Financial Standard Volume 19 Number 09

www.financialstandard.com.au

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Lakehouse Capital

ETP Forum

Tax cuts, super reforms

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Gerwin Bell & Mehill Marku, PGIM

Health & wellbeing

Danielle Wood Grattan Institute

Product showcase:

Opinion:

Budget takes swing at legacy products Elizabeth McArthur

hile it didn’t make the headlines in this W year’s federal budget, a planned reform to the treatment of legacy retirement products is set to be more significant than most may realise, super commentators say.

The government announced that retirees would be freed from legacy retirement productsunder a two-year amnesty allowing people in market-linked, life-expectancy, lifetime pension and annuity products that commenced prior to 20 September 2007 to exit without penalty.

The amnesty applies to self-managed super funds and will allow people to choose whether they transfer capital into another retirement product or super fund or take a lump sum.

Transferred capital under this amnesty will not be counted towards the concessional contribution cap or trigger excess contributions. But it will be taxed at the 15% assessable rate.

Rainmaker Information executive director of research Alex Dunnin says this reform is the Financial Services Council, which lobbied for the change, having a wish granted by government.

“This reform, while it may seem one for the nerds, is actually very significant,” he says.

That’s because 10% of all assets held in APRA-regulated funds, a total of $162 billion, is invested in legacy superannuation products.

According to ATO data, around two million individuals are in legacy super products with returns below that of more modern products.

The FSC’s pre-budget submission recommended a comprehensive scheme be extended to super.

It alleged that 46% of assets in legacy products are in high-fee products. The average fee in this group is 2.2% - more than three-times the industry’s most prevalent fee rate of 0.7%.

But the FSC is cautious in chalking the amnesty up as a win. While it said it is pleased that the government is committed to tackling the “vexed” issue of legacy products, the FSC says policy settings need to be carefully calibrated to ensure any solutions will be beneficial for consumers.

“The ability to move out of legacy pension products, many of which are outdated and expensive, is a welcome move. However, the tax and social security settings will be the key factor in consumers and their financial advisers in determining whether to take up the scheme,” FSC chief executive Sally Loane says.

According to Dunnin, Australia has too many investment products.

“It’s not so much because the managed funds sector is inefficient, it’s because rationalising products is too difficult given doing so can trigger tax events, social security reviews and big fee hits on unsuspecting consumers,” he says.

He adds that on top of these considerations, many managed funds are built on trust law.

That means promoters can’t force people to change products if they don’t want to.

Due to the complexity of the system, Dunnin estimates there are probably legacy products with very few trapped investors.

“This means many older wealth groups probably have dozens or even hundreds of legacy products to look after, many with just a handful of people in them, each with their own administration and old-style computer system,” he says.

Australia’s largest annuity provider Challenger would not comment on the changes.

However, an analyst note from Credit Suisse indicated Challenger might not have too much cause for concern. It said most of Challenger’s lifetime products were written after the 2007 cut-off date. Challenger launched its lifetime annuity in 2012.

But the analyst noted that it may still have a small number of legacy products.

The budget contained no update on the Retirement Income Covenant (or on the delayed Comprehensive Income Products for Retirement), which could have been good news for retirement income product providers like Challenger.

IOOF head of technical services Martin Breckon explains financial advisers must be cautious when assisting clients to make the right choice in regard to these legacy products.

While the measure does apply to marketlinked pensions (term allocated pensions), lifeexpectancy pensions and lifetime pensions, it will not apply to flexi-pensions or lifetime pensions in APRA-regulated defined benefit funds or public sector defined benefit schemes, he explains.

“Lifetime and life expectancy pensions have not been able to be commenced for over 15 years (since January 2005) [within] self-managed superannuation funds and small APRA-regulated funds,” Breckon says.

“In many instances these products no longer provide appropriate or suitable outcomes for members.” fs

17 May 2021 | Volume 19 Number 09 www.financialstandard.com.au 20 January 2020 | Volume 18 Number 01

Events:

Feature:

Budget 2021:

Profile:

Disability income faces reckoning Karren Vergara

Martin Breckon

head of technical services IOOF

The former chief executive of TAL has slammed life insurers’ ineptitude in managing disability income products, invoking the industry to come together and find a solution by the end of the year.

Speaking at the 2021 Actuaries Summit yesterday, Jim Minto reflected on the “broken” state of disability income benefits, which are increasingly becoming unaffordable and being shunned by people who need it the most.

“The community suffers in a wider sense from poorly designed and over-engineered products.

Including products, I designed when I was chief executive. They delivered generous benefits in most cases to some, while policyholders generally faced cycles of price increases as companies looked to recoup losses from unsustainable products,” he said.

The market is littered with legacy disability products deemed expensive and poorly valued.

For example, products created in the 1990s with lifetime benefits had “disastrous consequences” Continued on page 4

Managed funds outlast COVID-19 Elizabeth McArthur

An ASIC review of retail managed funds found that they effectively coped with the challenges presented by COVID-19.

ASIC found managed funds largely did not face serious investor liquidity challenges during the height of COVID-19 market disruptions and that their liquidity frameworks were generally adequate.

While there was a significant drop in net investor cashflow in the first half of 2020, ASIC reported that responsible entities of these funds did not tighten members’ ability to withdraw their investments.

The review looked at four mortgage funds, five direct property funds and five fixed income funds between June and November 2020.

These funds accounted for $1.7 billion in assets under management and more than 8000 investors had money in them.

ASIC specifically chose to review these funds because it feared they were exposed to liquidity Continued on page 4

News

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

AMP Australia announces new leadership team

Editorial

Kanika Sood

Jamie Williamson

A

Editor

While it may feel as though we only just had a budget – last year’s having been delayed to October – another one has been and gone, handed down on May 11.

Unlike budgets past, there were very few surprises to be had, with just about every initiative being leaked in the lead up to the night. Still, there were a few sneaky tweaks to superannuation lurking in the depths of the budget documents.

And it wouldn’t be a federal budget without a few reforms to super, would it?

In comparison to last year’s polarising Your Future, Your Super reforms, legislation for which is still yet to be finalised, the new changes will likely require very little effort on super funds’ part.

Chief among them, in what was the closest we’ve come to a budget for women the government has finally decided to scrap the $450 per month income threshold. This cohort – close to 65% of which are women – will now be entitled to superannuation guarantee contributions.

While those contributions will be minimal, with the power of compound interest, the move will go a long way to providing better retirement outcomes and put a dent in the super gender gap, albeit a small one.

Also buried was the government’s decision to scrap the controversial and, frankly, ill-conceived idea to allow survivors of family and domestic violence early access to their super for the purpose of starting over.

First proposed back in 2018, the legislation was set to allow survivors to access up to $10,000 of their superannuation over a 24-month period to meet costs, like rent and furniture. Currently, victims of domestic violence cannot access their super before reaching preservation age.

The proposal was heavily criticised – and rightly so. Why should those who have been through hell and come out the other side, likely already at a financial disadvantage, have to then draw on their retirement savings to re-establish themselves?

Why it’s taken the government close to three years to realise the error of its ways remains a mystery, but thankfully it has done so and is instead introducing a package that will provide those escaping violent homes with cash and other necessities.

The changes made are small gestures and certainly more can and should be done to close the gender super gap. Still, these measures will inevitably place women in a stronger position for retirement.

At this point, given the disproportionate number of women over 55 years of age living in poverty or sleeping rough, any efforts to improve their retirement outcomes are more than welcome.

For more on the 2021/22 federal budget check out our special coverage (pg.22) that came out of Financial Standard’s first ever budget lock-up in Canberra; an incredible experience and an amazing team effort. fs

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The quote

This will improve efficiency and ultimately the performance of the business.

MP Australia chief executive Scott Hartley announced a new leadership team and an updated operating model.

Hartley will have seven direct reports.

This includes three external hires, including a new managing director advice, a chief investment officer, and a director for transformation and investments.

Matt Lawler is the new managing director of advice, and was most recently the chief executive of Wealth Market. Prior to this, he has worked at advice and broking businesses at MLC/NAB and as the chief executive for wealth management of Yellow Brick Road.

Anna Shelley, who will be AMP Australia’s chief investment officer has been the chief investment officer of Equipsuper and Catholic Super joint venture since 2018. Prior to this, she worked at JANA and Perpetual.

Lastly, Sunsuper’s chief financial officer Jason Sommer is joining as AMP Australia’s director, transformation and investments.

“As well as bringing together an experienced leadership team with four new executives, we also have an updated operating model to deliver a flatter structure to enable empowered, distributed leadership. This will improve efficiency and ultimately the performance of the business by giving our leaders end-to-end operational accountability,” Hartley said.

“The four new leaders will be in place by July

this year. They bring the skills and experience needed to help AMP deliver the transformation of its business and will complement existing skills AMP has in its current leadership group.”

The new additions have all worked in large in­ stitutions and small to medium sized business­es over the course of their careers, he added, saying they will bring a healthy perspective on how it ensures AMP Australia is a lean, efficient and competitive business.

“We’ve looked for individuals who are excited about the opportunities, have a firm grasp of the challenges we have as an organisation, and a strong sense of urgency about the changes we need to see in our business,” he said.

“I’m very pleased we are bringing in such well respected, talented executives, to help transform the business, and I am confident we now have the team to successfully deliver on the strategy.”

The other four additions to the leadership team include two permanent appointments: Ilaine Anderson as director, super and retirement, permanent appointment of Sean O’Malley as managing director for AMP Bank.

Also joining the leadership team is director, platforms Edwina Maloney and chief technology officer James Kent.

The extended leadership team includes client services led by Steve Vaid, and adviser distribution led by Nicole Mahan. There are also four group-aligned leaders across finance, people and culture, legal, and risk. fs

ASIC not recommending general advice label change Jamie Williamson

ASIC has confirmed it will not be recommending changing the label of ‘general advice’, after independent research commissioned by the regulator found such a move is unlikely to prevent consumer confusion.

Both the Financial System Inquiry’s final report and Productivity Commission Inquiry Report into Competition in the Australian Financial System recommended the re-labelling of general advice to prevent confusion around the nature of advice being provided.

Now, research by Newgate Communications has found no evidence that changing the general advice label will have any measurable impact on consumer perceptions of the advice they receive.

The key finding of the research was that there was no evidence to suggest amending the label will change consumers’ understanding of general advice. Testing of hypothetical alternative labels also found many consumers don’t notice the label, with no effect evident on consumers’ understanding of general advice when there was a label used compared to when no label was used.

The research also found that when participants were asked to rate three randomly selected alternative labels in terms of their fit with the description of general advice provided, no alternative label enhanced their understanding.

The circumstances in which the general advice is provided also plays a big role in the consumer’s

perception of the nature of the advice, the research found.

For instance, participants were more likely to believe the advice was tailored to them when provided one-on-one either on the phone or in person; they had an existing relationship with the person providing the advice; they had asked a specific question in relation to their own circumstances; or had provided some personal details at the outset.

It also found there are other ways advice providers can clarify what is meant by ‘general advice’, ASIC said.

“The research also identified potential means of clarifying general advice to consumers such as by contrasting the descriptions of general and personal advice, and explicitly stating in the general advice warning that the provider of general advice is not required to act in the consumers’ best interests,” the regulator said.

Newgate Communications conducted indepth interviews and group discussions with 66 participants and hypothetically tested a shortlist of possible alternative labels in a survey sent to 3642 consumers.

In response, the Financial Planning Association of Australia said it is disappointed ASIC has decided not to make recommendations.

The research findings have been handed on to the government to consider in its Quality of Advice review. fs

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www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

01: Kevin O’Sullivan

DII income faces reckoning

chief executive UniSuper

Continued from page 1 and many of these policies are still in force charging large premiums.

The current chair of Swiss Re Life & Health Australia told insurers to get their act together and provide a solution by the end of the year – or else face another scenario similar to the Life Insurance Framework.

“The Life Insurance Framework came about because the industry could not commit to unified action when we were being told by the regulators and government we had to,” Minto said.

“We complain about the framework, but we caused it. We couldn’t act. Here we are again with disability income. Can [the industry] act?”

Minto is urging insurers to come up with a solution by the end of 2021, or else face another “higher, capital charge imposed on all participants”.

Not mincing words about the state of Australia’s life insurance industry, Minto criticised its failure to unify, which has ultimately led to an erosion of profitability.

“If we had true alignment in the industry, sales manager and company executives would be receiving negative bonuses each year from distributing loss-making products and destroying shareholder value. Customers aren’t happy either,” he said.

“Shareholders are hurting with losses and capital injection, yet we still struggle with the simple idea that we need to change and act together to do this.” fs

Managed funds outlast COVID-19 Continued from page 1 risks due to a mismatch between investor expectations and potential desire to exit and the liquidity of the fund assets in a financial stressed market.

ASIC found that across all the funds there was less cash received from investor applications versus cash paid out in investor redemptions during the first half of 2020.

The average net investor cash flow declined from 19% of the funds’ net asset value in the last quarter of 2019 to 3% in the first quarter of 2020, before a moderate recovery to 6% in the second quarter of 2020.

“However, this deterioration had little to no negative impact on investor redemption opportunities or on the size and frequency of distributions paid to investors,” ASIC said.

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

ASIC said its findings were consistent with feedback from industry associations.

“Overall, the responsible entities we reviewed well managed the liquidity challenges and market disruption of COVID-19. As the economic situation improves through 2021, responsible entities should continue to carefully manage the liquidity risks associated with their funds,” ASIC deputy chair Karen Chester said.

“We will continue to monitor liquidity management by responsible entities and may take compliance or other action where we find misconduct.” fs

UniSuper to open fund Annabelle Dickson

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The quote

We create real value for our members with strong long-term performance, excellent service and low fees.

he $95 billion industry fund for higher education and research sector is opening the fund to the general public.

From July 5, UniSuper will allow new members to join the fund, growing its 450,000-member base.

UniSuper chief executive Kevin O’Sullivan 01 said as the fund opens to all Australians its purpose remains to deliver greater retirement outcomes for all members.

“We’re delighted to offer more Australians the opportunity to join one of the country’s largest and best-performing super funds. We create real value for our members with strong long-term performance, excellent service and low fees,” O’Sullivan said.

“We are focused on, and driven by, members’ best interests in everything we do. That singularity of focus is embedded deep in our DNA and culture.”

O’Sullivan said opening the fund coupled with the fact that the higher education sector

and super industry are undergoing disruption, will allow current and new UniSuper members to benefit from scale.

“Regulatory change and industry consolidation will significantly reshape the super sector in coming years. As the fifth largest super fund in the country and largest investor in ESGthemed strategies—with more than $10 billion in funds under management across these options—UniSuper is well placed to navigate the changing environment and welcome new members from outside the sector given our strong investment performance, leadership in sustainable investing, low fees and strong member focus,” he said.

The latest Rainmaker Information analysis recorded UniSuper balanced returning 22.6% per annum over one year, 9.1% over three years, 9.2% over five years and 8.7% over 10 years.

The development may be a final act for O’Sullivan who announced he is departing the fund later this year after eight years as chief executive. fs

Westpac to face court over insider trading allegations Jamie Williamson

ASIC has commenced civil proceedings against Westpac for insider trading on a $12 billion deal with AustralianSuper and a group of IFM entities.

Westpac will face off against the regulator in the Federal Court on allegations of insider trading, unconscionable conduct and breaches of its AFSL obligations in relation to interest rate hedging undertaking during a $12 billion interest rate swap transaction with a consortium comprising AustralianSuper and several IFM entities.

The allegations relate to the consortium’s majority stake in Ausgrid, which it purchased from the NSW government in 2016. The consortium signed the deal at about 7am on 20 October 2016, taking control of 50.4% of the electricity provider.

ASIC alleges that by 8.30am Westpac knew or believed it would be selected by the consortium to execute the interest rate swap transaction that morning - a transaction that remains the largest of its kind to be executed in one tranche in Australian financial market history.

It is alleged Westpac knew this by way of inside information and, when the market opened at 8.30am, Westpac’s traders acquired and dumped interest rate derivatives to pre-position Westpac in anticipation of the transaction which was completed via a special purpose vehicle just shy of two hours later. This had the potential to impact the price of the transaction

to the detriment of the consortium or the special purpose vehicle, ASIC said.

The special purpose vehicle was established to obtain $12.77 billion in syndicated debt funding for the acquisition and ongoing related costs. It also sought to hedge the floating interest rate risk by way of 11 interest rate swaps, to be paid off over 10 years, in one transaction with a notional value of $11.93 billion.

“This effectively enabled the conversion of variable interest rates for the debt funding to a fixed rate, being the price of the swap transaction,” ASIC said.

Westpac’s trading occurred while it was in possession of information that was not generally available to other market participants including those that traded with Westpac that morning, ASIC alleges.

“Prohibitions against insider trading are a fundamental tenet of market integrity,” the regulator said.

It is also alleged Westpac failed to provide the consortium full and informed disclosure about its intention to pre-position its trading book prior to and with notice of the transaction. This amounts to unconscionable conduct, the regulator said.

Acknowledging the proceedings, Westpac said it takes the allegations very seriously and is considering its position.

AustralianSuper did not respond to requests for comment. IFM declined to comment. fs

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www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

Proxy advisers under scrutiny The government is proposing to reform proxy voting by requiring superannuation funds to disclose more detailed information related to voting policies and/or by requiring proxy advisers to be meaningfully independent from super funds and advise only on an arm’s length basis.

Treasury opened consultation on greater transparency for proxy advice reforms on 30 April 2021.

The consultation paper says the use of proxy advisers by institutional investors, such as super funds, to assist on voting decisions currently lacks transparency.

In Australia, the four main proxy advisers are Institutional Shareholder Services Australia, CGI Glass Lewis, Ownership Matters and the Australian Council of Superannuation Investors (ACSI).

ACSI said it is unclear what problems the proposed changes are seeking to address and that the reforms are unlikely to benefit any superfund members.

“No rationale has been provided for the notion that super funds should not have an association with proxy advisors and we are struggling to see the point of this part of the proposal. It would almost certainly have the impact of increasing cost and reducing efficiency of the exercise of ownership rights,” ACSI chief executive Louise Davidson said.

“Producing research for a number of funds provides significant cost efficiencies for superfunds who are focused on delivering cost savings to ensure low member fees.”

She added that it is already common practice for super funds to disclose voting activities.

Proxy advisers are required to hold Australian financial services licences for advice they provide to investors. But Treasury is apparently concerned that they may be advising on issues they don’t have the qualifications to assess. fs

APRA approves MLC takeover APRA has given IOOF the go-ahead to take over MLC’s superannuation business.

The regulator approved IOOF’s application to hold a controlling stake in NULIS Nominees, the trustee for MLC Super.

On 31 August 2020, IOOF entered into an agreement with National Australia Bank to acquire the MLC wealth management business, which includes NULIS. Under the Superannuation Industry (Supervision) Act 1993, APRA must approve any changes to the holder of a controlling stake in an RSE licensce.

IOOF agreed to buy MLC Wealth for $1.44 billion last year, with NAB saying the sale was in line with its strategic objective of simplifying the bank’s structure.

The transaction will turn IOOF into the largest retail wealth manager, with approximately $510 billion in funds under management or advice. The MLC super business has more than $173 billion in member funds.

NULIS Nominees has a spotted record though.

In 2020, APRA hit the trustee with new licence conditions after the regulator found concerns it was not always considering members’ best interests as the highest priority. fs

01: Deb Potts

group executive, employer and industry engagement Rest

Super fund in-houses financial advice service Karren Vergara

T

The quote

It’s another step toward maximising the reach of our services.

he $59 billion industry superannuation fund Rest is shaking up its advice and employer units by internalising its general advice service and hiring several managerial positions to the employer division.

From July, Rest’s general advice team will work in-house, a service currently provided by Link Advice.

The general advice team will sit within the advice and education unit, and the broader umbrella of the employer and industry engagement group.

Group executive for employer and industry engagement Deb Potts 01 said providing general advice in-house will build the fund’s internal capabilities and help connect members with the full range of advice and information on offer.

“This team will support our members according to their needs, whether it’s providing them with information, directing them to our online tools, or booking them in for a session with our personal advice team. It’s another step toward maximising the reach of our services,” she said.

Rest also announced its efforts to bolster its workplace superannuation unit.

It is looking for a northern regional manager and southern regional manager, based in Sydney and Melbourne respectively, to lead the relationship management of large employers.

Three client relationship manager positions, who will report to the regional managers, are looking to be filled.

Rest has created the role of national manager of business solutions, which will be responsible for supporting the fund’s long-term new business growth aspirations.

The leadership roles will report to general manager of workplace superannuation Richard Millington.

These changes will be complemented by a new phone-based service team to aid and information to small-and-medium-sized employers, Potts said.

“There have been significant changes to superannuation and insurance in the past two years, and there are potentially more on the way in the coming months. It’s important that employers are abreast of any changes to their obligations and are able to access the right information to share with their employees,” she said. fs

Research aims to solve ongoing cash conundrum, improve retirement Elizabeth McArthur

With record-low interest rates set to stay in place for some time, Allianz Retire+ has released new research looking at how best to solve the cash conundrum.

Term deposit rates have fallen 96% since the Global Financial Crisis high of 8.25% and now sit at just 30 basis points, according to the research.

A pre-GFC term deposit with $1.25 million could have generated $100,000 of annual income.

Today, that same retiree would only have $3750 of annual income.

For a retired couple to live off term deposits comfortably in Australia right now, they would need $21 million in cash investments.

According to Allianz Retire+, financial advisers need to rethink the defensive cash component of retiree portfolios.

“Retirement strategies that offer downside protection have traditionally been used in the equity component of portfolios to safeguard against sharemarket volatility,” Allianz Retire+ chief executive Matthew Rady said.

“They haven’t been thought of as an approach that can potentially deliver higher returns than traditional defensive assets.”

Rady said he is particularly concerned about retirees who roll over a one-year term deposit, feeling that they are keeping their money safe and that they have no other options. For the last several years, this practice will have seen them get smaller and smaller returns.

Newer retirement income products, like that offered by Allianz Retire+ or annuities or equitiesbased retirement income products like that offered

by QSuper, appear to be part of the solution.

Rady cautioned that there is a potential limited downside risk involved. Returns are generated from having linked exposure to local and international shares. In the example of using a 0% protection ‘floor’, if linked markets were to post 0% or negative returns, investors could be subject to a maximum downside loss of 0.8% in a year.

“People in retirement get peace of mind from having downside protection, which is the sense of safety they feel in cash, but potentially a higher return than cash, generated from having exposure to local and international shares. In this market, every extra point of return counts,” he said.

He added that the complexity of this issue is why professional financial advice is important for retirees. fs

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8

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www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

AMP trims platform fees AMP Australia is reducing fees on its platforms, in a bid to attract more clients.

Its flagship MyNorth wrap reduced administration fees by up to 22% effective May 1 for balances above $250,000. Administration fees for individuals are reducing by $400 and for families at $500 per year.

AMP North will be next from June 1, followed by Summit on August 1 – bringing their fees largely in line with MyNorth’s.

The three platforms together hold about 90% of AMP’s platform clients.

The remaining are in iAccess and Generation platforms, which will also be reviewed in the second half of the year.

AMP Australia chief executive Scott Hartley said the fee cuts are in response to AMP’s intent to “compete strongly and transparently” across its wealth product range, and to the practice of competitor platforms using rate cards to attract advisers.

“The fee reductions we have announced across our platforms should be seen by clients and financial advisers as a signal of AMP’s intent to compete strongly and transparently across our wealth product range,” Hartley, who was previously Sunsuper’s chief executive, said.

He joined AMP last year after then-AMP Australia chief executive Alex Wade resigned from the company.

“These are highly competitive and transparent fees, which we have introduced as a response to the use of advice licensee or advice practice rate cards by many in the industry, which we see as distorting the system and creating member equity issues in the super and pension wrap products,” Hartley said.

“We are not going to play that opaque game as it creates inequity for financial advisers and their clients and is arguably breaching legal obligations to treat members fairly.” fs

State Street to track Bitcoin Elizabeth McArthur

The global investment giant State Street has launched a new Bitcoin Thematic Indicator to track the impact of Bitcoin on more traditional financial markets.

The new State Street MediaStats Bitcoin Thematic Indicator series will quantify media coverage of Bitcoin, measure the intensity or prevalence of coverage relevant to all news of the day and track sentiment over time.

This will expand the MediaStats Thematic Indicators offering, which launched in November 2020.

The indicators read hundreds of thousands of digital news sources to generate daily sentiment signals for various assets to help institutional investors form a more complete picture of what factors are driving their portfolios and overall markets.

The new Bitcoin Indicator is set to capture information around its linkages to traditional currencies and emerging trends, which investors should theoretically be able to leverage for portfolio planning. fs

01: Linda Elkins

national sector leader asset and wealth management KPMG

Rise of the mega super funds continues Annabelle Dickson

I The quote

We will see an increase in scale of the ‘mega’ funds and a widening gap between the ‘submega’ funds and those lower down.

ncreased merger activity in the superannuation sector will see most of Australia’s retirement savings managed by just 12 funds, new research shows.

KPMG’s annual Super Insights report analysed APRA and ATO data and found that once the mergers that have been previously announced are finalised, 77% of member accounts will be managed by 12 funds all with assets under management of over $50 billion.

KPMG defined mega funds as those with more than $100 billion in AUM and sub-mega funds as those with over $50 billion.

Sunsuper and QSuper will merge later this year with the two funds becoming a $200 billion entity, while AustralianSuper already has $210 billion under management.

Aware Super has already reached mega fund status with $116 billion in AUM and recently signed a Memorandum of Understanding with the Victorian Independent Schools Superannuation Fund (VISSF), which would add a further $855 million.

Cbus and Media Super also announced they are working on a merger plan to become a $60 billion fund while Maritime Super and Hostplus announced an asset pooling part-

nership which will create a $61 billion trust.

“The stand-out issue in the industry is consolidation. We see an increase in ongoing merger activity – which kept up during COVID but will now accelerate, mostly in the industry funds sector,” KPMG national sector leader, asset and wealth management Linda Elkins 01 said.

“Over the next few years, we will see an increase in scale of the ‘mega’ funds and a widening gap between the ‘sub-mega’ funds and those lower down.”

As at 30 June 2020, industry funds accounted for 29.6% of the industry. KPMG predicts that by 30 June 2021 they will have overtaken SMSFs and, by 2025, represent 36% of the market.

In 2019/20, the number of APRA-regulated funds dropped from 171 to 154.

In addition, KPMG believes the ongoing impact of APRA’s heatmap will continue to drive mergers while the Your Future, Your Super measures will drive flows to mega funds because of their brand awareness.

However, KPMG noted the key issues for mergers this year is maturing regulatory and government settings, business model sustainability, separation and integration, globalisation and rising member expectations. fs

New Islamic advice group launches, hires from MSC Group Kanika Sood

A new Sydney dealer group focused on Muslim clients is looking to hire up to 50 financial advisers in the next 12 months, as it nabs MSC Group’s chief operating officer to lead the business.

Hejaz Financial Services will build a network of both specialist and financial advisers, totaling 150 to 200 over time under its master licence.

It will advise on Islamic-compliant investments in a Sharia compliant way.

The firm has hired Susan Wolff as general manager for wealth management. Wolff was most recently Melbourne trustee services provider MSC Group’s chief operating officer. Prior to this, she has worked at Challenger, IOOF, Capstone Financial Planning and AMP. She will lead the development of Hejaz’s financial adviser network.

“Muslims are a growing but underserved financial services market in Australia. To date, they have not been able to access specialist advice or products designed to help them achieve their financial goals in a way that reflects their religious faith,” said Hejaz Financial Services chief executive Hakan Ozyon.

“By establishing a network of advisers who deeply understand the customers they serve, Hejaz is helping to make wealth management more accessible to Islamic communities. We believe we are also setting an example at a time when questions have been raised about how aligned advisers are to their clients’ needs.”

The adviser group’s launch follows on from that of Hejaz’s two funds: the multi-asset Global Ethical Fund and the Ethical Income Fund. Together they have about $170 million in assets.

“Hejaz is taking steps to make wealth creation more customer-centric. The market potential here is enormous – Muslim Australians are diligent savers and, given the choice, will always gravitate to financial products that align with their faith and values,” Wolff said.

“I am pleased to be joining Hakan and the leadership team as Hejaz continues to create innovative new funds and solutions to everyday problems. A laser focus on what our Muslim and non-Muslim customers are actually looking for is exactly what the industry needs.” fs

Product showcase

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

9

01: Joe Magyer

chief investment officer Lakehouse Capital

Multiple ways to win A fascinating approach to investing hat is the best way of identifying high W quality companies that will perform over the long term?

That is the question that the team at Sydney boutique fund manager Lakehouse Capital asks itself each and every day. A lot of fund managers ask themselves the same question, but their answers are likely a little different to Lakehouse Capital’s.

When chief investment officer Joe Magyer01 co-founded Lakehouse Capital at its inception in 2016, there was perhaps more pressure on him to perform than many other investments leads just starting out. This is because Lakehouse Capital is wholly owned by The Motley Fool and Magyer had spent the previous decade writing content and providing investment advice to millions around the world by way of the fund manager and media house.

Recognising that Lakehouse Capital could do things differently, Magyer steered away from a traditional investment model, developing a differentiated approach to spotting the best prospects and running money.

Known to the team as the Fascinations-based model, the Lakehouse approach is focused on identifying companies that exhibit one of three core features: loyalty, networks and intellectual property (IP).

Lakehouse considers loyalty as both possessing high switching costs and the delivery of value, and relates to enterprise software, subscriptions or any other form of business focused on customer loyalty and retention.

Meanwhile, Lakehouse is passionate about businesses with network effects – where the value of the product or service grows as more customers join – because they tend to scale quickly with capital efficiency.

Finally, businesses with strong IP - brands, data, patents and even corporate cultures that are difficult to replicate – have enduring pricing power and often have an easier time of generating new, more valuable IP. “When we first approached new idea generation at Lakehouse, we stepped back and we said, ‘If the ultimate goal was long-term outperformance by owning a high conviction basket of companies, what’s the best way to get those companies in the portfolio and what kind of companies do we want to own?’” Magyer says.

“What we came to appreciate was they consistently came from businesses with those three key traits.”

With that in mind, instead of implementing a traditional model whereby team members are responsible for overseeing a particular region or

sector, the Lakehouse Capital team focuses on those three factors.

Most ideas don’t survive this level of due diligence, but Magyer says that not only does this make sure that only the highest quality companies enter the process from the top, but that the team is building a deep domain expertise around the specific business traits that best align to long-term performance.

It is at the conclusion of this process that the Lakehouse team determines which companies will and won’t make the cut for its two long-only, growth strategies, the Lakehouse Global Growth Fund and the Lakehouse Small Companies Fund.

The Lakehouse Global Growth Fund invests in mid to large capitalisation growth companies located mainly in developed markets, including some of the world’s largest growth companies like Facebook, PayPal, Amazon, Monster Beverage and CoStar Group.

Meanwhile, the Lakehouse Small Companies Fund invests in small, growing companies in Australia and New Zealand. Current holdings include Netwealth, Tyro, Pinnacle Investment Management and Pro Medicus.

Much like its method of selecting companies, the firm’s investment philosophy is also underpinned by three core pillars.

Foremost, and as already touched upon, Lakehouse Capital and its team are long-term investors.

“We believe in putting time on our side,” Magyer explains.

“In an era when more investors are competing on short-term tactical edges and focusing on short-term performance, we think the value of a long-term perspective is that much more valuable and I’d like to think was proven by being patient during COVID-19.”

To say it was proven during the pandemic is almost an understatement. In the 12 months to March 2021 end the fund, incepted in December 2017, returned 48.1% - a whopping 23.9% above its benchmark, the MSCI All Country World Index.

The Lakehouse Small Companies Fund, established in November 2016, also saw outstanding performance at the height of the economic downturn, returning 71.8% in the 12 months to 31 March 2021. Its benchmark, the S&P/ASX Small Ordinaries Accumulation Index returned 52.1% over the same period.

The pandemic aside, the funds have returned 25.6% and 23.9% since inception, respectively.

The second element to the philosophy is that Lakehouse Capital is a high conviction fund manager with a firm belief in backing its best ideas.

The quote

We believe in putting time on our side.

A recent analysis undertaken by Lakehouse Capital of its competitors found the median competitor to the Lakehouse Global Growth Fund had about 66 holdings. Today the Lakehouse strategy holds about 20 companies.

And finally, Lakehouse Capital seeks asymmetric opportunities only.

“We’re looking for companies where we think there are multiple ways to win and few ways to lose,” Magyer says.

Ultimately, it’s about finding differentiated, high-quality ideas and only owning the best businesses.

But that’s not quite all there is to it; “That’s most of the ball game, but it’s not all of the ball game.”

Lakehouse Capital also uses a proprietary risk rating framework which sees every company measured against eight different parameters, both quantitative and qualitative, aimed at helping the team size and better understand the risk and reward position of its portfolio.

However, the businesses Lakehouse Capital selects cannot operate in a silo. Each business, regardless of how strong it may be, must compliment the rest of the portfolio.

“We will look at each position and how it’s a contributor to risk in the portfolio.

“It’s all about maximising our return relative to our risk,” Magyer explains.

But fund managers are supposed to protect a portfolio from risk, right? Well, yes. But Magyer believes it’s this unwavering, laser focus on risk management that differentiates Lakehouse Capital from other growth managers.

“We’re a growth manager, we’re proud of that and we wear it on our sleeve. But we’re not just focused on upside capture – it’s great, we like it and we value it – but we’re also concerned with protecting our downside,” he says.

“When we look at companies, there’s a consistent focus on risk and trying to reduce points of failure in our thesis.”

At the end of the day, he says, it’s about trying to skew the odds in your favour and ensuring there’s fewer ways to lose.

“And you won’t always get that right,” Magyer acknowledges.

“But I think the mantra and maintaining that focus puts you in a better position to succeed.” fs

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Opinion

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

01: Gerwin Bell

02: Mehill Marku

lead economist for Asia PGIM Fixed Income

senior investment strategist PGIM Fixed Income

Three focal points for US-China t its most fundamental level, the new, more A confrontational relationship between the US and China reflects growing concerns about the latter’s seemingly unstoppable ascent as an economic superpower during the “Chinese Century”, to use a consensus phrase among geopolitical analysts. However, these concerns require some perspective in terms of the current positioning of the two countries.

China’s rising military assertiveness combined with its globally expanding diplomatic and economic clout has raised US concerns about a potential irreversible shift in the balance of power between the two countries.

Yes, China is the world’s second largest economy with significant catch-up potential remaining. Yet, its working-age population is already declining, and productivity gains are increasingly hard to come by.

While a straightforward projection of the past GDP growth trend places China at the top of global economies over the current century, correcting for projected working age population growth and extrapolating productivity growth trends flips the projection in favour of the US. We believe this dynamic—particularly along the critical nexus of technology and productivity—will set the stage on which the longer-term global rivalry will evolve.

The Biden administration has initiated a strategic review of the entire set of US policies and measures towards China, and while it is too early to know the outcome of the review, recent statements from President Biden and senior administration officials signal a recalibration, rather than a fundamental change, in US policy.

This will likely dash Beijing’s hopes for a return to the pre-Trump status quo, which, in turn, may prompt China to continue its more assertive global stance. While perceptions that China’s trade practices economically harm the US and its workers continue to grab the attention of policymakers and the press, the future of the relationship increasingly revolves around the following three points.

Leveraging economic power The fate of the so-called “Phase 1” trade deal continues to draw media attention as China’s imports from the US remain woefully short of targets. However, purchases have recently accelerated, particularly of agricultural goods, and both sides have expressed an interest in maintaining the arrangement.

Yet, solely focusing on trade misses a bigger issue. China may be tempted to use its market size as leverage considering that the sales of US companies and their affiliates in China far outweigh the value of imports from the US. In a

not-too-subtle way, the agreement on the China-EU investment treaty flags potential risks to US corporations doing business in China if their market access is deemed unnecessary and is subsequently restricted or revoked.

Technological competition The national security dimension of the technology sector makes any material easing of trade restrictions unlikely with the Biden administration already indicating that it expects to keep the bulk of existing restrictions in place. For its part, China has publicly aired the prospect of banning rare-earth exports for US defence uses and has continued to press for the adoption of its 5G technology in allied countries.

As a result, bifurcated global platforms will likely emerge for 5G and other emerging technologies, such as artificial intelligence. This may pose some hurdles for China, which has recently stumbled in converging to global technology standards, including those for microchips and aircraft engines, despite significant investments.

Furthermore, the International Monetary Fund has recently estimated that China’s substantial productivity gap (70% below the global frontier) has deteriorated in key sectors as the renewed focus on the state-led economic model has stifled innovation. In terms of a potential retaliation, experience suggests that a rare earth ban would be unlikely to cause lasting harm as alternative supplies would be forthcoming, albeit at potentially higher costs.

National security and possible geopolitical risks The Biden administration has highlighted the importance of working with like-minded allies to address China-related challenges, which is a point not lost on Beijing. Success, however, is far from assured. China wields hefty economic and political influence over US allies in Asia and in Europe, and it will likely continue trying to peel more of them away from the US. Few US allies would want to alienate China by openly supporting an anti-China coalition for fear of a retaliation by Beijing. Thus, no matter how well-designed the new US strategy towards China may be, the Biden administration will face significant implementation hurdles. This does not mean that the two sides won’t be able to reach out and develop constructive relations on “win-win” topics, such as climate change.

Historians have highlighted the risk of the so-called “Thucydides’ Trap” where the mismanaged rivalry between an existing and newly ascendant power can lead to armed conflict.

That is not our base case. Yet, the concept clearly maps out an extreme tail event.

The quote

The Biden administration has highlighted the importance of working with like-minded allies to address China-related challenges, which is a point not lost on Beijing.

The most immediate risk however likely stems from US efforts to sway the balance of power in the Asia Pacific region even more strongly in its favour by restoring and rebuilding ties with regional allies. Combined with the US drive to re-invigorate the West’s valuebased democratic model in juxtaposition to China’s communist-party led model, the shift in the US. and allied military posture in the Asia Pacific region presents a threat to regional stability.

These issues are most clearly interlinked when it comes to Taiwan. China’s threat to reunify with Taiwan is real and credible. Beijing has increased its military presence across from the Taiwan Strait and carried out military drills that simulate an invasion of Taiwan on nearby islands. And more recently, the Chinese military has ratcheted up the incursions of the island’s airspace in a show of force to the Biden administration. Biden’s response has been to reaffirm the United States’ “rock-solid” commitment to Taiwan.

Such unequivocal support for Taiwan will almost certainly continue as the US is legally obligated to enhance the island’s defensive capabilities. To the extent that Taiwan does not push for outright independence from China, the risk of a US-China military confrontation over the island remains low.

However, in a scenario where the economic and military gap between the US and China remains, the West’s largely rhetorical reaction to China’s accelerated integration of Hong Kong could embolden China to be more assertive towards Taiwan. It’s a risk the markets have essentially overlooked to this point.

While the Biden Administration offers the prospect of a fresh start to US-China relations, we continue to see three contentious points that will likely set the tone between the world’s two largest economies.

Beyond the fate of trade deal phases, China can exert significant economic leverage via the market access it provides to US companies and affiliates. We also expect something of a technological “arms race” between the countries, likely resulting in competing platforms across a range of cutting-edge technologies.

Furthermore, the geopolitical risks between the countries cannot be overlooked: China will likely attempt to bolster its relationships with US allies while continuing to take a hard line towards Taiwan.

Although the two sides may find more common ground on less contentious topics, these three points will likely cast a chill over the relationship and pose attendant investment risks going forward. fs

News

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

Statewide not contesting ASIC

01: Alex Vynokur

chief executive BetaShares

Kanika Sood

The $10.8 billion industry fund will not contest ASIC’s March allegations against the fund regarding the administration of group insurance policies.

On March 4, the corporate regulator commenced civil penalty proceedings against Statewide alleging it had been misleading or deceptive in its correspondence with members for about three years between May 2017 and June 2020.

Statewide filed its response to ASIC’s claims on May 7.

“In the circumstances, Statewide Super considers that your interests, as a member, are best advanced by not contesting the allegations,” it told members in a statement.

Statewide’s letter to members referred to the incident as a “self-reported insurance administration error”.

However, ASIC’s March 4 allegations said although Statewide became aware of the mischarges in May 2018, it did not notify members, nor did it act to prevent the premiums being charged again.

In doing so, ASIC says Statewide breached its obligations as an AFSL holder. It is also accused of breaching its obligation to report such breaches to ASIC within 10 days.

The matter relates to the fund sending annual statements and warning letters to about 12,500 members detailing their insurance cover at a time when they did not have cover under a Statewide insurance policy.

The regulator also alleged the fund deducted insurance premiums to the tune of $1.5 million from the super accounts of 1300 members who did not hold cover.

ASIC’s proceedings sought declarations, pecuniary penalties, injunctions relating to a remediation program and publication orders.

According to documents filed by ASIC, the $9.7 billion fund changed its administration system to one known as Acurity and the migration of insurance data and coding of insurance rules into Acurity was not completed correctly.

“Statewide did not conduct structured, successful testing of insurance data and end of month processes by which insurance statuses were updated and premia deducted within Acurity prior to its implementation,” the documents read.

“The insurance coverage status of certain members within Acurity could, and did, differ from their status under the Statewide insurance policies during the relevant period.” fs

BetaShares opens NZ office, makes hire Annabelle Dickson

T

The quote

It makes a lot of sense for us to establish an office in New Zealand to continue expanding the New Zealand operations over time.

he exchange-traded fund provider has established its first office in Auckland, New Zealand and has appointed a director to manage its adviser and institutional business across the ditch.

Thom Bentley is BetaShares’ first New Zealand-based employee and joins from Smartshares where he was client director – institutional. He was responsible for developing strong relationships with asset consultants and institutional investors.

Prior to this, Bentley was managing director at Remarkable Capital and head of investment relations at Pie Funds Management.

He also spent time at Nomura Asset Management in the UK as vice president of sales and marketing and at Macquarie New Zealand as a business development manager.

BetaShares chief executive Alex Vynokur01 told Financial Standard the business has developed longstanding relationships with institutional investors and advisers in New Zealand over the years which it was managing from its Sydney

Elizabeth McArthur

Grant Thornton Australia has sold its private wealth business to its senior team members.

The small private wealth team consists of Jon Black, Joanne Kenderes and Laura Peressini. They are the majority owners of Oreana Private, aligned with dealer group Oreana Financial Group.

Oreana provides services in Australia and Hong Kong.

Following the sale, Black, Kenderes and Peressini will be joined by several Grant Thornton employees.

“The Private Wealth team provides specialist wealth advisory services to high-net-worth individuals and family offices,” a spokesperson for Grant Thornton said.

“Our decision to sell this business was not taken lightly and is connected with our need to ensure that we comply with national and international independence regulations.”

Grant Thornton Australia forms part of the Grant Thornton

International network and the spokesperson added that these regulations are of critical importance for the Australian arm to comply with.

“The sale of this business ensures that the firm is not affected by providing direct or indirect investment recommendations on clients or potential clients,” Grant Thornton said.

“As a standalone business, the private wealth team will be able to focus all of their resources and priorities on providing the highest level of support to clients while meeting any additional requirements and regulations.”

Clients of the private wealth team will be able to continue their relationships with the same employees and Grant Thornton said they can expect to receive the same level of service.

Oreana will use Grant Thornton for other services.

“We look forward to working closely with the team into the future,” Grant Thornton said. fs

Outstanding performance through the economic cycle Independently rated

office, but the time had come to establish a permanent presence.

“It makes a lot of sense for us to establish an office in New Zealand to continue expanding the New Zealand operations over time,” Vynokur said.

“Bringing on board Thom Bentley, who is a veteran in the financial services industry, is a really great first step for us in terms of building out our presence in New Zealand.”

In Bentley’s new role, he will take over maintaining and developing existing relationships with New Zealand institutional investors and advisers.

He will report directly to co-head of distribution and head of capital markets Peter Harper.

Following on from this, Vynokur said the firm will look to expand the team in New Zealand with a variety of roles in the future.

“We definitely want to continue expanding our presence in New Zealand, but we want to make sure that we take things one step at a time.

We certainly have a long-term commitment to the Australian market and New Zealand market as well,” he said. fs

Grant Thornton sells private wealth division

Market leading investment solutions $12 billion AUM

11

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12

Events | ETP Forum

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

Chris Yates

Russel Chesler

Financial Standard ETP Forum

The boom in exchange-traded products (ETPs) isn’t stopping any time soon.

This year, speakers explained how ETPs benefit clients and the role they’re playing in the changing investment landscape.

Over the last decade, ETPs in Australia have reached more than $100 billion in assets. During that period, flows to ETPs grew at an exponential rate of approximately 40% every year.

Last year, was the biggest year of growth yet for these products, as funds in ETPs grew from just over $60 billion to more than $100 billion.

There is another side to the incredible growth ETPs have enjoyed, though. Not every manager will be able to get in on the action, and legacy unit trusts will likely lose out.

Opening the conference, Rainmaker head of investment research John Dyall took a deeper look at the growth of ETPs and ETFs. When compared with unlisted unit trusts, ETPs are a better “mouse trap”, Dyall said.

“It’s the difference between booking a taxi the day before you need it for a price you don’t know, compared with booking an Uber that will arrive in five minutes and knowing the price instantly,” he explained.

His research indicates that ETPs will be the preferred product for the wholesale market and retail clients. And advice fees will diminish in the process as ETPs are cheaper products.

The big loser in this growth story will be unit trusts, according to Dyall, which have already been suffering yearly net outflows of close to 1% per annum.

“Rent seeking behaviour” could be of concern, Dyall said, as unit trusts suffer and ETPs become more popular. He cautioned the audience that large licensees have been known to apply pressure to keep clients in high-fee legacy products.

Director of adviser business at BetaShares Chris Yates reiterated Dyall’s observations on the growth

in popularity of ETFs. BetaShares alone has grown to more than $17 billion in funds under management.

In 2020, BetaShares enjoyed more than $5 billion in inflows. During 11 of last year’s 12 months, Yates said BetaShares had the most inflows of any ETF provider in Australia. However, overall BetaShares was pipped at the post.

Vanguard had the most growth in inflows at 27%, while BetaShares had 26%.

He added that managed accounts have been experiencing a very similar growth trajectory to ETPs, about $80 billion is now invested through managed accounts – a number which has surpassed analyst predictions which suggested managed accounts would be worth closer to $60 billion by 2020.

According to Yates, fee pressure explains much of the growth, and since ETPs are generally included in model portfolios for managed accounts, the growth stories between the two align.

He showed an example of two comparable riskadjusted model portfolios, one heavily invested in ETFs and one in unit trusts, the ETFs resulted in a 60% reduction of fees across the portfolio.

Yates also pointed to the latest S&P SPIVA report which found that even when the markets were down during COVID-19 volatility, Aussie equities active managers largely failed to beat the benchmark. He told the advisers in the audience that this should be pause for thought on whether investment fees in more expensive active funds were really worth passing on to clients.

Later in the day, VanEck Australia head of investments Russel Chesler explained how

$40bn+ The amount funds in ETPs grew by in 2020 alone.

financial advisers can use ETPs to gain exposure to certain favourable investment thematics.

Chesler focused on Chinese equities, investments that have traditionally been difficult for Australians to get exposure to in their portfolios.

Chesler said the Chinese consumer and the demographics at play in China are changing the business landscape the world over, and investors would be remiss to fail to take notice.

For example, baiju (a clear spirit popular in China) is now the most popular alcoholic spirit in the world. The companies that produce this liquor, including Wuliangye, are now worth more than Budweiser producer Anheuser-Busch.

The millennial generation in China is now larger than the baby boomers, and Chesler theorised that this spells success for brands that cater to that market.

He pointed out that as the Baby Boomer generation in the West grew up, so too did companies that catered to them. For example, Toys “R” Us listed when the Baby Boomers were around two years old, McDonald’s when they were nine, Nike when they were in their 20s and Starbucks when they were in their 40s.

He argued that the Millennial generation in China is equivalent in size, wealth and spending power to the Baby Boomers in the West.

“When it comes to China the market is different to the rest of the world. Just buying the index is not really an option,” Chesler said.

For example, while China had GDP growth of 113% from 2010 to 2020 it only had stockmarket growth of 10%. During the same period, the US had 22% GDP growth, but the S&P 500 grew by more than 17%.

ETP Forum | Events

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

Jordan Eliseo

Camilla Love, Emilie O’Neill, Mark Montfort

Eu-Jene Teng

John Dyall

Mark Montfort, Adam Montana

Anthony Doyle

Chesler said this is because of the state-owned companies which are on the Chinese stock market.

Some of these companies prioritise government contracts over shareholder returns and are prone to paying unnecessarily bloated executive salaries.

Several other speakers touched on how ETPs can be used to diversify portfolios and gain exposure to thematics or assets that might otherwise be difficult for a retail client to invest in.

For example, The Perth Mint manager of listed products and investment research Jordan Eliseo told the forum about gold ETFs. The physical gold market itself is large and liquid, he said. Less than 2.5% of gold market liquidity goes through ETFs. In terms of market cap, gold is only surpassed by US T-bills at $11.3 trillion.

“But the first and foremost argument for owning gold is that over the long-run it has delivered fairly good returns,” Eliseo said.

Since the 1950s, annual returns for gold have been close to 9%, he said. However, it does broadly have volatility close to that of the equity market.

Eliseo argued that in the current environment, with interest rates low, gold is compelling as an investment. In the past when interest rates have been below 2%, gold has outperformed bonds and stocks in terms of nominal and real returns.

“The opportunity cost of holding money in a bank is drastically reduced or completely eliminated,” he said.

Elsewhere, Martin Currie client portfolio manager Eu-Jene Teng made the case for emerging market ETFs. Martin Currie continues to offer segregated accounts and unit trusts along with its active ETFs, he added.

“We’re agnostic, or maybe we believe in universalism. We have different ways investors can access investments and our investors can choose,” Teng said.

According to Teng’s research, by 2030 seven out of 10 of the world’s largest economies will be

Thank you to our event partners

what are now referred to as emerging markets.

This shift in the dynamic between world economies is driven by several factors. For example, the flows of trade are changing over time. Emerging markets are trading more and more with developed markets.

Like Chesler, Teng is of the view that shifting demographics in Asia and China cannot be ignored. For example, Teng said growth of the middle class in 2015-2030 was 153% in all of South East Asia and around 1% in parts of Europe.

“The question to ask yourself and your clients is – when there are markets we know is going to grow rapidly, probably for the rest of the century – why are you not investing in them?” Teng said.

Taking a different tact, Fidelity international director, cross-asset specialist Anthony Doyle spoke to the forum about behavioural finance. Whether investing through ETPs or any other vehicle, Doyle said it is always relevant to understand how human behaviour changes investment outcomes.

“Because markets are dominated by humans and human behaviour, you find that prices move in unexpected ways,” he said.

New forms of economic models are emerging, that take into account human biases and behaviours, rather than assuming that the market has the ability to price companies perfectly.

Doyle briefly summarised the main biases that impact irrational investment decisions. For example, confirmation bias allows people to take in new information but use that information only to confirm their existing beliefs and biases. Humans are twice as likely to seek out information that confirms their beliefs, Doyle said.

Another example is commonly seen in investors holding onto sinking stocks for too long, waiting to get back to the price they purchased it for.

Contrary to logic, the more they lose while holding the stock, the longer they often wait. This is known as the sunk costs fallacy.

To view the video

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www.fsitv.com/events/ best_practice/exchange_ traded_funds

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Stereotyping is another bias, Doyle pointed out. It’s easy for investors to wrongly expect good companies to stay good and to wrongly think a company is hot because of its sector alone.

“It’s not necessarily about being contrarian, but it is about finding the hidden gems,” Doyle said.

Herding, the urge to do what others do, also has a powerful impact. Doyle said this can be seen in the markets when people buy when prices are high and sell when they are low. For this reason non-consensus investing can be profitable.

Rounding out the forum, eInvest managing director Camilla Love hosted a panel on the topic of ESG. She was joined by eInvest ESG equities analyst Emilie O’Neill, New Era Analytics founder Mark Montfort and Altus Financial adviser Adam Montana.

Montfort said ESG ETF funds under management across all the products available on the ASX and Chi-X has already hit $3.5 billion and could hit $4 billion by the end of 2021. He also said those ESG products had seen better performance across the last year.

Montana said in his client base, of varied ages, he mainly sees interest in ESG among younger people.

“There was a perception that in allocating to ESG strategies you were going to compromise a little bit on returns. We’ve got some great data now that that’s not the case,” Montana said.

In her role at eInvest, O’Neill surveys the ASX300 each year to assess their ESG priorities.

This year, she said 75% of companies said discussing ESG with investors has improved their performance.

“One of the best ways to see how integrated ESG is in a company’s day-to-day is to ask the question,” O’Neill said.

The panel agreed that ESG considerations are likely to become a more prominent theme in ETPs in the future. fs

14

Feature | Health & wellbeing

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

ON THE FRONTLINE Healthcare professionals are more likely to have mental health challenges than the broader population, but are less likely to seek help. How do financial advisers help those who have dedicated their lives to helping others? Kanika Sood writes.

Health & wellbeing | Feature

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

01: Darren Johns

02: Peter Baldwin

03: Benjamin Martin

SMSF specialist adviser Align Financial

clinical research fellow and clinical psychologist The Black Dog Institute

senior technical and training manager AIA Australia

T

he first time that Sydney financial adviser Darren Johns 01 realised his client, a medical professional, was exhibiting compulsive behaviour was when he noticed unusual withdrawals from the client’s selfmanaged superannuation fund (SMSF).

“We just asked the client the particulars of those withdrawals,” Johns says.

“At the outset, we were told they were for investments. But when more of them were made, and there looked little chance of repayment, we realised that they were not for investments and that the client had compulsive behaviour issues.”

Johns’ response was to see if there was any means of repairing the damage (the SMSF was at risk of violating its withdrawal limits), to check in with family and financial liabilities.

“Not to give them advice on their mental health, but to plan on what options they had to rectify potential legislation issues that may arise,” he says.

A tough job One in 15 people employed in Australia work as a registered health practitioner, according to the Australian Health Practitioner Regulation Agency (AHPRA) and the National Boards.

These 801,659 Australians work in 16 professions including as nurses and midwives, medical practitioners, psychologists, dentists and paramedics.

Many of them work in high-stakes environments with long hours, which can take a toll.

For example, doctors are more susceptible to mental health conditions compared to the rest of the population and other professionals, according to Beyond Blue which surveyed 42,942 doctors and 6658 medical students for a 2013 study, which was updated in June 2019.

The findings showed higher rates of thoughts about suicide, depression, and anxiety.

One might think a doctor or a healthcare worker facing mental issues may find it easier than the rest of the population to seek help. After all, they have spent years studying the human body, and have seen first-hand the impact mental or physical issues can have.

But the reality is different.

Peter Baldwin 02 is a clinical psychologist, currently leading a government-funded mental health service for healthcare workers called The Essential Network which sits outside of Medicare.

He says, in his experience, the cohort often doesn’t seek help even though it has higher prevalence of conditions such as post-traumatic stress disorder (PTSD), substance abuse and burnout-triggered depression or anxiety.

“Doctors get mixed messages. Explicitly, they are encouraged to seek help, but the implicit suggestion may be that they might not be fit for duty [if they do].”

Baldwin lists the deterrents. First, doctors can be uncomfortable with the reversal of roles in being the patient. Second, they face implicit pressure to be invulnerable. Third, they may fear getting reported to watchdog AHPRA if they seek mental health support.

A colleague or a patient who is concerned about a registered health practitioner’s conduct can make a complaint to the watchdog.

This complaint is called a “mandatory notification” and triggers a review of the physician’s practice.

“Only 1% of AHPRA complaints result in a deregistration. Sometimes these claims are for valid reasons, such as a doctor being drunk on the job or touching a patient inappropriately.

But in other cases, patients make nuisance claims if they are just angry or dissatisfied,” Baldwin says.

“Doctors often fear if they seek mental health support, they might get reported to AHPRA. A mandatory notification review can be very stressful and reputation damaging [even if it doesn’t result in a disciplinary action].”

Baldwin’s observations were mirrored in Beyond Blue’s survey, which found doctors stigmatised peers with mental health disorders.

Nearly 40% of the survey’s respondents said medical professionals with a history of mental health disorders were perceived as less competent than their peers. About 48% felt that these doctors were less likely to be appointed to roles compared to doctors without a history of mental health problems.

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Further, nearly 59% of doctors felt that being a patient is a cause of embarrassment for a doctor.

Female doctors were more accepting of peers with mental health disorders, with 69% (versus 55% for male doctors) saying they would see a doctor with mental health history to be as reliable as the average doctor.

First steps

We are not expected to be counsellors or psychologists, but we are expected to know the client.

Darren Johns

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According to Medical Recruitment, based on a salary survey, on average a full-time general practitioner in Australia earns between $200,000 and $350,000 per annum. Depending on the shifts they work or whether they choose to specialise, GPs can earn anything up to $500,000 a year, the survey found.

Elsewhere in the industry, on average, neurosurgeons can earn $242,200, anesthesiologists can take home up to $153,506, while an experienced dentist earns $121,000 per year, according to MEDIQ Financial.

They are significant incomes for significant roles, but also incomes that require more nuanced financial plans and comprehensive protection. As a result, while financial advisers are not in the business of telling clients what they can and can’t do with their money, they are in a privileged position and are often the first to spot a change in behaviour.

Johns says anomalies in a client’s cashflows are the first way for an adviser to trace something may be wrong.

“For example, if the household expenses were $90,000 a year and they go up to $160,000 and there have been no big one-off expenses, we would have a talk and see if they are aware of their finances,” he says.

“It’s not our place to judge or correct or advise (in relation to medical matters), we are not mental health professionals. But we can bring awareness.

“Some in the advice community shy away from asking deeper questions of their clients.

We are not expected to be counsellors or psychologists, but we are expected to know the client.”

Next, he suggests checking the client’s insurance cover, including the definitions of critical illness, followed by business continuity plans and estate plans.

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Feature | Health & wellbeing 04: Yves Schoof

05: Sarah Hackney

director and principal adviser Affluence Private Wealth

founding partner, protection adviser Full Circle Wealth Management

“If they are in their own practice, they have to plan and prepare before the event. This may include identifying key person risk, appointing or nominating [a replacement], and a panel of potential businesses to merge with or which can buy out the business,” Johns explains.

With estate planning, he suggests changing or modifying the plan sooner rather than later because determining if the client had the capacity to give authority to act may become difficult down the track.

Further, AIA Australia senior technical and training manager Benjamin Martin 03 says selfemployed medical professionals should seek advice about how they can protect the mortgage on the family balance sheet from an unexpected death or disablement.

Like Johns, Martin sees value in considering how to protect any equity interest held in the underlying practice for self-employed doctors.

“The protection of the shareholding in the practice is often overlooked by self-employed practitioners. It’s important to have a fully funded exit agreement to cover premature death or disablement. This provides peace of mind that their family can receive fair value for any shares that they inherit and look to liquidate,” Martin says.

“Medical professionals who have been in practice for some time will often have very meaningful values attributed to their shareholdings. If consideration has not been given to the exit strategy from the practice, surviving family members may end up in a position where they cannot realise the value of these shares in a timely and tax effective manner.”

He says if life insurance is being used as the funding mechanism for the exit strategy, then forward underwriting could also be beneficial.

“This allows the sum insured on the policy to keep in step with anticipated increases in the value of the shares as the practice becomes more successful over time,” Martin says.

Insurance cover A key component of a doctor or medical health professional’s financial plan is their insurance cover.

24.8% of doctors had suicidal thoughts in the last 12 months. This is higher than both the general population (13.3%) and other professionals (12.8%).

Source: Beyond Blue, 2013 study updated in 2019.

Often the cohort can be written out of making future claims for mental health episodes, depending on the severity of their mental health conditions in the past.

Yves Schoof 04 is director and principal adviser at Affluence Private Wealth, where he works with 90 ongoing clients, of which about 80 are doctors or dentists.

He says about 20-30% of them would have an exclusion stemming from past mental health episodes on their insurance policies.

“What I do find is a lot of mental health professionals will already have an exclusion of some sort. In many cases, it can be traced back to when they were studying,” Schoof says.

“They get encouraged to refer [themselves] to a GP if they are facing stress or anxiety. They are trying to do the right thing, but it gets put as a black mark on their insurance. That’s quite unfair in a way.”

Schoof says if the client’s mental health issue was a one-off, the insurer may be willing to underwrite the risk. However, if the client gets excluded from making claims on future mental health episodes, it’s time for them to also think about self-insurance.

“If they have no cover at all for future mental health conditions, we do have to accept it and use other risk management resources. If they do not have some sick leave, they need some emergency reserves, especially if they are in a private practice,” he says.

In recent times, Schoof has seen a 15-25% increase in premiums, not as a result of the policyholder’s advancing age but from insurers’ readjusting their base rates.

“The underwriting is a lot harsher than when I first started in the industry in 2006. They can take months for policies to be put in force, and that is a combination of complex financial underwriting, and the insurance industry in general toughening up underwriting policies to combat losses,” Schoof says.

“This is the future for insurers. There will be very few, what we call ‘cleanskins’ – people with no medical history.”

Despite the increasing cost of cover and harsher underwriting, he finds his doctor clients are still keen to have insurance cover.

2% said they had attempted suicide.

21% of doctors reported having had a diagnosis or treatment for depression, of which 6% had a current diagnosis.

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

The underwriting is a lot harsher than when I first started in the industry in 2006.

Yves Schoof

“Very rarely we see someone blatantly rejecting insurance. They will have at least a minimum level of cover because they do realise the impact it can have as they work with sick patients every day,” he says.

Sarah Hackney05 , a risk adviser for 13 years has similar experience. She works with about 120 high-net-worth clients, of which about 25% are medical specialists like obstetricians, neurologists and general practitioners.

These clients usually don’t have access to group insurance policies via a superannuation fund or their employer, she says.

“Doctors often fall out of group policies because, more often than not, they operate as sole traders. They may have been a part of a [fund like] QSuper when they were in public practice, but they often move from retail or industry funds to SMSFs as they progress through their career,” she says.

Hence most insurance for self-employed doctors is via the retail channel, which has harsher underwriting standards than group policies.

In Hackney’s experience, if the client has had a once-off mental health issue, the insurer may be willing to underwrite them for future events.

But it gets harder from there.

“We tend to find if they have had a mental health issue in the last five years or have had a recurrence, nine out of 10 times they will get an exclusion. They are looking at much harsher underwriting because of past mental health claims [whereas] 10 years ago, as long as we could give them a reason, they were willing to underwrite the risk,” she remembers.

“If someone has a group policy and is going to get an exclusion, we recommend they hold on to those and add top up cover if needed.”

Like Schoof, Hackney has witnessed a trend in insurance premiums of base rates going up each year.

One of the strategies she has used for her clients to bring down the cost of the premiums is to push out the waiting period for the claims to be paid.

“Normally income protection claims have a waiting period of 30 days. What we find is, in some situations, the doctors have built up some cash and are happy to push out the waiting period to 90 days,” she says, adding some clients have even opted for 12-month waiting period on their IP policies after they’ve built up their cash reserves.

Reluctant to claim Hackney says her practice gets a claim at least once a month across the total 900-plus clients including her other business, but often they are not for mental health issues.

“In general, medical professionals – and this is also true for people in high-level, white-collar jobs like barristers – they really don’t want to take time off work,” she says.

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Copyright © 2021 AIA Australia Limited (ABN 79 004 837 861 AFSL 230043). All rights reserved. The life insurance policies relating to Priority Protection and Priority Protection for Platform Investors are issued by AIA Australia Ltd. This information is current at the date of this document and may be subject to change. AIA Australia Ltd takes no responsibility for any incorrect information (by omission or otherwise) contained in this document. This provides general information only, without taking into account your objectives, financial situation, needs or personal circumstances. You should consider such factors and view the Product Disclosure Statement, available at aia.com.au, in deciding whether to acquire or continue to hold a financial product. This document is a summary of the circumstances in which AIA Australia Ltd pays claims under these policies. The payment of claims is subject to the terms and conditions of the relevant product as summarised in the relevant PDS. 05/21 – ADV6012B

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Feature | Health & wellbeing 06: Helen Rowell

07: Marcello Bertasso

deputy chair Australian Prudential Regulation Authority

head of underwriting and claims management PPS Mutual

An ongoing trend in the life insurance industry is that adviser-led claims for death, total and permanent disability (TPD), trauma, and disability income insurance (DII) have higher admittance rates than unadvised or group claims.

However, the admittance rates for adviser-led claims fell in the most recent statistics published by the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission.

For the individual advised channel, admittance rates stood at: death (96%, same as 2018), TPD (81% versus 87% in 2018), trauma (86% versus 87% in 2018), and DII (94% versus 95% in 2018).

The future of adviser-led claims is uncertain, as more advisers shift away from processing claims for clients and the Life Insurance Framework (LIF) reforms continue to wreak havoc on the viability of life insurance advice from a cost perspective.

Hackney says her practice has had two clients make TPD claims recently, taking 12 months and 18 months to process, respectively.

In recent years, fee for service has become a more popular option for risk clients and as a result, claims management is charged out at an hourly rate.

“What you might find [in the future] is that advisers will be assisting less with the claims.

They have already started to pull away. It is time consuming and there are added costs of compliance with LIF,” she says.

Insurer’s perspective The life insurance industry’s losses are no secret.

Insurers have been hit by a perfect storm of lax underwriting in group insurance, unsustainable premium levels in light of competition, higher levels of claims and low interest rates.

APRA has been vocal in expressing its concerns on the group insurance market.

“Recently, the APRA has seen a re-emergence of some concerning developments in group life insurance in superannuation in relation to premium volatility, availability

and provision of data and tender practices,” APRA deputy chair Helen Rowell 06 said in a March speech.

“APRA’s view is that these developments, if unaddressed, are likely to result in poor member outcomes, and adversely impact the availability and sustainability of life insurance through superannuation.”

AIA Australia’s Martin says in 2020, approximately 25% of all IP and TPD claims it paid were for mental health-related conditions.

“In our experience they can occur as a primary condition, but also commonly occur as secondary condition,” he says.

“The nature of the work that medical practitioners perform can be stressful and it has been noted that medical practitioners report higher rates of mental ill-health than the general population.

“A positive however is that due to their experience in the industry, medical practitioners can have a greater awareness of their symptoms and know the benefits of seeking support.”

It goes without saying the last 12 or so months have been tough on everyone, but perhaps especially so for this cohort. AIA acknowledged that healthcare workers are at increased risk of developing COVID-19 than the broader population.

While AIA did not comment on occurrences of mental health claims arising out of COVID-19, studies reveal medical professionals have shown increased mental health issues during previous pandemics.

AIA’s response has been to deliver COVID-19 rehabilitation services so if a COVID-19 diagnosis were to occur, its customers can be supported. It also pivoted to offering all rehabilitation services via telehealth to help customers with their recovery.

Outside of the bigger insurers, newer firms like PPS Mutual are gaining popularity with doctors, according to Schoof.

PPS Mutual head of underwriting and claims management Marcello Bertasso 07 says about 59% of its 5000 members are doctors.

The five-year-old business has so far had 126 claims in total.

How do doctors cope in pandemics?

COVID-19 is not the first pandemic in recent years. A paper published in May 2020 by Steve Kisely et al aimed to examine psychological effects on clinicians who were working to manage novel viral outbreaks, and successful measures to manage stress and psychological distress.

It found 59 papers across severe acute respiratory syndrome (SARS), coronavirus (COVID-19), Middle East respiratory syndrome (MERS), Ebola virus, influenza A virus subtype H1N1 and influenza A virus subtype H7N9.

The researchers found staff in contact with affected patients had greater levels of both acute or post-traumatic stress and psychological distress. Risk factors for psychological distress included being younger, more junior, parents of dependent children, and in quarantine, having an infected family member, lack of practical support and stigma.

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

What you might find [in the future] is that advisers will be assisting less with the claims.

Sarah Hackney.

“PPS Mutual takes a long-term view due to its mutual model, only offering products to Australian professionals thereby creating a stronger risk pool, lower lapse rates of about 4%, and a reinsurance arrangement that offers rebates if the insurance pool stays within pre-decided parameters,” Bertasso says.

A pull for advisers is its investment account.

PPS Mutual allocates a share of profits (after all the expenses and claims) into these accounts.

Even though the clients must wait for a holding period until they can withdraw the returns, they receive an extra investment return each year.

“We have made a profit-share allocation of 7% after tax [on average]. The most recent also included an investment return 4% ,” Bertasso says.

Of the 126 claims PPS Mutual has had, just 5% were in relation to mental health - but this is a proportion that will increase over time, Bertasso anticipates.

“We haven’t seen any change from COVID. We are expecting factors from it in future because we understand they [doctors] are under quite significant pressure in COVID. In fairness, we would be very surprised if we don’t [come] close to that low-double digits,” he says.

The bottom line The stigma about mental health may run both ways – that is advisers may ‘under-disclose’ a client’s pre-existing mental health to an insurer while taking out a policy.”

“I think in general terms, yes things like that happen,” Bertasso says.

“They [advisers] definitely expose themselves to potential liability. Advisers may not tell insurers everything [about a client] because they aren’t confident to explain the underwriting terms to members.”

Doctors and other healthcare workers offer an essential service to the broader population.

They also show higher chances of mental health issues in the process.

Research from previous pandemics and insurers’ opinion of mental health claims indicate COVID-19 will put increased pressure on the cohort. And the longer the pandemic continues, the more pressure builds.

This is unwelcome news, with healthcare workers often finding it difficult to obtain insurance cover. And, even when covered, often unwilling to claim on their insurance.

Couple these intricacies with their considerable incomes, and the complexity of healthcare workers’ financial needs truly come to the fore. fs If you or anyone you know needs support, call Beyond Blue on 1300 22 436. For crisis support or suicide intervention services, call Lifeline on 13 11 14.

OFFER YOUR CLIENTS’ ADDITIONAL SECURITY AND PEACE OF MIND WITH AIA AUSTRALIA’S FIVE-YEAR TERM LEVEL RATE GUARANTEE

aia.com.au

20

News

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

Executive appointments 01: Angus Benbow

Advice group chief executive exits Angus Benbow01 who has led Centrepoint Alliance since 2018, will leave the company on May 28.

Centrepoint did not ascribe a reason to the departure in its ASX filings.

“We thank Angus for the contribution he has made to Centrepoint Alliance, particularly the repositioning of the advice business through his leadership of the strategic refresh transformation, during a significant shift in the regulatory environment,” Centrepoint Alliance chair Alan Fisher said.

“He has led Centrepoint Alliance through an unparalleled period of change in the financial services industry.”

Benbow was previously chief executive of Shadforth Financial Group, and a general manager at Perpetual.

Centrepoint Alliance reported December half gross revenue of $70.6 million (up 15% over previous corresponding period) and net profit after tax of $1.6 million which was a slight improvement from $1.5 million after-tax loss in the December 2020 half.

“I take great pride in our accomplishments during the more than three years in which I have served the company and the advisers and clients throughout Australia that we support,” Benbow said of his departure.

“I am grateful for the opportunity to have led Centrepoint Alliance through its transformation and repositioning at a period of such disruptive and significant industry change, and strongly believe that the company is well positioned to continue its recent growth.”

Investment chief departs Mutual Trust Graeme Bibby, who was chief investment officer at Mutual Trust for more than four years, has left the business.

A spokesperson for Mutual Trust said his departure is part of a strategic review of its wealth function.

Jono Gourlay, Mutual Trust head of wealth, will now lead the business’ investments.

He has been with Mutual Trust since 2015, joining from Credit Suisse Private Bank. Prior to that, Gourlay held roles at Kardina Capital and Austock Asset Management.

Prior to Mutual Trust, Bibby spent seven years as chief investment officer for AIA Australia and also held senior roles at Russell Investments, Mercer and AllianceBernstein. His LinkedIn shows he is now self-employed.

“In our 100th year, Mutual Trust continues to evolve by expanding our wealth management offering to meet the needs of our diverse client base,” Mutual Trust said in a statement.

“We are bringing the client facing advisory team in closer alignment with our research team, as part of our broader corporate growth strategy.

“This new structure led by Jono Gourlay, head of wealth, will enable us to deliver richer information and a more responsive service on a wider range of investment offerings.”

Cbus appoints head of advice Industry super fund Cbus has appointed a head of advice.

Lynda Cross has stepped into the role, promoted from her previous position as manager of advice partnerships and performance.

Prior to joining Cbus, Cross was manager of advice and education at LUCRF Super and had a 16-year career at Mercer in roles including scaled advice leader.

She has a background as a financial adviser herself and is a certified financial planner.

“Recognising the increasing importance of advice for members, Cbus is delighted to confirm Lynda’s appointment as head of advice, which will play a critical role in developing and managing member experience at key points where advice is important,” Cbus group executive member and employer experience Marianne Walker said.

Iress adds former dealer group chief Former Financial Services Partners chief executive Geoff Kellett has stepped into the position of head of commercial operations, a newly created role at Iress.

He departed IOOF at the end of 2020 after two years as chief executive of Financial Services Partners. Kellett was general manager, adviser services at IOOF prior to that.

Earlier in his career, Kellett was a division director at Macquarie and private client adviser at ANZ Private Bank.

Iress confirmed that Kellett will be based in Sydney, reporting to chief commercial officer Michael Blomfield and will be responsible for helping to drive consistency and momentum in sales and client relationships globally.

Blomfield took to LinkedIn to congratulate Kellett on the new role.

“Geoff is going to lead us on our journey to become a world class sales and service organisation through a revitalised methodology, supported by our entire dedicated, talented and passionate commercial team,” he said.

“As any good business should be, we are determined to be better and to keep getting better until we’re the best. Then we’ll raise the bar higher.”

Milford hires wholesale distribution lead Murray Pell has been appointed head of wholesale distribution at Milford Asset Management, joining from Macquarie Bank where he was responsible for building and executing key account strategy in managed accounts and cash management.

Regan van Berlo, who has been head of distribution, Australia since November 2018, will now serve as head of retail distribution.

Milford also appointed Brad Mackay to the position of regional manager for Queensland.

He joins from Centrepoint Alliance and is a longstanding member of the Financial Planning Association of Australia.

Prior to his time at Centrepoint, Mackay worked at NAB, MLC and Zurich.

Also in Queensland, Rachael Satchell has been appointed business development manager.

She most recently held distribution roles with Praemium and Asteron Life.

“Continued delivery of strong returns is leading to increased inflows and interest, and a requirement to build out our award-winning team. The appointment of Murray, Brad and Rachael will allow us to uphold our excellence in client service and engagement, while building on our offering and products for the benefit of Australian investors.” Milford, head of Australian business Kristine Brooks said.

ClearView appoints head of life strategy ClearView Wealth hired a former Zurich executive as its head of life strategy and transformation. a Maria Falas02 was most recently Zurich Financial Services’ head of mental health and wellness. She held the same role at ANZ/OnePath before its pensions and investments business was acquired by Zurich.

02: Maria Falas

In her new role at ClearView, Falas will report to ClearView general manager, life insurance Gerard Kerr, who also joined ClearView after having worked at Zurich and ANZ. “The life insurance industry is undergoing enormous structural and regulatory change making it critically important for life insurers to have experienced people with fresh ideas in key roles,” Kerr said.

“Maria is a respected professional who has successfully led strategic change across the life insurance value chain and has driven operational innovation. She is a high performer with a proven track record for delivering results and achieving strategic goals.”

ClearView reported operating earnings after tax of $13.1 million for the December half. Of this, $12.4 million came from life insurance, while wealth management and financial advice made small contributions of $0.6 million and $0.8 million each.

It said it is currently on a multi-year transformation journey to ensure it has the right strategy, systems and processes to drive efficiencies and scale.

“The cornerstone of the transformation program is the delivery of an integrated life insurance policy administration system, underwriting rules engine and adviser portal to coincide with the launch of a new life insurance offer in the second half of the year,” ClearView said.

LIV chief executive chief joins Legalsuper The $4.5 billion industry superannuation fund has welcomed Law Institute of Victoria chief executive Adam Awty to its board of directors.

Awty has replaced Ashurst partner Geoff Hone who served on the board for 11 years.

“At a time when superannuation has become the subject of daily media commentary covering material issues such as reform, performance, mergers and regulation, we look forward to Adam contributing valuable experiences and insights to board discussions and deliberations,” legalsuper chief executive Andrew Proebstl said.

The fund said Awty’s appointment “continues the important link all directors of the fund have with the legal sector, as well as expanding the financial and commercial expertise on the board, at a time when scrutiny and change across the entire financial services system have never been greater”.

“Adam’s role as chief executive of the Law Institute of Victoria centers on meeting members’ expectations through the highest standards of professionalism and service delivery – a direct alignment with legalsuper’s own role in managing the retirement savings of Australia’s legal community,” legalsuper chair Kirsten Mander said.

He also brings additional strong governance credentials, having previously served on statutory authority boards and audit and risk committees, she added.

“We regard this as a vital attribute, in keeping with legalsuper’s recognised excellence in corporate governance,” Mander said. fs

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

Financial advice | Featurette

21

PI insurers kill advisers’ crypto appetite Advisers are warming up to investing in cryptocurrency. But their insurers and investment committees don’t want any of it. Kanika Sood reports.

If a security were to rise from 97 cents to $70,000 in 10 years, it would be hard for a financial adviser to not get calls from clients asking about it.

This is what Bitcoin did between April 2011 and April 2021. Over the decade, the cryptocurrency’s wild gains and falls have continued.

Despite the volatility, it has also won acceptance from large institutions like BlackRock, Fidelity and State Street. At the time of writing, BetaShares and VanEck are working on ASX-listed ETFs based on cryptocurrencies.

And now some advisers are willing to have a look.

One of them is Align Financial’s Darren Johns.

“I am not averse to it. Some advisers don’t like it,” he says.

Despite his interest, Johns can’t advise his clients on the cryptocurrency yet. The reason being that his professional indemnity insurer is unwilling to cover him.

“They said, ‘not yet’. It exposes me to claims from my clients,” Johns says.

All four advice associations: Association of Financial Advisers (AFA), Financial Planning Association of Australia (FPA), SMSF Association (SMSFA), and Association of Independently Owned Financial Professionals (AIOFP) declined to comment on the specifics.

They were asked: if advisers should be able to advice on cryptocurrencies, if they knew of any advice firms adding cryptocurrencies to their approved product lists (APLs), if they had engaged with PI insurers on covering advisers for cryptocurrency advice, and what the best practice for advisers was if their clients wanted to invest.

AIOFP executive director Peter Johnson said: “...I am not aware of any of them currently dealing in cryptocurrencies. We did address the issue at our 2019 London conference, but I think it is fair to say there has not been much of a demand or appetite for further information since.”

The FPA pointed to CFP 4 Investment Strategies, page 106: “Investors can often become caught up with potential for high returns, sometimes desperately so. The role of a financial planner is to educate clients on the risk return trade-off and help them find solutions that achieve targeted returns within an acceptable level of risk.”

Despite the silence from the associations, advisers are pushing ahead with Bitcoin.

Pitcher Partners partner Charlie Viola says nine of his 150 high-net-worth clients have invested in either Bitcoin or Ethereum, while 60 have requested information.

“It’s certainly something that is getting harder to ignore,” Viola says.

“Often the discussions will really just be cryptocurrency’s validity as currency, as an investment versus method of transferring wealth – should they buy it, where does it fit, is it something that absolutely has to be in a portfolio.”

Viola’s clients who have invested in cryptocurrencies usually invest $200,000 to $400,000 from their average $10-15 million in investible assets. As they are sophisticated investors, the cryptocurrencies don’t have to be on the APL. “We are certainly not exposing mum or dad investors to cryptocurrencies or other exotic investments like seed venture capital. These [nine] investors usually work as investment bankers, corporate executives for listed companies or are wealthy professional investors,” he says.

“We don’t ask them to sign a liability waiver, but we certainly provide a reasonably intense warning for any exotic asset on things like risk versus return and volatility.”

For McDougall Kelly & Martinis, which brokers PI insurance for 200 AFSLs with about 1500 advisers, covering crypto advice is a “complete decline” for all the PI insurers it works with.

“Crypto is too volatile and people don’t understand it at the investor level,” senior partner Oscar Martinis says.

He says insurers are often willing to cover liability for leveraged funds. But some others, with a history of losses for the insurance industry, like mezzanine debt funds and agribusiness funds, are covered on a case-by-case basis.

“We can get mezzanine finance and agribusiness covered but by exception only. That is, they are typically automatically declined [for new PI policies] but we can go in and negotiate with the underwriters,” he says.

We don’t ask them to sign a liability waiver, but we certainly provide a reasonably intense warning for any exotic asset on things like risk versus return and volatility.

SURA Professional Risks managing director and underwriter Paul Robinson’s comments indicate there isn’t strong motivation for providers to cover potential liabilities from cryptocurrency advice.

“We wouldn’t underwrite it because Bitcoin is famous for its volatility,” Robinson says.

SURA provides professional indemnity insurance cover to about 400 of the 1975 small-to-medium financial planning practices operating in Australia.

None of these 400 advice practices have asked for crypto advice cover, says Robinson.

“We have 10 underwriters, and I can’t recall even one case where advice is being offered on cryptocurrencies. Certainly, a financial planner would struggle to get their investment committee to approve it [and to put it on the APL],” Robinson says.

One dealer group whose investment committee has had conversations about approving crypto advice is Lifespan Financial Planning.

“It comes up [in investment committee meetings] because clients do ask advisers about it,” Lifespan’s chief executive Eugene Ardino, who also sits on the investment committee, says.

“But we’ve never considered putting it on the APL. It is way outside our risk profile as a licensee. The reason for that is it is a very difficult product – or instrument or whatever you want to call it – to understand.

“How do you value it? Look at the volatility you’ve seen it have moves of 10-20% up and down in a day and it has collapsed 80% or more from its peak four or five times in its history. How on Earth do you recommend it to a client?”

Ardino says conversations at Lifespan about crypto never advanced to a level where they’d talk to their PI insurer. However, if a Lifespan advice client wanted to invest in Bitcoin or other cryptocurrencies, the firm wants the adviser to document the investment was un-advised.

“Clients can invest in whatever they like, they often hold things we wouldn’t recommend. It has to be well-documented [by the adviser] that the client’s made a decision to hold it,” he says.

“It hasn’t come up yet [with crypto] but you would either document it in your client file, put it in the Statement of Advice, in the client data form, or some form of signed document that indicates that the [crypto] investment wasn’t advised on.” fs

22

Budget 2021

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

Photo by Sam Mooy/Getty Images

A budget for everyone The 2021/22 federal budget had something for just about everyone, including tax cuts, measures to ensure women’s economic security and greater flexibility for retirees. Here’s what you should know.

This year’s budget delivered something for everyone as the government looks to cement Australia’s economic recovery. Handing down the budget on May 11, treasurer Josh Frydenberg painted a pretty picture of the country’s financial position and forecast even greater prosperity.

Frydenberg declared Australia to be “coming back”, saying unemployment is lower than prepandemic rates and the nation’s underlying cash balance is forecast to be -$161 billion in 2020/21 financial year compared to -$213.7 billion at the 2020/21 budget.

“With more Australians back at work, this year’s deficit is $52.7 billion lower than was expected just over six months ago in last year’s budget,” Frydenberg said.

The government expects the cash balance to improve to a deficit of $57 billion by 2024/25.

Net debt will increase to $617.5 billion or 30.0% of GDP this year and peak at $980.6 billion or 40.9% of GDP in June 2025, which the government says is low by international standards.

“We are better placed than nearly any other

2021. Further to this, the government has extended temporary full expensing until 30 June 2023.

The government has also extended temporary loss carry-back to include the 2022/23 income year to offset tax losses that have been paid to generate a profit. Businesses will receive a tax refund until 2023 against losses incurred in the years following 2018 to assist companies that were profitable prior to the pandemic.

country to meet the economic challenges that lie ahead,” Frydenberg said.

Extending tax relief The government opted to retain the low-andmiddle income tax offset (LMITO) for another year and introduced a tax cut for small to medium businesses in the 2021/22 budget in a bid to create more jobs and support business investment.

Low-and middle-income earners will receive an additional $7.8 billion in tax cuts. The LMITO relief is up to $1080 for individuals or $2160 for dual income couples, which will benefit an estimated around 10.2 million individuals.

Individuals with salaries of $37,000 or less will receive a $255 reduction while those with incomes of $90,000 to $126,000 the offset phases out at three cents per dollar.

Treasury estimates that extending the LMITO will boost GDP by around $4.5 billion in 2022/23 and will create an additional 20,000 jobs by the end of 2022/23.

Small and medium businesses will benefit from a tax rate reduction from 30% to 25% from 1 July

Securing women’s futures

We are better placed than nearly any other country to meet the economic challenges that lie ahead.

Josh Frydenberg

The longstanding requirement for workers to earn more than $450 a month to be entitled to the superannuation guarantee has been scrapped.

In a move that would benefit more than 200,000 women, the need for Aussies to earn more than $450 a month in order to qualify for SG payments is being abolished from 1 July 2022.

It’s expected to cost about $31.5 million over the forward estimates.

“The government is focused on improving retirement outcomes for women by increasing superannuation coverage and making our system fairer,” minister for superannuation Jane Hume said in a joint

Budget 2021

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

statement with minister for women, Marise Payne.

The Retirement Income Review found that 63% of those earning less than $450 a month are women. It also found that the current median gender gap in superannuation balances at retirement is 22%.

The government has confirmed it will not proceed with plans to extend the early release of superannuation to family and domestic violence survivors.

Scrapping the plan will decrease receipts by $110 million over the forward estimates period and payments by $27 million over the forward estimates period, as ATO funding is no longer required.

Overall, it’s expected to cost about $83 million.

Among other things, the government will provide $164.8 million over three years in financial assistance and support to affected women. This will include a two-year trial of a program that will run through to 30 June 2023 providing women with up to $5000, including $1500 in cash and the remainder in goods.

Further, the new Family Home Guarantee which will make available 10,000 government guarantees over four years to eligible single parents with dependants. The initiative will enable them to buy a home with a deposit of as little as 2%.

It’s estimated around 125,000 single parents with dependants will be eligible for the scheme – 84% of which are female.

Infrastructure to drive recovery Billed as one of the budget’s cornerstone commitments, the government will spend an extra $15 billion over the coming decade on projects around Australia ranging from roads, to ports, to expanding runways at major regional airports. This brings government spending on infrastructure over the last eight years to $170 billion.

The list of nationally important infrastructure projects loosely aligns with the priority list announced

by Infrastructure Australia (IA) in February 2021. IA’s 244-page report outlined a raft of projects aimed at boosting Australia’s international competitiveness, connecting cities and major regional areas, energy projects and water security.

Where the government’s latest infrastructure project list differs to previous announcements is in its special emphasis on technology infrastructure.

“Digital infrastructure and digital skills will be critical for the competitiveness of our economy, creating massive opportunities for growth and jobs. In this budget, we are investing $1.2 billion in our digital economy strategy,” Frydenberg said.

Supporting older Aussies The government introduced more flexibility for older Australians by abolishing the work test, extending access to downsizer contributions and improving the Pension Loan Scheme.

From 1 July 2022, those aged between 67-years-old and 74-years-old will no longer be subject to meeting a work test before making or receiving non-concessional superannuation contributions or salary sacrificed contributions.

Individuals in this age range will be able to access the non-concessional bring forward arrangement, however access to concessional personal deductible contributions will still be subject to the work test.

The existing $1.6 million cap on lifetime superannuation contributions ($1.7 million from July 1) will continue to apply, along with the annual concessional and non-concessional caps.

In addition, the government has extended access to downsizer contributions by lowering the

eligibility age by five years to 60, allowing post-tax contributions of up to $300,000 per person into their superannuation.

The change is aimed at ensuring Australians are more secure in retirement if they downsize their home, as well as freeing up the supply of housing for younger families.

Further to this, from 1 July 2022 the Pension Loan Scheme (PLS) will provide access to advance payments in a lump sum and introduce a No Negative Equity Guarantee.

The PLS will give eligible retirees immediate access to lump sums of 50% of the maximum Aged Pension, being around $12,385 for singles and $18,670 for couples.

Those who are eligible are permitted two advances totalling up to the maximum amount in a year.

The No Negative Equity Guarantee mandates that borrowers under the PLS will not owe more than the market value of their property.

Boosting aged care Aged care expenditure will increase 7% during 2021-22 to $24.3 billion and by 37% over the next four years to $31.2 billion, making it one of the fastest growing areas of the budget.

This significant increase includes nearly $18 billion in specific funding that is in direct response to recommendations that arose from the Royal Commission. Almost half of this will be directed to reforming residential aged care with $6.5 billion ear-marked for in-home facilities investment.

The budget also contains initiatives to make the sector easier to access and navigate. These include new funding models that aim to better align patient care needs with provider capabilities, providing better information to families regarding the quality of care patients are receiving, imposing service level benchmarks on providers and introducing better choice and control mechanisms.

The My Aged Care website and contact centres will receive extra attention through the imposition of higher performance and client satisfaction targets. Disclosure standards of performance of providers against Aged Care Quality Standards will also be enhanced.

These reforms are expected to dramatically impact how Australia’s 3000 aged care providers operate their 9000 outlets. Partially in response to this, the budget also includes the announcement of nearly 34,000 training places to supplement the 370,000-strong aged care workforce.

Key Treasury initiatives outlined Buried deep within budget documents are several steps the government will take to further boost our financial system, including greater powers for regulators and $11.2 million to enhance super fund member outcomes.

While far from the headline measures introduced, this year’s budget included numerous tweaks to the financial system’s structure, processes and oversight.

Chiefly, the government is set to introduce a Financial Market Infrastructures (FMIs) regulatory reform package that will provide Australian regulators with the power to pre-emptively identify and manage risks, or intervene in a FMI failure crisis.

Under the reforms, the Reserve Bank of Australia (RBA) will be able to manage a failure at a clearing and settlement facility. There will also be a facility for the RBA to draw up to $5 billion per event as a last resort measure to ensure the continued operation of clearing and settlement facilities, with any funding to be recovered once a crisis is resolved.

Further, ASIC will be given enhanced

The government is focused on improving retirement outcomes for women by increasing superannuation coverage and making our system fairer.

Jane Hume

23

supervisory and licensing power, and regulatory powers will be streamlined to ensure system efficiency.

APRA will also receive $9.6 million over the next four years to supervise and enforce the implementation of the Your Future, Your Super reforms. A further $1.6 million will be given to Super Consumers Australia to support stronger outcomes for super fund members.

The funding for this initiative will be partially met through an increase in levies on regulated financial institutions, the government said.

Even Kiwis, or at least those now living and working across the ditch are set to benefit, with the government committing $11 million over the coming four years and $1 million per year thereafter to facilitate the transfer of unclaimed super to KiwiSaver accounts.

And something that isn’t expected to incur any cost, the government has said it will look to restore previously available regulatory relief for foreign financial service providers who are licensed and regulated in jurisdictions with similar financial systems. The relief would mean these entities would not need to hold an AFSL to operate in Australia, reducing duplicate requirements.

It will also develop a means of fast tracking the licensing process for foreign financial service providers who wish to establish more permanent operations in Australia.

On the flip side, the government will provide Treasury with close to $60 million over the next five years to support the delivery of its priorities.

Industry responds Responses to the budget were largely mixed, with many industry stakeholders saying several measure don’t go far enough.

HESTA welcomed the scrapping of the $450 super threshold but said there were disappointingly few budget measures targeted at improving women’s financial security in retirement.

HESTA chief executive Debby Blakey said that the super system continues to have a ‘gender blind spot’ that saw women retire with considerably less.

“HESTA has been calling for the scrapping of the unfair $450 super threshold for more than 10 years so it’s pleasing the government has taken this long overdue step as it will help improve financial security for women and the lower paid,” she said.

“However, the fact that super continues not to be paid on parental leave remains a glaring gap in our super system.”

Rest also welcomed the move, but agreed it should only be regarded as the first step.

Elsewhere, the Actuaries Institute said the budget had not leveraged the Retirement Income Review report’s findings. “...such as measures to help non-homeowners (renters) in retirement, in particular some of the most at risk of poverty in retirement - single female renters,” it said.

“The system also still lacks an overall objective for superannuation and its role in supporting retirement incomes,” Actuaries Institute president Jefferson Gibbs said.

Finally, on tax cuts, H&R Block director of tax communications Mark Chapman said: “Let’s call this what it is and ignore the government spin; this isn’t a tax cut, its simply the deferral of a tax rise. Nobody should be counting the extra dollars in next year’s pay packets because there aren’t any; the tax burden for low and middle income individuals next year is exactly the same as it was this year.”

“So, a cautious welcome but – please – let’s not sell it as a tax cut.” fs

24

International

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

Macquarie, W&R finalise deal

01: Bill Gates

co-founder Microsoft

Karren Vergara

Macquarie Asset Management has completed the acquisition of NYSE-listed Waddell & Reed Financial.

Overall, Macquarie paid $2.3 billion for Waddell & Reed Financial, an asset management and financial planning company based in Kansas.

In finalising the acquisition, MAM has also sold off Waddell & Reed’s wealth business to LPL Financial, a retail investment advisory firm, broker-dealer and registered investment advisor custodian, for US$300 million.

Some 900 Waddell & Reed advisers have joined LPL. LPL expects to onboard the advisers over the next few months.

MAM will retain Waddell & Reed’s asset management business Ivy Investments, which has about US$76 billion in assets under management.

LPL Financial chief executive Dan Arnold said: “Waddell & Reed advisers are seasoned and wellregarded throughout the industry and are a strong cultural and strategic fit with us. We look forward to supporting them with our comprehensive platform that helps them design and operate the perfect practice for them and their clients. Waddell & Reed and Macquarie have been strong partners throughout the process, and we look forward to our ongoing collaboration.” fs

Russell adds to senior leadership Annabelle Dickson

Russell Investments has named a longstanding Goldman Sachs managing director as its global chief investment officer and appointed a president from Morgan Stanley to oversee sales and support.

Kate El-Hillow spent over 16 years at Goldman Sachs Asset Management and served as deputy chief investment officer and was previously a senior portfolio manager for OCIO portfolios and head of portfolio management and trading.

El-Hillow previously spent eight years at J.P. Morgan Chase & Co., where she held dual roles as client portfolio manager and chief operating officer in the asset allocation business.

Based in New York, El-Hillow will work closely with chair and chief executive Michelle Seitz and will oversee all aspects of the firm’s investment division, including portfolio management, implementation, and research.

“There are very few firms that offer Russell Investments’ one-stop access to end-to-end investment solutions, proprietary risk management tools, and trading and implementation capabilities,” El-Hillow said.

“Clients today are grappling with more complex investment problems, and Russell Investments is uniquely positioned to provide holistic solutions that will help them achieve their goals.”

In addition, Kevin Klingert has been appointed as president and will focus on the day-to-day business execution.

He previously spent a decade at Morgan Stanley Investment Management where he was global chief operating officer, head of global operating group, global head and chief investment officer of liquidity and managed futures. fs

Bill and Melinda Gates file for divorce Elizabeth McArthur

I The quote

We ask for space and privacy for our family as we begin to navigate this new life.

n what is expected to result in one of the largest settlements on record, Bill01 and Melinda Gates have filed for divorce.

A petition for dissolution of their marriage was filed by the couple, who share a US$130 billion fortune, in King County, Washington.

They have been married since 1 January 1994. They have said they will continue their professional relationship at the Bill and Melinda Gates Foundation, said to be the largest private foundation in the world.

“The marriage is irretrievably broken. We ask the court to dissolve our marriage and find that our marital community ended on the date stated in our separation contract,” the filing said.

Their youngest child has just turned 18, so no custody arrangements are needed, and the filings said there would be no need for child support or spousal support.

There is a written separation contract, which the court is asked to enforce.

The Gates’ released a joint statement confirming the divorce.

“After a great deal of thought and a lot of work on our relationship, we have made the decision to end our marriage. Over the last 27 years, we

have raised three incredible children and built a foundation that works all over the world to enable all people to lead healthy, productive lives,” they said.

“We continue to share a belief in that mission and will continue our work together at the foundation, but we no longer believe we can grow together as a couple for the next phase of our lives. We ask for space and privacy for our family as we begin to navigate this new life.”

The Gates’ have significant assets to divide.

The Land Report recently revealed the couple are the largest owners of farmland in the entire US. The couple owns approximately 242,000 acres.

Cascade Investment, the holding company controlled by the Gates’, is technically the owner of the land.

The couple also owns an impressive art collection which includes Leonardo da Vinci’s notebook, known as The Codex Leicester, which he purchased in 1994 for US$30.8 million. In 2017, he loaned the manuscript to a museum in Florence – its first time being displayed to the public in decades.

Various publications have also reported that Bill and Melinda Gates own up to 30 luxury vehicles, two private jets and multiple helicopters. fs

Canadian pension giant, real estate manager in joint venture Jamie Williamson

A major Canadian pension investment manager has entered a joint venture with a UK real estate investment firm to develop a logistics portfolio valued at close to $2 billion.

Together, the Public Sector Pension Investment Board (PSP Investments) and Bridge Industrial will acquire properties and develop last-mile logistics assets in Greater London and the Midlands region.

They are targeting a total portfolio value of $1.78 billion, focused on “build-to-core” opportunities.

Under the arrangement, Bridge will oversee all development activities.

“We are excited to form this strategic partnership with PSP Investments as Bridge continues to grow its global portfolio and capital

partnerships,” Bridge chief financial officer Sean Zasche said.

“Their focus on high-quality, infill real estate and long-term ownership aligns well with Bridge’s business model.”

Likewise, PSP Investments managing director for Europe and Asia Pacific, real estate investments Stephane Jalbert said the investment manager is excited to be partnering with Bridge as it builds out its European logistics portfolio.

“Urban logistics is a key sector for PSP globally, given the accelerated growth of e-commerce and the need to adapt real estate to meet shifting consumer behaviour. Bridge has proven development capabilities from which the venture will benefit, enhancing returns beyond the sector trend,” he said. fs

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Between the lines

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

Pengana appoints US manager

01: Paul Barrett

chief executive AZ NGA

Kanika Sood

Pengana Capital has appointed a US-based fund manager to its global equities assets, after Jordan Cvetanovski and Steven Glass’s surprise walkout in March.

Connecticut-based Axiom Investors will manage the two funds: Pengana International Ethical Fund and Pengana International Fund – Ethical Opportunity.

Axiom manages US$19 billion in total assets, including for institutional investors.

The Axiom Global Equity strategy has returned 11.64% p.a. over 10 years, and 17.30% p.a. over three years – better than benchmark.

“We are excited to be able to bring such a high-quality investment product to our Australian investors. We pride ourselves on our track record of partnering with some of the world’s leading investment teams, and Axiom fits perfectly into this construct,” Penagana Capital Group chief executive Russel Pillemer said.

In March, Cvetanovski and Glass who co-founded Pengana’s international equities business, left the firm.

At the time, Pengana said it would announce permanent arrangements for the investment management team soon, including the appointment of an external manager.

“Jordan and Steven have no intention to, and will not, disturb existing client relationships of the International Equity Strategy funds. They are confident that with their individual track records of success they will enjoy new opportunities,” the two said in a joint statement at the time. fs

25

AZ NGA acquires two advice practices Karren Vergara

A The quote

Our focus is increasingly on other capital cities and subur­ban corridors of growth.

Z Next Generation Advisory (AZ NGA) has acquired two Queensland-based financial planning firms.

Blue Harbour Financial Partners (formerly Bridges Brisbane Bayside) and Henderson Matusch Group brings the network to a total of 79.

Blue Harbour, which was part of Bridges Financial Services, rebranded in late April when it became an authorised representative of Fortnum Advice.

Based in Cleveland, Blue Harbour is led by partners Todd Hitchcock, the chief executive, and Blake Roberts, the chief financial officer. It employs 16 staff, including six financial advisers.

Based in Brisbane, Henderson Matusch is led by executive directors Benjamin Matusch and Ian Henderson, and director Colin Archard.

Rainmaker Mandate Top 20

AZ NGA will bring over some 19 financial advisers from both practices.

AZ NGA chief executive Paul Barrett 01 said Queensland is an important geographic area for the group and a market with exceptional professional accounting and advisory businesses.

“The addition of Blue Harbour Financial Partners and Henderson Matusch Group broadens the capability inside AZ NGA and expands our capacity for long-term growth,” he said.

“We have built a strong presence in New South Wales and Victoria, and our focus is increasingly on other capital cities and suburban corridors of growth. We continue to see plenty of potential opportunities.”

Matthews Steer Accountants and Advisors, a Melbourne-based wealth management firm, joined the network in September 2020. fs

Selected alternative investment mandates appointed last two quarters.

Appointed by

Asset consultant

Investment manager

Mandate type

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

Triple Three Partners Pty Ltd

Alternative Investments

Care Super

JANA Investment Advisers

LGT Capital Partners

Private Equity

9

Care Super

JANA Investment Advisers

Antin Infrastructure Partners, S.A.S

Infrastructure

23

Christian Super

JANA Investment Advisers

Other

Other

26

Christian Super

JANA Investment Advisers

First Sentier Investors

Infrastructure

7

Christian Super

JANA Investment Advisers

LGT Capital Partners

Alternative Investments

4

Christian Super

JANA Investment Advisers

Siguler Guff & Company, LP

Alternative Investments

3

Construction & Building Unions Superannuation

Frontier Advisors

Capital Dynamics (Australia) Limited

Infrastructure

104

Energy Industries Superannuation Scheme - Pool A

Cambridge Associates; JANA Investment Advisers

LGT Capital Partners

Private Equity

4

Energy Super

JANA Investment Advisers

Franklin Templeton Investments Australia Limited

Private Equity

15

Energy Super

JANA Investment Advisers

Ardea Investment Management Pty Limited

Alternative Investments

Energy Super

JANA Investment Advisers

QIC Limited

Various

Health Employees Superannuation Trust Australia

Frontier Advisors

Russell Investment Management Ltd

Currency Overlay

Hostplus Superannuation Fund

JANA Investment Advisers

Other

International Private Equity

2

Local Government Super

Cambridge Associates; JANA Investment Advisers

Marathon Asset Management (Australia) Limited

Other

6

Local Government Super

Cambridge Associates; JANA Investment Advisers

PGIM, Inc.

Hedge Fund

MTAA Superannuation Fund

Whitehelm Capital

Macquarie Investment Management Australia Limited

International Infrastructure

Natixis Investment Managers Australia Pty Limited

Other

Other

Spirit Super

Whitehelm Capital

Macquarie Investment Management Australia Limited

International Infrastructure

Sunsuper Superannuation Fund

Aksia; JANA Advisers; Mercer Consulting; StepStone

StepStone Pty Ltd

Infrastructure

Amount ($m) 30

124 47

100 29 220 29 454 Source: Rainmaker Information

26

Managed funds

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09 PERIOD ENDING – 31 MARCH 2021

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

$m

% p.a. Rank

% p.a. Rank

% p.a. Rank

CAPITAL STABLE

Vanguard Diversified High Growth Index ETF

863

31.6

6

13.0

1

Macquarie Capital Stable Fund

27

9.6

20

7.0

1

6.6

3

Vanguard Diversified Growth Index ETF

399

24.0

19

10.7

2

IOOF MultiMix Moderate Trust

586

13.3

7

6.9

2

7.3

1

3857

31.5

7

10.5

3

10.9

4

Dimensional World Allocation 50/50 Trust

644

20.4

1

6.5

3

7.1

2

Vanguard High Growth Index Fund Perpetual Split Growth Fund

43

28.4

13

10.2

4

10.9

3

MLC Index Plus Conservative Growth

251

15.6

5

6.3

4

MLC Wholesale Horizon 6 Share

309

33.3

4

10.1

5

11.0

2

MLC Horizon 3 Conservative Growth

1150

17.3

3

5.9

5

Fiducian Ultra Growth Fund

246

47.8

1

10.0

6

11.3

1

Vanguard Diversified Conservative Index ETF

169

9.9

18

5.9

6

Fiducian Growth Fund

192

32.3

5

9.6

7

10.1

7

Vanguard Conservative Index Fund

2898

9.9

19

5.8

7

5.6

6

10

34.3

3

9.6

8

10.5

5

AMP Capital Income Generator

1477

16.2

4

5.5

8

5.5

8

IOOF MultiMix Growth Trust

673

22.4

21

9.4

9

10.4

6

Perpetual Conservative Growth Fund

325

10.0

17

5.4

9

5.0

13

MLC Wholesale Index Plus Growth

156

26.8

16

9.2

IOOF MultiMix Conservative Trust

639

8.3

22

5.3

10

5.6

7

Sector average

602

27.8

Sector average

419

4.8

5.0

BT Multi-Manager High Growth Fund

10

8.0

8.7

BALANCED

11.6

6.3

4

CREDIT

BlackRock Global Allocation Fund (Aust)

585

34.4

2

9.8

1

9.3

3

MCP Real Estate Debt Fund

762

7.9

10

8.8

1

Ausbil Balanced Fund

132

34.8

1

9.7

2

10.2

1

MCP Secured Private Debt Fund II

653

7.7

11

8.5

2

Australian Ethical Balanced Fund

153

19.8

24

9.7

3

Legg Mason Brandywine Global Inc. Opt. Fund

135

15.6

2

7.3

3

Macquarie Balanced Growth Fund

789

17.8

30

9.1

4

9.6

2

Yarra Enhanced Income Fund

169

12.0

5

5.6

4

BlackRock Tactical Growth Fund

533

23.6

14

8.8

5

8.2

13

VanEck Vectors Aust. Corp. Bond Plus ETF

246

3.9

23

5.1

5

Fiducian Balanced Fund

477

27.3

4

8.8

6

9.2

4

Metrics Credit Div. Aust. Sen. Loan Fund

2904

4.3

21

5.0

6

4.9

4

Responsible Investment Leaders Bal

128

24.9

8

8.6

7

8.4

11

Janus Henderson Diversified Credit Fund

642

13.9

4

4.9

7

5.1

3

92

21.3

21

8.5

8

8.5

9

Pendal Enhanced Credit Fund

407

3.1

26

4.6

8

4.4

10

IOOF MultiMix Balanced Growth Trust

1871

17.8

31

8.4

9

9.2

5

Vanguard Australian Corp Fixed Interest Index

543

2.7

28

4.6

9

4.5

7

MLC Wholesale Index Plus Balanced

298

22.3

20

8.0

Vanguard International Credit Securities Index

544

6.2

15

4.5

10

4.2

11

Sector average

692

21.8

Sector average

790

6.4

4.0

3.8

SSGA Passive Balanced Trust

10

6.9

7.5

Note: The performance figures for diversified funds are net of fees, performance figures for sector specific funds are adjusted for fees.

6.6

1

Source: Rainmaker Information

ESG analysis is a tricky road ne of the many questions surrounding O ESG investment options is whether they provide superior investment returns.

Dial tones

By John Dyall john.dyall@ financialstandard .com.au www.twitter.com /JohnDyall

It’s not a trivial question, but like the questions surrounding active management it is one that receives many self-serving answers.

Given the variety of ESG methodologies this is not surprising. There is no agreed upon definition of what an “ESG” style encapsulates, at least not in the same way that “value”, “growth” or even “quality” have agreed definitions.

At their most basic ESG options avoid certain industries. They are unlikely to invest in arms manufacturers, tobacco or gambling. Companies in these categories are not that significant in the scheme of things, so avoiding them is not as likely to create an environment of consistent outperformance or underperformance.

The big companies they are likely to avoid are those involved in fossil fuels. If these industries are going through a cyclical decline – which they are – then it is likely that portfolios that deliberately avoid them will outperform. This isn’t a result of an ESG manager’s investment philosophy, it is the result of decreased demand for the product these companies sell.

But lumping together all the self-declared ESG funds and analysing them for signs of difference

to the norm is doing a disservice to those funds that look, act and behave as ESG funds, but don’t declare themselves as such. As an example, the “quality” investment style exhibits many of the same characteristics investors would expect to see from an ESG-styled fund. After all, “quality” companies would, you’d think, embrace diversity among their management and on their boards and ensure that their supply chains weren’t exploiting vulnerable workers.

In addition, ESG as a brand or marketing label is a relatively new phenomenon. This means researchers don’t have times series of returns that have lasted through different business and investment cycles. Analysts simply cannot determine whether ESG funds as a group perform more like eachother or whether individually they perform more like other accepted investment styles.

My thoughts are that individual ESG investment products or options should be analysed on their own merits and not part of a broad grouping. If they are actively managed, they should be compared both with replicable ESG indexes and against traditional market cap weighted indexes.

There are two ways to analyse ESG product returns. The first is qualitative, where analysts look through a manager’s philosophy and process to ensure the manager lives and breathes

their ESG philosophy. They would also examine a manager’s voting record at company AGMs and have some way of looking at how effectively the manager engages with company management. Hopefully, this ensures that managers and companies engaged in so-called “greenwashing” are called out and held to account. This is a tough one, as it also depends on the quality, integrity and incorruptibility of the analysts making the call. We have all seen the rise of instant experts in any number of industries happy to provide accreditation where there is payment on offer.

The second is quantitative. Personally, I would expect active ESG managers to have lower turnover than average, since they should be invested for the long haul rather than for short-term gains. Active risk against traditional indexes, or tracking error, should also be higher. We want companies that think and behave differently, and we want managers to do the same. And maybe it’s just me, but I would expect a good ESG-style company to have resiliency by investing in and planning for the future. This should result in lower downside risk.

And so to answer the original question: Individual ESG products will have superior investment results (and that’s not just performance) but as a group their results will be as widely varied as the rest of the market. fs

Super funds

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09 PERIOD ENDING – 31 MARCH 2021

Workplace Super Products

1 year

3 years

% p.a. Rank

5 years

SS

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

GROWTH INVESTMENT OPTIONS

27

* SelectingSuper [SS] quality assessment

Retirement Products

1 year

3 years

% p.a. Rank

5 years

SS

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

GROWTH INVESTMENT OPTIONS

UniSuper - Sustainable High Growth

29.1

11

12.9

1

12.0

2

AAA

UniSuper Pension - Sustainable High Growth

32.3

15

14.3

1

13.3

2

AAA

UniSuper - High Growth

35.1

1

11.8

2

12.6

1

AAA

UniSuper Pension - High Growth

38.4

3

13.1

2

13.9

1

AAA

HESTA - Sustainable Growth

26.5

33

10.6

3

10.8

7

AAA

Suncorp Brighter Super pension - MM High Growth Fund

26.6

51

12.2

3

AAA

UniSuper - Growth

28.3

16

10.2

4

10.7

8

AAA

HESTA Income Stream - Sustainable Growth

29.7

27

11.6

4

11.7

8

AAA

Equip MyFuture - Growth Plus

30.0

9

10.0

5

11.7

3

AAA

UniSuper Pension - Growth

31.3

19

11.3

5

11.9

7

AAA

PSSap - Aggressive

21.8

91

9.9

6

10.3

14

AAA

smartMonday PENSION - High Growth Index

34.5

9

11.3

6

11.5

13

AAA

Military Super - Aggressive

21.7

93

9.8

7

10.3

14

AAA

MyLife MyPension - PositiveIMPACT

20.5

83

11.2

7

AAA

Cbus Industry Super - High Growth

30.9

7

9.8

8

11.1

5

AAA

Cbus Super Income Stream - High Growth

35.3

5

11.0

8

12.5

5

AAA

ADF Super - Aggressive

21.4

96

9.8

9

AAA

Vision Income Streams - Growth

30.7

22

11.0

9

11.7

9

AAA

HOSTPLUS - Shares Plus

30.1

8

9.7

AAA

Equip Pensions - Growth Plus

33.9

12

10.9

10

12.9

3

AAA

Rainmaker Growth Index

25.0

Rainmaker Growth Index

27.8

10

8.1

11.5

4

8.9

BALANCED INVESTMENT OPTIONS

8.8

9.8

BALANCED INVESTMENT OPTIONS

UniSuper - Sustainable Balanced

20.0

33

10.0

1

9.4

2

AAA

UniSuper Pension - Sustainable Balanced

22.6

29

11.4

1

1

AAA

UniSuper - Balanced

22.6

9

9.1

2

9.2

4

AAA

Suncorp Brighter Super pension - MM Growth Fund

21.7

40

10.8

2

AAA

Australian Ethical Super Employer - Balanced (accumulation)

19.3

49

8.9

3

8.4

21

AAA

Future Super - Balanced Growth Pension

19.2

71

10.4

3

8.4

43

AAA

Australian Catholic Super Employer - Socially Responsible

17.3

77

8.9

4

8.0

40

AAA

UniSuper Pension - Balanced

25.4

7

10.4

4

10.4

3

AAA

AustralianSuper - Balanced

21.7

16

8.6

5

9.5

1

AAA

Australian Catholic Super RetireChoice - Socially Responsible

19.1

72

10.0

5

9.1

22

AAA

HOSTPLUS - Indexed Balanced

22.7

8

8.5

6

8.7

13

AAA

Sunsuper Income Account - Balanced Index

25.0

8

9.6

6

9.4

13

AAA

Sunsuper Super Savings - Balanced Index

22.7

6

8.4

7

8.2

24

AAA

HOSTPLUS Pension - Indexed Balanced

25.8

5

9.5

7

9.8

8

AAA

CareSuper - Sustainable Balanced

18.2

60

8.4

8

8.4

20

AAA

ESSSuper Income Streams - Basic Growth

22.9

25

9.4

8

AAA

Lutheran Super - Balanced Growth - MySuper

20.6

24

8.2

9

8.8

11

AAA

AustralianSuper Choice Income - Balanced

24.1

14

9.4

9

10.4

2

AAA

AustralianSuper - Indexed Diversified

20.1

31

8.2

10

8.3

23

AAA

AustralianSuper Choice Income - Indexed Diversified

22.8

27

9.3

10

9.4

12

AAA

Rainmaker Balanced Index

17.9

Rainmaker Balanced Index

20.1

6.6

7.3

CAPITAL STABLE INVESTMENT OPTIONS

7.3

10.6

7.9

CAPITAL STABLE INVESTMENT OPTIONS

QSuper Accumulation - Lifetime Aspire 2

13.0

16

7.3

1

7.3

5

AAA

Suncorp Brighter Super pension - MM Balanced Fund

15.1

19

8.4

1

AAA

QSuper Accumulation - Lifetime Focus 1

13.4

13

7.2

2

7.3

6

AAA

Vision Income Streams - Balanced

18.5

2

7.9

2

8.7

1

AAA

Vision Super Saver - Balanced

16.6

2

7.0

3

7.7

1

AAA

AustralianSuper Choice Income - Conservative Balanced

17.1

7

7.7

3

8.4

2

AAA

AustralianSuper - Conservative Balanced

14.9

5

6.8

4

7.4

2

AAA

QSuper Income - QSuper Balanced

13.1

34

7.5

4

8.2

4

AAA

QSuper Accumulation - QSuper Balanced

12.1

20

6.7

5

7.3

4

AAA

Cbus Super Income Stream - Conservative Growth

15.5

15

7.5

5

8.2

3

AAA

QSuper Accumulation - Lifetime Focus 2

11.8

22

6.7

6

6.6

10

AAA

LUCRF Pensions - Moderate

17.0

9

7.2

6

7.5

6

AAA

VicSuper FutureSaver - Balanced

12.3

18

6.3

7

7.4

3

AAA

Suncorp Brighter Super pension - Suncorp Universal Bal Fund

17.2

5

6.5

7

AAA

Cbus Industry Super - Conservative Growth

13.6

10

6.2

8

AAA

Aware Super Pension - Balanced Growth

13.0

37

6.5

8

5

AAA

LUCRF Super - Moderate

14.5

6

6.2

9

6.5

11

AAA

Suncorp Brighter Super pension - Lifestage Fund 1955-1959

17.4

4

6.5

9

AAA

QSuper Accumulation - Lifetime Focus 3

10.1

43

6.1

10

6.0

17

AAA

Super SA Income Stream - Moderate

17.1

8

6.5

9

AAA

Rainmaker Capital Stable Index

10.5

Rainmaker Capital Stable Index

9.6

4.4

4.7

4.8

7.7

7.2

10

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

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

2021 Rainmaker Information AAA Quality Ratings announced View the full list of AAA rated superannuation products at www.rainmaker.com.au

28

Economics

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

It’s not time to make a change: Fed Ben Ong

T

he US Federal Reserve’s message to the markets at the conclusion of its recent FOMC meeting essentially is to spread calm and not make waves.

After two days of deliberation, the Committee decided to maintain the status quo - federal funds rate at 0-0.25% increase its bond purchases by at least US$80 billion a month and agency mortgage‑backed securities by around US$40 billion monthly. “…I know that it’s not easy, to be calm when you’ve found, something going on.” That “something” is the sharp improvement in economic activity underpinned by low interest rates, trillions of dollars of government support to households and businesses, falling coronavirus infections and the acceleration in vaccinations.

These is not lost on the Fed. “Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement.”

The US National Accounts released the day after backs up the Fed’s statement. Preliminary estimates showed that the US economy expanded at annualised rate of 6.4% in the March 2021 quarter following the previous three-month’s 4.3% growth.

As per the definition of “annualised growth rate” – the rate that would be registered if the quarterly change were maintained for a full year – both the IMF and the OECD’s most recent 2021 US GDP growth forecasts are on the ball, at 6.4% and 6.5%, respectively.

The conventional year-over-year measure also provides reason to be raving as calculations show the US economy growing by 0.4% in the year to the March 2021 quarter following three consecutive quarters of contraction.

The first quarter growth was driven by a 10.7% annualised jump in consumer spending – the one that accounts for about 70% of the US economy. The revival in consumer confidence suggests continued strength, if not further increases, in US consumer spending.

The Conference Board’s survey showed consumer confidence surged to a reading of 121.7 in April – the highest level from February last year and the fourth straight month of improvement. Similarly, the University of Michigan’s improved to a reading of 86.5 in April – the highest since March 2020 – from 84.9 in the previous month.

There’ll be plenty more where this came from because confident consumers are spending consumers. More so, if they’re expecting good jobs prospects, continued monetary policy accommodation and increased fiscal largesse.

The latest Conference Board consumer confidence survey for April found that the percentage of consumers saying jobs are “plentiful” increased from 26.5% to 37.9%, while those claiming jobs are “hard to get” declined from 18.5% to 13.2%.

And there’s US president Joe Biden’s US$1.8 trillion “American Families Plan” and, although still in the works, his broader US$4 trillion plus (including US$2.25 trillion in infrastructure spending). fs

Monthly Indicators

Apr-21

Mar-21

Feb-21

Jan-21

Dec-20

Consumption Retail Sales (%m/m)

-

1.40

-0.78

0.29

Retail Sales (%y/y)

-

2.30

9.09

10.61

-3.55 9.74

Sales of New Motor Vehicles (%y/y)

-

22.42

5.05

11.06

13.55

Employment Employed, Persons (Chg, 000’s, sa)

-

70.71

88.67

29.47

46.35

Job Advertisements (%m/m, sa)

-

7.40

8.80

2.98

8.82

Unemployment Rate (sa)

-

5.62

5.83

6.34

6.59

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

-

-

15.09

-11.77

16.44

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

-

-

21.65

-19.37

12.17

Survey Data Consumer Sentiment Index

118.78

111.80

109.06

107.00

AiG Manufacturing PMI Index

-

59.90

58.80

55.30

112.00 -

NAB Business Conditions Index

-

25.23

17.00

10.44

14.67

NAB Business Confidence Index

-

15.47

17.82

12.97

6.50

Trade Trade Balance (Mil. AUD)

-

-

7529.00

9616.00

Exports (%y/y)

-

-

9.10

1.64

-6.49

Imports (%y/y)

-

-

-3.64

-12.23

-14.03

Mar-21

Dec-20

Sep-20

Jun-20

Mar-20

Quarterly Indicators

7577.00

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

-

14.52

10.71

16.38

7.48

% of GDP

-

2.86

2.20

3.50

1.48

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

-

-6.55

3.22

15.84

3.02

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

-

0.67

0.08

0.08

0.53

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

-

0.52

0.53

-0.08

0.38

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

-

0.52

0.45

0.00

0.45

Inflation CPI (%y/y) headline

1.11

0.86

0.69

-0.35

2.19

CPI (%y/y) trimmed mean

1.10

1.20

1.20

1.30

1.70

CPI (%y/y) weighted median

1.30

1.30

1.20

1.20

1.40

Output

News bites

UK PMI The IHS Markit / CIPS Flash UK Composite PMI surged to 60.0 in April – the highest reading in around seven and half years. The manufacturing PMI jumped to 60.7, the best reading in nearly 27 years while the PMI for services rose to 60.1 – the highest in 80 months. This is also the first time since the pandemic that activity in the UK service sector outpaced manufacturing production (59.1) due mainly to “a boost from easing government stringency measures regarding some consumer services and non-essential retail in England and Wales from mid-April, with Scotland and Northern Ireland to follow similar reopening paths by the end of this month”.

US PMI The IHS Markit flash US Composite PMI rose to a reading of 62.2 in April – an all-time high – from

Real GDP Growth (%q/q, sa)

-

3.13

3.40

-7.00

-0.30

March’s final reading of 59.7, with activity in both the manufacturing (60.6) and services sectors (63.1) ramping up to their highest levels on record.

America’s service sector activity has been boosted by the easing of social and business restrictions resulting from declining rates of coronavirus infections and the ramping up of vaccinations in the country. Similarly, and despite supply chain disruptions, activity in the manufacturing sector had been buoyed by a significant improvement in manufacturing production. However, the surveys’ findings with regards to inflation isn’t good – “pace of output price inflation for goods and services accelerated to a series high”.

Real GDP Growth (%y/y, sa) Industrial Production (%q/q, sa)

-

-1.12

-3.70

-6.31

1.40

-

-0.30

0.20

-3.01

0.10

Eurozone PMI The IHS Markit flash Eurozone Composite PMI increased to a nine-month high reading of 53.7 in April (from 53.2 in March). The region’s manufacturing PMI rose to a record high of 63.3 while the services PMI went up to a reading of 50.3 – the first reading indicating expansion and the highest in eight months. This is good news according to Chris Williamson, chief business economist at IHSMarkit.

“In a month during which virus containment measures were tightened in the face of further waves of infections, the eurozone economy showed encouraging strength. Although the service sector continued to be hard hit by lockdown measures, it has returned to growth as companies adjust to life with the virus and prepare for better times ahead.” fs

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

- 30-Apr

3.03

-3.08

-5.51

-1.91

Mth ago 3mths ago 1yr ago 3yrs ago

Interest rates RBA Cash Rate

0.10

0.10

0.10

0.25

1.50

Australian 10Y Government Bond Yield

1.69

1.79

1.09

0.89

2.61

Australian 10Y Corporate Bond Yield

1.96

1.58

1.27

2.17

3.36

Stockmarket All Ordinaries Index

7290.7

4.60%

6.11%

30.24%

20.08%

S&P/ASX 300 Index

7021.5

4.44%

6.45%

28.05%

18.21%

S&P/ASX 200 Index

7025.8

4.27%

6.33%

27.22%

17.44%

S&P/ASX 100 Index

5801.1

4.30%

6.43%

27.01%

17.95%

Small Ordinaries

3285.5

5.47%

6.64%

36.59%

20.06%

Exchange rates A$ trade weighted index

64.40

A$/US$

0.7725 0.7600 0.7673 0.6547 0.7549

64.50

63.00

57.80

62.50

A$/Euro

0.6417 0.6480 0.6315 0.5977 0.6248

A$/Yen

84.43 83.83 80.33 70.01 82.60

Commodity Prices S&P GSCI - commodity index

505.85

468.96

430.99

257.04

475.76

Iron ore

163.68

166.99

163.93

83.84

65.40

Gold

1767.65 1683.95 1863.80 1702.75 1313.20

WTI oil

63.58

60.55

52.16

19.23

Source: Rainmaker Information /

68.56

Sector reviews

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

Figure 1. Australian CPI inflation measures

Australian equities

6.0

8.0

Trimmed mean

7.0

Weighted median

6.5

3.0

RBA target band

6.0

2.0

5.5

1.0

Prepared by: Rainmaker Information Source:

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].

RATE %

7.5

Headline

4.0

CPD Program Instructions

Figure 2. Unemployment rate

ANNUAL CHANGE %

5.0

5.0

0.0

4.5 4.0

-1.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Low for longer Ben Ong

L

atest inflation figures released by the Australian Bureau of Statistics (ABS) underscores both the RBA’s prescience and governor Philip Lowe’s expectation that the official cash rate would remain low until “at least 2024”.

According to the ABS, “Annual inflation for the March 2021 quarter increased to 1.1 per cent following a rise of 0.9 per cent in the December quarter. Price rises in tobacco and furnishings were partially offset by falls in rents, automotive fuel and utilities”.

While the annual rate of change in the headline CPI continued to improve since the deflation of the June 2020 quarter (-0.4%) – the first since the March quarter of 1998 (-0.2%) – it remains below even the bottom end of the RBA’s 2%-3% target band.

In addition, and as the Australian central bank anticipated at its April meeting, “In the short term, CPI inflation is expected to rise

International equities

temporarily because of the reversal of some COVID-19-related price reductions”, suggesting that the acceleration in consumer prices over the past three quarters could reverse.

But more important, the RBA’s preferred measure of inflation – the trimmed mean – decelerated to an annual rate to 1.1% in the March 2021 quarter – the lowest on record – from 1.2% in the December 2020 quarter.

The RBA anticipated all these in its April missive. “…wage and price pressures are subdued and are expected to remain so for some years. The economy is operating with considerable spare capacity and unemployment is still too high. It will take some time to reduce this spare capacity and for the labour market to be tight enough to generate wage increases that are consistent with achieving the inflation target.” Looking through this, underlying inflation is expected to remain below 2% the next few years.

The Australian economy is certainly recovering faster than expected and the labour market has improved significantly.

The unemployment rate dropped to 5.6% in March after jumping to 7.5% in July last year, its highest level in 22 years.

This jobless rate remains insufficient to drive wages higher.

Recall the good governor declaring that wages have to grow sustainably by more than 3% for it to be transmitted into higher inflation.

The experience of the past few years suggests that the unemployment rate needs to drop by more than the RBA’s expectations of “around 5.25 per cent by mid 2023”.

Australia’s unemployment rate fell to around 5.0% between late-2018 and early-2019, yet growth in total wages growth reached a high of only 2.3% during that period and the annual rate of inflation remained below the RBA’s target – headline CPI and underlying measure at 1.9%. fs

Figure 1. New Zealand house prices

Figure 2. NZ unemployment and inflation

25

6

PERCENT

RATE %

ANNUAL CHANGE %

3

Headline inflation

5

20

4

Core inflation Unemployment rate -INVERTED RHS

3

5

10

2

Prepared by: Rainmaker Information Source: Rainmaker /

6 1

0 2018

2019

2020

2021

0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

7

RBNZ keeps policy steady Ben Ong

I

f in doubt, remain patient and do nothing.

This is the gist of the Reserve Bank of New Zealand (RBNZ) policy statement following the conclusion of its April 14 monetary policy meeting.

The RBNZ kept the official cash rate unchanged at 0.25%, maintained the existing LSAP programme of a maximum of $100 billion by June 2022, and the existing Funding for Lending Programme (FLP) conditions.

While the New Zealand central bank cited the improvement in the global economic outlook – and the attendant benefit the country gets from rising commodity export prices – and hopes that the planned Trans-Tasman bubble will “support incomes and employment in the tourism sector both in New Zealand and Australia”, it also acknowledged that “Economic activity in New Zealand slowed over the summer months following the earlier rebound in domestic spending”.

This is compounded by the uncertain effects

of the government’s tighter policies on housing, inflation and employment.

In efforts to lessen property speculation – sending house prices surging that are, in turn, locking out first-time homebuyers and low-income Kiwis from purchasing their own homes – and prevent a bubble, Bloomberg reports that, “From Oct. 1 [this year], investors won’t be able to deduct mortgage interest as an expense on properties acquired from March 27. For existing property owners, mortgage interest deductibility will be phased out over the coming four years so that it can’t be claimed at all by the 2025-26 tax year”.

New Zealand prime minister Jacinda Ardern underscored this in her March 23 announcement, declaring that, “Property investors are now the biggest share of buyers, with the highest amount of purchases on record. Last year, 15,000 people bought homes who already owned five or more”.

Australian equities CPD Questions 1–3

1. Which target did the RBA’s achievable in the March? a) Headline CPI b) Trimmed mean c) Weighted median d) None of the above 2. What is the RBA’s inflation expectation in the next two years? a) Underlying inflation will rise above its target b) Underlying inflation be within its target c) Underlying inflation will remain below 2% d) Underlying inflation will be negative 3. The RBA says wages must grow by 3% to be transmitted to higher inflation. a) True b) False

4

15

5

29

But while the RBNZ recognises that this will “take time to be observed, the reduction of incentives to housing investment certainly presents a downside risk to the housing market and by extension, the general economy.

“The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained at the 2 percent per annum target midpoint, and that employment is at or above its maximum sustainable level.”

It believes that “medium-term inflation and employment would likely remain below its remit targets in the absence of prolonged monetary stimulus”.

“Meeting these requirements will necessitate considerable time and patience,” it said.

The RBNZ judges that the risks to the economic outlook remains balanced but stressed that, “it was prepared to lower the OCR if required”. fs

International equities CPD Questions 4–6

4. What was the RBNZ’s policy decision? a) Raised the official cash rate b) Kept the official cash rate unchanged c) Lowered the official cash rate d) Expanded QE 5. What was/were the reason/s behind the RBNZ’s decision? a) slowing domestic economic activity b) uncertainty over the government’s nee housing policy c) inflation and employment remains below its remit d) all of the above 6. The RBNZ judges that the risks to the economic outlook remains balanced. a) True b) False

30

Sector reviews

Fixed interest CPD Questions 7–9

7. Which international institution upgraded its global growth outlook for 2021? a) OECD b) IMF c) Both a and b d) Neither a nor b

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

Fixed interest

Figure 1: BOC target rate and inflation 5

RATE %

9. The BOC kept the Bank Rate unchanged at its April meeting. a) True b) False Alternatives CPD Questions 10–12

10. What was copper’s all-time high? a) Easing in restrictions b) Adaptation to ongoing containment measure c) Monetary and fiscal policy support d) All of the above 11. What is/are the reason/s behind the pickup in economic activity around the world? a) Composite PMI b) Services PMI c) Manufacturing PMI d) None of the above

ANNUAL CHANGE %

Headline inflation

4

5 4

Core inflation Target rate -LHS

0

2

-5 1

Prepared by: Rainmaker Information Prepared by: FSIU Source: Rainmaker / Sources: Factset

1

0

0

-1 2007

2009

2011

2013

2015

2017

2019

2021

Ben Ong

B

rowse through recent monetary policy statements released by many central banks around the world and you’ll notice a central theme – economic recovery starting this year powered by vaccinations, eased restrictions (in some countries), adaptation by both businesses and consumers to coronavirus controls on their normal activities and continued policy support from monetary and fiscal authorities.

This optimism is collectively embodied by upward revisions in the OECD Economic Outlook, Interim Report March 2021 – “Global GDP growth is now projected to be 5.6% this year, an upward revision of more than 1 percentage point from the December OECD Economic Outlook” – and the IMF’s World Economic Outlook Update, January 2021 – “Policy Support and Vaccines Expected to Lift Activity.”

Waxing positive they may (nearly) all be, they haven’t walked their talks – preferring to wait for

Alternatives

days better than the optimistic ones they anticipate. Not the Bank of Canada (BOC).

It decided to taper QE at the conclusion of its April 21 meeting, to wit: “The Bank of Canada today held its target for the overnight rate at the effective lower bound of ¼ percent, with the Bank Rate at ½ percent and the deposit rate at ¼ percent. The Bank continues to provide extraordinary forward guidance on the path for the overnight rate, reinforced and supplemented by the Bank’s quantitative easing (QE) program. Effective the week of April 26, weekly net purchases of Government of Canada bonds will be adjusted to a target of $3 billion [from C$4 billion]. This adjustment to the amount of incremental stimulus being added each week reflects the progress made in the economic recovery.”

“Global economic growth is stronger than was forecast in the January Monetary Policy Report (MPR).”

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“In Canada, growth in the first quarter appears considerably stronger than the Bank’s January forecast, as households and companies adapted to the second wave and associated restrictions. Substantial job gains in February and March boosted employment.

However, new lockdowns will pose another setback and the labour market remains difficult for many Canadians, especially low-wage workers, young people and women. As vaccines roll out and the economy reopens, consumption is expected to rebound strongly in the second half of this year and remain robust over the projection.”

Still, the BOC thinks that, “the recovery continues to require extraordinary monetary policy support”.

But in taking the first step towards normalising monetary policy, the BOC sends a powerful message that its optimism is more than lip service. fs

Figure 2: US dollar index

Figure 1: Copper prices

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BOC walks the talk

Ben Ong

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12. The US dollar’s depreciation is supportive of copper prices. a) True b) False

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8. What was the Bank of Canada’s policy decision at its April meeting a) It raised the overnight cash rate b) It lowered the overnight cash rate c) It raised the deposit rate d) It tapered QE

Figure 2: Canada real GDP growth 10

opper prices continue to rally and indications are it won’t be long now until it recaptures the US$10,000 a tonne level it reached 10 years earlier.

Copper prices reached a peak of US$9990 per tonne before closing at US$9949/tonne in April – a mere half a percent short of the US$10,000/ tonne mark and only 2.0% shy of the all-time high of US$10,148/tonne recorded in February 2011. Given copper’s strong upward momentum and improving economic fundamentals, prices are certain to get there soon.

Economic activity in most parts of the world have picked up as governments relaxed restrictions and/or businesses and consumers adapted to on-going pandemic restrictions, vaccine rollouts and continued fiscal and monetary policy support.

In its latest World Economic Outlook (WEO) released in April, the International Monetary

Fund (IMF) predicted world GDP to expand from – 3.3% last year to 6.0% in 2021 and 4.4% in 2022 – representing a 0.5 and 0.2 percentage point upgrade from its January 2021 forecasts – reflecting the higher-than-expected growth outturns in the second half of the year for most regions after lockdowns were eased and as economies adapted to new ways of working.

The IMF’s revised projections are in line with the OECD’s assessment (released a month earlier) where it predicts global GDP growth to expand by 5.6% this year, an upward revision of 1.4 percentage points from its December 2020 forecast.

Because of the red metal’s copious and pervasive use in industries – from car manufacturing to electrical goods to construction to solar panels, etc. – the uplift in global economic growth should, in turn, lift demand for the red metal.

Certainly, risks still cloud the near-term outlook. Among them are the lingering coronavirus

infections in many countries around the world, with some experiencing a resurgence in cases that have prompted the re-imposition of social restrictions and lockdowns, the slow pace of vaccinations especially among emerging markets, the effectiveness of the vaccines against variants of the virus and growing concerns over its side effects (blot clots).

The rally in copper prices has also been driven by the US dollar’s depreciation. The US dollar index (versus major currencies) has now fallen by 11.4% from the 17-year high it recorded in March last year – which, itself, suggests greater investor confidence (i.e., lesser safe-haven purchases) in the revival of global economic activity.

This confidence is backed by assurances from central banks and governments around the world to keep monetary policy and fiscal policy accommodative until the economic recovery becomes sustainable and the world has gotten on top of the covid-19 pandemic and its variants. fs

Sector reviews

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

31

Property

Property

CPD Questions 13–15

Prepared by: Rainmaker Information Source: Rural Bank

or the first time since 2005, every single F state in Australia has seen the price of farmland increase.

The median price per hectare of Australian farmland increased by 12.9% in 2020, with the nation enjoying its seventh consecutive year of farmland value growth. This is according to Rural Bank’s annual Australian Farmland Values 2021.

Over the last 20 years, farmland value has compounded at 7.6% annually. And, according to Rural Bank, the fact that every state has experienced increased farmland value this year is a sign of the resilience of farmland as an asset.

In 2019, there were historically low transaction volumes in farmland. But, in 2020 that volume increased by 14.5%. Total transactions equated to a combined 8.2 million hectares of land with a value of approximately $10 billion.

Rural Bank chief executive Alexandra Gartmann said low interest rates, consistent commodity prices, exceptional seasonal conditions through 2020 and farmers with capital and an incentive to invest have all driven demand for farmland.

“Historically, there has been a strong relation-

Farmland values grow across the nation: Research Elizabeth McArthur

ship between commodity prices and farmland values, however, 2020 saw an increasing gap between the two, which we first observed in 2016 and which continues to widen,” Gartmann said.

“Farmland prices and farmland as an asset class will continue to be keenly watched but increasing asset price alone is no guarantee that agriculture as an industry will continually prosper.”

The report drew on 263,000 transactions across 315.9 million hectares of land with a combined value of $167.3 billion over 26 years.

Tasmania experienced 25.3% growth in 2020, the most of any state. It was followed by Western Australia with 19.3% growth, New South Wales with 15.6% growth and Queensland with 11.8% growth. South Australia has 10.9% growth and Victoria had 6.9%.

“Positive trends in commodity prices underpinned by strong export demand and a growing domestic market can be tempered by factors such as a changing climate and increasing demands from consumers for transparency within the production and supply chain,” Gartmann said.

Queensland’s growth was somewhat stymied

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by North Queensland, where farmland values declined by -1.3%, while the west of the state experienced an impressive 39.4% value growth.

Grazing regions in Queensland benefited from strong cattle prices, eventual rainfall allowing properties to sell well presented and exclusion fencing providing grazing options.

In NSW, the breakdown was similar. Northern NSW had negative -3.1% growth in values while the west saw a 37.5% increase. An estimated 1.4 million hectares of farmland was traded in NSW. This was down to drought conditions in the north of the state continuing into 2020. The south (12.4%) and south west (6%) saw sales activity decline as the region was still recovering from bushfires.

Mixed farming and grazing properties are in high demand and water security is the most important consideration for investors.

In Victoria, demand for grazing land in Gippsland boosted median land values for the whole state. Gippland was in such hot demand that there were 302 farmland transactions there alone, 59 more than last year. fs

3: According to Rural Bank, farmland property prices experienced: a) a median price increase of 12.9% in 2020 b) historically low transaction values in 2021 c) a compounding rate of 4% over the past seven years d) slower growth in 2020 compared with 2019 14: In terms of Rural Bank’s findings, which state experienced the greatest increase in farmland values for 2020? a) New South Wales b) Queensland c) Tasmania d) South Australia 15: Rural Bank found a widening gap between commodity prices and farmland values in 2020. a) True b) False

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32

Profile

www.financialstandard.com.au 17 May 2021 | Volume 19 Number 09

THE POWER OF POLICY Grattan Institute chief executive Danielle Wood is on a mission to make the esoteric subject of economics accessible to Australians and call attention to why it matters in their day-to-day lives. Karren Vergara writes.

n Year 11, high school students around the Ichoose nation are typically given the freedom to the subjects that pique their interest.

When it came to picking her electives, Danielle Wood cannot pinpoint the exact reason why she took up economics, other than it seemed interesting.

Wood ended up with a teacher who she describes as “fantastic” and opened her mind to how important economics is to all the key decisions made for the country.

Because the school did not offer economics in Year 12, she enrolled in another one just so she could study it and ended up with another excellent teacher – who recently sent Wood an email after she spotted her former student on television.

Wood remembers one tenet this teacher communicated that stuck with her after all these years: that the most powerful people in the country aren’t necessarily the heads of state, but the head of the Reserve Bank of Australia, the Productivity Commission, and the Australian Competition and Consumer Commission because they are making the decisions that shape the economy and people’s lives.

“That, to me, was quite profound – understanding who makes these big decisions and what kind of framework they use. Essentially, the message is it’s economics that was driving these things,” Wood notes.

“She had me watching the federal budget and understanding how important that was to big policy decisions. I comprehended at a young age that, one, this was really interesting, and two, that it was really important.”

Thanks to those inspirational teachers, Wood went on to study economics at the University of Adelaide earning her bachelor’s degree with honours, and then at the University or Melbourne where she pursued two Master’s, both with honours.

In 2002, after completing her first Master’s, she scored a role as a senior economist for a government initiative: the Taskforce on Reducing Regulatory Burdens on Business.

Her rising star in a field dominated by men saw her land a job at the Grattan Institute in August 2014 as a director of budget policy and institutional reform, spending nearly six years in that role.

In July 2020, John Daley handed the chief executive reins to Wood and since then she has helped boost the work of the Melbourne-based institute.

“A key part of my role at Grattan is to try and make policy areas like economic policies and other areas of policy approachable and understandable because that’s how we have a better conversation; it’s when everyone can engage and understand and grapple with these issues,” Wood says.

“Our mission is to inform public policy in the national interest. We are an honest broker. We

start with an open mind and look at the evidence and come up with what we believe is good policy changes and try and advocate for them.”

Grattan focuses exclusively on Australian domestic policies. It has dedicated teams to cover school education, transport and cities, energy and climate, health and aged care, economics, and government and political institutions.

“It’s difficult to choose between your children and pick which initiatives should be prioritised,” she says.

But for Wood, two issues are critical at the moment. The first, she says, is the COVID recovery and vaccine rollout because reaching herd immunity, opening borders and getting the economic settings right in the next couple of years will support jobs and growth.

“None of those are simple things but they are all incredibly important if we are going to emerge from COVID,” she says.

The second is climate change.

“There is no bigger policy challenge for the world. This decade is absolutely crucial for the long-run trajectory and whether or not we are successful in producing better and comprehensive plans to contribute to global efforts. If I had to pick two for Australia in the short and long run, these two would be it,” she explains.

As many developing countries struggle with the pandemic more than a year on, the economies of rich countries, including Australia, are separating from the pack. While GDP has yet to hit pre-coronavirus levels, Australia still boasts a V-shaped recovery.

Wood is concerned about the next phase of the pandemic.

“Our vaccine rollout is progressing too slowly.

I don’t think we had the right strategy. I think we should have been much more aggressive in the amount and diversity of vaccines acquired. That was a policy mistake, and we are taking a while to get to the right distribution model,” she points out.

“I am nervous about the data coming out on people’s reluctance to get vaccinated. We need to be putting policy energy into that, an advertising campaign is not going to cut it.”

One of Grattan’s main objectives is to get everyday Australians to understand the decisions the government makes and how that influences consumption, wealth, production, as well as how economic principles can be used to solve real world problems.

“Economics is essentially the language of decision makers and decision making. And if you care about the policies that we see in place, then you need to understand or care about economics,” Wood says.

“Economics is not just a subset of elite people that can understand the language. Being able to communicate is incredibly important.”

Elsewhere, data from the RBA shows the number of Year 12 students studying economics over the past 25 years has dropped a whopping 70%.

More worrying is the number of female students shunning the subject, tipping the gender imbalance to a level more pronounced than in science, tech-

Economics is essentially the language of decision makers and decision making.

Danielle Wood

nology, engineering and mathematics (STEM) subjects to a ratio of 2:1.

Outside of the classroom, a growing body of research finds that the profession suffers from gender discrimination, some of which reveals that women are less likely get promoted and have their work published.

In 2016, Wood co-founded the Women in Economics Network (WEN), an affiliate of the Economic Society of Australia, which helps promote and support the careers of female economists in the nation.

“Hearing some of their experiences with discrimination, I was motivated to create change,” she says.

WEN has done extensive work on boosting the profile of women in the media, as well as trying to get more young women to take up economics and enter the profession.

Whether they know it or not, the work of inspirational and passionate teachers can have a profound effect on students’ career choices and trajectory. One piece of research from the US finds that female university students are more likely to take up further economics subjects if they had exemplary role models in the field.

Wood says she continued studying economics at university because of her high school teachers.

“It’s so important to communicate to high school students why studying economics is a good choice and why we need more bright, community-motivated individuals going into the profession.” fs