Financial Standard vol20 n21 by financial.standard

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31 October 2022 | Volume 20 Number 21

HESTA, Industry Super Australia

Dugald Higgins, Zenith

Publisher’s forum:

Feature:

News:

Opinion:

Federal Budget

Coursera

Custody

Simon Brinsmead, Challenger Solutions Group

Profile:

www.financialstandard.com.au

31 October 2022 | Volume 20 Number 21

HESTA, Industry Super Australia

Dugald Higgins, Zenith

Publisher’s forum:

Feature:

News:

he recent craziness seen in the UK’s bond market holds some salient lessons for investors and, despite having a very different pension system, Australia isn’t immune from such crises, experts say. The Bank of England (BoE) was recently forced to intervene when the price of 30-year government bonds, known as gilts, collapsed and threatened a financial crisis. “The tipping point in the crisis in the UK gilt market was motivated by asset management practices within the LDI pension sector but that was more the icing on the cake,” GSFM investment strategy advisor Stephen Miller says. “The cake itself was a series of policy missteps by the BoE and the UK government. “Bond markets are highly sensitive to perceptions of a lack of commitment from any central bank toward containing an inflation breakout and the BoE allowed perceptions to develop that it lacked the requisite commitment.” In the case of the UK government, he says there are two main areas of concern. “Firstly, the Brexit backlash, Boris Johnson’s government appeared unwilling to address some of the supply chain and labour shortage issues that arose as a consequence,” Miller says. “Secondly, the [former] Truss government’s mini-budget involving, as it did, tax cuts and additional expenditure measures to protect households from energy price increases represented a massive fiscal expansion in a high inflation environment.” The fiscal expansion, to be debt funded by issuing more gilts, put pressure directly on UK bond yields. Several liability-driven investment (LDI) pension schemes levered using their gilt holdings effectively as collateral and so became the icing. As gilt values fell, they were forced to sell. He says the BoE’s backstop measure was in opposition to inflation containment efforts but was necessary. Its was to effectively default to a highly risky approach of letting a squeeze on real incomes become the cure for a diminishing of inflation. However, MFS Investment Management fixed income research analyst Peter Goves believes the BoE executed its interception well. “The BoE intervention in this specific episode of market volatility was targeted and timely,” he says.

“In this sense, it has been a success and the BoE stuck to its timetable to end purchases... This enhanced the bank’s credibility, together with its determination to go ahead with its quantitative tightening program in November.” Following Rishi Sunak’s appointment as prime minister, the 30-year gilt yields have leveled out returning to 3.67%. “Drivers of gilts are complex and multifaceted at present. First, the politics unleashed a wave of volatility owing to uncertainty regarding the UK’s fiscal outlook. This has now changed with the new chancellor and the resignation of Truss.” In addition, Goves adds the BoE remains in hiking mode due to the high inflationary backdrop. “Again, some pricing has been pared back owing the abandonment of unfunded tax cuts. Liquidity considerations are also playing their part. All in all, we can expect some erosion of risk premia in the long-end and some paring back of aggressive BoE hikes. The BoE is still hiking nonetheless, and inflation is uncomfortably high. As such, gilt yields look set to remain relatively high for the foreseeable future.” As for Australia, Miller says the specific form of what went wrong is unlikely to occur here given the defined contribution and generally funded nature of the pension system. However, the problem can arise with any form of excess leverage in the financial system, he notes. “The most egregious example of excess leverage was that which occurred in the lead-up to the Global Financial Crisis. Locally, from timeto-time there are concerns about excess leverage in the system, for instance with respect to residential housing, but any “tipping point” leading to “fire sales” of financial assets due to, say, higher interest rates is not yet obvious,” he says. A particularly salutary lesson Miller highlights is an over-reliance on monetary policy. “From the tech wreck through to the GFC and pandemic, monetary policy bore the brunt of stabilisation. It seems curious that in the case of the former two occurrences where excess leverage was a key factor driving the problem, the solution involved even more leverage,” he says. “But the key lesson from the UK is the virtues of sound macro policies leading to low and stable inflation and the ability to withstand systemic shocks, as well as the avoidance of excess leverage through appropriate structural and regulatory policies.” fs

Federal Budget

Coursera

Custody

Simon Brinsmead, Challenger Solutions Group

Investors heed UK bond market lessons Cassandra Baldinir

Opinion:

22 Profile:

Advice fees jump 16% in FY22

Stephen Miller

investment stratgeies advisor GSFM

Initial advice fees charged by financial advisers on a per advice document basis increased from 16% in FY22 to $3315 from $2859 the previous year. According to the Padua Advice Fee Data Report, FY 2022 ongoing advice fees charged by advisers on a per advice document basis has also risen 33% this year to $4865 from $3656 since last. “It’s no wonder the high cost of financial advice is frequently cited by Australians as the main reason for not seeking advice,” Padua Solutions co-chief executive and co-founder Anne-Marie Esler said. “Especially when advice fees can rise by more than double the current rate of inflation.” Further, the report noted since the end of 2018, financial adviser numbers have fallen by 43% to 15,908 from 27,929, placing further pressure on the sector. “The mass exodus of advisers from the financial advice industry has only exacerbated existing concerns around the cost and accessibility of advice,” she continued.

Continued on page 4

Byres delivers parting shot Andrew McKean

Departing APRA chair Wayne Byres has made a parting shot at the superannuation sector, saying one of the things he is most proud of is the increased transparency the regulator has driven in an industry where “self-interest can sometimes outweigh member interest.” On what’s been the most important and impactful change in the super industry, Byres said it’s been the increased transparency forced upon the industry. “Given the weak accountability that most superannuation trustees are subject to by virtue of their ownership structure and limited member engagement, corporate interest and self-interest can sometimes outweigh member interest,” he said. “Transparency has been key to increasing the discipline on trustees to ensure they are always managing members’ money in their best interests.” Byres cited that the transparency afforded by APRA’s heatmaps and the performance test has

Continued on page 4

Editorial

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

Congratulations to the Power50 W

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

ell, we finally made it. After months of preparations, the 2022 Financial Standard Power50 is here. This is the ninth time we’ve curated this list, with the aim of highlighting those that are driving the advice industry forward, whether it be through active participation in industry associations or government consultations, working overtime to produce content to reach more than just those who can afford advice, or – to Michelle Levy’s delight – simply providing good advice. The Power50 occurs every year and it’s no mean feat; hours upon hours of due diligence is conducted by our editorial and research teams and that’s before even a single vote is cast. We also work with the Financial Planning Association of Australia (FPA) and Association of Financial Advisers to bolster the Power50’s credibility. A recent study from the FPA and MYMAVINS found that those who receive financial advice enjoy a better quality of life when compared to those who don’t seek advice. And this wasn’t just true across one or two metrics; this was consistent across all age groups and on all metrics. Financial security, comfort with level of wealth, you name it – those who receive advice are reporting having more of it. The findings are a boon for the advice industry, particularly at a time of great uncertainty. And more so given the biggest challenge facing

the sector, that of accessibility and affordability. The Quality of Advice Review has been ongoing all year and is expected to drop its final report in mid-December. If the proposals within its interim paper are anything to go by, the recommendations and potential reforms to come could turn the industry on its head. Deregulating general financial advice, allowing superannuation funds to offer personal advice, removing the need to provide a Statement of Advice or Record of Advice at every turn; major reforms that would prove a major makeover. At the same time, the Australian Law Reform Commission is tasked with reviewing financial services laws with a view to removing the “clutter” that’s causing compliance headaches. While there are no silver bullets, these two initiatives combined stand to solve a significant chunk of the issues that have plagued advisers in recent times, driving up the cost of doing business and, therefore, the cost of advice. This year has proven somewhat of a watershed moment in the advice industry, being the deadline for many advisers who likely feel their time in the sector was cut short and still had much to give. For those that remain, the ongoing uncertainty as to what the future holds and the knowledge that the demand for advice now simply can’t be met may feel equally taxing. The Power50 is a reminder of the support network that’s out there for advisers and of the wonderful community that financial advice in

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Australia is. For those considering a career in advice, it’s a shining example to look up to and be inspired by, and for those that have left one behind, it offers hope that clients and would-be clients will be taken care of. We couldn’t be happier to share the Power50 with you. This year’s cohort showcases varied specialisations and reasons for being deemed ‘influential’. It could be an innovative business model, like Finnacle’s Daniel Thompson and Prashant Nagarajan, a personal mandate to ensure marginalised communities are empowered to access advice like Fox and Hare’s Glen Hare or being one of the most trusted voices in ethical and responsible investment advice, like David Rae and Louise Edkins. Being recognised as a future leader by your peers is also important and certainly something that many consumers would see as valuable. It’s exciting that this Power50 highlights a new generation of female leaders emerging in the industry like TWD’s Dawn Thomas, Yield Advisory’s Morgan Hayward, or Kearsten James from Addi House. It’s them and the 44 other advisers recognised in this year’s Power50 that are the future of advice in Australia, doing what they can to ensure as many people as possible are financially empowered to enjoy a greater quality of life. On behalf of the Financial Standard team, I congratulate the Power50. fs

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www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

Sharia-compliant ETFs launch

CommSec, AUSIEX to pay $27m penalty

Chloe Walker

Jamie Williamson

Two of the group’s Sharia-compliant funds are now available on the ASX, appointing a responsible entity for both. Both the Hejaz Equities Fund and the Hejaz Property Fund aim to create a positive impact and building wealth for members without negatively impacting society. Specifically, the Hejaz Equities Fund (ISLM) is a growth fund with exposure to a diversified global equities portfolio of Sharia-compliant investments. It invests primarily in developed markets around the world, primarily Europe, North America and selected Asian markets, including Australia. Meanwhile, the Hejaz Property Fund (HJZP) applies an ethical overlay to invest in globally listed REITs. Sharia investment principles are applied as negative screens to exclude investment assets based upon the nature of their business activities and their failure to meet financial thresholds relating to debt, liquidity, and income. The group has appointed Equity Trustees as RE for both of the funds. Hejaz chief operating officer Muzzammil Dhedhy said: “While Islamic ETF products are widely available overseas, this will be the first time Islamic Finance products are listed on the ASX.” By making it simple for retail investors to access our award-winning funds, we are taking an important step towards our goal of providing highperforming, ethical financial products to Australian Muslims, he added. “Hejaz is also planning to launch a third ETF before the end of the year, providing retail investors with greater access to the Hejaz Income Fund, Australia’s highest returning Islamic Income Fund,” Dhedhy revealed. fs

C The numbers

$4.3m

The amount overcharged in brokerage fees.

ommSec has been ordered to pay $20 million while AUSIEX will pay $7.12 million for systemic compliance failures over a nine-year period. In a case brought by ASIC, the Federal Court found the two companies contravened Market Integrity Rules in a variety of ways and on multiple occasions. The breaches include CommSec customers being overcharged brokerage fees on close to 121,000 occasions and to the tune of more than $4.3 million; failure by both companies to comply with client money reconciliation requirements; failure by both to provide accurate confirmations to customers for certain transactions; and CommSec not having appropriate system filters to detect wash trading. Further, CommSec and AUSIEX failed to

comply with their own best execution policies and procedures; CommSec failed to enter into the required warrant agreements forms with clients and provide an explanatory booklet before accepting a client order to purchase a warrant for the first time; and both failed to include required intermediary identification in regulatory data submitted to relevant operators. The court also held that CommSec made a false or misleading representation when it said it considered ASX CentrePoint and executive venue for those customers who submitted orders via the ASB Securities platform when it did not. This meant some customers who placed certain orders through the ASB platform were excluded from trading on CentrePoint despite having been told they could be. fs

Harness returns. Limit losses.

KKR, Mubadala in $1.6bn partnership KKR and sovereign investor Mubadala Investment Company are exploring private credit coinvestment opportunities in the Asia Pacific region. The two entities have signed a strategic partnership aimed at deploying at least $1.58 billion (US$1bn) of capital into bespoke credit solutions. It sees the expansion of Mubadala into the region’s credit market, while enabling KKR to scale its APAC credit platform. Mubadala will deploy its capital alongside KKR’s existing pools of capital in the region, including the $1.7 billion KKR Asia Credit Opportunities Fund. “The partnership commences at a time when the region’s growth has fueled an enormous demand for funding solutions, as many companies, sponsors, and entrepreneurs face challenges accessing flexible financing due to limited supply of capital from banks and nonbank lenders,” the two parties said. “The partnership between Mubadala and KKR aims to address this shortage of flexible capital while supporting businesses in APAC in achieving their long-term growth ambitions.” Mubadala’s co-head of credit investments Omar Eraiqaat said expanding into APAC is a core pillar of the sovereign investor’s strategy. fs

Future Safe.

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This material is issued by Allianz Australia Life Insurance Limited, ABN 27 076 033 782, AFSL 296559 (Allianz Retire+). Allianz Retire+ is a registered business name of Allianz Australia Life Insurance Limited. This information is current as at July 2022 unless otherwise specified. This information has been prepared specifically for authorised financial advisers in Australia, and is not intended for retail investors. It does not take account of any person’s objectives, financial situation or needs. Before acting on anything contained in this material, you should consider the appropriateness of the information received, having regard to your objectives, financial situation and needs. The returns on the Future Safe product are subject to a number of variables including investor elections, market performance and other external factors, and may differ from the information contained herein. Past performance is not a reliable indicator of future performance. No person should rely on the content of this material or act on the basis of anything stated in this material. Allianz Retire+ and its related entities, agents or employees do not accept any liability for any loss arising whether directly or indirectly from any use of this material. Allianz Australia Life Insurance Limited is the issuer of Future Safe. Prior to making an investment decision, investors should consider the relevant Product Disclosure Statement (PDS) and Target Market Determination (TMD) which are available on our website (www.allianzretireplus.com.au). PIMCO provides investment management and other support services to Allianz Australia Life Insurance Limited but is not responsible for the performance of any Allianz Retire+ product, or any other product or service promoted or supplied by Allianz. Use of the POWERED BY PIMCO trade mark, or any other use of the PIMCO name, is not a recommendation of any particular security, strategy or investment product. AR2022-07_IDGR-A5861-M

News

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

01: Neil Rogan

Advice fees jump 16% in FY22

head of adviser and intermediary solutions, Australia Russell Investments

Continued from page 1 “If we as an industry don’t work towards reducing the cost of providing advice, it will become increasingly inaccessible for most people, and especially those who would potentially stand to benefit most from financial advice.” According to Padua Solutions co-chief executive and co-founder Matthew Esler, technology can improve the accessibility of advice by automating key processes and enabling financial advisers to do more with their time. “This starts with a client’s fact find and goes right through to using algorithms to determine which advice strategies would be best suited for a client and the actual monetary benefit of each strategy for that client,” he said. He further pointed to the Quality of Advice Review (QAR) paper where Michelle Levy prioritised accessibility of advice by putting forward several proposals that simplified reporting requirements on advisers and the cost of running an advice business. “These are important proposals, but we also believe the cost of running an advice business - and therefore the cost of financial advice to the end user - can already be reduced today by finding the right technology partner. Automating as much of the technical components of providing financial advice should be viewed as a priority in the future viability of the advice industry,” he concluded. fs

Byres delivers parting shot Continued from page 1 been the single most powerful force in driving better member outcomes, shining a spotlight on underperformance, and giving flunking trustees no place to hide. However, in an industry where size matters, there’s still a long tail of smaller funds whose longevity is challenged, Byres explained. While not simply being a case of ‘big is good, small is bad,’ overall the evidence is clear that size helps deliver better member outcomes, he argued. “Trustees that cannot compete on that basis need to think very hard about how (and whether) they can deliver in their members’ best financial interests, now and into the future,” Byres said. The spotlight on them will only get brighter and more intense, he added. Meanwhile, on community expectations and APRA’s responsibilities Byres noted that the recent message to regulators has been to be tougher. Aware that community expectations of its regulators are high, Byres stood firm that this doesn’t guarantee bad things won’t happen. Equally, APRA has no mandate from the government to prevent failure at all costs. “It is almost inevitable that every so often hings will go wrong in the financial system, and participants will suffer losses,” Byres said. “This should not automatically be assumed to be a regulatory failure. It may well simply be a natural – if at times uncomfortable – product of having a competitive, efficient, and innovative financial sector that is not completely drowned in red tape.” fs

Quantifying the value of a financial adviser Andrew McKean

R The quote

The sheer number of decisions to be made and the knowledge required to understand their implications can lead to decision fatigue and increases the risk of poor outcomes.

ussell Investments’ Value of an Adviser report says many investors are being pressured into sub-optimal investment decisions but having a financial adviser could add more than 4% to total portfolio value. So, even though advice fees have jumped 16% in FY22, from $3656 to $4685, Russell Investments’ analysis argues that the total value of the services typically provided are worth substantially more than a typical advice fee. The report supported its claim by developing a value of advice formula that weighted, appropriate asset allocation, behavioural coaching, choices and trade-offs, expertise, and tax planning. “There is research that suggests that asset allocation drives over 85% of the investment outcome for an individual, yet this critical step of an advice process is often undervalued and underappreciated,” the report said. “In the superannuation environment, there are generally two types of non-advised investors. Disengaged investors who are defaulted into a one-size-fits-all asset allocation, with very limited or no reference to their personal circumstances or needs. Or engaged investors, who build their own portfolios - which comes with its own risks.” Of the $1.2 trillion of assets in the various MySuper investment options, over 60% of these assets are managed to a single strategy asset allocation. This means for a member in a single strategy default, no matter their age, current super balance or retirement goal – they are invested the same way as everyone else. Likewise, for individuals who take a DIY approach and build their own portfolios, there are many inherent risks, like not having a sufficient understanding of key investing topics requisite to setting the right asset allocation for specific goals, circumstances, and preferences. Also, not having the discipline and skills to maintain that asset allocation in the face of market movements and volatility. Russell Investments head of adviser and intermediary solutions in Australia Neil Rogan01 said: “We believe that being in an asset allocation that is appropriate to an individual’s personal needs, as identified by their adviser, can be worth up to 1.6% per annum in annual portfolio value, particularly in periods of market instability such as those investors are currently experiencing.” On behavioural coaching, Rogan commented: “The past two years have been challenging for investors, with many facing these prolonged levels of volatility for the first time in their investing lives. As a result, many investors have turned away from investment markets, seeking shelter in assets like cash which they believe to be safer.” “In their role as a behavioural coach, advisers have helped their clients remain invested through the turbulence, preparing them for an

uncertain future and working with them to determine their post pandemic goals. This year, that aspect of an adviser’s role alone is responsible for 2.9% of portfolio value.” The report suggests that, without guidance, investors often buy when markets are euphoric and sell when markets are bearish. “We believe there is good value in your [advisers] ability to help clients stick to their longterm financial plan and avoid the behavioural mistakes that may have them miss out of the market’s best days,” the report said. Regarding choices and trade-offs, the report stated: “Every client has a unique set of circumstances, preferences and considerations, which increase in volume as they age, and in complexity as their needs and experience develop over that time. The sheer number of decisions to be made and the knowledge required to understand their implications can lead to decision fatigue and increases the risk of poor outcomes.” “An adviser can help evaluate and prioritise these decision points. The impact of implementing the right strategy to meet an individual’s unique set of needs, while maximising the outcomes of these choices and trade-offs can be invaluable.” Meanwhile on expertise, the report suggested that recurringly advisers bring their technical and emotional expertise to the benefit of clients. In better times, helping clients to achieve lifelong goals, while in challenging circumstances, adding value through cases of trauma, illness, financial crises, estate planning, and death. The report shows that an adviser’s contribution to the success of their client’s wealth building journey is more than what can be quantified. Only 55% of Australians are considered financially literate, but 83% of advised Australians report feeling peace of mind about their future. “The value of an adviser isn’t limited to their positive portfolio impact. Advisers are experts at simultaneously incorporating their emotional expertise into their technical capabilities, to help clients overcome periods of immense personal and family challenges such as trauma, illness, and death,” Rogan said. “These tangible, but non-quantifiable, qualities also extend to how advisers help their clients synthesise the myriad combination of personal goals, circumstances, preferences and considerations into a cohesive plan to provide their clients with financial certainty.” According to the report, the remaining attribute of quantifiable adviser value is drawn from tax savvy planning and investing. While commonly considered the responsibility of accountants, tax considerations are an important part of the advice process – 23% of investors consider tax effectiveness as one of their top three investment concerns. fs

Harness returns. Limit losses.

Future Safe.

News

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

Perpetual, Pendal deal progresses

01: Blake Briggs

chief executive Financial Services Council

Andrew McKean

In Perpetual’s first quarter business update, it said that progress has been made across the key conditions to the Pendal Group takeover, including client consents and regulatory approvals. Pendal chief executive and managing director Rob Adams said: “Client consents are tracking in line with both parties’ expectations and the regulatory approval processes has also commenced.” “Assuming all the key conditions to the transaction are met, we are on course for targeted completion of the transaction by January 2023.” As previously reported by Financial Standard, Perpetual entered a Scheme Implementation Deed to acquire Pendal. Since the announcement, a joint transaction integration committee was established to oversee the key conditions to the Scheme and to ensure both parties work closely together. The committee is chaired by Sam Mosse, Perpetual’s chief risk officer. Meanwhile, Perpetual reported that its total assets under management (AUM) were $89.8 billion at September 2022, 1% lower than the period prior. The investment advice company attributed this result to negative market impacts and flows offset by positive currency movements. Perpetual Asset Management International’s AUM was $68.5 billion, down 1%, impacted by negative market movement and net outflows. Perpetual Asset Management Australia’s AUM was $21.3 billion, flat on the prior quarter, with net outflows impacted by the loss of one mandate in the intermediary channel. Perpetual Corporate Trust funds under administration was $1.12 trillion, up 3% on the previous quarter. Perpetual Digital attracted two new clients in the quarter, with a new mandate form a large auto lender as well as MFS and Laminar combining to win a large wealth management mandate. fs

MSC receives CCIV authority MSC Trustees is now authorised to operate both retail and wholesale Corporate Collective Investment Vehicles (CCIV), becoming the first professional trustee firm to do so. The CCIV framework was effective July 1. MSC Trustees is also now the first to hold this authorisation and Singapore’s similar Variable Capital Companies (VCC) authorisation; MSC Trustees expanded into Singapore earlier this year. “We welcome this new CCIV capability in our core trustee business. The CCIV regime is designed to offer an alternative structure for pooling of capital for investment purposes, in line with similar structures around the world, and ensure Australia remains internationally competitive in attracting and managing investor capital,” MSC Group managing director Matthew Fletcher said. He added that the business has already fielded interest from several multi-national fund managers seeking to replicate similar structures overseas. “We believe MSC Group’s ability to offer CIV and VCC structures respectively in both Australia and Singapore provides a compelling offering for regional and international fund manager clients,” Fletcher said. fs

QAR could see 12% increase in insured Aussies Chloe Walker

The numbers

$17bn

The amount paid by Australians in premiums each year.

ccording to research commissioned by the Financial Services Council (FSC), the introduction of a scalable advice model for life insurance would see more than a million Australians have the life insurance cover they need. Research by NMG Consulting found that if the Quality of Advice Review (QAR) results in the implementation of a scaled advice model and other reforms to simplify advice, there will be a 12% increase in the number of Australians with life insurance cover, or 432,000 Australians. It also noted that proposals to reform the advice framework will reduce the cost of providing advice by almost $2000, allowing people to get advice at times when they need life insurance protection but cannot afford an up-front fee to pay for it. “The recommendations proposed will steadily increase the total number of in-force policies, with the level of comprehensive advised sales still falling,” NMG said. “But not as far as today’s scenario, which will by more than offset by a simplified life risk advice model creating additional new policies.”

However, given the dynamic between lapsing policies and new business, even with these changes in place, it is expected to take at least 10 years to address the underinsurance gap, it said. In response to the research, FSC chief executive Blake Briggs 01 said that the government has a rare opportunity to deliver affordable and accessible advice to consumers as an outcome of the QAR. “FSC research shows how the unmet life insurance needs of consumers can be addressed by comprehensively reforming the regulatory framework, not just tinkering with it,” he said. If nothing changes, the number of life insurance policies held by Australians is set to reduce by 17% in the next five years. As it stands, about 15 million people have insurance cover, paying a total of $17.3 billion in premiums each year. “These insights also suggest the benefits that a reformed financial advice framework can have across the broad range of financial services that consumers must navigate, from superannuation savings, to investing for the future for themselves and their families.” fs

Australian Ethical FUM dips ahead of Christian Super merger Jamie Williamson

Australian Ethical has seen a slight drop in its funds under management, including a final institutional redemption, and provided an update on its merger with Christian Super. Australian Ethical’s total FUM now sits at $6.18 billion, a drop of 0.4% from June end. Broken down, $1.81 billion of this is in managed funds and $4.37 billion is in superannuation. The manager now holds no institutional money following a final redemption by an institutional client that amounted to $183 million. Excluding the redemption, the business had net flows of $213 million last quarter. Australian Ethical also confirmed it is on track to complete its merger with Christian Super on November 25. It said the costs associated with this remain consistent with early estimates of up to $4 million. The merger will see $1.96 billion added to Australian Ethical’s super FUM and more than 30,000 members join. “Following the successor fund transfer, increased scale will allow Australian Ethical to pass on superannuation fee reductions to all

members and improve competitiveness of our super offering,” the group said. It added that, based on its current product mix, the revenue margin across all products is expected to be 1.01%, down from 1.05% at June end. This includes changes made to fees last month. Effective September 1, Australian Ethical reduced the dollar-based administration fee across all its products from $97 a year to $74 a year. This is charged in addition to a percentagebased fee of 0.29% of a member’s balance. In other recent news, Australian Ethical’s chief investment officer David Macri is set to depart. Macri has led the firm’s investment function for the past 11 years. In total, he’s been with Australian Ethical for almost 14 years, having joined in January 2009 as an equities analyst and portfolio manager. When Macri took over the fund manager had about $600 million in funds under management. It now has more than $6.2 billion. Macri said he is proud to be leaving the business in an excellent position and is confident the team will be able to continue building on the existing platform. fs

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www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

Jarden shuffles leadership team

01: Edwina Maloney

director of platforms AMP

Jamie WIlliamson

Having grown at a faster rate than anticipated, Jarden has implemented a new business structure which has required several changes to its management team, including a new role for the chief executive. To maintain momentum, the group has introduced two core business lines, Jarden Wealth and Jarden Investment Bank. Jarden Wealth will comprise the advisory business and its stakes in Hatch and Harbour Asset Management. It will be led by Malcolm Jackson as chief executive. Meanwhile, Jarden Investment Bank will comprise Advisory & Capital Markets, Equities & Research, Energy & Renewables and Agriculture, and Capital Solutions, including Pearlfisher Capital and Principal Investments. It will be led by Aidan Allen and Sarah Rennie as co-chief executives, who will also join the group’s board. The New Zealand investment bank will be run by Sam Ricketts and Dan Reynolds. In making the changes, chief executive Robbie Vanderzeil will take on the new role of chair of Australia, “allowing more time for our clients to benefit from Robbie’s market leading judgement and experience.” Elsewhere, John Spencer and Ben Gilbert retain their respective roles as head of Australian equities and head of Australian research. fs

AMP debuts hybrid retirement solution Andrew McKean

The quote

Retirement is a really complex environment and that’s why we think it’s important that clients get advice at that crucial time in their lives.

New green metals ETF launched Global X has launched the Global X Green Metals Miners ETF (GMTL), investing in companies producing metal for clean energy infrastructure and technologies. The ETF launch comes as significantly more green metals are required to produce, transmit and store renewable energy, Global X head of investment strategy Blair Hannon said. Metals to be invested in through GMTL include lithium, copper, nickel, rare earths, and cobalt. The fund tracks the BITA Global Green Energy Metals Index and will include companies that make more than 50% of their revenue mining or producing green metals and screens out businesses which do not meet reasonable industry standards. “Demand for green metals is soaring around the globe and promises to intensify as climate change initiatives become more ambitious,” Hannon said. fs

MP launched a new suite of solutions available through the North platform that combines an account-based pension with the lifetime cashflow features of annuities. The MyNorth Lifetime Income account is a flexible pension account that provides a marketlinked income stream and an annual bonus with rates guaranteed for life. The annual bonus, which is underwritten by TAL, rises the longer customers live and the premium is paid from their estate when they die or exit the platform. The Lifetime Income account also qualifies as a lifetime income stream under the Age Pension rules meaning an investment in this solution qualifies for a 40% upfront discount on the Age Pension assets test. The other available options, the MyNorth Lifetime Super account and Deferred Lifetime Income account can be opened before clients move into the retirement phase. These solutions provide enhanced tax and Centrelink benefits, aiming to provide greater opportunities for long-term client engagement with enhanced retirement outcomes. AMP director of platforms Edwina Maloney01

explained that financial advisers have typically had the problem of only having account-based pensions at their disposal, not enabling them to manage longevity risk. Alternatively, while traditional lifetime annuities pay a fixed income for life, they require conservative investments and pooled capital reserves. As a result, rates of income can be quite low. So when looking at what an adviser would need to give good advice to clients, Maloney highlighted that still having market exposure, a full range of investment options, and levers to adjust income for their clients were key. “A lot of products out there in the market don’t allow advisers to do this, giving them that breadth of choice whilst providing longevity protection in a cost-efficient manner. I think we’ve ticked those boxes,” she said. AMP chief executive of Australian Wealth Management Scott Hartley said there hasn’t been enough thinking around innovation, especially as most people are leaving most of the accumulated super balance when they pass. “Innovations have been fairly light on, there’s been enhancements to account-based pensions, enhancements to annuities...” he said. fs

Colonial First State partners with Bravura Solutions, Tech Mahindra Chloe Walker

CFS chief executive, superannuation Kelly Power said: “This will ensure that one of the largest and most highly regarded platforms in the market becomes even better.” “This is a significant and important next step which will enhance the FirstChoice offering with best-in-class technology providers delivering market leading cloud native technology and services to employers, members and advisers.” The new platform will integrate seamlessly with adviser software, helping to lower the cost of providing financial advice and making it accessible to more Australians, she added. Meanwhile, Tech Mahindra president - BFSI, HLS and corporate development Vivek Agarwal said that the partnership will focus on leveraging digital tools and solutions to provide a seamless experience. fs

Market Leading Investment Solutions Outstanding performance through the economic cycle *

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News

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

HESTA changes admin fees

01: Louise Watson

country head, Australia and New Zealand Natixis Investment Managers

Jamie Williamson

Administration fees will change for both super and pension members next year, with the fund saying its operational costs have increased. From February 2023, HESTA is reducing the dollar-based component of the administration fees paid by accumulation members from $1.25 to a flat $1. However, the percentage-based component is increasing to 0.15%. Currently, the percentagebased fee for the default Balanced Growth option is 0.08% and 0.10% for all other investment options and capped at a $350,000 balance. From next year, it will be standardised across all options and capped at $500,000. According to HESTA’s modelling, the change will mean a decrease of up to $8 a year for members with a balance of less than $15,000. However, a balance of $50,000 will see an increase of between $12 and $22, and a $100,000 balance will see admin fees grow by between $37 and $57. Meanwhile, a member with $250,000 will pay between $112 and $162 more, and a member with $500,000 will see an increase of between $387 and $457. For pension members, the weekly dollarbased fee will drop from $1.75 to $1.50, and the percentage-based fee will also drop. At present it’s 0.28% for balances up to $250,000 and 0.23% for higher balances. From February, the 0.23% fee will be applied across all balances and capped at a balance of $600,000. This means all pension members will see a decrease, the highest being a $138 saving on $250,000 balance, which HESTA said is the average savings of its income stream cohort. fs

Millionaires worry about retirement Cassandra Baldini

The quote

A million may seem like a lot, but many people are surprised when they do the math.

ccording to new research, 35% of millionaires believe it will take a miracle to retire securely. Natixis Investment Managers released The Million Dollar Question report which evaluates retirement sentiment among high-networth investors. It found millionaires and everyday investors (40%) were almost on par in believing it will take a miracle to achieve a secure retirement. Those surveyed reported median retirement savings of $625,000, which equates to 2.5 times the $250,000 median retirement savings of the overall survey population. While an average retirement savings rate of 19.4% is positive, unforeseen circumstances can still cause concern. Most of those surveyed aim to retire at 63, however, 58% accept the fact that they may have to work longer, while 44% worry they will not be able to. Government support, employers, and individuals have often been the three pillars of sustainability in retirement. However, the report further revealed 75% believe that high levels of public debt will result in lower payments from public benefits in the future and 38% argue without public benefits it will be hard to make ends meet.

A concerning 36% of millionaires surveyed believe retirement might not be an option at all and 42% are so worried about retirement security that they avoid thinking about it. According to the report, 49% underestimate the impact of inflation, 42% overestimate investment income 40% set unrealistic return expectations and 46% underestimate how long they will live. A total of 41% are too conservative with their investments, 39% forget to factor in healthcare costs, 33% rely too much on public benefits and 21% are too aggressive in investments. Some 23% underestimate real estate costs while 35% fail to understand income sources. If a person with $1 million in savings were to take 4% as annual income, they would be withdrawing $40,000 a year and that may not be enough, the report said. “A million may seem like a lot, but many people are surprised when they do the math,” said Natixis IM country head of Australia and New Zealand Louise Watson01. “This is usually quite a bit less than these individuals are likely used to living on annually. This underscores why it’s so important to work out all the assumptions early when making plans – and why professional advice is necessary.” fs

Primewest rolls out rebrand

Members stick with dud super funds

Chloe Walker

Andrew McKean

The Perth-based real estate funds manager has formally adopted the brand of its parent company, Centuria Capital Group. The rebranding comes 13 months after the entities merged, marking the group’s significant expansion throughout Western Australia. Centuria’s WA business now totals $4.2 billion, accounting for 22% of its entire Australasian real estate assets under management. The company has also significantly invested in its Perth team, growing 37% to 85 personnel, it said. Primewest founders David Schwartz, John Bond and Jim Litis said: “This is a new era for our company, and we believe, now that our investors are familiar with the wider Centuria Group, it is an ideal time to change to the Centuria brand.” “With a number of new colleagues joining the fold, it also made sense to come under the one umbrella with our co-workers across east coast Australia, New Zealand and the Philippines. “This is still the same highly proficient group of professionals who have managed our investors’ funds for years.” Other than the branding, there are no other changes being made, the group said. fs

Members of funds that failed the inaugural Your Future, Your Super (YFYS) performance test aren’t leaving, with new modelling showing just 10% have found a new fund. According to Industry Super Australia (ISA) analysis, only 10% of members switched out of the super funds that failed the performance test. However, 850,000 members failed to leave their “dud” super product, costing them $1.6 billion. ISA modeling shows if a member on the median wage with a balance of $50,000 stayed with one of the poorest performing funds for the next decade they could be approximately $25,000 worse off. If a 30-year-old was stapled to one of these dud funds for the rest of their working life, they could be $225,000 worse off at retirement. ISA warned that further losses could accrue because of the previous government’s stapling reform that can tie members to failing funds unless they act. As previously reported by Financial Standard, YFYS stapling requirements tied around one million members to a super fund that’s failed APRA’s performance test. While members can leave underperforming funds, most Australians don’t know the effects of the YFYS reforms and are generally detached from their super. “This policy (stapling) was designed to get members to switch, but the inaction combined with the stapling reform will mean members are stuck in dud funds for longer,” ISA said. “While the stapling reform has stopped the future

proliferation of unintended multiple accounts it needs to be linked to the performance test so that members can only be stapled to a fund that passes.” Meanwhile, new research from Super Consumers Australia (SCA) has found that products which failed the annual super performance test have on average cut their fees by 20%. SCA argued that the performance test is protecting Australians from poorly performing super products. “In just over one year, every fund bar one that failed the first performance test is addressing its underperformance through either fee reductions or a merger with a better performer,” SCA said. SCA research found that failed products have on average, experienced a 20.64% reduction in fees. SCA director Xavier O’Halloran commented: “The test is doing what it set out to do, chopping off the tail of poor funds.” “The performance test’s objective ‘bright line’ and clear consequences for failure have driven dramatic positive fee changes for people in poor products.” Though he conceded that there’s still more to be done with respect to cleaning up underperformance in the super sector, as APRA’s most recent data on performance found more than 60% of investment options had failed to meet a heatmap benchmark. Interestingly, the research also found that products which passed the test by a significant margin (at least 50 basis points), on average increased their fees 5.7%. fs

Publisher’s forum

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

01: Raghav Gupta

managing director, India and APAC Coursera

Transforming talent to win the BFSI digital race A

few years ago, DBS took a page out of the Silicon Valley playbook and held a hackathon internally. Early in its digital journey, building technology literacy and creating a nimble culture was a top priority for this financial services leader in Southeast Asia. The hackathon involved understanding technology and building skills in human-centred design to create an app – a process that sowed the initial seeds of digital thinking in the organisation. The secret sauce for success in the banking, financial services, and insurance sector (BFSI) sector hasn’t changed since. It still has to do with how effectively companies can transform their technology, talent and culture. What has changed is the accelerated speed at which BFSI companies need to do this, as the customer journey leapfrogs digitally. NAB noted in July that customers have become accustomed to instant decision making, whether that’s getting the green light on a new credit card, or the offer of a mortgage. Under the hood of BFSI’s rapid transformation is a story of skill reinvention, with talent at the centre of BFSI success. Here are four ways BFSI incumbents across Australia are turning talent into a strategic advantage, to win on the digital battleground.

They are innovating from within: Upskilling beats hiring In 2017, Lloyd Blankfein, former chief executive of Goldman Sachs, had famously said: “We are a technology firm. We are a platform.”

English novelist George Orwell once said that “Every generation imagines itself to be more intelligent than the one that went before it, and wiser than the one that comes after it.” No doubt if you ask a Baby Boomer, a Gen-Xer or a Millennial if they think this is their experience, many will agree. The great equaliser to address this is education. What we don’t know we can learn and it’s never been easier to do so than today. Online education has flourished and at the top of the heap is US-listed online course platform Coursera. Founded a decade ago by a couple of computer science professors from Stanford University, the organisation now boasts more than 110 million users in its books. But how do you close the generational divide in the world of financial services while solving the challenges of the so-called ‘Great Resignation’? Coursera’s managing director, India and APAC, says the answer is simpler than you think.

Michelle Baltazar Director of Media & Publishing

In today’s advanced digital landscape, every BFSI company is thinking like a technology company. Yet hiring tech talent is both competitive and expensive. By upskilling internal talent online with cutting-edge technical skills, BFSI incumbents are closing the talent gap to drive digital innovation. Many banks in Australia are also leveraging Coursera for Business to not just build deep tech and data skills, but also improve talent retention and attract talent for hard-to-source roles.

They are implementing strategies for skills-first learning Skills like software development, data analysis, machine learning, cloud computing and cybersecurity are in high demand, especially in APAC – BCG estimates 20% of digital banks worldwide are here. Technologies like AI and cloud computing are breaking new ground on online services and tailored customer service. In fact, APAC’s financial services sector is outpacing other industries on AI spends, for uses that go far beyond chatbots. BFSI organisations are adopting a ‘skill-first’ approach to efficiently build and scale such digital skills. Companies are focusing on three key elements: the first is identifying critical digital skills to meet their business objectives. The second is developing a talent pipeline across the organisation and mapping employees to specific courses that teach these in-demand skills – customisation is key here, since every employ-

ee is at a different learning level. Finally, BFSI enterprises are activating training programs at scale, empowering teams to upskill, reskill and collaborate in tandem.

They are focusing on leadership development as a top priority

The quote

The democratisation of tech has raised the standard of competition and with it, customer expectations.

Leadership has transformed in the digital age, and BFSI enterprises are keeping pace by nurturing next-gen leaders who can reshape the business. Business leaders need an enhanced set of skills today to champion technical innovation, steer change management and nurture top talent, as they create a future-ready enterprise. Working with BFSI organisations across Asia Pacific, we don’t just see an emphasis on developing core leadership skills, but also on hands-on training – to help leaders leverage ‘planning and data analysis’ tools, or track and benchmark the development of human skills, for instance.

They are going beyond tech skills for the digital age The democratisation of tech has raised the standard of competition and with it, customer expectations. Users want convenience and personalisation – but not at the cost of their privacy. They expect a superior customer experience for every interaction. BFSI companies will increasingly need to prioritise human skills like creativity and problem solving in an automated world, alongside technology skills. In a testament to the sector’s relentless focus on skill development, financial services learners took the number-two spot for ‘overall skills proficiency’ in Coursera’s Industry Skills Report 2021, for the second year in a row. They excelled across the board, in business, technology, and data science domains. By upskilling online, financial services incumbents are turning technological disruption into an advantage, while unlocking new opportunities to stay ahead in the digital race. fs

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News

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

FSC adds to Life Code of Practice

01: David George

chief executive Magellan Financial Group

Chloe Walker

Several new consumer protections will be added to the Financial Services Council (FSC)’s Life Insurance Code of Practice, including the industry’s first guidelines on family and domestic violence, as well as new protections in the genetics moratorium. Specifically, from July next year, the new Life Code will require life insurers to develop and publish their policy on supporting people experiencing family and domestic violence. The FSC said that in developing these policies, life insurers must make sure that safety is paramount for customers affected by family and domestic violence through the protection of private and confidential information. Life insurers must train employees to be equipped to respond appropriately to customers affected by family and domestic violence, including enabling early recognition of affected customers and promoting, enabling and arranging access to financial hardship help, and referring customers and employees to specialist support services. If applicable, insurers’ policies should also include a commitment to the customer that their family and domestic violence situation will have no adverse effect. Meanwhile, the Moratorium on Genetic Tests, allowing consumers to undergo a genetic test without fear that the result could stop them from taking out life insurance, will be extended indefinitely and take effect July 2023. fs

Magellan targets $100bn in five years Jamie Williamson

The quote

Through growth of our existing strategies and new products, I believe we will be a fund manager of global scale once more...

ASIC sues BPS Financial ASIC has commenced civil penalty proceedings in the Federal Court against BPS Financial (BPS). The regulator alleged BPS made false, misleading, or deceptive representations and engaged in unlicensed conduct in relation to a non-cash payment facility involving a crypto-asset token called Qoin (the Qoin Facility). ASIC further alleged BPS made false, misleading, or deceptive representations regarding the marketing of Qoin Facility. This included claims that consumers who purchased Qoin tokens could be confident they would be able to exchange them for other cryptoassets or fiat currency (such as Australian dollars) through independent exchanges. BPS Financial also claimed Qoin tokens could be used to purchase goods and services from an increasing number of merchants registered with BPS. The group also claimed Qoin Facility and or the Qoin wallet application used to transact Qoin tokens were regulated, registered, and or approved in Australia and both the Qoin Facility and BPS were compliant with financial services laws. ASIC deputy chair Sarah Court said: “We allege that, despite what BPS represented in its marketing, Qoin merchant numbers have been declining, and that there have been periods of time where it was not possible to exchange Qoin tokens through independent exchanges.” ASIC is particularly concerned about the alleged misrepresentation that the Qoin Facility is regulated in Australia. fs

utlining his plans to restore Magellan’s sheen, chief executive David George 01 hopes to double its funds under management by 2027 by diversifying its capabilities and strengthening its UK and Europe operations. Speaking at the Magellan annual general meeting, George acknowledged Magellan’s poor investment performance and said there are several opportunities within its three core investment capabilities it will focus on for near term growth. These are its Core Series format, the energy transition and small cap Aussie equities. He also added that it will grow beyond these capabilities. “We will be looking for opportunities to invest in experienced, quality teams and capabilities in equities and we believe we can replicate the integration success of Airlie,” he said. He also said the group will look toward areas like private markets for investment opportunities, adding that it will be disciplined in its approach. This will help diversify the business, making it less reliant on global equities, George said. “Through growth of our existing strategies and new products, I believe we will be a fund manager of global scale once more with over $100 billion in funds under management after five years. This will not be growth for the sake of growth. It will be considered growth, driven by creating long-term shareholder value,” he said. The group has a strong balance sheet and capacity to execute this, he added. In terms of actual business growth, he said the distribution teams in Europe and the US will be expanded. He will also look to implement a long-term incentive plan that aligns to the five-year strategy for business success.

Reaching $100 billion in FUM in five years will mean doubling its current FUM, which stood at $50.9 billion at September end. It has consistently dwindled over the past year, while the Magellan share price has also fallen. At its height in 2020, it traded at near $65. Today, it trades at just over $10. Meanwhile, Magellan also confirmed it has appointed the former chief investment officer of equities at First Sentier Investors as deputy chair of Magellan Asset Management. The fund manager has said it intends to appoint David Dixon to its board as nonexecutive director and deputy chair, effective November 1. Dixon led the equities investment function at First Sentier, previously Colonial First State Global Asset Management, from 2013 to 2020. Prior to that, he was the global chief investment officer for a decade. He has also previously served as head of equities and chief investment officer at IAG and held several investment roles with Westpac. Dixon also currently sits on the investment committee of Aware Super, a role he’s held since early 2021. Commenting on the appointment, Magellan chair Robert Fraser said: “The board welcomes David’s extensive experience as a senior investment leader, and company and trustee director.” “His deep investment experience will be invaluable to the Magellan group, and we look forward to his contribution for the benefit of our clients.” Dixon also commented, saying it’s a great pleasure to be joining the board and that he looks forward to working with its other directors “as we focus on the future.” fs

Koda Capital, Redwood merge Cassandra Baldini

Koda Capital (Koda) is expanding into the Perth market through a merger with Redwood Wealth Alliance. In bringing the two businesses together, Redwood will become part of the broader Koda professional partnership. Some Redwood staff will hold equity in Koda, consistent with its principle of ownership aligned with client interests. Koda’s team includes 46 partners and 38 advisers, and manages over $10 billion on behalf of high-net-worth individuals and non-profits. Its founding partner and chief of staff Quentin Reeve said the two firms have a common goal making the merger a natural fit. “We feel really confident from a cultural perspective and alignment from a client interest perspective,” he explained. “We think bringing the Koda tool kit out into the Perth market with a team on the ground there that is as high quality as

anything else we’ve seen leaves us feeling really excited about the opportunity.” Redwood has grown to a team of over 20 professionals with seven advisers supported by a strong investment and administration team. It adds over $5 million of additional revenue. Redwood former managing director and Koda adviser and partner Paul Begley said: “We are excited to join Koda as it gives both our clients and team greater opportunities and allows us to continue on our journey.” “Koda is a model that we have aspired to emulate and importantly we have an aligned cultural and purpose.” Reeves said Koda has always felt the Perth market was an attractive opportunity for growth. Earlier this year, Koda received investment from Emigrant Partners. The US firm is now a minority strategic investor in Koda, enabling it to undertake its own acquisitions. fs

Opinion

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

01: Dugald Higgins

head of responsible investment and sustainability Zenith Investment Partners

Advisers and responsible investing T

he increase in investors focusing on ethics and sustainability in their investments over the past five years has been a remarkable growth story. The intersection of changing social attitudes and increases in regulation around managing environmental sustainability, human rights and governance failures, are underpinning a permanent change in the investment landscape. These trends have been driven by two investor groups. On one side of the arena are global pension funds, whose long-dated liabilities and inability to diversify away from issues like climate risk, have made them early adopters of responsible investment principals. At the other end of the spectrum, individual self-directed investors in equities markets have often been early movers on values-based issues such as gaming. Between these two groups are the estimated 1.8 million Australians who use financial advice. Unlike self-directed investors however, advisers obviously face myriad challenges when pursuing responsible investing with their clients. This is naturally complicated. How can an adviser accurately determine client preferences and use that information to deliver actionable outcomes? How can both these issues be addressed at scale? And how does balancing best interest duty impact this process?

A bridge too far? While challenging, these obstacles are not insurmountable. For as long as the advice profession has existed, advisers have relied on soft skills around communication and relationshipbuilding to help clients better understand their needs and identify which issues matter most in their lives. These skills are highly transferrable in helping clients understand the implications of pursuing responsible investment principles. This move however, will not be easy. Advisers coming to grips with these developments will need to accept that responsible investing is a broad church, both in terms of client preferences and product design. Typically, attempting to match the two will result in an imperfect fit. In addition, fund managers do not always clearly separate what is merely an internal process versus what is a defined product, further obscuring the risks around any accidental mis-selling issues. Logistical challenges are also formidable. The high level of individuality expressed in client preferences clearly challenges traditional risk-based models. Simply directing ’growth’ investors into a ‘growth’ model will no longer be suitable when combining responsible investment considerations such as individual ethical preferences. For advisers using funds, how should these challenges be addressed? Materiality of issues in responsible investment are rarely clear cut, with ambiguities and trade-offs to be grappled with. Even funds with the same manager and

a range of risks around misunderstanding characteristics, inadequate disclosure and potential mis-selling of products to investors. This can create widespread reputational and financial risks for all involved and drives a broader loss of trust in responsible investment as a result.

asset class can interpret and prioritise issues differently. Funds and labels are also not homogeneous. What’s ‘good’ differs across asset classes and investment approaches. So how can this be dealt with?

Embrace ‘best fit’ Critical to facilitating the uptake of responsible investment by advisers is the willingness to accept there is usually no perfect solution in matching client preferences to funds or portfolios. Rather, a recognition that concessions may have to be embraced on issues like different ethical screens, sustainability objectives or portfolio diversification may be more conducive to a result. Of course, even after fund/portfolio selection takes place, a critical issue is helping clients stay the course when markets get challenging. Like all investments, responsible investing strategies will exhibit periods where performance is challenged and it will be important for advisers to help clients understand what expected outcomes look like and why. The concept of ‘adviser alpha’ doesn’t just apply to the more traditional concepts of risk and return - it is also going to play a pivotal role in facilitating responsible investment preferences. With adoption still in an early phase, it will be tested when markets experience turmoil. While the broader funds management industry has an important role to play if we are to accelerate responsible deployment of capital, we can only carry this so far.

Is ESG sustainable? Despite the increase in take up of responsible investment principles by advisers and investors, these changes remain far from uniform, with many areas of contention. This is particularly important when talking about ESG. In its purest form, ESG essentially seeks to account for how E, S and G factors affect the financial value of a company. Sustainability however, while a related concept to ESG, focuses on how a company affects the environment and society. This is an important distinction. While most fund managers consider ESG to at least some extent in their investment process, this does not mean the pursuit of ESG oriented outcomes, or even real-world sustainability, is actually an objective of the fund. Identifying which is which remains vital to maximising the best fit between product and client. While clarity on these issues remains the exception rather than the rule, progress on responsible investment is no different from other developments in financial markets in the sense that there is a learning curve before the basics are well understood. The challenge however is that evolution in clarity, transparency and comparability of products is not yet keeping pace with market growth and product development. This leads to

Coming ready or not

The quote

Critical to facilitating the uptake of responsible investment by advisers is the willingness to accept there is usually no perfect solution in matching client preferences to funds or portfolios.

Realistically, the increasing adoption of industry sustainability targets means a range of economic activities are on a transition path, with a material reshaping of these activities as a result. And while it is important to recognise not all clients will voice an interest in exploring responsible investment options, we believe that advisers should not let lack of direct inquiry hinder planning, if not outright action. Globally, regulations in responsible investment are both increasing and converging, not just for product providers, but for all participants in the financial services sector. While advice may well represent one of the last areas to be impacted, developments across major markets are already moving to include disclosure around responsible investment principals in advice requirements. While Australian guidelines are not currently explicit on these issues, there is recognition amongst global regulators that cross border harmonisation and interoperability of rules is desirable. If this is indeed correct, the continued development of standards in Europe, the UK and the US may foreshadow what the future ultimately looks like in Australia. For example, funds in Europe must already be classified based on the degree to which ESG and sustainability is a consideration. In addition, European advisers are now required to integrate client sustainability preferences into product suitability assessments. ASIC continues to acknowledge the priorities of global harmonisation around sustainable finance regulations. As a result, Australian advisers should begin to actively consider what implications similar regulatory frameworks would mean for their practices. Even if we are years away from formal regulation, those advice practices already using responsible investments need to ask themselves some fundamental questions. What level of training do advisers need? Is there a consistent strategy for identifying clients’ responsible investment preferences? How can this be systematically actioned against product selection? For advisers, now is the time to assess what critical resources and/or partnerships will be required to ensure adaptability for the future. The pursuit of perfection doesn’t have to hold back getting started. The more prepared you are, the more time advisers have to get back to what they do best – helping their clients. fs

News

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

James Mawhinney sues ASIC, Court The Mayfair 101 managing director is claiming he was defamed by the regulator and deputy chair Sarah Court in a recent press release. Mawhinney has filed defamation proceedings against ASIC and Court in the Federal Court over information included in a September 15 press release in relation to Mawhinney’s 20-year ban being overturned. Court is included in the suit as she was quoted in the release, Mayfair 101 said. Mawhinney claims the press release included imputations that he caused 500 investors to lose $211 million by knowingly misleading them as to the level of risk their investments involved, and that “unless restrained by injunctions of the court while proceedings continue, he will cause further harm to investors.” Mawhinney is seeking damages and aggravated damages, saying his reputation has been “seriously injured” and that the press release caused him distress and embarrassment. The press release remains visible on ASIC’s website, including the quotes from Court. It was publicised by ASIC following the Full Federal Court’s decision to overturn Mawhinney’s ban on the grounds that he was denied procedural fairness in the first trial, with the court agreeing that the presiding judge at the time based the judgement on findings of contraventions that ASIC had not sought. The Full Federal Court has ordered a retrial and Mawhinney has now made an application to the High Court, arguing that ASIC should be allowed to “go back and try again with a different case.” fs

Separation of ANZ P&I completes Several years in the making, Insignia Financial has finally completed the separation of the pensions and investments business, in a first of its kind move. This is the first time a superannuation business has been separated from a big four bank, with the purchase having been completed more than two and a half years ago. The transaction was first announced about three years ago. During that time, 1257 employees transitioned from ANZ to Insignia, while 638 licence arrangements and 589 applications were separated from ANZ. “This is a momentous achievement for our organisation and the industry as major banks exit from wealth management to simplify their businesses. We’re thrilled to have successfully completed the P&I cutover and separation, and to have done so within our planned timelines,” Insignia Financial chief transformation officer Chris Weldon said. “Unravelling complexities to achieve a clean separation is no small feat. All of the systems and people supporting the P&I business and its clients have now transitioned to the Insignia Financial environment, reinforcing Insignia Financial’s ability to execute on strategic initiatives.” He added that Insignia now has full control and management of the systems which support the P&I business. “This enables us to unlock benefits of scale for our clients and people, aligned to our enterprise priority of simplification,” he said. fs

01: Ian Martin

outgoing chair UniSuper

UniSuper chair to step down Jamie Williamson

The quote

I leave my role feeling optimistic for the future of the fund...

an Martin01 will retire as chair of UniSuper at the end of the year, with an existing board director to replace him. Martin has been on the UniSuper board for close to a decade, the last five years of which were spent as chair. During that time the fund has grown from $60 billion to $100 billion, and he has overseen its transition to a fully public offer fund and the planned merger with Australian Catholic Superannuation and Retirement Fund. He joined the board following an extensive executive career which included serving as chief executive of BT Financial Group and global head of investment management for Bankers Trust. He is also currently chair of QIC. “Ian has been a source of steady wisdom, experience and perspective in his role as chair, to UniSuper’s great benefit. On behalf of all UniSuper members, and our executive leadership team, I would like to thank Ian and wish him all the very best for the future,” UniSuper chief executive Peter Chun said. Martin described his involvement with UniSuper as a pleasure. “I leave my role feeling optimistic for the future of the fund, knowing UniSuper is widely

acclaimed as one of Australia’s leading superannuation funds, and with exceptional staff unrelentingly focussed on our members’ best interests,” he said. “I thank my fellow directors and the entire UniSuper team, members and other stakeholders for their support and commitment.” Martin is to be succeeded by Mark Armour, a current independent non-executive director on the fund’s board and former chief executive of Invesco Australia and of funds management at AXA Australia. He is also currently chair of the fund’s investment committee. “Incoming chair Mark Armour has a wealth of knowledge, experience and the passion for members’ outcomes that is a hallmark of UniSuper. I look forward to working with him in this new role,” Chun said. Commenting, Armour said: “UniSuper is one of Australia’s leading super funds. It will certainly be an honour to work with my experienced colleagues on the board and our talented executive leadership team to guide this exceptional fund as chair.” “Ian has provided strong strategic direction for the fund for almost a decade. I thank Ian for his dedication to UniSuper and our members.” fs

Colonial First State partners with Bravura, Tech Mahindra Chloe Walker

Colonial First State (CFS) is making significant changes to the FirstChoice platform, entering a strategic partnership with Bravura Solutions and Indian IT company Tech Mahindra. The partnership marks the next stage of its ongoing $430 million transformation project, with this step aimed at turning FirstChoice into a digital-first operating model that delivers real-time customer interactions enabled by straight-through processing, integration with adviser software, and market leading portfolio construction tools. It will also feature a new employer portal completely integrated with clearing house, improved employer support and reporting, and simplified employee maintenance underpinned by straight-through processing capabilities. Implementation is expected to commence in early 2023. CFS chief executive, superannuation Kelly Power said: “This will ensure that one of the largest and most highly regarded platforms in the market becomes even better.” “This is a significant and important next step which will enhance the FirstChoice offering with best-in-class technology providers delivering market leading cloud native technology and services to employers, members and advisers.” The new platform will integrate seamlessly with

adviser software to create even higher levels of efficiency and ease of doing business, helping to lower the cost of providing financial advice and making it accessible to more Australians, she added. Meanwhile, Tech Mahindra president - BFSI, HLS and corporate development Vivek Agarwal said that the partnership will focus on leveraging digital tools and solutions to provide a seamless experience. “Our proven track record from more than 11 years in the superannuation and wealth industry in Australia around the modernisation and migration of IT technology platforms positions us well to partner with CFS in delivering the new FirstChoice platform,” Agarwal said. CFS also recently launched CFS Elevate, a people and culture platform that aims to provide support for advice professionals across Australia. Designed in collaboration with financial advisers, CFS Elevate offers free training, networking events and collaboration tools, as well as the CFS Professional Year online community hub with XY Adviser. Other resources include a comprehensive suite of education and personal development materials, and various webinars and downloadable learning content. This followed CFS being named a ‘fat cat fund’ by Stockspot. Five of its investment options were ranked among the worst across a range of risk profiles. fs

News

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

Executive appointments Former AUSIEX chief to join Investment Trends Eric Blewitt will take over as chief executive of Investment Trends, as Sarah Brennan becomes chair of the research house’s newly established advisory board. Blewitt has over 25 years of experience leading wealth management and financial markets businesses, working with boards and regulatory bodies. He has also previously worked with Investment Trends, serving as chief operating officer between 2012 and 2013. Most recently, he was chief executive of AUSIEX, a role he departed in August after nine years, including at CommSec Adviser Services. “I am excited to be joining such a well-respected global business whose work provides meaningful insights assisting its clients to shape their strategy through invaluable research and insights,” Blewitt said.

Brighter Super hires Huang Brighter Super has hired the high-profile Jason Huang as head of cash, fixed income and credit. Huang joins from ANZ Private Banking, where he was a senior portfolio manager, responsible for investment research, governance and fund manager review across several asset classes. Before that, he worked at Sunsuper for seven years as an investment manager. There, he ran investment research, strategy implementation and asset allocation within fixed income, cash and cashplus asset classes.

Magellan makes investment leadership changes Magellan Financial Group has appointed a deputy chief investment officer in Gerald Stack. Stack is currently head of infrastructure, overseeing the $16.8 billion in listed infrastructure assets the group has, and has been with the company since 2007. His responsibilities “will draw upon his demonstrated strength in driving engagement and collaboration to optimise activity across the global equities research team,” Magellan said. Meanwhile, in addition to chief executive and managing director of the group, David George is now Magellan’s chief investment officer. The official appointment follows him having been given responsibility for the investment function when he joined in July.

CountPlus names HR executive CountPlus has appointed a new group head of people and culture in Raelene Hinchliffe. Hinchliffe will officially start next January and will bring significant financial services experience to the role. She has previously held senior human resources positions at AMP, the Commonwealth Bank, News Corp, and the global professional services firm, Marsh McLennan. CountPlus chief executive Hugh Humphrey said the appointment would deliver strategic benefits to its national community of member firms.

ClearView expands distribution team ClearView Wealth made three new hires and promoted two, to offer further support to advisers. Alex Koodrin has joined ClearView from BT Financial Group as its new national technical manager. Previously, he was business manager at Colonial First State, and national technical manager CommInsure. Meanwhile, Jeremy Anthony and Mathew Amanovich have been appointed as business development managers. Prior to ClearView, Anthony worked as business development manager at MLC, while Amanovich joins from BT Financial Group. Internally, Leah Henshaw and Heather Sherwell have been promoted to digital business development managers (formerly business development associates). Henshaw, a former financial adviser, has held a variety of business development roles since joining ClearView in 2016. Sherwell has been at ClearView since 2017.

Carlyle appoints PE head Carlyle has appointed industry veteran Geoff Hutchinson as managing director and head of private equity in Australia and New Zealand. Hutchinson, who is based in Sydney, will build Carlyle’s presence in Australasia and have responsibility for leading the investment advisory team. He’ll also oversee investments across the firm’s priority sectors of consumer, healthcare, technology, and financial services across Australia and New Zealand. Hutchinson has over 15 years of private equity industry experience as well as expertise in dealmaking, and value creation for portfolio companies. He joins Carlyle from Morrison & Co, where he was co-head for Australia and New Zealand. fs

The numbers

The number of executive appointments published by Financial Standard this fortnight.

Revolution AM adds to board Vicki Hartley and Bill Entwistle have been appointed as non-executive directors to the board of Revolution Asset Management. With a career spanning over 30 years in financial service, Hartley was most recently chief financial officer at Lendi. She has also held senior executive roles at Australian Credit and Finance, Click Loans, and Challenger. She is currently chair of Dress for Success Sydney, an organisation helping to empower women to achieve economic independence. Meanwhile, Entwistle has held several senior management roles, such as managing director, relationship management and strategy at Ares Management Corporation. Prior to his nearly 10 years with Ares, Entwistle held senior management roles with Credit Suisse, JP Morgan and Chase Manhattan Bank, and was chief investment officer at Absolute Capital.

Andrew Hagger leaves Tattarang After three years in the role, Andrew Hagger has stepped down as chief executive of Twiggy Forrest’s Tattarang and the Minderoo Foundation. Commenting on his decision, Hagger said: “Minderoo and Tattarang are in such strong positions, so it’s a good time to turn my attention to other things in life and to other challenges.” “I’m proud of the deals we have done, the partnerships we have collaborated on, the leaders we have recruited and the businesses we have built.” He will hand the reins over to John Hartman, who is currently chief investment officer of both entities. Hartman has been named permanent chief executive of Tattarang and acting chief executive of Minderoo. A spokesperson for Tattarang confirmed he will also remain as investment lead.

Feature | Custody

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

CUSTODY UNLOCKED

Custody is at the foundation of nearly everything that takes place in the financial services sector. But, as the industry evolves, so too does the role of the custodian - with the ball firmly in their clients’ court when it comes to shaping value proposition. Chloe Walker writes.

Custody | Feature

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

he word “custody” belongs to an old world of legal and financial traditions. Custodians, who hold responsibility for assets in custody, have existed for millennia, since the first money lenders in the temples of early civilisations took deposits of ancient currencies, like minas and shekels. Today, while custodians still play a key part in safeguarding financial assets, their role has expanded rapidly. An ever-changing macroeconomic landscape means they must also keep pace with continuous regulatory updates, superannuation fund consolidation, evolving investment options and digital transformations. As at June 30, the value of Australian investor assets under custody totalled $4.3 trillion, with the top five custodians holding about 80%, according to the Australian Custodial Services Association (ACSA). So how are some of the biggest custodians maintaining their unique value propositions in a shifting industry? And what can we expect from the sector moving forward?

A steady pair of hands According to BNP Paribas head of sales, relationship management David Pember01, while custodians no longer fuss over minas and shekels, their role, at its core, hasn’t actually changed all that much. “The one thing that this industry is, it’s fairly stable year on year. It’s not like a trading relationship, where suddenly you’ve got to do something fundamentally different tomorrow,” he says. “That said, we do need to be innovative and keep ahead of what’s happening and what our client’s changing demands are. They’re witnessing increasing changes and pressures on them, and we seek to make it easier for them to keep up with those changes.” ACSA chief executive David Travers 02 agrees that safekeeping of assets is always going to remain the principal focus of custodians, no matter the asset. “Whether it’s a digital asset, a crypto type asset or a traditional asset, how custodians save, keep and protect the rights of the underlying cliBNP sheep 225x50.5mm̲o.pdf 1 2/9/2022 下午5:09 ent are going to be really important,” he says. “While we may see new players coming into the market to approach custody differently,

01: David Pember

02: David Travers

03: Teresa Walker

head of sales relationship management BNP Paribas

chief executive Australian Custodian Services Association

managing director Australia and New Zealand Calastone

I still think they have to be able to demonstrate that they’ve got the financial strength and the stability and the ability to make sure those assets are protected, for better or worse.” Meanwhile, HSBC’s head of securities services for Australia and New Zealand Enzo Cotroneo says custodians have evolved from providing safe keeping to being a technologydriven business, which, when required, is supported by operations. “Custodial services now must include the ability to offer data as a service, provide access to global markets, provide a seamless private asset servicing offering and have a crypto/digital assets custody capability to provide ongoing superior client experience in a rapidly evolving market,” he says. “Australia has always been a very competitive market but there are plenty of opportunities to bring broader bank capabilities to clients, from markets and cash management to securities services.” Cotroneo says super fund clients are seeking broader banking products and services from their custodian, such as foreign exchange, including currency overlays, and cash management. In addition, super funds want to leverage a custodian’s global network to help them gain direct access to investment opportunities in non-traditional assets. As a result, he says custodians need to offer a complete product offering to service both public and private assets, and to have robust global capabilities as funds invest more offshore.

The super client As super funds merge at a rapid rate, Calastone managing director Australia and New Zealand Teresa Walker03 says that so too is the intensifying competition for mandates. “Super funds, particularly very large ones, are looking at how they evolve their investment approach, for example, what to bring in-house, where to use specialist external managers, how to broaden the range of assets they invest in, having direct holdings in infrastructure, and so on,” Walker says. “This will give rise to challenges to custodians on how they approach this from a safe custody, asset valuation and investment process standpoint.” She says that in order to win in this market, custodians need to have a forward-thinking

The conversations that we’re having today with super funds are very, very different to what they were just a few years ago. Tim Helyar

strategy, high efficiency, good technology, and the ability to accommodate new approaches. State Street’s head of Australia Tim Helyar04 echoes Walker’s statements. “The short of it is that super fund mergers are driving at lot of activity in the custody sector. When we’re going from hundreds of super funds down to potentially under 100, that creates a lot of project activity,” he says. To stay ahead of the trend, Helyar says State Street has spent a lot of time creating capabilities around merging funds smoothly. “We’ve had a lot of opportunity to do that with our clients, with one of our clients having almost 20 mergers and transitions into their funds over recent years. So, we’re very well versed in how to do that in a way that doesn’t interrupt the business operation on the fund, or of the custodian,” he says. Helyar says that the biggest thing this process does is create a lot of discussions around scale. “When you’ve got a fund that is as big as AustralianSuper or Australian Retirement Trust, for example, that’s a $200+ billion fund - they don’t want the same types of services and their model doesn’t look the same as a $5 billion fund. So, you have a lot of discussions around being able to support them at scale and provide new capabilities to them,” he explains. Helyar adds that super funds are becoming more and more like asset managers as they grow, because they’re insourcing a lot of that function. “They’re also changing some of the things that they invest in, such as private markets, unlisted types of investments, and we need, as the custodial partner, to be able to support them, both from a custody and an administration perspective,” he notes. Australia’s super funds are also increasing their global aspirations, with many increasingly investing offshore and several also now operating entire teams overseas. “All of the bigger funds are starting to want to do more and more around the world, and are opening deal origination desks in London, in New York, in Shanghai, in Hong Kong, which gives them access to investments in different markets. Therefore, they’re looking for partners that can support them in those markets,” Helyar explains. “The conversations that we’re having today with super funds are very, very different to what

Feature | Custody

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

04: Tim Helyer

05: Rita Da Silva

06: Garnett Hollier

country head, Australia State Street

wealth and asset management leader EY Oceania

chief financial officer Brighter Super

they were just a few years ago. Now, we’re looking to provide some very different types of solutions, such as asset management-type solutions, data solutions and capabilities to help them invest around the world.” Much of the drive for this comes from Australia’s super fund industry being seen as a global market, with annual growth in funds under management all but guaranteed to continue, leader EY Oceania wealth and asset management leader Rita Da Silva05 says. “As competition intensifies, at EY we are seeing a greater demand for custodians who can service global assets, as well as more alternative assets such as exchange traded funds and digital assets,” she says. “With the guaranteed contributions inflow, the steady growth of the superannuation sector is certain.” Da Silva adds that this growth and requirement to diversify assets provides a key opportunity for custodians, as servicing the superannuation sector as primary asset owners is crucial for a custodian’s scale and business sustainability. Mega-fund consolidation will drive a new round of selection as these funds look to select a custodian to serve the unified funds. “Therefore, custodians will need to be more agile in how they communicate their value proposition and build much more diverse product offerings to serve these funds,” she says. “Funds under management and transactionsbased revenue models may change and shift to more of a broad fee-for-service model. Custodians’ unique value propositions will need to encompass value-added insights which will support the business in their strategy and risk management.” Service of listed assets will remain important, but a greater ability to service unlisted assets will also be paramount, requiring greater use of technology solutions and data. For Brighter Super chief financial officer Garnett Hollier06 , the custodian and the administrator are the two biggest outsourcing decisions for a super fund from a back-of-house perspective. When selecting a custodian to support its merger with Energy Super last year and the transition of Suncorp’s superannuation business earlier this year, Hollier says he looked at three main factors: flexibility, relationship model and partnership. “We’re on an inorganic growth strategy as an organisation… A lot of that work impacts the custodian, and so we wanted a partner who is going to be flexible, particularly with timelines which are very strict often with transactions,” he explains. On relationship model, and Hollier says the fund has a very good relationship with its custodian, NAB Asset Servicing, on all levels. “Because we’re doing a lot of things at once, and there’s lots of complexity, we really need to have great relationships with not only the account managers, but also with the SMEs in the different business units at the custodian.

Therefore, custodians need to be able to provide a good middle office servicing proposition to them to be able to support them in that endeavour.” “What we’re seeing is probably a little bit of a coalescence of some of the products and services that we might typically offer only to investment manager clients, becoming much more relevant to superannuation fund clients and vice versa. “If investment managers have superannuation trustees as part of their business, they’re going to be interested in what we’re doing for our superannuation clients. So we don’t look at it, and I don’t think the industry looks at it, in one dimension when considering our segments.” Stavrou says Northern Trust’s client base is evenly split between sovereign wealth funds, investment managers and superannuation funds. “It’s about being able to support all of those segments well and having services that meet their needs, and then a servicing model and an operating model that can deliver,” he says. “That’s the key to being competitive.”

Our relationship with the custodian is deep and broad at all different levels,” he says. “They’ve got to be good partners with us, obviously, but they’ve also got to be good partners with our other outsourced partners… We’ve just implemented a data warehouse with Matrix and they’ve been excellent integrating with NAB Asset Servicing.” Hollier says the relationship a super fund has with its custodian often undervalued. “It’s definitely not from my perspective; it’s a critical relationship. It’s a strategic relationship,” he notes. “We couldn’t do what we want to do as an organisation without having our custodian as a strategic partner.”

A global strategy As Australia’s super fund industry drives up demand for global capabilities, Netwealth managing director Matt Heine07 says that platforms such as his own are becoming more sophisticated. “Right now, we’re partnering with global custodians to access bond and international markets directly,” he says. “From our own perspective, we’re in an interesting spot at the moment, we are starting to challenge some of the traditional custodial segments, in particular those focused on midmarket clients.” Netwealth’s custody business has been steadily growing in recent years, with ACSA data showing it held $55.7 billion in assets as at June 30, making it the ninth largest in Australia. Heine says Netwealth is seeing success with the emerging institutional space. “In this space, we’re focusing on clients such as ultra-high-net-worths, school foundations, charitable trusts and large endowments that are too small for the big custodians, but still very significant clients,” he explains. “What we’ve been able to tap into through various relationships is a mid-market custodial offering where for, at a fraction of the price of the global custodians, we can offer the custody solutions they’re looking for, as well as very sophisticated performance and tax reporting and increased online and mobile access.” Northern Trust head of Australia and New Zealand Leon Stavrou08 also believes it is increasingly important for custodians to enhance their global strategies. “We see global expansion as a great growth opportunity for us as an organisation, and we treat it that way in terms of how we resource and how we bring out capital to bear,” Stavrou says. “In terms of the competition side of things, I think it does come back to having strong relationships, delivering on the commitments you make, but also being able to have the capabilities to service your clients as they grow and as their strategy changes.” Stavrou provides an example: “As superannuation funds grow, they may look to internalise investment management or a component of that.

The future is digital

We couldn’t do what we want to do as an organisation without having our custodian as a strategic partner. Garnett Hollier

Looking back 10 or 20 years ago, and a custody business would likely be described as an operational business supported by technology. Now, Cotroneo says, it’s the reverse; “I would describe securities services as a technology-driven business, which, when required, is supported by operations.” “We leverage a lot of the investment in technologies being rolled out in HSBC’s banking business, for example our investment in cloud, micro-services or tokenisation,” he says, adding that a custodian’s top priority must always be client experience and how technology can make clients’ lives easier. Helyar agrees, saying it used to be that the people a business had on board were most valuable, but now it’s a combination of the people and the technology being used and developed. “We invest a very large proportion of our revenue back into our technology capabilities and we will continue to do that going forward, because it helps us become more efficient as each year passes, and that helps us pass benefits back to our clients in terms of those compelling value propositions to their members and investors,” he explains. “All of our new products, whether it’s alternatives, data, or ESG, are all driven by technology investments. These systems are the latest and greatest vendor applications or proprietary applications, and technology investment is at the core of all of that. “It takes smart people to come up with smart ideas, but it takes the technology to be built to actually operationalise that and turn it into something that’s meaningful for a fund.” Travers agrees that the future for custodianship is digital. But what does that mean for legacy systems? “I think that the use of blockchain does create opportunities for the market to start to operate differently in the future, and that’s something that we’re very excited about,” he says, adding

Custody | Feature

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

that custodians are also looking for real time data solutions as they insource more mandates, and new technologies will only help to get more speed and data availability. “As an industry, the areas that we are focused on is ensuring that the regulatory priorities truly reflect the role that a custodian plays in the market, and we advocate for strong licensing regimes around all custodians. We’re also advocating for efficient and practical data solutions for the industry,” Travers notes. Strong data solutions are critical to the delivery of custodial services, Pember says. “Increasingly, however, those data requirements are becoming more complex, so we need to move out of some of the traditional domains of a custodian’s remit or portfolio,” he says. “It’s not just data, it’s actually creating services on top of the data that better help clients.” Heine agrees, saying: “As the world becomes more global, and there’s more parties connected into the broader ecosystem, custodians and platforms need to continue to invest in their technology, both from a reporting perspective, connectivity perspective, but also from a data, settlements and admin efficiency perspective.” “Data integrity is key to every business these days, and in addition to looking for efficiencies and automating a lot of their processes, cyber has to be a focus for custodians who ultimately deliver a service to protect clients’ assets which also includes their digital assets.” Heine says it’s becoming increasingly important for custodians to offer crypto and digital asset capabilities. Institutions are increasingly adopting digital assets and there is increasing choice among digital asset funds and crypto strategies. State Street has State Street Digital, dedicated to providing custodial services for digital assets, while BNY Mellon recently launched its Digital Asset Custody platform in the US, after surveying institutional clients and finding 91% were interested in tokenised investments. “However, one of the big risks with crypto has always been the exposure to digital wallets, and so whilst it’s certainly not going to be a huge growth area in the short term, I think in the next couple of years, longer-term, as digital assets

07: Matt Heine

08: Leon Stavrou

09: Hong-Viet Nguyen

managing director Netwealth

head of Australia and New Zealand Northern Trust

partner Ashurst

and crypto continue to evolve as a legitimate asset class, there will be a need for better custodial solutions as people will look at different ways to protect and manage their holdings,” Heine says. Da Silva adds that this year EY has seen growing demand around how custodians should service crypto and digital assets, and the stabilisation of market forces will only see a greater demand for diverse assets. “Digital assets will require more specialised function support. The war on talent for these very specialist skills means custodians will either need to develop these skills or look to sub-custody partnerships to provide a streamlined service,” she says. Da Silva says that the industry is largely adopting this model, and most of the larger custodians have either developed or are developing their capability to support digital assets. “It’s still early days at the moment, but in 12 to 18 months if this service is not offered to clients, it could then become a disadvantage,” she says. Having lagged in recognising the potential importance of digital assets, just recently the Australian government announced it will look to regulate digital asset markets. “The government recently announced a token mapping exercise, which is designed to create a full picture of holdings and allow regulators to assess risks associated with a range of digital tokens,” Ashurst partner Hong-Viet Nguyen09 says. “Treasury has also consulted on a potential market licensing regime under the previous government. We are yet to see what shape any additional regulation will take, but it will be interesting to see how the approach might interact with our current financial services regulatory frameworks, including financial services licensing, payments laws and the AML/CTF regime.” Nguyen adds that it will be imperative for custodians to have data management systems and procedures in place, to curb potential cybersecurity risks in the future, as well as understanding how those systems and procedures work. “Making sure that there is no data leakages – especially when it is transferred across multiple systems will be very important,” Nguyen points out. There is one thing to be very clear on, however. Da Silva says that when it comes to data

A legal lens Ashurst partner Scott Charaneka says there has been an increasing number of interactions with custodians in recent years connected to a number of significant superannuation fund mergers. “In addition to conducting analysis of all material contracts, we have also required greater information sharing in order to populate due diligence data rooms,” he says. “In some cases there has been substantial lead up work required to identify and restructure key investments in order to facilitate the merger.”

When it comes to the custody industry’s evolution, Charaneka believes the law has kept pace. “The area is well regulated contractually. Only rarely do we encounter issues which cannot be readily accommodated through existing terms,” he says. In the superannuation space, Charaneka says the myriad of obligations resting on trustees dictate close and effective oversight of custodial duties, as well as the implementation of business rules which align with trustee obligations.

protection, there is a large misconception that the super fund is not responsible for their own data and that this is the role of the custodian – this is not the case. “Fundamentally, the regulatory environment mandates that the super fund, as owner of the data, is responsible for the storage and use of this data,” she says. “Often too few questions are asked by super funds on how data is being stored and protected. There should be an auditable process of who is accessing the data and the custodian will need to evidence how the data is used, where it is held, the controls in place, and who has access to this data on a regular basis.”

Evolution, not revolution

Often too few questions are asked by super funds on how data is being stored and protected. Hong-Viet Nguyen

To date, custodians have evolved rapidly in response to client demand for new services and capabilities, not to mention a shift in industry trends such as globalisation, technological advancements, increased regulatory burden and constant threats to cybersecurity. However, Pember says that while the role of a custodian has certainly changed, the core principles of what they do remain. “Of course, how we do it has evolved as the market too evolves. However, one of the fundamental parts that has opened opportunities for custodians and also for our clients is partnering,” he observes. In years gone by, Pember says vendors were simply viewed as wholesalers providing a service. “If clients treat their vendors in that kind of way, they’re not going to get the best out of a partnership. But as soon as you move into a partnership environment, you’re able to start bouncing ideas around and find great solutions. Partnering is going to be particularly important moving forward, as super funds get bigger, and their requirements become more complex, diverse, and global,” he says. “Partnering really opens those opportunities, because there’s so much experience and capability within organisations like BNP Paribas, for clients to tap into. It’s such a diverse set of services, skills and capabilities across the whole organisation. And that’s where those partnerships become important and can deliver enhanced value.” Helyar says this will also ultimately lead to winning more mandates over time. “Over recent years, it’s become very clear that the traditional world of custody is now largely commoditised. Therefore, all the big global custodians are relatively on par with their capabilities around core custody and fund administration,” he says. “It’s all about a custodian’s ability to become an essential partner for their clients, whether it’s a super fund or an asset manager. So that end-to-end integration, that value add, that’s reducing the complexity of your clients’ operations and investment in technology… Custodians who can provide that will be the ones who will do best over time, because that’s where the industry is headed.” fs

News

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

Carbon credits ETF hits market VanEck Australia has launched an ETF to give investors access to a global marketplace for carbon credits. VanEck Global Carbon Credits ETF (XCO2) will track the ICE Global Carbon Futures Index, which sources carbon credit futures prices from the four most actively traded and largest carbon markets and emission trading schemes in the world, being the European Union Emissions Trading Scheme, the Western Climate Initiative (California Cap and Trade Program), the Regional Greenhouse Gas Initiative (RGGI) and the UK Emissions Trading Scheme. VanEck chief executive and managing director Asia Pacific Arian Neiron said that carbon pricing threads climate change costs into economic decision-making, incentivising changes in production and consumption patterns towards decarbonsiation. “The benefit of global carbon credit futures is that they can be freely traded on global exchanges with attractive market size and liquidity, giving investors full price discovery,” Neiron said. “Carbon credit prices are expected to increase significantly as the fight against climate change ramps up. The value of carbon futures and this asset class will likely benefit significantly over the longer term, making it an attractive way for investors to get exposure. The carbon credit market is growing and in 2021 the carbon credit futures market traded almost US$700bn. Neiron said Australian investors will benefit from XCO2 exposure as a hedge for the impact of carbon risks/climate change on investor portfolios. fs

01: Ian Learmonth

chief executive CEFC

CEFC, Grok Ventures back solar tech firm Rachel Alembakis

The quote

The solar cells needed to decarbonize the world will need to be more efficient, cheaper and scalable than they are today.

ETF industry drops in value Cassandra Baldini

Australia’s ETF industry has dropped in value despite seeing positive inflows in September. Betashares’ latest Australian ETF Review said overall industry assets under management (AUM) fell 4.3% month on month, with total industry market capitalisation at $124.4 billion by the end of September. It found ASX ETF trading value decreased 11% month on month for a total of $9.1 billion. With continued asset value depreciation, industry growth over the last 12 months is now flat, recording a small decline year on year of 0.7% Notwithstanding significant global market volatility, industry flows remained positive, although as per last month, were muted with less than $1 billion of net flows for the month. Given the significant falls in global share markets, Betashares said the best performing funds were all leveraged short equities products, including BBUS and BBOZ returning 23% and 15%. Despite the overall drop in the market, new data released by the ASX and Vanguard says investors are still viewing ETFs as a safe bet. “Domestic bond ETFs experienced the strongest flows of any asset class in the third quarter as investors sought to manage market risks amidst global volatility,” Vanguard said. The reason being increasing interest rates, rising inflation and weaker economic growth seemingly push investors towards safer havens. fs

he Clean Energy Finance Corporation (CEFC) has joined Mike Cannon-Brookes’ Grok Ventures in backing an Australian company commercialising technology that could drastically cut costs and increase efficiency of solar panels. The CEFC and Main Sequence Ventures led SunDrive’s $21 million Series A round along with Grok Ventures and Blackbird Ventures. The CEFC committed $7 million through its Innovation Fund, managed by Virescent Ventures. SunDrive has patented technology that replaced silver with copper to improve solar panel efficiency. Because copper is “nearly 100 times cheaper than silver and far more abundant, the switch to copper has the potential to improve solar panel uptake by driving down costs,” CEFC noted. “Demand for renewable energy generation continues to grow as the world strives to reach net zero by 2050,” said CEFC chief executive Ian Learmonth.01 “Solar power represents one of the most efficient ways to reduce emissions from the energy sector and fill the gap in supply from the retirement of coal-fired power stations.” CEFC cites information from the World Silver Survey stating that the solar PV industry consumes approximately 10% of the world’s silver, and 20% of total industrial demand. The demand for silver is expected to increase as uptake of solar power continues to increase. “The solar cells needed to decarbonise the world will need to be more efficient, cheaper

and scalable than they are today,” SunDrive cofounder and chief executive Vince Allen said. “The use of silver is the common denominator and is holding back the rapid advancements needed to transition to a solar powered electric world.” Using more widely available resources like copper reduces the likelihood that silver will be mined from lower quality ores which have higher emissions, CEFC said. The CEFC has committed $1.5 billion to large scale solar projects with a generating capacity of 2.1 GW, as well as supporting solar PV technology like Sunman’s innovative eArc solar panels. Separately, the CEFC has also committed up to $30 million to a hybrid sustainable grazing model, with the goal of delivering carbon credits alongside enhanced biodiversity protection and sustainable red meat production. The Wyuna Regenerative Agriculture Investment Fund has also secured a $30 million commitment from global industrial property company Goodman Group, and $5 million from the Wyuna Founders. Wyuna Regenerative Agriculture, cofounded by GreenPoint and Steve Green, undertakes large-scale regeneration with a focus on carbon sequestration, sustainable food production and improved biodiversity. As part of the fund strategy, Wyuna will seek to generate high-quality land-based Australian Carbon Credit Units (ACCUs), by changing reducing or removing factors that suppress vegetation growth, including from land clearing and over grazing. fs

The challenges of investing in agriculture Chloe Walker

While it’s one of the oldest asset classes in the book, most Australian investors remain underweight and face challenges in allocating towards agriculture, according to iPartners director of capital markets Toby Harpham. Hosting a panel of experts at the iPartners Alternatives Investment Conference held in Sydney, Harpham suggested that lack of allocation may be because of its perceived complexity. “Agriculture is complex, especially to those who don’t have an affiliation with it,” he said. “The second part is that the majority of agriculture is privately funded, therefore it can be hard to get exposure.” Argyle Capital chair Kim Morison agreed with Harpham’s sentiments. “One of the reasons I think that the asset class has been missing out on allocation is there’s not a lot of people walking the streets of major capital cities like Sydney or Melbourne that have had an operational experience on how to get the best returns,” he said. “But certainly, out there amongst the farming community, while there’s fewer farmers than there were in the 1940s, the ones who are still there are the ones generally who are able to deliver on some pretty good returns.”

He added that a principle that applies is about 15% of farmers make 80% of the profits and own 80% of the assets; “And they’re the ones we really need to get to understand.” AAM Investment Group founder and managing director Garry Edwards said that there has never been a better time to invest in agriculture. “The really exciting thing in the sector at the moment is that with the right people, and the access to the technology, there are dramatic changes in asset values that can be accomplished by executing well,” he said. However, he agreed that a big challenge for investors getting involved is the management of an asset or a business they don’t understand. “What we have found is that investors who have an interest in regional Australia or being involved in agriculture have become investors in our funds, and therefore get to have our professional management team,” he said. “Because we see assets on behalf of our investors, that sort of solves what is conventionally the biggest problem and biggest limitation. A lot of people are excited to be involved, they just don’t have any idea how they’re going to manage it or access management expertise.” fs

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Federal Budget

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

Federal Budget

Treasurer Jim Chalmers handed down the first Federal Budget from a Labor government in a decade on Tuesday, October 25. Budget pressured by debt costs The government has blamed its predecessor for inheriting a budget burdened by $1 trillion in gross debt and deficits projected for at least the next decade. Consequently, new fiscal policies have largely been offset for this year and the next. “We face growing pressures with interest payments and essential services – such as the National Disability Insurance Scheme (NDIS), hospitals, aged care, medical benefits, Age Pension and defence – growing faster than the economy. These spending pressures have become even more pronounced since the election,” Budget documents say. Treasurer Jim Chalmers said: “Borrowing costs are the fastest growing budget pressure, rising at more than 14% a year over a decade.” The Labor government’s 2022/23 Budget forecasts an underlying cash deficit to the tune of $36.9 billion in 2022/23, $44 billion in 2023/24, $51.3 billion in 2024/25, and $49.6 billion in 2025/26. Comparatively, the Coalition government’s 2022/23 budged released in March estimated a deficit of $78 billion in 2022/23, $56.5 billion in 2023/24, $47.1 billion in 2024/25, and $43.1 billion in 2025/26.

Chalmers touted that the 2022/23 deficit forecast was a $41.1 billion improvement on Coalition estimates for the same period, however, evidently government deficit estimates significantly blown out in coming years. He reasoned that the government’s gloomy long-term deficit forecast is because the temporary revenue boosts from higher employment and higher commodity prices will fade and fall, whereas the permanent spending pressures on the Budget are forecast to exponentially grow. Nevertheless, Budget documents show that the government’s economic and fiscal strategy is focused on making the economy and budget stronger, more resilient, and more sustainable over the medium term. Pertinently, data from the Australian Bureau of Statistics (ABS) on October 26 showed the Consumer Price Index (CPI) rose 1.8% in the September quarter. Over the 12 months to September 2022, CPI rose 7.3%, the highest annual movement since 1990. Nevertheless, over time, the strategy alluded to the fact that the focus will shift to achieving measured improvements in the budget position to stabilise and reduce gross debt as a share of the economy.

The strategy said these objectives will be achieved by investments that grow the economy and expand productive capacity, and budget discipline that restrains spending growth and enhances the quality of spending. It added that the Budget will still be improved in a manner consistent with the objective of maintaining full employment, while continuing to deliver essential services.

We don’t Affordable housing in spotlight pretend that this Access to affordable housing is at the core of the [Housing] Accord Budget, including a new national Housing Accord solves every issue, struck between the government, institutional nor do we pretend investors, and industry to help tackle the growing we can solve this housing affordability issue. problem overnight. Under the Housing Accord, one million new, Jim Chalmers

well-located homes will be built over five years from 2024. The government will commit an initial $350 million to get the Accord started and for an additional 10,000 new affordable homes. State and territory governments will add up to 10,000 new homes as well, for a total of 20,000. Chalmers said the Accord is backed by superannuation funds, who will leverage more investment to deliver in members’ best interests.

Federal Budget

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

The construction sector also endorses the Accord, he said. “We don’t pretend that this Accord solves every issue, nor do we pretend we can solve this problem overnight,” he said. “But this is a serious start – a serious agenda that will lead to more Australians knowing the security of a good job and decent housing.” The government is also introducing the $10 billion Housing Australia Future Fund to increase housing supply and improve service delivery. The fund will provide 20,000 new social housing dwellings, 4000 of which will be allocated to women and children impacted by family violence and older women at risk of homelessness. A further 10,000 dwellings will be provided for frontline workers. Up to $575 million will help the National Housing Infrastructure Facility to support a further 5500 homes.A Help to Buy Scheme will allow 40,000 eligible Aussies to own their own home with a lower deposit and smaller mortgage. Meanwhile, the Regional First Home Buyer Guarantee will help 10,000 new homeowners each year.

Small wins for some pensioners Chalmers has increased pensioners’ earnings amount, with the temporary income bank top up to increase from $7800 to $11,800, before their pension is reduced. Older Australians will also be able to earn an extra $4000 without losing any of their pension due to a one-off bonus that aims to incentivise them into the workforce, Chalmers has further increased the income threshold for the Commonwealth Seniors Health Card. For singles, it will jump from $61,284 to $90,000, and for couples from $98,054 to $144,000. Speaking to Financial Standard, Mercer senior partner and global pension expert David Knox said the government is merely responding to costof-living pressures and delivering on promises made in the election campaign. “I think the government did the right thing by alleviating some of that cost-of-living pressure by being a little bit generous in those areas,” he said. “Increasing deeming rates because rates are rising would have put more pressure on pensioners where they are already under cost-of-living pressures.” He says it’s a win – but not for all. “Only people on the margin will be slightly better off. For instance, there will be some who are now eligible for the health card. There will be the deeming rate so again some may be earning a little bit more on the term deposit, but it’s not a lot,” Knox said. “And of course, for pensioners, who have very little money other than the pension, there’s no change. The government is not physically handing out lots of money to pensioners. It’s just at the margin, there will be people who will now get a little bit more.”

Plans afoot to narrow pay gap The government announced a suite of measures aimed at narrowing the gender pay gap, including requiring the Fair Work Commission to consider gender equity when formulating minimum wages. According to Budget documents, this year marks the first that the government has used gender responsive budgeting, trialling the use of gender impact assessments on key measures to ensure women’s outcomes were considered. These issues included the care economy, housing, and jobs and skills. This approach will continue to be used in future Budgets, the government said. The national gender pay gap currently sits at 14.1%, meaning the average woman who works

Chalmers delivers on childcare

full-time earns $263.90 less per week than a man working full-time. Since May 2002, this has only decreased by 1.2 percentage points. When including the part-time workforce, the gap increases substantially to almost 30%. To combat this, the government has announced the Fair Work Act 2009 will be amended so that the national workplace relations system can better address issues of pay equity, with a statutory equal remuneration principle to make it easier for women in low-paid sectors to make pay equity claims. It will also be required to consider gender equity when it assesses and adjusts minimum wages. Further, the government is budgeting $20.2 million to establish two new expert panels within the Fair Work Commission on pay equity and the care and community sector. Pay secrecy clauses in employment contracts will also be prohibited, and the Fair Work Act 2009 will limit the used of fixed-term contracts, most of which are held by women. The government said it is developing a National Strategy to guide whole-of-government actions to achieve the goal of Australia being a global leader in gender equality, setting our concrete actions that focus on, among other things, women’s economic equality and independence and balancing family and care responsibilities.

Chalmers has promised to improve early education and childcare affordability for more than 1.2 million eligible Australian families. Labor’s “game-changing” investment for families will increase the paid hours worked by women with young children by up to 1.4 million hours a week in the first year alone, Charmers said. “That’s the equivalent of 37,000 extra full-time workers.” From July 2023, childcare subsidy rates will increase up to 90% for eligible families earning less than $530,000. Families will continue to receive existing higher subsidy rates of up to 95% for any additional children in care aged five and under. “The significant cost of early childhood education and care can prevent parents, particularly women, from working as much as they want,” Chalmers said. “The reforms will also support children’s learning and development and their readiness for school.” The changes will cost about $4.7 billion in total. The ACCC will also conduct a 12-month inquiry into rising early childhood education and care costs. Commencing in January 2023, the inquiry will also examine the impact of the Child Care Subsidy changes on out-of-pocket fees for families. HESTA chief executive Debby Blakey said the federal government’s decision to make childcare more affordable will help to increase women’s workforce participation. “HESTA has long supported universally affordable childcare as it critical to supporting women’s participation in the workforce,” Blakey said. “We know that if women can keep connected to the workforce, they typically have higher earnings throughout their working lives, with more in their super account when they retire.”

Gas, NDIS pose challenges In an interview with Financial Standard, independent economist Chris Richardson said the Treasurer has two big and difficult problems on his hands, the first being gas prices and the other the National Disability Insurance Scheme. The government is investing $40.9 million in increased oversight of gas markets by the ACCC and is exploring “options for further reforms that may be required to ensure Australian customers have access to energy at reasonable prices.” Gas prices are a key source of cost-of-living pressure for Aussies, with Richardson saying it is “very central” to the bad news for families and businesses. “Rising gas prices are pushing electricity prices and pushing inflation - which will keep interest rates higher for longer, which will slow the economy down, which will add to unemployment. Or in other words, you will get a bunch of the bad things that are likely in Australia right now, and gas is very central to this,” Richardson said. “It’s also a bit of an unforced error, that Australia is an energy superpower. We can and should be able to do better than this.” Meanwhile, there has been an upward revision to the expected cost of the NDIS. A further $19.4 million has been provided to extend the Disability Employment Services program for two years. Funding for the National Disability Insurance Agency has also increased by $385 million in 2023-24 and 380 additional staff will cost close to $160 million. Fraud and non-compliance will be addressed with $126.3 million in funding, while more than $30 million is being provided to support dispute resolution and appeals. The government has said it will establish a review of the NDIS too. The NDIS is more expensive than ever before, Richardson said in response. “There is now a clear set of trade-offs between disabled Australians and taxpayers,” he said. “We need to do the right thing by disabled Australians, and we need to do the right thing by taxpayers. But that juggle is looking even more complex than before, and both of those groups have every right to be grumpy about the trajectory on where we’re headed.”

Paid parental leave boosted

We will give families more leave - and more flexibility, to ensure the system works in a way that’s best for them. Anthony Albanese

The government will introduce reforms to improve the paid parental leave system’s flexibility and extend the scheme to 26 weeks. The changes are targeted at increasing women’s participation in the workforce, with further details of the reforms to be laid out by the women’s economic equality taskforce which is chaired by Sam Mostyn. As it stands, the scheme allows for 18 weeks of government-funded leave to care for a newborn child and an additional two weeks’ paid leave for fathers and partners. Under the reforms, two weeks would be added to the scheme every year from 1 July 2024 to 1 July 2026 to a total of 26 weeks shared between both parents. It will cost $531.6 million. The family income test will also be expanded, making paid parental leave available to any families earning up to $350,000 combined. “By 2026, every family with a new baby will be able to access a total of six months paid leave, shared between the two parents,” prime minister Anthony Albanese said. “And single parents will be able to access all 26 weeks. “We will give families more leave - and more flexibility, to ensure the system works in a way that’s best for them. It will also maintain the use-it-or-lose it approach, incentivising new parents to take up the scheme. “Our plan will mean more families take-up this leave, share in that precious time - and share the caring responsibilities more equally. This plan will support dads who want to take time off work to be more involved in those early months,” Albanese said. fs

News

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

Fidante revamps brand, digital

01: Bryce Quirk

group executive, distribution Colonial First State

Cassandra Baldini

Fidante has a fresh look, unveiling a new brand, online offering and registry service. The new look includes a revamped logo in the colour green to reflect growth and prosperity. Meanwhile, the new website is cleaner, with a more personalised and user-friendly experience, it said, and will now include greater content, comparison tools, and interactive charts. The Challenger subsidiary also completed the move to a new registry service provider, Boardroom Group, which offers improved systems, flexibility, and online transactions. Fidante global head John Burke said customers want easy, anytime access to funds and related information through efficient digital channels. “Our new investor portals are self-service and allow investors and advisers to manage portfolios directly and provide easy access to a wide range of services,” he explained. “This includes online applications, a consolidated view of investments, distributions, payments and transactions, access to client tax and distribution statements, and historical and transactional data.” In its first quarter update to the ASX, Challenger said Fidante’s new website and full upgrade of the online digital tools will support customers and their financial advisers. “Investing across the globe, including Australia, Europe, Asia, and North America, 92% of our investment managers have beaten their respective benchmarks since inception, and AUM has increased four-fold in the past decade. Fidante is expanding and these changes will propel our next stage of growth,” said Burke. fs

Link to offload Fund Solutions Andrew McKean

Link Group is exploring divestment options for the troubled Link Fund Solutions business, which includes Link Fund Solutions Limited, and has appointed Macquarie Capital and UBS Securities as advisers. As previously reported by Financial Standard, in September, Link announced that the UK Financial Conduct Authority (FCA) had issued a draft warning to Link Fund Solutions about its role as an authorised corporate director to the LF Woodford Equity Income Fund. While the FCA approved Dye & Durham’s takeover of Link, this acquisition was subject to a requirement that the funds were made available to meet any shortfall to cover the redress payments Link Fund Solutions may be required to make, following the mismanagement of the Woodford fund. The FCA said that its view is that Link Fund Solutions may be required to pay in relation to the Woodford matters an amount up to approximately $519 million. Subsequently, Dye & Durham revised its takeover offer, stating that it developed a revised proposal that was structured as an upfront cash payment of $3.81 per Link Group share to Link shareholders on the implementation of the scheme. fs

Colonial First State introduces new platform Chloe Walker

The quote

Through education, thought leadership, advocacy and strategic partnerships, CFS Elevate hopes to contribute to a stronger advice industry....

he wealth management group has launched CFS Elevate, a people and culture platform that aims to provide support for advice professionals across Australia. Designed in collaboration with financial advisers, CFS Elevate offers free training, networking events and collaboration tools, as well as the CFS Professional Year online community hub with XY Adviser. Other resources include a comprehensive suite of education and personal development materials, and various webinars and downloadable learning content. “At CFS, we believe that quality financial advice is vital to helping Australians achieve financial freedom in retirement, and we are committed to building a stronger and more sustainable advice industry,” CFS group executive, distribution Bryce Quirk01 said. “Over the past decade, we have seen a significant

reduction in the number of registered financial advisers and a fall in the overall number of Australians who are able to access financial advice. “We see our role as identifying and addressing gaps that are making it difficult to meet the demand for quality financial advice, and we’ve been speaking to advisers about how to make delivering advice easier. That’s how we came up with Elevate.” Quirk added that advisers are increasingly time-poor and do not have the same access to human resources tools and resources like large organisations do. “CFS Elevate seeks to address this gap by providing advisers with the support they need to successfully attract, develop and retain their people,” he said. “Through education, thought leadership, advocacy and strategic partnerships, CFS Elevate hopes to contribute to a stronger advice industry and deliver better outcomes for Australians seeking financial advice.” fs

Challenger offloads banking business Jamie Williamson

Just two years after acquiring it, Challenger will sell its banking operations to New Zealand’s Heartland Group. Challenger spent $35 million to buy the banking business from Catholic Super in December 2020. The aim was to reach a wider range of customers and to expand the bank’s term deposit offering by replicating the same strategy used in its term annuity business. At the time, Challenger said it expected to break even on the purchase from FY22. The group announced the bank would be sold to Heartland Group, a New Zealand-based, ASXlisted financial services company. Heartland will pay $36 million for the business, funded through existing resources, it said. As at June 30, the business had $89 million of retail lending, $17 million of corporate lending and $228 million of deposits. The acquisition is part of the group’s strategic expansion in Australia, saying it needed to become an ADI to access a deep and efficient pool of funding; potential uplift in margin; and to provide a platform to grow the business. “Heartland’s purchase of Challenger Bank signals a major step forward in our Australian expansion strategy. A pathway to acquiring an ADI licence would create access to deep and efficient funding pools which allows for growth and the possibility of improved margins. This particular acquisition also presents the opportunity to build a high-quality and scalable banking platform in Australia, allowing reach to more customers,” Heartland chief executive Jeff Greenslade said.

“Our approach in the Australian market is guided by our best or only strategy, meaning we will target segments of the market where we can provide products where we can differentiate from the mainstream.” The group’s Reverse Mortgage and Livestock Finance businesses will be transferred to sit under the Challenger Bank. Greenslade added that the plan is to scale the bank’s digital banking platforms to broaden the reach of its existing offerings. Challenger further reported its funds under management (FUM) is $91 billion, a decrease of $2.4 billion or 3% for the quarter. It explained this was primarily driven by Fidante. Fidante’s FUM for the quarter is $70 billion, a decrease of $2.5 billion or 3%. Challenger said Fidante’s FUM growth was driven by net outflows of $1.7 billion for the quarter, distributions of $1.1 billion, partially offset by positive investment market movements of $0.3 billion. Its net outflows primarily reflect redemptions across fixed income managers partially offset by net inflows across equity and alternatives strategies. The whole of Challenger saw total life sales of $2.8 billion in Q1 of FY23, including about $1.8 billion in annuity sales. Group assets under management came in at $96 billion. “We are well placed to continue our growth trajectory, with the interest rate environment supportive for the business and achieving our purpose of helping customers achieve financial security for retirement,” chief executive Nick Hamilton said. fs

Between the lines

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

Household Capital, Genworth partner

01: Matt Brown

executive general manager, advice Australian Unity

Andrew McKean

Genworth Financial Mortgage Insurance has taken a 22% stake in home equity retirement funding provider Household Capital, concluding a $37.6 million series C capital raise. Speaking to Financial Standard, Household Capital chief executive Joshua Funder welcomed Genworth as a strategic investment partner. Funder said: “Genworth’s renewed mission as a long-standing expert and major player in the Australian mortgage market is to deliver the benefits of home ownership to Australians throughout life.” “Genworth have a real appetite to deliver the benefits of home ownership not just for first home buyers but extending their contribution and expertise to the last 30 years of Australian homeownership, which is retirement. “We’re very much aligned in focusing on the family home as both housing and funding for retirement.” On the partnership, Genworth chief executive Pauline Blight-Johnstone said: “Genworth is delighted to have entered a strategic partnership with Household Capital. This investment demonstrates a significant step toward achieving our purpose of accelerating financial well-being through home ownership.” She added that Genworth is committed to helping Australians through a range of solutions on their property journey and that the partnership would help it deliver on this pledge. fs

Australian Unity joins forces with Austbrokers Life Cassandra Baldini

A The quote

Receiving this support from Australian Unity is a strong validation for the quality of advice we provide.

ustbrokers Life and Australian Unity Personal Financial Services (AUPFS) are partnering to offer clients access to a broader set of capabilities focused on enhancing financial wellbeing. AUPFS will deliver strategic and other support to Austbrokers Life, enhancing the quality of advice to end users. Clients will also receive access to more solutions including financial advice, trustee services, banking, and health insurance. Austbrokers Life will deliver financial advice under Australian Unity's financial licence. Australian Unity Advice executive general manager Matt Brown01 said the organisations share values, ensuring a successful partnership. “Australian Unity is delighted to partner with Austbrokers Life, an organisation that is likeminded in its deep commitment to delivering quality advice and financial solutions that support the wellbeing of Australian households,” he said.

Rainmaker Mandate Top 20 Appointed by

Austbrokers Life has close to 9000 clients, has provided over $37 million in payments over the last financial year, it said. Its managing director Ben Donald added that its life insurance clients will greatly benefit from the partnership. “Financial guidance is a core component of what we do, enabling our expert team to advise Australians through life,” he said. “Receiving this support from Australian Unity is a strong validation for the quality of advice we provide. It will enable our business to benefit Australians in new ways with a more comprehensive advice offering.” Australian Unity also recently restructured its funds management business. Collectively responsible for more than $15 billion, the dedicated business will comprise wealth and capital markets' investment capabilities including in healthcare and commercial property, mortgages, equities, fixed interest, emerging companies, and multi-asset solutions. fs

Largest property & infrastructure mandate appointments FY22

Asset consultant

Investment manager

Mandate type

Amount ($m)

Care Super

JANA Investment Advisers

Other

Infrastructure

Construction & Building Unions Superannuation

Frontier Advisors

Self

Unlisted Property

4,107

Construction & Building Unions Superannuation

Frontier Advisors

Dexus Funds Management Limited

Unlisted Property

282

Construction & Building Unions Superannuation

Frontier Advisors

Kohlberg Kravis Roberts & Co.

Unlisted Infrastructure

268

Construction & Building Unions Superannuation

Frontier Advisors

Infrastructure Capital Group Limited

Unlisted Infrastructure

162

Construction & Building Unions Superannuation

Frontier Advisors

QIC Limited

Unlisted Property

Construction & Building Unions Superannuation

Frontier Advisors

EG Funds Management Pty Ltd

Unlisted Property

First Super

Frontier Advisors

Other

Infrastructure

Hostplus Superannuation Fund

JANA Investment Advisers

Other

Property

217

Hostplus Superannuation Fund

JANA Investment Advisers

Kayne Anderson Capital Advisors, L.P.

Property

Ironbark Asset Management Pty Limited

Resolution Capital Limited

Global Property

legalsuper

IFM Investors Pty Ltd

Infrastructure

Meat Industry Employees Superannuation Fund

Internal

AMP Capital Investors Limited

Unlisted Property

Retail Employees Superannuation Trust

JANA Investment Advisers

AMP Capital Investors Limited

Infrastructure

1,810

Retail Employees Superannuation Trust

JANA Investment Advisers

State Street Global Markets

Infrastructure

992

Retail Employees Superannuation Trust

JANA Investment Advisers

State Street Global Markets

Property

955

Retail Employees Superannuation Trust

JANA Investment Advisers

Other

Infrastructure

Retail Employees Superannuation Trust

JANA Investment Advisers

Other

Property

State Super (NSW)

Frontier Advisors

Other

Unlisted Infrastructure

Zurich Financial Services (Australia) Limited

Mercer Investment Consulting

Bennelong Funds Management Ltd

Global Property

131 23

465 12 Source: Rainmaker Information

Managed funds

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21 PERIOD ENDING – 31 AUGUST 2022

Size 1 year 3 years 5 years

Fund name

Managed Funds

% p.a. Rank

% p.a.

Rank

GROWTH

% p.a. Rank

% p.a.

Rank

CAPITAL STABLE

First Sentier Wholesale High Growth Fund

398

-10.5

6.9

8.7

IOOF MultiMix Moderate Trust

577

-3.1

4.2

5.8

-5.9

6.8

8.8

Allan Gray Australia Stable Fund

339

3.6

4.0

IOOF MultiMix Growth Trust

702

-4.8

6.4

8.4

CT Pyrford Global Absolute Return Fund

0.4

3.5

4.6

MLC Wholesale Horizon 6 Share

356

-7.8

5.9

7.7

MLC Horizon 3 Conservative Growth

1,170

-5.6

2.8

4.2

Vanguard Diversified High Growth Index ETF

1,706

-8.7

5.9

MLC Index Plus Conservative Growth

395

-5.9

2.8

4.5

Vanguard High Growth Index Fund

4,627

-8.7

5.9

8.0

IOOF MultiMix Conservative Trust

573

-2.4

2.7

4.1

Russell High Growth Fund

118

-9.0

5.2

6.4

Perpetual Conservative Growth Fund

181

-2.3

2.5

4.0

Pendal Active Growth Fund

-5.6

5.1

6.1

AMS Moderately Conservative Fund

227

-6.6

2.4

3.3

BT Multi-Manager High Growth Fund

-8.9

5.1

7.4

Morningstar Balanced Real Return Fund

165

-2.2

2.3

3.2

Australian Ethical High Growth Fund - Wholesale

-10.8

5.1

7.0

Dimensional World Allocation 50/50 Trust

846

-8.7

2.2

4.1

4.5

6.3

Sector average

333

-6.7

1.4

3.1

Ausbil Balanced Fund

Sector average

382

-8.5

BALANCED

ESG

Orbis Global Balanced Fund Perpetual Balanced Growth Fund IOOF MultiMix Balanced Growth Trust Allan Gray Australia Balanced Fund

1.7

6.9

4.7

396

0.8

6.9

7.1

1,868

-3.5

5.7

7.5

119

3.5

5.6

5.8

BetaShares Global Sustainability Leaders ETF

2,064

-14.4

13.3

16.5

Perpetual Ethical SRI Fund

820

0.5

10.9

7.5

Dimensional Global Sustainability Trust (H)

392

-13.6

10.0

8.9

Robeco Global DM MF Equities Alpha Fund

-2.4

9.9

Pendal Sustainable Balanced Fund

794

-6.3

4.8

5.8

Dimensional Global Sustainability Trust

408

-11.3

9.7

BlackRock Global Allocation Fund (Aust)

456

-12.0

4.8

4.3

Ausbil Active Sustainable Equity Fund

146

-7.3

9.6

-0.6

4.7

5.6

Candriam Sustainable Global Equity Fund

-11.3

9.5

11.3

Pendal Active Balanced Fund

265

-5.3

4.3

5.4

Australian Ethical Emerging Comp. Fund

215

-23.3

9.3

12.4

Macquarie Balanced Growth Fund

791

-9.1

4.1

6.0

Perennial Better Future Trust

-17.6

9.2

16.2

Fiducian Balanced Fund

596

-10.0

4.0

6.4

Franklin Global Responsible Investment Fund

-8.1

9.0

Sector average

912

3.4

5.1

Perpetual Diversified Growth Fund

-7.5

Sector average

210

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

-11.5

12.0

4.7

6.9

Source: Rainmaker Information

Super: Not as big as you think A

Brumbie By Alex Dunnin alex.dunnin@ financialstandard .com.au www.twitter.com /alexdunnin

ustralia’s Future Fund Management Agency, already one of the biggest funds managers in the land, is getting another $10 billion nation building fund to run, the Housing Australia Future Fund. This brings the number of special so-called nation building funds the agency runs to 10, which should take its funds under management up to about $260 billion. But as impressive as this figure is, let’s remember the Future Fund’s core job, which is not to be a regular sovereign wealth fund that invests in the future of our great nation. No, it’s real job is more mundane: to build up capital reserves that the government can call upon down the track to defray the costs of the unfunded superannuation liabilities of Commonwealth public servants and military personnel. The latest budget papers report these liabilities are right now approaching $300 billion, on their way to being almost $530 billion by 2060. This means that the Future Fund, which at end June accounted for $194 billion of the $242 billion the FFMA oversees, covers only about twothirds of these liabilities. More than half the fund being invested overseas just reinforces what the Future Fund’s ‘guardians’ see as their true mission, which is

why we should be wary of being bluffed into calling the Future Fund a regular sovereign wealth fund. Having these types of government fiscal funds comes in handy, however. Australia has $515 billion in net debt, almost twice that being $895 billion in gross Commonwealth bonds on issue. If things go pear-shaped and Australia runs out of money, the Future Fund will hold off creditors. That said, Australia’s national government debt is nowhere near as bad as it sounds. It’s just 37% of GDP. National government debt in the UK is two-and-half-times bigger at about 100% of their GDP, notwithstanding they don’t have states governments racking up their own separate sovereign debts. But adding in the roughly $400 billion Australia’s state governments have in their own issued bonds brings Australia’s total public sector gross debt to $1.3 trillion. To cover that we’ll need to call in the big gun, which is the general superannuation system. Throwing around numbers so vast may seem fanciful but so too is the big number that gets tossed around whenever someone has a nation building thought bubble. “We have to put the nation’s $3.3 trillion superannuation sector to work in the national in-

terest, for the good of the people,” you’ll hear them shout. It may be a technical point, but the actual number is nowhere near that. Self-managed super funds are unlikely to climb aboard that train, nor too will many retail funds. Take out cash-constrained SIS-exempt public sector funds and other residual categories, the amount of money available drops to about $1.6 trillion. This is about half the headline $3.3 trillion figure, bellying the folly of calling all super “workers capital”, a catchphrase now doing the rounds. We should be wary of always leaving the nation building heavy lifting to a small number of mega-sized industry funds and a handful of public sector funds, all of which have trustee boards bound by the Sole Purpose Test. Which brings us back to encouraging super funds to invest into social housing projects. Even if those super funds with that $1.6 trillion aggressively invested 1-2% of their portfolios into such schemes it would raise only $30 billion. If those homes cost $200,000 each to build, that’s only 150,000 new homes –a long way short of the one million target. But there’s a good idea here. Let’s wait and see how it develops. Giddyup. fs

Super funds

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21 PERIOD ENDING – 31 AUGUST 2022

Workplace Super Products

1 year

3 years

% p.a. Rank

5 years % p.a. Rank

GROWTH INVESTMENT OPTIONS

* Rainmaker [RM] quality assessment

Retirement Products

Quality*

1 year

% p.a. Rank

3 years

% p.a. Rank

5 years

% p.a. Rank

RM Quality*

GROWTH INVESTMENT OPTIONS

HESTA - High Growth

-3.5

7.4

8.5

AAA

UniSuper Pension - High Growth

-9.1

7.9

9.8

AAA

UniSuper - High Growth

-8.2

107

7.4

8.9

AAA

Telstra Super RetireAccess - Lifestyle Growth

-2.0

7.9

8.7

AAA

Christian Super - Ethical High Growth

-4.1

7.3

7.9

AAA

Vision Income Streams - Growth

-5.1

7.8

9.0

AAA

Vision Super Saver - Growth

-4.6

7.1

8.1

AAA

Hostplus Pension - Shares Plus

-5.3

7.8

9.0

AAA

Hostplus - Shares Plus

-4.6

7.0

8.1

AAA

Rest Pension - High Growth

-1.6

7.8

8.4

AAA

Lutheran Super - High Growth

-1.6

6.8

8.1

AAA

Christian Super Pension - Ethical High Growth

-4.7

7.7

8.6

AAA

ANZ Staff Super Employee Section - Aggressive Growth

-4.1

6.8

8.0

AAA

Christian Super Pension - Ethical Growth Plus

-1.5

7.7

AAA

TWUSUPER - High Growth Option

-4.1

6.8

7.4

AAA

Suncorp Brighter Super pension - MM High Growth Fund

-7.6

7.7

9.6

AAA

Equip MyFuture - Growth Plus

-6.1

6.8

8.4

AAA

Hostplus Pension - Balanced

0.4

7.7

8.5

AAA

Rest Super - High Growth

-1.5

6.7

7.4

AAA

Lutheran Super Pension - High Growth

-1.9

7.6

9.1

AAA

Rainmaker Growth Index

-5.4

Rainmaker Growth Index

-5.7

5.2

6.7

BALANCED INVESTMENT OPTIONS

5.8

7.5

BALANCED INVESTMENT OPTIONS

Hostplus - SRI - Balanced

0.0

7.6

7.7

AAA

Hostplus Pension - SRI - Balanced

-0.1

8.5

8.6

AAA

Energy Super - SRI Balanced

-0.6

6.8

7.3

AAA

CareSuper Pension - Sustainable Balanced

-0.5

7.2

8.3

AAA

Christian Super - My Ethical Super

-0.7

6.3

6.5

AAA

Energy Super Income Stream - SRI Balanced

-1.4

7.0

7.8

AAA

CareSuper - Sustainable Balanced

-1.5

6.3

7.3

AAA

Christian Super Pension - Ethical Balanced Growth

-0.9

6.7

7.2

AAA

Christian Super - Ethical Balanced Growth

0.3

6.1

AAA

Rest Pension - Diversified

-1.4

6.5

7.1

AAA

Spirit Super - HCC and LCC Defined Benefits funds

-0.8

6.1

7.2

AAA

Telstra Super RetireAccess - Lifestyle Balanced

-1.7

6.3

7.3

AAA

Lutheran Super - Balanced Growth - MySuper

-2.0

5.8

6.9

AAA

ESSSuper Income Streams - Basic Growth

-3.7

6.3

8.1

AAA

Vision Super Saver - Balanced Growth

-4.3

5.8

6.8

AAA

AustralianSuper Choice Income - Balanced

-3.6

6.1

8.0

AAA

Rest Super - Diversified

-1.3

5.7

6.3

AAA

Suncorp Brighter Super pension - MM Growth Fund

-0.8

6.1

8.2

AAA

AustralianSuper - Balanced

-3.4

5.6

7.4

AAA

Cbus Super Income Stream - Growth

-4.1

6.0

7.6

AAA

Rainmaker Balanced Index

-4.5

Rainmaker Balanced Index

-4.8

4.1

5.6

CAPITAL STABLE INVESTMENT OPTIONS

4.5

6.2

CAPITAL STABLE INVESTMENT OPTIONS

Christian Super - Ethical Conservative Balanced

-0.8

4.4

4.9

AAA

Prime Super Income Stream - Income Focused

0.6

4.9

5.8

AAA

Vision Super Saver - Balanced

-3.1

4.4

5.7

AAA

Vision Income Streams - Balanced

-3.7

4.9

6.4

AAA

Spirit Super - Sustainable

-3.5

4.4

6.2

AAA

Christian Super Pension - Ethical Conservative Balanced

-1.3

4.8

5.4

AAA

Prime Super (Prime Division) - Income Focused

0.4

4.2

4.9

AAA

Australian Catholic Super RetireChoice - Conservative

0.6

4.4

5.6

AAA

Spirit Super - Quadrant Defined Benefits fund

-1.5

4.2

5.6

AAA

Energy Super Income Stream - Capital Managed

-3.7

4.4

5.1

AAA

Energy Super - Capital Managed

-3.0

3.8

4.3

AAA

AustralianSuper Choice Income - Conservative Balanced

-4.1

4.1

6.1

AAA

AustralianSuper - Conservative Balanced

-3.8

3.7

5.4

AAA

Aware Super Pension - Balanced Growth

-3.1

4.0

5.7

AAA

State Super (NSW) SASS - Balanced

-1.6

3.6

4.7

AAA

legalsuper Pension - Conservative Balanced

-2.3

3.9

5.4

AAA

NGS Super - Balanced

-2.8

3.5

5.0

AAA

Cbus Super Income Stream - Conservative Growth

-4.6

3.9

5.9

AAA

Australian Catholic Super Employer - LO LifetimePrime

0.1

3.5

AAA

Active Super ABP Plan - Conservative Balanced

-3.6

3.9

5.5

AAA

Rainmaker Capital Stable Index

-4.1

Rainmaker Capital Stable Index

-4.1

1.9

3.4

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

1.8

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

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

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Economics

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

Tax creeps

Figure 1. Share of individual taxpayers by tax bracket 2010-20

Alex Dunnin

ustralia’s political class is right now having the wrong policy fight over the ‘Stage 3 tax cuts’. We shouldn’t be discussing how these reforms are too aggressive, we should instead be discussing how they’re too timid. ‘Tax creep’ is a major problem for Australia’s 15 million individual taxpayers that needs a bigger solution than just tweaking the tax bracket scales every few years. Tax creep is when people move into higher tax brackets simply because of wage inflation, not because they become high income earners. The politics of tax creep is that because the tax brackets aren’t indexed, governments use them as a back-door way of getting more tax revenue. This leads to pressure on governments to legislate to lower the tax brackets, triggering massive policy fights regarding whether such reforms are tax handout for wealthy people – which is precisely the arguments we’re having now. Australia’s individual taxpayers have five tax brackets that cut in around the thresholds of $18,200, $37,000, $90,000 and $180,000. The Stage 3 tax cuts, implying there were Stage 1 and Stage 2 tax cuts before them, will raise the $37,000 tax threshold to $45,000 and to compress two brackets into one, meaning our new brackets will cut in at $18,200, $45,000 and $200,000. Analysts estimate the Stage 3 tax cuts will reduce tax revenue by about $244 billion over the 10 years after they’re introduced from 2024,

that is, by about $24 billion a year. The social equity argument is that most of the tax benefits goes to higher income earners. But of course it does because Australia has a progressive income tax system that forces higher income earners to pay higher taxes than lower income people. This manifests in how the 4% of taxpayers who in 2019-20 had taxable incomes above $180,000 paid 32% of the $225 billion Australians paid in income tax that year. Reflecting the impact of tax creep, 10 years before, in 2010-11, the 2% of taxpayers in that tax bracket paid 26% of all the individual income tax, meaning their share went up one quarter. This means tax creep has seen the proportion of taxpayers in the top tax rate double while their absolute number increased from 252,400 to 545,800. At the other end of the scale, the proportion of taxpayers in the lowest tax brackets - those with taxable income less than $37,000 - reduced 7% through the 10 years 2010 to 2020. As a proportion of all taxpayers they contracted from 49% to 38%. And totally indicating reverse bracket creep at the low end, the tax they paid as a share of the whole halved from an already tiny 4% to an even more miniscule 2%. No wonder the new Albanese Labor government is loath to jump on the ‘slash the Stage 3 tax cuts’ bandwagon – doing so could set aflame his government’s pitch to millions aspirational voters, many of whom recently voted Labor for the first time. fs

50%

10-11

11-12

12-13

13-14

14-15

15-16

16-17

17-18

18-19

19-20

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% $37,000 OR LESS

$37,000-$80/90,000

$80/90,000-$180,000

$180,000 OR MORE

Source: Australian Taxation Office

Figure 2. Share of individual taxes paid by tax bracket 2010-2020

50%

10-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19 19-20

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% $37,000 OR LESS

$37,000-$80/90,000

$80/90,000-$180,000

$180,000 OR MORE

Source: Australian Taxation Office

Financial market returns to September 2022

Financial market returns to September 2022 Australian equities

International equities US Europe Japan EM Aust Listed Property Global infrastructure Australian equities ESG International equities ESG

S&P ASX 200 S&P ASX 200 Industrials S&P ASX 200 Resources S&P ASX Small Ordinaries MSCI All Countries ex AU Local Currencies MSCI All Countries ex AU in AUD S&P 500 S&P 500 in AUD MSCI Europe MSCI Japan MSCI Emerging Markets in USD MSCI Emerging Markets in AUD S&P/ASX 200 A-REIT FTSE Developed Infrastructure Hedged MSCI Australia ESG Leaders MSCI ACWI SRI

1 month -6.2% -7.6% -2.1% -11.2% -8.3% -3.2% -9.2% -3.2% -6.0% -6.3% -11.7% -5.8% -13.6% -12.0% -7.7% -8.5%

3 months 0.4% -0.5% 2.8% -0.5% -4.4% 0.5% -4.9% 1.7% -4.1% -1.5% -11.4% -5.3% -6.7% -8.7% -2.5% -5.0%

6 months -11.6% -11.6% -11.4% -20.8% -18.1% -7.9% -20.2% -6.8% -12.1% -5.8% -21.5% -8.3% -23.2% -16.7% -13.5% -19.1%

1 year -7.7% -13.5% 17.0% -22.6% -15.3% -9.4% -15.5% -5.0% -11.2% -7.9% -27.8% -18.9% -21.5% -4.0% -11.1% -15.9%

3 years pa 2.7% 0.7% 9.8% -0.8% 6.4% 6.8% 8.2% 9.9% 1.8% 7.7% -1.7% -0.1% -5.3% 2.1% 0.8% 7.3%

5 years pa 6.8% 5.0% 13.7% 4.1% 7.0% 10.2% 9.2% 13.7% 2.8% 4.9% -1.4% 2.6% 2.6% 5.7% 4.7% 8.4%

10 years pa 8.4% 8.8% 6.9% 4.6% 10.2% 14.2% 11.7% 17.2% 7.1% 11.9% 1.4% 6.4% 7.7% 8.2% 7.8% 6.7%

Australian Fixed Interest

Bloomberg Barclays Australia (5-7)

-1.4%

-0.5%

-3.9%

-11.5%

-3.3%

0.9%

2.1%

International fixed interest High yield in USD Emerging market debt in USD Corporate investment grade Cash

Bloomberg Barclays Global Agg Hedged iBoxx Liquid High Yield in USD Barclays Emerging Markets Debt in USD Barclays Global Corporate in USD 90 Day Bank Accepted Bills

-3.5% -3.7% -6.5% -5.2% 0.2%

-3.8% -0.7% -4.5% -4.8% 0.6%

-8.3% -10.5% -15.6% -12.2% 0.8%

-12.8% -13.8% -23.8% -19.0% 0.9%

-3.6% -1.3% -7.1% -3.4% 0.5%

-0.2% 1.1% -3.0% 0.3% 1.0%

2.4% 3.2% 0.7% 2.1% 1.7%

Source: FactSet

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News

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

CPI rises despite Fed rate hikes The US Consumer Price Index (CPI) rose 0.4% in September, up 8.2% over the last year. Increases in the shelter, food, and medical care indexes were the largest of many contributors to the monthly seasonally adjusted all items increase. Though, these increases were partly offset by a 4.9% decline in the gasoline index. Meanwhile, the Federal Open Market Committee minutes said: “Inflation remained elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.” “Participants recognised that Russia’s war against Ukraine was causing tremendous human and economic hardship. Participants judged that the war and related events were creating additional upward pressure on inflation and were weighing on global economic activity.” It was also observed that inflation remained unacceptably high and well above the Committee’s longer-term goal of 2%. “Participants commented that recent inflation data generally had come in above expectations and that, correspondingly, inflation was declining more slowly than they had previously been anticipating,” the minutes said. “Price pressures had remained elevated and had persisted across a broad array of product categories.” Consequently, bearing in mind “unacceptably” high levels of inflation, participants remarked that purposefully moving to a restrictive policy stance in the near term was consistent with riskmanagement considerations. fs

01: Jérôme Broustra

head of investment specialists, fixed income and multi-asset solutions AXA Investment Managers

Global green bond market continues to grow Rachel Alembakis

T The quote

The green bond market is doubling almost every year and the truth is that it has become much more diversified.

otal issuance of green bonds certified under the Climate Bonds Initiative has surpassed US$31 billion year to date, while investors say the market continues to grow and diversify. The Climate Bonds Initiative released its latest statistics on green bonds certified under its certification process. The Climate Bonds Standard is one of the leading certification schemes for green bonds globally. CBI noted that cumulative issuance under the Climate Bonds Standard has surpassed US$254 billion in 2022. The State of the Netherlands issued the single largest certified bond in 2022 with US$5.2 billion in certified green issuance across several sectors including solar, wind, marine renewable energy, water infrastructure, low carbon buildings and low carbon transport. Separately, AXA Investment Managers head of investment specialists fixed income and multi asset solutions Jérôme Broustra01 spoke with FS Sustainability regarding green bonds. “The green bond market is doubling almost

every year and the truth is that it has become much more diversified,” said Broustra. “A few years ago, green bond issuance was tilted towards and driven by utilities and quasi-sovereign, and now we have a much more granular footprint with a lot of sovereigns and corporates issuing green bonds.” Broustra set the overall universe of green bonds – certified and non-certified – at US$1 trillion. Demand is growing as investors seek to not only invest in green assets but also because of the characteristics of green bonds overall. “We see a lot of volatility in the market based on geopolitics, inflation, and central banks acting to tackle inflation,” Broustra said. “What we observe is during those phases of the market, we feel there's more resilience in the green bond market because green bondholders are stickier investors. “The wider spreads we are seeing in conventional bond markets are less visible in the green bond market because there's no panic selling. Investors in green bonds will hold them longer than conventional bonds.” fs

Fed looks at big bank failures

Reserve Bank downplays exchange rate inflationary impacts

The Federal Reserve has invited public comment on proposed rulemaking to enhance regulators’ ability to resolve large bank failures. The Fed said recent merger activity and growth has increased the size of large US banking organisations, which could lessen regulators’ capacity to resolve dissolutions without disruption. The advance notice of proposed rulemaking asks for comment on potential new requirements and resources that could be used for an orderly resolution of large banking organisations, including a long-term debt requirement. The draft advance notice would also seek comment on the costs associated with proposals for large banking organisations and their customers. Fed vice chair for supervision Michael Barr said: “As the banking system changes, policymakers must continuously evaluate whether resolutionrelated standards and prudential standards for large banks keep pace.” Separately, Fed vice chair Lael Brainard raised concerns about the increased banking concentration in the $250-$700 billion category. “Since we know from experience that even noncomplex banks in that range can pose risks to the broader financial system when they experience financial distress, I am encouraged that the board is seeking comment on an advance proposal to improve their resolvability through long-term debt requirements,” she said. fs

Andrew McKean

Reserve Bank of Australia (RBA) assistant governor Christopher Kent said inflation is too high in most economies, reflecting disruptions to supply coupled with strong demand. Kent explained how the behaviour of exchange rates, both real and nominal, conflated these inflationary pressures. “For many years over the past decade or so, actual wages growth was much weaker than the bank had forecast. The bank has discussed a range of reasons for that unexpected weakness, including rising participation rates, heightened global competition, changes in bargaining arrangements and technology advancements,” Kent said. But another factor that contributed to the spare capacity in the labour market, affecting wages growth, was the long shadow cast by the end of the mining boom. “This massive expansion in productive capacity underpinned a sizeable and prolonged increase in the demand for Australian labour. But once the new infrastructure was in place, and coincidentally the terms of trade began to decline, the demand for labour eased noticeably,” Kent said. “The surge in demand for labour in the boom years and the decline thereafter had significant effects on wages growth and the Australian dollar, which persisted for many years after the peak in mining investment.” Two margins of adjustment enabled the resources sector to attract labour in its boom years. Firstly, companies in the resources offered higher wages in Australian dollar terms than those being offered elsewhere, encouraging workers across the country to shift away from other endeavours.

The nominal exchange rate provided a second a margin of adjustment, helping to contain broader inflationary pressures despite strong growth in domestic demand. “The key point was that the adjustment in the boom years was achieved with a balance of a rise in wages in Australian dollar terms and a nominal exchange rate appreciation that pushed up wages in foreign currency terms,” Kent said. Though, once the terms of trade and mining investment declined and the associated labour was freed up from the resources sector, the process of adjustment worked in reverse. “The nominal exchange rate depreciation that followed reduced the cost of Australian labour in foreign currency terms, helping to guide labour that was now in surplus in the resources sector back into other traded sectors,” Kent said. However, by itself, this depreciation wasn’t sufficient to restore the level of competitiveness of Australian labour to its pre-boom levels and absorb all the economy’s spare capacity. Rather, that was achieved by slower growth in the cost of labour in Australian dollar terms relative to trading partners, in which came a long period of low wages growth. It took several years after mining investment had peaked for the real Australia trade-weighted index of the exchange rate (TWI) to return close to its pre-mining boom level. But, while slower wages contributed only gradually to adjustments in the real exchange rate, this isn’t true of the nominal exchange rate, Kent explained. “The nominal TWI didn’t start in earnest until around 18 months after the peak in the terms of trade. This may have in part reflected expectations for the terms of trade, which for a time remained at elevated levels even when the actual terms of trade had declined,” he said. fs

Sector reviews

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

Figure 1. ASX Value vs ESG leaders, rolling 12 months

Australian equities Prepared by: Rainmaker Information Source: FactSet

MSCI Australia Value

60%

MSCI Aust ESG Leaders

50% 40%

Growth, value and ESG Alex Dunnin

20% 10% 0% -10% -20% -30% -40%

Figure 2. ASX Value, Growth vs ESG leaders

MSCI Australia Value

190

MSCI Australia Growth

180

MSCI Aust ESG Leaders

170 160 150 140 130 120 110 100 SEP-22 AUG-22 JUL-22 JUN-22 MAY-22 APR-22 MAR-22 FEB-22 JAN-22 DEC-21 NOV-21 OCT-21 SEP-21 AUG-21 JUL-21 JUN-21 MAY-21 APR-21 MAR-21 FEB-21 JAN-21 DEC-20 NOV-20 OCT-20 SEP-20 AUG-20 JUL-20 JUN-20 MAY-20 APR-20 MAR-20

But the rubber meets the road when we overlay these indexes against the MSCI Australian ESG Leaders Index, which is a capitalisation weighted index of companies that score highly on MSCI’s ESG research regarding environmental, social and governance assessments. The correlation between the MSCI Value Index and their Australian ESG Leaders Index is a whopping 0.95 being 40% higher than it is between the MSCI Growth Index. Correlations this high give us a new lens through which to view ESG outperformance. That is, while we can wax lyrical about sophisticated ESG assessments, maybe the ESG performance premium we enjoyed up until early this year was in reality just an investment style tilt. If it was, by 2019 end when the Growth Index had caught back up with Value Index, the writing was probably on the wall for ESG’s performance premiumia. That being the case, the mixed story since the onset of COVID-19 helps explain recent jitters among ESG investors. This is because since end-2020 the ESG Leaders Index has lost its way, remaining stuck directionless midway between Growth and Value. fs

JUN-22 DEC-21 JUN-21 DEC-20 JUN-20 DEC-19 JUN-19 DEC-18 JUN-18 DEC-17 JUN-17 DEC-16 JUN-16 DEC-15 JUN-15 DEC-14 JUN-14 DEC-13 JUN-13 DEC-12 JUN-12 DEC-11 JUN-11 DEC-10 JUN-10 DEC-09 JUN-09 DEC-08

ustralia’s stock market continues to struggle, with the S&P ASX 200 delivering -7.7% in the 12 months to end September. The rolling three-year return is just 2.7% pa. We have to go back as far the five and 10-year returns to get upbeat returns of 6.8% pa and 8.4% pa. Add in inflation and the real return over 12-months crashes to -14%. So it’s timely to have a refesher look at the investment style indexes to see if they can shed some light on what’s going on under the bonnet. Proving the point, turns out it tells us a lot about what’s going on in the ESG sector as well. Focusing on the month-by-month rolling 12-month returns so as to remove short-run noise, reveals a 0.93 correlation between the S&P ASX 200 and the MSCI Value Index. The correlation between the S&P ASX 200 and the MSCI Growth Index is noticebly lower at 0.84. The differences here remind how important are investment style factors. Indeed through the same period the correlation between the MSCI Value and MSCI Growth Indexes is 0.52, about where it should be.

30%

Figure 1. CBOE VIX Vs S&P 500 Price Index

International equities

10000

S&P 500 PRICE INDEX

CBOE VIX

Prepared by: Rainmaker Information

Source: FactSet

How to read the VIX index John Dyall

CBOE VIX

60 50

1000

40 30 20 10

100

0 JAN-22

JAN-20

JAN-18

JAN-16

JAN-14

JAN-12

JAN-10

JAN-08

JAN-06

JAN-04

JAN-02

JAN-00

JAN-98

JAN-96

JAN-94

JAN-92

JAN-90

Figure 2. CBOE VIX Vs realised 30-day volatility VOLATILITY % PA

120 CBOE VIX

100

S&P 500 30-day vol.

80 60 40 20 0 MAR-22

MAR-20

MAR-18

MAR-16

MAR-14

MAR-12

MAR-10

MAR-08

MAR-06

MAR-04

MAR-02

MAR-00

MAR-98

MAR-96

MAR-94

MAR-92

MAR-90

ne of the major indexes referenced when talking about stockmarkets – particularly when stockmarkets are falling - is the VIX index. The VIX is sometimes known as the “fear” index because commentators only talk about it when stockmarkets are falling and investors are “afraid”. The idea behind that concept is that stockmarkets fall faster than they rise, which means that volatility is higher when markets are falling and lower when markets are rising. The VIX was developed in the late 1980s by academics as a tool in the pricing of derivatives such as futures and options. These derivatives require an estimate of future volatility as a part of their pricing formulae. In 1993 the Chicago Board of Exchange announced that the index, called the CBOE Market Volatility Index, or VIX, would be reported in real time. But what is it, really? There are two ways to calculate volatility in financial markets. The first is to collect data on, say, the daily endprice of an index or security. The volatility (or standard deviation) of these price changes are

then calculated. This is the historical volatility. The second way is to collect prices on something that requires an estimate of future volatility as a part of its pricing formula. In the case of calculating the VIX, options on the S&P 500 Index that expire, on average, 30 days in the future are used to calculate the current VIX. The VIX is not really a better predictor of future volatility than the volatility of the previous 30 days; it is just a value that is used to calculate the price of something that expires at some point in the future. The current VIX level of around 32 is much higher than the long run average of 20, but also much lower than the peak of 83 (which occurred in March 2020). The average of historic volatility is a bit less, at around 15% pa. Since the S&P 500 Price Index peaked in January this year it has fallen 23%. At the time the VIX was 17, just over half of what it is now. It certainly was not predicting the losses experienced since then. What we should take away from this better understanding of the VIX is this: pay attention to it but don’t use it to predict turning points. fs

S&P 500 Price Index

CPD

www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

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 below for instructions on how to submit your answers].

Australian equitie

International equities

CPD Questions 1–3

CPD Questions 4–6

CPD Program Instructions

1. ASX index returns in the year to end September, adjusted for inflation, are -14%. a) True. b) False.

4. CBOE VIX stands for Chicago Board of Exchange Volatility Index. a) True. b) False.

2. The correlation between the MSCI Value Index and the MSCI Australian ESG Leaders Index is: a) 0.52 b) 0.84 c) 0.93 d) 0.95

5. The VIX is a predictor of future volatility in the S&P 500 Price Index. a) True. b) False.

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.

3. Since the onset of COVID-19, performance of the MSCI Australian ESG Leaders Index has: a) surged to all-time highs. b) collapsed. c) become stuck midway between the Growth and Value indexes. d) matched inflation.

6. How does the October 2022 VIX level of 32 compare to the historic VIX average? a) It is higher. b) It is lower.

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www.financialstandard.com.au 31 October 2022 | Volume 20 Number 21

CAUTION TO THE WIND Challenger Solutions Group general manager Simon Brinsmead has taken an unconventional career path. While not recommending others follow in his footsteps, there’s much to be admired about his unabashed individualism and pursuit of the interesting. Andrew McKean writes.

n a family of eight, Simon Brinsmead says he was the child to slip through, the perfect mistake. With a sizeable age difference between himself and both his older and younger siblings, he remembers that he was regularly left to his own devices growing up, often quite lonely. Unfortunately, school wasn’t a place of much respite, with Brinsmead feeling trapped in a system that he felt was more gaol than learning space. “I’d pretty much failed high school, I didn’t do very well,” Brinsmead shares. “I became a rebel without a cause and because I didn’t have some guidance, I was very, very naïve when I left school.” Taking to hospitality, Brinsmead found a job through TAFE at the Novotel Wollongong North Beach as a bellboy – or so he thought. Come time to sign on the dotted line of his employment contract, a problem arose. “They asked for my licence, which I’d actually lost, so they couldn’t give me the job,” Brinsmead admits. A silver lining, he was still taken on in the bar where he explains that he learned “bucket loads,” including how to deal with difficult people and be quick on his feet. After a few years, he moved to Sydney to work at the Renaissance Hotel, now the Marriott, finally getting that elusive bellboy position. “They still didn’t get my licence; they never asked, so I got to drive some really nice cars,” he says with a smirk. Nice cars aside, working terrible hours and realising that he wasn’t getting paid much, Brinsmead was spurred to action. “I was doing a lot of thinking, starting to engage more with the guests checking into the hotel, asking them what they do, just trying to be more observant, and I met some really interesting people,” Brinsmead reflects. “Funnily enough I met a distant relative who worked at Commonwealth Bank on the bond trading floor, he spent half a day with me inviting me to the bond trading floor. “Long story short, I realised what I’m really interested in is investing and wealth creation.” Brinsmead got his break in the Colonial First State investor call center. Eager to progress, he left after only a few months to join Skandia as an investment analyst. “I thought, ‘Geronimo, I’m going to go headfirst and do what’s interesting’,” he says. “I tend to get bored easily and refuse to do something just for the sake of having to do it for a job, so I took the plunge and went to work for Skandia.” Deeply involved with fixed income and currency portfolio management at the multimanager level, after several years Brinsmead took it upon himself to have another Geronimo moment.

Invited to join Barclays Global Investors in the consultant relations channel, Brinsmead went to the other side of the table. “I was really excited about that because I realised that during my time at Skandia, I enjoyed doing deals and transactional things. Although I find investment strategy work satisfying, I liked the actual people engagement and psychology of problem solving,” Brinsmead says. “I did that until we got ‘BlackRocked’ and I wasn’t particularly keen on that environment. I don’t think there was too much I could do there because we already had all the clients.” With an appetite to grow something and build a business, Brinsmead then joined Deutsche Asset Management. “I knew what I was getting myself into there because Deutsche had been through some troubles. On the asset management side there was a lot of change, but I was very eager to have that opportunity to really get into the weeds,” he says. “Because no one else was putting their hand up, I wrote up the sales plan for the Australian institutional business. That’s where I really cut my teeth into actual solution development and going above and beyond vanilla investment strategy in institutional sales.” After nearly nine years as co-head of institutional sales Australia and New Zealand and head of consultant relations EMEA and Asia, Brinsmead was hot on the idea of taking a year off. “I didn’t realise until I made the decision to leave how highly strung I was. I thought I needed to recalibrate, spend some time with the family, and get healthy again,” Brinsmead says. It was the first time he’d actively left a job without having somewhere to go; “I thought I’m just going to embrace the uncertainty and switch off.” “I really wanted to think about what I want to do, because whatever I did next, I'd be pretty intense at it, and unless I was doing something that set off that spark inside of me, it would’ve been painful,” he says. Initially, Brinsmead was inclined to get involved with a different part of the value chain, in investment management or just generally within financial services. He initially flagged advice as a potential area of focus because of the industry’s flux and because there were apparent issues in the marketplace where investors or members in funds struggled to get from point to point. “It’s because of the advice issue that I had this hypothesis that something would have to happen regarding more intelligent product design, to embed advice into product design to get members from A to B, if there’s a lack of actual explicit traditional advice,” Brinsmead says. But after six months of hypothesising, an opportunity came up to build an institutional proposition in the life business at Challenger. “When Challenger approached me, I had this moment where half my life just flashed before my eyes. It reminded me of the time I

It’s quite fascinating because I can hand on my heart say a lot of what we’re thinking about, I don’t know what the answer is going to be... Simon Brinsmead

was probably having the most fun, at Deutsche when I was doing lots of interesting work on tail risk protection solutions and overlay solutions,” he says. “I then thought, ‘You know what, Challenger isn’t doing this idea I’ve got but they want to penetrate the institutional market. Maybe if we think about it slightly differently, we could create a new way of thinking, partnering with super funds, integrating our balance sheet in an institutional way into the funds, helping them to develop their proposition’. “That was a leap of faith Challenger took and because of it we’ve done some incredible things." Walking the talk, Brinsmead says that Challenger has managed to build an institutional proposition in the life business in just three years. Last year alone, the investment manager secured approximately 70% of its life business through the institutional channel. Still, not content with resting on past laurels, Brinsmead is eager to head into the unknown in terms of what retirement is and what solution development is. “It’s quite fascinating because I can hand on my heart say a lot of what we’re thinking about, I don’t know what the answer is going to be, but we’ve got the know-how to think about it, the curiosity to think about it and the licence to be creative about it,” he says. “For the first time in my career, I have a team where we’ve got the IP to genuinely be creative and problem solve. We’ve got a Solutions Group which can be much more laser focused with our clients with greater flexibility. “We’re in the business of thinking how to bring solutions together in an ecosystem that’s going to help solve the retirement puzzle.” fs

SCAN THE QR CODE About Generation Life video By Grant Hackett OAM Chief Executive Officer and Managing Director Generation Life