Financial Standard vol20 no14

www.financialstandard.com.au

25 July 2022 | Volume 20 Number 14

09

11

25

Lazard Asset Managementl

Adrian Johnstone, Practifi

Ontario Teachers’, Qantas Super

Executive appts:

Feature:

Profile:

Product showcase:

10

BetaShares, HESTA

Performance test uncertainty grows Andrew McKean

W

ith the next Your Future, Your Super performance test right around the corner, speculation is mounting as to which funds will be dragged across the coals once again. However, with recent poor performance hanging over the entire sector, predictions are proving more difficult to make.

Last year, the first iteration of the test, saw 13 products from 12 funds fail; products included MySuper options of AMG Super, AvSuper, Christian Super, Colonial First State, EISS Super, LUCRF Super and Maritime Super.

“Trustees of the 13 products that failed the test now face an important choice: they can urgently make the improvements needed to ensure they pass next year’s test or start planning to transfer their members to a fund that can deliver better outcomes for them,” APRA said.

Of the 13, just AMG Super, Colonial First State’s FirstChoice and Commonwealth Bank Group Super remain as they were. All others have either merged, committed to merge, or closed.

Be that as it may, at a recent industry event, APRA chair Wayne Byres said: “We still have too many trustees that could do better.”

“Our primary focus continues to be to drive out sub-standard products and practices, using a combination of the government’s annual performance test, our own heatmaps, intensified supervision and when needed a more muscular approach to enforcement.”

A report from US-based CEM Benchmarking says: “In the next round of testing, we would expect the number of failing funds to drop from 12 to 10, not driven by better performance, but because of APRA’s intention to stretch the test to eight years.”

However, CEM notes that over the longterm, failure rates are highly dependent on investment eras.

“When markets crash, the range of investment outcomes widens and more investors fall below the negative 0.5% net value added threshold of the Your Future, Your Super performance test,” CEM Benchmarking says.

The latest Rainmaker Information MySuper Index shows single strategy, default MySuper options were likely to deliver the fourth worst result in 35 years for the 2021/22 financial year.

May performance commentary from Rainmaker added that longer-term MySuper returns

were also affected, with three-year and five-year returns likely dropping down to 6.4% and 6.5% respectively. It should be noted that June also wreaked havoc on investment portfolios.

Rainmaker predicts that the top performing single strategy MySuper or default products for FY22 would belong to Hostplus, Christian Super, First Super, Legalsuper and HESTA. Of specific concern to products that failed the test last year and haven’t yet completed a planned merger or ceased, CEM Benchmarking suggests that unfortunately one failure typically precludes another.

CEM Benchmarking commented: “While failure in one year can have a severe commercial impact, failure in consecutive years could be hard to recover from for funds that would no longer be allowed to take on new members.”

“If you failed the eight-year test one year, institutional investors in the CEM database had a 75% chance of failing again the following year.”

Mercer senior partner and actuary David Knox concurs, saying: “It’s very hard to overcome a bad failure with one year’s return even if it’s good, because you’ve still got the previous seven.”

But more than just being barred from accepting new members upon successive failures, Knox says: “Clearly repeated failures are bad for funds’ image and bad for a fund’s future.”

While not predicting specific funds’ success, Knox adds that he doesn’t expect much change to occur. Of course, this is also likely the case now that the expansion of the test to Choice products has been put on hold.

Meanwhile, Lonsec Group has said it expects to see some MySuper solutions prevented from accepting new members because of a repeat failure, likely further accelerating consolidation; APRA previously flagged it will pay particular attention to the steps RSE licensees are taking to adequately address the risk of successive performance test failures. In some circumstances, the regulator said it would go so far as to enforce the preparation of contingency plans that include pre-positioning for the transfer of members to another fund.

Despite its many flaws and possible criticisms, CEM Benchmarking said the test does appear to be operating as intended – filtering out underperformers while also contributing to improvement in system-wide performance. fs

Opinion:

14

Fixed income

Between the lines:

32

Keith Cullen, WT Financial Group

Complaints data shows big shifts Jamie Williamson

David Knox

senior partner and actuary Mercer

In the realm of investments and advice, the number of complaints made to the Australian Financial Complaints Authority over the interpretation of product terms and conditions increased more than six-fold last financial year, while complaints about inappropriate advice more than halved.

Latest data from AFCA shows it received 654 complaints about product terms and conditions in FY22, catapulting it to the top of the list for complaints made about the investments and advice space. The body only received 100 complaints about the same issue in FY21.

Interestingly, complaints about the same issue in the life insurance sector also increased significantly.

Complaints about interpretation of product terms and conditions rose from 45 to 234, while complaints about misleading life insurance product or service information jumped from 109 in FY21 to 437 in FY22.

On the investments and advice front, the second most complained about issue was service

Continued on page 4

Reserve Bank review underway Treasurer Jim Chalmers is instituting the first major review of the setting of monetary policy and the Reserve Bank of Australia (RBA) since the 1990s.

In the context of Australia facing a complex combination of difficult economic conditions, Chalmers said now is an opportune time to get the ball rolling on an RBA review; a review which Chalmers believes is desperately needed to ensure the setting of monetary policy is done most effectively into the future.

“The review will consider the RBA’s objectives, mandate, interaction between monetary, fiscal and macroprudential policy, its governance, culture, operations and more,” Chalmers said.

The review will ask, ‘how do we make sure that the institutional and other arrangements are set up as well as they can be to ensure the right decisions, sometimes difficult decisions, are taken in the future interest of Australians and their economy’,” Chalmers said.

But he made clear the review isn’t about

Continued on page 4

2

Editorial

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

Back with a vengeance I

Editorial

By Jamie Williamson jamie.williamson@ financialstandard.com.au

magine someone hands you $100 million.

What would you do with it? Would you even know where to start spending it?

That’s roughly how much Afterpay founders Anthony Eisen and Nick Molnar received in bonuses alone last year. In fact, it was more – together they received $264.2 million, setting a record for realised pay after exercising their $1 options when the share price was near $90.

Not bad, especially when you consider the share price has since dropped more than 30%, hovering around $66.

According to the Australian Council of Superannuation Investors, across the ASX 100 in 2021 the median bonus was 76.7% of the maximum payable. In 2020 it was just 30% - the lowest on record.

So, it seems that even though we were still firmly planted in a pandemic, the impact that had on bonuses was very short-lived.

For ASX 100 chief executives, the average bonus paid came in the highest on record at $2.31 million. The record previously was $2.30 million, set in 2017. Other notable bonuses went to Goodman Group’s Greg Goodman ($37.1m), Macquarie’s Shemara Wikramanayake ($14.69m), Woolworths Group’s Brad Banducci ($11.79m), BHP’s Mike Henry ($10.46m), and CSL’s Paul Perreault who, at $58.9 million, would have also set a record if it weren’t for the Afterpay boys.

“However, if the Afterpay effect is excluded from the ASX100 sample, average realised chief executive pay was flat in FY21, rising less than ordinary earnings,” ACSI’s report reads.

Of course, there are a lot of factors that determine the size of a bonus at an ASXlisted entity. Things like the company’s size and how big base salaries are play a big part in determining how lofty an annual bonus might be – but it’s also up to the individuals in charge.

Despite reporting on these things for as long as Financial Standard has, it’s still difficult to stomach at times the fact that pay packets of this size continue to be handed over no matter the economic or market environment. Even more so when you consider most Australians have to fight tooth and nail for their pay increases – and almost certainly won’t be seeing even a CPI raise this year.

But perhaps this Afterpay example is even more difficult to stomach because the company’s share price likely never would have hit the highs that led to these bonuses if it hadn’t been for the pandemic, the impact it had on the finances of some of the nation’s most vulnerable and, of course, JobKeeper.

In late 2020, UBS surveyed 1000 buy now, pay later users and found that those using these services were almost 300% more likely

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to be JobKeeper recipients than people not using them. The same survey found that 60% of users who were on JobKeeper believed they would have defaulted on their repayments if it weren’t for the stimulus measure; about 40% of users receiving JobSeeker said the same.

Considering this, it’s hard not to feel a little satisfied by the recent turmoil the BNPL sector has experienced. With company valuations faltering, minister for financial services Stephen Jones has hinted it will soon be regulated just like all other credit products; “If it walks like a duck and quacks like a duck, it’s a duck.”

But, at the same time, with the cost of living becoming increasingly difficult for many to keep pace with, will we see more and more Aussies relying on BNPL to keep afloat again?

My hope is that we don’t as I shudder to think what greater reliance on a largely unregulated and shaky industry could result in, but only time will tell. fs Editor’s note: The special feature in this edition has been contributed by Anthony O’Brien. Anthony is a freelance finance writer with more than 20 years’ experience, working with companies including ipac securities and Westpac. He is also a regular contributor to Money magazine, which is also published by Rainmaker Information.

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News

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

Pendal, Perpetual renew discussions The two entities are in high-level discussions, it’s been confirmed.

Pendal entered a trading halt shortly after midday on July 19, pending an announcement.

Later in the afternoon, the manager announced it is in discussions with Perpetual regarding a potential transaction.

Also commenting, Perpetual said the discussions are preliminary, confidential, and not sufficiently advanced to require any further disclosure.

However, it did seek to set the record straight, saying: “In response to inaccurate media speculation, should there be a transaction, no equity raising would be required nor would there be private equity involved.”

The discussions follow Perpetual’s attempts in April to acquire Pendal, offering one Perpetual share for every 7.5 Pendal shares plus $1.67 cash for each – or $6.23 per share. Pendal’s share price fell following the announcement, dropping the indicative consideration to $5.97 per share.

Pendal said the offer was being made at a time when global asset managers’ trading values were materially impacted by geopolitical and macroeconomic uncertainty.

Just over a week later, the Pendal board unanimously rejected the offer, saying it significantly undervalued the company’s current and future value and was therefore not in shareholders’ best interests.

Both Pendal and Perpetual said they will keep shareholders informed of any material developments. fs

FTI names head of Australia, NZ Chloe Walker

Felicity Walsh will step into her new role as Franklin Templeton’s managing director and head of Australia and New Zealand on August 1.

Walsh, currently head of sales, will now be part of the APAC leadership team, supporting co-heads Tariq Ahmad and Matt Harrison.

Her new responsibilities will include an executive oversight of sales, marketing, client services and product strategy.

Walsh has been at Franklin Templeton for over seven years, with the company saying she will leverage her extensive experience to provide strategic direction on business strategy, product innovation and customised investment solution to cater to shifting client needs in the market.

Walsh will continue to assume direct client responsibilities in Australia and New Zealand and continue to act as key conduit to the local and global investment teams, it said.

Prior to Franklin Templeton, Walsh spent 11 years at Towers Watson (now Willis Towers Watson) in the UK and Australia, working with some of the world’s largest pension funds and superannuation funds.

Commenting on her promotion, Walsh said she feels extremely privileged to receive these added responsibilities and to have the opportunity to drive the future growth of the Franklin Templeton business in Australia and New Zealand. fs

3

01: David Elia

chief executive Hostplus

Hostplus links returns to active approach Andrew McKean

H

The quote

Our activemanagement approach has seen Hostplus perform well in both bull and bear markets over our 34year history.

ostplus has advocated for the employment of active management strategies to navigate difficult global markets.

On the back of announcing it had delivered a positive 1.57% return for its members in its Balanced (MySuper) option for the financial year, Hostplus lauded active management’s capacity to manage continued volatility.

Hostplus chief executive David Elia01 said: “Off the back of the 2021 financial year, where we saw Hostplus deliver our best annual return in the fund’s history of 21.3% for the Balanced option, it was a very different set of circumstances we faced this financial year with global investment markets afflicted by heightened political tensions, rising inflation, and rising interest rates.”

“Based on current industry estimates, these conditions are indicating that the industry median return for Balanced options could settle in the red.”

As previously reported by Financial Standard, Rainmaker Information data shows that a median MySuper return of -2.8% is expected for the 2021/22 financial year. Further, real returns are expected to be the third lowest on record at -7.9%.

Recently, AustralianSuper reported an annual return of -2.73% for its Balanced MySuper

option – its first negative return since the Global Financial Crises. More than 90% of the funds’ members are invested in the option.

What’s more, AustralianSuper chief investment officer Mark Delaney added that Australians should be prepared for poor investment performance to continue.

On Hostplus’ strategy, Elia commented: “We have a firm belief that active management will continue to be the key to managing the continued volatility we are expected to see over the coming years.”

“Our active management approach has seen Hostplus perform well in both bull and bear markets over our 34-year history.”

Elia added: “Actively managing and applying a strategic asset allocation to perform under different market conditions, enables us to smooth out returns over the longer term, as opposed to some of the lower cost, passive products in the marketplace where investors are more exposed to market movements.”

“With more volatility forecasted in the years ahead, we encourage superannuation members to clearly understand their funds underlying investment strategies and not to focus on cost alone and consider this when choosing superannuation funds and products.” fs

New guidance to improve super funds’ understanding of ESG risks Jamie Williamson

APRA has said it intends to issue draft guidance on how super funds can demonstrate clear understanding of ESG risks, manage those risks, and reflect ESG considerations in investment strategy.

Responding to submissions to its consultation process for strengthening investment governance standards (SPS 530), the prudential regulator said several submissions contained requests for detailed guidance on managing risks associated with ESG practices. These requests included “specific reference to ESG risk as a material investment risk to be considered at both the idiosyncratic and market-wide level”.

Under SPS 530, RSE licensees must manage and monitor all identified sources of investment risk and APRA said it is of the view that this includes ESG considerations. However, some participants in the consultation called for greater clarity on the interplay between Prudential Practice Guide CPG 229 Climate Change Financial Risks (CPG 229) and SPG 530.

“Submissions noted that the current SPG 530, released in 2013, limited the consideration of ESG factors to the offering of ethical style investment options as part of the overall investment strategy,” APRA said.

And the regulator said it recognises the increasing significance and materiality of ESG financial risk factors in the range of risks considered by funds, regardless of investment philosophy.

“Reflecting that these risks are long term in nature and remain an emerging risk area for many RSE licensees, APRA intends to issue draft guidance on how a prudent RSE licensee can demonstrate it has a clear understanding of ESG risks, reflects ESG considerations in the investment strategy and manages material ESG risks,” APRA said.

“This may include demonstrating, through scenario analysis and stress-testing, the impact of investment decisions and risk management on the investment portfolio and the broader market.”

APRA said it will also clarify the interplay of CPG 229 and SPG 530, with particular reference to stress-testing and the fact that ESG risks include more than just climate change.

On the topic of stress-testing, APRA said many submissions requested more guidance on how stress tests be constructed and asked for specific example scenarios with reasonable time periods for events to be considered. They also asked for guidance on how the tests should be framed in terms of member outcomes and connected to performance test results.

APRA said it is up to RSE licensees to construct scenarios that are realistic to their individual funds, however the regulator will focus on guidance on key considerations a licensee should apply when developing scenarios.

APRA said it intends to clarify valuation governance, valuation methodology, frequency and monitoring, and the types of valuation risks a fund is expected to consider. fs

4

News

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

01: Stephen Jones

Complaints data shows big shifts

minister for financial services

Continued from page 1 quality which had 570 complaints. However, this was down on FY21 which saw 674 complaints about the same thing.

There were 332 complaints made about failure to follow instructions, failure to act in clients’ best interests drew 281 complaints and inappropriate advice saw 241 complaints made, down significantly from 534 in FY21.

The superannuation sector didn’t see quite as significant shifts in complaint figures, however the number of complaints made about service quality did increase markedly, coming in at 774 in FY22 compared to 517 in FY21.

Complaints about account administration errors also increased slightly, with 506 recorded in FY22 versus 487.

The majority of other complaints received about super funds focused on delays in claim handling (737), denial of claims (438), and claim amounts (342).

Finally, on the life insurance front, aside from product related complaints, the main complaints received included incorrect premiums (286), service quality (205), and failure to act in client’s best interests which also saw a big increase – 66 complaints in FY21 but 229 in FY22.

Overall, superannuation funds received 3765 complaints for the year while life insurers copped 1962.

In total, AFCA received 72,358 complaints and just over 71,000 of them were closed. The body’s dispute resolution processes saw $207.73 million paid in compensation, which each complaint taking an average of 72 days to resolve. fs

Performance test expansion paused amid YFYS review Rachel Alembakis

T

The quote

... the review will consider whether the performance test has had any significant unintended consequences for MySuper products...

Reserve Bank review underway Continued from page 1 revolutionising monetary policy.

The RBA review also isn’t going to be an exercise in pot shots and second guessing, Chalmers said.

“I don’t want it to be exclusively focused on a backward-looking blame shifting exercise,” he added.

The recently released terms of reference for the review further stipulate that it will exclude the RBA’s payments, financial infrastructure, banking, and banknote functions.

Chalmers announced that a three-member panel of independent experts from Australia and overseas have been appointed to conduct the review.

The panel members are Bank of England Financial Policy Committee external member Carolyn Wilkins, ANU interim director of the Crawford School of Public Policy and macroeconomist Renée Fry-McKibbin and secretary for public sector reform and economist Gordon de Brouwer.

They will produce a final report with recommendations to government by March 2023.

In addition to publicising the forthcoming RBA review and naming its panel, Chalmers announced an extension to Mark Barnaba’s appointment to the RBA board.

At Chalmers’ request, Barnaba has agreed to serve another year on the RBA board. His current five-year term as a part time member on the board was due to expire on August 30. fs

reasury has halted the extension of the Your Future, Your Super (YFYS) performance test beyond MySuper products for 12 months while conducting a review of the laws.

Minister for financial services Stephen Jones01 announced that the review will commence after the second round of MySuper performance tests have taken place by August this year.

The government will also release exposure draft legislation for consultation to implement its election commitment to adjust the performance test for faith-based products.

The impact of YFYS on ESG investing is a topic of concern for the super fund sector, as integrating ESG investing into a superannuation portfolio can increase tracking error, raising concerns that ESG could lead super funds to negative outcome against the YFYS performance test.

YFYS presents a challenge to the rapid adoption of ESG investing in the Australian superannuation sector. A moderate level of tracking error is a by-product of ESG investment approaches, such as screening and integration.

Tracking error is a key input into the YFYS performance test outcomes.

“The government is aware of concerns that the YFYS laws have the potential to create such outcomes by discouraging certain investment decisions or certain infrastructure investments,” Jones said in an announcement.

“Treasury will be tasked in its review to examine and consider the operation of the new laws in this context.

“With two rounds of annual tests completed, the review will consider whether the performance test has had any significant unintended consequences for MySuper products and assess how the test should be applied to other superannuation products.”

The review will also consider concerns relating to the regulatory complexity of best financial interests duty requirements, Treasury said.

The announcement is the fulfilment of an announcement made by Jones during the Responsible Investment Association Australasia (RIAA) annual conference in April.

In a speech to RIAA, Jones called out an “alarming anomaly, where the benchmark will essentially drive faith-based investing out of the market which is a perverse outcome for a government which purports to champion the role of choice in superannuation and in investment.” fs

ASX 100 chief executive bonuses hit record highs Cassandra Baldini

In the first year of the pandemic, Australian boards responded to market turmoil, and appropriately reduced chief executive pay outcomes. However, latest data shows bonuses paid last year were the highest they’ve been in seven years.

Research conducted by ACSI shows the “pendulum has swung significantly in the opposite direction over the following 12 months, evidencing a market-wide catch up in pay for chief executives- and, most likely, their executive teams.”

The study revealed that the average bonus awarded to chief executives hit $2.31 million, exceeding 2017’s record of $2.30 million.

“An increase is expected when you have had your lowest year on record, but it is concerning to see bonuses not just rebounding but reaching new heights,” the report said.

Afterpay bosses Anthony Eisen and Nick Molnar set a joint record, taking home $264.2 million of realised pay - more than $100 million each.

The report states that even without the duo’s record, the FY21 sample would have still set a new high in the eight years of its reporting.

CSL chief executive Paul Perreault received $58.9 million, Goodman Group’s Greg Goodman made $37.1 million, Macquarie Group’s Shemara Wikramanayake received $14.69 million, Woolworths Group’s Brad Banducci was paid $11.79 million, former Fortescue Metals executive Elizabeth Gaines received $11.12 million and BHP’s Mike Henry received $10.46 million.

“Common to all chief executives with realised pay above $20 million in FY21 and consistent with prior years, was the vesting of large equity grants accompanied by very strong

share price growth,” the report said.

Eisen and Molnar received their gains in August 2020 after each exercised 1.5 million options, at just $1 per option, at a time when the share price was nearly $90.

The report further stated that in FY21, CSL’s Perreault exercised his last legacy options: “With exercise prices of $107.25, when the share price was $292; another 82,800 zero exercise price options (ZEPOs) also vested for the CSL chief.”

And realised gains for Goodman reflected strong security price growth and the weighting of his incentive pay entirely to equity: “With vesting of almost two million ZEPOs, originally granted in 2015, 2016 and 2017.”

By contrast, Qantas’ Alan Joyce was the only incumbent ASX 100 chief executive not to receive a bonus in either FY20 or FY21.

ACSI said it will be closely monitoring outcomes in the 2022 reporting season to ensure that rewards are reaped only by outperforming chief executives who deliver value to shareholders - rather than a payment delivered in rain, hail and shine.

“This is of particular concern at a time in which markets are again in significant turmoil and returns to investors will be under pressure,” the report said.

It stated further that alongside bonus outcomes, the research highlighted some of the highest pay ever recorded in the study, fuelled by the vesting of equity incentives.

“This clearly raises the question of whether the quantum of rewards being delivered to senior executives is appropriate.

Boards will have to carefully consider when deciding the size of equity packages, whether the eventual outcome is accurately reflective of achievements,” it said. fs

News

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

JANA wins Spirit Super mandate The industry superannuation fund has selected JANA as its new asset consultant.

The appointment, which came into effect on July 1, sees JANA replace long-term partner Whitehelm Capital which was acquired by German manager PATRIZIA last year.

Commenting on the mandate, JANA chief executive Jim Lamborn said the firm is delighted to partner with Spirit Super.

“Spirit Super has recently made some exciting acquisitions in its unlisted portfolio, including Parliament Square in Hobart and, prospectively, a majority share in the Port of Geelong,” Lamborn said.

“These assets hold strong underpinnings which will play a key role in the communities they serve.

Together, we look forward to working toward a brighter future for millions of Australians.”

Spirit Super’s chief investment officer Ross Barry said: “The investment team at Spirit has undergone a major evolution in our operating model and our consulting needs are changing as a result.”

“We felt JANA was strongly aligned to our aspirations, our global research focus and our first principles approach to investing.”

Lamborn added that a growing number of superannuation funds continue to face challenges posed by regulatory change and increasing market consolidation. However, mid-sized funds are uniquely positioned to look at opportunities in Australia as mega funds increasingly shift their focus to global markets. fs

Mirvac to become trustee of AWOF Andrew McKean

AMP Capital Wholesale Office Fund investors have voted to replace the trustee and manager of the fund with Mirvac Funds Management.

Despite AMP Capital and Dexus putting forward a combined proposal to retain management of AMP’s Capital Wholesale Fund, a requisite majority of the investors approved a resolution to replace the current trustee with Mirvac.

Mirvac said it expects to become the trustee of AMP’s Capital Wholesale Office Fund in midOctober 2022. From the effective date, Mirvac will be the investment manager and property manager of the $7.7 billion fund.

Subject to the proposal and approval of constitutional amendments at a forthcoming meeting of the fund’s unitholders, Mirvac will offer $500 million of liquidity to the AMP Capital Wholesale Office Fund.

As a result of the transaction, Mirvac’s thirdparty capital under management will grow by 76%, increasing to $18.1 billion.

Mirvac’s chief executive and managing director Susan Lloyd-Hurwitz is pleased to have been entrusted by unitholders with the management of a leading Australian unlisted office fund.

Lloyd-Hurwitz said: “The addition of the $7.7 billion fund is an acceleration of Mirvac’s longstated strategy to grow our third-party funds under management with aligned capital partners and further enhances our position as a top tier manager of prime office assets in Australia.” fs

5

01: Justin Greiner

executive NAB Private Wealth

BlackRock, NAB collaborate on ETF suite Chloe Walker

T

The quote

We look forward to extending our relationship with the NAB Private Wealth team as we broaden our local range of sustainable investment solutions...

he partnership will see a range of specially designed iShares ETFs made available on nabtrade alongside educational content for investors.

Building on an existing relationship with NAB Private Wealth, the initiative aims to make ETF investing more accessible for all Australian investors, from retail to ultra-high net worth.

BlackRock’s iShares ETFs will include globally diversified and sustainable multi-asset portfolios, while a dedicated ETF Centre will feature educational content and tools.

“As one of the global pioneers in ETF investing, BlackRock iShares is known for the breadth of its global offering, sustainability focus, and investor education in helping investors understand how they should think about portfolio construction,” NAB Private Wealth executive Justin Greiner01 said.

“This partnership brought to market through nabtrade and iShares plays to our strategy and provides scope to deepen our re-

lationship with BlackRock across our Private Wealth business.”

BlackRock deputy head of Australasia Jason Collins said: “The combined expertise of BlackRock and NAB Private Wealth draws on our global iShares product set paired with local insights to develop funds specifically designed to meet Australian investors’ evolving needs.”

“The convenience of ETFs is enabling a new generation to invest. ETFs have helped more Australian investors access diversified exposures and portfolio outcomes, and ultimately pursue their long-term wealth creation and investment goals.

“We look forward to extending our relationship with the NAB Private Wealth team as we broaden our local range of sustainable investment solutions to ensure every Australian investor who seeks to invest more sustainably has a broad choice of cost-effective investment options.”

The new iShares ETFs are expected to be available in August. fs

Australian Ethical, Christian Super confirm merger will happen Jamie Williamson

Australian Ethical and Christian Super have signed a Successor Fund Transfer deed.

The decision brings an end to Christian Super, which was established in 1984, with all its members expected to transfer to Australian Ethical no later than early 2023.

The funds said they are in agreeance that it is in Christian Super members’ best interests to merge and aligns with their preference for purpose-driven investing. While more details will come in time, Australian Ethical said the merger will provide additional scale and accelerate its ability to implement fee reductions.

Australian Ethical currently has about $4.42 billion in super funds under management and will add a further $2 billion through the merger.

Australian Ethical’s membership will also increase by about 30,000, bringing it to more than 90,000.

There was no update as to what the merger means for Christian Super’s leadership team, but Australian Ethical did state that there will be no changes to its board.

“Since 1986, Australian Ethical has been investing for a better world, carving out positive impact for people, planet and animals through our investments. We’re delighted to welcome new members who share this vision and want to use the power of their money to support a more sustainable future,” Australian Ethical chair Steve Gibbs said.

Also commenting, Christian Super chair Neville

Cox said: “As we look to wind up Christian Super after nearly four successful decades of pioneering values-based investing in Australia, we are pleased to have found an alternative for our members that is not only in their best interest but also champions a similar purpose-driven approach.”

In late 2021, Christian Super had a range of licensing conditions imposed on its licence following its failure of the Your Future, Your Super performance test. One of the conditions was that it must make plans to merge by the middle of this year.

Australian Ethical said the details of estimated transition and integration costs will be included in its annual report, expected in August.

The news came as Australian Ethical provided an updated for the June quarter. While it reported positive net flows of $102 million, it also saw a $150 million redemption from an institutional client that is in-housing its responsible investment strategy upon merger. It said the strong flows were driven by super contributions.

It saw record net flows for the financial year at $943 million. Excluding institutional, they were $1.14 billion, up 20% year on year. Super flows were up 22% for the year, coming in at $751 million.

However, on a quarterly basis, total FUM is down 9% from March 31.

Australian Ethical welcomed close to 4800 new customers in the three months to June 31, up 4% for the quarter and 17% year on year with the total now sitting at 83,066. fs

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8

News

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

Praemium reports 92% flow increase The investment platform now has $40.5 billion in funds under administration, up 10% on the same time last year.

Additionally, Praemium’s financial year net inflows were $2.9 billion, up 92% from its prior corresponding period.

Unfortunately, gross inflows saw an approximate $650,000 decline, with last year’s $21 million inflow trumping this year’s $14 million. Net inflows were down 53%, coming in at $306 million for the quarter.

This result can be partly attributed to the unsettled market conditions impacting all wealth management firms, Praemium’s chief executive Anthony Wamsteker said.

However, taking a turn to focus on the positives, Wamsteker said: “Praemium deliver solid net inflows this quarter and strong annual net inflows.”

“The divestment of our international business allows us to focus on our strategy to become one of Australia’s largest independent specialist platform providers.”

Wamsteker also paid credit to Praemium’s cornerstone product and highest revenue earning service, its separately managed accounts (SMA) offering.

“The SMA added annual net inflows of $3 billion, and $284 million for the quarter. It’s annual net funds flow represents 28.8% of the starting FUA, an outstanding growth achievement,” he said.

“We are fully committed to our advisers and their clients. We will grow these relationships and our FUA by being focussed on even better technology and service for the remainder of the year and on into 2023.” fs

01: Xavier O’Halloran

director Super Consumers Australia

Aussies don’t need so much in retirement savings: SCA Jamie Williamson

N

The quote

Having credible targets, based on actual spending, means people can confidently spend and get on with enjoying their retirement.

Brookfield, Infratil sell mobile towers Brookfield Asset Management and Infratil are offloading their stakes in Vodafone New Zealand’s passive mobile tower assets.

Brookfield and Infratil bought 49.5% each of the assets in 2019 for NZ$1 billion. Now, alongside Vodafone, which will continue to own the active parts of the network, Brookfield and Infratil have sold the assets for NZ$1.7 billion to InfraRed Capital Partners and Northleaf Capital Partners.

The buyers will own 80% of the assets while Infratil will reinvest and own 20% of the new TowerCo, which comprises 1484 towers and covers 98% of New Zealand’s population.

Under the deal, the new TowerCo will sign a 20-year master services agreement with Vodafone New Zealand and commit to an additional 390 sites over the next decade to enhance coverage and capacity.

Brookfield Infrastructure managing director Udhay Mathialagan said: “This transaction is a material milestone in the execution of our strategic program to increase use of assets at Vodafone NZ, releasing capital from the network when it makes sense and conditions are supportive and through targeted partnerships around infrastructure.”

The transaction is subject to approval by the Overseas Investment Office but is expected to close in Q4 of this year. fs

ew retirement targets released by Super Consumers Australia suggest the ASFA Retirement Standard needs a rethink, saying a pre-retiree couple only needs to save $402,000 by age 65 to achieve a joint annual income of $64,000 in retirement.

The consumer body has developed new retirement income targets – one for pre-retirees and one for existing retirees – that it expects super funds to use in helping members determine their financial needs in later life.

According to Super Consumers Australia, an individual pre-retiree – those aged 55-59 – who wishes to spend $1308 per fortnight ($34,000 a year) will need to have $88,000 saved by age 65 on top of their Age Pension entitlements. If they wish to spend $1692 per fortnight ($44,000), they will need to have $301,000 saved, while anyone wanting to spend $2115 ($55,000) will require $745,000 in savings.

Meanwhile, for couples, a fortnightly spend of $1846 ($48,000) will require $111,000 in joint savings plus Age Pension, while those wanting to spend $2462 ($64,000) will need $402,000 and couples wanting to spend big $3115 ($81,000) – will need $1,003,000.

As for current retirees (aged 65-69), individuals looking to spend $1115 a fortnight ($29,000) will need to have $73,000 saved before age 65 on top of their Age Pension income. Those wishing to spend $1462 or $38,000 will need $258,000, while someone with a fortnightly budget of $1962 ($51,000) will need $743,000.

For couples, a fortnightly spend of $1615 ($42,000) will require joint savings of $95,000.

Meanwhile, spending $2154 ($56,000) will re-

quire $352,000, and couples at the higher end with a fortnightly spend of $2885 ($75,000) will need combined savings of $1,021,000.

Under the March 2022 iteration of the Retirement Standard from the Association of Super Funds of Australia, a single person aged around 67 needs $46,494 to live comfortably, while $29,632 is needed for a modest lifestyle. A couple would need $65,445 for a comfortable lifestyle and $42,621 for a modest living.

The Super Consumers Australia targets assume an individual owns their own home outright or won’t be renting or paying a mortgage and all spending figures have been adjusted for inflation and based on Australian Bureau of Statistics data.

In developing the targets, Super Consumers Australia engaged with consumers, academics, regulators, industry experts and super funds, receiving feedback from more than 30 organisations. The research behind the targets was supported by a philanthropic grant from Ecstra Foundation.

“Our goal is to improve consumer and industry understanding of people’s retirement needs through industry wide adoption of the targets and the underlying assumptions and research,” Super Consumers Australia director Xavier O’Halloran01 said.

“These savings targets are based on what people spend in retirement with a buffer built in to provide confidence that people’s savings can weather the type of market volatility we’re currently experiencing. Having credible targets, based on actual spending, means people can confidently spend and get on with enjoying their retirement.” fs

Pearler raises $7.8m to continue growth Chloe Walker

The one-year-old retail trading platform has successfully closed a seed funding round led by Portage Ventures, a global fintech investor.

Australian venture capital firms Archangel Ventures and Ten13 also participated in the round.

The funding will allow Pearler co-founder and chief executive Nick Nicolaides and his team to continue the development of core technology and expand product offerings further.

Commenting on the seed funding round, Portage Venture partner Stephanie Choo said: “We are really excited to be backing Nick and the Pearler team as they build the next generation of holistic investing products.”

“Our thesis is that there is a big gap in the market between trading single stocks and having an advisor do everything for you.”

So far, 53,000 customers have already signed up to the platform since its launch last year.

Pearler’s foundational products include an online brokerage providing access to Australian and US listed shares and ETFs, a

micro-investing facility linked to a suite of ETFS, and rebalancing tool Autoinvest, which allows investors to set rules across multiple bank accounts and automate their spending, saving, and investing.

“What attracts investors is our emphasis on helping young investors navigate their wealth journey over the next 20, 30 or 40 years while giving them the tools to navigate any market environment,” Nicolaides said.

“We are not interested in enabling investing as a series of transactions.

“Rather, our process is about helping people set goals and achieve them over the long term in a simple and efficient way.

Nicolaides added that automation will play an increasingly important role in managing investments.

Other plans that Pearler will pursue with this funding include a new range of social wealth features, including the Pearler Exchange, an in-app group for discussing money issues with financial advisers.

It is also looking to expand n into the New Zealand market and to develop an investing app for kids, Pearler Headstart. fs

Product showcase

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

9

01: Matthew Landy

portfolio manager and analyst Lazard Asset Management

Value done differently The investing playbook has changed.

W

hile it’s largely only garnered attention in recent months, the return of value investing started about a year ago, when the global economy began to show signs of recovery following the onslaught of the COVID-19 pandemic.

The last decade or more has undoubtedly belonged to growth investors, almost primarily because of global central banks pumping out stimulus measure after stimulus measure in the wake of the Global Financial Crisis and the pandemic. The most powerful tool in the banks’ arsenal, interest rates, have been at historic lows and have added to the inflated valuations of companies not expected to generate their greatest profits for some time.

But that seems to be over now and the first half of this year has seen some of the worst performance on record for growth stocks. For value however, it’s experiencing its renaissance, powered by rising inflation and interest rate increases.

And while many may think the shift is cyclical, Lazard Asset Management portfolio manager and analyst Matthew Landy01 believes its more likely structural.

“If you look back over the last 10 years, we’ve been in a very unusual environment with abnormally low interest rates, particularly in the context of GDP growth that’s been reasonably healthy at 4-5%. Having interest rates of 1-2% is historically unusual – we all got accustomed to it, but it’s not the norm,” he explains.

The combination of inflation and central banks raising rates means the great normalisation is here, Landy says, adding that this environment is quite favourable to value stocks.

And there’s no telling how long it will last as it typically depends on how far from normal markets and the economy have strayed.

“The sheer degree of growth versus value over the past decade has been almost unprecedented,” Landy notes.

“If you look back over 100 years, there’s been times where each has outperformed but typically value has had the upper hand – but over the past 10, even 15 years it’s really been all growth. The degree of normalisation and mean reversion that needs to happen or could happen is just beginning.”

And it could spell trouble for some of those that have benefited in recent years, with Landy reminding us that low interest rates have created distortions in a range of assets; consumer staples, profitless technology companies and speculative stocks at high valuations, bond proxies at double the multiple they were previously.

Looking at it from a fundamental perspective, the only thing that underscores all these developments is low interest rates, Landy says.

“We think that many of those market valuations won’t survive a higher interest rate environment,” he says.

As a portfolio manager of the Lazard Global Equity Franchise Strategy, Landy focuses on a very unique universe of companies called Economic Franchises – companies with very large competitive advantages and forecastability, meaning relatively predictable cash flows over five, 10, 15 and 20-year periods.

“One of the biggest issue we face as investors is making forecasts, which is difficult, so we’re trying to reduce that forecasting error over the long-run cash flows,” Landy says.

To have those two characteristics present in the one company is rare, with just 220 investment opportunities identified by Lazard in the strategy’s investment universe.

It should also be noted that, unlike most value investors, the strategy does not invest in banks, energy stocks and any other companies seen as deeply cyclical because they don’t meet the key criteria for the fund.

By maintaining that criteria, Lazard is aiming to reduce the risk of a value trap.

“It’s one of the biggest risks you face as a value investor, where the earnings of the company turn out to be structurally lower than you forecast. So, by focusing on Economic Franchises that have competitive advantages such as brands, intellectual property, scale economies, network effects and switching costs, we think we reduce that risk,” Landy says.

These companies also tend to earn higher returns on capital.

“When you’re a value investor and you buy a business that’s trading below what you think is its intrinsic value, it often takes the market quite a while to come round to your point of view. But if you’re an Economic Franchise, throughout that period the business is compounding economic value, so your risk of a bad outcome is reduced,” he explains.

It’s also easier to minimise forecasting errors when focusing on Economic Franchises, he adds.

“One of the biggest issue we all face as investors is making forecasts, which is difficult, so we’re trying to reduce that forecasting error over the long-run cash flows,” Landy says.

“And we’re also obviously trying to buy these companies at discounts to intrinsic value, so we do a lot of detailed modelling and cash flow work to understand the businesses.”

The strategy’s composition today reflects the strategy’s investment team’s view that, while the environment is changing rapidly, stock markets are still expensive. This means the portfolio is quite concentrated, with 26 stocks

The quote

The opening valuation you pay for a stock is going to be a very important driver of your total return because you’re not going to get that free kick from falling interest rates...

in total as at 30 June 2022; a mix that Landy describes as “eclectic”.

These include IGT, the largest owner of lottery concessions around the world, and H&R Block which is the US’s largest tax advisory business. Other holdings include Midtronics, Mednax and CVS Health.

It’s concentrated but diversified, he says.

Looking forward, Landy says it’s important for investors to realise that the investment playbook that’s worked for the last 10 years may not be the playbook that works in the next 10 years.

In terms of tips for investing in such uncertain times, in addition to reconsidering growth stocks and bond proxies, he says investors should probably reconsider indexed investments.

“What’s happened in the last decade with declining interest rates is you’ve had significant multiple expansion across most stocks.

We think that’s much less likely to be the case and you need to be more selective,” he says.

And finally, it’s no surprise he’d say this given he’s a value investor, but Landy believes valuations become even more important in an inflationary environment.

“The opening valuation you pay for a stock is going to be a very important driver of your total return because you’re not going to get that free kick from falling interest rates,” he explains.

In his opinion, companies with pricing power, particularly in elastic demand, low capital intensity and minimal risk will be investors’ friend.

“If you overpay for assets that do have inflation protection, you might have a bad outcome. If you focus on businesses, maybe in the energy sector that may be benefitting from inflation now, it’s still risky because you’re effectively making a bet on where the oil or copper price might be in five- or 10-years’ time,” he says.

“Don’t take on too much risk in the pursuit of inflation protection.” fs

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10

News

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

Executive appointments HESTA hires high profile economist HESTA has appointed high profile economist Annette Beacher as an investment manager and market strategist.

Beacher has spent two decades as a market economist for international investment banks, working in Australia and Singapore. Most recently, she was a full-time anchor for business and markets live-streaming platform ausbiz TV. “Annette’s depth of financial markets expertise and unique experience is a great addition to our investment team, supporting us to continue delivering strong, long-term investment performance for members,’ HESTA said.

The bulk of Beacher’s career was working as a macro analyst at TD Securities where she served as head of Asia Pacific Research, and at Citi, where she spent the same amount of time. Earlier, Beacher did a four-year stint in Canberra as a forecaster and policy advisor with the Prime Minister’s department.

ART adds to board Australian Retirement Trust has announced Aaron Santelises has joined its board of directors, effective June 30.

Santelises replaces union finance specialist Mark Goodey who stepped down from the board on March 31. Goodey was a board trustee of Sunsuper from January 2020, his appointment filled the vacancy created by the departure of former Sunsuper chair Ben Swan.

Santelises is an industrial advocate and legal advisor for the Australian Workers’ Union, responsible for advocating for members across a range of industries. He provides advice regarding governance and compliance.

LGT Crestone names head of sustainability LGT Crestone has hired Amanda MacDonald as head of sustainability, joining from Perpetual Private.

She is tasked with managing LGT Crestone’s environmental impact through ESG and sustainability-related initiatives and “plays a crucial role in ensuring the firm’s core sustainability commitments are maintained and ultimately exceeded.

MacDonald joins LGT Crestone from Perpetual Private in Sydney, where she was an investment director, providing strategic wealth advice to not for profit clients across Perpetual’s wealth business.

BetaShares grows team amid demand BetaShares added two to its sales leadership team to oversee wealth management and highnet-worth groups.

Adam O’Connor has been promoted to the role of executive director, national head of broking and wealth management groups. He was previously director, ETF capital markets and adviser business.

Meanwhile, Tony Pattison takes on the roles of executive director, national head of high-networth groups and is also now BetaShares’ state manager for VIC/TAS/SA. BetaShares said both appointments “reflect their management experience, leadership outcomes and responsibilities” within the business.

EG appoints joint MDs Roger Parker and Chris Pak have been promoted as EG’s new joint managing directors, taking over the roles of head of distribution and chief investment officer, respectively.

Parker, EG’s executive director of nine years, will assume the title of head of distribution leading all capital raising, business development and marketing endeavours across the business.

Meanwhile, Pak will step into the role of EG’s chief investment officer, working alongside head of capital transactions Sean Fleming and divisional director of asset management, Gemma Moulang.

As joint managing directors, Parker and Pak will work alongside chief executive Adam Geha and chair Michael Easson.

Cath Bowtell steps down at IFS Cath Bowtell has handed over the reins after almost six years as chief executive of Industry Fund Services.

Bowtell has stepped down as chief executive, the position she’s held since December 2016, and taken over as chair of the Industry Fund Services board, effective this month.

Taking over the top job is Csaba Baranyai in the newly combine roles of chief executive and chief operating officer. It’s a promotion for Baranyai, who was previously executive manager of legal, risk and compliance and company secretary. fs

The numbers

29

The number of executive appointments reported by Financial Standard in the past fortnight.

Andrew Mouat joins Kilter Rural Kilter Rural has appointed the seasoned executive as its new head of growth and distribution.

Mouat brings with him 30 years of experience in financial markets across equities, ECM, and senior management.

Most recently he was head of growth and distribution at Tanarra Capital, and prior to that he spent more than six years at BT Investment Management and Pendal.

In his new role, Mouat will be responsible for driving the capital raising efforts of Kilter’s three managed funds.

Atrium welcomes chief operating officer Atrium Investment Management has named former Pendal executive David Harris as its chief operating officer.

Harris was most recently head of product at Pendal Group. He has held executive and leadership roles within asset management firms in Australia and across the Asia Pacific, including AMP, GAM Investments, NAB Asset Management and Man Investments.

In his new role, Harris will oversee Atrium’s core operational functions including investment operations, compliance and product, as well as working with the group executive to form and drive overall strategy.

Opinion

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

11

01: Adrian Johnstone

president Practifi

Robo advisers no threat to tech adopting advisers T

echnology will never replace advisers, but advisers who use technology will almost certainly replace those who don’t.

On July 1 the retirement income covenant (RIC) came into force, requiring super trustees to develop a retirement income strategy for their members. It’s something that the government is pinning its hopes on to improve financial outcomes for Australian retirees.

This leaves a large advice-affordability gap which could simply be filled by digital wealth solutions like robo-advice.

But there’s a problem with this. History tells us that robo-advice has limitations, and while people are happy to use models and calculators to hypothesise, the vast majority still want to interact with a human prior to taking action.

That’s backed up by recently released Investment Trends’ 2022 Digital Wealth report, which found digital wealth platforms were increasingly changing how they engaged with customers to remain relevant. Those that performed best, the study found, were platforms who were able to deliver “personalised experiences” across several channels and make you feel as though you are having a one-on-one conversation with a financial adviser.

Research also tells us that users of robo-advice generally use a human as well. The Million Dollar Round Table, a US-based group of financial professionals, published an analysis of robo-advisors’ roles and found that scepticism toward independent robo-advisors was strong: 36% of professionals said they wanted their finances handled solely by people but just 8% said they wanted their finances handled solely by automated systems.

One important takeaway from the study was that “to mollify concerns about their own fallibility, human advisors must effectively incorporate technology into their practices - and effectively communicate the technologies they use to their clients.”

The study also found that robo-advisors evoke stronger concerns about personal or financial security breaches, and impressions of the advantages are considerably less enthusiastic than the human advisor advantages. In other words we are generally more fearful of the potential mistakes of robo-advisers and less impressed by the supposed advantages.

With this body of evidence, the role of an adviser becomes clearer and further from extinction in markets like Australia where the industry has contracted. It is clear that technology is an enabler to more efficient and affordable human advice, rather than a replacement for it. All the algorithmic technology in the world isn’t read-

ing the emotion of the individual at the point of a major life event such as retirement.

Robo-advisers are also unable to consider that the silent partner in the room is terrified of the impending change, but the one pressing the keys is completely bullish.

Cost remains the major advantage for roboadvice and deterrent for human advice. The cost of advice simply reflects the cost of the component parts like salaries, office space, compliance and technology but adjustments at every level can help to improve efficiency.

Raising the pay of salaried advisers will attract more/better talent and the move to remote is already putting downward pressure on office space, so the focus should be on the other two areas - compliance and technology.

Compliance is critical but also needs to be tempered on a risk versus reward basis - if regulation is geared at controlling the 2% of advisers who are doing the wrong thing, it will negatively impact the 98% who are doing the right thing.

Technology goes hand in glove to solve this problem. Reducing the friction in compliance and making monitoring comprehensive and proactive through technology, rather than adhoc and retroactive through audits is a big step in the right direction. Particularly if the advisers are being paid a better salary.

Technology, particularly AI, should be used to interrogate data at scale to weed out problem advisers. It can achieve this by looking for patterns that aren’t obvious to humans doing the monitoring manually. In short, rather than digitising the end-client experience, it’s far more effective to digitise the compliance process.

Over the past five years the industry has changed immensely and mostly positively, yet the technology underpinning it has barely changed at all.

Licensees remain fixated on the production of a compliant SOA or ROA rather than the quality of the overall relationship with the client. This in turn drives adviser behaviour and technology investment and as a result, the perception of value from the end-investor is inextricably linked to the one or two interactions they have annually on this topic.

The quote

Price is only an issue in the absence of value.

Through this lens advice feels expensive.

Price is only an issue in the absence of value.

Our learnings from the US market make this very clear. The system driving high performing firms is the CRM. Products like Practifi are heavily used by every team member every day - advice tools are widely used but on a transactional basis and are secondary whereas enterprise-grade CRMs are the core. Client experience, not compliance, dominates technology investment. Compliance is assumed and embedded in systems.

There will always be that 2% who will work around the controls, regardless of what they are. If client experience becomes the focus and the relationships evolve beyond the annual advice generation exercise, then the perception of value increases and pressure on costs goes down. With increased pay attracting more high-quality talent to the industry the joint problems of affordability and accessibility are eased. If we don’t value these professions and we continue to increase the risk to operate in them, they’ll continue to contract and supply/ demand will fall further from balance.

Advice is and always will be, a human industry. Technology’s job isn’t to replace advisers, but to better enable them. fs

12

Open letter

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

01: Phil Anderson

chief executive Association of Financial Advisers

AFA responds to QAR submissions from Choice, ISA T

he Quality of Advice Review (QAR) has drawn many submissions. Many of them have included recommendations that have the potential to make a difference in ensuring that financial advice is more accessible and affordable than is the current case. Not all submissions are supportive of financial advisers, and it is worthwhile to reflect on some who have included recommendations that would have a seriously detrimental impact on the financial advice profession and their clients.

clients. We know from a number of research reports that the existing clients of financial advisers value their advice relationship and trust their adviser.

Choice submission

Choice claim that life insurance commissions “create a perverse incentive for advisers to sell life insurance to people that are not suitable for their needs”. What evidence do they have to make this claim? Well, they go on to quote from the 2014 ASIC Report 413 on life insurance advice: “This research into life insurance advice found the way an adviser is paid (e.g., under an upfront commission model compared to a hybrid, level or no commission model) has a statistically significant bearing on the likelihood of their client receiving advice that is not in their best interest.”

Seemingly, in including this quote, they are oblivious to the fact that it is saying that there was no correlation between poor advice and the use of either hybrid or level commission models. Of course, the hybrid model was an 80% upfront, 20% ongoing model at the time of the ASIC Report 413. The cap is now 60% for upfront commissions, which is 25% less than the hybrid model in 2014 that generated a 93% pass rate in ASIC Report 413. To the best of our understanding, there have been no ASIC reviews of advice quality over the last 10 years that have delivered a result as good as a 93% compliance result.

They go on to demonstrate their total ideological opposition to commissions, however have they bothered to ask life insurance clients about their views on paying advice fees or commissions? Surely a body that claims to advocate for consumers, would appreciate that very few clients are willing to pay an upfront fee to cover the full cost of life insurance financial advice.

There are numerous research reports that demonstrate this.

Our members find that even when they offer their clients the choice of an upfront fee or a commission, that clients invariably choose to pay by commission. There are a couple of good reasons for that. Firstly, commissions provide a means to spread the cost of the advice over several years. Secondly, clients rarely pay more than a small fee, where they go through the full advice process, however, are ultimately unable

The Choice submission to the Quality of Advice Review is full of criticism of financial advisers, unfair judgements, and generalisations.

In just their second sentence they start with a statement that “conflicts of interest that remain in the advice industry continue to contribute to poor outcomes for many people”. What proof do they have that this is true in the post FoFA/ LIF/Professional Standards and Annual Renewal era? They make the often-repeated statement that the Banking Royal Commission exposed widespread misconduct in the financial advice industry. It might be worthwhile pointing out that only one adviser took the stand during the Banking Royal Commission and only ten advisers were the specific subjects of case studies. The Banking Royal Commission provided sensational coverage on a number of issues, many of which were already known at the time. Most of the focus was on the conduct of large institutions and not individual financial advisers or the many small business financial advice practices.

Choice research The Choice submission refers to a survey that they did in May 2022 which they believe demonstrated widespread distrust in the financial advice profession. This survey was an online survey directed at Choice supporters (and the public, they claim), so it is hardly surprising that given the reporting they get from Choice, that they would take this perspective. However, it is evident from the five examples that they have included on pages 10 and 11, that none of these people are current clients of financial advisers and they clearly lack an understanding of the current regulatory regime. The comments refer to “best commission”, “bank affiliations” and “who benefits from where my money is invested”, all of which reflect a bygone era. On this basis, I think that we can safely disregard the relevance of this survey. To understand what financial advice clients really think about their advisers, they should survey real advice

to get acceptable cover, due to pre-existing or family health conditions.

Asset-based fees

Choice recommendations Choice has made two key recommendations related to adviser remuneration: • Banning life insurance commissions.

• Banning asset-based fees.

Life insurance commissions

The quote

Surely a body that claims to advocate for consumers, would appreciate that very few clients are willing to pay an upfront fee to cover the full cost of life insurance financial advice.

The Choice discussion on asset-based fees goes to the next level, in terms of unfounded claims and inaccuracy, as demonstrated in the following statement: “Once established, assetbased fees do not provide an incentive to provide ongoing services to the client, because the financial adviser is paid regardless. They have consistently been a source of poor consumer outcomes for decades and have driven disastrous business models.”

These are extraordinary claims, with no evidence provided and fail to acknowledge the existence of Fee Disclosure Statements and now the Annual Renewal obligation. Whilst there has been a recent trend in the movement towards fixed annual fees, this has not been driven by the protestation of clients. If Choice really thinks an adviser can get away with providing no service, but still get clients to sign the annual renewal and consent forms, then they are harshly judging the common sense of the hundreds of thousands of existing clients who pay for ongoing advice on the basis of asset-based fees.

Their submission then goes on to make further extreme claims, that potentially mix up the fees charged by advisers, versus what product providers charge. If Choice is truly calling for an end to asset-based fees charged by product providers, which is almost universal, including industry funds, then maybe they could be more explicit.

“Asset-based fees also allow firms to ‘clip the ticket’ of their client’s hard earned-savings at multiple stages in the process. Consumers can be hit with an asset-based fee when they engage with an adviser. They are hit with an asset-based fee when they access an investment platform. They are hit with an asset-based fee for each product they invest in on that platform.

Further, asset-based fees penalise those with more savings. With a “platform administration fee” of 0.75%, an individual with $200,000 invested in the platform would pay double the fees paid by an individual with $100,000 invested in the exact same platform. Asset based fees in financial advice should be banned and be replaced with fixed fees for service.”

Maybe someone should explain to them that the “platform administration fee” is not charged by a financial adviser and that it is the product provider. It appears evident that they do not understand how the charging model works.

Open letter

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

ISA submission submission We have not heard much from Industry Super Australia on the financial advice front in recent times, however we certainly remember the active role that they played at the time of the FoFA legislation and the FoFA Amendments debate in 2014.

As we would expect, the ISA submission was presented from the perspective of advice and guidance provided by super funds, with an obvious industry fund emphasis.

Unlike some previous submissions, there were no direct attacks on the financial advice profession.

We appreciate the important role that industry funds play in the financial services sector, and we also recognise that they are an important part of the solution for providing financial advice. We also recognise the importance that default insurance plays within the group super market, which ensures that many more Australians have some life insurance, even if it is nowhere near what they require. Whilst we don’t support some of the ISA recommendations, including expanding the scope of intra-fund advice, there are other recommendations that we can agree with.

However, there are two important recommendations that we strongly oppose, and which need to be addressed. These recommendations are: • Banning ongoing advice fees within Choice funds.

• Banning life insurance commissions.

Ongoing advice fees The banning of ongoing advice fees in Choice funds has been argued by ISA based on the lack of competitive neutrality between MySuper funds and Choice funds. It was Commissioner Hayne who recommended the banning of all advice fees in MySuper funds.

This recommendation came from his lack of understanding of the value of financial advice and a tight view of the application of the Sole Purpose Test.

He failed to understand that the value of financial advice was predominantly with respect to strategies and the psychological benefits of confidence about a plan and being held accountable for improved financial behaviours.

He presumably thought that if you had your money in a MySuper option, then there was not much need for ongoing advice. The government took a more balanced perspective and only banned ongoing fees in My Super funds.

So yes, there is an issue with the lack of a level playing field, and advisers being more likely to work with clients in Choice funds, however the solution to this is not to compound the flawed thinking of Commissioner Hayne, but instead to reconsider what has been done with MySuper fund members. It is certainly not the case that the clients in Choice funds are calling for the banning of ongoing advice fees. There needs to be some common sense applied in this context.

Life insurance commissions The call for the banning of life insurance commissions is equally based upon flawed logic. It is seemingly once again founded on the protection of the life insurance offers of the industry funds, however, more than in any other sense, there is a complete lack of comparability of the default life insurance in industry funds, compared to what is available in the individual advised retail context.

The ISA submission refers to the poor client outcomes illustrated by the 2014 ASIC Report 413, however as noted above, the compliance outcome for hybrid (80% upfront commission and 20% ongoing) and level commission business in Report 413 was that 93% of files passed, which is far higher than any other recent report on advice quality. It should also be noted that this was advice provided back in 2013, before the full impact of all the recent reforms. The December 2019 ASIC Report 639 on advice provided by super funds (including industry funds) revealed that only 49% of the advice complied with the Best Interests Duty and related obligations. Given that the current 60% cap on life insurance commissions is much lower than the hybrid products that existed prior to LIF, this further highlights the lack of evidence to argue for the banning of life insurance commissions on the grounds of consumer protection.

To be blunt, on the obvious difference in compliance results between the 93% pass rate for hybrid and level commission business in Report 413 and the 49% pass rate for super funds in Report 639, life insurance advisers should not be lectured to by super funds.

And that is before we talk about the conflicts that exist in vertical integration.

In terms of presenting an incentive for advisers to recommend clients move their insurance out of group super funds, there are some key points that need to be made.

• The level of default cover in group super funds is vastly inadequate for most Australians. A recent report by ASFA/Deloitte states that the average group super payout for death cover is $137,000, and $136,000 for TPD. • Default cover is typically around $160,000 - $180,000 for a 40-year-old, declining to around $55,000-$80,000 by the age of 50.

These amounts are simply not going to meet consumer needs.

• Typically advisers will recommend as a minimum, that clients have enough cover to payout their mortgage and to cover living costs for a few years. In this way the member, or the surviving spouse, will not be subject to being forced to leave the family home.

• With the average mortgage in Australia being around $564,000, according to the latest Census, default super is never going to be enough cover, and is often substantially inadequate. Advisers are forced to consider other options, including increasing the level of cover in the current product (including the super fund).

• The cost advantage for default group super cover typically disappears when larger insurance amounts are needed, and underwriting is required. The individual advised options can be cheaper, and in some cases significantly cheaper.

One of our risk adviser members recently compared the cost of cover for a 40-year-old white collar worker seeking $500,000 of death and TPD cover and $4700 per month of Income Protection Insurance. They compared the offer from three of the largest industry funds with the 10 retail, individually advised products for both males and females. The results were very interesting and particularly contrary to what many people might expect.

For males, the four cheapest products were individual advised products. For females, the

The quote

Life insurance advisers should not be lectured to by super funds.

13

seven cheapest products were individual advised products. The industry funds were certainly not cheaper, and one was substantially more expensive than all the other options.

Importantly, it is the retail advised products that can offer the better terms, including the option for own occupation cover, level premiums, portability of cover and super linking to avoid restrictions around conditions of release.

And of course, individual advised products are guaranteed renewable, whereas group super products are subject to changes in the terms, typically every three years.

An adviser is forced to act in the best interests of their clients. If the existing fund can provide the best cover, then they must recommend this and seek to charge a fee accordingly. If the best option is to place the insurance through an individually advised policy, then they will need to do that. It is certainly not the case that the best option for the client is always to stay where they are. Knowing the options, and understanding what suits the client best, is part of the value that comes with getting financial advice.

Clawback requirements Another justification put forward in the ISA submission is that the clawback of commissions, when a product lapses in the first two years, does not apply to renewal (trail) commissions, which they think reduces the disincentive to recommending switching products within the clawback period. This is a nonsensical suggestion when you look at the detail.

If an adviser was to recommend the client move to another insurance policy within the first year, they would lose 100% of the upfront commission, and would not yet have received any servicing commission. If they were to recommend moving during the second year, then they would lose 60% of the upfront commission through the clawback but would retain the first servicing commission. So, let’s look at a simple example. For a client with a combined premium of $4000, the upfront commission would be $2400, which would not cover the cost of providing the advice (estimated at $3000). If they received the first servicing commission of $800, at the end of year one, but recommended moving to a different product in year two, and needed to repay 60% of the upfront commission ($1440), then they would have earnt a net $1760 by this point, which is still $1240 less than the cost of the provision of the initial advice (let alone the cost of servicing at the end of the first year).

If anyone thinks that this is a good business model, then they know something that we don’t. The lack of clawback on servicing commission is largely irrelevant.

Concluding comment We welcome the Quality of Advice Review consultation process and the open debate on how to fix the problems in the current financial advice regulatory regime and operating model, however the debate needs to be based on the facts and submissions should be subject to challenge. We look forward to further constructive debate as the Review progresses. fs This is a truncated version of the AFA’s response to Choice and ISA. The open letter can be found in full at www.fsadvice.com.au.

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Feature | Fixed income

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

BACK FROM THE WILDERNESS A prolonged period of record low interest rates saw fixed interest fade from investors’ radar. But as rates rise, fixed income is gaining favour as new options emerge to generate attractive returns.

Anthony O’Brien writes.

Fixed income | Feature

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

I

t’s no secret that fixed income has been seen as somewhat of a ‘problem child’ in portfolios in recent years, with the asset class seeing some of the worst returns in memory even as recently as the first half of this year.

However, as equity markets continue to suffer, fixed income is beginning to catch some investors’ eyes again.

“We are coming off what was a very low interest rate environment, and we have had a big repricing this year in fixed interest assets. So, what was once a low yielding asset class, is really no more. In our view, that is starting to create better value in fixed interest as an asset class today,” Neuberger Berman senior portfolio manager Adam Grotzinger01 explains.

Today, the US aggregate index is yielding about 3.75% and, he says, if you wind the clock back to the beginning of the year, it was 1.86%.

Grotzinger says this shows fixed income is starting to look, once again, quite attractive; “We have had a recalibration to higher yield.”

“So now, when clients are saying, ‘I need a 5% yield’, you can achieve that today in some combination of investment grade fixed interest securities, without taking a lot of credit risk,” he says.

“And that is a far less volatile proposition than equities, and other assets that you used to have to own to get that yield in the past environment of financial repression.”

For FIIG Securities director of fixed income and investment strategy Jonathan Sheridan 02 , any consideration of fixed interest as an asset class should involve addressing both sides of the equation – risk and return.

On the return front, Sheridan says: “With the large rise in yields already priced into the market well ahead of the Reserve Bank of Australia (RBA) actually lifting overnight rates, there are very attractive nominal yields available on very sound credit – and amazingly, even with inflation on the rise, positive real yields.”

He cites the example of the recently issued subordinated bond from Macquarie, which offers a yield around 5.7% for five years to the first call.

“This is just the return side of the equation.

The risk side, which is usually completely ignored by most investors in Australia – both retail and institutional, means that with a rate-

X0203_0622_Financial Standard ad_v2.indd 1

15

01: Adam Grotzinger

02: Jonathan Sheridan

03: Roy Keenan

senior portfolio manager Neuberger Berman

director of fixed income and investment strategy FIIG Securities

co-head of Australian fixed income Yarra Capital Management

hiking cycle underway, which typically causes a recession, this risk has not yet been priced into riskier assets such as equities,” he says.

Sheridan believes that right now investors should be looking to allocate more of their capital to safer investments as a measure of “capital protection given the large uncertainty in markets over the next year or two.”

Interestingly, Yarra Capital Management went overweight fixed income for the first time in five years in the last month.

Yarra Capital Management co-head of Australian fixed income Roy Keenan 03 explains: “During the COVID period interest rates were very, very low, even by normal standards. But now we are starting to see rates get to a point where income again is meaningful. That is why we think having some allocation to it makes sense, whereas at half a percent yields, it probably did not make a lot of sense.”

That said, Keenan believes the decision to move into fixed income comes down to an investor’s individual needs.

“If you are a younger person who has a long time to go, fixed income may not be the most sensible place to be. But for people that need some kind of stability in their portfolios, fixed income still offers this quality – and it doesn’t matter what type of fixed income it is,” Keenan says.

“All fixed income tends to have the same underlying principles; it is relatively capital stable, and it gives you income. And that is really what you want more than anything.”

With returns from fixed income looking set to improve in the year ahead, investors should be allocating back to bonds, says Schroders head of Australian fixed income Stuart Dear04 , pointing to valuations and higher income, the global economic outlook and return potential, and diversification.

“Rising yields have bought about some pain for investors, but there are now some great opportunities to reset portfolios that will generate strong returns over the next year,” he says.

“The starting point for yields is much higher than a year ago, and this extra income provides a higher buffer to capital losses if market yields continue to rise.”

In terms of the international outlook, Dear notes: “Inflation is peaking, and if central

banks are successful in taming inflation, this could be at the expense of negative economic growth and/or recession.”

According to Dear, fixed income is also becoming more valuable as a portfolio diversifier, citing Schroders’ internal research that shows the negative correlation between bonds and equities is likely to hold unless there’s a move to sustainably higher yields.

However, amid compelling arguments to increase fixed income portfolio weightings, not everyone is rushing in.

Hamilton Wealth managing partner Will Hamilton 05 is keeping an eye on the sector but says he has no plans to allocate until there is a sell-off in fixed income.

“Bond markets have experienced their worst year since records began, with the main Australian Composite Bond Index down more than 15% from peak to trough. I am watching the bond market closely and preparing to add to our portfolios at the appropriate time,” he says.

“We are waiting for a few more triggers such as returns over 4%. Then we would definitely be looking to push some money there,” he says.

Challenges and opportunities The starting point for yields is much higher than a year ago, and this extra income provides a higher buffer to capital losses if market yields continue to rise.

Stuart Dear

Despite some relatively bullish outlooks, a confluence of events is playing out in bond markets, including a decelerating growth environment, as well as ongoing hawkish central bank rhetoric and action because of ongoing inflation pressures. This is creating ongoing volatility in government bond interest rates and fuelling uncertainty.

At the same time, Grotzinger says the opportunity is that a lot of this is already priced into the market.

“Corporate credit, outside of government bonds, is increasingly priced for recessionary outcomes. It is not a foregone conclusion that we will have a recession But, it is interesting that those markets are already pricing for a recessionary outcome today,” he says.

“So, it is manifested in the price, and as a result there is value in areas of credit markets.”

However, fears of a recession are certainly settling in. But are they warranted?

“This could be the year of the monetary policy mistake, where playing catch up is hard

6/29/2022 11:06:58 AM

18

Feature | Fixed income

to do. The risks to both growth and asset markets are far greater this cycle. Central banks need to raise interest rates aggressively and this significantly increases the risk of recession,” Schroders’ Dear says.

“This will be one of the best opportunities to buy government bonds.”

The repricing of credit as we embark on a global tightening cycle may also provide an opportunity to get more constructive on asset classes such as emerging market debt and Asian credit, according to Dear.

“Valuations are already very attractive in investment grade credit if we assume no recession,” he says.

Nick Lloyd 06 , principal adviser at Income to Live Financial Planning, says the main challenge is the potential for further price declines if bond yields continue to rise further in the face of higher-than-expected inflation.

“The opportunity would be the reverse situation, whereby interest rates don’t move as high as the market anticipated and yields decline (and therefore capital prices increase). We’ve seen this happen over the last month but only time will tell if we’ve seen the peak,” he says.

Active or passive?

Investment markets have seen a significant boom in exchange traded funds (ETFs) focusing on fixed income. BlackRock is predicting assets under management across fixed income ETFs will hit US$5 trillion by 2030, but should investors in the fixed income space take an active approach or stay passive?

Dear acknowledges the appeal of ETFs for fixed income, saying: “Investing directly in the bond market can be challenging given it is an over-the-counter market and not listed on an exchange.”

He notes too that fixed income ETFs offer several benefits to investors looking to add liquid bond exposure to their investment portfolio – with a level of simplicity and transparency that is not possible by investing in global bond markets directly.

However, he says: “We believe fixed income portfolios need to be actively managed to provide diversification and a low-risk source of income. These characteristics are expected to hold true even as the environment for bonds remains challenging.”

The challenge to fixed income ETFs, in the case of high yield as an example, is that the liquidity in the high yield market often limits the securities that these ETFs can own in their attempts to replicate an index, Grotzinger says.

“The short of that is you often get tracking error issues in fixed income ETFs, relative to the index they’re trying to track,” he explains.

“And underperformance, in some cases, of those indices has resulted in that tracking error issue.”

It could be that the main driver for fixed income ETFs is investors’ desire for simplicity

and low cost, which is common to most passively managed ETFs. There is also a certain appeal in passively managed ETFs for financial advisers, with FIIG Securities’ Sheridan saying they allow the adviser to concentrate on asset allocation and “leave the performance to the market”.

Nonetheless, he says: “This is a risky strategy as different market regimes should result in different asset allocations, and passive strategies can easily miss these shifts. The current environment, and the last six months or so, has been a salutary lesson in this.”

Sheridan notes that a passive approach can work well with equities. However, when it comes to fixed income, he says: “There are many variables for each bond such as coupon rate, coupon type, different maturities, where in the structure the bond is issued from and so on, all of which contribute to the relative value of the particular instrument.”

“This makes active management of bond portfolios so much more important in my opinion, and more likely to add value.”

Alternatives With volatility high across most asset classes at present, it can be worth considering fixed income alternatives that deliver income without a considerable uplift in risk.

“When we look at relative value across the world in fixed income, we are identifying a lot of attractive relative value in investment grade securities,” Grotzinger says.

“And you can achieve upwards of 5% yield pretty easily with a high quality, straightforward investment grade portfolio.”

He adds that corporate debt is attractive and believes the “triple B part of that market has some interesting value”; telecommunications, cable media, and US banks are three industries that offer good value.

“We also like current production agency mortgages in the US, which are a high-quality liquid asset, backed by the full faith and credit of the US government,” he says.

WAM Alternative Assets portfolio manager Dania Zinurova07 says there are numerous fixed income alternatives available to investors, and they can provide strong risk-adjusted yields with low volatility within the alternative assets space.

She believes these investments can provide a powerful alternative to conventional fixed income investments, adding: “Valuations on alternatives are done less frequently compared to more traditional asset classes, and thus more wholly reflect long term underlying fundamentals as opposed to short term market volatility.”

Moreover, Zinurova says the highly specialised nature and low number of participants across the alternatives market mean that more favourable terms can often be negotiated – including high yield relative to publicly listed counterparts, and inflation hedging via CPIlinked cash flows embedded in contracts.

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

04: Stuart Dear

05: Will Hamilton

head of Australian fixed income Schroders

managing partner Hamilton Wealth Management

There is never a free ride. If you are getting something, you are paying something else for it.

Roy Keenan

“Certain types of unlisted infrastructure investments, which are largely non-discretionary in nature (such as schools, hospitals and renewable energy) are often characterised by long term contracts with highly creditworthy counterparties, and monopolies or high barriers to entry can provide regular and reliable streams of income through economic cycles,” she says.

“Investments in some types of natural resources, such as investments in water rights, can be a valuable source of diversification in the income-producing component of a portfolio due to their returns being driven by a different underlying risk premium (that is, climactic conditions) than that of publicly listed stocks (the equity risk premium).”

Dear argues that it is important to distinguish between risk to underlying cashflows and mark-to-market risk.

“Some fixed income alternatives have avoided the market-to-market volatility but could be subject to underlying cashflow impairment ahead,” he observes.

Meanwhile, Schroders sees opportunities in private debt, which has avoided much of the market-to-market volatility by virtue of its floating rate nature and reduced sensitivity to daily market moves.

Even so, he says: “A very prudent approach to assessing credit risks is required as we enter the more difficult phase of the economic cycle for borrowers.”

Dear notes that other fixed income alternatives may be appealing if they genuinely offer exposure to different types of underlying economic risk.

“If your portfolio has a concentrated exposure to corporate risk, various forms of securitised debt may offer some diversification,” he advises.

“Debt linked to activities with low correlation to the economic cycle, for example, insurance linked securities, are likely to be truer diversifiers.”

As Yarra’s Keenan points out, the issue of where to generate income without too much risk is the million-dollar question for all investors.

“There are lots of asset classes that people say will give you income, but capital volatility is quite often the trade-off,” he says.

“As much as fixed income over the last couple of months has been very volatile relative to its long-term history, it has still been less volatile than many other asset classes. But it is a truly income-focused product. You’re not really in there for the capital gains that you may be trying to get with equities.”

He highlights that it is “very hard” to get additional return without taking risk – and cautions that the risk may be hidden in some alternative products. It could be liquidity risk, or some other financial risk that isn’t obvious – especially to retail investors.

“There is never a free ride,” he adds.

“If you are getting something, you are paying something else for it.”

Fixed income| Feature

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

Is private debt promising?

Australia’s superannuation sector is increasingly showing interest in private debt opportunities, and there are a range of factors driving both activity and opportunities in the space – but it is an asset class that also brings challenges.

“Private debt is often considered a safe harbour in times of economic turbulence – with covenant packages and often real asset security providing additional comfort. This allows managers to step in early and take pro-active steps to protect the principal of their investors at the first signs of stress,” Dear explains.

He adds that with rate hikes underway – and more expected in the near-term, the floating rate nature of private debt can provide reassurance to investors’ principal and interest in the event of rate rises.

“With inflation risk looming on the horizon, history tells us that rates generally rise as inflation pressures mount. So, whilst not a direct hedge, floating rate debt may act as a protection mechanism against such inflationary pressures,” he says.

Dear suggests that credit analysis needs to be even more focused in such times, as these pressures are also creating stress on the cashflows of underlying borrowers. He believes this calls for an increase in the amount of downside analyses on cashflows that should be undertaken.

Notwithstanding this, he says: “The benefit of private debt is the depth and breadth of information provided about company cashflows.

This, combined with the ability to get much closer to the management of our borrowers, allows for a more granular understanding of how strong these cashflows are in relation to the terms and conditions on offer.”

Private debt, like many alternative asset classes, encompasses a broad range of strategies that vary significantly in their risk-return characteristics. This enables the asset class to perform well across market cycles and work well as an alternative to fixed income investments.

Zinurova says: “The withdrawal of liquidity

from the banking sector has led to a supply and demand imbalance, creating the potential for strong risk adjusted returns.”

“Over the past decade, low interest rates have driven demand for higher yielding alternatives and have led institutional investors to increasingly shift their allocations from conventional fixed income to private debt in order to achieve their risk/return objectives.”

Moving forward, she expects this trend to be further supported by the floating rate structure of many private debt instruments, which provides a valuable interest rate hedge in the current high inflationary and increasing interest rate environment.

Historically, lending in Australia has been dominated by the big four banks. However, recent regulatory changes, led by the Basel Accords, have seen them withdraw from the sector. As a larger provision of debt financing is required from non-bank financial institutions, Australia’s nascent private debt industry has been growing rapidly.

For investors seeking strong income with reduced volatility through economic cycles, Zinurova says senior loans in particular, offer the potential for stable, frequent cash returns.

“Senior loans are characterised by lending to highly cash-generative businesses, extensive due diligence processes, first ranking security (that is, paid out first in the case of insolvency or bankruptcy) and bespoke structures with extensive maintenance covenants to protect against credit deterioration and ensure recoverability in the case of a default,” she says.

Risk versus return For Hamilton, the benefits of private debt need to be balanced with additional risks.

“We had a designated private debt allocation, and I want to stress it is very, very different from fixed income. You need to look at liquidity. You need to look at what the underlying investments are, and what the risk is,” he warns.

“This is an area for us that over the last eight

Figure 1. Australian Yield Curve Australia cash Australia 5Y bond yield Australia 1Y bond yield

5

Australia 10Y bond yield Australia 3Y bond yield

4

Australia 15Y bond yield

YIELD % PER ANNUM

3 2 1 0 -1 JUN 2022

JUN 2021

JUN 2020

JUN 2019

JUN 2018

JUN 2017

JUN 2016

JUN 2015

JUN 2014

JUN 2013

JUN 2012 Source: FactSet, 2022

06: Nick Lloyd

07: Dania Zinurova

principal adviser Income to Live Financial Planning

portfolio manager WAM Alternative Assets

Clients are increasingly blurring the lines between public and private, or liquid and illiquid fixed income.

It’s simple: It’s about, how can I get more unit of return, higher levels of yield, and continue to reduce my volatility?

Adam Grotzinger

19

years or so has paid good, stable returns. But we also recognise economically that the environment is different, and we are watching it with a lot more caution.”

Neuberger Berman manages a $16 billion private debt business globally, and Grotzinger confirms an appetite for private debt spanning institutional clients and high-net-worth individuals. He says this is partly a function of wanting to achieve higher levels of running yield and lower levels of mark to market volatility in a portfolio.

“What we have also seen, particularly as the private debt market has grown over the last 15 to 20 years, is that it has expanded to all types of areas of private debt – not only corporate, GP-backed, mid-market loans, but also consumer financed areas of the business,” he says.

“Clients are increasingly blurring the lines between public and private, or liquid and illiquid fixed income. It’s simple: It’s about, how can I get more unit of return, higher levels of yield, and continue to reduce my volatility?”

While he can see the benefits of the sector and why it’s growing, Sheridan sees two main points of appeal driving the market.

The first is opportunities to lend to issuers/ borrowers who have no need to access public markets for whatever reason.

“It may be that they do not want to pay for a credit rating, or their business is too small to satisfy the minimum size requirements of a public issue (typically $200 million-plus), or the borrower is in a specialised field where detailed credit work is required to understand the particular risks,” he says.

The second driver is the opportunity to capture an illiquidity premium.

“Just as in private equity, private debt is not marked to market. This sometimes offers the illusion of stability in capital price as the positions are not marked to market on a regular basis,” he explains.

“As most of these loans are not made in security format and therefore are not tradeable on a public market, the illiquidity for the investor must be compensated for in the form of a higher return than might be paid for an identical issue in the public markets.”

Summing up, Lloyd says private debt is stepping into the opportunity created by regulated banks moving out of lending to certain sectors – or where their pricing was uncompetitive, and where corporate bond markets are not accessible to borrowers.

Private debt can offer attractive risk-adjusted returns as part of a diversified portfolio – so long as the underlying portfolio is well managed.

“The challenge is primarily in the management of the portfolio” Lloyd cautions.

“In the listed private debt space, we saw a dislocation of prices to NTA during the crunch of COVID in early 2020 and again last month.

“This can be seen as both a challenge and an opportunity.” fs

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News

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

First app for FirstWrap

01: Lisa Sorgini

general manager, wealth distribution AMP

Jamie Williamson

The Colonial First State FirstWrap mobile app will give members access to their superannuation, pension, and investment accounts via their phone.

The app is available on both Apple and Android devices and can be used to view total portfolio balances of any investments held on the FirstWrap platform as well as summaries of contributions, debits, fees, and the like. Members can also access details of where the money is invested and the current value of the investments.

A member’s financial adviser can also be contacted directly through the app, CFS said.

“The launch of this app is another strong step in improving the digital experience for FirstWrap members. It allows members to conveniently view their FirstWrap accounts through their phone and access features not available through online investor access,” CFS chief executive, superannuation Kelly Power said.

In terms of security, the app features twofactor authentication and has face and touch ID capability.

CFS said the launch is just the next step in its transformation program, which also includes the launch of the revamped Wrap platform later this year.

A total of $430 million is being invested across the business over the next four years, CFS said.

Power added: “We are well on the journey and will continue to listen to feedback from our members and deliver more features in the future to meet their ongoing needs.” fs

Magellan FUM drops again The fund manager’ latest update shows its funds under management have dipped to $61.3 billion.

Over the June quarter Magellan saw outflows of $5.2 billion - $1.7 billion from the retail side of the business and $3.5 billion from the institutional business.

The retail business now holds $22.2 billion total while the institutional business has $39.1 billion.

By asset class, total FUM is comprised of $33.3 billion in global equities, $20.1 billion in infrastructure equities and $7.9 billion in Aussie equities.

Net of reinvestment, Magellan said its funds will pay about $0.4 billion in July.

The group said it is entitled to estimated performance fees of $11 million for the financial year just gone.

At May end, Magellan had $65 billion and three months prior it had $70 billion.

Meanwhile, the group said it is entitled to estimated performance fees of $11 million for the financial year just gone.

This latest drop in FUM follows long serving distribution lead Frank Casarotti flagging his intention to retire at the end of next year.

New chief executive and managing director David George officially joined the business on July 19.

“I am excited to join Magellan as chief executive. This is an important period for Magellan to demonstrate value to clients and shareholders, and I am confident we will deliver the strategy and strong investment performance to support this,” he said. fs

AMP appoints general manager, wealth distribution Chloe Walker

L The quote

The team and I look forward to continuing to meet and engage with advisers...

isa Sorgini 01 has been appointed to the role of general manager of wealth distribution, as part of AMP’s Australian Wealth Management business.

Having acted in the role since February this year, Sorgini’s permanent appointment takes immediate effect.

Previously, Sorgini worked as program director at BT and general manager, wealth alliances at MLC. Before that, she spent 17 years at Macquarie Group.

In her new role, Sorgini’s focus will be to extend and strengthen AMP’s relationships with the advice community, including growing its platform and product reach into the external financial advice (EFA) market.

She will report to AMP’s director of plat-

forms Edwina Maloney.

“With the ongoing investments in the North platform, an expanding managed portfolio range and a new market leading retirement solution set to be launched later in the year, it’s an exciting time for AMP,” Sorgini said.

“The team and I look forward to continuing to meet and engage with advisers, where we know there is a growing appreciation for the quality of AMP’s wealth offers.”

Maloney added: “Lisa is a highly experienced leader and deeply respected in the market, and we’re delighted she’s accepted this important role.”

“She’s leading a highly motivated wealth distribution team, intent on ensuring advisers across the market recognise the quality and value of our products and platforms for their businesses and clients.” fs

ASIC takes Lanterne Fund Services to court over deficiencies Andrew McKean

ASIC has issued civil penalty proceedings against wholesale licensee Lanterne Fund Services, saying it operated with almost no compliance staff or risk management processes.

The regulator alleges that Lanterne has on multiple occasions failed to meet its obligations as an AFSL holder, including a failure to meet organisational competence requirements.

ASIC deputy chair Sarah Court said: “ASIC is concerned that for an extended period there was a real risk of investor harm due to shortcomings in Lanterne’s systems and processes.”

“Despite Lanterne’s authorised representatives operating under its licence being responsible for over $1 billion in funds and collectively paying monthly fees of around $180,000 to Lanterne during this period, it appears to ASIC that Lanterne operated a wholly deficient business, with no compliance staff and almost no risk management processes in place.”

ASIC alleges that Lanterne failed to have in place adequate risk management systems, have adequate resources (including financial, technological, and human resources) to provide the financial services and carry out supervisory arrangements.

The regulator also claimed Lanterne didn’t maintain competence to provide its financial services or ensure that its representatives were adequately trained.

ASIC also said the ‘licensee for hire’ hadn’t taken

steps to ensure that its representatives complied with the financial services laws or done all things necessary to ensure that financial services were provided efficiently, honestly and fairly.

“ASIC expects all wholesale licensees to reduce risk by ensuring their businesses develop, implement and maintain robust risk and compliance procedures,” Court added.

She concluded: “As today’s action demonstrates, when ASIC sees a business it considers to have deficient risk management processes, we will look to take action.”

ASIC stated its seeking declarations and pecuniary penalties from the Court. It’s also seeking orders that an independent expert be appointed to review and report on Lanterne’s systems, processes, and controls, and that Lanterne then implement a risk management and compliance program once the report is received.

The date for the first case management hearing is yet to be scheduled by the Court.

Lanterne operates a business in which its authorised representatives provide advice and other financial services to wholesale customers under its AFSL. The business has over 200 authorised representatives and over 60 corporate authorised representatives.

Those operating under Lanterne’s licence include venture capital funds, managed investment schemes, and corporate advisory services. Tom Waterhouse’s venture firm Waterhouse VC uses its licence. fs

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News

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

Foord AM hands Apex mandate Foord Asset Management has appointed Apex Group to provide fund administration, transfer agency and custody services to its new Australiadomiciled fund.

Foord recently announced its expansion into the local market with its Global Equity Australian Feeder Fund that invests exclusively in the Foord SICAV- Foord Global Equity Fund (Luxembourg).

At the time, it appointed Equity Trustees as Responsible Entity.

Now mandating Apex Group, Foord Asset Management Singapore chief executive Agnes Cai said: “Their ability to provide a single-source solution, meeting all our fund administration and custody needs, delivered via one relationship with an experienced local team.”

“This efficiency and convenience of this model will allow us to focus on managing risks to deliver superior returns to Australian longterm investors.”

Apex Group delivers its single-source solution via a network of over 80 offices in 40 countries.

Apex Group’s head of business development for Oceania Nick Bradford said there is a significant increase in the number of managers looking to launch new, onshore fund vehicles in Australia.

“These managers require a service partner with the right experience and a global footprint to seamlessly support their administrative and operational needs as they expand into new jurisdictions. We look forward to working with the Foord team as they continue to scale their business and deliver sustainable returns for their investors,” he explained. fs

01: Trenna Probert

founder Super Fierce

Super Fierce super index shows top 15 funds Andrew McKean

S

The quote

Identifying the highestperforming superannuation fund through basic comparisons is a daunting and complicated task for the average Australian consumer.

Impax welcomes sustainability lead Jamie Williamson

The specialist manager has appointed Nana Li as head of sustainability and ESG for Asia Pacific.

Li commenced in the role this month, joining from the Asian Corporate Governance Association, an independent organisation that works with investors and regulators in implementing corporate governance processes in Asia Pacific.

Her new position is a newly created role for Impax, with Li responsible for leading the firm’s sustainability, stewardship, advocacy and engagement activities in the region.

Li reports to Impax head of sustainability and ESG Lisa Beauvilain, who said she is pleased to have Li join as the group continues to expand the team.

“Nana will be a hugely valuable addition to our sustainability and ESG team as we increase our coverage and analysis with issuers in the region,” she said.

“She will pay a crucial role in leading Impax’s sustainability and stewardship work in Asia Pacific.”

Also commenting on her appointment, Li said: “This is an incredible opportunity to join one of the fastest growing asset managers investing in the transition to a more sustainable economy, with a proven legacy in this area.” fs

21

uper Fierce has released a list of super funds that have passed its tests of consistent outperformance, labelling it the Fierce Performers Index.

From an analysis of 2069 investment options across 359 super funds, only 15 funds were found to outperform in all categories (high growth, growth, balanced, moderate, conservative, Australian shares, global shares, ethical and indexed).

These funds were Australian Retirement Trust, AustralianSuper, Australia Post Super (now merged into Australian Retirement Trust), CareSuper, Cbus, Energy Super, Equipsuper, HESTA, Hostplus, Vision Super (Local Authorities Super Fund), Mercy Super, MyLifeMyMoney Super, NGS Super, Public Service Super, Qantas Super and UniSuper.

Breaking it down, according to the Index, the best option for a 30-year-old woman on an income of $105,000, with a balance of $60,000 and plans to retire at 67 is AustralianSuper’s High Growth option. Other strong options are HESTA High Growth, Sunsuper Growth, CareSuper Growth and PSS Aggressive.

Meanwhile, for a 50-year-old man with $220,000 today on an income of $155,000 and planning to retire at 67, the best option is Sunsuper Balanced Index, followed by Hostplus’ Indexed Balanced option. Two UniSuper options and an Equipsuper option are also named.

Super Fierce said its index is the only to accurately measure not just performance but also the

consistency of performance across multiple market cycles and across multiple investment options.

It also called itself the “first-ever non-biased, comprehensive and highly accurate mathematical analysis reporter of super fund performance”.

Super Fierce founder and chief executive Trenna Probert 01 said: “Identifying the highestperforming superannuation fund through basic comparisons is a daunting and complicated task for the average Australian consumer.”

“We created the Fierce Performers Index to provide all Australians with an affordable way to find and select a super fund that will suit their individual needs, leaving them substantially better off in retirement.”

Probert went on to say that rankings, ratings, and the multitude of other sources of information available are difficult for average Australian consumers to find and understand.

Super Fierce co-founder Craig Swanger commented: “APRA’s Your Future, Your Super does what it is meant to do by highlighting the poorest performing super funds. But it was never designed for everyday Australians looking for guidance on choosing a fund that is likely to perform well in the future.”

“This is because, to date, we haven’t had any proof that historical performance can reliably predict future performance. But our data has uncovered that past outperformance can be a predictor of future performance - so long as you analyse a fund’s performance across multiple market cycles and investment options.” fs

Former AR charged over unlicensed advice Cassandra Baldini

Former authorised representative Nizi Bhandari has been charged with engaging in dishonest conduct and providing unlicensed personal financial product advice.

Between November 2017 and December 2020, Bhandari was an AR of The Australian Dealer Group Pty Ltd, an Australian financial services (AFS) licensee that helped consumers find lost superannuation and consolidate their superannuation accounts.

For the same period, he was also the sole director, responsible manager and key person under The Australian Dealer Group’s licence.

In March 2021, ASIC permanently banned him from providing financial services and engaging in credit activities, controlling a financial services or credit business, or performing any function in relation to carrying on a financial services or credit business.

A statement from the regulator alleged that between January 2019 and March 2020 Bhandari provided seven consumers with personal financial product advice that neither he nor The Australian Dealer Group was authorised to provide.

ASIC further allege that Bhandari encouraged 15 consumers to tell their superannuation funds that they were not working, had permanently retired, or were working less than 10 hours per week to enable them to access their

superannuation when they were not entitled to.

He allegedly told 15 consumers they could access their superannuation based upon having reached preservation age when he knew that those consumers also had to be retired or working less than 10 hours per week in order to have such access.

The statement added that Bhandari advised three consumers to ask their employer to pay their employer superannuation contributions into a superannuation account other than the consumer’s super account to prevent the administrator of that super fund becoming aware that the consumer had made a false statement about their work status.

ASIC also alleged that he advised one consumer that he would describe them as retired so the consumer could withdraw his superannuation, when he knew the consumer was still working; and told another they were ‘technically’ retired when he knew it wasn’t the case.

On the occasions where consumers allegedly followed Bhandari’s advice, his business received fees.

The maximum penalty for engaging in dishonest conduct is between 10 to 15 years’ imprisonment, a fine of $945,000, or both.

The maximum penalty for providing unlicensed personal financial product advice is five years’ imprisonment, a fine of $126,000, or both. fs

22

News

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

Sirius Financial loses AFSL

01: Tim Steele

chief executive Class

Cassandra Baldini

Over-the-counter derivatives provider Sirius Financial Markets Pty Ltd has surrendered its AFSL and its former executives Jonathan Schneider and Oskar Pecyna have both been banned for eight years.

ASIC reported that Sirius Financial, trading as Trade360, engaged in an off-shore call centre, Toyga Media Ltd (Toyga), to source clients to trade in high-risk contracts-for-difference (CFDs) and margin foreign exchange contracts products issued by Sirius Financial.

The regulator found call centre representatives persuaded Sirius Financial clients to trade using pressure selling tactics and provided clients with personal advice when it was not licensed to do so.

Sirius Financial was also found to have engaged in unconscionable conduct and conduct that was likely to mislead or deceive.

Meanwhile, Schneider and Pecyna were banned from controlling an entity that carries on a financial services business or performing any executive or management role in relation to a financial services business for eight years.

ASIC found both were involved in Sirius Financial’s breaches of its licence obligations and were not adequately trained or competent to be controlling a financial services business.

ASIC concluded both men failed to adequately perform their duties as responsible managers and lacked the necessary professionalism, integrity, judgement, and diligence to play a role in the management or control of a business.

ASIC commissioner Danielle Press said: “ASIC’s investigation uncovered concerning consumer losses from trading in CFDs, including a Sirius Financial investor, who had limited knowledge of the market, losing over $400,000 after being told CFDs were a safe investment.” fs

AFA Awards 2022 now open The Association of Financial Advisers has opened nominations for its 2022 awards.

Looking to unearth the best across the financial advice spectrum, AFA and its partners are searching for the AFA Adviser of the Year, sponsored by Zurich, and AFA Female Excellence in Advice, sponsored by TAL. AFA chief executive Philip Anderson said the awards champion excellence, diversity, and innovation by recognising the outstanding leaders in advice and rewarding inspirational female leaders in advice.

“We are excited to run our adviser awards program for the first time since 2019 and are looking for people within our profession who are doing great things for their clients and leading our profession in the direction of a brighter future where great advice is broadly recognised and valued,” he said.

Zurich Life chief distribution officer Kieran Forde welcomed back the awards.

“We are really pleased to be an ongoing partner of this prestigious award, it recognises outstanding individuals and celebrates qualities of leadership, innovation, customer-centricity and commitment to professional excellence,” he said.

Nominations close August 12. fs

HUB24 names new Class chief executive Jamie Williamson

T The quote

I am delighted to welcome Tim to Class to lead the business forward as we focus on delivering great customer outcomes...

he former group executive for retirement and investment solutions at MLC will soon become chief executive of SMSF administrator Class.

Tim Steele01 will take over the top job on August 1, replacing HUB24 director of strategic development Jason Entwhistle who has been acting in the role since Class was taken over in February.

Steele served as group executive, retirement and investment solutions at MLC for about 18 months before leaving in mid-2021. He also served as general manager, NAB Financial Planning and NAB Direct Advice for close to four years.

Elsewhere, he spent almost eight years at AMP, first as director of AMP Horizons and then as managing director, ipac and Genesys.

In the new role, Steele will report directly to

HUB24 managing director and chief executive Andrew Alcock, who praised Steele’s experience in leading teams and delivering customercentric solutions.

“I am delighted to welcome Tim to Class to lead the business forward as we focus on delivering great customer outcomes and enhancing Class’s already market-leading SMSF documents and corporate compliance solutions,” Alcock said.

Steele joins as HUB24 prepares to launch a new SMSF product leveraging the expertise of all three HUB24, NowInfinity and Class teams.

HUB24 said the product “is designed for advisers to meet the needs of aspirational accumulators who are keen to access the benefits of a cost-effective SMSF solution.”

A pilot of the product is expected to be launched in Q1 FY23, HUB24 said. fs

Uncertain times call for dynamism Chloe Walker

Australian investors can seek to narrow downside risks by deploying various strategies designed to reduce risk and boost portfolio efficiency, according to Insight Investment – a challenge currently facing super funds.

At a briefing in Sydney, Insight Investment director, Australia and New Zealand Bruce Murphy said complex challenges, including long-term demographic shifts of an ageing population, regulatory changes and environmental, social and governance expectations, through to macroeconomic challenges posed by the Ukraine war, the pandemic, and their global economic consequences, call for innovative solutions.

“We seek to deploy a dynamic approach to asset allocation, within a disciplined process, which is less concerned by the constraints of alpha or beta generation, more with understanding how best to manage the reflexive nature of those assets to again deliver more certain outcomes for investors within a tighter expected range of returns,” he said.

“Looking across the areas of market, regulatory and demographic uncertainty, we can readily identify areas where nimble asset allocation, greater implementation efficiency and a simplified re-think of retirement solutions can maximise certainty for investors.”

He added that alternative assets can help deliver this, however: “We also believe that you need exposure to a significant number of stocks, or bonds in the order of 180 or more, diversified across industries so that you’re not subject to any major default risk.”

Insight investment specialist Ben Ereira said this has been a key challenge for superannuation funds.

“In the currency space, super funds are growing ever larger, and with that, they certainly have far more foreign currency risks,” he said.

He said a passive hedging program is needed in instances such as these but how they’re done can make a real difference.

Ereira said: “They’ll probably do that with a sort of a static hedge ratio, which is completely fine and sort of the market norm, but at the end of the day, it’s imperfect, and the reason why it’s imperfect is because it is relying upon an immediate and exact implementation of that hedging. And it’s assuming that it’s doing it without any transaction cost associated with it.”

At the end of the day, Ereira said a fund can’t get a perfect passive return, because of the transaction cost associated with it.

“We think there’s a defensive return where you can control and create a steadier path return over that period of time,” he said.

Murphy said that with various elements of complexity, Australia’s retirement problem can’t be over thought.

“What we believe is that solutions can be over engineered, so we’ve tried to distil the problem into basic ingredients we believe people need in a retirement income strategy,” he said.

“Simple, innovative approaches that offer access to fixed income markets via low cost, liquid means can create potential new opportunities for investors seeking to preserve capital but enjoy the benefits of more certain income along the way.” fs

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24

International

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

Value Partners adds APAC exec

01: Camille Blackburn

director, wholesale buy-side Financial Conduct Authority

Jamie Williamson

Value Partners Group has appointed a new head of intermediaries, Asia Pacific.

Effective this month, Vincent Ching as taken over the role, responsible for the management and development of fund distribution management in the region and Hong Kong.

He replaces Wallace Tsang who is the group’s current regional head, intermediary business APAC who has resigned.

He brings close to two decades’ experience in financial services and was previously the group’s head of Hong Kong, retail distribution. He has been with Value Partners since 2015 and was previously vice president at BlackRock Asset Management, North Asia and has also worked at First State Investments.

In the new role, Ching reports to Value Partners chief executive June Wong.

“Vincent has made a consistent and valuable contribution to the group. He has done a very good job in running the Hong Kong Retail Business in the past, and I am excited to invite Vincent for this bigger role to help Value Partners create further success,” Wong said. fs

Former ASIC executive joins UK regulator Cassandra Baldini

T

he Financial Conduct Authority (FCA) is bolstering its leadership team with six new appointments, including former ASIC and Westpac senior executive Camille Blackburn01 as director of wholesale buy-side.

Blackburn will join the FCA in October from Legal & General Investment Management, where she is currently the global chief compliance officer, responsible for the company’s global compliance framework and team.

Closer to home, she is known for her time as senior executive leader, investment banking at ASIC in the lead up to and during the Global Financial Crisis. She was also involved in the Capability Review of the regulator in 2016.

She has also previously served as global head of compliance at Westpac’s institutional bank and as a principal advisor to Commonwealth Treasury during the Australian Financial System Inquiry.

In more recent years she was chief compliance officer at Aviva Investors and was chair of the Investment Association's Brexit Committee.

She has held international chief compliance officer roles in investment banking and money services businesses and senior policy roles at the Central Bank of Ireland.

Companies’ ESG efforts improve ESG focus across global companies is up 7.69% in response to regulatory and investor pressure, report states.

Fidelity’s 2022 survey of analysts on sustainability issues capture's the view of 161 investment analysts from across the globe.

The report found tangible signs of corporate progress towards net zero, with around half of the analysts involved stating their companies made ESG efforts that matched or exceeded what they promote.

Despite the impact of the war in Ukraine and an increase in the immediate demand for substitute fossil fuels (including coal) to alleviate higher prices, analysts noted many areas of progress.

For example, a higher number reported that the companies they cover now link senior managers’ pay to greenhouse gas (GHG) emissions.

The report states: “43% of analysts say the companies they cover now link GHG emissions to executive remuneration (up from 34% last year), while 39% say their companies link senior pay to employee welfare (up from 32%). Both responses are now more common than do not link, although this remains the most popular answer among China and Japan-focused analysts.”

Another positive is an increase in companies with formal policies on other environmental issues such as deforestation.

According to the report European companies still lead the transition to net zero targets currently sitting at 50% “leading the charge”. Asia Pacific (excluding China and Japan) is currently just over 20%.

China meanwhile has the smallest proportion of “leading the charge” companies. However, more than half of Chinese companies are starting to change, according to analysts.

This is reflected in the proportion of analysts who say Chinese companies will meet net zero by 2050. fs

In the newly created role at the FCA, Blackburn will be responsible for policy development and the effective supervision across asset management, alternative investments, custody banks and investment research.

FCA said in a statement it’s expanding headcount to meet a growing remit and achieve its strategy, launched in April.

The three-year strategy focuses on reducing and preventing serious harm, setting and testing higher standards, and promoting competition and positive change.

The appointments fill a mix of new and existing roles, drawing on internal and external talent and will add to the almost 500 recruits hired between January and the end of July this year.

The regulator named Roma Pearson as director of consumer finance, Matthew Long as director of payments and digital assets, Karen Baxter as director of strategy, policy, international and intelligence.

It promoted Anthony Monaghan to director of retail and regulatory investigations and advised interim director Simon Walls will continue in the role of director of wholesale, sell-side on a permanent basis. fs

New emissions measuring tool

The quote

Total Portfolio Footprinting creates a snapshot of financed emissions across asset classes and subsets, giving institutions clearer visibility over where they stand today...

MSCI has launched Total Portfolio Footprinting, helping financial institutions measure carbon emissions across lending and investments as part of the transition to a net zero economy.

The global tools provider said in a statement “Total Portfolio Footprinting will allow institutions to better understand the extent and impact of the greenhouse gas emissions they are financing.”

The tool aims to provide the information needed to focus capital on more sustainable business practices.

“Measuring financed emissions is a foundational building block required for reporting, target setting, scenario analysis and creating climate-aligned portfolios,” MSCI said.

The tool also provides institutions with the ability to set and manage reduction targets for their financed emissions against a baseline, aligning this with their net zero commitments within banking, insurance, and investments.

MSCI global head of ESG and climate Eric Moen said the introduction of climate-related regulation paired with stakeholder demands are putting greater scrutiny on financial institutions to measure climate risk across their investment portfolios.

“These institutions (such as banks, insurers and asset managers) may need to take urgent action to accelerate progress on their climate journey. Total Portfolio Footprinting can help them to broadly assess the carbon emissions they are financing

through loans and investments and assist them in taking prompt and meaningful action,” he said.

“Total Portfolio Footprinting creates a snapshot of financed emissions across asset classes and subsets, giving institutions clearer visibility over where they stand today in relation to their climate commitments and obligations.”

MSCI added that leveraging climate data and models will help banks, insurers and other institutions to align with key global standards and requirements, including the Taskforce for ClimateRelated Disclosure (TCFD) framework, Partnership for Carbon Accounting Financials (PCAF), National Association of Insurance Commissioners (NAIC) and European Insurance and Occupational Pensions Authority (EIOPA) standard.

“Moving forward, Total Portfolio Footprinting will help them to measure against this baseline, focus capital on activities with more sustainable business practices, manage their climate impact and fulfill their crucial role in the global transition to a low carbon economy,” Moen said This is the latest addition to a range of climate models, data and tools that MSCI offers and follows the launch of MSCI’s Climate Lab, NetZero Tracker, and Implied Temperature Rise, which work with its Target Scorecard in aiming to measure how companies align to global temperature targets. fs

Between the lines

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

OTPP snaps up telco stake

01: Andrew Spence

The Ontario Teachers’ Pension Plan Board will acquire a 70% interest in Spark New Zealand’s mobile towers business TowerCo for $1.18 billion.

Under the terms of the acquisition, Spark has entered into a 15-year agreement, including rights of renewal with TowerCo, to secure access to existing and new towers. Under the deal, there is a building commitment of 670 sites over the next 10 years.

Ontario Teachers’ Pension Plan senior managing director and head of Asia Pacific infrastructure and natural resources Bruce Crane said: “The acquisition of a 70% stake in TowerCo is an ideal fit for our growing global portfolio of high-quality infrastructure assets.”

“This investment builds on our long track record of investing in superior businesses in New Zealand and will draw on our deep experience investing in digital infrastructure businesses globally.

“We look forward to working with the Spark New Zealand team to build and grow a leading business that will enable New Zealanders’ continued access to critical telecommunications services to meet their growing mobile demand needs over the long-term.”

Spark New Zealand chief executive Joie Hodson spoke highly of Ontario Teachers’, saying she is pleased to have formed this strategic partnership.

Hodson called Ontario Teachers’ a high-calibre investor with significant experience managing a portfolio of infrastructure investments in Australia and New Zealand.

The transaction is expected to close this year. fs

chief investment officer Qantas Super

Qantas Super, CEFC back new ESG fund Andrew McKean

Q The quote

We value the opportunity to provide environmentally aligned capital to support the work of Australia’s carbon abatement enablers.

antas Super and the Clean Energy Finance Corporation (CEFC) have made a combined $100 million investment in the Ellerston 2050 Fund.

The open-ended, wholesale fund, managed by Ellerston Capital will invest solely in companies that afford consumers technology and services which help reduce carbon emissions.

A joint statement by Qantas Super and CEFC said sustainability will be the core of the Ellerston 2050 Fund’s investment process and that the companies targeted will be assessed on their ability to contribute to meaningful carbon abatement.

The fund will also employ a ‘pick and shovel’ strategy, explicitly focusing on listed and unlisted small to mid-sized companies which have attractive earnings profiles and trade at a discount to valuation.

Qantas Super chief investment officer Andrew Spence01 said: “We value the opportunity to provide environmentally aligned capital to support the

Rainmaker Mandate Top 20 Appointed by

25

work of Australia’s carbon abatement enablers.”

“This approach is consistent with our commitment to deliver great investment performance to our members, while also achieving net zero carbon emissions across our investment portfolio by 2050.”

In a similar vein, CEFC chief executive Ian Learmonth said: “We are seeing significant change across corporate Australia as large companies commit to increasingly ambitious emissions reduction targets.”

“As this shift gains momentum, demand for products and services that enable companies to meet these targets will continue to increase and will play an integral role in building carbon reduction across the wider economy.”

Learmonth added he is pleased to work with Qantas Super and Ellerston Capital to support the growth of the emerging asset class. He also expressed confidence that the 2050 Fund will enable fast-growing companies to benefit from the transition to net zero emissions by bringing innovative products and service solutions to market. fs

Latest international equities investment mandate appointments

Asset consultant

Investment manager

Mandate type

Building Unions Superannuation Scheme (Queensland)

Frontier Advisors

Other

International Equities

Building Unions Superannuation Scheme (Queensland)

Frontier Advisors

Wasatch Global Investors

Emerging Markets Equities

41

Clime Asset Management Pty Limited

Mercer Investment Consulting

Mercer (Australia) Pty Ltd

International Equities

95

Copia Investment Partners Ltd

TT International

International Equities

16

Equipsuper

JANA Investment Advisers

Schroder Investment Management Australia Limited

International Equities

1,499

Equipsuper

JANA Investment Advisers

T. Rowe Price International Ltd

International Equities

1,044

Equipsuper

JANA Investment Advisers

Martin Currie Investment Management Ltd

Emerging Markets Equities

Ironbark Asset Management Pty Limited

GQG Partners (Australia) Pty Ltd

International Equities

20

Meat Industry Employees Superannuation Fund

Fidelity International Limited

Emerging Markets Equities

26

Natixis Investment Managers Australia Pty Limited

Vaughan Nelson Investment Management

Global Small Cap Equities

145

Pengana Capital Limited

Harding Loevner LP

International Equities

383

Pengana Capital Limited

Axiom International Investors LLC

International Equities

373

Prime Super

Other

Emerging Markets Equities

240

Retail Employees Superannuation Trust

JANA Investment Advisers

BlackRock Investment Management (Australia) Limited

International Equities

2,612

Retail Employees Superannuation Trust

JANA Investment Advisers

Robeco

International Equities

1,891

State Super (NSW)

Frontier Advisors

Challenger Limited

Emerging Markets Equities

5

State Super (NSW)

Frontier Advisors

Citibank

Emerging Markets Equities

132

State Super (NSW)

Frontier Advisors

State Street Global Advisors Australia Limited

Emerging Markets Equities

108

State Super (NSW)

Frontier Advisors

Ninety One Australia Pty Limited

International Equities

TWU Superannuation Fund

JANA Investment Advisers

State Street Global Advisors Australia Limited

Global Equities

Internal

Amount ($m) 147

308

83

Source: Rainmaker Information

26

Managed funds

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14 PERIOD ENDING – 30 MAY 2022

Size 1 year 3 years 5 years

Size 1 year 3 years 5 years

Fund name

Fund name

Managed Funds

$m

% p.a. Rank

% p.a. Rank

% p.a.

Rank

AUSTRALIAN EQUITIES

$m

% p.a. Rank

% p.a. Rank

% p.a.

Rank

COMBINED PROPERTY

PM Capital Australian Companies Fund

48

20.7

2

Chester High Conviction Fund

106

17.0

DNR Capital Aust. Eq. High Conviction Fund

736

11.1

1,697

9.3

Ausbil Australian Active Equity Ausbil Australian Concentrated Equity Fund

21.6

1

12.4

2

Australian Unity Diversified Property Fund

3

18.7

2

7

12.8

3

15.2

1

Investa Commercial Property Fund

9.8

21

10

12.8

4

11.3

4

SGH LaSalle Conc. Global Property Fund Cromwell Direct Property Fund

25

8.5

12

12.6

5

Tribeca Alpha Plus Fund

214

2.9

30

12.6

6

Airlie Australian Share Fund

336

5.6

18

12.6

7

UBS Clarion Global Property Securities Fund

Ausbil Active Sustainable Equity Fund

139

3.5

26

12.1

8

Resolution Capital Real Assets Fund

Perpetual Wholesale Share-Plus Long-Short Fund

839

14.8

4

11.7

9

20

10.5

9.9

Alceon Australian Property Fund 20

22

DEXUS Property Fund

35

Australian Unity Property Income Fund

8.2

11

14.2

6,133 25

1

14.7

10.6

8

7.6

12

459

14.6

1

8.8

2

11.3

2

8.4

3

8.3

7

4

8.3

4

8.5

5

600

13.5

5

8.0

5

8.1

9

1,664

14.9

3

7.3

6

7.7

15

406

2.5

31

6.4

7

6.9

18

44

6.6

15

6.3

8

8.0

10

11,295

12.4

7

6.2

9

8.6

4

9.3

10

6.1

12

AMP Capital Australian Property Fund

9.7

336

Perpetual Ethical SRI Fund

972

4.6

10

7.2

10

7.8

Sector average

954

4.3

8.2

8.6

Sector average

1,202

4.6

3.7

6.0

S&P ASX 200 Accum Index

4.8

7.8

8.8

S&P ASX200 A-REIT Index

3.3

2.2

5.7

3,150

5.2

1

5.6

1

667

0.9

2

3.4

2

2.7

2

INTERNATIONAL EQUITIES

358

FIXED INTEREST

PM Capital Global Companies Fund BetaShares Global Sustainability Leaders ETF Ironbark Royal London Concen. Glob. Share GQG Partners Global Equity Fund Loftus Peak Global Disruption Fund

605

9.0

7

18.9

1

12.7

11

MCP Wholesale Investments Trust

2,038

-0.8

32

17.5

2

16.0

2

T. Rowe Price Dynamic Global Bond Fund

993

10.4

3

17.0

3

14.4

4

Ardea Real Outcome Fund

9,072

-1.5

6

2.7

3

3.5

1

1,278

17.8

1

16.0

4

15.7

3

Ardea Global Alpha Fund

1,031

-1.7

8

1.4

4

2.5

3

186

-9.3

39

15.7

5

14.3

5

Bentham Asset Backed Securities Fund

39

-0.5

4

1.3

5

2.1

5

iShares Global 100 ETF

2,519

9.9

4

15.3

6

13.3

8

Macquarie Global Income Opportunities

375

-3.2

12

1.1

6

2.1

6

Arrowstreet Global Equity Fund

3,454

3.6

13

14.1

7

12.2

13

AMP Capital Corporate Bond Fund

733

-1.8

9

1.1

7

1.8

8

Claremont Global Fund

93

6.4

9

13.9

8

14.0

6

Janus Henderson Tactical Income Fund

4,796

-2.5

10

0.9

8

1.7

10

2,700

1.6

27

13.8

9

13.1

9

Perpetual Dynamic Fixed Income Fund

38

-4.0

13

0.8

9

2.0

7

Alphinity Global Equity Fund

196

3.8

12

13.6

10

12.8

10

MacKay Shields Multi-Sector Bond Fund

63

-4.3

15

0.8

10

1.4

13

Sector average

971

-0.3

10.1

9.6

MSCI World ex AU Index

3.1

12.0

11.2

VanEck MSCI International Quality ETF

Sector average

809

-7.5

-1.0

1.0

Bloomberg Barclays Australia (5-7 Y) Index

-9.2

-1.7

0.9

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

Source: Rainmaker Information

Why active performance tests are stupid E

Dial tones

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

verybody does it. Even me. It’s nothing to be ashamed of. It’s not even illegal.

It’s answering the question “Does active management outperform” by putting all active funds together in a big pot, calculating the average, or the median, return, and then comparing that to the benchmark index over a period of time.

Too often, the active managers come out wanting. If you had chosen the average or median fund, you’d have been better off if you’d chosen a product following the benchmark index as cheaply as possible. Not great news for active managers.

And their rebuttal to the existential question on whether the investing public should continue paying high fees for lower returns?

Just wait until markets get really volatile, then you’ll need us.

So markets did get volatile, and we didn’t need them.

For example, in international equities at the moment, you’d have been better just following the MSCI World Index for the past five years in some cheap index product.

In Australian equities you’d be slightly better off with the average active fund.

The most logical reason I’ve heard for giving up on active funds came from a financial ad-

viser. All their clients are now in index funds.

The reason isn’t because active funds on average don’t outperform.

The reason is that the adviser doesn’t like explaining why the active fund the client is in has underperformed. The portfolio of products in that particular asset class might have outperformed, but the client doesn’t want any funds underperforming.

The adviser sees their purpose is to be an investment coach and a strategist, not an investment expert. You have to respect that.

I’m not an adviser so I can take a different road. I’ve come to the conclusion that the greatest difference between actives is their investment style. By that I mean whether they are predominantly Value, Growth, Quality, Momentum-driven or some blend of styles.

Instead of judging funds on how they went against the market capitalisation benchmark of the ASX 200 or the MSCI World, I judge them against the relevant style index.

The most surprising result was that in Australian equities none qualified as value-style managers, not even the ones you’d think of as value managers, the ones who call themselves value managers.

They are either Quality or a blend of styles.

In fact, out of 88 Australian equities products

with at least a five-year performance record and tracking error against the S&P/ASX 200 Index of greater than 1% pa, 58 were Quality, seven were Growth and 23 were blended.

It used to be that many managers were known for their value style of investing. My back pocket theory is that these managers, seeing the underperformance of the value style since the GFC, drifted away to more quality-oriented companies. Over five years to March 2022 this paid off, as the MSCI Australian Quality Index was the best performing style index, earning 11.8% pa versus 9.2% pa for the S&P/ASX 200 Index.

The MSCI Australia Value Index returned a much more anaemic 6.4% pa, so this was a logical move on the part of those “value” managers.

But that wasn’t much good in 2022, when investors needed it most. The value index returned 11.7% in the first three months, compared with 2.2% for the general index and 0.4% for the quality index. So much for active managers coming into their own when markets turned volatile.

The point is, the world of “active” funds management should not be judged by blunt criteria such as the percentage of funds that outperform or underperform over a given time period. It is much more nuanced – and fascinating - than that. fs

Super funds

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14 PERIOD ENDING – 30 MAY 2022

Workplace Super Products

1 year

3 years

% p.a. Rank

% p.a. Rank

27

* SelectingSuper [SS] quality assessment

5 years % p.a. Rank

SS

Quality*

MYSUPER / DEFAULT INVESTMENT OPTIONS

1 year % p.a. Rank

3 years % p.a. Rank

5 years % p.a. Rank

SS Quality*

PROPERTY INVESTMENT OPTIONS

Aware Super Employer - High Growth

2.6

13

8.6

1

8.6

1

AAA

Telstra Super Corporate Plus - Property

17.4

2

9.3

1

9.6

2

AAA

Hostplus - Balanced

6.6

1

8.4

2

8.3

2

AAA

Hostplus - Property

18.7

1

8.0

2

8.6

3

AAA

Active Super Accumulation Scheme - High Growth

3.0

9

8.2

3

8.0

3

AAA

ART - Super Savings - Property

12.4

9

7.7

3

7.9

6

AAA

Mine Super - High Growth

1.8

23

8.2

4

7.7

5

AAA

CareSuper - Direct Property

13.4

7

6.8

4

8.2

4

AAA

Telstra Super Corporate Plus - MySuper Growth

2.9

10

7.9

5

7.6

8

AAA

Rest Super - Property

15.7

3

6.7

5

8.1

5

AAA

GuildSuper - MySuper Lifecycle Growing

0.7

35

7.9

6

7.3

9

AAA

Acumen - Property

15.2

5

6.2

6

7.5

7

AAA

AustralianSuper - Balanced

2.3

15

7.6

7

7.8

4

AAA

HESTA - Property and Infrastructure

13.2

8

5.9

7

6.3

13

AAA

ART - Super Savings - Lifecycle Balanced Pool

4.4

5

7.5

8

7.6

7

AAA

Catholic Super - Property

10.5

13

5.7

8

7.1

9

AAA

Australian Catholic Super Employer - LO LifetimeStart

4.0

6

7.4

9

AAA

AMG Corporate Super - AMG Listed Property

3.8

18

5.6

9

7.1

8

AAA

Virgin Money SED - LifeStage Tracker 1979-1983

1.4

27

7.4

10

AAA

FirstChoice Employer - FS Global Prop. Securities Select

0.8

29

5.5

10

5.7

16

AAA

Rainmaker MySuper/Default Option Index

1.7

Rainmaker Property Index

5.8

6.4

7.7

6

6.5

AUSTRALIAN EQUITIES INVESTMENT OPTIONS

3.7

5.5

FIXED INTEREST INVESTMENT OPTIONS

UniSuper - Australian Shares

6.6

7

10.9

1

11.4

1

AAA

Australian Catholic Super Employer - Credit Income

-1.9

2

1.2

1

AAA

Australian Ethical Super Employer - Australian Shares

-4.7

51

10.8

2

10.0

3

AAA

NGS Super - Diversified Bonds

-3.9

4

0.6

2

1.6

2

AAA

Prime Super (Prime Division) - Australian Shares

3.1

43

10.1

3

10.1

2

AAA

UniSuper - Diversified Credit Income

-2.4

3

0.4

3

1.0

9

AAA

AustralianSuper - Australian Shares

7.9

2

9.5

4

10.0

4

AAA

Catholic Super - FlexiTerm Deposit

0.0

1

0.3

4

0.9

15

AAA

Hostplus - Australian Shares

6.3

8

9.5

5

9.5

5

AAA

Equip MyFuture - Fixed Interest

-3.9

6

0.2

5

0.9

13

AAA

Energy Super - Australian Shares

5.8

13

9.3

6

8.9

9

AAA

AustralianSuper - Diversified Fixed Interest

-4.2

8

0.0

6

1.2

4

AAA

CBA Group Super Accumulate Plus - Australian Shares

5.0

27

9.0

7

8.8

17

AAA

Catholic Super - Diversified Fixed Interest

-3.9

5

-0.1

7

1.4

3

AAA

CareSuper - Australian Shares

6.9

4

8.9

8

9.1

7

AAA

Australian Catholic Super Employer - Bonds

-6.8

19

-0.2

8

1.8

1

AAA

Vision Super Saver - Australian Equities

5.6

18

8.6

9

9.3

6

AAA

FES Super - Fixed Interest Option

-4.1

7

-0.2

9

1.2

5

AAA

LGIAsuper Accumulation - Australian Shares

6.0

11

8.5

10

8.9

13

AAA

ART - QSuper - Diversified Bonds

-6.6

18

-0.3

10

1.1

7

AAA

Rainmaker Australian Equities Index

4.0

Rainmaker Australian Fixed Interest Index

-7.1

7.7

8.2

INTERNATIONAL EQUITIES INVESTMENT OPTIONS

-1.4

0.6

AUSTRALIAN CASH INVESTMENT OPTIONS

UniSuper - Global Environmental Opportunities

-2.8

37

17.2

1

13.1

1

AAA

ANZ Staff Super Employee Section - Cash

0.6

2

0.9

1

1.1

4

AAA

UniSuper - Global Companies in Asia

-1.5

31

11.5

2

11.6

2

AAA

LGIAsuper Accumulation - Cash

0.6

1

0.9

2

1.3

1

AAA

Vision Super Saver - International Equities

-5.7

50

11.2

3

9.2

10

AAA

AMG Corporate Super - AMG Cash

0.1

12

0.6

3

1.1

5

AAA

ART - QSuper - International Shares

-2.2

35

10.9

4

8.9

15

AAA

Rest Super - Cash

0.2

6

0.6

4

1.0

9

AAA

Virgin Money SED - Indexed Overseas Shares

2.8

3

10.6

5

9.9

3

AAA

NGS Super - Cash & Term Deposits

0.1

13

0.6

5

1.0

8

AAA

Vision Super Saver - Just Shares

-0.1

20

10.5

6

9.5

7

AAA

EISS Super - Cash

0.2

3

0.6

6

0.9

15

AAA

Vision Super Saver - Innovation and Disruption

-34.5

62

10.5

7

AAA

Prime Super (Prime Division) - Cash

0.0

21

0.5

7

1.1

3

AAA

legalsuper - Overseas Shares

0.3

18

10.5

8

8.9

16

AAA

Spirit Super - Cash

0.1

8

0.5

8

1.0

12

AAA

Mine Super - International Shares

2.8

4

10.4

9

9.0

12

AAA

Aware Super Employer - Cash

0.2

4

0.5

9

1.0

11

AAA

Hostplus - International Shares (Hedged) - Indexed

-1.3

27

10.4

10

AAA

Energy Super - Cash Enhanced

0.0

17

0.5

10

1.0

10

AAA

Rainmaker International Equities Index

-3.1

Rainmaker Cash Index

-0.2

8.4

7.8

Notes: Tables include Australia's top performing superannuation products that also have a AAA SelectingSuper Quality Assessment rating.

Investment options are sorted by their three year net performance results. All performance figures are net of maximum fees.

0.2

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

Leading intelligence, market opportunities and SPS 515 compliance for super funds

www.rainmaker.com.au

RML_Strip ad_225x55.indd 1

16/2/2022 12:19 pm

28

Economics

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

Wellbeing? It’s the economy, stupid.

Alex Dunnin

A

NZ official cash rate

3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% JUN-22

JUN-21

JUN-20

JUN-19

JUN-18

JUN-17

JUN-16

JUN-15

JUN-14

JUN-13

Hardly a surprise given the world is in the midst of global pandemic.

But because a wellbeing budget still has to be paid for, it reverted to form focusing back on measures aimed at stimulating GDP growth, generating national revenue so they pay down NZ’s debt, which in 2021 stood at about $NZ130 billion in government bonds on issue.

Which means the economy itself has to function effectively, employment needs to be maximised and national security maintained.

Long story short, NZ’s wellbeing budget seems just a regular budget but one with a narrative framed around the people rather than one centred on fiscal benchmarks.

But any politician worth their salt knows that this is what every great national budget should do anyway.

As for Labor's budget, expect it to be crafted precisely with this purpose in mind given the election result we just had. Meaning while it will contain a range of wellbeing measures with more emphasis on health and aged care, climate action and energy policy, its foundation will still be the traditional fiscal statements that underpin all government budgets.

After all, smart governments that want to continue to being the government know they must never forget the maxim first coined by James Carville, one of Bill Clinton’s key strategists in 1992: "The economy, stupid." fs

Aust cash target rate

4.0%

JUN-12

ustralia is getting a wellbeing budget.

Treasurer Jim Chalmers announced that his first budget, set to be delivered October 25, will include a wellbeing budget statement.

Progressive voters are reportedly overjoyed.

But steady on, what exactly is a wellbeing budget and how is it really any different to what a federal budget should contain anyway?

Illustrating the point, New Zealand was lauded in 2019 when it introduced its wellbeing budget. But if you review its actual content, it’s hard to see how it was any different to what should have been in the budget any way.

New Zealand’s fourth wellbeing budget released 19 May 2022 just reinforces this view.

It lists initiatives aimed at ensuring “economic and social security for generations to come, by investing in the infrastructure that will build a better country for everyone while making us less vulnerable to external shocks”.

After which it goes on to detail what they claim is NZ’s “largest-ever investment in the health system that takes care of all of us and provides a blanket of security against future COVID-19 variants. It makes the greatest strides in climate action by any government to date and continues the work of the past four years to lift more children from poverty, build more houses, encourage education and upskilling, and deliver higher-wage jobs that drive up productivity.”

Figure 1. Official rates, Aust vs NZ 2012-22

Source: RBA, RBNZ

Figure 2. Ratio of Aust's to NZ's selected portfolio expenditures, 2022

12 10 8 GDP ratio

6

Population ratio

4 2 0 HEALTH EXPENDITURE

EDUCATION EXPENDITURE

DEFENCE EXPENDITURE

Source: Budget papers, analysis by Rainmaker

Retail trade Definition

turnover — real retail sales — are included in the last monthly release in each quarter. These real retail sales numbers are, in turn, used in the Australian National Accounts as key components of domestic consumer spending.

The sample of 6500 business in the retail trade survey, like most ABS economic surveys, is taken from the ABS Business Register which includes registrations to the Australian Taxation Office's (ATO) pay-as-you-go withholding (PAYGW) scheme. The frame is supplemented with information about a small number of businesses which are classified to a non-retail trade industry but which have significant retail trade activity.

Market implication

Disclaimer: This is part of Financial Standard's 'Back to basics' for financial advisers and their clients.

To read more, you can find the 2021 Good Economics Guide online.

Figure 1. Retail trade spending, rolling annual, 2000-22

450

$BILLION

400 350

Food Household goods Clothing and footwear Dept stores Other Cafes and restaurants

300 250 200 150 100 50 0

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

Source: Australian Bureau of Statistics

2007

2006

2005

2004

2003

2002

2001

The pattern in consumer spending is one of the most significant influences on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. Retail sales not only give investors a sense of the big economic picture, but also the trends among different types of retailers.

For example, the retail sales report could show that sales of recreational goods are especially strong while clothing and soft goods sales are showing exceptional weakness. This will provide a point of reference for investors to seek out listed companies engaged in selling recreational goods and avoid clothing and soft goods retailers.

These trends from the retail sales data can

help investors spot specific investment opportunities, without having to wait for a company’s quarterly or annual report.

For bond investors and market watchers, the focus is whether economic growth goes overboard and leads to inflation. Strong consumer spending is positive for bonds when the economy is operating below its full potential.

However, if an economy is growing above potential, unrestrained growth in consumer expenditure is negative for bonds. This is because an overheating economy puts upward stress on consumer prices (inflation), which in turn increases pressure for higher interest rates. fs

2000

Retail trade is a measure of consumer spending that describes all business activity involved in selling goods and services to households in Australia.

Consumer spending accounts for two-thirds of the Australian economy, of which the retail trade survey published by the Australian Bureau of Statistics (ABS) represents about one-third.

It is considered to one of the best leading indicators of how Australia’s consumers are spending their money.

For investors, it provides them with an appreciation for the pattern of spending in the retail trade sector, giving them a good handle on where the broader economy is headed.

The ABS retail trade survey spans food retailing; supermarkets and grocery stores; non-petrol sales of convenience stores of selected petrol stations; takeaway and other food retailing; department store;, clothing and soft goods retailing; clothing retailing; footwear, fabric, and other soft goods retailing; furniture and floor covering retailing; domestic hardware; houseware retailing; domestic appliance and recorded music retailing; newspaper, book, and stationery retailing; other recreational goods retailing; pharmaceutical, cosmetic and toiletries retailing; hospitality and services; hotels and licensed clubs; cafes and restaurants; and other selected services.

The monthly estimates of retail sales are not adjusted for the effects of price increases.

But price-adjusted estimates of quarterly retail

News

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

Celsius latest casualty in crash

01: Joe Biden

president of the United States

Cassandra Baldini

Celsius Network has filed for Chapter 11 bankruptcy making it the latest victim of the crypto crash.

In a statement, Celsius said it has filed with the Court a series of customary motions to allow it to continue operation.

These “first day” motions include requests to pay employees and continue their benefits without disruption.

The lender said it has $167 million in cash on hand, which will provide ample liquidity to support certain operations during the restructuring process.

Celsius is not requesting authority to allow customer withdrawals at this time and said claims will be addressed through the Chapter 11 process.

Members of the special committee of the board of directors said: “Today’s filing follows the difficult but necessary decision by Celsius last month to pause withdrawals, swaps, and transfers on its platform to stabilise its business and protect its customers.”

In June, Celsius suspended customer withdrawals and froze $11 billion of assets.

“Without a pause, the acceleration of withdrawals would have allowed certain customers—those who were first to act—to be paid in full while leaving others behind,” it said.

Celsius co-founder and chief executive Alex Mashinksy added the decision was right for the community and company.

“We have a strong and experienced team in place to lead Celsius through this process. I am confident that when we look back at the history of Celsius, we will see this as a defining moment, where acting with resolve and confidence served the community and strengthened the future of the company," he said. fs

Acting now will hurt less than acting later.

Sri Lankan economy topples

Is the wage price spiral narrative a lie?

Chloe Walker

Sri Lanka’s debt-laden economy has collapsed, and its newly elected prime minister has announced bankruptcy as the island nation suffers its worst financial crisis in decades.

Due to the crisis, the country has seen severe shortages of necessities like food, fuel, cooking gas, and medicines.

It defaulted on its external debt in April and the usable foreign reserves are now so low that it has struggled to cover its needs from the international market.

Prime minister Ranil Wickremesinghe announced his plans to negotiate with the International Monetary Fund (IMF) as a bankrupt country.

“Our country has held talks with the IMF on many occasions before. But this time the situation is different from all those previous occasions,” Wickremesinghe told parliament.

“In the past, we have held discussions as a developing country. We are now participating in the negotiations as a bankrupt country. Therefore, we have to face a more difficult and complicated situation than previous negotiations.”

Wickremesinghe said earlier that a preliminary agreement on a bailout has been submitted to the IMF’s board of directors for approval. fs

29

US rocked by inflation disaster, CPI hits 9.1% Andrew McKean

T The quote

he US Bureau of Labor Statistics has reported that inflation has surged 9.1% over the last year, shooting up a torrid 1.3% in June alone.

While inflation has surged to its highest level in 41 years, US president Joe Biden01 said the CPI data doesn’t reflect the full impact of nearly 30 days of decreases in gas prices.

Biden stated: “Those savings are providing important breathing room for American families.”

He added that other commodities like wheat had also fallen sharply since the report.

The president said core inflation had come down for the third month in a row and that June is the first month since last year where the annual core inflation rate is below 6%.

But despite the beleaguered leader’s optimistic front, his approval ratings have collapsed to 38.6%. At this stage of his presidency, his approval ratings are comparatively lower than that of the last 12 US presidents, including Donald Trump.

In a White House statement, Biden said: “Tackling inflation is my top priority – we need to make more progress, more quickly, in getting prices under control.”

To do this Biden promised he’d continue

Labour costs have played an insignificant role in the recent increase in inflation, according to an Australia Institute analysis.

While a plethora of market commentary has expressed concern that aggressive wage growth will elevate inflation levels, the analysis said such fears typically ignore the fact that real wage growth is at historically low levels and has been for some time.

The Australia Institute suggested wage growth clearly has not been the driving force of recent increases in Australian inflation or inflation around the world. Rather, the blame should be placed on the continuing impacts of COVID and a sharp increase in global energy prices.

“While much is made of the link between increases in the costs of inputs (such as the price of oil) and increases in prices (such as the price of petrol) in fact many firms have a high degree of discretion about how much, if any, of an increase in costs they will pass on in the form of higher prices,” the analysis said.

It added: “In short, if firms choose to absorb all of an increase in cost rather than increase prices then cost increases will lead to a reduction in profit not an increase in prices.”

“Similarly, if firms pass on price increases that are more than enough to cover an increase in their production costs then profits will rise.”

Under these assumptions, macroeconomic data on economywide changes in prices, the share of GDP flowing to workers and company profits can shed light on inflation’s underlying causes. Data can also reveal the distributional consequences of businesses’ responses to rising production costs.

The Australia Institute analysis surmises that there’s no direct

the release of oil from the US’s strategic petroleum reserve and persist with putting price caps on Russian oil.

Biden also announced that’d he’d urge Congress to enact legislation that would reduce the cost of everyday expenses and give the Federal Reserve the room it needs to combat inflation.

“The Federal Reserve plays the primary role in fighting inflation and regulating financial institutions,” Biden added.

International Monetary Fund managing director Kristalina Georgieva said inflation is higher than expected and ensuing central bank monetary tightening paired with pandemic-related supply chain disruptions triggered further global growth downgrades.

Georgieva emphasised that countries do everything in their power to bring down high inflation.

She said: “Persistently high inflation could sink the recovery and further damage living standards, particularly for the vulnerable.”

As such Georgieva recommended that most central banks continue to tighten monetary policy decisively, especially where inflation expectations had started to de-anchor.

“Acting now will hurt less than acting later,” Georgieva remarked. fs

link between costs of production and prices beyond the desire of firms to maintain or increase profits.

“While firms in new industries seeking rapid growth often deliberately set their prices below their costs in, companies like Santos are currently enjoying a significant increase in price that is entirely unrelated to their cost of production,” the analysis said.

Further, it stipulated that given profits currently account for a record share of GDP there is no truth behind the assertion that the Australian corporate sector has ‘no choice’ but to pass on cost increases in full.

“The rising profit share of GDP suggests that Australian firms have, for some time, been choosing to increase their prices faster than their costs have been rising,” the analysis said.

Using a methodology instituted by the European Central Bank, to decompose shifts in price levels and attribute them to shifts in wages, profits and taxes, the Australia Institute found that unit labour costs played almost no role in inflation over the period between 2013 to 2021.

The ACTU responded to these findings stating that Australian companies that banked record profits rather than using them to shield consumers from cost increases are the leading drivers of inflation.

The ACTU said: “New research shows that big businesses are actively making choices which harm the economy and are putting millions of households under financial stress in order to increase their margins and secure record chief executive bonuses.”

“It also reiterates that wage growth, which is lagging well behind CPI, is not driving inflation.” fs

30

Sector reviews

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

Figure 1. Selected hedge fund indexes, 2017-22

Alternatives

CUMULATIVE INDEXES

Prepared by: Rainmaker Information Source: FactSet

200 190 180

Don’t hedge on hedge funds

170

Alex Dunnin

130

A

Fund indexes reveal correlations of 0.5 to 0.6.

At face value, this suggests there may indeed be something to the claim that hedge fund strategies can be non-correlated. However, complicating this interpretation is that the returns from various hedge fund indexes can parallel those of regular stock market indexes more than expected.

For example, 12-month returns at end June 2022 of selected high-level hedge fund indexes were much more closely aligned with mainstream equity index returns than investors may have expected. A similar phenomenon was observed for the three-year period.

Illustrating this, while the S&P 500 in USD delivered -10.6%, selected general hedge fund indexes delivered -3.5% to -8.8%. Sure there was a gap between them, but both were still negative and within sight of each other. Over the threeyear period, the results were even more aligned as the hedge fund indexes delivered 4.4% pa to 6.6% pa which must be said was lower than 10.6% pa delivered by the S&P 500.

Is the lesson here that diversified hedge fund indexes are a misnomer? Instead, if you want exposure to hedge funds, perhaps you should seek out the active but riskier event-driven specific ones. fs

120 110 100 90

Figure 2. Selected hedge funds and equities indexes, rolling returns

Barclays Hedge Fund Index Eureka Hedge Fund Index S&P ASX 200

12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12%

Credit Suisse Hedge Fund Index S&P 500 (USD)

1YR

3YRS

YIELD % PA

18

Source: FactSet

16

3 years

14

5 years

12

10 years

10 8 6 4 2 0 JUN 22

JUN 19

JUN 16

JUN 13

JUN 10

JUN 07

JUN 04

JUN 01

JUN 98

JUN 95

JUN 92

JUN 89

JUN 86

JUN 83

JUN 80

Figure 2. US spread to 10 year bonds ove 45 year

YIELD SPREAD % PA

4 3 2 1 0 1 year spread

-1

3 years spread 5 years spread

-2 -3

JUN 22

JUN 19

JUN 16

JUN 13

JUN 10

JUN 07

JUN 04

JUN 01

JUN 98

JUN 95

JUN 92

JUN 89

JUN 86

JUN 83

JUN 80

JUN 77

mature they will have to be reinvested at lower rates.

The total return from two five-year bonds, invested one after the other on maturity, should have the same expected return as a single 10-year bond.

The current flat yield curve is not normal. It’s only the fourth time (give or take) in the past 45 years when the spreads between short term bonds and the 10-year bond have all been close to zero at the same time.

The previous four times when spreads were so narrow were all periods of slowing economic growth or outright recession: • Mid-2019: The global economy was at its weakest since the Global Financial Crisis (GFC).

• 2007 and 2008: The actual GFC occurred leading to the Great Recession of 2008 and 2009.

• 2000: The tech wreck helped create the economic recession in much of the developed world.

• 1989: Just before the global recession of the early 1990s.

What’s the takeaway from all this? Just from looking at the yield curve (and not even mentioning inflation, energy or Ukraine) the global economy is in a precarious position. fs

1 year

JUN 77

he US Treasury yield curve, the most important for Australian investors, is currently flashing warning signals that there is danger ahead.

The first thing to notice is that over 45 years, yields on Treasuries have fallen significantly.

Current yields, while they may have risen dramatically in the past 12 months - leading to total return losses of around 10% - are still lower than the average and the median.

The average 10-year Treasury yield over this period was 5% pa, while at the end of June 2022 it was 2.9% pa. This puts it well within one standard deviation of the average.

In statistical terms, interest rates are returning to normal.

The second thing to consider is the spread between different maturities, the difference in the yield between one, three and five-year bonds and the yield of the 10-year bond.

When broad interest rates are declining (and expected to keep declining) it makes sense for longer term yields to be lower than shorter term yields. Why? When those shorter-term bonds

Eureka Hedge Fund Index S&P ASX 200

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Prepared by: Rainmaker Information

US Treasury yield curve signals difficult days ahead T

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Figure 1. US yield curve over 45 years

Fixed interest

John Dyall

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JUN-22 APR-22 FEB-22 DEC-21 OCT-21 AUG-21 JUN-21 APR-21 FEB-21 DEC-20 OCT-20 AUG-20 JUN-20 APR-20 FEB-20 DEC-19 OCT-19 AUG-19 JUN-19 APR-19 FEB-19 DEC-18 OCT-18 AUG-18 JUN-18 APR-18 FEB-18 DEC-17

hedge fund, according to the 2022 Good Investment Guide from Rainmaker Information, is that they are special managed funds that don’t focus on investing into particular types of physical assets but rather they exploit complex investment trading strategies like, options, derivatives and shorting etc.

That is, they aim to deliver investment returns through sophisticated investment processes, not based on what they physically invest in. By their nature they are higher risk than conventional funds and usually managed by highly specialised, skilled individuals.

Their major appeal is that they claim to deliver non-correlated investment returns. Which means, when conventional indexes encounter extreme volatility and even negative returns, utilising hedge fund strategies should help insulate investors from these forces.

But do they? Assessing the correlation in monthly returns since December 2017 of the Barclays Hedge Fund Index with the S&P 500 in USD the correlation is 0.9. It’s 0.8 against the S&P ASX 200. But similar comparisons of the Credit Suisse Hedge Fund Index and Eureka Hedge

Barclays Hedge Fund Index S&P 500 (USD)

CPD

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

CPD Program Instructions 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].

Alternatives

Fixed interest

CPD Questions 1–3

CPD Questions 4–6

CPD Program Instructions

1. Hedge funds are managed funds that specialise in following trading strategies rather than being focused on particular physical assets. a) True b) False

4. The most important bond yield curve to Australian investors is: a) the Kiwi yield curve. b) the US Treasury yield curve. c) the yield curve on based on fixed term mortgage rates. d) the Australian government yield curve.

Each fortnight the Financial Standard will provide you with a selection of CPD questions. You do not have to undertake the CPD program each fortnight. You can do it as often or as infrequently as you require. A CPD Activity Statement will be generated and is accessible from our website.

Online access Simply log in using your CPD Program username and password. A record of your CPD work history is maintained for instant online access. You need to have a Principal subscription of Financial Standard to access this service. For more information please go to our website www.financialstandard.com.au or Freecall +612 8234 7500.

2. Hedge funds’ claims they deliver non-correlated returns means that: a) they will generally deliver higher returns than conventional funds. b) they should never deliver a negative return. c) while they take more investment risk, their risk-adjusted returns should be higher. d) they aim to achieve returns that counter and offset those of conventional funds.

5. The current yield on the US Treasury 10-year bond is: a) lower than the average yield over the past 45 years. b) higher than the average yield over the past 45 years.

6. A flat yield curve is: a) normal. b) not normal.

3. In the three years to end June 2022, major selected global hedge fund indexes delivered returns of: a) 12-20% pa. b) 7-11% pa. c) 4.4-6.6% pa. d) Zero to 4% pa.

Go to our website to

Submit

All answers can be submitted to our website.

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31

32

Profile

www.financialstandard.com.au 25 July 2022 | Volume 20 Number 14

AN ENTREPRENEURIAL SPIRIT WT Financial Group managing director Keith Cullen has established multiple companies, overseen nine acquisitions and had his fair share of ASX dealings. Through all of it, he maintains a simple mantra - business is just business.

Cassandra Baldini writes.

A

ustralia's vast terrain offers endless exploration to those seeking wanderlust. Carried by an oceanic breeze, travelers can dip in and out of varying climates for months if not years.

When Keith Cullen was six years old his family decided to leave their home in Wagga Wagga and explore the “lucky country”.

Bundled into a caravan with his siblings, the family lived on campsites and Cullen received an education that was delivered in large yellow envelopes. Cullen recalls his mother using a post office phone booth to speak with the Department of Education which would enquire as to the family’s next stop to ensure the envelopes kept arriving. His mother, never too sure herself, would reply ‘Wherever the fishing is good, and the sun is shining’, he says.

After almost two years on the road, the family settled in Canberra where Cullen would finish his schooling and entered the workforce.

Cullen was hired by the Albert Family’s Australian Radio Network as an advertising sales account manager.

“We were a bit like footballers in suits, wellpaid young people having a lot of fun,” he laughs.

“You’re managing clients and relationships and helping them with their marketing, which fits that entrepreneurial spirit. I ended up running the sales team across the two radio stations in Canberra, before setting up a PR consultancy firm.”

Established in 1990 alongside Steve Williamson, Media Productions Australia specialised in government departments and industry associations. The duo conceived and produced the 1991 National Energy Management Forum for the Department of Transport and Energy.

Another contribution was helping the lobbyists behind the Road Transport Industry Forum successfully launch what was to become Australia’s peak road transport industry association.

After a hectic two years, the open road enticed Cullen once more, he farewelled Canberra and took on a new position.

“I went back into radio with the ASX-listed Wesgo Communications, initially on the [New South Wales] Central Coast," he says.

"I made a name for myself pretty quickly and ended up working at one of their flagship stations, 3MP in Melbourne as the general manager of sales."

Amid the turbulence of the 90s recession, Cullen moved away from media.

“Some people I knew had invested in a tech startup, they asked if I could check it out because they weren’t sure if they would see a return; 12 years later I was still doing it,” he says.

The small tech start-up morphed into eBet Limited which later changed its name to Intecq Limited.

He became the founding director and shareholder of the gaming and wagering-focused

company, saying he realises now he was on the bleeding edge of technology.

“We were the first anywhere to put TAB racing and sports services on the internet with NZ TAB, and the first to sell land-based lottery tickets, which we did for Tattersalls,” he recalls.

In 1999, the company went public, giving Cullen his first foray with the ASX. Needing to pivot due to legislative changes he oversaw four acquisitions of gaming tech competitors; "I got pretty good at it.”

After 10 years, Cullen was replaced as chief executive and while he stayed on the board for some time, he ultimately decided to leave. A short stint as chief executive of WPS Financial Group – now Anne Street Partners – followed before he decided to take a break and focus on a variety of passive investments.

His endeavors sent him northwards beyond Newcastle to a pretty patch of regional Australia.

"My brother and I own native Australian Hardwood farm forests and product saw logs on the Mid-North Coast… We went from selling timber at the farm gate on a royalty basis, to contract logging, milling, and freighting finished timber to a variety of buyers,” he explains.

It wasn't long until a gap in the market drew Cullen back to a corporate gig, co-founding Spring Financial Group in 2010 with Chris Kelesis.

With insurers, banks and product providers dominating the advice networks, Spring was an alternative, offering consumers a non-institutional approach to holistic advice.

In its first year, Spring turned a profit and in its first few years paid out about $7 million in dividends.

“Necessity is the mother of invention, and we built some fabulous consumer marketing tools, created 100 handbooks and manuals on financial literacy topics for consumers while continuing to motivate client seeking out holistic advice," Cullen says.

Listing on the ASX in 2015, the group grew to nearly 70 staff across its planning, real estate advisory, accounting, and mortgage broking operations. In two years, it paid more than $6.8 million in dividends to shareholders.

And then the industry started to change.

"The Royal Commission hit, and banks ran for the hills,” he says.

“We knew the unravelling of the vertically integrated model was coming but I don't think anyone thought banks would shut up shop so quickly."

The significant industry disruption and regulatory challenges continued to confront the group, leading to its restructuring.

While retaining Spring, the decision was made to move towards a more business-focused model. In late 2017, the company acquired Wealth Today and reemerged as WT Financial Group Limited (WTL) in 2018.

The reason for the name change was to alert advisers that the focus was now business to business licensing services and supporting independent practitioners.

However, Cullen adds that maintaining

If you want to attract a lot of practices, and you don’t want to run at a loss, then you need to have some serious scale in the business.

Keith Cullen

the direct consumer businesses was an important way of "keeping it real”.

"When you talk to independent financial advisers that run practices, a lot of them will tell you that their dealer group or licensee has either lost touch with what it's like to run a practice or to sit in front of clients, or they never knew it. But that’s not us, we know exactly what it’s like,” he says.

It’s acquisitions like these that have been central to its success.

Following Wealth Today, the business went on to acquire Sentry Group in mid-2021 and in March of this year acquired Synchron.

Each provides dealer group or licensee services to advisers while enabling WTL to capitalise on industry disruption. They also add scale.

“It’s imperative to genuinely support advisers across a diverse range of needs and, to do it right, you need scale," Cullen explains.

"Once you've got the intellectual property in the business to provide broad support services, whether you've got 50 advisers or 500 advisers, that knowledge is scalable across them.”

He says it’s not possible to have the necessary IP in a business if you’re building from scratch, one practice at a time.

“If you want to attract a lot of practices, and you don’t want to run at a loss, then you need to have some serious scale in the business,” he says.

Between the three B2B brands, Cullen says there are now around 600 advisers and 400 practices and underscoring them all is a comprehensive risk and compliance architecture.

“If I have a criticism of our industry, it's that there has tended to be this delineation between the entrepreneurs and the executives and their compliance and risk management functions,” he says.

“But that is what this business is: it’s risk management. So, if you're not involved in that, what are you involved in?” fs