Financial Standard Volume 18 Number 06

www.financialstandard.com.au

30 March 2020 | Volume 18 Number 06

07

10

22

Intermede

Platform cash rates

China

09

14

32

Peter Horsfield, Financial Management Works

Global equities

Greg Cantor ACSRF

Product showcase:

Opinion:

Featurette:

Feature:

Featurette:

Profile:

www.financialstandard.com.au

07

10

22

Intermede

Platform cash rates

China

09

14

32

Peter Horsfield, Financial Management Works

Global equities

Greg Cantor ACSRF

Product showcase:

Opinion:

Fixed income liquidity squeeze bites Kanika Sood

inancial advisers and investors in fixed inF come funds are feeling the heat as markets trade less frequently in the ongoing COVID-19 correction, and they are slugged with exit costs.

Unlisted managed fixed income funds from giants like Vanguard and PIMCO to smaller managers such as Ardea and Kapstream increased their sell spreads in the week ending March 20, while exchange traded funds showed substantial discounts for the first time on March 12, and many listed investment companies and trusts (LICs and LITs) have long traded at discounts to their net tangible assets.

Fixed income markets in March had far more sellers than buyers, and bid/ask spreads widened significantly, even for heavily traded and safe securities.

Australian government bonds were trading at bid/ask spreads of 15 to 20bps up from the under 1bps normally, while global high-yield debt was showing even greater dispersion in the spreads as of March 19, according to data compiled by Schroders.

The effect is that those looking to rebalance their portfolios move to cash, or buy equities which have fallen significantly since their February 21 peak, must now take an extra hit if they exit a fund.

“Typically, the indicative net asset value is calculated at the midpoint of the bid (seller’s price) and offer (buyer’s price) but because the bid/ask spreads are so wide, market makers are [pricing off] where the bids are. As a result, iNAV is a fairly lagging indicator at the moment,” Lonsec head of listed product Peter Green says.

Australian fixed income ETFs were trading at -2.87% of average discount at March 23 close, compared to all of previous year where the trading price was 0.12% higher than the underlying portfolio’s value.

The ETF with the biggest discounts was VanEck’s corporate bond plus ETF (PLUS) which ended the day’s trading at -11.86% to the iNAV. “You can’t actually get rid of the discount in current market conditions,” VanEck director of investments Russel Chesler says.

“The only way is if markets were to improve in liquidity, bonds are repriced, or if RBA starts buying credit and corporate bonds, though I doubt that will be the case.”

Chesler points to previous credit market dis-

locations to say why ETFs may be a better vehicle even though there isn’t a solution to fix the discounts.

“Fixed income ETFs are relatively new and weren’t around during the GFC or the credit crisis in 2011 when credit and mortgage funds froze. ETFs are more transparent [and still provide liquidity albeit a discount] so you can see exactly what’s going on,” Chesler says.

Another ETF issuer BetaShares, whose Australian Investment Grade Corporate Bond ETF ended March 23 trading with a discount of above 3% thinks the same.

“What we are seeing right now is that there is no meeting of the minds between the buyers and the sellers,” Vynokur says.

“ETFs are not trading at a discount themselves, but the underlying bonds are trading less frequently and so the net asset value (which is calculated with reference to the latest traded price of the bonds) is not aligned with the trading price.”

He adds ETFs were unlikely to freeze creations and redemptions in the near future.

“We will see a reinvigoration of the Australian corporate bond market in the coming weeks as banks continue lending, the securities will reprice and facilitate growth and liquidity again,” he says.

Bringing up the rear, with the worst discounts are credit LICs and LITs. While they have a means to address it to some extent through buy backs, they are plagued by illiquidity and their closed-end structure.

“Buy backs are often limited in value, and managers really don’t have many means to address discounts until sentiment in underlying markets improves,” Zenith head of real assets and listed strategies Dugald Higgins says.

“For equities LICs, the dispersion of the portfolio return (NTA) and the shareholder return {unit price) tends to be +/- 15% in a year but over five years, it can be a lot lower at around +/- 5%.”

Higgins also thinks the discounts in fixed income ETFs are nothing to worry about for long-term investors but those looking to make a change should avoid acting irrational.

“If you don’t have to sell, the discounts are not a consideration,” he says.

“But if you do, practice what we call good trading hygiene in trading – avoid putting in big orders at market and avoid trading near open and close, as this is when the trading price and NAV differences tend to be the widest.” fs

30 March 2020 | Volume 18 Number 06 www.financialstandard.com.au 20 January 2020 | Volume 18 Number 01

Featurette:

Feature:

Featurette:

Profile:

SMSFs expected to outperform Eliza Bavin

Russel Chesler

director of investments VanEck.

SMSFs are expected to outperform in the current climate, due to higher than average exposures to cash and other low volatility assets, according to Rainmaker research.

Around a quarter of the SMSF sector is held in cash and about 45% is held in shares, compared to other super funds that hold 10% in cash and 60% in shares on average.

Rainmaker executive director of research Alex Dunnin said: “This heavy exposure to low risk assets like cash may prove to be fruitful in the current COVID-19 climate as they may be better protected than the average not-for-profit and retail fund.”

“Some super funds’ diversified default investment options have fallen 10-15% as a result of the current market conditions.”

SMSFs reached a peak of 33% of all superannuation funds under management (FUM) in 2012, though this has since dropped to 26%, which is around $750 billion.

Continued on page 4

COVID-19 to hasten mergers Harrison Worley

Latest analysis of Australia’s superannuation industry shows COVID-19 may prove the catalyst for small superannuation funds to finally pull the trigger and merge.

Rice Warner believes the turmoil experienced across financial services will soon force small players in the super industry to accelerate merger discussions, even though the environment is more difficult to successfully execute a fund marriage than 12 months ago.

Explaining how it anticipates the pandemic will impact Australia’s super funds, the research firm said funds would be forced to cut costs as the asset-based fees or indirect costs charged to their investment portfolio fall.

Making things even more difficult, members are now scrambling to get in touch with their super fund, especially after the government allowed early access to superannuation for Australians under financial stress amid the crisis.

Continued on page 4

2

News

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

COVID-19 shaves $290bn off superannuation

Editorial

Kanika Sood

Jamie Williamson

C

Editor

And just like that, what was just weeks ago considered a health crisis in one specific region in one specific country has evolved into a worldwide emergency.

The impact COVID-19 is having and will continue to have on our collective health and way of life for some time to come is going to be immense, to say the least.

But it is the effect it’s having on the economy that may reverberate the loudest.

On March 22 Prime Minister Scott Morrison announced further social distancing measures that struck at the heart of Australia’s hospitality industry. The following day, more than 100,000 people queued up outside their local Centrelink branches – many of which had never before stepped foot inside a Centrelink office, let alone navigated the complexities of its system.

This is just the tip of the iceberg.

There will be more lay-offs to come, more scaling back of work hours and salaries and sadly, businesses, mostly small, will ultimately close taking with them some if not all of the retirement savings of the owner.

Super contributions will stop being made and the issue of affordability in financial advice will be further exacerbated, making it unattainable for those who will need it most, when they need it most.

Yes, the government has taken some steps ensure support is in place – but how effective will the proposed measures really be, and what of the domino effect when it comes to consequences?

For example, the early release of super up to $20,000 over two financial years to those who lose their job or 20% of their income.

We all know the power of superannuation is the compounding of returns. Rainmaker modelling shows that if a 30-year-old draws $20,000 out of their super now, their balance at retirement will have taken an $80,000 hit in the long run.

And the flow-on impact will be liquidity issues for super funds, possible underinsurance, a likely increase in fees, and the need for super funds – again mostly small – to merge, leaving the nation with less choice when it comes to who they trust with their savings.

Not only that, but having announced such a measure without consultation with the industry undermines the tireless work of the super and financial advice sectors in educating members and clients about the importance of their retirement savings.

They will continue to do that work, and I hope with even more passion than previous because now, more than ever, Aussies need sound financial guidance.

But will the people who need $10,000 or $20,000 to get through the coming months and years understand what they’re losing over the long term?

The government may have made the rules, but the industry has been left with the responsibility to inform people in what the Prime Minister has said is likely to be the worst year of their lives. fs

The quote

As difficult as this recent period is, we should take solace that it takes us back just to where many of us were two years ago.

OVID-19 and the accompanying market correction temporarily wiped out nearly $290 billion from Australia’s superannuation system since the ASX’s February 20 peak, according to new analysis from Rainmaker Information.

Many superannuation funds lost between 10% and 14% as the equity markets plunged, as at March 12.

“Of Australia’s $2.9 trillion overall in superannuation, about $2.2 trillion is non-self-managed. If we apply a 13% fall to this, it implies a loss in the order of magnitude of $290 billion,” Rainmaker executive director of research and compliance Alex Dunnin said.

The country’s largest superannuation fund AustralianSuper, for example, lost about 13.3% in the three-week period. The fund has since revised down its returns further, as it revalues unlisted assets.

In the three-week period ending March 12, while superannuation funds fell about 13%, the stock markets were down much more, to the tune of 20%.

“It shows that diversification did pay off,” Dunnin said.

“The interesting conundrum is that [even though funds have continued to diversify], they still show a 94% correlation to equities.”

While the $290 billion seems high for now, members will benefit from the upside in the recovery, Dunnin said.

“As difficult as this recent period is, we should take solace that it takes us back just to where many of us were two years ago,” he said.

“It is very wrong to say super has or is being wiped out. And we’ve learned from previous crises that super has this uncanny habit of surprising on the upside. It’s done so in the past and it will do so again.”

On March 25 the ASX opened 6% higher, while the Dow climbed up 11% in the previous day’s trading as the United States moved closer to a US $2 trillion coronavirus rescue package, even though it remains to be seen if the gains can be sustained.

During the trough of the GFC super funds averaged -8% in 2008-09 and -13% in 2009-10.

“Since then super funds have had a 10-year run of positive returns, six of which were around 10% or more. This delivered members 8.5% p.a. on average in this period,” Dunnin said. fs

Australian Unity investment boss to lead Mercer Harrison Worley

Mercer has tapped Australian Unity’s chief investment officer to lead its Australian office.

Australian Unity chief investment officer and wealth and capital markets chief executive David Bryant has been appointed as Mercer Australia chief executive and the leader of the global firm’s Pacific zone operations.

Reporting to Mercer international region president David Anderson, Bryant will replace the firm’s outgoing boss Ben Walsh, who will join AIA Australia as chief life insurance officer in June.

Anderson said Bryant’s 28 years of experience across the financial services industry made him the right person to leader Mercer forward.

“David has substantial experience leading multiple lines of business and has a strong track record of building highly successful and diverse leadership teams to execute on new strategies,” Bryant said.

“David has long-standing relationships across the industry, notable depth in corporate governance and a strong market presence. He is also known for having the right balance between strategy and execution focus.”

Bryant - formerly Perpetual general manager of superannuation, and private clients - said he was excited to join Mercer at what he labelled a “dynamic” time for clients and colleagues.

“I look forward to working with teams across the Pacific, including the leadership team, to drive profitable growth through delivering the most innovative solutions and high-quality service to clients to meet their current and future needs,” Bryant said.

Anderson said Walsh’s responsibilities will still

transition to Mercer head of industry and public sector superannuation Jo-Anne Bloch from April 30. Bloch will hold the reins until Bryant officials begins his new role.

“I thank Ben Walsh for his leadership in the Pacific over the last five years,” Anderson said.

“Our team’s achievements under his leadership are many during a period of significant growth and substantial change. Further, I want to thank Jo-Anne Bloch, who will be our interim Pacific zone leader and Australia chIef executive, starting April 30 until David Bryant commences with Mercer.

“A huge thank you to Ben and Jo-Anne for their leading contributions to our successful leadership transition.”

Walsh announced his departure from Mercer in mid-March, saying he will exit on April 30.

Anderson paid tribute to Walsh’s contribution to the firm, which began in the early 1990s when he joined as a graduate.

“Ben has been a valued and highly respected colleague for 26 years,” Anderson said.

“We are proud of the many accomplishments of our teams in the Pacific under Ben’s leadership and we wish him every success for the future.”

Anderson said Bloch was well-known and respected by people both within and outside the organisation, and confirmed the transition of responsibility would be complete by May. At the same time it was announce Walsh would join AIA. “In heading up the Life pillar of the business, Ben will pay a key role in helping us realise our vision of making Australia and New Zealand the healthiest and best protected nations in the world,” AIA chief executive Damien Mu said. fs

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www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

01: Stefan Strano

SMSFs expected to outperform

chief executive Club Plus Super

Continued from page 1 “A higher than average exposure to cash previously dampened the returns of the average SMSF when compared to a retail or not-for-profit fund, so perhaps it also damaged their appeal.”

Interest in SMSFs has lowered, experiencing a 75% drop from their peak, the research showed.

A decade ago there were a net 40,000 SMSFs started each year, while only 12,000 were started in 2019.

Meanwhile annual superannuation contributions have fallen from $157 billion to $130 billion, and SMSFs made up 90% of the reductions.

This number is even more significant given that SMSFs only make up 9% of all superannuation members in Australia.

The research pointed to the introduction of the Transfer Balance Cap (TBC) in 2017 as a key cause for the reduction.

Following its introduction retirees with large balances, many of whom were likely members of small funds, appear to have responded by significantly reducing their contributions.

“The drop in contributions has been so extreme that SMSFs are only marginally ahead of the retail fund segment, which fell out of favour with Australians after the Global Financial Crisis,” Dunnin said.

Other determining factors contributing to a decline in contributions are increased regulatory scrutiny, reductions in their taxation advantages and persistent attention on the segment’s low benchmark investment returns. fs

COVID-19 to hasten mergers Continued from page 1 “These contributions to fee income will have fallen considerably, and several funds will now be in a position where they will need to cut services or increase member fees or their indirect costs,” Rice Warner said.

“At the same time, demand from members for some services is spiking.

“We expect this might tip some of the smaller funds into merger negotiations – but they may find the climate a lot less amenable than a year ago.”

Conversely, the firm said large super funds and their consultants would continue business as usual.

“While the nature of the work and some priorities have changed, the industry has a list of requirements to comply with new and pending laws,” Rice Warner said.

“Focusing on getting this done efficiently will benefit funds as they emerge from the gloom late this year.”

However, the firm noted funds with a high unlisted asset and infrastructure exposures would need to avoid the mistakes made by funds during the GFC, whereby several super funds did not revalue their unlisted assets until APRA forced them to do so.

“The result is that some members switched their investments into portfolios which were subsequently revalued downward sharply after the equity markets had rebounded,” the firm said. fs

Industry fund face reality of shutdown Elizabeth McArthur

W

The quote

We encourage club members to look out for each other in the months ahead, albeit remotely.

We are acutely aware that for many people, clubs provide them with their primary social outlet.

ith close to or more than half of their members sitting in the millennial age range, the likes of Hostplus, Club Plus and Rest are likely to be some of those hit hardest by the ongoing COVID-19 pandemic with many, especially those in the hospitality industry, already facing unemployment.

These funds now face a series of challenges at once: their members are likely to be young with lower balances, may be facing unemployment and are likely to be eligible to access $10,000 from their super this year under the government’s plan to assist those facing financial hardship as a result of COVID-19.

Rainmaker analysis of APRA data shows 58% of Rest’s membership are millennials.

About 58% of Hostplus’ membership also sit in the millennial pool, however most recent APRA data doesn’t account for Club Super’s members which recently transitioned to Hostplus following the two funds’ merger. About 44% of Club’s members are millennials.

Only 31% of Rest FUM is held by millennials and 25% of Hostplus FUM. Club Plus’ membership is 42% millennial.

However, only 14% of its funds under management are held by millennial members.

Following the announcement from the government that clubs, bars and dine-in restaurants would have to close many Club Plus members are likely to have been stood down from their jobs and are facing an uncertain employment future.

Club Plus chief executive Stefan Strano 01 took to LinkedIn to share his thoughts on the unprecedented shutdown clubs are facing.

“While the clubs are closed for now, many of the people that make it what it is are ready and willing to work now,” Strano said.

“If your business can operate and needs new talent, please message me and I can connect you with the management of a club near you.”

On March 20, Club Plus wrote to members saying it had a number of enquiries from clubs about whether members with income insurance could claim if their employer was forced to close due to the pandemic.

“Income protection insurance is not business interruption insurance,” Club Plus said.

“Income protection insurance protects our members who are unable to work because of their own illness or injury.”

The fund directed members to the government support available.

“Unfortunately, if your employer has closed down or your employment has ceased for any [reason other than illness or injury] you are not covered for income protection insurance,” it said.

On March 23, Club Plus instructed members on how they could apply for early release of up to $10,000 from their super if they have been negatively impacted by COVID-19 and the shutdown.

Clubs NSW, co-founder of Club Plus and the peak industry body for clubs in NSW, said this is a devastating time for the industry and the 63,000 people in NSW alone who rely on clubs for their living.

“We expect many employees will be stood down for an extended period of time. Our thoughts are with them today,” Clubs NSW said.

ClubsNSW said its focus would be on ensuring that when the shutdown is lifted the industry could resume trading and remain viable.

“We encourage club members to look out for each other in the months ahead, albeit remotely. We are acutely aware that for many people, clubs provide them with their primary social outlet,” ClubsNSW said.

“Our message to club members and employees is – look after yourselves and if you need to talk to someone, call a family member or friend, or failing that contact Lifeline on 13 11 14.”

Hostplus chief executive David Elia said that the fund has not had many enquiries from members about accessing the $10,000 yet.

“Many members will not want to crystallise current losses by unnecessarily accessing their super accounts so as to take advantage of the eventual recovery in investment markets,” Elia said.

“To date we have had very very little, a handful of inquiries. The scheme does not come into operations until circa mid-April.”

He also said the early releases could pose administrative issues for the industry broadly.

“Many funds are already at full capacity dealing with member inquires,” Elia said.

“This new category of early release claims will most likely have to be processed manually which will require some time for fund administrators to implement. There is also a real and heightened level of risk around this early release scheme arising from identity fraud.”

While many retail stores currently remain open the impact of COVID-19 on the sector means Rest members are also facing a difficult year, Rest chief executive Vicki Doyle said.

“Many Rest members work in part-time and casual jobs in the retail industry, so they will be doing it tough in the coming months,” she said.

Doyle assured members that it is well placed to allow those who wish to access their super to do so.

“Rest has extensive fund assets including cash, and other liquid assets, and we are comfortable about managing our illiquid assets such as property and infrastructure,” Doyle said. fs

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6

News

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

01: Brendan Coates

02: Bernie Dean

03: Sally Loane

program director Grattan Institute

chief executive Industry Super Australia

chief executive Financial Services Council

Australia to lean on super Harrison Worley and Kanika Sood

T

he superannuation sector has been called on to act as a key pillar in Australia’s response to the COVID-19 pandemic, with the early release of super a central tenet of the government’s new policy initiatives.

The government’s latest suite of stimulus measures designed to handle the outbreak’s economic fallout were announced on March 22, including the early release of super for Australians in financial stress as a result of COVID-19.

Eligible Australians will be able to draw up to $10,000 from their super accounts for the rest of this financial year, as well as an additional $10,000 over the 2020-21 financial year.

The measure is expected to cost the budget up to $1.2 billion over the forward estimates, with the government set to allow Australians to access the funds tax-free. Additionally, the release of super under these circumstances will not impact an individual’s Centrelink or Veterans’ Affairs payments.

In total, Treasury estimates it will cost about $27 billion or 1% of the superannuation system’s total assets.

To add context, in the five years to 2019, 361,000 account holders took out an average of $8000, totaling $2.9 billion in total early release of super due to hardship, according to Rainmaker analysis of APRA data.

“The $10,000 per year the government is now allowing due COVID-19 is about 25% higher than the $8000 average release,” Rainmaker executive director of research Alex Dunnin said.

“Some critics may not be happy about this provision but let’s put it in context: in the last few weeks super funds probably lost $250 billion due to the stock market correction. The total amount the government thinks fund members will withdraw from their accounts due to this measure is only 10% of what the system lost last month. To attack this measure is to fight the wrong fight.”

Currently, about 55% of all superannuation accounts have less than $25,000 in superannuation balances.

If they avail the $10,000 early release twice by the end of the year, they might slip close to their life insurance opt-in threshold.

Grattan Institute household finances program director Brendan Coates01 said while he can’t comment on the insurance implications, $10,000 is not too high a number even for lower balance accounts.

“No, it’s not too high. The size of the economic shock coming down the line is significant. We don’t know yet but it could be that the unemployment rate is 20% in a few weeks,” Coates told Financial Standard.

“Cancelling SG [temporarily] is more chal-

lenging as it had to be made by firms instead of the ATO. Early release of superannuation will be logistically faster and more effective.”

Coates added the early release provisions will help all, but especially high-income earners who have rent/mortgage obligations but can’t access stimulus provisions such as the increase to Job Seeker rates.

The government will also temporarily reduce super minimum drawdown requirements for account-based pensions and “similar products” by 50% for the rest of this financial year and 2020-21.

The announcement comes after Financial Planning Association of Australia chief executive Dante De Gori called for the government to reduce the annual minimum payment amount for superannuation income streams in a missive he fired off to government last week.

De Gori said retirees should be afforded the “opportunity to offset some of the losses they had incurred through the market falls and strengthen their financial security for the remainder of their retirement”.

The superannuation sector’s response to the government’s decision has varied, with the industry super movement quick to point out the government’s decision to allow early access to super came without the consultation of industry funds.

However despite that, Industry Super Australia said its members stood ready to engage with the government and the Australian Tax Office to “make it work”.

“As we have been indicating publicly, this is an issue that must be handled very carefully in order to prevent the compounding of liquidity pressures that may be faced by superannuation funds in the current market conditions, and as they support anxious members,” ISA chief executive Bernie Dean02 said.

“Assisting those in financial hardship will come down to how well the ATO works with the funds, given each superannuation fund will have to manually issue the money.

“Effective co-ordination from the government and the ATO will be vital to ensure the scheme works efficiently and does not frustrate people further remembering that the workforce of many funds are working remotely just like other affected businesses.”

The Financial Services Council said it supported the package – which also includes another reduction to social security deeming rates to reflect the 25bps cut by the Reserve Bank of Australia - with FSC chief executive Sally Loane03 commenting the council was committed to working with all stakeholders to understand the potential impact of the measures.

“Accessing superannuation should not be the default response to providing income support

The quote

Unlike many countries which don’t have a mature, national, mandated retirement saving system, we are in a position to make a ‘Team Australia’ response.

for Australians in need over the short term, so we are pleased to see that this is a temporary measure as part of a broader income support package,” Loane said.

“Also, the decision to support retirees at this time by temporarily reducing minimum drawdowns and halving social security deeming rates is a welcome acknowledgement that it is inappropriate to force individuals to crystallise investment losses in a volatile market.

“We urge the government to continue working with the superannuation sector as we focus on safeguarding the retirement savings of Australians through this period of uncertainty, and look toward the industry’s role in investing to support the economic recovery effort.”

FSC chair and MLC wealth chief executive Geoff Lloyd said the measures reflected the strength of the super system, “and the fact it was built for the wellbeing and livelihoods of Australians”.

“This is a sensible package of temporary measures which recognises super is people’s money, it’s the savings of working Australians,” Lloyd said.

“In extreme times like this when people unexpectedly face financial hardship, it [superannuation] can and should be used.”

Lloyd called for the patience of super members while details and processes were finalised and put in place for those suffering severe financial hardship.

“Unlike many countries which don’t have a mature, national, mandated retirement saving system, we are in a position to make a ‘Team Australia’ response,” he said.

The Australian Institute of Superannuation Trustees chief executive Eva Scheerlinck also weighed in, and said the package would have “potentially far-reaching implications” on Australians and the broader economy.

“AIST is acutely aware of the significant upcoming need for a large number of members of our funds to be provided with income support due to the impacts COVID-19 on their income.

We stand ready to support the government and our member funds in assisting impacted Australians at this time,” Scheerlinck said.

“We are also aware that to ensure good longterm outcomes for all Australians as well as the wider economy, accessing superannuation should be done as a last resort, and the mechanism by which members’ savings are accessed should avoid locking in current losses for members, and be administratively tenable.

“AIST will work closely and constructively with our member funds, the government and regulators to address a number of administrative challenges and risks that will need to be overcome and mitigated for income support measures to be implemented in an orderly and effective way.” fs

Product showcase

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

7

01: Barry Dargan

chief executive Intermede Investment Partners

Focus, discipline, structure Making a mark through high-quality investments arry Dargan is chief executive, portfolio B manager and founder of Intermede Investment Partners.

01

He set Intermede up with a group of colleagues about five years ago. From the start Intermede had a clear purpose that separated it from other global equities funds management businesses.

“The difference between Intermede and other investment managers I think can be put into three categories: focus, discipline and structure,” Dargan says.

Intermede currently manages and has under advice around $6 billion in assets. The firm is majority owned by the partners with MLC Asset Management a minority investor – allowing Australian investors access to the Intermede strategy.

Intermede is a fundamental bottom-up fund manager that researches each company the Intermede Global Equities Fund invests in one stock at a time.

“We manage about 40 names in our portfolio and we just manage one portfolio. We look for high quality growth and return names with great long term prospects and good management,” Dargan explains.

Of course, quality is not the only concern.

The price has to be right.

“We try to buy these companies at a price that we think really undervalues the long term earning potential of the company,” Dargan says.

Having just one strategy means the investment professionals at Intermede are only concerned with how one specific portfolio performs, which could have something to do with its strong performance. Since 1 March 2015, the Intermede Global Equities Fund (the Fund) has outperformed the MSCI World Ex Australia (AUD) by 2.90% per annum, net of fees. This places the fund in the top quartile of International Shares - Global (Unhedged) funds, covered by Zenith Investment Partners.

“Analysts are not under pressure to have action on the stocks they recommend or that they cover. They can spend a lot of time working on something that might only be actioned at a later date,” Dargan says.

“We have a long term focus to everything we do.

So we can spend a lot of time looking at a company and not take action on it until we’re absolutely ready because we think the price is right at that point.”

How the team functions on a day-to-day basis is integral to ensuring it is focussed on the right things – that being, finding the highest quality companies and establishing the right price to buy them.

Thanks to a very experienced chief operating officer, Dargan himself is able to focus on portfolio management despite being chief executive.

“I do rely heavily on the chief operating officer. I might have one meeting a week to make sure everything is running smoothly, but he really operates the business side,” Dargan says.

“Myself and the rest of the team are focussed on the investing side.”

This is important to Intermede because the size of the investment universe it deals with is so enormous.

“It is a huge universe we’re looking at. There are over 8000 companies listed in the world with a market cap of over $1 billion,” Dargan says.

“There’s a very formidable opportunity set there, but we’re only looking to invest in a particular type of company.”

The companies Intermede is looking for are able to deliver higher rates of growth and return.

Intermede defines that, Dargan explains, as being those that deliver 10% EPS growth, 15% ROE and 5% revenue growth consistently on average.

“When you run a screen and see how many companies consistently deliver on those metrics it’s only around 5% or 6%,” Dargan says.

“We’re cutting the universe down to a very elite group of companies that we want to find and then we overlay our valuation technique on top as well. So we have a big universe but it’s really quite a limited number of companies that we are looking for.”

Dargan says he’s proud of the team he’s built at Intermede.

“Each of the investment analysts are specialists in their own sectors and they are specialists of long standing, so they really understand the areas they are looking at in some depth. I work with them as a generalist,” he says.

Intermede’s strategy has seen the manager develop particular team dynamics when it comes to choosing a stock for its highly concentrated, very selective portfolio.

When a suitable stock is identified, it is pitched to the team and reviewed by someone who believes they can formulate an anti-thesis “to see where the cracks are”.

“Then, ultimately, it’s my decision as to whether the stock goes into the portfolio or not.

I work very closely with my colleagues and we all know what we’re looking for,” Dargan explains.

“These are high quality businesses, there’s usually no disagreement on the type of businesses.

Any disagreements would usually be on where the valuation is and things like that, and then I’ll ultimately make a decision on that factor.”

So what kind of company actually lives up to the scrutiny the Intermede team applies?

Dargan points to one stock pick in particular, an Indian firm called HDFC.

The quote

We look for high quality growth and return names with great long term prospects and good management.

“It’s the leading mortgage bank in India and was listed back in the early 90s. The stock is up almost 1200 fold since it initially listed,” Dargan explains.

“It still has an enormous runway of growth ahead of it.”

In India, he says, there are around 775 million people under the age of 35 – making it a market with demographics indicate many people will be looking to form households and take up mortgages.

At the same time, Prime Minister Modhi has a program aiming to build 50 million homes over five years and these will all have to be financed somehow.

“The company has a great history of delivering value; it also has stakes in one of the leading banks in India, a life insurer and an asset manager – these are all businesses that have been spun out of the company over time,” Dargan says.

“So it’s a company we’ve done great with and we still have a big position in.”

It’s that kind of long term outlook and thorough research that separates Intermede from the rest.

And all it takes is focus, discipline and structure. fs IMPORTANT NOTICE AND DISCLAIMER The Speaker featured in this article is an authorised representative of nabInvest Capital Partners Pty Limited ACN 106 427 472, AFSL 308953 (‘MLC Asset Management Pty Ltd’). MLC Asset Management Pty Ltd is the distributor for units in Intermede Global Equities Fund (‘Fund’) issued by responsible entity, Antares Capital Partners Ltd ABN 85 066 081 114, AFSL 234483 (‘ACP’). The Speaker is not the holder of an AFS licence, or an employee of MLC Asset Management Pty Ltd or in partnership or joint venture with MLC Asset Management Pty Ltd. MLC Asset Management Pty Ltd and ACP are members of the group of companies comprised National Australia Bank Limited ABN 12 004 044 937, AFSL 230686, its related companies, associated entities and any officer, employee, agent, adviser or contractor (‘NAB Group’). An investment with ACP does not represent a deposit or liability of, and is not guaranteed by the NAB Group.

A copy of the PDS is available upon request by phoning Client Services 1300 738 355 or on our website at mlcam.com.au. The securities mentioned in the communication may not be held by the Fund at the time of publication.

While it is believed the information is accurate and reliable, the accuracy of that information is not guaranteed in any way. Opinions constitute our judgement at the time of issue and are subject to change. We do not give any warranty of accuracy, nor accept any responsibility for errors or omissions in this presentation. Past performance is not a reliable indicator of future performance. Whilst we believe any projections have been formulated reasonably, actual results may differ materially from these projections.

Zenith Investment Partners (“Zenith”) (ABN 27 103 132 672, AFS Licence 226872) is the provider of General Advice (s766B Corporations Act 2001). To the extent that any content of this document constitutes advice, it is General Advice for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual and is subject to change at any time without prior notice. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Zenith accepts no liability, whether direct or indirect arising from the use of information contained in this document. Past performance is not an indication of future performance. Full details regarding Zenith’s contact details and research processes are available at http://www.zenithpartners.com.au/RegulatoryGuidelines Any reference in this publication to a specific company is for illustrative purposes only and should not be taken as a recommendation to buy, sell or hold securities or any other investment in that company. Securities mentioned in this presentation may no longer be in the Fund after the time of publication.

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8

News

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

Cbus Property launches JV Cbus Property and Scentre Group have announced a joint venture partnership to construct a new building in the Sydney CBD. The project, located at 111 and 121 Castlereagh Street, will be a “luxury” residential, retail and office space building, transforming the former David Jones Men’s Store.

“The heritage building will be transformed into a leading luxury destination that celebrates its legacy while inspiring a reimagined identity,” Cbus Property said.

“The mixed-use community, with a refined and tactile design, seamlessly integrates elite residences, dynamic commercial spaces and a luxury retail precinct.”

Cbus Property will deliver a 22-storey residential tower with 101 residences available at 111 Castlereagh, and six levels (floors seven to 12) of serviced office space of approximately 11,500 square metres, at 121 Castlereagh.

The commercial space will be visibly connected to the extension of Westfield Sydney below, which is being developed by Scentre Group.

Cbus property said the 11,500 square metres of commercial space will offer large, flexible and contiguous floor plates that range from approximately 1700 square metres to 2030 square metres.

Cbus Property said it is committed to using its extensive experience in Australia in the investment and delivery of developments that provide a benchmark for both economic and environmental sustainability. fs

First Sentier nabs Nikko executive Frist Sentier has picked up another executive from Nikko Asset Management.

Earlier in March, Financial Standard revealedHendrie Koster was leaving his role as head of product strategy at Nikko Asset Management to follow new opportunities.

Now, First Sentier has announced Koster will join as head of investment product research and assurance.

Koster will lead the investment product research and asssurance team, which is focused on building a global product research capability to identify long-term commercial opportunities.

Prior to working at Nikko Koster held a number of roles in Mercer’s investment team in London and Sydney.

First Sentier also appointed Kerry Baronet as head of pooled fund management, with both roles part of its recently established global product function.

The company said the global product function, led by London-based Clare Wood, was established to enable it to better identify product development opportunities.

At the time, Baronet was promoted to lead the pooled fund management team, which is responsible for developing a profitable, sustainable and strategically targeted product suite across global markets.

Based in London, she was previously FSI’s head of product, EMEA, responsible for the UK and Irish pooled fund platforms. Europe and Asia. fs

01: Kristalina Georgieva

managing director IMF

Recovery expected in 2021 Eliza Bavin

A The quote

The outlook for global growth for 2020 it is negative—a recession at least as bad as during the Global Financial Crisis or worse. But we ex­pect recovery in 2021.

lthough the outlook for 2020 looks bleak, recovery is on the cards for 2021, according to IMF managing director Kristalina Georgieva 01.

Georgieva said that while the human cost of COVID-19 is “already immeasurable” if countries work together they can protect people and limit the economic damage.

“This is a moment for solidarity—which was a major theme of the meeting today,” Georgieva said.

“The outlook for global growth for 2020 it is negative—a recession at least as bad as during the Global Financial Crisis or worse. But we expect recovery in 2021.”

Georgieva said it is paramount to prioritise containment and strengthen health systems across the globe.

She said that while the economic impact of doing so will be quite severe, the faster the virus is able to be contained the quicker and stronger the recovery will be.

“We strongly support the extraordinary fiscal actions many countries have already taken to boost health systems and protect affected workers and firms,” she said.

“We welcome the moves of major central banks to ease monetary policy. These bold efforts are not only in the interest of each country, but of the global economy as a whole. Even more will be needed, especially on the fiscal front.”

Georgieva added that advanced economies are in a better position to respond to the crisis, and many emerging markets and low-income countries are facing significant challenges.

“They are badly affected by outward capital flows, and domestic activity will be severely impacted as countries respond to the epidemic,” Georgieva said.

“Investors have already removed US$83 billion from emerging markets since the beginning of the crisis, the largest capital outflow ever recorded.

We are particularly concerned about low-income countries in debt distress—an issue on which we are working closely with the World Bank.”

Georgieva said the IMF is concentrating bilateral and multilateral surveillance on this crisis and policy actions to temper its impact.

“We will massively step up emergency finance—nearly 80 countries are requesting our help—and we are working closely with the other international financial institutions to provide a strong coordinated response,” she said. fs

Early release will cost dearly in retirement Kanika Sood

Australians who take out $20,000 from their superannuation due to the COVID-19 economic slowdown will sacrifice nearly $79,000 from their retirement nest eggs, according to new Rainmaker modelling.

Rainmaker modelled after-fee, after-tax superannuation outcomes for a 30-year-old member who starts working at 25 years old and will continue until the age of 65. The member starts at a salary of $45,000 a year, with 1% p.a. wage inflation and is paid contributions at current SG level of 9.5%. Their superannuation fund returns 5% before fees.

The member would end up with $423,309 in superannuation savings by the time they are 65 years old.

However, if they were to avail the Federal Government’s $10,000 early release measure, and withdraw that amount from their superannuation, they would end up $40,250 lower with an end balance of $383,049.

If this person was to avail the $10,000 release twice (as is permitted by the government for this financial year and the next), this person would be $78,952 worse off in retirement as their end balance slips to $355,357.

The modelling shows while the early release amounts may give Australians breathing room now, it will bite into their retirement savings.

The impact for older members who withdraw $20,000 will be lower. A 45-year-old will lose $22,300 to $43,800 in their end balances from the withdrawals.

“Rainmaker estimates while the long run retirement savings costs for a 30-year-old accessing the $20,000 is $80,000, for

a 45-year-old, the long run retirement savings cost is $43,000 – that is half the cost foregone by the younger member,” Rainmaker executive director of research and compliance Alex Dunnin said.

“If a 30-year-old takes the cash…[it]could eventually cost them $80,000. But if you need the cash, you need cash. It will have a long run costs however.”

The modelling doesn’t assume gaps in work, or gender pay gap.

“Women, on average, earn less so they will be probably more likely to need this short cash and be less likely to catch up the contributions later,” Dunnin said.

The government’s early release provisions have been largely supported by some stakeholders such as Grattan Institute and the Financial Services Council. However, it has also been panned by others including Industry Super Australia and Labor who have argued dipping into superannuation should not be the first solution but the last resort.

ISA’s modelling says a 20-year-old, who takes out $20,000 from their superannuation could lose more than $120,000 from their retirement balance. For 30-year-old members and 40-yearolds, the loss in retirement savings will be about $100,000 and $63,000, respectively.

“Some members will have lost their jobs or had their hours dramatically reduced and industry super funds will do all they can to help them,” ISA chief executive Bernie Dean said.

“But members should tread carefully and only think about cracking open their super after they’ve taken up the extra cash support on offer from the government- super should be the last resort given the impact it can have on your retirement nest egg.” fs

Opinion

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

9

01: Peter Horsfield

senior financial adviser Financial Management Works

Why I’m not quitting financial advice verregulation, increasing costs, loss of inO come, increased education standards and ongoing negative sentiment headwinds from the wider public and media have driven thousands from our industry.

I regularly hear stories of advisers who have taken their own lives, lost their homes, their livelihood’s and families; at the same time in their career many others would consider thinking of retirement rather than going back to university or a change of career.

Indeed the industry is at a turning point.

The question we all need to be asking ourselves is: “What do we all want from our financial service providers and how much are we prepared to pay for it?”

Money always flows to where it’s most valued.

Call me a sadomasochist, but I believe the outcome will result in something better for us all as the advice community and industry transitions into a profession.

So without further ado, the following are my top 10 reasons I’m sticking around as a financial planner for the long term.

1. Because I’m not a dinosaur I’m 48, not 68 and even if I was ever eligible for the Age Pension, it’s still 19 years away. And between now and then I’m extremely confident the government will again extend the eligibility age to even later.

I’m young enough to adapt and my combined experience and education support my growth.

Furthermore I really enjoy helping my clients achieve and celebrate their major milestones, financial and personal.

2. It’s my calling and completes me Learning about money, helping others become better with their money and archiving our bigger goals and dreams i.e. making a difference is who I am. It is my every breath and every heartbeat.

This “helping others and learning more” is what I look forward to doing each and every day and have done so since I decided to become a financial planner back in 1999.

3. Competitors exiting When I was a teenager I was a good swimmer, however my path to being known as a great swimmer was assisted by one main fact. My fellow competitors discovered other interests, lost passion and ultimately stopped turning up.

I’ve seen this same reality play out in university, careers, news businesses and industries. The following quote is one of my favourites: “Success is 1% inspiration and 99% perspiration”. Another is: “When the going gets tough, the tough get going!”

4. The barrier to entry is higher Life always gets harder. It’s like the generation before us are always pulling up the ladder behind themselves.

On one hand this is a good thing for existing participants because it somewhat protects them.

However on the other hand the more positive outcome is that by doing so they lift the quality of experience for all.

Making it harder for new entrants fosters greater innovation from those who aspire to “get a ticket to the game”. It sorts the wheat from the chaff. New entrants build on their own character and abilities while challenging and testing the old.

In life I’ve learnt that success is simple, but not easy. You simply need to know specifically what you want, know how much it will cost and pay for it.

5. Consumer’s lives Information overload is the unintended consequence of more choice. The good news is we all have greater speed and access to information; the bad news is we don’t know who to trust. Furthermore, who knows where our private data goes once it’s online?

The truth is since the measurement of time was invented we have never had more time and we never will have more time.

Time is a unit measurement. The challenge we have however is, in this unchanged amount of time, how do we manage our greater commitments, responsibilities, expectations, choices and desires?

The common thread I discovered about those who achieve the most is that it was their ability to delegate low value and/or specialist time consuming jobs to others that gave them the advantage.

It’s also my belief that, in our hyper-competitive world, the personal services market that can deliver clients trust and can free up their clients time will always have both a busy and profitable future ahead.

6. I’m my own boss Being your own boss means you get to work as much or as little as you choose. Earn as much or as little as you choose and deciding for yourself what clients you want.

As a financial planner I work with and am paid by clients. This ensures our client’s interests are always put before our own. This also means we feel good about what we do and our clients do too.

7. It’s always interesting The saying “May you continue to live in interesting times” feels especially so in financial services, and has felt so for a very long time.

We now have more complex regulations, investment markets, bespoke services, and ways in which we communicate. The list goes on and so too will it continue to grow and complicate in our lives, while we discover new ways of dealing with this more effectively and efficiently.

8. The like-minded community

The quote

I’m young enough to adapt and my combined experience and education support my growth... I really enjoy helping my clients achieve and celebrate their major milestones, financial and personal.

We love our clients and by the way our clients greet when we meet with a hug; it’s my guess they probably feel the same love we do too.

The same goes for our self-employed financial planning community. When we are together we celebrate each other’s stories and regale about how we are helping our clients.

We talk about how we are making a real difference to our clients especially in their times of uncertainty and need. We inspire and are inspired by each other. We learn from each other. We hold each other accountable and we cry too because sometimes it all just gets too f#%king hard.

9. Increasing revenue Name an industry that has gone on to become a profession only to then earn less money.

Please let me know if you know, because when I think about it, accountants, doctor, lawyers, architects, sports players are all earning more now than ever before because they are now professionals and people (paying customers) want and like their professionals.

I believe we will look back in the next five years and see the same results. More trust, more money, better businesses and better clients.

10. Technology In 1999 I’d never heard of Google, I had a Yahoo email and my modem was a telephone line that took 30 seconds to dial up.

Today I live 3000km from Sydney and spend over nine months a year in Cairns, I have regular phone, and video meetings while I send via secure email massive data between institutions and clients within micro seconds. It’s easy and clients appreciate the convenience too.

The result is more time with clients and designing bespoke and meaningful services for them.

What’s the one thing that changes everything?

It is common to every single individual, relationship, family, team, economy, country and nation. The one thing if removed will destroy the most powerful government, successful business, greatest friendship and the deepest love.

On the other hand, if developed and leveraged, this one thing has the potential to create unparalleled success and prosperity in every dimension life has to offer.

Trust. fs

10

Roundtable

Featurette | Platform cash rates

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

Platforms maintain cash rate on RBA cut The ethics of some of the most widely used platforms are being questioned as they again come under fire for the interest rates applied to their cash accounts. Ally Selby writes.

Netwealth and HUB24 maintained interest rates on cash accounts at 0%, following the Reserve Bank of Australia’s unprecedented rate cut that brought the official cash rate to 0.25%.

And the move has seen them cop criticism over their refusal to at least apply the RBA rate for account holders.

Both platforms confirmed the decision to maintain rates at 0%.

“Nothing has changed [since last week] for our cash accounts – clients are receiving zero,” a HUB24 spokesperson said at the time.

“Following the RBA rate cut of 25bps, Netwealth… will absorb this reduction in respect to our client’s cash transaction accounts,” Netwealth said.

While HUB24 would not reveal if the RBA rate cut would impact its revenue, Netwealth amended its outlook for the full year to be between $116-120 million.

Netwealth and HUB24 previously cut their cash rates to zero following the Reserve Bank’s rate cut to 0.50% on March 3.

But WealthO2 co-founder and managing director Shannon Bernasconi01 told Financial Standard the likes of Netwealth and HUB24 have some explaining to do.

“Platforms did not get any scrutiny during the Royal Commission,” Bernasconi said.

“I feel that platform providers and everyone in the value chain have the obligation to clean up their act and stop charging cash fees.”

“I believe the trustees should be obligated to provide members with, at the minimum, RBA cash rate,” Bernasconi said.

“With regards to the many other areas of regulatory focus, fee for service (or lack thereof) in

my mind should be reviewed across the board.”

She has seen an increase in cash holdings on WealthO2 amid the current market volatility.

“In recent month s, a sell down of assets has increased cash levels. On WealthO2, cash levels have increased by 50% in the past few weeks,” she said.

Pre-coronavirus sparked market volatility, members may have already had significant cash holdings on their platform, Bernasconi said.

“Other members may maintain higher levels of cash to support monthly pension payments,” she said.

“The other factor to consider is when a separately managed account or investment manager of a managed account decides to increase cash allocation. This substantially increases the levels of cash held by the investor.”

Bernasconi called out minimum cash holdings, arguing they leave the client worse off.

“In some cases the client is forced by the platform to hold up to 1% in cash,” Bernasconi said.

“In these cases the adviser is recommending a product platform that is forcing sells to maintain this minimum cash level, but now the client will not only not get interest income but will also be paying administration fees on those balances.”

Responding, a HUB24 spokesperson said: “Given we are now operating in an environment where cash rates are at historical lows, similar to transactional bank accounts with the recent decrease in the cash rate most of our clients are earning zero on their cash account.”

However, the spokesperson maintained cash accounts on the platform were not intended to be used as an investment option.

“The cash account is the transaction hub used

I believe the trustees should be obligated to provide members with, at the minimum, RBA cash rate.

Shannon Bernasconi

to facilitate activity on the platform, for example withdrawals, deposits, pension payments and investment trading, it includes features like automatic investment plans and regular withdrawals,” the spokesperson said.

“It is not intended to be used as a cash investment option.”

Netwealth joint managing director Matt Heine 02 reiterated that cash accounts on platforms are not an intended as an investment.

“Given the recent reduction in the RBA rate, Netwealth now pays 0% on our cash account,” he said.

“Our rate is a floating rate, is clearly disclosed, and therefore reflects the current RBA rate less 50bps.

“The cash held in a client’s account can be invested into a range of other cash products (term deposits, cash funds, ETFs etc) and we do not require them to hold a surplus above our minimum.

“If a client chooses to hold extra ’at call cash’ it is at their direction and discretion for a variety of reasons which are in their control.”

But Bernasconi is adamant her competitors are charging unfair cash fees.

“Be open and transparent about the service you’re offering and the fee that comes with it,” she said.

“Don’t make money hidden behind the scenes to subsidise the fact that you’re actually not charging it upfront.”

In a note to investors, Macquarie equity researcher Matt Johnston argued that the RBA’s earlier 0.5% cash rate cut will leave platform members worse off.

“If HUB24 and Netwealth fully pass [this rate cut] through to consumers, on average, accounts will generate 0% gross interest,” he said.

Platform cash rates | Featurette

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

“Net of fees, the majority of cash accounts on HUB24 and Netwealth will be negative. i.e. it will cost consumers to keep cash in these accounts.

He believes advisers are unlikely to recommend large cash holdings on these platforms at these current rates.

“Under the best interest duties we find it likely advisers will struggle to justify keeping significant cash balances in accountholders cash accounts to provide better outcomes for their clients,” Johnston said.

This is particularly the case for retirees, he argued.

“Superannuation has typically higher balances… The net of fees return to clients we estimate underperforms the RBA cash rate by about 75 to 80bps for super members, causing undue erosion of superannuation assets for members,” Johnston said.

In addition, current market volatility will see more platform members increase their cash holdings, which may draw regulatory scrutiny, Johnston said.

“Both platform operators have noted that in high volatility and bear markets, accounts increase weighting to cash, which can offset declining FUA,” he said.

“However, we think this only highlights our thesis and increasing weights in cash accounts on negative carry causing undue erosion of assets we believe will attract higher regulatory scrutiny.”

Bernasconi questioned whether this was ethical.

“There is no legislation, there’s nothing put on a trustee, to ensure that pensioners cash weightings get at least RBA. Many of them get zero percent, they get nothing on their cash,” she said.

“Is that even ethical, is it an issue that [the platforms] are making money on that cash but they’re not even giving them RBA rates in a super pension account?”

Evans and Partners believes cash to be a big source of revenue for the likes of HUB24 and Netwealth.

“We assume that the cash administration fee represents around 22% of platform revenue for both HUB24 and Netwealth,” the stockbroker said in a note to investors.

However, this is hard to discern as neither platform discloses cash-related revenue.

“Neither HUB24 nor Netwealth disclose the exact contribution to revenue related to the cash administration fee,” Evans and Partners said.

“While Netwealth provides a more detailed breakdown of platform revenue, the exact quantum of the cash administration fee is not disclosed.

“HUB24 does not disclose the breakdown of its platform revenue, however it has previously called out that around half of the platform segment revenue is in the form of administration fees, with the balance in transactional and ancillary charges, including the spread earned on cash transaction accounts.”

Evans and Partners said any further rate cuts will have a material impact on platform’s earnings.

IMAP chair Toby Potter told Financial Standard that cash account fees are justified.

“Cash accounts operated by platforms are a

01: Shannon Bernasconi

02: Matt Heine

03: Recep Peker

managing director WealthO2

joint managing director Netwealth

research director Investment Trends

service that have a cost to operate; it’s not a free service to take on the risks of managing what are essentially quite complex bank accounts,” he said.

“On the one hand, platforms have got a competitive pressure to pass on the best interest rates they can achieve. On the other hand, platforms, like any commercial enterprise, deserve to be compensated for the work, develop and risks they take on in providing that part of their service.

“I don’t see any evidence of cartel-type behaviour, it’s a highly competitive market, in which there are both bank and non-bank participants.”

He argued it is up to the adviser to assess whether large weightings towards cash, and the subsequent fees involved, are right for their clients.

“Part of the role of advisers is to understand the impact on particular clients of the combined package of services offered by a platform or some other administration service,” Potter said.

“So for a client who is going to the minimum cash in a cash account, then at these current low rates, the half a percent may be utterly inconsequential to the client. To a client who has a lot of cash this may be a significant issue.

“Part of the adviser’s job is to understand the personal circumstances of the client.”

Citi equity analyst Siraj Ahmed, who specialises in wealth platforms, says clients are aware of cash fees.

“Cash margins are an indirect fee; platforms do make margins on cash but I do think this is pretty well disclosed to the client, it’s in the PDS as an indirect cost so it’s not a fee for no service,” he said.

“Fees on cash make up 26% of Netwealth’s revenue, while admin fees made up 50%. The rest is transaction fees and ancillary fees.

“The 26% is the interest that they retain on the cash balance. Clients get a particular cash rate, Netwealth and HUB24 get a different one and that’s the cash admin fee.”

Whether or not this is fair, Ahmed refused to comment.

“There’s various platform pricing models out there – which one works and which one doesn’t, at the end of the day, price is an important component in choosing a platform provider, but it’s not the only reason to choose a platform provider; functionality is important, customer service is important, all of it comes into play,” he said.

Bernasconi believes a regulatory crackdown on the platform’s hidden costs would help make fees more transparent.

“If regulators started actually looking at some of these hidden costs and so forth and actually started saying ‘no that’s inappropriate, you can’t do that, or you have to disclose it as a fee outright in the same way you disclose your obvious fees,’ that would help,” she argued.

“I also think it would help the advisors not have to find it; finding it in the PDS all these hidden fees is so difficult.”

ASIC did not reveal whether it is looking into transparency and fees on platforms, however, a spokesperson said that “platform operators need to act in the best interest of their clients and clearly

Planners are demanding more support from platforms, and their support needs to go beyond custody and reporting.

Recep Peker

11

disclose both the returns and fees for their cash options.”

Meanwhile, a financial adviser, who preferred to remain anonymous, said she would be very surprised if advisers recommended their clients have significant cash holdings in accounts on these platforms.

“Some clients prefer to have large cash holdings, and I would usually recommend they put this cash in high interest bank accounts or term deposits,” she said.

“I use platforms to actively invest my client’s money – I don’t think advisers would recommend clients put their money in cash accounts on platforms.

“Usually there is only enough cash in these accounts to cover fees.”

NMG Consulting partner Mark Watmore, who surveyed nearly 400 advisers last year as part of his firm’s Australian Adviser Insights Programme, told Financial Standard advisers would appreciate more competitive cash options on platforms.

“When we talk to advisers, they say they would actually love to have more competitive rates and a more diverse range of cash options offered on their platforms, but because none of the major providers are offering that they have had to accept the status quo,” he said.

He argued that cash fees are not topping the priority list for advisers.

“I think there was a lot of noise about it during and after the Royal Commission, because there were some cash accounts that went into negative because of fees,” Watmore explained.

“But I think in adviser land (whilst they see it as important) they’re not seeing it as the important factor in selecting a platform.”

Despite this, Investment Trends said that fees remain an important selection point.

“Post-Royal Commission, the most cited platform selection driver is now fees, with low overall cost to clients (57%) overtaking efficient admin (45%),” Investment Trends research director, Recep Peker03 said.

He argued that advisers now expect more from their platforms.

“While many platforms continue to maintain high user satisfaction, industry wide overall satisfaction has declined to a seven-year low,” Peker said.

“Planners are demanding more support from platforms, and their support needs to go beyond custody and reporting.

“In fact, over half of planners (54%) are willing to pay their main platform more to access better support in their practice and personal development, highlighting the opportunity for platforms to expand their value proposition.”

Although many platforms make a significant percentage of their revenue from interest on pooled cash accounts and cash related fees, Watmore said the current low interest rate environment will limit that potential.

“Within a platform there are many levers for making fees, and cash seems to be one of them, but the opportunity for that is clearly reducing as rates get so low,” Watmore said. fs

12

News

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

Plenary Group sells US business

01: Alex Dunnin

executive director, research and compliance Rainmaker

Jamie Williamson

Plenary Asia Pacific is set to offload its North American operations to one of the world’s largest pension funds.

Caisse de dépôt et placement du Québec (CDPQ) will acquire Plenary Americas’ in addition to the controlling stake already held through its PPP portfolio.

Plenary Asia Pacific will retain a minority interest in the business, and Plenary and the CDPQ will continue to work together to potentially explore new markets.

“Our long-standing relationship gives us enormous confidence in the success of the acquisition for both CDPQ and the North American business. The acquisition validates Plenary’s global standing in the PPP market and our long-term partnership model,” Plenary global chair John O’Rourke said.

Divesting the business will free-up capital to support Plenary’s opportunities in the fast growing Australian and Asian infrastructure markets, he added.

“The immediate pipeline on the eastern seaboard of Australia is of an unprecedented scale,” O’Rourke said.

“Over the years, CDPQ has appreciated firsthand Plenary Asia Pacific’s impressive know-how, particularly in developing and managing projects.

We are very proud of our partnership with them and we look forward to what we can achieve together in the Australian and Asian markets,” CDPQ executive vice-president and head of infrastructure Emmanuel Jaclot said. fs

Stopping SG is nuclear response to COVID-19 Elizabeth McArthur

S The quote

Stimulating the economy is a good idea.

Us­ing super to do to it is a nuclear option. It de­pends on the extent of the emergency.

Insurers doing their best: FSC

uggestions in response to the coronavirus pandemic that pausing superannuation contributions would stimulate the economy have been panned.

Association of Superannuation Funds of Australia chief executive Martin Fahy was blunt in his assessment of the situation.

“These are anxious times and a strong fiscal response is warranted, but raiding Australia’s superannuation system is not the solution to the economic challenge we face,” Fahy said.

“Given where interest rates are, and taking into account the government’s borrowing capacity, it doesn’t make sense to raid retirement savings and compromise our long-term security in retirement.”

Meanwhile, Rainmaker head of research Alex Dunnin 01 said the idea of pausing super contributions in economically tough times has some merit, and some precedence.

In 1998 in response to the Asian Financial Crisis the Singapore government did just that.

“In Singapore, compulsory contributions into their Central Provident Fund (CPF) are 37%. Employees pay 20% and employers 17%,” Dunnin said.

“Singapore’s CPF plays a central role in their economy, much more so than Australia’s superannuation system does in ours. This is because CPF has three elements: it’s a retirement account, it’s a home saving fund and it’s a health insurance fund.”

That said, while stimulating the economy with super could work, he said there’s no way the current government would do it.

“Stimulating the economy is a good idea. Using super to do to it is a nuclear option. It depends on the extent of the emergency,” Dunnin said.

“It is a lever that could be pulled though, but it’s drastic.”

And, he added, implementing such an action would be a “nightmare” with just the first dilemma – who gets to keep the money?

By pausing SG, Australians may actually lose out on investment gains that could be made as the economy bounces back.

“As the Prime Minister said, the global economy will bounce back on the other side of this health shock,” Fahy said.

“Pausing SG contributions would rob Australians of the opportunity to capitalise on that recovery and to maximise their retirement savings” fs

Elizabeth McArthur

The Financial Services Council has responded to a largely damning report from the Life Code Compliance Committee, arguing it is silent on positive changes the industry has made.

The report looked at cases dating back to June 2017 and found that timeframes for claim processing as outlined in the Life Insurance Code of Practice were not met.

The review of 11 subscribers to the code’s compliance came about after the LCCC received more than 700 alleged breaches of the code from law firm Maurice Blackburn.

“The report is silent on the positive changes made by the life insurance sector,” the FSC said in a statement.

It noted that the LCCC’s criticisms in the report relate only to the timing of decisions, not the outcomes.

The FSC said 598 of the approximately 700 allegations of code breaches related to the timing of claims decisions.

Of those, 13% were found to be unfounded.

“This report is also silent on the LCCC’s own findings from their latest compliance report, which shows in the year to 30 June 2018, life insurers assessed 131, 271 claims,” the FSC said.

“Of these, 89% of income related claims and 92% of non-income related claims were within the required Code timeframes.” fs

Advisers too time-poor for cash management Harrison Worley

New research shows financial advisers are struggling to make time for important aspects of the advice process, including cash management.

Macquarie’s newly released Cash flow management opportunity report shows 93% of advisers recognise the value of cash management services, but just 50% are able to offer those services to their clients.

The report draws on the findings of a quantitative survey of 541 business leaders across advice, accounting and stockbroking, including 450 independent and dealer group aligned advisers, and shows 87% of advisers believe their wealth needs of their clients need to be viewed holistically to consider issues of cash flow and lifestyle.

However, many advisers still do not offer those services to clients, citing cash flow management as “too onerous” and a an aspect of advice which takes focus off areas where they believe they can add value.

Macquarie head of payments and deposits Olivia McArdle told Financial Standard it was hard for advisers to be across the cash flow of a client given so many Australians use multiple bank accounts across different institutions.

“Gone are the days when I just had all my bank accounts with one bank, and had everything in one spot,” McArdle said.

“Most people today have got kind of a scattering of bank

accounts with different banks. And that makes it quite difficult for advisors to get a hold of that holistic view.”

Despite those issues, McArdle said financial planners who could find a way to implement cash management into their advice process would stand to benefit, citing the intergenerational transfer of wealth which is set to take place over the next two decades.

“Bottom line is this is something really valuable and both clients and advisors are keen for it, but at the moment it’s not happening. Therefore we see that as a big opportunity for advisors to step into,” McArdle said.

“62% of people in that 30 to 44 year old bracket, they are most likely the ones to benefit from cash management services.

“And you think of that group and then the amount of intergenerational wealth that we expect to happen over the next sort of 10 to 20 years, it’s quite a significant group.”

McArdle said advisers may find cash management becomes easier to administer to clients as open banking helps banks transmit the transactional banking data of their clients to other institutions and platforms.

“I think the next challenge goes to other banks and the speed at which they embrace the open banking regulations and the connectivity that they have, into advisers’ platforms to make it easier for advisers to see that whole picture for their clients,” she said. fs

News

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

13

Executive appointments 01: Mark Rider

APAC ETF head named BlackRock has hired from Citi to appoint a new head of iShares for Asia Pacific.

Rimmo Jolly is currently Citi’s regional head of ETF and index sales and business development for Asia Pacific and Japan.

In his new role, Jolly will be tasked with growing iShares’ market share in the region.

He reports to BlackRock’s head of iShares and index investing, Susan Chan.

“Rimmo is a highly-respected finance industry veteran and brings a wealth of experience to our ETF business development and distribution,” Chan said.

“The recent extreme risk-off market environment has showcased the underlying strength of ETFs. I look forward to working with Rimmo to bring our suite of global and local products to investors in the region, and to raise awareness of using iShares ETFs as an instrument of active investment management.”

Jolly has spent nearly two decades at Citi and previously worked for Deutsche Bank’s equity structured products group, where he was involved in the delivery of solutions for hedge funds, pensions and endowments.

“I’m very excited to join the team in bringing ETFs into BlackRock clients’ investment making process. With ongoing education and outreach to the industry, regulators, and our clients on ETF application, iShares is well positioned to capture the tremendous growth potential in Asia Pacific with the broadest line-up of products in the ETF industry,” Jolly said of his appointment. iShares is the second biggest player in the local ETF market, with a nearly 25% slice of the total $63.9 billion at February end. The local business is headed by Christian Obrist.

It is second to Vanguard, which at $19.8 billion manages about $4 billion more in ETF assets in Australia.

Centuria appoints GM The ASX-listed property manager is growing its presence in the sunshine state, with a former CBRE head of asset management set to head up its new Brisbane office.

Centuria Capital has appointed former CBRE head of asset management David McGuigan as its new Queensland general manager, as the investment manager looks to grow into Queensland.

McGuigan will work from the firm’s new Brisbane office, located within the $89 million 348 Edward Street property it purchased late last year.

Queensland properties make up around 20% of the firm’s assets under management, representing just roughly $1.6 billion.

According to Centuria, strong growth in its Queensland-based AUM over the past year made a Brisbane office a “logical move”.

The Brisbane office will open this month,

ANZ Wealth CIO exits The former chief investment officer for ANZ Wealth has left the business as part of the extensive job losses announced in early March.

Financial Standard understands Mark Rider01, ANZ Wealth’s chief investment officer since March 2017, has left the business.

Rider was responsible for delivering the overarching investment strategy, including asset allocation, investment themes, product selection and monitoring, investment compliance, risk and analytics for all ANZ Wealth client investment offerings.

Following the sale of the pensions and investments business to IOOF, Rider held the same role in ANZ Private Banking and Advice.

Rider was with ANZ since April 2013, originally having joined as head of investment strategy and asset allocation.

with a team of nine - including McGuigan - set to grow from there. Centuria said the decision was consistent with the manager’s philosophy to provide full asset management services across its portfolio where possible.

“With the Brisbane market already constituting around 20% of Centuria’s AUM, the opening of the office is in line with the company’s strategy to accelerate AUM growth, with Brisbane a favoured market,” Centuria joint chief executive Jason Huljich said.

“Direct asset management is part of Centuria’s DNA. “The new Brisbane-based team, including asset management, property management, facilities management and distribution staff, are excited about the opening of the 348 Edward Street office and look forward to further expansion of the group in the state.”

McGuigan said he believed now was “the perfect time” for the firm to expand its Queensland footprint.

“With the proven growth and growth targets that Centuria are looking to achieve in South East Queensland, as well as the belief in a hands-on approach to managing property, it is perfect timing to establish a Brisbane presence and maintain a local presence,” McGuigan said.

FEW adds to leadership team Financial Executive Women (FEW) has expanded its leadership, naming a new executive director.

Alex Tullio 02 has been appointed to the position having held a number of senior leadership roles at Bendigo Bank, IOOF and Citi.

In addition, Tullio has worked as the chief executive of Trampoline, a HR tech company, and is the owner and founder of her own business, Alex Tullio Consulting.

FEW said of the appointment: “Alex has built a deep level of experience and a strong reputation for growing and transforming businesses into successful enterprises.”

“In her role on the group executive at Bendigo Bank, Alex was accountable for the performance of the retail and business banking division, including 3570 staff, a network of over 500 branches and a loan book of $31 billion.

Judith Beck, chief executive of FEW, said the organisation is fortunate to welcome someone of Tullio’s calibre and experience to spearhead FEW’s new growth initiatives.

“We are at a period of substantial growth and we need additional leadership to successfully implement our strategy,” Beck said.

“In addition, as a member of the FEW advisory board for the past six years, Alex has acted as an advocate, has a strong understanding of our members, corporate partners and FEW’s role in the industry working towards the Positive Progression of Women.

Tullio said: “I am honoured and excited to be part of the future growth of FEW. I am passionate about women, leadership and business - so

02: Alex Tulio

making the decision to be part of this amazing organisation was an easy one. “ “FEW already have a hugely positive impact on our members and the financial services industry - and we are just getting started! The opportunity for us to continue to build and serve our community is huge, and exciting.”

FEW was founded by Beck in 2013 to provide a Career Advocacy Program for successful women within financial services.

The Career Advocacy Program is designed specifically so FEW members can obtain advice, guidance and support from more experienced members to help them achieve their career goals on a daily basis through various platforms.

Fixed income head appointed NAB’s MLC Asset Management has named a new head for its Antares fixed income business, with the outgoing head to stay with the business.

Mark Kiely will move into the role at end of March.

Outgoing head of Antares fixed income Ken Hyman will stay with the business but will hand over his business and team leadership responsibilities to Kiely.

Kiely and Hyman are long-standing MLC investors, and together led the development of the Antares fixed income business over the last 27 years, MLC said.

Kiely started at MLC in 1993, as an analyst and currently has portfolio management responsibilities for funds including the Antares Income Fund. Hyman has spent 47 years in the industry, of which 29 have been with Antares’ fixed income team.

MLC Asset Management chief investment officer John Armitage said the changes are a part of the team’s succession plan.

“This leadership transition is the culmination of a steady, decade-long succession plan which saw Mark assume the role of lead portfolio manager for all large external client investment portfolios back in 2006,” Armitage said.

“Ken’s transition creates opportunities for the next generation of Antares fixed income team members to assume greater investment and client responsibilities. Mark will continue to be supported by the Antares fixed income team, all with deep industry experience and who have worked together, on average, for more than a decade.”

Armitage pointed to Kiely’s investment skills, people leadership capabilities and commercial acumen in regard to his appointment.

“We’re dedicated to advancing the capabilities of Antares fixed income through ongoing investment in new and current talent and by enabling a smooth transition between Ken and Mark.

“We thank Ken for his outstanding contribution to the business, and congratulate Mark on his appointment.” fs

14

Feature | Global equities

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

GLOBAL EQUITIES GO VIRAL An almost unprecedented worldwide health emergency has sent global equity markets into a tailspin. Investors will recover, but they’ll need cool heads. Harrison Worley writes.

Global equities | Feature

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

01: Matthew Gadsden

02: James Baird

03: Don Huber

global equities research head JANA Investment Advisers

financial planner JustInvest

senior vice president portfolio manager Franklin Templeton

E

verybody knows the one about how things might not go to plan.

It’s not often directly quoted from its original source these days, but it goes like this: The best-laid plans of mice and men often go awry.

It’s safe to say investors are feeling its meaning more now than ever before.

Before the COVID-19 crisis came along, investors were considering how themes such as late cycle market behaviour, central bank policy, and the implications of climate change – among others – would impact their global equity strategies, according to the head of JANA’s global equities research team, Matt Gadsden01.

Investors, with an eye to the future already had their plans well in place. Alas, nobody can predict the future. And so, what started as just another news story has quickly morphed into a market-melting global health emergency, leaving those best laid plans in its wake.

Since February 20, the ASX200 index has lost more than 33% of its value at the time of writing.

But that’s just here in Australia.

Take a look around the world and it’s plain to see that nobody saw this coming. The value of significant global indices have quite literally fallen off a cliff over the past few weeks.

The MSCI World index sat at US$2434.952 at market close on February 12, while its emerging market-inclusive sibling, the MSCI ACWI index closed at USD$581.025 on the same day. (Figure 1).

At time of writing both have lost around 30% of their value.

But is it the end of the world?

The answer depends on several variables.

For some investors, maybe it is.

Those close to retiring are surely having flashbacks to the Global Financial Crisis, concerned they may not be able to regain any losses they suffer as they dance on the precipice of their drawdown phase.

“The scars from the GFC are definitely still there for many middle aged and older clients,” JustInvest’s James Baird02 says.

And while that reality is sobering for those investors, the experts are at pains to remind the public – and the wealth management industry – that

the COVID-19 crisis is firstly a global health risk that needs to be effectively managed for the betterment of humanity. And secondly, one of several crises financial markets have powered through before, and will almost certainly triumph over again.

Still, for those with serious skin in the game – be they financial advisers and their clients, or superannuation trustees and their members – there’s a myriad of significant considerations to make.

Perhaps most intriguing – and pressing right now – is what to do with global equity allocations, especially in light of the severe damage doled out to those aforementioned indices.

It isn’t hard to understand why.

Speaking to Financial Standard before the crisis deepened, Franklin Templeton senior vice president and portfolio manager Don Huber03 said investors were using the firm’s global equity funds to strengthen their portfolios by way of geographical diversification.

At the time, he said investors were particularly focused on active management, which could also protect investors from the type of index-smashing economic event currently wreaking havoc.

“Clearly, one of the main reasons investors include global equities in their portfolios, in combination with home market equity investments, is to provide diversification,” Huber said.

“I think investors are looking for strategies that are different from the index, not benchmark hugging, which move outside of the mega cap companies that dominate indices.”

Huber’s sentiment seems tightly connected to reality.

According to Rainmaker analysis, almost 35% of AustralianSuper’s mammoth $126.7 billion balanced investment option is invested in global equities. At $43.9 billion – far heavier than any other asset class – the attraction of global equities to the nation’s largest super fund is clear.

Smaller investors have followed suit. Australian Tax Office data shows Australia’s self-managed super funds held well over $8.8 billion in overseas shares as at September 2019.

State Street Global Advisors local head of investments, Jonathan Shead04 , says Australian investors have slowly but surely expanded their investment horizons beyond our shores, where they’ve typically been heavily focused.

FRANKLIN GLOBAL GROWTH FUND

INVESTING IN POTENTIAL. DELIVERING ON PERFORMANCE. Learn more at www.franklintempleton.com.au/globalequity ©2020 Franklin Templeton. All rights reserved.

Read full disclaimer at www.franklintempleton.com.au/globalequity

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15

So much so, the firm’s global equity SPDR ETFs have grown by 59% over the last two years.

“We consider the investment domestic bias to be diminishing over time,” Shead says.

“Advisers are increasingly educating their clients on the benefits of diversification and, with more products available, it has never been easier for investors to access global equities.”

Timing is everything, right?

It is very difficult to work out what the impact is going to be on global growth.

Jonathan Shead

But has this newly realised popularity in investing beyond Australia’s (temporarily-closed) borders come at the worst possible time?

With the COVID-19 virus quite literally shutting down several economies, – investors with any global equity exposure are asking the far-more-than-$1-million question: how big is this problem?

The answer depends on who you speak to.

Shead says that at the moment, it’s hard to know.

“Really at this point it is very difficult to work out what the impact is going to be on global growth and then what impact it’s going to have on corporate earnings, and hence where the share market will be in 12 months’ time,” he says.

This is perhaps why he hasn’t detected any “panicky” activity within SSGA’s large institutional portfolios so far.

“We haven’t seen reactionary selling or any kind of reactionary buying,” Shead says.

While his statement is broad, Shead is adamant panic hasn’t set in just yet, at least among the firm’s larger clients.

“It doesn’t mean that our large institutional investors aren’t doing anything,” he says.

“It just means that [in that] part of the portfolio that we hold for them, we’re not seeing evidence of that [panic].”

Others, such as Gadsden, say it’s a big enough issue that active managers are well and truly on notice.

“All things being equal, a more volatile investment market environment with increased stock dispersion should be more conducive for active investing,” Gadsden says.

Either way, if you’re an investor with a decent allocation to global equities, you’ve got several decisions to make. Not just now, but over the course of the next few months.

So what are the options?

16

Feature | Global equities

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

04: Jonathan Shead

05: Charlie Viola

06: Charles Woodhouse

head of investments State Street Global Advisors Australia

wealth management partner Pitcher Partners Sydney

chief investment officer QSuper

MSCI ACWI

500.000 600.000

PRICE (USD)

400.000 500.000

PRICE (USD)

300.000 400.000 200.000 300.000 100.000 200.000

OC OC T T 26 26 , N , NO 20 OV 201 V 8 1 26 8D 26, DE , 2 EC 20 C 01 26 18 2 8J , JA 6, 2 AN 201 N 01 26 8 26 8F , FE , 2 EB 201 B 01 26 9 2 9M , M 6, 2 AR 201 AR 01 2 9 26 9A 6, 2 AP , 2 PR 01 9 0 2 R 2 19M 6, M 6, 2 AY 201 AY 01 2 9 9JU 6, 2 2 N 01 JU 6, 2 2 0 N 6 9 2 19JU , 2 L 01 JU 6, 2 2 L 01 A 6, 9 2 9 U 20 G AU 6, 2 1 G 0 1 S 26, 9 26 9 E 20 P , 1 SE P 201 O 26, 9 26 9 C 20 T OC , 2 2 19 T 01 N 6, 2 9 O 20 V NO 6, 2 2 19 V 01 D 6, 26 9 EC 20 , DE 2 19 2 C 01 JA 6, 2 26 9 N 0 JA , 2 2 19 N 01 F 6, 2 2 9 EB 02 26 0 FE 6, 2 ,2 B 02 26 0 02 ,2 0 02 0

0.000 100.000

0.000

MSCI WORLD Figure 2: MSCI WORLD 3,000.000

MSCI WORLD 2,500.000 3,000.000 2,000.000 2,500.000 PRICE (USD)

1,500.000 2,000.000 1,000.000 1,500.000

PRICE (USD)

500.000 1,000.000 0.000 500.000

2 NO 6, 2 V 01 8 2 DE 6, 2 C 01 26 8 JA , 2 N 01 2 8 FE 6, 2 B 01 26 9 , M AR 201 9 2 AP 6, 2 R 01 9 2 M 6, 2 AY 01 26 9 JU , 2 N 01 9 2 JU 6, 2 L 01 26 9 AU , 2 G 01 9 2 SE 6, 2 P 01 26 9 OC , 2 T 01 2 9 NO 6, 2 V 01 9 2 DE 6, 2 C 01 26 9 JA , 2 N 01 2 9 FE 6, 2 B 02 26 0 ,2 02 0

Australia’s large institutional investors seem to be reading from the same songbook as financial advisers.

Seemingly also not too concerned is the $96 billion Queensland government super fund, QSuper.

“Our strategy is based on the long-term.

Most of our investors are focused on the long-term,” QSuper chief investment officer Charles Woodhouse 06 says.

The fund famously employs a risk-allocation strategy instead of a typical asset allocation strategy, a decision made in the aftermath of the global financial crisis, which saw member accounts take a hit. A decade later, it’s prepared for precisely this kind of market phenomenon.

“If you measured us against a traditional strategy, we would have a lot less equities than most,” Woodhouse says.

The QSuper investment boss says that while the fund’s equity allocation has performed “basically down, in-line with [the] market”, its exposure to asset classes with a similar level of expected return – such as long-term bonds – have not only provided protection, but pushed the fund to excel.

“Our long term bonds would be really doing the heavy lifting there to help smooth that ride out for our investors,” he says.

“It [QSuper’s strategy] recognises that there are periods of market volatility, and it helps if we can find diversifying alternatives that we can allocate to which can still generate strong returns over the long term, but can help smooth the ride through these periods of uncertainty, particularly uncertainty around listed equities.”

Despite that, the fund still parks around $18 billion in international equities, which is significantly more than what it puts into local listed equities. Woodhouse, like others, points to the benefits of diversification.

600.000 700.000

0.000

T 2 NO 6, 2 V 01 8 2 DE 6, 2 C 01 26 8 JA , 2 N 01 2 8 FE 6, 2 B 01 26 9 , M AR 201 26 9 AP , 2 R 01 9 2 M 6, 2 AY 01 26 9 JU , 2 N 01 9 2 JU 6, 2 L 01 26 9 AU , 2 G 01 9 2 SE 6, 2 P 01 2 9 OC 6, 2 T 01 26 9 NO , 2 V 01 9 2 DE 6, 2 C 01 2 9 JA 6, 2 N 01 26 9 FE , 2 B 02 26 0 ,2 02 0

The big end of town

MSCI ACWI Figure 1: MSCI ACWI

700.000

T

ity to generate earnings into the future,” Viola points out.

“And we continue to remind clients about that. These companies will continue to generate earnings, these companies will continue to have solid quality businesses through the other end of these kind of events.”

For ethical investment specialist and JustInvest planner James Baird, the crisis is just another bump on a long road for investors. Instead of focusing their energy on the financial impact of the crisis, Baird says his clients are more interested in the positive impacts their global equity investments will make.

“Global equities is a long term asset class, and we know that there will be ups and downs in markets along the way,” Baird says.

“The coronavirus won’t be around forever, so it doesn’t change our long term views. Our clients are not only interested in performance figures – they also want to understand how the companies that they invest in are creating positive impacts.”

OC

For the most part, the experts are preaching calm.

Firstly, as Pitcher Partners Sydney wealth management partner Charlie Viola05 says, global equities should be treated the same as any other asset class he invests in for clients: with a focus on diversity and a thorough top-down investment approach.

“When we look at global equities as an asset class, we very much take that top down approach,” Viola says.

“We have a look at what’s driving the economy and where earnings are coming from.”

Explaining his strategy, Viola says the global equities allocation is then split between a direct international equity portfolio and a bunch of ETFs. “We have a full analyst team here that do the qual and quant on a direct model portfolio that we utilise, and we treat international equities no different to what we do domestic ones,” Viola says.

“We’re seeking out key competitive advantages, good quality companies, good continuity of earnings. At the end of the day, we really want to own quality businesses that can withstand various events in market.”

Pitcher Partners’ model portfolio at the moment consists of Apple, Abbot Laboratories, Alibaba, Google, Johnson and Johnson, Microsoft, Nestle and Union Pacific, among others.

“So we’re very much looking for that stable, large cap, global leading [company]. We’re looking for those absolute best-of-breed-style companies,” Viola says.

He says the firm’s use of ETFs is just “like everybody else’s”, to obtain exposure to specific sectors, using fund managers with good track records that can offer something different what the direct equities portfolio is bringing to the table.

“We have tended to put a reasonable allocation to funds like Magellan, Aoris, and Loftus Peak, because we like the managers, we like their approach,” he points out.

“We like the fact that what’s on the label is in the bottle in terms of the investment philosophy.”

Viola says the crisis has become the dominant force in conversations between himself and his clients over recent weeks, though points out his clients aren’t too concerned, because they believe in the investment process.

“It’s clear that it’s dominated conversations,” he says.

“I don’t think that there’s a heap of fear around.

We’ve worked really hard over the last couple of weeks to stay as close as we can to clients.”

The FS Power50 adviser says daily investor notes have focused on how the situation is unfolding. Clients understand and appreciate the fact that the crisis presents non-diversifiable risk which pulls the performance of the global equities portfolio down. The firm’s key investment filter, Viola says, is the risk of impairment.

“What we don’t want to see is these types of events occur, and we have assets that are genuinely becoming impaired or don’t have an abil-

OC

Cool heads

All things being equal, a more volatile investment market environment with increased stock dispersion should be more conducive for active investing.

Matthew Gadsden

“We would have lower exposure to Australian shares than most might have. But it’s spread out over a range of different markets,” he says.

“We have a bit of emerging market exposure, but we’re also quite spread out across developed market countries relative to a traditional sort of market cap weighted country exposure.”

Contrasting this, Cbus is more balanced, splitting its equity exposure almost evenly between overseas and Aussie equities. Currently, the fund’s default option allocates around 24% to global equities, while about 6% is dedicated to emerging markets.

Cbus deputy chief investment officer Brett Chatfield says the fund’s approach is largely active, and incorporates a mixture of fundamental active managers and an internal strategy, which accounts for around 17% of the global equity allocation.

Meanwhile, Cbus global equities senior portfolio manager Lyn Foo07 says the fund’s internal strategy runs two funds. One is focused on the US and Europe, while the other invests exclusively in emerging markets, including China.

Foo says the fund’s stock picking is based on a bottom up, concentrated approach.

“We invest in what we deem as the highest quality assets,” she says.

“So those are where we have a high conviction that these companies have very strong competitive advantages, which we think will lead to excess returns on the long term basis, and which operate in attractive industry structures.”

Financial infrastructure assets, she points out,

FRANKLIN GLOBAL GROWTH FUND

INVESTING IN POTENTIAL. DELIVERING ON PERFORMANCE. Franklin Global Growth Fund takes a long-term approach to building high-quality, sustainable portfolios of 35-40 global growth stocks1 for Australian investors.

With a focus on high-quality companies with sustainable business models and a high ‘active’ share investment approach, Franklin Global Growth Fund is positioned to benefit from multi-year structural growth trends in the global economy.

As long-term investors with an emphasis on bottom-up stock research, we view short-term inefficiencies in markets as potential opportunities to purchase fundamentally sound companies that meet our strict criteria.

Our forward-looking approach to risk management, based on limiting the economic overlap among holdings, results in a diversified and resilient portfolio of global growth stocks.

Learn more at www.franklintempleton.com.au/globalequity

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1. Average portfolio holdings as at 31/1/20. Portfolio holdings subject to change. ©2020 Franklin Templeton. All rights reserved.

Franklin Templeton Investments Australia Limited (ABN 87 006 972 247) (Australian Financial Services Licence Holder No. 225328) issues this publication for information purposes only and not investment or financial product advice. It expresses no views as to the suitability of the services or other matters described herein to the individual circumstances, objectives, financial situation, or needs of any recipient. You should assess whether the information is appropriate for you and consider obtaining independent taxation, legal, financial or other professional advice before making an investment decision. A Product Disclosure Statement (PDS) for any Franklin Templeton funds referred to in this document is available from Franklin Templeton at Level 19, 101 Collins Street, Melbourne, Victoria, 3000 or www.franklintempleton.com.au or by calling 1800 673 776. The PDS should be considered before making an investment decision. Morningstar Awards 2020 ©. Morningstar, Inc. All Rights Reserved. Awarded to Franklin Global Growth Fund for Fund Manager of the Year, Global Equities, Australia.

18

Feature | Global equities

are among the themes currently most interesting for the fund, thanks in part to their scalability, and secular and structural growth drivers.

Companies with a high level of recurring earnings – described by Foo as “sticky, repeatable products” – and barriers to entry such as brand name, distribution and scale capabilities, and product innovation.

“We like exposure to the emerging market middle class. And you get that through a variety of ways,” she says.

Pulled together with a range of factor and beta strategies and an objective to outperform the market by around 1.5% per annum on a rolling five year basis, it’s clear the fund’s approach is sophisticated.

“While we didn’t predict this event, the structure of the portfolio is very diversified to help buffer against events such as this,” Cbus head of asset allocation Tim Ridley says.

“The portfolio structure is designed to have cushioning elements for events such as this, so you’re not seeing the full effect of equities going down.

This explains why the $56 billion fund simply isn’t scrambling amid the market turmoil.

Instead, it’s looking to double down.

“One thing we are conscious of, is episodes like this typically provide favourable pricing for new investments because there’s so much risk aversion priced into the market,” Ridley says.

While understanding of the sensitivities involved with investing amid a delicate and tragic global health emergency, Cbus recognises its role in managing the investments of its members.

“So that’s one of the things that we are considering on a forward looking basis: At what time does it look to be a good time to be purchasing more global equities?” Ridley adds.

He says the environment created by the crisis is “very unusual”, despite being similar in some ways to the GFC. “The market stress that we see right now is roughly where we got to at the peak levels of the GFC,” he says.

Ridley says that while the two events are similar, it’s the speed at which the crisis has deepened, with only a few weeks from market peak to the same levels of stress the GFC eventually reached around a year after the peak of October 2007.

Why this is important, Ridley says, is because the speed of the transmission is so high that investors can’t quite keep up. As such, he says the fund is dealing with an issue that is not only difficult to contain, but without proper precedent.

“We don’t have templates historically to lean on to say ‘Well this is what we think should happen given what has happened in the past,’” Ridley says.“Cbus has a large investment team of around 100 people who are extremely committed to ensuring that the membership receive the best possible outcomes in a very difficult investment environment.”

Ridley says the investment team have embraced the challenge, highlighting that the team is working extremely hard to manage members’ investments.

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

07: Lyn Foo

08: Fraser Murray

09: Jacob Mitchell

global equities senior portfolio manager Cbus

head of equities Frontier Advisors

chief investment officer Antipodes Partners

When opportunity knocks Huber says the market volatility comes as not only investors, but all people, “seek some degree of clarity on the depth and duration of the coronavirus health crisis”. “We remain focused on investing in high quality companies with strong balance sheets that will persevere long-term despite the near-term uncertainty,” Huber says.

“In an environment marked by uncertainty and turbulent markets, we believe that active management supported by strong risk management offers a compelling proposition.”

Asked whether sentiment among superannuation funds at the moment is that active global equities managers must shine in this crisis – or find themselves replaced by passive providers – Gadsden agrees. But he does so with a couple of caveats: that the market seeks safety irrelevant of valuations, and that managers are benchmarked according to respective styles.

“Consistent with greater potential for dispersion for the forward looking prospects of companies, JANA believes that opportunities arise in times of crisis and the only way to harness this is through active management,” Gadsden says.

Frontier Advisors head of equities Fraser Murray08 agrees, and says active managers must use the next 12 months to prove the management fees they charge.

“I think that’s a reasonable assertion,” he says.

However he points out that it’s still early to determine the success or failure of active global equities management so far. “[On the] 20th of February we were still at market highs,” he notes.

“We’ve obviously had a steep decline since, but it’s only 20 days to be talking about active managers and how they’ve performed.

“I think there’s probably a lot more water under the bridge before you’d start assessing how your active managers have performed through what’s obviously a difficult period.”

Gadsden says headwinds to active management have persisted in the post-GFC environment, as the popularity of passive and index investing has grown among investors.

However, he says the tension posed by the dynamics of macros factors, and “wild sentiment swings” will come under pressure after a market shock similar to this crisis.

“While the active versus passive debate will endure, we don’t see it a mutually exclusive consideration; rather we see both as having roles in portfolios depending on investor preferences and portfolio objectives,” Gadsden says.

So with active management under pressure to perform, where’s the smart money heading?

“Asian equities and Chinese equities have actually been relative outperformers during this period of volatility in global equities,” Antipodes Partners chief investment officer Jacob Mitchell09 says.

The market stress that we see right now is roughly where we got to at the peak levels of the GFC. Tom Ridley

According to Mitchell, it’s arguable China’s response included a relative quickly shutdown, which could lead the nation to recovery quicker.

“It’s also starting to warm up. It’s going to take a while before that makes a difference to the spread of the virus, but it seems like most of the science indicates that given the common cold is a coronavirus, these things are less likely to spread in a warmer environment,” he says.

Mitchell says Antipodes believes China is starting to reintroduce normalcy to day-to-day life in the nation, which he says will make a big difference to important supply chains.

“We think selectively there’s opportunities in some of the higher quality consumer related exposures,” Mitchell says.

“Some of the e-commerce beneficiaries like Alibaba, or a high quality restaurant operator like Yum China, which operates the KFC and Pizza Hut business in China. It’s the largest chain restaurant operator in China.”

Mitchell says those stocks can be bought on multiples which he says “are pretty interesting” given their rates of growth.

Elsewhere, Mitchell says one of the crisis’ major impacts will be to speed up some of the secular changes the fund thought to be in play already, including the way people shop, andconsume food and content.

“The solution to COVID-19, is sadly, social distancing,” he says.

“And social distancing means we do a lot more stuff online. So it speeds up some of the secular changes.”

He believes that after experiencing the benefits of online grocery shopping or food delivery services, some “slow adopters” may never return to their old habits. Additionally, he says investors should be on the lookout for markets where governments are happy to introduce stimulus measures, noting it could become a permanent feature of economic policy.

“It’s really a question of who has the most, if you like, dry powder,” he says.

“Broadly speaking, Asia has reasonable ammunition. Europe has been in fiscal austerity mode.

The fiscal surpluses in Europe tend to be in the north, but even in the southern parts of Europe, there has been a lot of fiscal repair. And we’d expect that to be used in the short term for income support, and specific support for businesses.”

He says in the longer-term, if the crisis was a structural shift, investors should consider what governments will use that dry powder for.

In places like Europe, initiatives such as subsidies to support the adoption of electric cars might be installed, underpinning the value of electrical vehicle stocks. Whereas stimulus may be pushed towards subsidising the upgrade of housing, he muses.

Whatever the case, there’s value for investors who can see through the panic, and keep a cool head. fs

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REACH FOR BETTER™

Franklin Templeton Investments Australia Limited (ABN 87 006 972 247) (Australian Financial Services Licence Holder No. 225328) issues this publication for information purposes only and not investment or financial product advice. It expresses no views as to the suitability of the services or other matters described herein to the individual circumstances, objectives, financial situation or needs of any recipient. You should assess whether the information is appropriate for you and consider obtaining independent taxation, legal, financial or other professional advice before making an investment decision. Investments entail risks, the value of investments and the income from them can go down as well as up and investors should be aware they might not get back the full value invested.

20

News

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

Insurers halt some virus cover Two of the country’s biggest insurers have halted cover for COVID-19 for some new customers, in new exclusions since the outbreak of the virus.

TAL and MLC Life have introduced new policy provisions for any new customers in response to the COVID-19 pandemic but existing customers will still be covered.

A TAL spokesperson told Financial Standard: “TAL continues to provide cover in the event of a claim for COVID-19.New customers purchasing TAL policies will be covered in line with their policy and individual underwriting terms.”

“However, at the time of taking out a policy, those customers who have recently travelled abroad, or are showing symptoms of COVID-19, or are in high risk groups will be individually assessed, and individual underwriting terms may be offered.

“These matters would be identified and assessed through our normal underwriting process. This is consistent with how most of the life insurance industry has responded to the COVID-19 situation so far.”

MLC Life said there are no additional exclusions on new customers due to COVID-19 unless currently infected or in contact with someone who is.

“If you have been diagnosed with COVID-19 and have been advised to self-isolate, you won’t be given cover until medically cleared,” MLC Life said.

“New customers will not receive cover if they have been in contact with someone diagnosed with COVID-19, in contact with someone in quarantine or in contact with someone who has been in self-isolation.”

Meanwhile, ClearView said there will be no specific exclusions for claims arising from a pandemic event, and said there are no plans to include exclusions going forward.fs

AMP cops downgrade Elizabeth McArthur

International ratings agency Moody’s has downgraded AMP Group, AMP Bank and AMP Life.

AMP Group, AMP Bank and AMP Life were all downgraded from A2 to A3 and remains under review for downgrade.

AMP Life’s insurance financial strength rating was downgraded to reflect the weaker profitability and elevated product risk of the wealth protection business as well as the expectation of a weaker market position going forward, after AMP Life is sold to Resolution Life.

“The ongoing weakness in the wealth protection business has negatively impacted profitability, with the company reporting an operating loss (prior to underlying investment income) of $21 million for fiscal year 2019, compared with an operating loss of AUD 3 million for fiscal 2018,” Moody’s said.

The ongoing challenges in AMP’s wealth management business were noted by Moody’s as a reason behind the AMP Group downgrade.

“This reflects the reputational damage to AMP’s brand following allegations of governance failures raised at the Royal Commission,” Moody’s said.

Moody’s said it anticipates ongoing margin compression along with higher regulatory and compliance costs continuing to constrain AMP Group earnings this year. fs

01: Alex Vynokur

chief executive BetaShares

Coronavirus puts rocket under shorting ETFs Kanika Sood

A The quote

Trading volumes are 30 times higher than average trad­ing volumes.

ustralian investors are flocking to ETFs that allow them to short the ASX200 and the S&P 500 amid the stock market correction, doubling their assets since start of the year.

The ASX 200 and S&P 500 had both lost over 20% from the start of the year to yesterday’s close, as COVID-19 and economic slowdown sweeps through the world.

The market inflows have translated into juicy inflows for three shorting ETFs, the BetaShares Australian Equities Bear Hedge Fund (ASX: BEAR), the BetaShares US Equities Strong Bear Hedge Fund – Currency Hedged (ASX: BBUS), and the BetaShares Australian Equities Strong Bear Hedge Fund (ASX: BBOZ).

Investors have poured about $250 million into the three ETFs since the start of the year, doubling their assets to about $551 million at Monday’s market close, according to BetaShares chief executive Alex Vynokur 01.

“In the past month or so, we have seen a very, very significant increase in their usage. Trading volumes are 30 times higher than average trading volumes,” Vynokur told Financial Standard.

“The liquidity has been fantastic. We are seeing trading of over a $100 million every day in these ETFs. BBOZ has done $95.7 million.”

He said the primary users have been financial advisers, especially with retiree and pre-retiree clients and some institutional investors.

BetaShares also has a suite of three managedrisk ETFs but inflows there tend to dominate when markets are up, according to Vynokur.

BEAR returns 0.9% to 1.1% return every time the S&P/ASX 200 Accumulation Index falls 1%.

Its leveraged version, BBOZ, delivers 2-2.75% increase for 1% fall in the index – similar to what BBUS does for the S&P 500 Total Return Index.

On March 16 when the ASX reported its worst one-day fall ever, BBOZ ended the day 22.07% higher than the previous trading day’s close. fs

Low rates support some bond managers: Report Eliza Bavin

The fall in interest rates has supported bond managers with a longer duration stance, according to new Morningstar research revealing the performance of fixed income houses during coronavirus-induced volatility.

The report said fixed income, particularly those with high credit quality, has provided diversification and reduced risk.

Morningstar said fixed income has been stabilising investor portfolios against equity losses during a period of increased volatility.

“Aggressive central bank easing globally has been favourable for managers with a bias to neutral or longer duration positions,” Morningstar said.

“Meanwhile, instability in credit markets has also seen a flight to the safety of higher-quality, more liquid securities.”

Morningstar said it is common in periods of severe uncertainty for investors to place greater importance on the return of capital, rather than the return on capital.

“Credit spreads have widened especially further down the quality spectrum, and credit issuance softened. High-grade sovereign bonds have outperformed credit,” the report said.

The analysis found that CFS Wholesale Australian Bond has been leading the way, followed by Pendal Fixed Interest and Schroders Fixed Income Fund – Wholesale. This is based on unit price returns between February 21 and March 16.

The outperformance was partially to do with each funds long rate exposures across Australia and the US, with Schroders also extending into New Zealand.

The report said funds with a short-term stance have not performed as well compared to their peers.

“Many shorter duration credit strategies have declined in value over this period. Losses of up to 3% were common, with these funds feeling the pinch from widening credit spreads,” the report said.

Sitting among the bottom performers is the Janus Henderson Australian Fixed Interest Fund, Aberdeen Standard Australian Fixed Income Fund, AMP Capital Wholesale Australian Bond Fund and PIMCO Australian Bond Wholesale.

On the global bond front, T. Rowe Price Dynamic Global Bond Fund and Vanguard International Fixed Interest Index (Hedged) option are sitting at the top. Meanwhile, PIMCO’s Global Bond Wholesale and the Advance International Fixed Interest MultiBlend Fund are among the worst performers, alongside options from Franklin Templeton and Legg Mason Brandywine.

Vanguard, AMP Capital and Schroder are sitting among the top performers for diversified credit. However, Vanguard’s International Credit Securities Index (Hedged) ETF is among the bottom funds, along with products from CFS and iShares.

Finally, when it comes to multi-strategy income, Kapstream Absolute Return Income is sitting at the top, ahead of the likes of the JPMorgan Global Strategic Bond Fund and AB Dynamic Global Fixed Income.

“Many shorter duration credit strategies have declined in value over this period. Losses of up to 3% were common, with these funds feeling the pinch from widening credit spreads. Two clear trends were discernible,” Morningstar said.

“Unsurprisingly, credit funds that stuck to higher grade instruments tended to fare best.”

Finally, Morningstar said it has seen some passive offerings perform well over the period.

“More broadly, passive fixed income strategies have often appeared among the top of the charts through this period,” it said.

Though credit was an exception, it added.

“Otherwise, passive strategies that replicate broad-based indexes usually have a large structural allocation to sovereign and government-related bonds,” Morningstar said. fs

Products

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

21

Products 01: Bryce Doherty

Elanor launches new fund Elanor Investors Group has announced the establishment of a new healthcare and real estate fund, bringing funds under management to over $1.9 billion.

The fund, Elanor Healthcare Real Estate Fund, was established with the acquisition of two healthcare properties, with a combined asset value of $123.3 million.

Elanor said the properties, one in Brisbane and one on the Gold Coast, are located in established health precincts and supported by strong anchor tenants.

“With Australian healthcare expenditure growing at over 2.5 times GDP, prevailing healthcare sector cost structures are driving demand for more efficient healthcare service delivery models,” the company said in an announcement to the ASX. “Consequently, healthcare services are increasingly being delivered in lower cost day surgeries and medical centres/clinics.”

The company said the fund’s strategy is to acquire high quality commercial healthcare real estate assets and actively manage those assets to optimise the use of the properties.

The group’s co-head of real estate David Burgess said the acquisition of the two seed assets is a positive starting point.

“The seed assets represent high investment quality commercial healthcare properties, underpinned by strong anchor tenants,” Burgess said.

“With a Year 1 Fund distribution yield of 7.5%, we are positive that our proven active asset management capability will deliver superior risk adjusted returns for our investors.”

Elanor chief executive Glenn Willis said the group is positive about the investment prospects within the growing Australian healthcare real estate sector.

“We have been actively reviewing the broader healthcare real estate sector for some time and the establishment of this fund represents the fourth real estate investment sector of focus for the group,” Willis said.

“We look forward to acquiring further high investment quality commercial healthcare real estate assets to grow the fund.”

UBS says goodbye to ETFs UBS is sweeping clean its suite of ASX-listed ETFs, shutting down six funds and delisting three as asset growth stalls.

UBS currently has nine ETFs with $300 million in funds under management at February end.

It informed investors of its plans to delist six of them, telling investors that the funds were unlikely to become viable as ASX-quoted exchange funds.

“This is primarily due to insufficient scale, leading to costs that are disproportionately high as a percentage of the net asset value of each fund.

On this basis, UBS has determined for each fund that it is in the best interest of the members as a whole to terminate the fund,” it said in ASX filings.

UBS head of Australia and New Zealand Bryce Doherty 01 said the decision to shut its ETFs comes

Bond fund spreads widen Investors looking to redeem their fixed interest allocations face deep buy/sell spreads, as poor liquidity forces funds to push them up significantly during COVID-19 volatility.

Franklin Templeton, PIMCO, Ardea and Kapstream are some of the managers who have notified managers of a higher buy/sell spread at the end of March.

The higher spreads come as liquidity dries up in many parts of the fixed interest universe universe and traders face higher bid/offer spreads.

Kapstream’s flagship absolute return income fund, for example, last week pushed up its buy/ sell spread for investors to 0.00%/1.00% from the previous 0.00%/0.00%.

“The wider buy/sell spreads are a reflection of the current market liquidity.

It is as bad or worse than during the bad periods of the GFC. Back then, bonds were trading on price [instead of bid/ask spreads] and that is the case in large parts of the market right now,” the fund’s lead portfolio manager Steve Goldman told Financial Standard.

as it chooses to focus on institutional mandates.

“Strategically we have decided to focus on our successful domestic and global passive business, where we manage $23 billion in institutional mandates in Australia, along with $500 billion in index assets managed globally,” Doherty said.

“We continue to listen to our clients, the capabilities they want us to deliver and the way these capabilities should be packaged. This includes active and passive capabilities, and as such we have been investing in our emerging markets capabilities and deepening our CBRE Clarion Solutions and Yarra Capital Management partnerships, building client-centric portfolios focused on delivering alpha.”

The funds that are closing include three international ETFs (Europe, Japan and US subindices of MSCI), two Morningstar Australia ETFs and a cash ETF. Together they had about $63 million in assets at February end.

ETFs that don’t attract enough investors are a problem for issuers. In January, BlackRock shut a Taiwan stocks ETF which had only $5.65 million in assets. A 2019 report from Rainmaker titled ‘Zombie ETFs’ identified nine funds — including three of the ones that UBS is shutting — which had failed to attract investors.

UBS has decided to convert three other ETFs (UBA, UBW, UBP) to unlisted wholesale funds, and is asking investors to send their choices in regards to the change by April 29.

These are the larger funds of the lot and together had about $238 million in assets at February end.

UBS will also drop the fees on all three of these.

For example, the biggest one, the $179 million UBS IQ MSCI Australian Ethical ETF will go from charging 35bps in annual fees to 15bps.

It will also keep its 14 mFunds open, which together had $38 million at February end.

Zenith boosts Mosaic offering Zenith Investment Partners has unveiled the latest major update to its flagship research portal Zenith Mosaic, allowing financial advisers to compare investment products side-by-side.

Zenith has rolled out an update to Zenith Mosaic which enables the latest release to its research portal for financial advisers, allows for the comparison of product performance, risk and correlation on the platform.

Advisers will also be able to generate a variety of surveys across a number of statistical measures.

Zenith said the update means advisers can “quickly filter and slice” its reports in different ways, such as across different timeframe and return periods. Advisers will also be able to select one (or more) product for more detailed analysis, at which point the visuals will cross filter before their eyes and update in real time.

Advisers will have the option of exporting Analyse’s date to Microsoft Excel, so that they can manage that data in the most relevant way.

Zenith confirmed it would not retire the “old”

02: Vic Jokovic

adviser portal as part of the update, ensuring advisers they could still use the tool in the same way they always have.

Separately, the firm recently entered superannuation through the acquisition of Chant West’s super and consultancy business for $12 million in February.

Zenith chief executive David Wright said he was “very pleased” to welcome the Chant West team aboard.

“This is a logical fit for our growth plans to better serve an expanded client base with unbiased research, consultancy and online tools, especially at a time when the broader super, pension and advice markets are undergoing considerable change and further evolving how they serve their clients and members,” Wright said in February.

Chi-X continues TraCR roll out Chi-X has released another tranche of US listedblue chip company TraCRs to meet demand for local access to US mega cap stocks.

Another 10 large US companies are available for Australians to gain exposure to, including Google parent company Alphabet, giant US telco AT&T, Nike and Costco.

The latest release now brings Chi-X’s range of US TraCRs to 30, as Australian investors continue to seek access to large US companies.

Chi-X Australia chief executive Vic Jokovic 02 said significant market volatility thanks to the impact of the COVID-19 outbreak was causing investors to look for a way to diversify their portfolios.

“The impact of COVID-19 on markets across the world has been significant,” Jokovic said.

“Adding to the list of available TraCRs will broaden the opportunities currently on offer to buy US mega caps.

“With the addition of Alphabet all of the US FAANG stocks are now available locally to Australian investors. Whilst names like Nike, Boeing and PepsiCo have joined the TraCR suite by popular demand.”

Jokovic said the addition of Alphabet was likely to gain popularity among investors, by allowing direct, single-stock exposure to Google in a way no other exchange in Australia currently can.

“The addition of Alphabet presents a huge opportunity,” Jokovic said.

TraCRs are issued by Deutsche Access Investments, and Deutsche Bank head of depositary receipts Australia and New Zealand Chris Bagley said the firm was encouraged by the increasing demand for TraCRs as it released more series’ with Chi-X. “More and more investors are realising the benefits of going global when it comes to their investment decisions, especially in light of recent market fluctuations,” Bagley said.

“Gaining access to US listed companies via TraCRs makes that investment decision simpler and more cost effective.”

In February, Chi-X added another tranche of 10 US listed companies, including Netflix, McDonald’s, Starbucks, Caterpillar and Visa to the TraCRs menu. fs

22

Roundtable| China Featurette

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

Is China a safe investment?

There is often an unspoken struggle that investors face behind closed doors. Eliza Bavin explores how those in the business balance good returns and standing up for what’s right.

From the protests in Hong Kong to the secretive handling of the coronavirus breakout, not to mention international concerns over human rights violations, it is no wonder investing in China can be tricky to navigate.

The possible returns though are what dragged investors in, and certainly what keeps them there.

China is often seen as the next economic powerhouse, on track to overtake the United States, but lurking below the temptation of great possibilities are headlines fraught with concern.

One might like to argue you can like the investment opportunity without liking the country it’s based in, but the Chinese Communist Party (CCP) has inserted itself into most aspects of private business.

The CCP has always has direct control of state firms, but when current President Xi Jinping gained control in 2013, he dramatically strengthened the party’s role in private business.

Chinese based firms are still, for the most part, in charge of the day-to-day running of their businesses but pressure from the CCP to be included in major decisions is thought to be intense.

Intentions matter There are two main drivers behind an investor wanting to enter Asia; one is more mechanical and tactical and the other is more principle-based.

The tactical driver of investing in China is because China A-shares are included in the MSCI benchmark.

If the leading benchmark provider is including Asia then a lot of fund managers must at least consider participating in some form.

China is the second largest economy in the world and it continues to be the incremental global growth driver.

Soon, depending on estimates, it will rival the US as the number one economy, if not surpass it.

In addition, it is the largest population in the world, so there is a lot of economic activity, but more importantly, the Chinese have plenty of money to invest.

So, the second main factor as to why a lot of people are investing in Asia is because at some point they want to tap into that market.

At the moment, while most of the investing population does it through their own retail channels, at some point if they, like other countries, decide to start evolving to allow institutional managers to manage that money then the international managers will benefit.

There are factors for investors to consider when getting a foot in the door. One, as trite as it may sound, is the language barrier, which can be cultural too.

Pat Ru, portfolio manager for Neuberger Berman’s emerging markets fund, says there are quite literally a lot of ‘lost in translation’ issues.

“Sometimes a lot of misunderstandings will be misinterpreted as malicious or unethical and in many cases it is simply a misunderstanding,” Ru says.

The theoretical argument in finance markets is that when there is more risk there is more reward.

Pat Ru

“Of course, there are other cases where it is malicious and fraudulent, but there are a lot of situations where that is not the case.”

Ru argues that although there is a dilemma when investing in China, that is somewhat going to be the case for any investment.

“There is a moral dilemma that most investors when they invest in anything across the board,” he says.

“Depending on certain industries that you invest in globally, like defence for example – in the US defence has done very well but investing in it has certain implications, so there are all these decisions that an investor is being faced with.”

Both investors and their clients need to figure out where that line is, Ru says. The decision that’s made depends on a range of factors from the type of investment to the type of client.

“The theoretical argument in finance markets is that when there is more risk there is more reward.”

“So, some people do believe that and think the China market is messy but that is where is allows alpha opportunities if we can get it right.”

“The other school of thought is Chinese companies can be pretty bad, but there are so many companies there has got to be some, even if it’s the minority, that are still global and standard. And those companies do exist.”

Another thought process is that although China is bad, it is not as bad as perceived, Ru says.

“Coming from the US, one would argue the US government says ‘we protect privacy’ but

China | Featurette

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

post-Snowden we figured out there was a lot of back-doors expected of the US-based tech companies, Ru explains.

“So, the argument then becomes once you are aware of the problems in China, as an investors you need to measure that risk and scale it to the reward you expect.”

“China can sometimes seem worse than it actually is. That is not to say the problems don’t exist, just the magnitude of the problems may not be as big as people think.”

Finding nuance There are two decisions every investor must make; one is which lines they are not willing to cross and then ensuring the proper due-diligence has been done.

“Investors need to understand that China is an emerging market, so you have nuances that are going to be different from developed markets,” Stephen Kam, co-head of product management for Asia (ex Japan) from Schroders says.

“It has always been the case, given how China works, there has always been and will continue to be government influence within the economy and within companies.”

International governments have certainly expressed their concerns about this influence.

In 2019 when the US claimed Huawei was helping the Chinese government spy on it, officials only needed to point to the introduction of a national security law passed in 2017.

The law said any organisation or citizen must support and cooperate in national intelligence work for the CCP. Kam says this is one of the reasons you need to be selective when investing in Chinese companies.

“We do a lot of detailed research into each company and business. I wouldn’t say we need to do more because you always need to do a lot, but the challenge sometimes is the influence of government and government policy,” Kam explains.

“We need to be really cognisant of that; we meet management teams, visit the factories and speak with everyone across the supply chain to get a better understanding of how the business is doing.”

At the end of the day, Kam says, it is all about collecting enough data points to help determine the long-term profitability of a business.

“What can happen in China, is that you may have new regulation that can be introduced overnight that may change the investment case for one of our business and that is certainly a challenge,” he says.

It can be argued, says Kam that the ‘G’ part of ESG has always been the main focus in China, but as time moves on there is a higher focus on the social side.

“With respect to what our clients are looking at from a long-term business concern perspective, when you are dealing with China, it is more often

01: Pat Ru

02: Stephen Kam

03: Marco Li

portfolio manager Neuberger Berman

co-head of product management, Asia (ex Japan) Schroders

portfolio manager TT International

than not going to be concerns,” Kam says.

“With respect with the more international concerns around China, we don’t tend to necessarily take a moral stance or judgement.”

“Certainly, some of thing things happening in China do weigh on our considerations as to which business and industries we want to be invested in, but that just comes with the overall evaluation process.”

Kam says, at the end of the day emerging markets need to be taken at face value; they are developing economies at different stages.

Progression in the works If Kam’s school of thought is to be believed then China, along with its fast-paced economic growth would also be seeing growth in terms of ESG. Marco Li, portfolio manager for the TT International China fund says this is the case.

“Corporate governance and ESG are improving as on-shore companies look to diversify their investor base, there is increasingly better transparency and access to companies,” Li says.

“Particularly when it comes to the environment, in fact we have seen both producers and consumers showing more of an interest in this area.”

Being ‘green’ is good for business says Li, because it helps reduce costs, spurs innovation and gives producers a unique selling point.

“Take China’s move to ban single use plastics permanently in 2025, not only does this reduce pollution, it helps those companies which have invested R&D into developing renewable packaging,” Li explains.

In practice for Chinese companies, it is GES governance, environmental (poor environmental practices are very bad business as business can lose their license to operate) and with no less importance the social element, Li says.

“Any infractions or human rights abuses would impact the social score within the overall score of our companies,” Li explains.

“Clearly abuses of human rights would be a big detractor. As allocators of capital, we focus on the risk versus rewards.”

Human rights concerns have plagued China for some time, whether it is broader issues, like the treatment of the Uyghurs, or more company specific like working conditions in factories.

China still lags in this department, but as those who invest in China know, this is simply a factor that goes into measuring the risk and reward.

Staying power Another potential issue with investing in China is the ability to stay there.

China is known for being secretive; in fact the nation only opened its borders to foreign businesses in December 1978.

Despite this, the country is still wary of foreign businesses, often having a ‘Chinese version’ of well-known international brands.

Corporate governance and ESG are improving as onshore companies look to diversify their investor base, there is increasingly better transparency and access to companies.

Marco Li

23

Instead of Fedex China has SF-Express, instead of Amazing it has Alibaba and instead of the western social networks it has WeChat and RenRen. So, with a history of preference being awarded to national companies, why would this be any different with investors?

Li says this is no cause for concern and instead says it is not the Chinese market to blame, but the lack of understanding from foreign companies.

“There isn’t much foreign influence in China to begin with, so any demise is more due to natural attrition because products lack competitiveness,” he says.

“Internet and technology offerings in China need to be customised and localised for the Chinese consumer.”

“Take WeChat for example, one of the key elements aside from its messaging services is its wallet and payment services, this is far superior and more advanced than the international peers, so I don’t think it’s a matter of being pushed out, more so a lack of local expertise to compete.

Kam agrees that the Chinese government isn’t looking to oust foreign investors, but there are some issues on the horizon for foreign business.

“The Chinese government is trying to open up the markets more and more and certainly from a financial perspective they welcome foreign investments,” Kam says.

“However, with respect to their key strategic businesses and industries it is very clear the issues in the relationship between the US and China has moved beyond just trade and tariffs.

“I think over the medium and longer term that tensions will continue because there is competition and we believe China will look to become more self-sufficient.”

Kam says, for the Chinese government, this has been the key focus and will continue to be an important element of China trying to solidify its position in the world.

As Ru explains technology has always been a strategic focus for China, but that is being expanded.

“Technology has always been a focus for China; they are good at the low and mid-end but for high-end they have to pay international companies intellectual property rights; they were getting annoyed with that,” Ru says.

Taking a very speculative stance, Ru says a number of factors will determine in the CCP might push out foreign investors in the future.

“If you look at the history of other countries, and despite how globally integrated we are nationalism is on the rise,” he says.

“But historically, as much as China is going to produce these supply chains and try to be selfsufficient, the reality is that we are still globally integrated.”

China, Ru says, cannot afford to close itself off. fs

24

Mandates

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

Industry fund awards mandate

01: Simon Swanson

managing director ClearView

Kanika Sood

HUB24 wins $1b mandate Ally Selby

A

listed diversified financial services company has awarded HUB24 a $1 billion mandate, as it moves away from its own wrap platform.

ClearView will migrate the $1 billion from its own WealthSolutions wrap platform to HUB24, subject to all regulatory requirements.

ClearView will not be closing the wrap platform, and its products will remain with the firm, a spokesperson confirmed.

ClearView’s primary superannuation life insurance portfolio will also be transferred to the HUB24 Super Fund. The portfolio will continue to be administered by ClearView.

With the new partnership, ClearView hopes to launch investment and insurance products initiatives in the future, including a ClearView-branded version of HUB24’s retail solutions, HUB24 Invest and HUB24 Super, and the addition of the firm’s managed portfolios and flagship life insurance product, LifeSolu-

tions, to HUB24 Invest and HUB24 Super.

“The partnership is expected to deliver on ClearView’s previously advised project to seek a modern replacement solution for its wrap technology, substantially address the tax credit issue in the ClearView Retirement Plan and deliver competitive new products in the future,” the firm said.

The development, transition and implementation of the migration will cost ClearView $4-6 million. This will be incurred over the next six-12 months.

ClearView managing director Simon Swanson 01 said the move would help simplify the business and offer a differentiated solution to advisers.

“This is an exciting strategic partnership for ClearView,” he said.

“We are committed to delivering a highquality, differentiated wrap-based offer to advisers and clients, with a focus on adviser efficiency, offering choice and value for money. fs

Rainmaker Mandate Top 20

The quote

This is an exciting strategic partnership for ClearView.

An industry fund has allocated about $27 billion to an unlisted infrastructure fund from First Sentier, as it diversifies its portfolio.

Christian Super invested €15 million (about $27.4 million) to the First Sentier European Diversified Infrastructure Fund III, which will invest in mature infrastructure assets across Europe’s energy, transportation and utility sectors.

The allocation follows Christian Super’s US $15 million commitment to the Brookfield Infrastructure Fund IV, which closed with a US $20 million raise last month.

At the same time, the fund has been shifting its equities allocations to lower fee, screened passive strategies from Dimensional Fund Advisors, while maintaining a small roster of active managers.

The First Sentier investment was led by Christian Super research and portfolio analyst Yong Tan and the fund’s newly-appointed deputy chief investment officer David Brown, chief investment officer Tim Macready said.

“Over the last few years, we have been looking to build out and diversify our infrastructure portfolio – particularly by adding offshore assets to complement our existing domestic portfolio.

“This year we have made a commitment to the First Sentier European Diversified Infrastructure Fund III. Across these portfolios we will see an expanded infrastructure portfolio that covers America, Europe and Australia.”

Christian Super manages about $1.6 billion for about 28,000 members. fs

Note: Largest alternative investments mandates appointed in previous quarter (December 2019)

Appointed by

Asset consultant

Investment manager

Mandate type

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

Partners Group Australia

Private Equity

42

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

IFM Investors Pty Ltd

Private Equity

4

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

Wilshire Australia Pty Limited

International Private Equity

Australian Catholic Superannuation and Retirement Fund

Frontier Advisors

Wilshire Australia Pty Limited

Private Equity

AustralianSuper

Frontier Advisors; JANA Investment Advisers

Other

Alternative Investments

AustralianSuper

Frontier Advisors; JANA Investment Advisers

Other

International Infrastructure

57

Christian Super

JANA Investment Advisers

AMP Capital Investors Limited

Infrastructure

29

Christian Super

JANA Investment Advisers

Triodos Investment Management

Alternative Investments

22

Christian Super

JANA Investment Advisers

Stafford Capital Partners Pty Ltd

Alternative Investments

7

Christian Super

JANA Investment Advisers

Brookfield Australia Investments Limited

Infrastructure

6

Christian Super

JANA Investment Advisers

IFC Asset Management Company

Alternative Investments

6

Christian Super

JANA Investment Advisers

Other

Alternative Investments

4

Christian Super

JANA Investment Advisers

MicroVest Capital Management

Various

3

Christian Super

JANA Investment Advisers

The Abraaj Group

Alternative Investments

2

Christian Super

JANA Investment Advisers

Credit Suisse Investment Services (Australia) Limited

Alternative Investments

1

Hostplus Superannuation Fund

JANA Investment Advisers

Other

Alternative Investments

38

Hostplus Superannuation Fund

JANA Investment Advisers

Other

International Private Equity

13

Sunsuper Superannuation Fund

Aksia LLC; JANA Investment Advisers ; Mercer Investment Consulting; StepStone Group

PineBridge Investments

Alternative Investments

530

Sunsuper Superannuation Fund

Aksia LLC; JANA Investment Advisers; Mercer Investment Consulting; StepStone Group

Affirmative Investment Management Partners Limited

Alternative Investments

152

WA Local Government Superannuation Plan

Willis Towers Watson

Other

Alternative Investments

Amount ($m)

418

36 Source: Rainmaker Information

International

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

AXA IM in strategic overhaul

01: Nigel Green

chief executive deVere

Jamie Williamson

AXA Investment Managers is splitting its asset management business in two, creating a dedicated alternatives business that will run alongside a strengthened core investments business. As such, AXA IM’s leadership team has also been overhauled.

AXA IM is restructuring its operations by dividing its asset management business into AXA IM Core and a new unit, AXA IM Alts. The changes are expected to be put in place in Q2.

The core business will comprise fixed income, Framlington Equities and multi-asset investment platforms, and will also now include Rosenberg Equities. The total assets under management for the business unit will stand at $932 billion (€536 billion).

It will be led by global head of core investments Hans Stoter as global head of AXA IM Core, while Framlington Equities global head Matthew Lovatt will become global head of client group, core.

Rosenberg Equities chief executive Heidi Ridley has opted to step down and pursue opportunities outside of AXA IM. Paul Flavier, currently AXA IM chief risk officer, will take over as head of Rosenberg Equities on March 31. Flavier will be replaced in the lead risk role by Matthieu Tonneau, currently head of solutions, portfolio management and LDI. Meanwhile, the new dedicated alternatives business will encompass real assets, structured finance and hedge fund business Chorus.

It will be led by Isabelle Scemama as global head of AXA IM Alts, in addition to her current role as chief executive of AXA IM Real Assets. Deborah Shire has been appointed deputy head of the new division in addition to her current role as global head of structured finance, and global head of business development for AXA IM Real Assets Florence Dard will also hold the role of global head of client group, Alts. fs

Afterpay coughs up $1.5m in US Ally Selby

Afterpay has settled with a California financial services regulator over allegations it was offering illegal loans in the state without a licence.

The settlement with the California Department of Business Oversight (DBO) will see the ‘buy now pay later’ provider cough up $1.5 million.

The settlement costs include a refund of US$905,000 in late fees previously paid by Californian-based consumers, as well as an administrative fee to the DBO of US$90,500.

Following an investigation into the service, the DBO found Afterpay had provided “illegal loans” to its customers, the majority of which were “young consumers who are unable to qualify for traditional financing options like credit cards”.

“After an inquiry launched last year, the DBO concluded Afterpay had engaged in the business of a finance lender without obtaining a required license,” it said.

“Under the settlement, Afterpay will only make future loans or extensions of credit to California residents under a California Financing Law (CFL) license issued to its affiliate, Afterpay US Services, LLC.”fs

25

deVere launches global contactless advice offering Harrison Worley

G The quote

Using a combination of existing technolo­gy, and our industry-leading applications, we’re able to offer unparalleled financial advice from the comfort of your home.

lobal wealth management group deVere is responding to the COVID-19 outbreak by immediately launching a free, worldwide, contactless advice service.

In an effort to ensure those seeking advice stick to global social distancing standards, deVere is launching a contactless advice service, which will see clients conduct a “wealth scan in”, a fact find, and be provided with a customised report which their adviser will analyse and discuss with them.

The service will also eventually allow clients to track their entire portfolio and financial strategy in real time, and book e-meetings with their adviser. deVere founder and chief executive Nigel Green01 said the world was changing “fast”, and added that if the global economy fell into recession on the back of the coronavirus, it – and its subsequent recovery – would have “far-reaching consequences for people’s wealth”.

“We are launching contactless advice now – which is an industry first – for four clear reasons,” Green said.

“First, social distancing is currently the only tool available to fight the spread of the coronavirus. As such, more and more cities, regions and countries are going into lockdown and people into enforced or self-imposed isolation to help

fight COVID-19. This means that they might not be able to see their financial adviser face-toface as they do ordinarily.

“And second, the economic landscape is shifting. The global economy is facing a short and deep recession. As always, new industries will emerge and, of course, there will be winners and losers in terms of sectors, jobs and wages – and this will, naturally, directly impact people’s finances.”

Green also pointed out a future era of negative interest rates and ongoing volatility in financial markets will need attention, given “perhaps once-in-a-generation” buying opportunities would spring forth.

“Against this backdrop, in order to create, build-up and safeguard their wealth as the world adapts to a new era, investors should be revising their portfolios to ensure they mitigate risk and take advantage of the opportunities,” Green said.

“Using a combination of existing technology, and our industry-leading applications, we’re able to offer unparalleled financial advice from the comfort of your home.

“In these trying times we must all play our part, by removing physical interactions from our services, you can have peace of mind that your health, and your wealth will remain secure.” fs

UK asset manager acquires stake in retirement funder Elizabeth McArthur

A UK asset manager and financial services provider has acquired a 20% stake in a local specialised retirement funder.

Household Capital announced the completion of series B financing with Legal & General.

Existing and new investors joined Legal & General in the financing, which takes the total amount of equity capital raised by Household Capital to $25 million since launching in 2017.

Legal & General is Household Capital’s first non-domestic, multinational investor and will be used to underpin its corporate growth.

Legal & General has close to £1.2 trillion in assets under management. The company is also a provider of insurance, annuities and lifetime mortgages in the UK. “Legal & General’s strategic investment shows when it comes to tackling the challenge of our burgeoning retirement-age population, global investors see Australia as a significant market opportunity,” Household Capital chief executive Joshua Funder said.

“We’re excited to have an investor on board with experience in this market segment and who recognises that Household Capital is an innovator in home equity retirement funding with a clear values-based focus on customer outcomes.”

Legal & General Retail Retirement chief executive Chris Knight said Legal & General has plans to grow the scale of Household Capital’s business. ”This is a great opportunity to invest in a dynamic business, in a market with lots of potential. It reflects our commitment to improving the opportunities available to everyone at retirement, regardless of where they may be, so that they can live longer, healthier and happier lives,” Knight said.

“The Australian equity release market is extremely promising, with Household Capital at the forefront of developing innovative funding options for retirees. We’re looking forward to working together to help grow the scale of the business so that consumers have better options at this critical life stage.” fs

26

Managed funds

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06 PERIOD ENDING – 31 JANUARY 2020

Size 1 year 3 years 5 years

Size 1 year 3 years 5 years

Fund name

Fund name

Managed Funds

$m

% p.a. Rank

% p.a. Rank

% p.a. Rank

GROWTH

$m

% p.a. Rank

% p.a. Rank

% p.a. Rank

CAPITAL STABLE

MLC Wholesale Horizon 6 Share Portfolio

240

22.3

1

12.4

1

9.5

5

IOOF MultiMix Moderate Trust

590

13.2

1

8.5

1

6.8

1

BT Multi-Manager High Growth Fund

17

21.0

5

12.4

2

9.1

7

BlackRock Scientific WS Diversified Stable

57

12.9

3

7.8

2

6.0

4

Perpetual Split Growth Fund

48

19.9

8

12.3

3

9.7

2

Dimensional World Allocation 50/50 Trust

389

12.5

4

7.5

3

6.5

2

2545

22.1

3

12.3

4

9.5

6

MLC Inflation Plus - Assertive Portfolio

402

13.0

2

7.4

4

5.9

5

IOOF MultiMix Growth Trust

657

20.7

7

12.2

5

9.6

3

Vanguard Conservative Index Fund

1914

12.2

5

7.1

5

5.7

6

Fiducian Growth Fund

127

21.8

4

12.0

6

9.6

4

MLC Horizon 3 Conservative Growth Portfolio

1001

11.8

7

7.0

6

5.5

7

Fiducian Ultra Growth Fund

185

22.2

2

11.5

7

10.8

1

Pendal Active Moderate Fund

204

11.8

6

6.7

7

Vanguard High Growth Index Fund

BT Multi-Manager Growth Fund

52

18.4

10

11.0

8

8.1

9

Fiducian Capital Stable Fund

259

11.4

9

6.6

8

5.3

10

4785

19.0

9

10.7

9

8.3

8

Perpetual Diversified Growth Fund

116

10.4

13

6.6

9

5.1

11

MLC Wholesale Horizon 5 Growth Portfolio

502

18.4

11

10.3

10

8.0

10

13

11.1

11

6.5

10

5.0

13

Sector average

670

19.4

10.9

7.9

6.0

5.0

Vanguard Growth Index Fund

Macquarie Capital Stable Fund Sector average

BALANCED 483

20.5

2

11.9

1

8.8

3

PIMCO Capital Securities Fund

Ausbil Balanced Fund

125

22.3

1

11.4

2

8.8

2

Bentham High Yield Fund

67

19.4

4

11.0

3

8.4

5

Yarra Enhanced Income Fund

306

19.6

3

10.9

4

8.7

4

1840

17.1

7

10.6

5

8.4

6

BlackRock Tactical Growth Fund

543

18.7

5

10.5

6

6.9

14

Vanguard Managed Payout Fund

25

16.1

12

10.0

7

Macquarie Balanced Growth Fund

606

16.3

9

10.0

8

8.2

7

BT Multi-Manager Balanced Fund

106

16.2

10

9.9

9

7.3

95

16.9

8

9.6

10

8.0

8.2

6.7

Fiducian Balanced Fund IOOF MultiMix Balanced Growth Trust

Zurich Managed Growth Fund Sector average

9.9

CREDIT

BlackRock Scientific WS Diversified Growth Fund

SSGA Passive Balanced Trust

372

763

14.3

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

85

14.1

1

7.2

1

105

9.4

5

6.5

2

7.3

1

75

7.0

10

6.5

3

6.1

3

UBS Global Credit Fund

169

12.1

2

6.4

4

5.3

7

Principal Global Credit Opportunities Fund

149

12.0

3

5.9

5

5.4

5

Vanguard Australian Corp Fixed Interest Index

233

8.0

7

5.7

6

4.8

10

Vanguard International Credit Securities Index

750

10.3

4

5.7

7

4.7

11

Pendal Monthly Income Plus Fund

527

9.2

6

5.6

8

4.4

15

11

Pendal Enhanced Credit Fund

543

7.5

9

5.5

9

4.6

12

10

Bentham Syndicated Loan Fund

544

5.0

14

4.9

10

6.1

2

Sector average

744

6.9

4.9

4.8

Source: Rainmaker Information

Mic drop on growth/defensive argument ake our time machine back to a simpler time when a ‘sophisticated’ investment portfolio conT sisted of 60% equities and 40% high quality bonds.

Dial tones

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

Equities were called growth because dividends were tied to profits, and profits were tied to economic growth. As long as the economy grew, so too could dividends. All this growth meant that share prices would rise as well. This is the growth that compensated investors for the fact that their initial yield from equities was lower than for bonds.

Whenever a bond had run its course and had to be paid back, only the initial principal, also known as the face value, was repaid. The important point here is that this initial investment was repaid with a high degree of certainty. Inflation, such as it was, was baked into the yield.

If there had been inflation over the holding period, then the real value of the face value had decreased over time as well.

Because the capital growth of equities was tied to the economy, they would lose significant value when the economy contracted or went into recession. These losses could last for many years before recovering.

In that situation, bonds came into their own.

During a recession yields fall—primarily because expected future inflation is lower—which leads to an increase in the price of bonds. This happens

when bonds have what is called duration. A 10year government bond has higher duration than a three-year government bond. When yields fall, the price of a longer duration bond will increase by more than that of a shorter duration bond.

Cash and equivalents have no duration and do not increase in price when interest rates fall.

This is the reason why bonds were known as defensive assets. They play defence when a portfolio is attacked by the aggression of recession.

Short dated bonds might produce more income than cash, but they don’t actively defend a portfolio. If anything, they sit on the sidelines while the yield they produce falls.

Fast forward to today’s environment—as before (although for very different reasons) we are faced with a pretty much inevitable recession both in Australia and globally. What is different is that bond yields are significantly lower than dividends from equities. Also, there are major differences in our investment options.

Extremely low bond yields mean that their potential for future price appreciation is limited. It does not mean they are useless. They are one of the few assets that still play an important defensive role in an investment portfolio, particularly during recessionary periods. During a depression they are even more imporant.

Among the greater range of investment options many are called ‘defensive’, such as property, hedge funds, infrastructure and other ‘alternative’ investments. But are they really? Will they increase in value during a recession? Are they negatively correlated with equities?

There are even arguments that some assets can be classified as 75% growth and 25% defensive, or half growth and half defensive. To me, this is the half-pregnant argument. Or perhaps Schrodinger’s cat might be a better example. By looking at the box you don’t know if the cat is alive or dead, it’s only during a deep recession that you get to open the box and find out. Until then, whether that asset is growth or defensive is just a probabilistic function.

Growth and defensive aren’t colours you can mix to your favourite palette. They have real meanings. As soon as you lose sight of those meanings you might as well be living in a posttruth world where words mean just what you choose them to mean at the time you say them without concern for what they meant in the past.

In the current environment, ascribing growth or defensive labels to most assets (apart from equities and long duration high-quality bonds) has become a nonsense. Their meaning has been perverted over the course of years and used for purposes other than their original intention. fs

Super funds

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06 PERIOD ENDING – 31 JANUARY 2020

Workplace Super Products

1 year % p.a. Rank

3 years

5 years

SS

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

GROWTH INVESTMENT OPTIONS

27

* SelectingSuper [SS] quality assessment

Retirement Products

1 year % p.a. Rank

3 years

5 years

SS

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

GROWTH INVESTMENT OPTIONS

UniSuper - Sustainable High Growth

28.6

1

14.6

1

10.5

1

AAA

UniSuper Pension - Sustainable High Growth

31.6

1

16.1

1

11.7

1

AAA

Vision Super Saver - Just Shares

21.2

4

12.6

2

9.9

5

AAA

Equip Pensions - Growth Plus

19.6

29

14.1

2

10.5

11

AAA

AustralianSuper - High Growth

19.1

24

12.0

3

9.9

4

AAA

Vision Income Streams - Just Shares

23.5

3

14.1

3

10.9

6

AAA

HOSTPLUS - Shares Plus

17.8

45

11.9

4

10.4

2

AAA

smartMonday PENSION - High Growth Index

23.8

2

13.7

4

10.4

13

AAA

VicSuper FutureSaver - Equity Growth

19.4

20

11.9

5

9.2

17

AAA

HOSTPLUS Pension - Shares Plus

19.4

35

13.2

5

11.3

3

AAA

smartMonday PRIME - High Growth Index

21.8

2

11.9

6

8.9

23

AAA

Cbus Super Income Stream - High Growth

20.0

24

13.2

6

11.5

2

AAA

Cbus Industry Super - High Growth

17.8

47

11.7

7

10.2

3

AAA

AustralianSuper Choice Income - High Growth

20.9

15

13.1

7

10.9

5

AAA

First State Super Employer - High Growth

17.3

66

11.7

8

9.3

14

AAA

Media Super Pension - High Growth

21.2

13

13.0

8

10.8

7

AAA

Club Plus Industry Division - High Growth

15.1 124

11.7

9

9.9

6

AAA

Australian Ethical Super Pension - Growth

22.1

6

12.9

9

9.5

31

AAA

Media Super - High Growth

18.5

11.6

10

9.6

10

AAA

legalsuper Pension - High Growth

20.2

22

12.9

10

10.3

14

AAA

SelectingSuper Growth Index

16.7

SelectingSuper Growth Index

18.3

31

10.0

7.9

BALANCED INVESTMENT OPTIONS

11.0

8.8

BALANCED INVESTMENT OPTIONS

HESTA - Eco-Pool

18.5

2

11.7

1

9.9

1

AAA

UniSuper Pension - Sustainable Balanced

24.4

1

13.1

1

9.6

6

AAA

UniSuper - Sustainable Balanced

21.7

1

11.6

2

8.4

9

AAA

HESTA Income Stream - Eco

20.1

2

12.7

2

10.7

1

AAA

AustralianSuper - Balanced

16.6

23

10.9

3

9.3

2

AAA

Media Super Pension - Growth

18.9

11

12.3

3

10.4

2

AAA

Media Super - Growth

16.7

19

10.9

4

9.2

3

AAA

AustralianSuper Choice Income - Balanced

18.1

19

11.9

4

10.2

3

AAA

Mercy Super - MySuper Balanced

15.9

28

10.3

5

8.7

5

AAA

TASPLAN Tasplan Pension - Balanced

19.5

6

11.5

5

9.2

12

AAA

smartMonday PRIME - smartMonday - Age 50

17.9

4

10.1

6

7.7

32

AAA

Cbus Super Income Stream - Growth (Cbus Choice)

16.0

46

11.1

6

10.1

4

AAA

NGS Super - Indexed Growth

16.6

20

10.1

7

7.8

27

AAA

NGS Income Stream - Indexed Growth

18.1

20

11.1

7

8.5

26

AAA

Australian Ethical Super Employer - Balanced (accumulation)

17.9

3

10.0

8

8.1

13

AAA

HOSTPLUS Pension - Indexed Balanced

19.1

9

11.1

8

8.4

29

AAA

9

AAA

Media Super Pension - Balanced

16.2

43

11.0

9

9.5

7

AAA

AAA

AustralianSuper Choice Income - Indexed Diversified

18.9

12

11.0

10

8.5

24

AAA

SelectingSuper Balanced Index

14.7

TASPLAN - OnTrack Sustain

17.0

10

10.0

Cbus Industry Super - Growth (Cbus MySuper)

14.1

59

9.9

SelectingSuper Balanced Index

13.5

10

8.3

8.9

4

6.7

CAPITAL STABLE INVESTMENT OPTIONS QSuper Accumulation - QSuper Balanced

12.8

5

VicSuper FutureSaver - Socially Conscious

14.0

TASPLAN - OnTrack Control

14.4

AustralianSuper - Conservative Balanced

1

7.9

1

AAA

QSuper Income - QSuper Balanced

14.3

4

2

9.1

2

7.4

3

AAA

1

8.7

3

AAA

AustralianSuper Choice Income - Conservative Balanced

14.5

Energy Super Income Stream - SRI Balanced

16.6

12.9

4

8.5

4

7.5

2

AAA

Cbus Super Income Stream - Conservative Growth

Energy Super - SRI Balanced

13.9

3

8.2

5

6.1

12

AAA

Media Super - SmartPath 1949-1953

12.1

11

7.9

6

9.9

49

7.6

7

6.5

UniSuper - Conservative Balanced

11.4

19

7.6

8

Catholic Super - Conservative Balanced

11.1

29

7.6

Mercy Super - Conservative

10.9

32

7.6

SelectingSuper Capital Stable Index

9.1

7.3

CAPITAL STABLE INVESTMENT OPTIONS

9.1

NGS Super - Balanced

9.0

10.2

1

8.7

2

9.6

2

1

9.5

3

13.3

10

9.2

UniSuper Pension - Conservative Balanced

13.1

11

AAA

Media Super Pension - Moderate Growth

14.0

7

AAA

MyLife MyPension - Conservative Balanced

6.4

8

AAA

9

7.1

4

10

6.8

5

5.8

1

AAA

8.5

2

AAA

6.9

12

AAA

4

8.4

3

AAA

8.9

5

7.5

5

AAA

5

8.6

6

6.6

13

AAA

12.5

14

8.5

7

8.1

4

AAA

NGS Income Stream - Balanced

11.1

26

8.5

8

7.3

8

AAA

AAA

TASPLAN Tasplan Pension - Moderate

14.0

6

8.5

9

AAA

AAA

legalsuper Pension - Conservative Balanced

12.4

15

8.3

4.7

SelectingSuper Capital Stable Index

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

WORKPLACE SUPER | PERSONAL SUPER | RETIREMENT PRODUCTS

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

Simply visit selectingsuper.com.au/tools/performance_tables

9.5

10

6.1

6.9

10

AAA

5.1 Source: SelectingSuper www.selectingsuper.com.au

28

Economics

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

Policy responses fail to calm economic nerves Ben Ong

the 13th isn’t so unlucky after all as it FTheriday turned out to be a rally day on Wall Street.

S&P 500 index surged by 9.3% while the Dow and the Nasdaq pole-vaulted by 9.4% on the day following US President Trump’s declaration of a national emergency and announcement of US$50 billion fund to fight the coronavirus pandemic.

This is in addition to a number of monetary policy support measures planned and already implemented by many central banks of the world: “PBOC announced targeted required reserve ratio (RRR) cuts that it said will release 550 billion yuan (US$79B) of liquidity. BOJ announced it would buy ¥200B (US$1.9B) of JGBs with maturities of five to 10 years in an unscheduled move,” Factset said.

“It also said it would inject an additional ¥1.5T in two-week lending. ECB chief economist Lane said in a blog post the central bank will not tolerate any risks to smooth transmission of its policy and stands ready to do more. BOC cut 50bps to 0.75% following similar cut March 4; announced purchase facility for Bankers Acceptance notes.

RBA injected $8.8 billion into the financial system. Riksbank to lend US$51 billion to banks to maintain supply of credit to Swedish companies.

Norges Bank cut its key rate by 50 bp to 1%, lowered the counter-cyclical capital buffer for banks by 150 bp to 1% and said it is prepared to make further rate cuts.”

The Fed announced another “inter-meeting” rate reduction on March 15 this time by a full percentage point to 0-0.25% (following the 50bps cut on March 3), as well as launching a US$700 billion quantitative easing program

and asserting coordinated action with BOE, BOJ, ECB and SNB to boost liquidity via US dollar liquidity swap lines.

Opening trade on March 16 saw the Reserve Bank of New Zealand (RBNZ) deliver its own “emergency” rate cut – a 75 bps reduction in the official cash rate from 1% to 0.25%.

Fiscal authorities have also been doing their bit. There was Trump’s and China (previous to everybody else). There’s the UK Treasury’s £30 billion stimulus package; Canada’s C$1billion; Japan’s US$4 billion – second stimulus package following the US$96 million package of emergency funds announced only three days earlier; the European Union plans to launch a €37 billion investment initiative, allow flexibility on budget deficits and use €1 billion in funding to guarantee company loans.

Australia, too, announced a $17.6 billion stimulus package.

The overriding goal of these monetary and fiscal policy responses is of course to mitigate (if not lessen) the sense of panic that’s freezing economic activity that, in turn, could turn prophecies of a global recession into a self-fulfilling one.

However, these aggressive and/or coordinated policy responses could have the opposite effect.

This is evident in the renewed 4.8% drop in the S&P 500 index futures the day after the Fed’s second emergency rate cut.

For sure and for certain, there’ll be lotsa lotsa market volatility ahead until the incidence of infections has peaked.

The good news: The coronavirus is succeeding where the Kyoto Protocol or the Paris Agreement, and many other gabfests on climate change failed. Nature’s rebalancing itself. fs

Monthly Indicators

Feb-20

Jan-20

Dec-19

Nov-19

Oct-19

Consumption Retail Sales (%m/m)

-

-0.28

-0.65

1.00

0.03

Retail Sales (%y/y)

-

1.96

2.60

3.20

2.21

-8.22

-12.52

-3.76

-9.75

-9.11

Sales of New Motor Vehicles (%y/y)

Employment Employed, Persons (Chg, 000’s, sa) Job Advertisements (%m/m, sa) Unemployment Rate (sa)

-

13.53

28.72

37.06

-22.44

0.71

4.05

-5.57

-1.78

-1.14

-

5.29

5.08

5.17

5.31

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

-

0.35

0.96

5.12

-4.51

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

-

-15.26

3.91

10.41

-6.22

Housing Finance Commitments, Number (%m/m, sa) -

-

-

-

-

Housing Finance Commitments, Value (%m/m, sa)

-

-

-

-

-

Survey Data Consumer Sentiment Index

95.52

93.38

95.10

97.00

92.80

AiG Manufacturing PMI Index

44.30

45.40

48.30

48.10

51.60

NAB Business Conditions Index

0.37

2.00

3.04

4.46

4.14

NAB Business Confidence Index

-3.55

-1.03

-1.99

-0.07

1.80

Trade Trade Balance (Mil. AUD)

-

5210.00

5376.00

5656.00

Exports (%y/y)

-

-0.19

8.30

5.18

4.85

Imports (%y/y)

-

-1.70

5.58

-2.79

1.33

Dec-19

Sep-19

Jun-19

Quarterly Indicators

4024.00

Mar-19 Dec-18

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

0.96

6.50

4.58

-1.88

-6.72

% of GDP

0.19

1.29

0.92

-0.38

-1.39

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

-3.45

-0.61

4.46

2.07

3.71

Employment Average Weekly Earnings (%y/y)

3.24

-

3.02

-

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

0.53

0.53

0.54

0.54

2.48 0.62

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

0.45

0.92

0.38

0.39

0.46

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

0.45

0.83

0.46

0.46

0.46

Inflation CPI (%y/y) headline

1.84

1.67

1.59

1.33

1.78

CPI (%y/y) trimmed mean

1.60

1.60

1.60

1.50

1.80

CPI (%y/y) weighted median

1.30

1.30

1.30

1.40

1.80

Output

News bites

China indicators The latest economic data releases out of China – the coronavirus pandemic’s ground zero – provide an indication of where other economies are headed. Industrial production dropped by 13.5% (year-on-year) in the January-February period following a 6.9% expansion in December.

Fixed asset investment plunged by 24.5% over the same period (following a 5.4% gain) and retail sales sank by 20.5% (after growing by 8% at the end of 2019). The sharpness of the declines in these activity indicators are understandable considering the closures and stoppages and lockdowns implemented by Chinese authorities.

Early indications of reduced incidences of infections and the gradual resumption of normal “life” in China also provides hope for other economies.

US Federal Reserve cuts rates “The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected.” This was how the US Federal Reserve explained its announcement of another “intermeeting” rate reduction on March 15, this time by a full percentage point to 0-0.25% (following the 50bps cut on March 3), as well as launching a US$700 billion quantitative easing program, among a raft of other stimulus measures, and asserting coordinated action with BOE, BOJ, ECB and SNB to boost liquidity via US dollar liquidity swap lines.

Australian stimulus, RBA injection The Australian Federal government has unveiled a A$17.6 billion stimulus package “to keep Australians in jobs, keep businesses in business and support households and the Australian economy as the world deals with the significant challenges posed by the spread of the coronavirus”. This comes on top of the bushfire relief spending of at least $2 billion – and interest free business loans – announced in late January.

The RBA is also doing its bit, injecting A$8.8 billion into the financial system on March 13; in addition to cutting the official cash rate to an unprecedented 0.25% on march 19. This was just two weeks after its last rate cut. fs

Real GDP Growth (%q/q, sa)

0.53

0.55

0.60

0.50

Real GDP Growth (%y/y, sa)

2.19

1.82

1.62

1.75

0.16 2.17

Industrial Production (%q/q, sa)

1.53

0.48

1.37

0.39

0.39

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

Financial Indicators

-2.79

-0.44

-0.93

-1.76

1.51

28-Feb Mth ago 3mth ago 1yr ago 3 yrs ago

Interest rates RBA Cash Rate

0.75

0.75

0.75

1.50

1.50

Australian 10Y Government Bond Yield

0.97

1.04

1.26

1.96

2.94

Australian 10Y Corporate Bond Yield

2.00

1.81

2.00

2.88

3.45

Stockmarket All Ordinaries Index

5590.7

-22.40%

-18.32%

-10.49%

S&P/ASX 300 Index

5490.0

-22.21%

-18.00%

-10.15%

-3.52% -3.76%

S&P/ASX 200 Index

5539.3

-22.02%

-17.81%

-10.09%

-3.79%

S&P/ASX 100 Index

4602.0

-21.82%

-17.68%

-9.24%

-3.90%

Small Ordinaries

2283.2

-25.46%

-20.73%

-17.39%

-1.70%

Exchange rates A$ trade weighted index

57.00

A$/US$

0.6154 0.6732 0.6875 0.7087 0.7582

58.10

59.00

60.70

66.70

A$/Euro

0.5559 0.6206 0.6173 0.6266 0.7106

A$/Yen

65.94 73.93 75.12 78.83 86.91

Commodity Prices S&P GSCI - commodity index

298.40

394.01

428.05

431.49

380.16

Iron ore

90.13

85.14

92.27

85.01

87.90

Gold WTI oil

1562.80 1575.05 1466.60 1306.95 1204.20 32.93

51.41

60.11

58.27

Source: Rainmaker /

47.95

Sector reviews

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

Australian equities

Figure 1: All ordinaries index 5700

25

INDEX

P/E RATIO

DIVIDEND YIELD %

18 16

20

5500

14

15

5400

12

10

P/E Ratio

LT ave P/E

Dividend yield -RHS

LT ave DY -RHS

10

5300

5

5200

Prepared by: Rainmaker Information Source: Thompson Reuters /

CPD Program Instructions

Figure 2: Valuation

5600

8

0

5100

6

-5

5000 JAN

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

-10

4 94

97

00

03

06

09

12

15

2

Budget surplus or bust Ben Ong

I

t’s official! The World Health Organisation (WHO) has declared COVID-19 a pandemic.

Uh, scary! But what’s in a word? According to the ABC: “An outbreak is a sudden rise in cases of a disease in a particular place. An epidemic is a large outbreak. A pandemic means a global epidemic.”

This was before it was declared a pandemic, with Prime Minister Scott Morrison said: “So while the WHO is yet to declare … it’s moved towards a pandemic phase, we believe that the risk of a global pandemic is very much upon us and as a result, as a government, we need to take the steps necessary to prepare for such a pandemic.”

The Federal government has unveiled a $17.6 billion stimulus package “to keep Australians in jobs, keep businesses in business and support households and the Australian economy as the world deals with the significant challenges posed by the spread of the coronavirus”.

International equities

This comes on top of the bushfire relief spending of at least $2 billion – and interest free business loans – announced in late January.

Bye, bye surplus.

The government’s Mid-year Economic and Financial Outlook (MYEFO) handed down in December 2019, estimated an underlying cash surplus of $5 billion in FY2019-20. Take away least $19.6 billion (A$17.6 billion plus $2 billion) in extra spending, leaves a deficit of $14.6 billion … and that’s before factoring in the drop in government revenues due the general slowdown in business activity.

But nah, Prime Minister (and Treasurer) not a single Australian would fault you for not achieving that promised surplus. Australiansmight even celebrate you should your efforts succeed in extending the country’s 29 years of no recession into 30 years.

The NAB business confidence index fell to a reading of -4 in February from -1 in the previous month, its lowest level since July 2013. Business

conditions declined to 0 from +2 due to weaker trading conditions and profitability. …and this was before the coronavirus turned into a worldwide coronaphobia.

The extent of coronaphobia could be discerned from the Westpac/Melbourne Institute’s latest survey of consumer confidence – the index dropped by 3.8% to a reading of 91.9 in March – the lowest in five years and the second lowest since the GFC – from 95.5 in the previous month. The survey was conducted in the week from March 2 to 6 March 2020. The RBA cut rates on March 4.

Australia’s fiscal finances certainly won’t be in a surplus this financial year but that’s better than the economy going bust.

The RBA cut rates again just two weeks later, bringing the official cash rate down to an unprecedented 0.25%.

The move indicated the central bank could no longer meet its objectives using traditional monetary policy. fs

Figure 1: Nikkei-225 versus MSCI World Equity Index

Figure 2: Nikkei-225 and the yen

110

115

INDEX (JAN 2014 = 100)

18000

YEN/US$

105 105

100

16000 Yen per US$

14000

Nikkei-225 index -RHS

95

85

10000

Nikkei-225 MSCI World Equity

80

75 FEB14 MAR14 APR14 MAY14

JUN14

JUL14 AUG14

SEP14

OCT14 NOV14

2011

2012

2013

2014

8000

Coronaphobia sickens Japan Ben Ong

W

hile most nations around the world are reeling from the virtual freezing of economic activity in their respective economies and sharp declines in their equity markets, Japan is fast becoming a special (basket) case.

Japan’s economy contracted at an annualised rate of 7.1% in the December 2019 quarter following a mere 0.5% uptick in the previous quarter, as private consumption declined by 2.9% over the three-month period due to the typhoon that hit the country and in reaction to the government’s lifting of the consumption tax rate from 8% to 10% in October.

Business investment dropped by 3.7% and while net exports contributed 0.5 percentage points to fourth quarter GDP, this is due to a 10.1% tumble in imports and a 0.4% decline in exports.

That was bad then ... and that was before coronaphobia.

Australian equities CPD Questions 1–3

1. What is the amount of the stimulus package the federal government recently unveiled to mitigate the coronavirus’ impact on the domestic economy? a) A$2.0 billion b) A$2.6 billion c) A$17.0 billion d) A$17.6 billion 2. How much is the 2019/20 underlying cash balance predicted in the MYEFO? a) A$17.6 billion deficit b) A$14.6 billion deficit c) A$2.0 billion surplus d) A$5.0 billion surplus 3. Australian consumer confidence dropped to a five-year low in February. a) True b) False

12000

85

JAN14

The Financial Standard CPD Program has been developed for professionals governed by the Corporations Act 2001 and hold an AFS Licence which provides an obligation to undertake continuous professional development (CPD). Test your knowledge with the following questions.

[See next page for instructions on how to submit your answers].

95

90

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

29

Recent reports that Japanese real wages rose by 0.7% in January – the first increase in four months – or 2.8% year-on-year would have provided a positive impetus for consumer spending and by extension, the economy going forward.

However, a separate report showing that household spending fell for a fourth straight month (-3.9% year-on-year) in January indicate that Japanese consumers have been tightening their purse strings even before the coronavirus scare became full-blown.

There goes the BOJ’s oft-repeated claim that: “Domestic demand is likely to follow an uptrend, with a virtuous cycle from income to spending being maintained in both the corporate and household sectors…”

The Nikkei-225 index has declined by 28.1% this year to date, in line with the selloff in global equity markets. The on-going global slowing, and exacerbated by the yen’s safe-haven strength, compound the hit on

the Japanese economy, practically ensuring another recession, with economists predicting an annualised contraction of 1.2% in the March quarter this year.

There’s also the increased probability that the Tokyo 2020 Olympics – scheduled for July this year -- will be cancelled. If so, the cancellation is expected to shave 0.1%-0.3% off Japan’s GDP growth for FY 2020-2021.

With its policy rate at negative 0.1% and targets the 10-year JGBs at zero, the BOJ has been left with no other option but to increase QE. In an emergency meeting on 16 March, the Japanese central bank announced it would buy ETFs at an annual pace of ¥12 trillion, double its J-REIT purchases to ¥180 billion and set aside ¥2 trillion for additional purchases of commercial paper and corporate bonds ... until financial markets stabilise while at the same time, stressing that it would implement more stimulative measures if necessary. fs

International equities CPD Questions 4–6

4. Japan lifted its consumption tax rate in October from 8% to how much? a) 9% b) 10% c) 11% d) 12% 5. What was Japan’s annualised GDP growth rate in the December 2019 quarter? a) +0.5% b) -2.9% c) -3.7% d) -7.1% 6.The BOJ has cut its policy interest rate down to -1.0% in March. a) True b) False

30

Sector reviews

Fixed interest

Fixed interest

CPD Questions 7–9

7. What is the debt to GDP ratio imposed by the Maastricht Treaty on Eurozone member countries? a) 3% of GDP b) 6% of GDP c) 9% of GDP d) 12% of GDP 8. What was Italy’s debtto-GDP ratio as at the end of 2019? a) 65% of GDP b) 105% of GDP c) 135% of GDP d) 195% of GDP 9. Italian GDP growth slowed in 2018 and 2019. a) True b) False Alternatives CPD Questions 10–12

10. Which Chinese economic indicator/s suffered sharp contractions in the January-February period? a) Industrial production b) Fixed asset investment c) Retail sales d) All of the above 11. Which stock market index dropped least this year to date? a) S&P 500 b) Euro Stoxx-50 c) Shanghai composite d) Nikkei-225 12. China’s containment procedures and fiscal and monetary policy support appear to be working. a) True b) False

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

3 Italy

2

Germany

1 0

1.50

-1

1.00 0.50

-2

0.00

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

PERCENT

YIELD (%)

3.50

2.00

Quarterly change

-3

-0.50

Annual change

-4

-1.00

JAN17 APR17 JUL17 OCT17 JAN18 APR18 JUL18 OCT18 JAN19 APR19 JUL19 OCT19 JAN20 APR20

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Italy shoots two birds with one virus but downs it economy Ben Ong

I

taly, it seems, is getting everything that it wished for courtesy of one microscopic organism.

Long before the COVID-19 epidemic spread, the Italian government implemented new rules and regulations in an attempt to reduce overtourism such as: prohibiting sitting on the Spanish steps, riding bikes in Venice, eating snacks on the street of Florence, etc. and is considering installing barriers around the Fontana di Trevi.

These rules and regulations have become petty compared to the Italian government’s latest move to prevent the spread of the coronavirus – a total lockdown. The government announced… “…Nationwide curbs on a wide range of events that were likely to put large numbers of people in close proximity. Weddings were banned; muse-

Alternatives

ums, cinemas, theatres and exhibitions were closed; bar and restaurant owners were warned that they would be shut down if they failed to ensure that their customers stayed at least one metre apart.”

“In parts of the north—the whole of Lombardy and two other areas comprising 14 provinces—additional curbs were imposed on people’s movements. They were not allowed to leave (or, indeed, travel within) these so-called “orange zones”, except for work or emergencies,” The Economist reported.

Overtourism solved!

And then there’s that bugbear of a budget deficit the new populist Italian government argued with the European Union about.

Brussels was worried that the government’s big spending promises would put its budget deficit to GDP ratio in breach of the Maastricht Treaty that limits the ratio of member Euro-

50

ANNUAL CHANGE %

ANNUAL CHANGE %

30

25

Fixed asset investment

20

Industrial production -RHS

15 10

20

5

10

110

INDEX (JAN 2020 = 100)

105 100 95 90 85

0

80

All Ords

Stoxx 50

-5

S&P 500

FTSE-100

-10

75

-10

70

Nikkei-225

Shanghai Composite

-20

-15

65

-20

60

0

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

zone countries to 3% of GDP. Italy’s already in breach of 60% debt to GDP ratio limit with its ratio clocked at 135% of GDP as at December 2019.

That was the time in late-2018 to early-2019 when 10-year Italian bond yields soared to as high as 3.65% – compared with the 0.47% rate on German bonds – as financial markets became concerned over the country’s ability to pay down its debts.

This is because the country’s slowing economic growth would make it even harder for Italy to reduce the budget deficit to GDP ratio, much less to pay down its national debt. Italian GDP slowed from 1.9% in the year to the December 2017 quarter to 0.1% in 2018 and 2019.

The best Italy can hope for given the lockdowns and shutdowns is for no growth … at least over the next two quarters. fs

Figure 2: Shanghai composite index

Figure 1: China FAI & industrial production

40

-30

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

JAN20

FEB20

MAR20

China leads the way erhaps, a throwback to my childhood but P the lullaby applies to the different stages governments around the planet – culminat-

All answers can be submitted to our website.

Figure 2: Italian real GDP growth

2.50

“Hush, little baby don’t say a word Papa’s gonna buy you a mocking bird…”

Submit

4.00

3.00

Ben Ong

Go to our website to

Figure 1: Italian and German 10-year bond yield

ing in total lockdown of their borders – have been putting in place in efforts to contain the coronavirus. It also applies to the bigger and bigger policy responses by central banks and fiscal authorities.

Just as it’s become tedious to keep track of the number of infections on a daily basis, it’s become hard to keep tabs on which country has closed its borders, which central bank has eased policy and which government announced new stimulus measures and by what amount.

Still, little baby won’t hush. Equity markets are in turmoil with headlines trying to outdo

each other for a superlative to describe the crash of 2020.

Hardly surprising, given that most major equity markets have lost between a quarter and a third of their value this year to date (so far).

Glum (of Gulliver’s Travels fame) immortal cry, “we’re doomed, we’ll never make it!” – comes back to haunt.

And for good reason. With economic activity frozen in most parts of the globe, a worldwide recession is at hand.

The latest economic stats from China – ground zero – provide an indication of where other economies are headed. Industrial production dropped by 13.5% (year-on-year) in the January-February period following a 6.9% expansion in December.

Fixed asset investment plunged by 24.5% over the same period (following a 5.4% gain) and retail sales sank by 20.5% (after growing by 8% at the end of 2019).

This understandable and to be expected given the stoppages and closures implemented in the country.

Beijing also provides a glimpse of how this coronavirus game of chicken will eventually play out.

At the height of the viral scare in China, the Shanghai composite index was the worst- performing stock market in the world (or at least compared with other major equity markets).

But its containment regulations and monetary and fiscal policy support appear to be working.

It’s now re-opening its factories and shops for business. So much so, that the Shanghai composite index is now the best-performing stock market in the world (or at least compared with other major equity markets).

Beijing’s benchmark index remains 8.6% down this year to date but it’s outperformed the S&P 500 (-26.1%), the Euro Stoxx-50 (-31.0%), the FTSE-100 (-31.7%), the Nikkei-225 (-28.1%), the All Ords (-25.6%). fs

Sector reviews

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

31

Property

Property

CPD Questions 13–15

Prepared by: Rainmaker Information Source: Principal Global Investors

ocal and global REITs are anticipated to be L relatively resilient to the ongoing headwinds caused by the COVID-19 pandemic.

That’s according to Principal Global Investors, which said property projects like shopping centre and residential developments will likely be less fortunate. Supply chain delays and lower foot traffic will have an impact, though overall the sector continues to be a defensive play.

Recent corporate reporting shows the bushfires and COVID-19 concerns have already impacted trade, with regional shopping centres particularly affected.

“Lower foot traffic has hurt centres in Australia’s regional areas because of this summer’s devastating bushfires, but has now become a problem for retail shopping centres across Australia as coronavirus fears have risen,” Principal portfolio manager Janine Yoong said.

Australia is already seeing strain on education and tourism, along with a more long-term concern – construction supply chains.

“Delays are going to hit Australian REITs and property once current stocks are used up.

Coronavirus delays property development, REITs resilient Jamie Williamson

Big high-rise developments in particular will be affected, because taller office towers and apartments use lifts and bathroom fittings that are mainly imported from China,” Yoong said.

However, on a brighter note, Yoong said construction delays will benefit existing landlords.

“Australia has more landlords than developers, so overall A-REITs should benefit from a tighter market,” Yoong said.

“Overall, Australian REITs are appealing because they’re transparent, and give high yields, particularly compared to Hong Kong and to some extent, the US.” Another benefit is that REITs are still seen as defensive during periods of volatility, Yoong said.

“The recent official cash rate cut by the Reserve Bank of Australia makes A-REIT yields even more attractive. A-REITs now yield about five per cent – a lot better than the less than one per cent yield of a 10 year bond,” she said.

“That’s attractive to international investors, who already like Australia because of our deep real estate market and also good stable government and politics.”

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The same cannot be said for international REITs however. While China looks to be gaining control of the virus, other nations are not and may need to implement similar measures seen in China and Hong Kong, Principal said.

“We have seen hotel REITs in the US withdraw their 2020 guidance. Hotels and travel companies are seeing a falloff in bookings and increasing cancellations from business and leisure travellers,” Principal client portfolio manager Todd Kellenberger said.

As for Europe, Kellenberger said: “The larger concern in Europe is how the change in human behaviour in response to controlling the spread of the virus will negatively impact economic activity within the region. UK homebuilders are seeing a softening in demand, for example.”

Meanwhile, in Asia, China and Hong Kong landlords are offering rent relief, and footfall in malls and discretionary shopping centres has been very weak as has residential property.

Kellenberger agreed REITs won’t be immune but still have the advantage. fs

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14. In terms of property projects, what is cited as a key long-term concern for Australian REITs? a) Lack of transparency b) Delays in construction supply chains c) Recent RBA cash rate cuts d) All of the above 15. According to Principal Global Investors, overall, A-REITs should benefit from a tighter market. a) True b) False

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32

Profile

www.financialstandard.com.au 30 March 2020 | Volume 18 Number 06

A DIGNIFIED LEGACY Dignity is important for Greg Cantor. It underpins who he is, and it’s what he has strived for 30 years to provide fund members each and every day. Harrison Worley writes.

ithin seconds of sitting down for a chat W with Australian Catholic Superannuation and Retirement Fund chief executive Greg Cantor, you feel completely at ease.

Maybe it’s his firm, but warm handshake. Or the way his eyes meet yours as he greets you. Either way, Cantor is a little bit old school. And it comes as no great surprise given his schooling at Randwick’s Marcellin College, in a time when the school’s staff – then mostly brothers – taught students the “dignity of the individual”.

“They taught you to respect others, and those schools, they teach you to be a man,” Cantor says.

According to Cantor, these “little things” – looking others in the eye, having a firm handshake, even dressing appropriately – are all part of his make-up as a person, and he says people owe a lot of their formation to their schooling.

The long-time Sydney Roosters fan – which he admits put him in the minority at Marcellin, given most of its students supported South Sydney - oversees more than $9 billion in retirement savings on behalf of Catholic teachers across the nation. He reveals it’s his upbringing that is responsible for the simple principle which he lives his professional life by today: CHIPS. “Compassion, honesty, integrity, pride and selflessness,” he explains.

More executives should live by the principle, according to Cantor, which he says is responsible for much of the fund’s success. People, not one person, he notes, are behind ACSRF’s achievements.

“I think if more executives lived by these five tenets, the world would be a much better place,” Cantor says.

“I know very well the success of the business is not down to me alone. It is the people we employ and the calibre of our board. “However, they must embrace the culture of the organisation, which is based on values and ethics.”

Cantor says he and ACSRF’s staff share a fundamental passion. At the centre of it all, he just wants to help the fund’s 90,000-strong membership – 70% of which are women - have a dignified retirement, and it’s driven him since he joined Sydney’s Catholic Education Office as finance manager.

“I’ve been here a long time. But from day one I’ve always wanted to be the person that helped our members have a dignified retirement,” Cantor says.

Day one, in 1989, arrived after several stints in finance and accounting, including six years at the Overseas Telecommunications Centre while studying a Bachelor of Business in night classes at the University of Technology Sydney.

A spell as a management accountant at Yellow Pages and a period in foreign exchange and money markets with IBM followed before Cantor joined the Catholic Education Office, where he would remain if not for a function of his role

as finance manager growing beyond the job’s original remit.

“Part of that role included being the fund secretary of the super fund,” he recalls.

Cantor says that with less nuns and brothers employed in Catholic schools around the country by the end of the 1970s, something had to be done to attract good teachers. State school employed teachers, he explains, were offered superannuation. In response, the Catholic Education Office set up its own fund.

When Cantor joined the super fund was managing $80 million.

By 1994, the fund had grown so large it required his full-time attention. Then Prime Minister Paul Keating had begun the process of subjecting superannuation funds to corporation law, and during the next decade the fund was involved in 13 successful mergers among the Catholic sector across the nation.

“When Paul Keating called for superannuation funds to be incorporated, I went to the executive director of the Catholic Education Office, brother Kelvin Canavan and informed him I thought it was time I gave up the finance manager’s role and concentrated on the super fund,” Cantor says.

“He agreed, and the rest is history.”

As he tells it though, that “history” is full of examples of Cantor doing whatever was needed to ensure the fund ran smoothly after the board implemented a self-administration model in 1996.

“When the fund started, we only had a few staff,” he says.

“I’ve been over the years the chief investment officer, the company secretary, the privacy officer, the complaints officer and the accountant.

“I’ve done all those roles, so that’s served me well.”

The fund has now grown to such a size that it made sense to purchase a permanent home for its NSW-based staff among Sydney’s bustling inner-city suburb of Burwood in 2000.

“When they [staff] come to me to do projects, because I’ve had the whole gamut of the organisation, I can ask questions that maybe somebody else might not be able to ask, because they haven’t had that rounded experience,” he says.

Not that he’s getting bored; it’s hard to with successive governments continually messing with super’s policy settings, he says.

“But as I say, from a technical sense, no two years have been the same in the industry,” he says.

“Every budget there’s some tinkering, they do something. There’s always something going on.

And I understand some of those changes are for the better, but I still think the essence of that 12% [superannuation guarantee] needs to happen.”

Cantor is concerned by the agitations of “vested interests” who continue to pull the super system away from the ambitions of Keating and former Australian Council of Trade Unions secretary Bill Kelty.

I’ve been here a long time.

But from day one I’ve always wanted to be the person that helped our members have a dignified retirement.

Greg Cantor

“And I don’t understand why those vested interests exist,” he admits.

“Unfortunately, the superannuation pot has become too tempting for Treasury and government of both political persuasions to keep their hands off as they try to balance budgets.”

Cantor says the industry needs more foresight, putting the case forward that the more people with sizeable super balances at retirement, the less pressure placed on the Age Pension.

“With interest rates so low – and looking like staying low for the foreseeable future – I have often wondered why we can’t have “nation building” bonds issued by the government where super funds (subject to their asset allocations) would be encouraged to take up these bond,” he says.

He isn’t apologetic for his views on super or the state of Australia’s politics either, because his life experiences tell him a failure to adequately prepare for retirement leaves people exposed.

“And I have enough experience to know that what Keating and Kelty did, it’s been nation building,” he says.

“And I’m not apologetic for espousing what they say. I believe in what they did.”

As for what’s next for ACSRF, Cantor says the fund will continue to innovate in the same vein it always has.

In 2000 it became one of the first funds in the nation to offer an allocated pension. An in 2015 it introduced RetireSmart, its solution for protecting account-based pension members from market downturns by holding two years’ worth of cash for retirees to drawdown, while their portfolio continues to fatten through exposure to growth assets - which all helps Cantor in his quest to deliver a dignified retirement for members. fs

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