data showing that already onethird of retirees use their super to pay off or pay down their mortgages should be seen as a canary in the coal mine.

Reinforcing this, advocates for the super for home deposit idea say home prices have risen so high because of compulsory super’s resultant economic distortions. Never mind that this confuses correlation with cause.

The Committee for Economic Development of Australia (CEDA) meanwhile reported that it was only after about 2003 that the index of real housing prices surged ahead of the real wage index. Up until then the two indexes pretty much tracked each other.

Finally, in 2015 the RBA said house prices surged due to the combined impacts of financial market deregulation that led to fierce competition between lenders, low inflation and low interest rates flooding the market with liquidity and high demand fueled by population growth.

So sure, let’s modify the Home Super Saving Scheme to help young people buy their first home. But don’t for a minute think it will address any of the factors squeezing young people out of the housing market. Giddyup. fs

News

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

CBA progresses with divestment

01: Kyle Mangini

global head of infrastructure IFM Investors

Annabelle Dickson

Commonwealth Bank has received another payment furthering the divestment of its life insurance business to AIA Group.

CBA has received a payment of approximately $450 million for the sale of CommInsure Life with the proceeds resulting in a pro forma increase to the bank’s Common Equity Tier 1 ratio of eight basis points at June 30.

The payment follows a $500 million upfront payment in November 2019 and is part of the revised transaction path.

The bank said it now expects the ultimate completion of the divestment will occur via a statutory asset transfer in the second half of FY21, CBA has now received a total of $2.3 billion of proceeds made up of $2.1 billion in cash and $240 million in dividends payments from CommInsure Life.

The bank forecasts the completion of CommInsure Life will occur in the second half of 2021 upon payment of the $100 million.

The deal excludes the bank’s 37.5% equity interest in BoCommLife Insurance Company.

It was only recently that a class action lawsuit was filed against CBA by Shine Lawyers on behalf of customers who obtained CommInsure life insurance products recommended by a CBA-licensed adviser.

Class Actions practice leader Craig Allsopp said group members were entitled to compensation because they incurred financial losses as a result of conflicted or incorrect advice from financial planners affiliated with or directly employed by CommInsure’s parent company. fs

Six Park, Rollit in partnership Ally Selby

Rollit Wealth has announced a new partnership with Six Park, set to help its members gain greater visibility across their investments.

The partnership, which will also provide a low-cost solution for those looking to invest in the share market, would help Six Park extend its footprint into vertical markets, co-chief executive Nuvan Aranwela said.

“These sorts of partnerships just make sense for us because they perfectly align with our core value of helping more Australians access simple, affordable, diversified and risk-appropriate investments,” he said.

“Our offering plugs effortlessly into platforms like Rollit because our service is online, straightforward and low cost.”

“As an employee, understanding and making the most of your financial position, and being able to start or grow your path to financial wellbeing is important - particularly as services like ours make investment management far more accessible to people than has been the case in the past,” Aranwela said.

“As employers, helping your team in this way makes for a more compelling and meaningful employee value proposition.”

Rollit Wealth chief executive Mark MacLeod said the platform was excited to offer its users access to affordable investment management.

“We believe everyone deserves the opportunity to live their best financial life,” he said. fs

27

IFM Investors, Trafigura form joint venture Ally Selby

I

The quote

We believe sustainable investments will prove to be one of the most exciting and durable opportunities for private clients in the years and decades ahead.

FM Investors has formed a joint venture with physical commodities trading group Trafigur to launch a new company set to invest in solar, wind and power storage projects globally.

Nala Renewables aims to build a portfolio of renewable energy projects with a cumulative capacity of two gigawatts within the next five years.

The investment company will identify, build and operate projects that produce renewable energy, across Europe, Asia and various emerging markets.

In addition to developing these projects, Nala Renewables will pursue opportunities to acquire assets or companies at various stages of development that fit the investment profile of the portfolio.

“As highly experienced infrastructure investors, IFM Investors are an excellent partner for this ambitious and timely endeavour,” Trafigura chief executive and executive chair Jeremy Weir said.

“The investments will provide synergies for our new power and renewables trading division which is going to become a significant pillar of our trading activity over the next few years and beyond and builds on our capabilities and understanding of other energy markets.”

Nala Renewables will also build and operate projects adjacent to Trafigura’s existing mining, port and smelting infrastructure assets worldwide, with the renewable energy generated by these projects used to power some of its facilities.

IFM Investors global head of infrastructure Kyle Mangini01 said the investment management firm was looking forward to continuing its successful partnership with Trafigura and “tacking the energy transition together”.

“This joint venture is an important step in our strategy to reduce the carbon impact of our investments,” he said.

Fifteen people were currently being recruited to manage the investment company, Trafigura and IFM Investors said, supported by renewables expertise from both companies.

It comes as the two parties’ second joint venture, following a successful partnership between Trafigura and IFM Investors in December 2018 to own and operate Impala Terminals’ network of base metals terminal infrastructure across Mexico, Spain and Peru.

Impala Terminals also includes a refined products storage and distribution business in Paraguay and a Swiss-based operation which provides global freight forwarding and multimodal transportation services. fs

ETF proliferation confounds investors Karren Vergara and Kanika Sood

The proliferation of products in the booming exchange-traded funds market is confusing investors and making it impossible to make like-for-like comparisons.

The research paper, Exchange-traded confusion: How industry practices undermine product comparisons, written by Ryan Clements, found one of the many gripes consumers face in a saturated market is that naming conventions can be misleading.

ETFs with similar names, tracking similar or related indices often perform very differently based on different holdings and portfolio maturity composition, Clements wrote.

Other areas of confusion include the abundance of custom indices; the lack of standardisation in calculating NAV per share (which is often undisclosed); and hidden costs like advisory and index-licensing fees.

Clements is advocating for reforms in the industry, firstly calling on the US Securities Exchange Commission to standardise ETP providers’ website formats. The industry should also use uniform calculation methodologies for key variables such as NAVs and intraday indicative value, a standardised ETF nomenclature or taxonomy system, including standards for sustainable investing.

While there has been significant innovation in the last 10 years, choice has been good for investors and ETFs open up

investment possibilities like never before, Alex Vynokur, founder and chief executive of BetaShares said.

It’s important to note that the ETP industry in Australia is not the same as the US, he said, pointing to several differences in naming conventions, disclosures and structures.

“ETP is the catchall name … Exchange-traded notes (ETNs) do not exist in Australia as they carry counterparty risk.” Moreover, most ETFs in Australia are transparent in the fees charged, he added.

“Just as you cannot judge a book its cover, you cannot judge an ETF by its name,” said ETF Securities head of distribution Kanish Chugh.

Chugh said the ETP industry is doing a good job of providing financial literacy to new investors, who might be “scared of acronyms,” as well as investors who are more advanced.

“We are at a stage now where the industry is raising awareness about ETFs and how they should be used appropriately”, Chugh said. “I think the ETF providers are doing a good job of that and collectively we are trying to do our bit and complement each other well.”

Ultimately, the aim is to help investors make the best decision with the full knowledge available to them that is not just based on cost.

“We are not going to launch the exact same fund as our competitors and differentiate it based on fees. There is no point to that,” Chugh said. fs

28

Economics

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

RBA negative on negative interest rates

Consumption

Ben Ong

Sales of New Motor Vehicles (%y/y)

R

eserve Bank of Australia (RBA) deputy governor Guy Debelle’saddress at the Australian Industry Group’s (AiG) September 22 virtual conference sparked a second wave – a second wave of negative interest rate speculation, that is.

It was last on the list of four monetary options Debelle revealed the RBA board is assessing that will “best support the economic recovery.”

The first three were: “(1) buy bonds further out along the curve, supplementing the three-year yield target.

(2) foreign exchange intervention is another potential policy option.

(3) lower the current structure of rates in the economy a little more without going into negative territory.

The second negative interest rate wave speculation in Australia comes soon after the Bank of England (BOE) divulged in its September 17 Monetary Policy Committee (MPC) report that: The MPC had been briefed on the Bank of England’s plans to explore how a negative Bank rate could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates.”

But just as Debelle said: “The empirical evidence on negative rates is mixed. In the shortterm, they can contribute to a lower exchange rate. In the medium term, the effectiveness can wane including through the effect on the financial system. Negative rates can also encourage more saving as households look to preserve the value of their saving, particularly in an environment where they are already inclined

to save rather than spend. That is, the income effect can be larger than the substitution effect. To date, those economies with negative policy rates have not lowered them further. Instead, they have eased monetary policy settings through other means.”

True that. The European Central Bank (ECB) took deposit rates down to negative back in 2014 and the Bank of Japan’s (BOJ) target rate had been below zero since 2016.

Both central banks have not taken interest rates deeper into the negative to counteract the negative impact of the coronavirus pandemic on their respective economies.

Jerome Powell’s last words on negative interest rate policy were that the FOMC was negative on it. Powell told a video conference hosted by the Peterson Institute for International Economics last May: “The committee’s view on negative rates has not changed …This is not something we’re looking at”.

Although an option, the minutes of its July meeting, the RBA wrote that: “Members agreed that negative interest rates in Australia remain extraordinarily unlikely.”

This was later stressed by RBA Governor Philip Lowe when he testified before the House of Representatives Standing Committee on Economics on August 14. “…negative interest rates in most countries do impair the profitability and efficiency of the financial system and ultimately its ability to provide credit to the real economy, which is really important … They would also create distortions in our financial system, because deposit rates would effectively be bounded at zero.” fs

Monthly Indicators

Aug-20

Jul-20

Jun-20 May-20 Apr-20

Retail Sales (%m/m)

-4.16

3.18

2.72

16.86

Retail Sales (%y/y)

6.89

12.04

8.52

5.79

-28.78

-12.84

-6.44

-35.29

-17.67 -9.18 -48.48

Employment Employed, Persons (Chg, 000’s, sa)

111.01

119.15

227.82

-264.17

-607.40

Job Advertisements (%m/m, sa)

1.56

19.15

41.01

0.65

-53.11

Unemployment Rate (sa)

6.83

7.48

7.44

7.07

6.36

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

-

8.48

-4.91

-3.91

2.49

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

-

11.99

-4.25

-15.89

-2.23

Housing Finance Commitments, Number (%m/m, sa) - Housing Finance Commitments, Value (%m/m, sa)

-

Survey Data Consumer Sentiment Index

79.53

87.92

93.65

88.10

75.64

AiG Manufacturing PMI Index

49.30

53.50

51.50

41.60

35.80

NAB Business Conditions Index

-5.78

0.27

-7.41

-24.57

-34.14

NAB Business Confidence Index

-8.02

-14.16

0.54

-21.46

-45.96

Trade Trade Balance (Mil. AUD)

-

4607.00

8149.00

7262.00

Exports (%y/y)

-

-20.31

-14.92

-16.99

-6.11

Imports (%y/y)

-

-15.62

-19.35

-23.04

-16.28

Jun-20

Mar-20

Dec-19

Sep-19

Quarterly Indicators

7882.00

Jun-19

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

17.74

9.02

2.18

7.53

4.66

% of GDP

3.79

1.78

0.43

1.49

0.94

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

14.97

1.44

-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

Australian PMI The IHS Markit flash Australia composite PMI index returned increased to a reading of 50.5 in September – indicating a return to expansion in business activity – from the final reading of 49.4 in the previous month “after containment measures were loosened in parts of the country” (Markit).

Preliminary estimates show the manufacturing PMI rising to a 29-month high of 55.5 from 53.6 in August on the back of increases in production and sales and a modest lift in net exports.

The flash Australia services business activity index went up to a two-month high reading of 50.0 in September from 49.0 in the previous month with “demand conditions broadly stable” but “activity remained subdued, coinciding with weak sales as the sector was more adversely hit by COVID-19 restrictions”.

Japan PMI The au Jibun Bank flash Japan composite PMI improved marginally from a final reading of 45.2 in August to 45.5 in September – indicative of continued contraction in business sector activity in the country. The manufacturing PMI was little changed, inching up to 47.3 in September from 47.2 in the previous month. The PMI for the services sector also improved but remained at a reading (45.6) indicating contraction.

Eurozone PMI The IHS Markit Eurozone composite PMI fell to a preliminary reading of 50.1 in September from August’s final reading of 51.9 as the decline in services sector activity negated the expansion in the manufacturing sector. The services PMI fell to a flash reading of 47.6 in September from 50.5 in August as the rising rates of coronavirus infections in the single currency region prompted renewed social distancing and lockdown measures. This is in contrast to the rise in the manufacturing PMI to a 25-month high reading of 53.7 from 51.7 in August aided by a sharp rise in new orders. “A two-speed economy is evident, with factories reporting that production growth was buoyed by rising demand, notably from export markets and the reopening of retail in many countries, but the larger service sector has sunk back into decline as face-toface consumer businesses in particular have been hit by intensifying virus concerns.” fs

Real GDP Growth (%q/q, sa)

-7.00

-0.26

0.55

0.51

0.76

Real GDP Growth (%y/y, sa)

-6.26

1.56

2.28

1.82

1.56

Industrial Production (%q/q, sa)

-3.42

0.19

0.48

0.67

1.07

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

Financial Indicators

-5.89

-2.06

-2.68

-1.33

-0.38

18-Sep Mth ago 3mths ago 1yr ago 3yrs ago

Interest rates RBA Cash Rate

0.25

0.25

0.25

1.00

1.50

Australian 10Y Government Bond Yield

0.89

0.87

0.88

1.13

2.80

Australian 10Y Corporate Bond Yield

1.57

1.62

1.83

1.99

3.31

Stockmarket All Ordinaries Index

6057.6

-3.37%

0.09%

-10.80%

S&P/ASX 300 Index

5851.4

-3.92%

-0.92%

-11.90%

4.82% 3.13%

S&P/ASX 200 Index

5864.5

-4.23%

-1.21%

-12.23%

2.52%

S&P/ASX 100 Index

4823.4

-4.54%

-1.65%

-12.95%

1.98%

Small Ordinaries

2780.0

0.75%

4.72%

-3.46%

12.76%

Exchange rates A$ trade weighted index

62.60

A$/US$

0.7307 0.7237 0.6863 0.6842 0.7973

61.90

58.80

58.90

66.30

A$/Euro

0.6161 0.6071 0.6117 0.6186 0.6669

A$/Yen

76.23 76.31 73.28 74.04 88.95

Commodity Prices S&P GSCI - commodity index

358.03

358.23

324.40

417.01

394.94

Iron ore

127.09

122.75

103.05

93.97

70.80

Gold

1950.85 2008.75 1719.50 1503.50 1312.10

WTI oil

41.09

42.89

38.79

58.19

Source: Rainmaker /

49.88

Sector reviews

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

Australian equities

Figure 1: Unemployment Rate

6 RATE %

ANNUAL CHANGE %

4

7.5

2

7.0

0

6.5

-2

6.0

-4

5.5

-6

Part-time

-8

Total

5.0

Prepared by: Rainmaker Information Source:

CPD Program Instructions

Figure 2: Employment growth

8.0

-10

4.5

Full-time

-12

4.0

-14

2004

2006

2008

2010

2012

2014

2016

2018

2020

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Australia’s employment surprise Ben Ong

A

ustralians all let us rejoice … in joyful strains then let us sing, Advance Australia Fair.”

It wasn’t supposed to go this way. Given the re-imposition of lockdown in Melbourne and most Australian states “closed border” policy, financial markets and economists were correct in expecting further deterioration in the domestic labour market.

But the Australian Bureau of Statistics’ (ABS) latest Labour Force update had me singing To quote: “Australia’s seasonally adjusted estimate of employment increased by 111,000 people in August 2020, with: - the number of unemployed people decreasing by 86,500 people; - the unemployment rate decreasing by 0.7 percentage points (pts) to 6.8%; - the underemployment rate remaining at 11.2%; “

International equities

- the underutilisation rate decreasing by 0.7 pts to 18.0%; - the participation rate increasing 0.1 pts to 64.8%; and - the employment to population ratio increasing 0.5 pts to 60.3%.”

These compare with consensus expectations for a 40,000 drop in employment in August and the unemployment rate rising to 7.7% (See Figure 1 and 2).

Wait, there’s more. Using the same metrics used in the US and Canada, the ABS estimates Australia’s unemployment rate falling to 7.3% in August from 7.8% in the previous month under its “Group 1” measure (employed people working zero hours who indicated they were stood down). Its “Group 2” classification (employed people working zero hours who indicated they had no work, not enough work available or were stood down) shows Australia’s unemployment rate down to 7.9%

Figure 1: au Jibun Bank Japan PMI 55

in August from 8.3% in July. This compares with 8.4% in the US and 10.2% in Canada.

While there’s a sense of disbelief in the recent stats, the “good news” could start a virtuous cycle in the domestic economy whereby rising employment boosts consumer optimism, stimulating spending, lifting company sales and profits, encouraging business spending in plant and machinery and staff, stimulating more hiring.

The Andrews government has already eased restrictions in regional Victoria and Melbourne’s 14-day rolling average of infections continues to decline and some states re-opening or on the verge of re-opening its borders.

News.com.au wrote: “Opposition employment spokesman Brendan O’Connor said Labor was concerned the encouraging figures would convince the government it could do less to support the economy and the almost one million Australians still out of work.” fs

Figure 2: Japanese Yen/US$ exchange rate 104

INDEX

50

106

45

108

40

110

YEN/US$

Services

Prepared by: FSIU Sources: Factset Prepared by: Rainmaker Information Source:

30

114

Composite Manufacturing

116

25

118

20 2017

2018

2019

2020

2017

2018

2019

S

o far fresh Prime Minister of Japan Yoshihide Suga is off to a good start.

Prime Minister takes over from Shinzo Abe at a time when the global economy appears to have seen the worst of the coronavirus pandemic. Many governments have eased/lifted lockdown and social restrictions, re-starting business activity.

Japan, itself, has lifted the “state of emergency” on May 25 – a month and a bit after it was put in place on April 16. This, along with fiscal and monetary policy support, has allowed the economy to slowly recover.

Latest indicators show that Japan’s past its worst – i.e. the worst economic slump on record with GDP collapsing at an annual rate of 28.1% in the June quarter. Worse than worst is this followed two quarters of negative growth: -7.0% (annualised) in the December 2019 quarter and -2.3% in the March 2020 quarter.

The au Jibun Bank Japan PMI survey underscores the improvement in activity. Although still in contraction territory (below the 50 reading), the composite PMI index has sequentially improved from a record low reading of 25.8 in April this year to a six-month high of 45.2. The manufacturing PMI has risen to 27.2 in August from an 11-year low of 38.4 in May while the services PMI stood at 45.0 in August from a record low reading of 21.5 back in April (See Figure 1).

According to Factset: “Nikkei/TV Tokyo opinion poll showed support for PM Suga’s cabinet at 74%, the third-highest for any cabinet on debut. This makes Suga the most popular new leader since Yukio Hatoyama in 2009. Also marks a jump from Abe’s latest approval rating by 19 points. Suga scores higher than Abe on trustworthiness and scored higher among women than men. Stability ranks second among voters’ reasons for supporting

Australian equities CPD Questions 1–3

1. Which statement is false? a) Australia’s estimate of employment increased by 111,000 people in August 2020 b) The number of unemployed Australians decreased by 86,500 people in August 2020 c) Australia’s underemployment rate declined to 11.2% in August 2020 d) Australia’s underutilisation rate decreased by 0.7 pts to 18.0% in August 2020 2. Based on the “Group 2 Classification”, which country has the lowest unemployment? a) Australia b) US c) Canada d) Australia and Canada

2020

Yoshihide Suga and the yen Ben Ong

The Financial Standard CPD Program has been developed for professionals governed by the Corporations Act 2001 and hold an AFS Licence which provides an obligation to undertake continuous professional development (CPD). Test your knowledge with the following questions.

[See next page for instructions on how to submit your answers].

3. Rising employment boosts consumer optimism. a) True b) False

112

35

29

International equities CPD Questions 4–6

Suga’s government at 39%. Diplomacy is one area where Suga lags Abe, polling only 7% vs more than 20% for Abe’s cabinet. Kyodo poll also showed solid result for Suga, with an approval rating of 66.4%, comparing favorably to the 62.0% for Abe’s Cabinet on his return to power in December 2012.”

But Suga also faces new challenges. Specifically, the emerging second wave outbreak in Europe.

While this has yet to trigger an aggressive “restriction” response from authorities, the renewed uncertainty has already sent safe-haven yen purchases.

The yen has appreciated by ¥104.84 per US1 – up 6.9% from this year’s low of ¥112.11 and by 4.5% from the start of 2020 (See Figure 2).

As well as eroding Japan’s export competitiveness and becoming a drag on growth, the higher yen would put downward pressure on Japan’s already very low/negative inflation. fs

4. How many quarters of negative growth has Japan recorded as at the June quarter of 2020? a) Two b) Three c) Four d) Five 5. Which PMI measure indicated economic improvement? a) Composite PMI b) Manufacturing PMI c) Services PMI d) All of the above 6. Business activity in Japan is now expanding. a) True b) False

30

Sector reviews

Fixed interest CPD Questions 7–9

7. Until when will interest rates remain on hold based on the Fed’s September dot plot? a) 2021 b) 2022 c) 2023 d) 2024 8. The Fed revised in 2020 GDP growth forecast from -6.5% to what? a) -4.0% b) -3.7% c) -3.5% d) -2.7% 9. The Fed’s revised inflation forecasts put “average inflation” below its 2.0% target by 2023. a) True b) False Alternatives CPD Questions 10–12

10. According to Statista. com’s figures, which country has the lowest coronavirus fiscal stimulus spend as a percent of GDP as of July 2020? a) US b) China c) Japan d) Germany 11. Which Chinese activity indicator/s improved in August? a) Retail sales b) Industrial production c) Fixed asset investment d) All of the above 12. China remains in recession. a) True b) False

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

Fixed interest

All answers can be submitted to our website.

PERCENT

2 ANNUAL CHANGE %

-10

RATE %

4.0

4

3.0

6

2.0

8

1.0

10

Annualised quarterly growth rate

-20

Quarterly Annual

0.0

12 Core PCE price inflation

-30

Prepared by: Rainmaker Information Prepared by: FSIU Source: Sources: Factset

-1.0 -40 2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

14

Headline PCE Unemployment rate -INVERTED RHS

-2.0 2010

04

05

06

07

08

09

10

11

12

13

14

15

16

17

18

16 19

20

Fed’s average inflation targeting goes live Ben Ong

T

he Fed’s new monetary policy framework – lower interest rates for longer or average inflation targeting – (virtually) announced at the August 27 Jackson Hole Symposium is now live.

The Fed kept policy settings unchanged at its 15-16 September FOMC meeting – the first since “the Hole” – and promised “to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.”

Based on the September dot plot, the fed funds rate would be zero (nought point 25 percent to be exact) till the year 2023, supported by the latest “economic projections of Federal Reserve board members and Federal Reserve Bank presidents, that show PCE price inflation

Alternatives

reaching the inflation target of 2.0% three years from now.

The Fed’s latest forecasts show GDP growth contracting by less this year (-3.7% versus -6.5% projected in June) but at the expense of a slower pick up in the following years -- 4.0% versus 5.0% in 2021 and 3.0% from 3.5% in 2022 before expanding by 2.5% in 2023. The Fed also upgraded its unemployment rate predictions to 7.6% this year (from 9.3% forecast in June), 5.5% (from 6.5%) next year, and 4.6% (from 5.5%) in 2022 and 4.0% in 2023.

A seamless and positive narrative if I may say so.

Then again, cast your eyes on the years before the covid-19 pandemic, when America’s unemployment rate hit a near 50-year low of 3.5%. That failed to lift the headline and core PCE price indices – the Fed’s inflation target – above 2.0%, did it not?

Even assuming that chairman Powell and his merry FOMC men are on the ball that infla-

Figure 1: Value of Covid-19 fiscal stimulus package 25

tion would hit the 2.0% target by 2023, the US central bank’s new “average inflation targeting strategy” puts average 2020 to 2023 inflation only at 1.7%.

Yes, Virginia, the fed funds rate could remain at near zero beyond 2023.

More so, when overlayed with the uncertainty of the forecasts themselves for as the Fed notes “The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

Added to this is the uncertainty over the upcoming US elections, the on-going Sino-US trade war and geopolitical tensions, among others.

To quote Nils Bohr – Nobel laureate in Physics – “Prediction is very difficult, especially if it’s about the future”. fs

Figure 2: Retail sales, FAI & IP 30 ANNUAL CHANGE %

% OF GDP

ANNUAL CHANGE %

5 July 2020

10

0

15

0 10

-5

-10

-10

Fixed asset investment

-15

Industrial production - RHS

5

Prepared by: Rainmaker Information Prepared by: FSIU Source: IEA / Sources: Factset

15 10

20

20

-20

Retail sales - RHS

-20

-30

0 JAPAN

USA

AUSTRALIA

GERMANY

CHINA

2014

-25 2015

2016

2017

2018

2019

2020

Post-pandemic China I

Submit

Figure 2: US unemployment rate & inflation 5.0

0

Ben Ong

Go to our website to

Figure 1: US real GDP growth 10

“ guess it also rings a bell for some countries, which are still struggling to fight COVID-19, that without strict measures, the virus won’t be fended off. We fought hard, this is our payback.”

Zhang Yong, a small taxi company owner in Wuhan, has every right to be proud and dish out advice to the rest of the world for China has proved that the coronavirus could be assassinated. So much so that its death sparked a post-pandemic pool party Wuhan Maya Beach Water Park that went viral on August 17.

Yes, Virginia, “payback” might not be the right word (or just lost in translation) but we all know what it meant, Mr & Mrs Wong and their children – China ditched its one-child diktat back in 2013 – are now reaping the sacrifices they made under the politburo’s cruel to be kind policy under the pandemic.

China’s draconian quarantine and isolation

measures were criticised and condemned by the outside world as a violation of human rights and/ or an infringement of civil liberties. But there was none of that inside the country – there were no protests or indignation by its citizens – given the threat of being incarcerated at home or in state prison, death by coronavirus or death by the state.

Draconian and an abuse to human rights it may be but it worked … in Wuhan (as the pool party shows) and in nipping the second wave budding in Beijing in just around two weeks.

The “payback” is there for all to envy. Latest data from worldometer.com puts China in the 40th position among 215 countries in terms of total cases of infection (85,202) to date; number 131 in new cases (8); number 97 in new deaths (0). Adjust these numbers for the population of around 1.4 billion and the percentages would be as miniscule as the coronavirus itself.

More bang for lesser bucks. China’s draconian response also limited the government’s

spending measures. Statista.com figures show the Chinese government’s fiscal stimulus packages amounted to 7% of GDP as at July 2020 – less than Japan’s 21.1%, America’s 13.2%, Australia’s 10.6% or Germany’s 8.9%.

The PBOC lowered its benchmark lending rate just twice so far this year – in February by 10 bps and in April by 20 bps – to 3.85% and cut its reserve requirement ratio for big banks by a total of 200 bps from 13% at the end of 2019 to 11% by May this year.

While the PBOC remains on alert, recent activity stats are easing pressure on both China’s fiscal and monetary authorities.

The annual growth in Chinese retail spending is back in the black, up by 0.5% in the year to August after spending five months in the red.

Industrial production continued to strengthen – up by 5.6% in the year to August, accelerating from 4.8% in the previous month and reversing March’s 1.1% contraction. fs

Sector reviews

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

31

Property

Property

CPD Questions 13–15

Prepared by: Rainmaker Information Source: Colliers International

nalysis by Colliers International of agriculturA al sale and leaseback transactions shows $2.15 billion worth of leased agricultural assets have changed hands in Australia over the last two and a half years – a trend that’s expected to continue as the impact of the COVID-19 pandemic wears on.

In 2019, close to about $1 billion in assets were sold. In total, about 28% of all farm operations in Australia are leased. This compares to about 40% in the United States.

In 2019, the National Farmers’ Federation outlined a roadmap as to how to grow the value of Australian agriculture to $100 billion by 2030, with Colliers saying the sector presents significant investment potential for institutional investors.

Colliers said Australian agribusiness investment opportunities are currently influenced by a long-standing period of low interest rates, low Aussie dollar, a green image and uncorrelated returns to other forms of investment.

Uncorrelated returns are particularly attractive in times of uncertainty, Colliers said, creating optimal conditions for agribusinesses to take advantage of sale and leaseback opportunities.

Insto investors eye agricultural assets amid pandemic Jamie Williamson

However, it is critical the rent is set at market from the start, and investments on land-intensive assets in principle provide the best return over the long term as land value growth becomes increasingly important.

Colliers said the uncertainty caused by COVID-19 has the potential to trigger structural changes to the approach traditionally taken by investors, with a counter-cyclical opportunity emerging to deploy cash into leased agricultural assets in place of office, retail or hotel assets.

Given they’re classified as essential services, agricultural assets have performed well and valuations remained resilient throughout 2020, despite the upset seen elsewhere.

The sector is likely to be helped along by increased risk profiles for office and retail postpandemic, Colliers said, however investors in agricultural sale and leaseback assets should be conscious of risks unique to the sector like seasonal conditions and natural disasters.

Still, Colliers said prolonged retraction in values of office, retail and hotels over the medium term will also shine a light on sale and lease-

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backs, saying some investors may need to reclassify agricultural investments as core assets.

Analysing average prime yields across the different property sectors from 2016 to mid-2020, Colliers found leased returns from ag investments are higher than CBD office, CBD retail and industrial real estate classes with the exception of cropping and grazing.

“Historically, this yield premium has been about 100 to 150 basis points and has reflected a higher risk profile as the farmland market has been less liquid…” Colliers said.

Overall, Colliers said the outlook for ag investments is positive, with landlords increasingly looking to attract tenants and deploy capital.

“We have the view that the sale and leaseback of agricultural assets will become more mainstream as existing investors expand and new investors look to incorporate agribusiness into their portfolios,” Colliers said.

“Uncertainties and structural changes within more traditional forms of real estate present an opportunity for agribusiness to become a more mainstream investment.” fs

15. Overall, Colliers’ outlook for agribusiness investment is positive. a) True b) False

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14. Which of the following reflects the trend in agricultural assets in 2020? a) While assets have performed well, valuations have fallen b) Assets have performed well and valuations have been resilient c) Valuations have not remained resilient in light of the pandemic d) Assets have underperformed and valuations have fallen

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13. What is currently influencing agribusiness investment opportunities? a) The low Aussie dollar b) A long period of low interest rates c) Uncorrelated returns to other forms of investment d) All of the above

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Profile

www.financialstandard.com.au 12 October 2020 | Volume 18 Number 20

CULTIVATING SUCCESS Schroders Australia chief executive and co-head of Asia Pacific Chris Durack has a number of passions. Armed with his rich family history in agriculture and investment expertise, he reveals how he balances it all. Annabelle Dickson writes.

hris Durack doesn’t like to sit still. As a C father to four children he often has his hands full and even more so now, having expanded his role from Schroders country head of Australia in March to also take on the role of co-head of Asia Pacific.

For some that might be enough, but Durack also dedicates an evening per week to teaching financial economics to a group of post graduate students at the University of Sydney.

“You always have to make a decision about what your capacity is…we’re a busy household at the best of times but I love to keep busy,” he says.

“At any given time on a Saturday I’ll either be at a soccer match or a netball game. Spending time with my family is really important to me.”

In recent years an integral part of Durack’s role has been guiding Schroders clients to migrate their portfolios towards real assets such as private equity, infrastructure and private debt which in turn has influenced his personal investments.

“Having had worked with clients on the complexities involved in their portfolios I can see that these assets may be genuinely diversifying but it is also important in making sure they have the right governance framework applying to management as well,” he says.

“In any sort of area of investment you need to have a clear sense of your objectives, what is trying to be achieved and what is required to achieve it.”

Durack had an idea of his objectives and what he wanted to achieve when he got in touch with a friend who happened to have a long family history in agriculture and spoke to him about developing a farming enterprise.

The conversation and his interest in agriculture came to life in the form of a successful macadamia farm near Byron Bay in New South Wales.

“For me, agriculture is that outside interest that I am happy to apply the time and energy to make sure I have the right management applicable to the asset,” he says.

“I think the work that I do has forced me to think about what I’m trying to achieve with this investment amongst others.”

The farm is named The Grass Castle and is a nod to his ancestor Mary Durack who wrote the classic Australian novel, Kings In Grass Castles, detailing her grandfather’s story as an Irish immigrant in Australia and going on to create a cattle empire.

“I found the opportunity in that part of New South Wales and through a few contacts I was able to sort through how it would be managed, what the business plan would look like and how it would develop from there,” he says.

While he doesn’t hold an operational role

within the farm, Durack says he looks at the business very closely and makes the trip north from Sydney a few times a year.

With a collective of other farms, his macadamias are sold to a processor offshore in China who markets them on behalf of the collective and distributes them around the world.

“Agriculture is a bit different to my role at Schroders and working with the university and my family,” he says.

“I don’t think everyone knows that about me but it is something I take a keen interest in,” he says.

In contrast, Durack’s teaching role at the University of Sydney started on the back of a collaboration with Schroders.

Each year, Schroders sits down with the university to talk about some industry problems they have been thinking about and how to tackle the problem in relation to investment management.

Last year Durack and his team considered climate change and different ways to tackle the problem so they asked the students to develop research questions and how they would apply the risk of climate change to investment.

“It was a really good exercise because you get the perspective from people who understand the issues very analytically but don’t yet work in the industry so they can give a bit of left field perspective,” he says.

Durack was then invited to take on a class of post graduate students. He says the fact that it is one night per week works well for his schedule but keeps him on his toes all the same.

His role involves teaching theory from the curriculum but using his practical experience to provide an overlay to the theoretical aspects of financial economics to provide context to the students.

He focuses on explaining how he thinks about certain theories when he carries out his job at Schroders, including risks, thinking through assumptions and bringing real life experiences to the classroom.

While his first priority, Durack says, is his responsibilities at Schroders, there are several complementary aspects to teaching that he benefits from like keeping up to date with capital markets research and gaining a broad perspective from the new generation coming through.

“I really do value education and not just my own education but more broadly and I call it out as something really important to stay on top of and connected to,” he says.

Having completed a Bachelor of Commerce with Honours in Economics, Durack started his career in Canberra in 1994 working as a graduate economist in the public sector, specifically on the balance of payments.

“At the time it was kind of a big deal because there was lots of political focus on the external accounts position,” he says.

But it was when he moved to Sydney he expanded not only his education but also the direction of his career, through a mentor.

I really do value education and not just my own education but more broadly and I call it out as something really important to stay on top of and connected to.

Chris Durack

Durack met former secretary of treasury Tony Cole when he started working as a research economist at the Life, Insurance and Super Association (which merged with the Australian Investment Managers Association to create the Financial Services Council) where Cole was an executive director.

It was when Cole went across to Mercer to run the investment practice that Durack first got into asset management, following his lead.

“It was a great experience working for him and to work with someone that senior, early in a career I found to be a great opportunity,” he says.

Having a mentor is something Durack values highly and encourages those starting out in financial services to find one.

He says there have been a number of people he has looked to over the years to give him a different perspective.

During his time as chief executive of State Super, Durack was mentored by the chair at the time, current AustralianSuper chair Don Russell.

“Don was very generous with his time and sharing experiences that were relevant to any questions I had relating to my role,” he says.

In turn, Durack is now doing the same.

“I’ve always been lucky and have learned a lot from people around me and they have taken the time to invest in me,” he says.

“So, where I have the opportunity to mentor, I do.” fs