Financial Standard Volume 18 Number 11

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9 June 2020 | Volume 18 Number 11

09

14

25

Ganesh Suntharam Redpoint IM

Property

AMP, BlackRock, ETF Securities

Executive appts:

Event:

Opinion:

13

21

VFMC, Mercy Super, Frontier Advisors

Advisers Big Day Out

I can rely on decades of experience over multiple market cycles.

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Feature:

Products:

32 Profile:

Sophia Rahmani Maple-Brown Abbott

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09

14

25

Ganesh Suntharam Redpoint IM

Property

AMP, BlackRock, ETF Securities

Executive appts:

Event:

Opinion:

ustralian investors have traditionally shown A a preference for unhedged international equities funds but the COVID-19-triggered volatility in the Australian dollar diverted money towards hedged versions, begging the question whether it’s time for advisers and institutional investors to review currency risk.

The Australian dollar started the year at 70 cents, declined over time to a 17-year low of 57 cents in March and, as at June 3, inched back towards 70 cents.

Meanwhile inflows into currency-hedged international equities funds gathered pace with Australians investing $735 million in the three months to March, according to Morningstar.

Similar ETFs had received $337 million since January to April end.

The inflows suggest investors may be taking a view on the direction of Australian dollar, even if it is as simple as just expecting it to be more volatile.

However, it is yet to be seen if the recent behavior will be enough to swell hedged international equities funds’ market share which currently sits at under 3% in the Morningstar universe.

“The conventional wisdom – and this is very broadly speaking – for international fixed income exposures has been to be hedged by default to reduce short-term currency volatility. For global equities, it is to be unhedged because equities investors can take a bit more of volatility anyways and the AUD tends to be pro-cylical meaning when economis are booming and risk assets are appreciating, the AUD tends to do the same,” Morningstar senior analyst Andrew Miles says.

Pointing to unhedged funds’ higher returns during the March quarter when markets fell, Miles says: “Being unhedged in international equities can be often quite helpful when the market falls because you get a sort of cushion when the AUD is falling. So far this year that’s broadly played out.”

One of the managers that saw investors change course from unhedged to hedged positions is VanEck Australia.

Its director of investment, Russel Chessler, says VanEck has seen “quite sizeable switches” between its international shares ex Australia ETF, QUAL and its hedged version QHAL in March and April.

“What we saw happen is when the AUD went down to 65 cents, we started to see the inflows

into the hedged. People believed that that was sort of the bottom point for the AUD and they were taking a currency view,” Chessler says.

Yet despite the recent preference towards currency-hedged funds, not all financial advisers are following the trends.

Kyoung Walker, a private client adviser at Shadforth Financial Group, is one of them.

“I am really an advocate for unhedged global equities exposures. Most of my clients are unhedged and their losses during this COVID-19 volatility have been minimised because, when the investment market fell, the AUD went down with it,” Walker says.

For the year ahead, she doesn’t see the need to switch to hedged international equities exposures.

“At the current currency level, I will continue to operate unhedged but if our currency goes below, say 55 US cents, I will seriously look at swapping to hedged managed funds, depending on what I want to protect,” she says.

But is thinking about currency hedging worth an adviser’s time?

As Chessler points out: “If you look where the money flows historically, probably only 10% is into hedged versus unhedged, and if you go back 20 years, it doesn’t make a big difference over the long-term.”

Meanwhile, the question of hedging versus not hedging international exposures is much different for institutional investors, who have increasingly globalised their holdings and sought to add returns by deliberately adding currency risk.

IFM Investors’ head of treasury services Richard Kerr says Australian superannuation funds have to do more hedging going forward – as unpalatable as it seems.

“The rule of thumb is near 60 cents, you should be looking to fully hedge on a valuation or cyclical point of view, 75-85 cents you are neutral and above 85 cents you are wanting to go back to more foreign currency exposure,” Kerr says.

However, a fund has large illiquid global holdings, it may not be able to have high hedge ratios because it may not be able to support the liquidity demand of the hedges.

Kerr says: “I feel a lot of superannuation funds should be reviewing their hedging policies right now because quite often crises like this quite often usher in a regime change (massively stimulating fiscal and monetary policy settings), and this new regime could be a weak USD.” fs

Feature:

13

21

VFMC, Mercy Super, Frontier Advisors

Advisers Big Day Out

Currency: To hedge or not to hedge Kanika Sood

9 June 2020 | Volume 18 Number 11 www.financialstandard.com.au 20 January 2020 | Volume 18 Number 01

Products:

32 Profile:

Sophia Rahmani Maple-Brown Abbott

Outlook brighter than predicted Eliza Bavin

Kyoung Walker

private client adviser Shadforth Financial Group

The Reserve Bank of Australia governor Phillip Lowe said the extent of the economic downturn, as a result of the impacts of COVID-19, is not as dire as expected.

At the June meeting, the RBA board decided to maintain the current policy settings, keeping the cash rate at the record low of 0.25%.

“The global economy is experiencing a severe downturn as countries seek to contain the coronavirus. Many people have lost their jobs and there has been a sharp rise in unemployment,” Lowe said.

“Over the past month, infection rates have declined in many countries and there has been some easing of restrictions on activity. If this continues, a recovery in the global economy will get under way, supported by both the large fiscal packages and the significant easing in monetary policies.”

Lowe noted that while some markets remain fragile, markets around the globe have continued to show improvement.

Continued on page 4

Calls for overhaul of AFSL system Elizabeth McArthur

The Financial Planning Association of Australia (FPA) wants a professional registration for individual advisers to replace the current system.

Currently, an Australian financial services licence (AFSL) is required to provide advice.

FPA chief executive Dante De Gori said the law should be changed to focus the AFSL system on the regulation of financial products, rather than requiring AFSLs to cover the provision of financial advice.

“While the AFSL system plays an important role in regulating financial products and services, recent reforms have focused the regulation of financial advice at the individual practitioner level,” De Gori said.

“This is an appropriate approach and acknowledges the relationship between a client and their financial planner is a personal relationship, not one between an AFSL and the client.

“Future reforms to the regulation of financial advice should occur through the professional Continued on page 4

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News

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

Grow Super co-founder in alleged betting scandal

Editorial

Elizabeth McArthur

Jamie Williamson

G

Editor

Seven licensees in nine years.

Let that sink in.

This is the case for a financial adviser recently banned by ASIC for providing dodgy SMSF advice and for recommending insurance products based on the commission he’d receive in return.

Starting out in 2010, Sean Lewis was licensed

by Wealth Today for two years before moving to a NAB’s GWM Adviser Services for 10 months. He then spent just three weeks at AMP. And at no point did the latter two licensees see red flags? At no point were they concerned there may have been a legitimate reason for his behaviour? I mean, the man clearly has some commitment issues.

Lewis then went on to Chubb Insurance for five months before spending a whole 26 days back at NAB, this time with Meritum.

Less than one month. Manicures have been known to last longer than that.

Finally, Lewis landed at the infamous Spectrum Wealth. So taken with Spectrum was Lewis, he committed long-term and stayed for five years.

Given what we now know of Spectrum, I suppose it’s not surprising that Lewis’ extensive resumé wasn’t held against him.

He finished up with Spectrum in June 2018 – in the thick of the Royal Commission – and appears to have not been advising, or at least without a licensee for a year, before managing to secure a spot at Consolidated Mercantile Group in July last year. It was here that ASIC finally caught up with him, bringing his tour of Australia’s AFSLs to an end.

How he was able to do it boggles the mind, but how he was able to get away with it and for so long is beyond me.

To me, it says more about the advice industry than it does the actual adviser.

Where was the due diligence? Who was reviewing the example client files at each new licensee? Was that even happening?

ASIC said Lewis failed to meet the best interests duty and failed to provide advice appropriate for client objectives. Knowing all this about Lewis’ career, does ASIC’s five-year ban seem like enough?

Keeping in mind that the regulator themselves acknowledged last year that many banned advisers keep working in the industry. With the tenacity (for want of a better word) Lewis has demonstrated, it’s not hard to imagine he might find a way.

The Financial Planning Association of Australia came out on June 3 advocating for the AFSL regime as we know it to change, with AFSLs to purely regulate financial products while advisers would register with an independent body and be individually licensed, like doctors and lawyers.

If Lewis’ case demonstrates anything, it seems AFSLs aren’t always spotting the red flags when they should be anyway. fs

The quote

We believe the actions of management and Mr Wilson’s in relation to his resignation from the board of DSMJ and as chief executive of Grow Super has been appropriate.

row Super co-founder and chief executive Joshua Wilson has stepped down from his role allegedly due to the involvement of his other company, StatEdge, in suspicious betting activity.

“On 22 May 2020 Josh Wilson resigned from his position as chief executive officer of Grow Super. He has had no further commercial involvement with our staff or clients and is no longer a director of any GROW related entities,” a spokesperson for the fund said.

“Given the recent police action concerning a former senior staff member we are conducting our own review into any potential association between Grow and the business and people under investigation. Two employees have stepped aside pending the result of this.”

Grow did not name the other two employees who have stepped aside.

A spokesperson for NSW Police Force confirmed to Financial Standard that two men, aged 29 and 31, were charged in relation to Strike Force Mirrabei.

“Police will allege in court that the men placed bets on the 2019 Dally M Coach of the Year Award winner with prior knowledge of the result,” NSW Police Force said.

“It will also be alleged that they shared information with other individuals, who in turn placed bets with various betting agencies.”

The men have been charged with using insider information to bet on the Dally M award and pos-sessing insider information communicated to others to bet on the event. They are due to appear in court in August.

The NRL Integrity Unit reported suspicious betting activity on the award to the police in November last year. The Organised Crime Squad’s Casino and Racing Unit then established Strike Force Mirrabei.

StatEdge, which Wilson described on his LinkedIn as a sports technology company, worked with the NRL to manage its team lists and team changes data. It also managed the voting for the Dally M awards.

The Sydney Morning Herald reported that the two men charged are Wilson and StatEdge general manager Ben Trevisiol.

Social media accounts for StatEdge have been taken down, as have Facebook and Instagram accounts for Grow Super. Wilson has removed any mention of Grow from his LinkedIn profile, though his role as chief executive of StatEdge remains.

The charges were laid following searches of residences in Paddington and Waterloo and a business premise in Surry Hills.

Both StatEdge and Grow Super have offices in Surry Hills. The spokesperson for Grow Super clarified that the two do not currently share an office.

IOOF, which is a minority shareholder in Grow Super with a director on the board, said it was satisfied with the fund’s handling of the situation.

“IOOF has been kept informed in an appropriate and timely manner of the situation in relation to Mr Wilson and StatEdge,” a spokesperson said.

“We believe the actions of management and Mr Wilson’s in relation to his resignation from the board of DSMJ and as chief executive of Grow Super has been appropriate.”

OneVue, owner of Diversa Trustees which is the trustee for Grow Super, did not respond to request for comment.

The spokesperson for Grow added that current clients and client activity are now being led by Mathew Keeley as managing director and Peter Savage as chief executive of Grow Admin.

Strike Force Mirrabei’s investigations into the matter are ongoing. fs

Seven licensees in nine years: Adviser banned Eliza Bavin

A financial adviser who cycled through seven AFSLs in nine years has been banned after ASIC found he provided poor SMSF advice and based insurance advice on the commission he’d receive.

The five-year ban follows ASIC surveillance of advice provided by NSW-based Sean Lewis while he was an authorised representative of Spectrum Wealth Advisers.

ASIC found that Lewis failed to comply with financial services laws, including failure to provide advice that was in the best interests of his clients and failing to provide advice that was appropriate for his clients’ objectives.

Lewis worked with a number of AFSLs throughout his career, starting with Wealth Today in October 2010 to January 2012.

From there he was an authorised representative of GWM Adviser Services, which is owned by National Australia Bank, from January 2012 to November 2012.

He was then licensed by AMP Financial Planning for one month from December 2012 to January 2013.

He was with Chubb Insurance Australia from January 2013 to June 2013, followed by Meritum Financial Group, which is also owned by NAB, from September 2013 to October 2013.

His longest stint was at Spectrum Wealth Advisers from December 2013 to June 2018, where ASIC’s investigation found

he failed to comply with financial services laws.

Most recently he was with Consolidated Mercantile Group from July 2019 to January 2020.

ASIC said Lewis advised most of his clients to use a Limited Recourse Borrowing Arrangement (LRBA) to fund the purchase of real property through a SMSF. ASIC said Lewis also gave insurance advice to all clients.

“When providing this advice, Lewis did not professionally and independently assess whether using an SMSF and borrowed funds to invest in property was an appropriate strategy for each of his clients,” ASIC said.

“He also did not adequately investigate or offer any alternative investment strategies that may have provided greater diversification of risks.”

ASIC also found that when providing insurance advice, Lewis prioritised his own interests over that of his clients.

“He provided insurance advice that would generate large commissions for himself, regardless of whether the recommended products were appropriate for his clients,” the regulator said.

“The banning of Mr Lewis is part of ASIC’s ongoing efforts to improve standards across the financial services industry.”

Lewis has the right to appeal to the Administrative Appeals Tribunal for a review of ASIC’s decision. fs

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News

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

01: Sean Carmody

Outlook brighter than predicted

executive director APRA

Continued from page 1 “Volatility has declined and credit markets have progressively opened to more firms. Bond rates remain at historically low levels,” Lowe said.

In Australia, Lowe said, the government bond markets are operating effectively and the yield on three-year Australian Government Securities (AGS) is at the target of around 25 basis points.

“Given these developments, the bank has purchased government bonds on only one occasion since the previous board meeting, with total purchases to date of around $50 billion,” he said.

“The bank is prepared to scale-up its bond purchases again and will do whatever is necessary to ensure bond markets remain functional and to achieve the yield target for three-year AGS.” Lowe indicated the target will remain in place until progress is being made towards the goals for full employment and inflation.

Lowe said despite the stimulus package working well, the outlook for the Australian economy is cautiously optimistic.

“The Australian economy is going through a very difficult period and is experiencing the biggest economic contraction since the 1930s,” he said.

“Notwithstanding these developments, it is possible that the depth of the downturn will be less than earlier expected.”

Lowe said, the outlook remains highly uncertain and the pandemic is likely to have long-lasting effects on the economy.

“In the period immediately ahead, much will depend on the confidence that people and businesses have about the health situation and their own finances,” he said. fs

APRA pushes for super fund consolidation Jamie Williamson

O The numbers

185

The current number of APRA regulated super funds.

Calls for overhaul of AFSL system Continued from page 1 standards framework and rely on individual registration of financial planners.”

The FPA believes the continued use of the AFSL system to oversee the provision of financial advice duplicates regulation, creates significant additional regulatory cost and introduces potential conflicts between the views of the licensee and the professional judgement of the financial adviser.

Allowing AFSLs to focus on the regulatory oversight of financial products instead could mitigate this, the association believes.

As part of the Royal Commission reforms, a single disciplinary body is to be established that will require the registration of all planners. The FPA sees the responsibility for registration resting with the individual planner rather than their licensee or employer.

“The regulation of financial advice is currently tied to the recommendation of a financial product, reflecting a history in which a product recommendation was the core component of most financial advice. In a professionalised financial planning sector, this is no longer the case,” De Gori said.

“Contemporary financial planning is about a lot more than recommending financial products.”

The FPA wants future regulation to better reflect this. fs

ver the past seven years, the number of APRA-regulated funds has decreased from 279 to 185 while the total assets managed by those funds has effectively doubled.

“In APRA’s view, even 185 funds (which offer more than 40,000 investments options is still a large number and means the industry is probably not operating with maximum efficiency,” APRA executive director Sean Carmody01 said.

And COVID-19 has certainly tested this efficiency, with falling asset prices, liquidity pressures and declining member contributions taking their toll on both the underperformers and those at the top of the table.

Declining returns going forward, reduced portfolios and dwindling membership bases will also present major problems, particularly when it comes to operating costs and the ability to provide value to members and demonstrate a “right to remain”, Carmody said.

He said the regulator is often told merging is too difficult, but many of the reasons provided are myths.

Much of it comes down to narrow thinking, Carmody said, with many trustees commonly saying it is difficult to comply with the equivalency test that requires both funds to agree the merger will provide transferring members with equivalent rights – those they’re entitled to by law – and that it’s in their best interests.

Carmody advised trustees against taking an

overly narrow view of the legislation governing mergers, saying APRA expects trustees to take a pragmatic approach rather than measuring line-by-line that all members are receiving the equivalent, not equal, rights.

If this cannot solve the issue, trustees should look to amend trust deeds in relation to mergers, rather than abandon the idea completely.

However, transfers of members between MySuper produces will, in almost all cases, satisfy the equivalency test given MySuper products are legally required to have the same core characteristics and embedded rights, Carmody said.

Carmody went on to say that even stronger performing funds are quick to express concerns around the cost of due diligence, effort involved and the kind of liabilities they may be taking on and how this could be considered in the members’ best interests.

One thing funds can do now to ensure this isn’t an issue when teeing up a potential partner is to shore up reserves to cover the expected and, to some degree, the unexpected liabilities that may pop up, Carmody said.

While costs are undoubtedly a factor when it comes to merging, they need to be considered in the context of the long-term benefits to members, he added.

Carmody urged funds facing, or at risk of facing, sustainability issues to develop and ‘exit plan’, saying this would ideally put performance triggers in place making it clear when trustees must make the call to exit. fs

Receivers appointed to Mayfair 101 entity Elizabeth McArthur

Receivers have been appointed to Mayfair 101’s IPO Wealth, with Mayfair slamming the decision by the trustee and claiming this won’t harm its Dunk Island development.

Vasco Trustees Limited, the trustee of IPO Wealth, advised that on 22 May 2020 it appointed receivers to IPO Wealth Holdings.

“The group considers this a premature and imprudent measure by Vasco given the current economic conditions imposed by COVID-19, and one that is likely to result in the unfortunate and unnecessary destruction of value for investors in the IPO Wealth Fund,” Mayfair 101 said in a statement.

It added that Vasco did not understand the steps that Mayfair 101 had already taken to protect investors and portfolio companies.

“Despite contrary media reports, no attempts were made

by Vasco to contact the Group in the week leading up to the appointment of receivers,” Mayfair 101 said.

“Furthermore, no response was received to an email sent to Vasco’s managing director, Mr Craig Dunstan, on Wednesday 20 May 2020 advising that the group was working on initiatives with its various advisers regarding restructuring to improve liquidity for the benefit of the Fund’s investors.”

The Mayfair 101 Group said it has been suffering under the twin pressures of COVID-19 and an ASIC investigation.

“The recent overreaching actions of ASIC with respect to the advertising of Mayfair Platinum’s two debenture products has also exacerbated the already challenging circumstances,” Mayfair 101 said.

It said Vasco’s decision to appoint receivers would compound the already “significant detrimental” impact of ASIC’s actions on the business.

As for Mayfair 101 Group’s highly publicised Dunk Island/ Mission Beach development, it was adamant that the receivership shouldn’t dampen those plans.

“The recent appointment of receivers by the IPO Wealth Fund’s trustee, Vasco Trustees Limited, does not directly impact the Group’s assets in Mission Beach, which are not subject to the receivership process,” Mayfair 101 said.

It added that it hopes it will be able to “resume settlements” once the restructure is complete - though did not detail what that restructure would entail.

The IPO Wealth Fund was advertised by Mayfair 101 as being appropriate for high net worth investors.

It is primarily a debt fund that lends money to IPO Wealth Holdings trading as Mayfair 101 Holdings. fs

News

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

Keybridge takes WAM to court Keybridge Capital has launched legal proceedings against Wilson Asset Management, alleging WAM improperly transferred Keybridge shares into its own name.

According to Keybridge, it commenced proceedings in the Supreme Court of NSW in relation to the improper transfer by WAM Active of over 16 million Keybridge shares from 96 shareholders.

Additionally, Keybridge alleges WAM processed the 16,057,929 shares through its agent, Boardroom Pty Ltd, into its own name on 6 March 2020.

WAM has launched a number of takeover bids for Keybridge in the last year to no success, and Keybridge chief executive Nicholas Bolton has alleged WAM transferred the shares in a bid to control the company.

Bolton has asked the court for the shares to be vested with ASIC for sale and WAM pay Keybridge’s costs associated with the matter.

Bolton also requested the court to order a declaration that WAM breached the Corporations Act and that the transfer of the shares is void.

The filing requests that WAM be banned from disposing of or transferring any of the processed shares and that neither WAM nor any of its associates be allowed to acquire the shares from ASIC pursuant to the sale. “[Keybridge requests] an order that none of WAM active or its associates may acquire any of the processed shares from ASIC,” Bolton said. fs

5

01: Sally Loane

chief executive Financial Services Council

FSC calls for SMSF access to infrastructure Eliza Bavin

T The quote

ASIIVs will allow National Cabinet to turbocharge asset recycling programs.

he FSC has proposed a plan to democratise investment in domestic infrastructure development, making these projects accessible to every Australian with money in superannuation.

The FSC said the proposed Australian Superannuation and Infrastructure Investment Vehicles (ASIIVs) would unlock around $1.7 trillion in choice and SMSFs for infrastructure projects from investors who have limited access to them.

“After steering Australia successfully through our most serious health crisis in a century, the National Cabinet faces the daunting challenge of creating jobs and getting Australia back to work - the financial services sector must be part of this critical recovery operation,” the FSC said.

The FSC developed a report, Accelerating Australia’s Economic Recovery, proposing

policy ideas to assist economic growth, and help people manage their own financial challenges during the current economic downturn.

FSC chief executive Sally Loane 01 said the centrepiece of the FSC’s report is the ASIIVs initiative to fully utilise Australia’s $2.7 trillion pool of retirement.

“ASIIVs will allow National Cabinet to turbocharge asset recycling programs by selling assets into a common vehicle to finance new jobcreating infrastructure projects,” Loane said.

“They will also enable the creation of tailored vehicles for greenfield projects, such as community housing.”

As part of its report the FSC also recommended the abolition of stamp duties on life insurance products and property.

It also recommended aligning the company tax rate to 25% for all companies. fs

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www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

Industry fund appoints admin

01: Marnie McLaren

head of investment research BT

Harrison Worley

GuildSuper, the industry super fund for 80,000 people working in the pharmacy, childcare, veterinary and allied health industries has awarded an administration mandate to Iress.

The deal will see Iress’ Automated Super Admin service used to support the fund’s delivery of administration, member access and member advice, which Iress said would allow the fund to “drive great efficiencies and savings”, so that it could re-invest in “higher-value” services for members.

Iress said the automated service helps funds reduce manual processes and their associate compliance and business risks, while providing members, employers, advisers and the fund’s service teams with real-time access to transactions and data with an online portal.

“In addition to our commitment to helping women and their families with improved retirement outcomes, we want to transform our fund into Australia’s leading digital super fund – delivering digital-led solutions to our members,” Guild Trustee Services general manager Greg Everett said.

“A key factor in our decision-making was the ability to have unfettered, 24/7 access to our data, to tailor our customer experiences and offer industry leading digital products and services including our award-winning product SUPERSUPER to our members.” fs

FICAP sponsors donate $150k despite postponement Jamie Williamson

A The quote

We still hope that we can hold Rockstar in 2020 to raise even more funds for our charities, but we also acknowledge that it just may not be possible in the current environment.

MLC Wealth appoints chair Eliza Bavin

A former chief executive of BT Financial Group has been named independent non-executive chair of MLC Wealth.

Robert Coombe has been named to take on the role, effective 1 July 2020.

NAB chair Philip Chronican said the appointment to the board of National Wealth Management Services Limited (NWMSL), the head company of MLC Wealth, was an important next step in the path to establishing MLC as a standalone business.

“Rob has the right leadership skills and experience for MLC as it separates from NAB at a critical time for the wealth management sector and its clients,” Chronican said.

“He has extensive relevant experience in wealth management and financial services including superannuation, asset management, retail and private banking and financial advice businesses.”

Coombe also holds a number of other board roles, including chair of ASX-listed Generation Development Group, chair of Tibra Capital and an independent director of CIMB Group, an ASEAN universal bank.

Additionally, he is deputy chair of the Australian Indigenous Education Foundation, deputy chair of Surfing Australia and is a member of the advisory board of 5V Capital Investors.

Until recently, he was chairman of Craveable Brands, where he was also chief executive from 2013 to 2017.

Prior to joining Craveable Brands, Coombe was group executive of Westpac Retail and Business Banking.

Before that he was chief executive of BT Financial Group for six years. fs

ll 41 of the Financial Industry Community Aid Program’s 2020 sponsors have agreed to donate their respective event sponsorship fees to FICAP’s three charity partners, despite the singing competition - which was slated for March 26 - not going ahead.

The three charities to benefit from the industry’s generosity are SHINE for Kids, which supports children and young people whose parents are incarcerated; child disability service Learning Links; and the Starlight Children’s Foundation, which works to brighten the lives of seriously ill children.

SHINE for Kids chief executive Andrew Kew said the money has enabled the charity to continue to support children during this difficult time, saying SHINE for Kids has been able to facilitate a technology loan scheme after it found only half of the families it supports had device and internet access.

“Our actions today have far-reaching impacts on a child’s life. By providing them with care and support, SHINE is helping children to live a stable life, providing the foundations upon which they can build a future. A child’s opportunity shouldn’t be imprisoned with their parent,” Kew said.

Similarly, Learning Links said it will be using the FICAP funds to develop much needed online literacy and numeracy programs for children across Australia struggling to learn.

“Learning Links is delighted and grateful to FICAP and its sponsors for their generous

donation and support for this critical project - it will benefit hundreds of children initially but has the potential to reach thousands as the program grows,” Learning Links chief executive Birgitte Maiborn said.

Finally, Starlight Children’s Foundation chief executive Louise Baxter said the foundation is over the moon with the funds received.

“Thank you so much to everyone involved in the generous donation from FICAP... The support of our Livewire program is more relevant than ever right now, particularly Livewire online which is providing much needed connection and a sense of community for young people during this challenging time,” Baxter said.

BT head of investment research and governance and Rockstar organiser Marnie McLaren 01 said FICAP’s sponsors didn’t hesitate when asked to donate their sponsorship dollars, despite investment markets being in turmoil.

“FICAP’s charities were in desperate need of financial support and facing a significant funding gap with the postponement of Rockstar,” McLaren said.

“Through the incredible generosity of our sponsors, we have paid out $146,415 to our charities.

“We still hope that we can hold Rockstar in 2020 to raise even more funds for our charities, but we also acknowledge that it just may not be possible in the current environment.” fs

Advice job market not all doom and gloom Elizabeth McArthur

There are some bright spots in the market for financial advice jobs, according to Kaizen Recruitment, despite over 1000 advisers leaving the industry since the start of 2020 and only about 50 joining.

“The implementation of restructures and exits announced in 2019 by a number of large players including AMP, ANZ, BT, CBA and MLC have left many advisers and support staff looking for work,” Kaizen recruitment consultant Simon Gvalda said.

“Consumers are seeking financial guidance around changes to job circumstances, early access of superannuation, falling investments, investment property issues including increased tenant vacancies and softening of the market.”

He noted that there are a few key things financial advice candidates are looking for from employers amid upheaval in the industry.

One is that they want clearly defined career pathways to see the benefits of the extra study they now have to do under the FASEA requirements.

Of course, attractive base remuneration and bonus structures and the potential for equity in the business and profit share is also appealing.

“With the rise of working from home due to the lockdown, many candidates are keen to maintain this flexibility as it can offer time and money savings. Candidates have discovered greater working productivity plus the benefits of spending more time with family and friends,” Gvalda said.

“Given the current economic environment, long term job security is high on the priority list.”

As for what their employers want – being conscious of cash flow in the current environment, many employers are looking for advisers who are already fully qualified.

They want them to be registered to provide financial advice, have their own referral network, have passed the FASEA standards or be on the way to passing, and they want them to be comfortable with technology.

“Holding your Certified Financial Planner qualification or Masters of Financial Planning may not be enough to differentiate your application without providing your best achievements,” Gvalda said.

“We are seeing a growing backlog of recruitment needs that will be progressively released to the market as the COVID-19 government restrictions ease. It is crucial to ensure candidates position themselves to benefit from this.” fs

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News

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

Complaints to AFCA surge

01: Dante De Gori

chief executive Financial Planning Association of Australia

Eliza Bavin

The Australian Financial Complaints Authority (AFCA) has received over 3180 COVID-19 related financial complaints since the pandemic was declared in March, with more than 600 directed at superannuation funds.

Speaking in an online forum, chief operating officer Justin Untersteiner revealed the COVID19 related complaints included 1430 banking and finance complaints, 1070 general insurance complaints, and 610 superannuation complaints.

Untersteiner said the majority of the complaints have been about delays in early release of superannuation, loan break costs, disputed transactions, requests to extend payment terms as well as denial of travel insurance claims.

Untersteiner urged financial firms to provide early, proactive communication with consumers following an increase in complaints relating to COVID-19.

“Many of these complaints result from poor communication, where a consumer has trouble contacting their firm, does not understand their policy, or is confused about the information they receive,” he said.

“To support consumers, we encourage financial firms to ensure their contact details and resources are visible and accessible and allow for genuine engagement with customers to resolve issues early on.”

Untersteiner said AFCA anticipates the amount of complaints will rise of the coming six to 18 months.

“We expect to see more complaints from vulnerable consumers or others who struggle to repay mortgages or other debts as government and sector support initiatives come to an end,” Untersteiner said. fs

EISS Super a top employer Harrison Worley

EISS Super has been named a Kincentric Best Employer, an award based on the feedback of its staff.

Kincentric, a global consulting firm specialising in human capital, offers the certification – previously known as the Aon Best Employer – to organisations which “strive to continuously inspire their people, spark change and accelerate business success”.

To achieve its recognition, EISS was assessed on employee engagement, organisational agility, the engagement of its leadership and its focus on talent.

The super fund placed in the top quartile for all categories, ensuring it performed “over and above” the benchmark for being a Best Employer.

So far, the fund is the only Australian organisation to be recognised this year.

“We are humbled to have been recognised as a Kincentric Best Employer, based on our employees’ assessment of the workplace environment that we have all created,” EISS Super chief executive Alexander Hutchison said.

“It’s always great to have confirmation of our employees’ satisfaction and belief in each other – especially currently when many Australians are facing uncertainty and disruption in their lives.

“We want to be a great place for people to work, and believe that a well-led, productive and happy workplace with top talent will ultimately provide a better outcome for our members and employer partners.” fs

FPA confirms redundancies Elizabeth McArthur

T The quote

As our five-year strategic plan was finalised it was natural to look at the team structure.

he Financial Planning Association of Australia has unveiled its five-year plan, which includes redundancies.

The FPA is calling its new strategy the MAC strategy, focused on members, advocacy and consumers.

The plan involves a restructure of the organisation which will see “a number of roles” made redundant.

The FPA declined to disclose which roles were being lost in the restructure when asked by Financial Standard.

“This new structure will enable the FPA to focus on the core areas outlined in the MAC strategy – member engagement, public policy advocacy and consumer education,” FPA chief executive Dante De Gori01 said.

“As our five-year strategic plan was finalised it was natural to look at the team structure. I am personally grateful for everyone’s contribution to the FPA over the past five years but as our strategy evolves and the environment changes we need to transform to ensure we remain relevant and effective.”

The new strategic priorities will see the FPA focus on leading the profession of financial planning on the model of the future, being the voice of the profession through advocacy and showcasing the value of financial advice to consumers.

“Our members are facing more regulation, higher education standards and increased costs.

At the same time, there has never been a greater need for Australians to seek financial advice,” De Gori said.

“In this context, we are excited to set in place a roadmap that we believe will support a vibrant and sustainable profession into the future and make financial advice accessible and affordable for all Australians.”

The FPA’s advocacy work has been in the spotlight as it has successfully lobbied for extensions to the FASEA education requirements and exam.

However, this hit a snag recently when the extension failed to pass after Assistant Minister for Financial Services, Superannuation and Financial Technology Jane Hume said during a FPA webinar that it would.

The legislation is expected to pass in early June. fs

ERS emerges as tax loophole for expats Ally Selby

The government’s early release scheme has opened up a handy loophole for expats living in Australia, helping them withdraw their super balances tax-free.

Normally, temporary Australian residents would face 35% taxes on the taxable component of their superannuation balance when they depart the country. For those on working holiday visas, this rate lifts to 65%.

The untaxed element of their superannuation, which applies to departing Australia super payment lump sums as well as roll-over amounts, is taxed at 45% and 65% respectively.

The government’s early release scheme however, allows them to withdraw up to $10,000 from their super savings – tax-free.

Eligible temporary residents need to have held a student visa for 12 months or more, be a skilled work visa holder or temporary resident visa holder and be able to prove that they are unable to meet their immediate living expenses.

Atlas Wealth Management managing director James Ridley said he has seen an increase in expats withdrawing their super for this reason.

“No one has been completely immune to the impacts of COVID-19, with job losses and hours wound back by employers,” he said.

“People, who aren’t looking to touch their super due to the long term impacts will look to drawdown on cash savings or potentially liquidate a portion of

their share portfolio to access quick capital.”

Similarly, HLB Mann Judd tax partner Peter Bembrick said he wouldn’t traditionally encourage expats to withdraw their super balances, but the current circumstances allowed for a tax-free opportunity.

“It’s not something we would be encouraging people to do necessarily,” he said.

“But in the case of the expat they wouldn’t have a huge amount in super and they are probably planning to go back anyway, so it makes sense for them, particularly for the tax saving in doing that.”

It was logical for expats impacted by the coronavirus pandemic to withdraw their super now to avoid tax concessions, he said.

“If they don’t face tax consequences now, when they do leave their super wont get treated under that penalty tax rate,” Bembrick said.

“I haven’t actually seen anybody do that, but that could certainly be a loophole.”

Ridley warns that expats need to be careful when withdrawing their super in the current environment.

“We’ve seen plenty of discussion about this on expat forums and expats really need to be careful, as if you are accessing these kinds of funds [they need to think about] how this impacts their tax residency,” he said.

“Furthermore, depending on the country they reside this could be treated as taxable income also.” fs

Opinion

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

9

01: Ganesh Suntharam

chief investment officer Redpoint Investment Management

Deciphering global infrastructure returns during COVID-19 nlike the previous two economic slowU downs in 2001 and 2008, infrastructure assets have had a higher level of dispersion in returns across sub-sectors during the COVID-19 downturn, forcing many investors to re-visit their underlying assumptions.

With distinct economic drivers often related to the regulated revenue streams, and a localised footprint for their asset base, infrastructure companies such as utilities, transport and telecommunication assets are typically considered to be a more defensive cohort of companies that have a greater level of immunity to local economic shocks.

Not so with COVID-19, where a shock to consumption-based demand tested this hypothesis.

Infrastructure sub-sector returns over March 2020 highlights greater underperformance among those assets exposed to discretionary travel - such as airports and toll roads - while utilities and telecommunication assets have held up well given that the underlying demand for these essential community services has not waned as the situation evolves.

Figure 1 shows the impact on return for the various infrastructure sub-sectors during the mid-March 2020 period which coincided with the largest drawdowns in equity market due to the COVID-19 pandemic.

Infrastructure performance has recovered since these lows however, this dispersion in the returns of infrastructure assets, or in other words risk, was a cause of concern for some investors.

But risk is only one component of the investment equation. The other key aspect of the investment equation is return - both yield and growth. And this is driven by the underlying fundamentals and financial health of these companies.

Historical dividend growth relative to market price Historically, the dividend stream that infrastructure assets have been able to generate has been a strong indicator of long-term valuation.

Figure 2 shows the historical growth in dividends of listed infrastructure companies over a 15-year period overlaid over the market price of the same securities. The figure highlights that the dividend stream of core infrastructure companies has remained reasonably stable, even through the 2008 financial crisis period, and emphasises the importance of these assets to their local market economies.

Given the impact of the recent crisis on the transport and pipeline sub-sectors of infrastructure, some cuts to dividends in these areas have already occurred. In addition, a small number of

assets have returned to the listed market seeking to raise fresh capital in order to shore up their balance sheets and help sustain their businesses through this short-term downturn in consumer demand. This capital raising effectively dilutes the investor base which subsequently dilutes dividend distributions to all investors.

So, for some infrastructure assets, this effective decrease in dividend will have a considerable impact on short-term valuations, and the shape of the recovery in this metric will determine the impact on longer-term valuations. But, for the majority of infrastructure assets, such as household utilities, the impact to financials and dividends will be more muted due to the critical nature of the services they provide.

Dividend yields in the backdrop of rate cuts The abrupt economic slowdown as a result of COVID-19 saw central banks across most developed markets signal rates lower in an attempt to re-stimulate local demand in their respective countries.

This change in central bank positioning, coupled with recent price movements and changes to dividend expectations, highlights the importance of assessing the dividend yield of infrastructure assets in both traditional yield terms and also on an excess of cash rate basis.

In traditional yield terms, the dividend yield of global infrastructure assets has remained reasonably stable since 2009 despite having had strong price appreciation over this period. This stable dividend yield, highlights that this price appreciation has been supported by the ongoing growth in the dividend stream of these underlying assets.

Furthermore, assessing dividend yield in excess of local market cash rates allows investors to incorporate the impact of changes in central bank cash rates into the yield picture. By adjusting dividend yield for the cash rate in the country each company operates in, investors gain insight into the ability of these companies to generate cash distributions in excess of their cost of debt funding.

Following the recent downturn, excess yields are now at levels not seen since 2017. So, for investors, this means that having money invested in core infrastructure companies generates an income premium relative holding cash at bank and receiving interest payments. But this income premium comes at the cost of volatility – that is the uncertainty of market movement compared to the relative safety of cash in a bank account.

However, for those investors who are in a financial position to take on this additional market risk, there is the potential to capture price

Figure 1: Fall in key listed infrastructure market sectors since 31 January 2020

Figure 2: Global listed infrastructure: Market Capitalisation vs Dividends paid

The quote

Identifying good quality assets delivering essential service to their local economies is an important return consideration for investors. But as markets continue to throw out new challenges, the other important consideration is risk management.

appreciation in the underlying assets in addition to the dividend stream that they generate.

When assessing the potential for price appreciation in infrastructure assets, identifying good quality assets with sound balance sheets, good management practices and that are financially well positioned is an important start.

These companies are generally in a better position to maintain pricing power in times of economic stress and this is an important characteristic as investors think about the preservation and growth of their invested capital.

Hence, identifying good quality assets delivering essential service to their local economies is an important return consideration for investors. But as markets continue to throw out new challenges, the other important consideration is risk management. Ensuring appropriate diversification across both individual companies and the various infrastructure sub-sectors coupled with the regular monitoring of each company is critical. Incorporating both these elements allows investors to turn an insightful investment perspective into a well-balanced portfolio that helps preserve and grow the purchasing power of their investment for the long-term. fs

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News

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

Northern Trust inks BlackRock deal

01: Simon O’Connor

chief executive Responsible Investment Association of Australia

Harrison Worley

Northern Trust has partnered with BlackRock, in a move that will see better operations, data and servicing capabilities delivered to the investment manager’s mutual clients.

The partnership - dubbed a “strategic alliance” - will see the new capabilities delivered through BlackRock’s Aladdin investment management and operations platform, in a move designed to increase efficiency, interoperability and transparency across the back, middle and front office.

Northern Trust said its relationship with the investment manager currently supported mutual clients, and was an extension of its Whole Office approach, which integrates its global asset servicing platform with “innovative partners, facilitating client access to new technologies, services and solutions”.

Northern Trust president of corporate and institutional services Pete Chereewich said the alliance would create greater connectivity between asset manager and servicer.

“Our Whole Office ecosystem delivers global asset owners and asset managers scale, efficiency, flexibility and optionality, ultimately enabling more informed investment decision making,” Cherecwich said.

“We have a long-standing relationship with BlackRock and are excited to be working with them as part of our Whole Office strategy. The alliance connects Northern Trust’s fund accounting, fund administration, asset servicing, and middle office capabilities to BlackRock’s Aladdin platform.”

BlackRock chief operating officer and head of BlackRock Solutions Rob Goldstein said the current climate had “once again” demonstrated the importance of data symmetry and streamlining communication across the investment lifecycle, “from the asset manager to the asset servicer”. fs

Impact investing set to skyrocket: Research Ally Selby

T The quote

There is now nearly $20 billion of capital in Australia being put to work targeted a delivering impact that builds a better society and environment.

Super withdrawals being misused New research has revealed 40% of those who accessed their superannuation early did not see any drop in their income during the COVID-19 pandemic.

Illion and AlphaBeta said that there was no income check prior to allowing people to access their super.

The data also revealed how the Early Release of Super payments are being spent, finding that a third of the money was used up in the first two weeks.

Most of the money, 64%, appears to have been spent on discretionary items such as clothing, furniture, restaurants and alcohol.

“There’s a group of people out there living very large on pizza and beer courtesy of tax-free super.

These are the most expensive pizzas they will ever eat,” said Illion chief executive Simon Bligh.

“This money is available for anyone with a bit of super who puts their hand up. It’s a situation that was entirely avoidable.”

Meanwhile, 14% of the money was used to repay personal debts. 11% was spent on gambling.

Bligh urged the government to institute some “checks and balances”.

On average, people withdrew $8000 and spent an extra $2855 in two weeks above their usual fortnightly spending. fs

he Benchmarking Impact 2020 report, comng out of the Responsible Investment Association Australasia (RIAA) found that the market for impact investing; investments that create positive environmental and social return alongside financial gains, has experienced exponential growth over the past two years.

The market has more than tripled from $5.7 billion to $19.9 billion in this period, as Australian investors – including super funds and family offices – increased their exposures to clean energy, housing, education, health and conservation.

The report shows 93% of those surveyed found their impact expectations are being met or exceeded by their current impact investments, and 92% said the same for their financial expectations. About 76% expect competitive or above market rates of return.

About 90% of investors believe impact investing will grow in significance, with measurable impact, mission alignment and financial returns driving this.

“As evidence mounts that companies with better records on social issues, environmental sustainability and good governance are more resilient to COVID market turbulence, this study shows a market delivering strong financial returns, while also positively impacting the lives of tens of thousands of people,” RIAA chief executive Simon O’Connor01 said.

The report surveyed 125 Australian investors with a collective $1722 billion in assets

under management and studied 111 impact investment products across the country.

The report found that the majority of impact investment products were “green” or “sustainable” bonds ($17 billion), while $2.9 billion was held by Australian investors in real assets, private debt, public and private equity, social impact bonds and more.

“Responsible investment has gained mainstream traction in financial markets and the next iteration will require investors to demonstrate the real-world outcomes they are generating through their investments,” O’Connor said.

“There is now nearly $20 billion of capital in Australia being put to work targeted at delivering impact that builds a better society and environment.”

Impact investing demonstrates the potential of capital markets to create a better future, he said.

“This study charts the significant growth in investor awareness and interest in impact investing over recent years, as Australian investors increasingly see the strong performance of many impact investment products, as well as respond to the increasing demand from their clients and customers for their money to deliver positive impact and avoid harm,” O’Connor said.

“Benchmarking Impact 2020 confirms that activity and interest in impact investing continues to grow among Australian investors,” the report’s author and Professor of Practice (Finance) at Deakin Business School, Fabienne Michaux said. fs

UniSuper stares down job crisis Elizabeth McArthur

The industry superannuation fund for universities is the only defined benefit fund still open to new members in Australia, now it is grappling with how the sector has been decimated by COVID-19.

The travel bans put in place around the world to curb the spread of COVID-19 will mean the lucrative flow of international students to Australian universities won’t be reliable for some time.

This, and other factors, has led to several universities making redundancies.

Central Queensland University cut 180 staff; La Trobe University flagged a shortfall of up to $200 million and voluntary redundancies and Deakin University also flagged deep cuts.

Deakin vice chancellor Iain Martin told staff that the university could not sign a job protections framework agreement because the impact of the pandemic may mean some staff have to go.

Deakin’s operating revenue is estimated to fall by between $250 and $300 million in 2021.

“We spend 55% of our total revenue on staff,” Martin said.

“While we will do everything possible to minimise staff impacts, we must look at our employment costs as well as

continuing to minimise other expenditure to adjust to where we need to be.”

This upheaval in the sector has forced UniSuper to develop a response.

“We’re working closely with our university partners as they review their workforce planning strategies and offering support through a number of channels including,” the fund said.

That support includes the financial advice team at the fund providing specific support related to redundancies.

However, the fund has not seen an unexpected boost in early release requests.

“To date early release of super applications are at the lower end of expectations. We have a very conservative approach to liquidity, so even if the number of applications does increase we can still manage with ease,” UniSuper said “Given the circumstances, we’re fully supportive of eligible members accessing their super if they chose to. Everyone’s situation is different and we’re here to help.”

The fund has so far paid out over $83 million to more than 10,000 members. fs

News

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

01: Esty Dwek

02: Kerry Craig

head of global market strategy Natixis Investment Managers

head of global market strategy J.P. Morgan

11

Sentiment weakens as macro threats loom Ally Selby

W

ith investors caught in a nasty tug of war between the dire economic reality and the hope of a virus cure, industry leaders have warned of the risk of further downside to come.

The warning is clear: with macro threats looming, markets already fragile from months of mixed messages, are likely to experience higher volatility in the months ahead.

Renewed trade tensions, poor economic and earnings data, the risk of a second wave of infections, as well as bankruptcies and job losses, threaten to topple markets and investor sentiment – however, Natixis Investment Managers head of global market strategy Esty Dwek01 told Financial Standard she doesn’t believe we will retest the March lows.

“The rally has been strong, but only in certain names and sectors across equity markets. As such, it hasn’t had much breadth and we think there are downside risks,” she said.

“However, the bounce has been sizeable, the bearish view is consensus and there is a lot of cash sitting on the sidelines, suggesting we may not re-test the lows even if we think we will see some downside and higher volatility at some point.”

Similarly, JP Morgan global market strategist Kerry Craig02 believes valuations are looking elevated, even compared to before the COVID-19 crisis “I think there’s a lot of downside risk in the economic outlook and shocks that could come and so we’re not overly bullish on the equity market, given the rally we have seen,” he said.

“I don’t think it would take much to scare people away from market.”

Investors were looking through the shortterm pain and dismal economic data to focus instead on support measures from governments and central banks and push equity markets higher, he said.

“Our view is that weakness in economic data just means the economy is weak, and it’s not going to get back to where it was in a hurry,” Craig said.

“That’s going to naturally flow through into the corporate outlook, and earnings numbers and revisions still need to be adjusted on that basis.

“We think there’s still downside risk to the equity market at these levels.”

Although this stimulus has been significant, UBS economist Carlos Cacho believes concerns are mounting on the impact of these measures ending.

“We are becoming increasingly concerned about what will happen in Q4 when JobKeeper, the JobSeeker supplement, along with loan deferrals, come to an end,” he said.

“We estimate the stimulus, along with early superannuation withdrawals, will actually see household cash flow improve in Q2 and Q3, before a sharp fall in Q4.

“This suggests renewed downside risk to Q4 consumer spending if the economy and labour market has not ‘snapped back’ strongly enough by then.”

And in a country highly leveraged household debt – these payments ending could see property prices plunge in a downward spiral.

“Our current expectation is that house prices will fall approximately 10%, however there is downside risk if the ‘fiscal cliff’ in Q4 leads to renewed economic weakness,” Cacho said.

“Indeed the current deferrals on 700k loans, worth $220bn have likely insulating the housing market from higher unemployment and lower incomes, but it remains to be seen what will happen when these end in September.

“The recent weakness in the capital city rental market, if continued, also has the potential to put additional downward pressure on prices, particularly for investment property.”

Although the economic impact of the pandemic and the risk of a second wave of infections remain the biggest risk to markets, trade tensions between China and the US, and ultimately, China and Australia, also point to further downside.

“Renewed trade tensions between the US and China could weigh on markets in the coming months, as risks of bigger economic retaliation could impact an already fragile and slow recovery,” Dwek said.

“For now, our view is that there will be more bark than bite, but that doesn’t mean markets will not react to the headlines.

“So higher volatility is likely, especially as ‘tough on China’ will clearly be a large part of Trump’s re-election campaign.”

Craig also believes that views on China – whether they be good or bad – will be used as a campaigning tool in the US election.

“There’s definitely been a shift in terms of foreign policy in the US and other economies around the world, seen through attitudes towards change, raising national incomes and a focus on domestic policies, rather than international ones,” he said.

“We lived through it in 2019 – all that riskoff sentiment with the two biggest economies in the world sparring with each other and what it means for emerging economies, supply chains and demand.

“At a base case, we think trade wars are absolutely terrible, and no one really wins from them, we’ve just been coming to a period where trade is being tested in a big way.”

The quote

We are becoming increasingly concerned about what will happen in Q4 when JobKeeper, the JobSeeker supplement, along with loan deferrals, come to an end.

However, Nikko Asset Management’s chief global strategist John Vail believes investors do not expect US President Donald Trump will make any rash decisions prior to the election six months from now.

“China also seems willing to accept increased pressure by the US, and even by much of the Western world, without major reprisals,” he said.

“Except that it seems to be using trade restrictions as a method for punishing Australia for its desire for an independent inquiry into the virus’ origins and restrictions on China’s 5G equipment.”

So where are the opportunities in the current uncertain environment?

Craig believes the opportunity lies in cyclical names – however, he doesn’t think it’s the right time to shift just yet.

“We’ve got the recession, we’ve had a bear market, we’ve actually started a new cycle – and credit spreads have widened so that naturally increases the scope for them to come down, notwithstanding some defaults that can come through,” he said.

Central banks have so far propped up investment grade credit, securitized assets and equity markets – however this has been driven largely by healthcare, and technology, he said.

“We expect there’s going be opportunities to rotate within the equity market into more cyclical names as the recovery gains case,” Craig said.

He believes quality equities in the US will outperform until we see more beta markets like Australia and Japan lift on the back of a better economic outlook.

In emerging economies he likes Asian equities as valuations aren’t as extreme and there is more room for upside, while in credit, Craig prefers investment grade asset backed securities in the US. In comparison, Natixis Australia’s head of distribution Louise Watson sees opportunities in fixed income and alternative assets – including credit and real estate.

“On the fixed income side, our affiliate manager Loomis Sayles has developed a Credit Dislocation strategy, which will pursue investment opportunities with potentially attractive returns after the market shock driven by COVID-19 pandemic and oil price war,” she said.

This strategy will invest in public market obligations, including corporations, governments, supranational entities, partnerships and trusts, all guaranteed by US and other foreign issuers.

“Looking at real assets, our real estate manager affiliate, AEW Capital, is monitoring valuations on GREITs very closely for signs of improvement, along with showing high quality assets in the UK for example, to Australian clients at compelling valuations with strong potential for higher yields,” Watson said. fs

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News

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

Industry fund probe urged

01: Jane Hume

assistant minister for financial services, superannuation and financial technology

Kanika Sood

Liberal MP Tim Wilson has written to APRA chair Wayne Byres urging the regulator to conduct an investigation into vertical integration at industry super funds and related conflicts of interest.

Wilson, who chairs the House of Representatives’ Standing Economics Committee, referenced a report from research and ratings house Lonsec on industry fund Hostplus in his letter.

Lonsec’s report sent to advice clients mentioned that 70% of Hostplus’s infrastructure investments were managed by an industry-superowned fund manager IFM Investors.

“Such a leak highlights a number of issues: a conflict of interest by the fund, a failure to sufficiently spread risk, and secrecy when such problems are identified,” Wilson wrote to APRA in the May 25 letter.

“There are a number of consistent trends in the evidence provided to the committee to date.

“One of the most glaring trends has been the interconnectedness of industry funds and their investment structures that raises questions about their fulfilment of the sole purpose test (such as allocating significant capital to ME Bank when it has never returned a dividend), conflicts of interest (such as heavy exposure to ISPT and IFM Investors) and low transparency (such as IFM Investors’ failure to answer basic questions on remuneration.”

In particular, Wilson took note of IFM’s lack of executive remuneration transparency. It last year denied to disclose the salary of the director accused of sexual harassment, but eventually revealed their chief executive Brett Himbury’s pay at committee hearings.

“I will shortly be putting to the committee the need to consider its full options to ensure that it can fulfil the purpose of its inquiry,” Wilson wrote. fs

Iress inks partnership Financial services software provider Iress has partnered with the Australian Bond Exchange in a move designed to increase investors’ access to bonds.

A partnership between Iress and the Australian Bond Exchange will allow users of Iress software to access the entire suite of bonds admitted to trading status on the exchange’s platform, giving private investors, SMSF trustees, brokers, and the clients of financial advisers with greater access to fixed income.

In addition to providing access to bonds, the deal will see users of Iress Pro, ViewPoint and Xplan provided with the ability to view real-time pricing data, subscribe to data feeds, and directly place execution orders, which is designed to make researching, tracking and trading corporate bonds “as easy as trading shares”.

Iress managing director financial markets Kirsty Gross said the move was driven by user demand.

“We’re excited to have built a simpler, more efficient way to access the corporate bond market,” Gross said.

“The new electronic interface removes inefficient, manual data entry processes, making it easier for brokers to see their clients’ total position as well as place orders and receive execution messages from the Australian Bond Exchange.” fs

Retirement income covenant delayed by COVID-19 Harrison Worley

T The quote

Trustees don’t need to wait for us to legislate the covenant.

he government is delaying the introduction of the retirement income covenant, due to the impact of COVID-19.

Originally slated for introduction on July 1, the retirement income covenant has been delayed, with the government not yet in a position to settle on a new date for its introduction.

The covenant is meant to form the first stage of the government’s proposed retirement income framework, however more consultation and legislative drafting needs to take place, particularly after COVID-19, assistant minister for financial services, superannuation and financial technology Senator Jane Hume 01 said.

Hume pointed out the deferral of the covenant will also allow its drafting to be informed by the retirement income review, which is due to

be handed to the government this month. The revised date of the covenant’s introduction is set to be determined after further consultation.

“We’ve been working for some time on a retirement income covenant,” Hume said.

“While efficient accumulation is imperative and we are steadily chipping away at the inefficiencies of that part of the system, we need to build a smoother transition from the accumulation to the de-accumulation phase.”

Hume said super funds should continue to work on retirement income strategies even though the covenant still needs development.

“Of course, there is nothing stopping funds and their trustees from developing retirement income strategies now and we’d encourage them to do so,” she said.

“Trustees don’t need to wait for us to legislate the covenant.” fs

MLC launches new advice business Jamie Williamson

MLC has introduced a new advice business to the market, retiring the Apogee, Garvan and Meritum brands and appointing a general manager to lead the venture.

Following on from the announcement in August last year that Apogee, Garvan and Meritum would be merged, TenFifty Financial Group is MLC’s new home for aligned financial advisers, with all attached to TenFifty operating as representatives of GWM Adviser Services.

It will stand alongside Godfrey Pembroke, MLC Connect and salaried adviser business NAB Financial Planning, which will soon be rebranded to MLC Advice.

According to an MLC spokesperson, there is currently 81 advisers attached to Apogee, 206 with Garvan and 35 with Meritum. They are all expected to transition to TenFifty over the coming months, as the process was delayed by COVID-19.

The new business’ name is derived from the translation of MLC into roman numerals, the group said.

TenFifty is to be led by general manager Brendan Johnson who has been with MLC for more than 18 years. Johnson has been general manager of Apogee since June 2015. Prior to that he held a number of roles across NAB and MLC, having initially joined in 2004 as a practice development manager, MLC Advice Solutions.

Johnson will work alongside former Securitor general manager Mark Fisher who was recently appointed

general manager of Godfrey Pembroke and MLC Connect, as reported first by Financial Standard.

“When we announced our strategic intent in 2019, we established a simpler operating model that would allow us to focus more on delivering for clients. This model included a new licensee business that could service a broad client base with different needs while offering unparalleled support for advisers,” MLC acting group executive, advice Geoff Rogers said.

“These challenging times have shown the true value of relationships and the power of community, and the advice industry is enduring extraordinary change. By establishing opportunities to connect with like-minded peers to learn, share and collaborate through the TenFifty network we believe advisers will be even better placed to offer quality advice and set themselves up for success.”

Rogers added that the new business will be built on the core pillars of community, compliance, consulting and capability.

“We’ve listened to our clients and understand the importance of providing advice that is fit-for-purpose, high quality and compliant on all levels. At the same time, we’ve spoken to advisers at length about their need for professional development and opportunities to connect, learn and grow,” he said.

“These insights have helped shape TenFifty into the licensee business we are launching today, and I’m excited to bring this unique proposition to market as we continue to refocus and reshape the broader MLC Wealth business.” fs

For more news and events, like us on LinkedIn

News

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

13

Executive appointments 01: Michelle Tredenick

First Sentier adds directors First Sentier Investors has moved to boost its board, with the appointment of two new independent directors, including a former MLC chief executive of corporate superannuation.

Michelle Tredenick01 and Richard Wastcoat have been appointed to the board of First Sentier Investors, as the firm aims to fill out its board with independent non-executive directors following its sale to Mitsubishi UFJ Trust and Banking Corporation last year.

Tredenick, previously the chief executive of MLC’s corporate superannuation business, also served as chair of the IAG and NRMA corporate superannuation fund for around six years.

Currently serving as a non-executive director of IAG, Bank of Queensland, Cricket Australia and St James Ethics Centre, Tredenick is set to bring decades of experience to the firm’s board.

She will be joined by former Fidelity International managing director Richard Wastcoat. Wastcoat, a former First State Investments non-executive director, brings more than 25 years of executive experience in the United States, Europe and Asia, with a track record of leading large businesses.

First Sentier Investors chair Sunao Yokokawa said he is pleased to welcome both to the board.

“As a standalone business, they will play an important role in ensuring we align with best practice corporate governance,” Yokokawa said.

“Michelle has extensive experience in businesses operating in a broad range of industries, including banking, insurance, wealth management, education services, health insurance, superannuation and technology. She also runs her own corporate advisory business advising boards and CEOs on strategy and technology.

“In addition, Richard brings broad risk management and financial services experience, as well as extensive asset management experience. Both appointments deepen the board’s existing skills and expertise.”

Mercy Super adds to board Mercy Super has appointed a financial services veteran as an independent director, bringing with him more than 40 years’ experience in funds management to the board.

Sandy Grant has nabbed the role, and will join the board’s existing member directors and employer directors.

“We’re pleased to announce the appointment of Sandy Grant as an independent director to the board of Mercy Super’s trustee,” the super fund said.

“Sandy has 40 years’ experience in financial markets, including broking and advisory roles, as well as more than 13 years within the funds management industry.”

Grant is currently the investment director for boutique Australian small cap fund manager Eight Investment Partners, after retiring from his role as the managing director and fund manager of Wilson Group (now Pinnacle Investment Management), where he spent the majority of his career.

VFMC appoints head of equities Victoria Funds Management Corporation has promoted a senior portfolio manager to head of equities, and hired from outside the company to fill the vacant role.

Michael Stavropoulos has been named VFMC’s head of equities after an internal recruitment process, moving up from senior portfolio manager.

To fill the vacant role, VFMC has hired Sahli Lingaretnam, who was most recently the chief investment officer of CCI Asset Management.

Lingaretnam joined as a senior portfolio manager (external mandates) on May 25 and reports to Stavropoulos.

VFMC manages about a third of its equities in-house.

“We are very pleased to see Michael join our investment leadership team as part of his ongoing career at VFMC,” chief executive Lisa Gray said in a statement to Financial Standard.

“We have nine people in our talented team across our internal and external portfolios in equities.”

Lingaretnam has worked at Macquarie Bank, Aviva, IOOF, Lonsec, across equities, fixed interest and derivatives.

Grant was appointed as the managing director of Wilson Group in 2014, after serving as its acting chief executive for nearly a year.

Prior to this, Grant served as the fund manager for the Wilson Group Priority Growth Fund from 2005, and co-managed the firm’s Core Fund since its inception in 2010.

He also served in several senior roles at predecessor firm Wilson HTM, having joined the firm in 1992.

Bennelong hires distribution executive Bennelong Funds Management has appointed an institutional distribution executive as the company focuses on growing its domestic and offshore institutional capability.

Eric Finnell is set to step into the role, having previously been at Fisher Investments, most recently as co-head of institutional business development and client services for Australia, New Zealand and Southeast Asia.

Prior to this, Finnell was a financial adviser with Ameriprise Financial.

Bennelong chief executive Craig Bingham said Finnell’s appointment represents Bennelong’s commitment to broadening its institutional footprint in Australia and overseas.

“We’ve seen increased interest in our products here in Australia, but also in our UK-based boutiques and their offerings,” Bingham said.

“As always, we’re focused on delivering the best outcomes for our clients across the globe, and that includes providing access to a suite of diverse and innovative investment strategies.”

Bingham said Finnell’s appointment will ensure Bennelong’s institutional clients continue to receive the high level of service.

Finnell will be based in Sydney and report to head of distribution Jonas Daly.

“Eric’s experience on both the funds management and advisory side of financial services gives him a unique insight into the intermediary market, which will be instrumental in supporting our institutional clients as well as the expansion of our global product base,” Daly said.

Bennelong is part of the BFM Group, an investment company that partners with boutiques asset managers across the globe to deliver actively managed equity funds.

Outside Australia the group operates as BennBridge, with a presence in the UK and US. Last year BennBridge announced two new partnerships with UK-based boutiques, BambuBlack Asset Management and Skerryvore Asset Management.

Frontier Advisors bolsters leadership David Jenkins will step into the role of head technology and operations at Frontier Advisors.

Jenkins joins Frontier from his role as head of product APAC for Liquidnet.

He previously was director, global partnerships at Thompson Reuters and global head of strategy and product at Bloomberg.

02: Matthew Done

Jenkins will be returning to Australia for his new role, after 16 years abroad in London, Hong Kong and New York.

Frontier Advisors chief executive Andrew Polson commented on Jenkins’ appointment, saying that it should excite the Australian market.

“David has a most impressive pedigree in the investment technology arena. There will be very few people in the Australian investment landscape with the depth of experience and breadth of background that David will bring to Frontier,” said Polson.

“Technology is an area of significant focus for Frontier as we look to extend our advantage into areas well beyond the research and modelling Frontier is already known for. David has strong experience with emerging tech areas, such as machine learning, and has a global knowledge of institutional investing.”

Jenkins will begin his role with Frontier on August 24 and will lead a team of nine dedicated technology developers, architects and data specialists.

He said he is looking forward to returning to Melbourne and joining Frontier.

“I’ve been fortunate to work in a number of leading technology businesses and with many investment managers and asset owners from around the globe,” Jenkins said.

“The opportunity to bring both of those facets, spanning over two decades of experiences, together into a role that aspires to take a strong technology position to an even higher level is a very exciting proposition.”

Wealth platform appoints technology lead A specialist wealth management platform has appointed a chief technology officer, bringing over 20 years’ experience in technology roles in Australia.

WealthO2 has appointed Matthew Done 02 as its chief technology officer, set to report directly to managing director Shannon Bernasconi.

Bernasconi said Done will bring a wealth of experience to the platform.

“Matthew is a highly accomplished application architect and development manager with experience managing and implementing several mission critical systems development projects,” she said.

“He has over 20 years’ experience in technology roles across a variety of industries from banks, to telecommunications to financial services companies, and he has solid experience in the implementation and management of software applications.

“He is an agile practitioner, who specialises in horizontally distributed applications for the cloud.”

The appointment follows an increase in demand for the platform, she said.

Done joins WealthO2 from London-based global payment provider WorldFirst, where he served as a technical principal in Sydney. Previously, he worked as a chief technology officer at FX hedging and payments company CurrencyVue, which was later acquired by WorldFirst.

He has also worked in software development at SAI Global, Nine Entertainment, Lucsan Capital, expanz, Macquarie Bank, Commonwealth Bank, and AAPT. fs

14

Feature | Property

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

A HEALTHY ARGUMENT Healthcare property has grown in popularity over the last two decades, as investors scramble for access to an industry set to benefit from Australia’s unfolding demographic trends. Harrison Worley writes.

Property | Feature

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

S

pend even just a short amount of time taking a look at the key statistics and trends of Australia’s health system, and you’ll quickly discover things aren’t looking fantastic.

The status of the nation’s healthcare system is perhaps one of Australian media’s favourite go-to stories - particularly during election years.

Whether it’s the availability of beds, the waiting times for elective surgery, or the hours worked by our frontline health staff, Australia’s health system always seems in a spot of bother.

Famously public, the system costs the government billions.

According to the 2019-20 parliamentary Budget review, total health spending this financial year was anticipated to reach $81.8 billion, or around 16% of federal government expenditure.

It’s also not negotiable. Strong health systems are required for societies to function, a fact which has been underlined more than ever given the recent demands placed on the system by the COVID-19 pandemic.

A major focus for its critics, the infrastructure and properties underpinning the healthcare system - such as hospitals - seem to constantly be labelled as crumbling.

Which makes sense, particularly when viewed in light of the nation’s ageing population, the longer life expectancy of our citizens and the fact more Australians are living with long-term health conditions than ever before, meaning more time in hospital beds.

While it all may sound a little morbid, it’s this combination of factors that presents a compelling opportunity for investors to take advantage of.

Under pressure Centuria Heathley managing director Andrew Hemming01 says pressure is increasing on Australia’s healthcare system.

He says demand for health services is increasing because Australians are living longer, a fact which isn’t lost on investors who he walks through the assets he manages on their behalf.

“It becomes quite tangible as to why we’re doing this,” Hemming says.

“But not enough money has been spent on this space of social infrastructure. And it will definitely need to be spent and it will come from the private sector. It won’t necessarily come from the government because the government just cannot afford it.”

Real Asset Management Group head of real estate Will Gray02 agrees.

“Public health care fund allocations has to go to upgrading existing fleet,” Gray says.

“If you look at all of the public hospitals, they’re all crying out for significant upgrades.

So they all either need more beds, or a lot of the build form was constructed 30 or 40 years ago.

01: Andrew Hemming

02: Will Gray

03: Chris Smith

managing director Centuria Heathley

head of real estate Real Asset Management

general manager of healthcare property Australian Unity

“A lot of medical property fixtures are highly specialised, like radiology equipment, and equity expensive.”

Gray says governments will focus their spending on upgrading existing hospitals serving Australia’s communities, however that spending doesn’t alleviate the pressure of an ageing population.

“That’ll mean that there’ll be more pressure as our population continues to get older and the demand for healthcare property becomes more and more prevalent,” he says.

“And you’re not just talking about the next five years, it’s the next 20 years. The privates will just have to take that up, there’s no-one else that can.”

Growth gallop Hemming has run Centuria Heathley since 2013 - known as Heathley prior to Centuria’s acquisition of a 63% interest in the firm last year - and has grown the firm’s portfolio to a suite of 50 healthcare properties in that time, with a tick above $700 million in assets under management.

The firm’s growth over the last seven years speaks to the upward trend in the sector, as investors recognise the performance capabilities of healthcare property and clue themselves up about the challenges the nation will face in providing enough supply to meet the system’s increased demand over the coming decades.

AustralianUnity general manager of healthcare property Chris Smith03 says that over the last 20 years the local healthcare property market has continued to grow, with sentiment underpinned by the high-quality of health services offers and, again, the nation’s ageing population.

“The result of an ageing demographic, together with an increased requirement for the provision of healthcare services including private hospitals and their range and quality of accomodation are fundamentals that provide owners of healthcare property confidence that this sector will continue to provide a long-term secure investment,” Smith says.

Smith says MSCI - then IPD - released the Healthcare Property Index in February 2012, which at the time was comprised of $947 million worth of direct healthcare property owned by healthcare REITs. Since then, Australia’s healthcare property sector has continued to grow, with more than $6 billion in healthcare property estimated to be held by both listed and unlisted REITs. “As an example of sector growth, since February 2012 the Australian Unity Healthcare Property Trust’s (HPT) direct property portfolio has grown from around $390 million to over $1.85 billion,” Smith says.

Smith says HPT’s growth - it now manages 59 properties housing 165 tenants with a weighted average lease expiry of 13.29 years and gearing of 21.9% - has been through a combination of acquisitions, brownfield and greenfield developments and capitalisation rate compression.

Not enough money has been spent on this space of social infrastructure.

And it will definitely need to be spent and it will come from the private sector.

Andrew Hemming

15

CBRE Capital Markets Australia director of healthcare & social infrastructure Sandro Peluso 04 says that even amid one of the most challenging economic environments in Australian history in COVID-19, the healthcare property market continues to perform well.

“There are several reasons for this, not least of which is an appreciation for the vital role our healthcare system plays in our community,” Peluso says.

“Another factor is the healthcare sector’s long history of strong investment returns, even during difficult economic times.”

A June 2018 research report produced by CBRE shows private hospital investments have returned on average around 16% p.a. over the past decade, outperforming office, retail and industrial, the three core property classes.

While performance is still being collated across 2019/20, the firm says they were only marginally lower at the start of the financial year.

Peluso says that while COVID-19 will be felt across all investment sectors, its impact in healthcare has been minimal so far.

“Our team has seen a slight slowing of new stock coming onto the market, but there are still quality assets to choose from and competition from domestic, international and institutional buyers,” he says.

Institutional interest Frontier Advisors head of property research Jennifer Johnstone-Kaiser05 says the sector has been gaining momentum and interest, particularly over the last five years.

However, she says large investors have been faced with some roadblocks in adding exposure to healthcare property to their portfolios, with scale proving difficult to access unless large sets of partners banded together.

“I think the interest is still there. It’s very attractive from a diversification principle. Long weighted average lease expiries (WALEs) and strong lease covenants are sought after by institutional investors,” Johnstone-Kaiser says.

Though the Frontier research boss says it’s more difficult for super funds and investors of a similar size to achieve that diversification through healthcare property.

“A $10 million ticket size does not move that needle,” she points out.

“It needs to be in the order of $200-$300 million to achieve meaningful scale, depending on the size of the investor of course. For smaller and medium size funds, a reasonable allocation to healthcare would be in the order of $25 million to $50 million.”

“That’s the challenge.”

Despite this, Johnstone-Kaiser says funds are still intrigued by the sector’s performance, which she notes has outstripped its property sector brethren.

16

Feature | Property 04: Sandro Peluso

director of healthcare & social infrastructure CBRE Capital Markets Australia

“The sector is primarily made up of non-institutional funds, retail funds, private operators and not-for-profit groups,” she says.

“Clearly the performance comes from having good lease covenants with long WALEs. Typically tenants are operators with good feasibility models, strong viability, less reliance on government subsidies and support.

“So that makes the income stream attractive from a risk return perspective.”

Some funds have been successful in picking up an exposure though.

The $4 billion industry fund Legalsuper confirmed to Financial Standard that it invests directly in healthcare property through a mandate with Barwon Investment Partners, which is understood to be worth around $39 million.

And late last year the industry superannuation fund responsible for the retirement savings of more than half of all Australians working in the health and community services sectors (HACS), HESTA, awarded a $200 million healthcare property mandate to ISPT, to take advantage of the aforementioned trends.

The fund’s chief investment officer Sonya Sawtell-Rickson06 says the fund seeks opportunities to invest in the sector through other property trusts it invests in too, in an effort to diversify its property holdings.

“Health and community services is projected to be one of the fastest growing sectors of the Australian economy, making it an attractive segment,” Sawtell-Rickson says.

She says the fund has developed very deep relationships with the sector over its 32 years serving its workers, which she believes provides it with a “real investment edge”, which can be leveraged to generate deal opportunities and “strong, long-term returns for members, while supporting jobs and growth in the sector where they work”.

Plans to broaden the fund’s exposure are already in train, with a pipeline of potential deals and strong interest since the strategy was launched.

Sawtell-Rickson says metropolitan and regional city locations across a broad range of deal structures form the bulk of the fund’s focus.

“We’re a long-horizon, patient investor so we’re very aligned with HACS organisations that are similarly wanting to make very longterm decisions about their real estate needs and want a stable, trusted investor to partner with,” she says.

Only a month earlier, Hemming managed to sew up a $500 million mandate with global asset manager, AXA Investment Managers.

He says the firm had begun to pique the interest of institutional investors, who were seeking to establish a foothold in the local healthcare property market.

Hemming notes $500 million mandates are not a particularly big deal for the $1.326 tril-

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

05: Jennifer Johnstone-Kaiser

06: Sonya Sawtell-Rickson

head of property research Frontier Advisors

chief investment officer HESTA

lion global manager, but says it’s likely AXA’s investment won’t stop at a few hundred million dollars.

“It’s a toe in the water, but it will increase.”

Hemming says the firm is confident it will be able to grow the AXA mandate - which is exclusive - relatively quickly.

“We’ve got a good pipeline that we’re working through with AXA and Grosvenor, which is at the heart of the mandate’s strategy, that is, short stay hospitals and specialist centres. Quite often we look at new developments with new healthcare operators entering the industry,” he says.

Asked about the interest of local institutional investors such as superannuation funds, Hemming says certain funds have been in touch.

“The super funds are growing an interest in the space,” Hemming says.

He says local funds are trying to get into the market with internal teams, with names such as State Super and AustralianSuper “really interested” in the sector.

Though touching on Johnstone-Kaiser’s earlier point, Hemming says super funds are still “trying to get their head around” the sector’s size constraints.

“I imagine many super funds have found it difficult getting their collective heads around the fragmented nature of the healthcare property sector. Particularly given they’re more used to buying very large commercial properties,” he says “Initially, it’s a hard industry to get your head around quickly - as the complexity not only lies in understanding the funding models, but also building the sticky relationships with key stakeholders. This takes time.”

Hemming says the firm is now starting to see portfolio opportunities ranging from $100 million to $500 million.

“So now those institutional investors, pension funds and the like, are really interested. Because it’s now at a stage where they think, `Right, I can understand this segment of the health chain,’ and spend some time knowing that the economics for that part of the chain with those businesses are scalable,” he says.

“It’s harder for newer entrants to do that because relationships are paramount in this space.

“Building relationships helps investors understand how healthcare providers’ businesses are performing, what forces impact on their business model and how to help healthcare providers think through those impacts.”

Hemming says Centuria Heathley is “just growth capital for these businesses”.

“It happens to be through land and building, but we’re providing them with the opportunity to use their capital more wisely and to grow margin in their healthcare business,” he says.

Liquidity fears While institutional investors are turning towards the sector more, smaller investors are telling a different story.

Health and community services is projected to be one of the fastest growing sectors of the Australian economy, making it an attractive segment.

Sonya Sawtell-Rickson

Of the five financial advisers Financial Standard approached for this feature, only one has a direct exposure to healthcare property.

According to Evalesco Financial Services director Marshall Brentnall07, advisers are wary of the sector due to the need to invest in illiquid assets, even when they come in a liquid structure such as a unit trust.

“We basically err on the side of caution and stay away from them because we just don’t want our clients to get money locked up for three years, or five years if situations change,” Brentnall says.

Brentnall says that while he doesn’t doubt the strategy behind it stacks up, he doesn’t want a client’s “entire portfolio held to ransom with one administrator” because they have 6% in a healthcare property trust.

He says the firm’s philosophy was borne out of the Global Financial Crisis.

“Property by its very nature is an illiquid asset. You can’t sell off one of the bedrooms or one of the medical suites of a large healthcare facility if you need money,” he says.

“Superannuation funds for advised clients are typically designed to be liquid. If you need to establish an income stream, access capital or make changes you want to be able to do that.

“And if you’re investing in something that is inherently illiquid but in a liquid structure, you’re just opening yourself up.”

The one adviser with a direct - albeit small exposure to healthcare property who spoke to Financial Standard, Lifespan Financial Planning chief executive Eugene Ardino 08 , agrees with Brentnall’s sentiment, and says the firm doesn’t do much investing in unlisted property.

“I think in advice circles any sort of unlisted property fell out of favour after the GFC, and I’d probably put us in that bucket as well,” Ardino says.

“There has been the odd healthcare property trust that we have used historically.”

Ardino says a problem for advisers looking to add exposure to the sector is the rarity of access to the high quality funds.

“A lot of the very good ones don’t open very often, and when they do open they fill up whatever amount they were trying to raise very quickly,” he says.

“So whenever that happens we let advisers know that it’s available for a short time, but it becomes oversubscribed very quickly.”

In the instances where Lifespan’s advisers have made the call to get into healthcare property, the central trends that underpin the decisions of most to invest in the sector have risen to the fore.

“There’s always going to be a growing demand for healthcare in a country with an ageing demographic, there’s no two ways about that,” he says.

“You’re always going to get demand for healthcare and so it makes sense as an asset class

Why Invest in the Australian Healthcare Property Sector?

Healthcare property has had sustained success because of the following characteristics: Stable revenue streams (backed by government funding) allows tenants to commit to longer term leases, creating greater revenue stability.

Non-discretionary nature of healthcare expenditure limits exposure to economic downturns.

Strong returns and relatively low volatility when compared to other traditional real estate asset classes.

Sources: Australian Bureau of Statistics, Australian Institute of Health and Welfare, Health Expenditure Australia 2017-2018

So what are the main drivers that underpin the healthcare property sector?

Learn more: centuria.com.au/healthcare-ebook

18

Feature | Property

if you can find good managers that can select good investments and you can be diversified.”

Ardino says the type of clients ripe for the sector are those who are comfortable with not being able to redeem their investment on short notice.

“That’s all fine provided you as the adviser understand that, you make sure the client is aware, understands, and accepts that, and that it’s appropriate for their needs.

“If they need the money in six or 12 months’ time, well then it’s certainly not appropriate.”

Overall, Ardino recognises that healthcare property will always be underpinned by the fact that regardless of the state of the economy, healthcare is a primary need.

“It’s kind of recession proof. People get sick in good times and in bad times, and they’ll always find the money to spend on healthcare,” he says.

Cost and transparency From Centuria Heathley’s point of view, there are two key issues which ensure the viability of the firm’s thesis: cost and transparency.

With a background in economics and financial market derivatives, Hemming became focused on industries built by non-discretionary demand which were fragmented and offering only a few players, when he decided to turn to healthcare property.

He says that as a nation, we are living longer but not necessarily better.

“There is an ageing population. There is a population that is growing, sadly, in terms of multi-morbidity. That is, people are living longer with chronic health issues that need to be treated on an ongoing basis,” Hemming says.

Thanks to improvements in detection and treatment, more Aussies are living with multiple chronic health issues, such as diabetes, or respiratory and skeletal problems, to name just a few.

“So what that does, it puts more pressure on the health system,” Hemming says.

He points out Australia’s activity-based health funding model - which sees the system earn revenue based on the number of patients it treats - incentivises the system to increase volume.

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

07: Marshall Brentnall

08: Eugene Ardino

09: Ursula Tonkin

director Evalesco Financial Services

chief executive Lifespan Financial Planning

head of listed strategies Whitehelm Capital

It’s kind of recession proof.

People get sick in good times and in bad times, and they’ll always find the money to spend on healthcare.

Eugene Ardino

“Now that’s good if wages increase,” Hemming says.

“Given that wage growth continues to fall in Australia, there is a greater risk that over time there will be a continued reduction in the participation rate of those who buy private health insurance.”

But they aren’t increasing enough.

Measuring the changes over time in the price of labour services, the Wage Price Index shows Australia’s wage increases have been becoming smaller over the last decade, having tumbled around 2010 before fluctuating around the 2% mark over the last couple of years.

With the cost of private health increasing to the tune of between 6% and 7% every year, Hemming says a dislocation between private health and its cost has emerged.

Extrapolated forward, the fear is that what we see in the US with Obamacare and Medicaid will happen in Australia, whereby we find ourselves with dislocation of private health and public health.

Right now, around 46% of Australians are covered by private health insurance. But that number is 2.8 percentage points lower than it was about five years ago.

If such a scenario were to take place, the next question to ask is how insurers will stem the loss of customers.

“They, health insurers, are incentivised to build transparency on the models of care from a health outcome and cost perspective, and to then measure these outcomes,” Hemming says.

Whitehelm Capital head of listed strategies Ursula Tonkin 09 is less certain, and says that when it comes to healthcare infrastructure whose definition she says largely overlaps with that of healthcare property - the themes and trends espoused by fund managers aren’t automatically a ticket to high returns.

“In a low interest rate environment, real assets such as healthcare infrastructure have a strong appeal for institutional investors,” Tonkin admits.

“However a rapid growth in healthcare costs and an ageing population does not necessarily translate into high returns for healthcare infrastructure.

“Low risk ‘core’ infrastructure assets will remain tightly bid, while investors seeking higher yielding assets will need to move outside of traditional definitions of infrastructure and take on more operating or developmental risk.”

Hemming says the firm’s strategy is “really clear” when boiled down to cost and transparency.

Our strategy is focused on acquiring the real estate in the parts of the health chain that are focussed on more efficient and effective models of care,” he says.

Hemming runs a portfolio of 50 properties across the nation, including a mix of day hospitals and specialist centres, medical centres and aged care facilities, which he says are designed to give people the right care, and to keep them in bed for only as long as they need to be.

“The two biggest areas of cost in the health chain are prosthesis and then accommodation, keeping people in bed,” Hemming says.

He points to the per diem cost of hospitals at around $2500 to $3000 a day, and the revenue generated from prosthesis manufacturing as a cash cow for private hospital operators.

“He says that by spending $70 to $90 and getting proper GP care - instead of a turnstile service which Australians can often receive - then over the years, across the population the overall expenditure in hospital care will drop.

“The hospitals that we own through the property funds include some same day operations. Even for those who are older patients, they leave within one to two days,” he says.

The average length of stay in a big private hospital is probably about five days for hip surgery. That extra four days of rent drives upwards the costs of health insurance.”

By using better surgical techniques, and providing people with the “Volvo prosthesis” - Hemming says the Rolls Royce option isn’t appropriate for most - the firm can deliver a better cost outcome and experience for the patient.

Which sounds like a pretty good thesis for a nation that spent close to $100 billion on healthcare last year. fs

Drivers of the healthcare property sector: Ageing Population

Longer Life Expectancy

Chronic Disease Occurrence

Focus on Preventative Care

Learn more: centuria.com.au/healthcare-ebook strip ad.indd 1

2/6/20 1:08 pm

Introducing Centuria Heathley Healthcare property fund managers H E A LT H CA R E P O R T F O L I O

$

99 750

%

Occupancy

m

Assets under management

40 50

yr

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Assets

As at 1 February 2020

Centuria Heathley is focused around three key areas: Surgical or Ambulatory Care

Aged Care

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Read our Healthcare ebook today, and be among the first to know about our future investment opportunities: centuria.com.au/healthcare-ebook

20

International

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

WTW sells Swedish firm Willis Towers Watson has offloaded insurance and financial advice business Max Matthiessen to private equity firm Nordic Capital.

Max Matthiessen has been operating since 1889 and saw revenues in 2019 of about $242 billion.

Terms of the deal were not disclosed.

Nordic Capital said that by investing in the firm it plans to support its expanded customer offering and next stage of sustainable growth and innovation to realise its full potential.

Going forward, the joint focus will be on scaling Max Matthiessen’s operations and investing in organic as well as acquisitive growth.

Together with the Company, Nordic Capital will support continued product innovation to the benefit of the customers and pension savers,” Nordic Capital Advisors partner and head of financial services Christian Frick.

“We are excited to partner with Nordic Capital for the next chapter of Max Matthiessen’s development. We are wholly aligned when it comes to our strategic vision,” Max Matthiessen chief executive Bo Ågren said. fs

US regulator settles with Ares Kanika Sood

Ares Management LLC, which has a joint venture with Challenger’s Fidante Partners in Australia via a related company, has paid US$1 million to settle charges alleging it traded in a portfolio company based on non-public information while an employee sat on its board.

The Los Angeles based alternatives manager, did not admit or deny the findings, but agreed to a cease-and-desist order, a censure and the US$1 million civil penalty.

The Securities and Exchange Commission (SEC) alleges that in 2016 Ares invested several hundred million dollars in debt and equity of a publically listed company, and as a part of the investment appointed a senior employee to its board, who passed on nonpublic information on which Ares increased its stake in the company.

“The order finds that Ares’s compliance policies failed to account for the special circumstances presented by having an employee serve on the portfolio company’s board while that employee continued to participate in trading decisions regarding the portfolio company,” the SEC said.

“According to the order, Ares obtained potential material nonpublic information about the company, including through Ares’s representative on the company’s board, relating to changes in senior management, adjustments to the company’s hedging strategy, and decisions with respect to the company’s assets, debt, and interest payments.”

SEC said after receiving this information, Ares purchased more than one million shares of the company’s common stock, representing 17% of the publicly available shares in the company that was not named. fs

01: Andrew Cuomo

Governor, New York

Death benefits mandated for frontline workers Jamie Williamson

N The quote

There’s not a transit worker who drove a bus or conducted a train or a nurse who didn’t walk into an emergency room who wasn’t scared to death.

ew York Governor Andrew Cuomo01 has mandated death benefits for frontline workers in the state, to be paid out of local and state pension funds.

Speaking on Memorial Day, Cuomo said local or state pension funds will pay death benefits to any public employee – state, local or county-level – who has died or dies as a result of COVID-19 and also implored the federal government to provide those who care for the ill with hazard pay.

“As John F. Kennedy said, remember with your actions. And today we say we’re honouring that service, and we’re going to make sure every government in the state provides death benefits to those public heroes who died from COVID-19 during this emergency,” he said.

Cuomo said he would make sure that every government in the state of New York provides death benefits to those who showed up because

he asked them to, and to the families of those who have died as a result.

“They showed up because I required them to show up. There’s not a transit worker who drove a bus or conducted a train or a nurse who didn’t walk into an emergency room who wasn’t scared to death,” Cuomo said.

However, whether or not it’s actually possible is another thing. For example, according to Foundation for Economic Education, New York City’s debt is estimated at just shy of US$200 billion and about 75% of this is down to pension and retirement liabilities.

New York City has been hardest hit in the state when it comes to COVID-19 and is home to numerous pension plans. Pension contributions account for about 11% of the city’s total budget and consume about 17% of tax revenues.

That said, according to Pew Charitable Trusts, public pension plans in the state of New York was about 90% funded overall as at 2017. fs

US pension funds approach point of no return The issues facing public pension funds in the US are widely known, and while it’s not clear how exposed to the recent market correction funds were, analysis from Wirepoints of 2018 data shows some may have reached the point of no return.

Looking at asset-to-payout ratios of 148 state and local pension funds with more than US$2 billion in assets, the worstoff funds are those that are already well known for their pension shortfalls. These are in Kentucky, Illinois, New Jersey and Connecticut.

Using the asset-to-payout ratio, a measure used by Moody’s to measure pension funds’ health, Wirepoints determined some funds had assets equal to just a few years’ worth of benefits.

In contrast, the strongest funds had assets equal to 20 years or more of payouts before COVID-19 hit, with some over 40 years. The strongest fund, DC Police & Fire, is 114% funded and has an asset-to-payout ratio of 54.8 years.

Kentucky’s Employee Retirement System ranks as the weakest fund, with just 2.5 years of assets to fund benefits.

According to Kentucky’s Bluegrass Institute for Public Policy Solutions chair Aaron Ammerman, this particular fund is at a level no public pension has ever recovered from.

Other funds in the state are in a similarly tight spot, with both county-level and teacher funds with less than 10 years’ worth of payouts left.

Illinois looks to be the state in the most trouble, with six of its funds ranking among the 15 weakest in the nation. Three funds are at the state-level, the other three are Chicago-based and all looked able to sustain just eight years or less in payouts two years ago.

In 2018 the New Jersey Teacher’s Fund had US$26 billion – enough to cover just six years of benefits. This sees it rank fourth for weakness, while the state’s public employee plan comes in at 15th spot as it can cover just eight years’ worth.

The report says that if the downturn lasts throughout the rest of the year, the state of New Jersey won’t have the liquidity to pay pensions in full or, possibly, at all.

According to the report, if funds run dry they will likely switch to pay-as-you-go systems, meaning pensioners will be forced to rely on the operating budgets of employers to get their retirement funds.

“Collapsing to pay-go status is risky given that sponsoring governments would have to make even bigger contributions directly from the operating budgets. With no pension assets left, they’d be responsible for paying the full amount of pension benefits each year,” the report reads.

“Some governments can’t afford that considering they’re at risk of going broke themselves.”

The report says that’s the case for Chicago which was junk rated by Moody’s before the pandemic hit, already had about US$240 billion in pension debt and has 53% of its revenues directly exposed to COVID-19.

According to a recent report from Pew Charitable Trusts, one in five state tax dollars is already going to pay for pensions in Illinois before factoring in any revenue declines associated with the pandemic.

Of the 17 Illinoisan public pension funds covered by the Wirepoints data, 12 have asset-to-payout ratios of less than a decade. All others have ratios of less than 19 years.

Illinois is now seeking a bailout of its pension funds, with US$20 billion requested in direct assistance for pensions as part of a wider US$42 billion bailout request mad in mid-April.

The move has been met with widespread criticism, with the editorial board of the Chicago Tribune saying the use of COVIDAccording to Wirepoints, any federal financial assistance should come with prerequisites focused on pension system reform. fs

Advisers Big Day Out | Events

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

Graeme Shaw

Peter Gardner

Matt Reynolds

Martyn Simpson

21

James Waterworth

Michael Angwin

Gavin Peacock

Advisers Big Day Out 2020 In its 18th year, Financial Standard took the annual Advisers Big Day Out (ABDO) roadshow online, offering video on demand to advisers looking to capitalise on the opportunities presented by COVID-19.

Opportunities amid pandemic Capital Group investment director Matt Reynolds said now is the time to consider which companies are going to get through the global pandemic well.

Reynolds admitted that the current COVID-19 induced economic pain is likely to get worse, before it gets better.

“We need to look for those opportunities that we believe have the ability to grow outside the regular economic cycle,” Reynolds said.

Reynolds and his team refer to these opportunities as secular opportunities and believe that the way to identify them is through rigorous, bottom-up research.

Capital Group has identified these opportunities as new consumer stocks (such cash digitalisation companies and millennial impact companies), digital disruptors, new defensives (such as cloud computing companies) and innovative healthcare stocks.

The thinking behind the opportunity in digital disruption is clear, Reynolds said.

His ABDO presentation itself, which was offered on demand on FSiTV as COVID-19 made large events temporarily impossible, could be seen as an example of how businesses are using technology to adapt to the current environment.

“As this presentation attests to, we are getting very used to using mobile data to conduct our business lives. That data is so much more efficiently transmitted over the 5G network,” Reynolds said.

Another likely winner from the pandemic will be healthcare stocks, he said.

“We see the medical sector as having strong growth even through a time of economic weakness,” Reynolds said.

Capital Group looked at research and development spend as a percentage of pharmaceutical profits and found that it has been growing significantly over time. This spend, Reynolds said, is likely to see the companies well positioned to continue to grow.

Reynolds explained Capital Group has strong allocations to cloud computing companies.

As the amount of data that needs to be stored grows, cloud computing companies see an increase in demand.

“Increased use of data is expected to power on even through this health crisis,” Reynolds said.

Amazon, Microsoft and Alphabet are some of the largest cloud computing providers.

Maximising retirement income The current low interest rate environment has made the pursuit for yield all the more difficult, with retirees forced further up the risk curve in their desire for income.

With the RBA purchasing bonds, signaling the three-year cash rate will remain at 0.25% going forward, retirees will no longer be able to generate income with anything linked to the cash rate, according to Plato Investment Management portfolio manager Peter Gardner.

This challenging income environment would likely persist for years to come, Gardner said.

We need to look for those opportunities that we believe have the ability to grow outside the regular economic cycle.

Matt Reynolds

“The overnight cash rate, the one-year term deposit rate, and the 10-year bond are all negative in real terms; below the rate of inflation,” he said.

“So if you’re investing in these kinds of assets in term deposits, for example, then your money is actually going backwards; you’re losing as much money in inflation as you’re gaining from the term deposits.”

Retirees are taxed differently, he said, with the first $1.6 million in pension phase tax free, while taxes are set at 15% for anything above that.

“What that actually means is a retiree can actually take advantage of some opportunities in the market that other more high taxed investors can’t take advantage of,” Gardner said.

Retirees also face longevity risk, he said, the risk of outliving your investments.

“There’s significant evidence out there that retirees prefer to live off their income rather than drawdown on the capital,” Gardner said.

In the current day and age, if a couple retires at 65 they can expect to live until 93, he said.

“That actually means you’ve got a 28-year investment timeframe as a couple to draw down your assets,” Gardner said.

“So if your only generating income through interest rate investments, where the average real return you’ve got is -0.05%, you’ll actually run out of money when you turn 81.”

If retirees can receive the pension, they can almost have enough money to live adequately until they are 93, he said, however they will completely run out of money by that age.

22

Roundtable Events | Advisers Big Day Out

“But if you can manage to achieve higher rates of return then that’ll survive you until that age of 93 and if you can get the pension as well on top of that, then you should be sweet living on that,” Gardner said.

As equities have almost never historically underperformed cash over a 28-year time frame, Plato believes it’s important for retirees to have a significant part of your investments in growth assets.

“We think it’s really important for retirees to have a significant balance of equities or growth assets in their portfolio and not to dial down their risk profile,” Gardner said.

“If you look at it since 2005, there’s been a 2.9% price return on the Aussie market, but if you include dividends that 2.9% price return increases to 7.5% accumulation, and if you include the franking credits as well on top of that then it becomes a 9.1% annualised return since 2005.

“So the market, when you include dividends and franking, has actually gone up significantly during that time.”

Will growth stocks dominate?

While growth stocks have dominated markets in past decade or so, Orbis Investment director Graeme Shaw said the debate of growth over value is not dead yet.

Shaw said that the lesson history has taught is that what goes up often comes down.

“Those downs can last for a really long time.

What’s true for the stock market overall, often tends to be true for the factors within the stock market,” Shaw said.

“If you look at the fact that it’s been shooting out the lights recently, it’s the growth factor, whereas it’s polar opposite the value fact that is squarely in the doghouse.”

Shaw said almost 100 years of the performance in US value shares relative to growth shows value has underperformed growth for about 12 years.

“Now it seems that 12 years is long enough for some commentators to say, perhaps this is permanent, perhaps growth is now going to win forever, which is a little bit curious because 12 years is not very long in the context of the stock market,” he said.

“It’s also curious because value has had a number of insights where it’s underperformed before.”

Shaw said four of these events were during the Great Depression, two were during oil crises, and two were during stock market bubbles.

“The interesting thing is when you look at these so called value death events, and what happens afterwards, you see it’s actually been a really good time for value investing over the next one to three years, on average value outperformed by 30 to 50%,” Shaw said.

“So far, from the death of value, these events look more like a zombie apocalypse for growth investors. And yet here we are, once again talking about the depth of value.”

Shaw said many investors believe that because big growth companies own many of the technology stocks, they are bound to perform better over time.

“I’m sceptical of this explanation for two reasons. The first is behavioural,” Shaw said.

“It’s well known as human beings; we tend to overestimate our own attributes that we deem to be positive.”

For example, Shaw said, 80% of drivers think they’re above average.

“When asked if we are better at creating new technology than our parents, it’s not just eye rolling teenagers who will say absolutely yes,” Shaw said.

“But is this really true? Are we really more innovative than the generations that have come before us? Well, if this were true, you would expect to see this faster rate of innovation reflected in a higher rate of GDP per capita growth.”

Shaw said this is something the data just simply doesn’t show. Pointing to the US as an example, Shaw said the GDP per capita in the US grew at 1.5% in the decade following the GFC. “It was actually higher than that in a decade before the GFC and even higher in the 40 years prior to that,” he said.

“So, in fact, we have not been getting more innovative, in fact, if anything, slightly less innovative than prior generations.”

Shaw said when you look at the history, growth stocks are generally better companies that do genuinely grow faster, but they also generally underperform.

“The reason they underperform is that the growth they manage to deliver tends to be, on average, less than the growth that is expected and built into the share price,” Shaw said.

“However, over the space of a decade or so valuations are a very good indication of the returns that will eventuate.”

Shaw said that stocks can underperform inflation for time scales up to 20 years, but this doesn’t mean investors should conclude stock market investing is broken.

“When growth managers say value investing is dead, you should be equally sceptical,” he said.

“Value investing looks quite exciting, not only because the valuation gap between the value shares and the market is historically very high but also because we are very close in time to a point where value investing does unusually well.”

The value of government bonds In times of market volatility, the role government bonds play can assist investors in securing the defensive element of their portfolios.

Martyn Simpson, investment officer at Colchester Global Investors said global bonds, Aussie dollar hedged, produced returns of around 20% through the GFC, whereas Australian equities were down quite considerably through that time period.

“I’m not saying that global bonds are always going to do this but this is why you hold them as a defensive allocation in your portfolio to add some kind of balance through these bad times and to be honest with through the bad times we’re experiencing now,” Simpson said.

Simpson said a number of investors like credit, and believe they have an allocation to fixed income through a credit allocation, but that is not the best way to generate returns.

“There’s nothing wrong with credit as a medium of trying to generate returns but what you’ve got to remember is that at times of market stress credit does not hold up, as well as government bonds,” he said.

“A cycle goes on where investors tend to become a bit fixated with the income side rather than the fixed and defensive nature.

“And there’s a simple rule of thumb; the more income you’re generating from your fixed income portfolio, the more risk that you’ll be taking.”

Simpson said he believes global bonds offer good diversification within an overall portfolio despite not necessarily having the most compelling returns.

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

“But, as we’ve seen through this coronavirus experience that traditional safe asset role has continued, that safe haven of global bonds is still doing the same job it’s always done in the past,” he said.

“Just because the yields were lower didn’t make any difference.”

Simpson said that while in volatile times there is no guarantee that government bonds will outperform, the liquidity offered can be a huge help.

“We’re doing what you’d expect a global bond manager to do at times like this,” he said.

“Nobody can ever guarantee liquidity, but at times of market stress other market participants are looking to sell down the risk assets they own and buy government bonds.”

Simpson said when the bad times come, you need to be “reasonably” defensive.

“I can’t promise things in terms of alpha or that we’re always going to do really well but we’re going to be in that defensive ballpark, simply because of the way that we invest,” he said.

Investing in a COVID-19 world

There’s a simple rule of thumb; the more income you’re generating from your fixed income portfolio, the more risk that you’ll be taking.

Martyn Simpson

Presenting for the sixth year in a row - but for the first time via video link – veteran investor Bruce Campbell discussed how the firm plans to invest in the year ahead.

Campbell, who founded Pyrford’s predecessor company in 1982 and now works as an advisor following an acquisition by Bank of Montreal Group in 2007, said he hasn’t seen anything like the current crisis in his five decades in the market.

“We are looking down the pipe here of a serious, global recession. We don’t know how long, how deep but we are going to cop one, we can’t avoid it [because] supply and demand have both collapsed in this [world] thanks to COVID-19,” Campbell said.

Looking forward, Campbell thinks equities are the only long-term solution from COVID-19 as a starting point, government bonds offer no value and international diversification will be essential.

“We’ve now removed 30% or more of that value from these [equity] markets so finally, we can say – hand on heart – we are getting some value in these equity markets. And believe me it’s been a long-time since we’ve been able to say that,” he said.

“Bond markets offer no value...So, our policy is, let’s gradually increase our equities exposure here,” he said, adding well-managed companies with higher than average dividend yields, modest debt and sustainably high return on equity remain the ‘magic combination’.

Geographically, Campbell sees Japan and mature European economies facing headwinds in the next few months.

“There is a real danger that countries like Italy and Greece and parts of the former Eastern Bloc will need to break away because they will need an independent monetary policy and fiscal policy, and they don’t have that whilst they are a part of the Eurozone.”

Pyrford’s Global Absolute Return strategy has been available in Australia for eight years and the locally domiciled fund is in its sixth year.

The fund aims to preserve capital over each 12-month period and has had only two negative calendar years in the last 25 years.

It has also beat inflation with significant margin with a 7% per year return since April 1994 inception and reported half the standard deviation of the equity market, according to BMO Global Asset Management (Asia) Limited director, intermediary business Michael Angwin.

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

“For over 20 years, we have found that in order to deliver our goals we need access to three broad asset classes: high quality global equities, which includes Australia, high-quality sovereign bonds and cash and an overarching currency program that helps us to identify currencies that are either expensive, fair value or cheap,“ Angwin said.

“This doesn’t mean that we don’t invest in assets like infrastructure, property, commodities or anything that’s alternate to companies, we do.

“We take exposure to this throughout various cycles but we will only do it through the listed equity markets which will provide us with the liquidity that we like and the transparency that we need.”

Decarbonisation an opportunity Despite including some of the highest polluting companies on earth, global listed infrastructure stand to benefit from the world’s efforts to decarbonise.

While the move towards decarbonisation may spook many people invested across global listed infrastructure firms, CBRE Clarion Securities senior vice president and senior analyst for Asia Pacific Gavin Peacock believes the world’s move away from carbon pollution represents a fantastic opportunity for the sector, particularly if those within it choose to create and own renewable energy plants.

Peacock said there is an opportunity for many global listed infrastructure firms to make renewable energy investments in a much lower risk profile than they have been historically.

“The cost of these renewable investments has come down dramatically, and of course it now has very strong regulatory and government support, which reduced the risk of that investment,” Peacock told advisers.

The CBRE analyst said decarbonisation was a strong opportunity for global listed infrastructure to not only realign itself from an economic perspective, but also to build a strong brand and get a reputational uplift. Further, Peacock said firms could tap into the potential for strong investment returns too.

“This decarbonisation theme touches all parts of the infrastructure market,” he said.

For midstream firms, Peacock said the benefit of decarbonisation would be felt in the increased demand for gas, noting it emits half the carbon of coal when burnt to use energy.

“As a result, we’re seeing many markets - particularly in emerging Asia - look at gas as an alternative way to be able to keep their economies going, but by using much less carbon than they have been historically,” he said.

Peacock said the investment opportunity had other prongs in ancillary parts of the infrastructure space.

PROUDLY SPONSORED BY

Advisers Big Day Out | Events “So much of this renewable production occurs in rural type locations and needs to be connected into the grid,” he said.

“So there’s fantastic opportunity for many of the companies in the transmission space.”

Peacock noted New South Wales’ estimated $10 billion alone in investments over the next 10 years to improve the amount of transmission lines across the state’s network. He added there were also great opportunities for companies in gas as it becomes an important transition fuel away from coal and toward more renewable sources of energy.

Closing, Peacock said the move towards decarbonisation was a long-dated structural theme which will continue to play out, even in a soft economic backdrop.

A strategy for equity success As advisers move to reposition their client’s portfolios for the new cycle, BlackRock has shared its four-step portfolio construction framework to help them construct an Australian equities portfolio.

According to the funds management giant, the BBIM framework; which stands for benchmark, budget, invest and monitor, helps advisers look past the binary strategies of “passive” or “active” to rethink Australian equities.

Benchmarking should be an adviser’s “north star”, national iShares specialist James Waterworth said, with asset allocation driving about 90% of investment risk.

BlackRock’s internal ‘think tank,’ the BlackRock Investment Institute, has forecast Australian equities will return 6.3% per annum over the next 15 years, he said, while emerging markets were forecast to return 8% in comparison.

If a client requires higher returns than 6.3% then an indexed Aussie equities strategy will not be sufficient, Waterworth said.

“We’re suggesting over the next 15 years we will be entering into a low return environment,” he said.

“So your asset allocation choices will be very important, but also when you think about an asset class like Australian equities, if you need a higher return than that 6.3% then you have to move into an active strategy.”

This low return environment will prove opportune for the country’s active managers, Waterworth said.

In terms of budgeting – he argues it is important to focus on both the cost of a client’s portfolio as well as its risk budget; the active risk or tracking error that a client takes over and above the benchmark.

“If you’re a balanced investor 50/50 equities and bonds, moving over or underweight leads to active risk,” Waterworth explained.

If you need a higher return than that 6.3% average, you are going to have to move along the risk curve for potentially higher returns, he said.

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23

“You can go into factor strategies that seek to outperform the index and have been proven [both] academically and from a practitioners perspective,” Waterworth said.

These factors include value, size, momentum, and quality, as well as factors that seek to reduce risk, like minimum volatility.

For those looking for even higher returns, Waterworth recommends advisers look to alpha managers.

“The first of these is systematic alpha; fundamental strategies that have a broad set of bets that are trying to beat the benchmark – and from a cost perspective, they’re relatively efficient,” he said.

Traditional fundamental strategies would also provide higher returns, as would highly concentrated strategies, he said.

“In the Australian landscape, this might be a fund that invests in 30 securities,” he said.

“When [advisers] see a manager has an edge, they will be investing into those high alpha concentrated strategies.”

For the investing portion of the framework, Waterworth recommends advisers find the perfect mix of indexed, factor and alpha strategies to meet their client’s objectives.

Despite indexed strategies outperforming the median active manager over the last three years, he maintains that active strategies will outperform going forward.

“Given the level of uncertainty, we think it’s the right market for active strategies,” Waterworth said.

“We’ve obviously seen an incredible amount of volatility in recent weeks and months with the coronavirus, so perhaps we will see a more fruitful period for active managers going forward.”

Advisers should diversify their client’s portfolios among several active managers, he said, with little to no correlation.

Just as an asset manager would diversify their holdings to manage risk, so too should an adviser diversify among strategies.

However, Waterworth advised against over diversification, which can result in index-like performance, he said.

Instead, he recommends advisers should use low-cost index strategies as a core component of their client’s portfolios, and consider using factorbased strategies for clients seeking differentiated returns at a low cost.

For client’s seeking higher risk-adjusted returns, he recommends advisers replace poor performers and allocate to systematic alpha-seeking strategies.

Finally, Waterworth recommends advisers actively monitor their client’s portfolios to assess whether they may need to change fund strategies.

Key signals to look out for include changing client objectives, unintentional risk in a portfolio, a shift in performance or style among managers, or when a financial adviser’s views on the market or managers have changed, he added. fs

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Between the lines

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

Fees drop at Raiz

01: Lucas Rooney head of institutional business Neuberger Berman

Harrison Worley

The management fees on Raiz Invest’s flagship fund have been cut in line with a drop in fees across two popular ETFs. Investors using the popular spare change investing app Raiz are set to benefit from lower management fees, after the firm passed on cuts to the fees of two of the ETFs its flagship product invests in.

Fees on both the SPDR S&P/ASX 200 ETF (STW) and the iShares Core Composite Bond ETF (IAF) have dropped to the tune of 0.06% and 0.05% respectively. The two ETFs form part of the portfolios Raiz customers can choose to invest in through the app.

According to Raiz, the fees have always been charged by the underlying ETF issuer and not Raiz, so were an indirect cost affecting the performance of investor’s portfolios.

A new product disclosure statement became available to investors, which outlines underlying issuer fees of 0.239% p.a. for members invested in the moderately aggres-sive portfolio.

Underlying issuer fees range from 0.211% p.a. to 0.428% across the firm’s range of invest-ment portfolios.

Speaking to Financial Standard, Raiz Invest managing director George Lucas said the impact to investors would depend on which portfolio they were invested in, according to the weighting of differing weight of both ETFs across the portfolios.

Lucas said the actual impact to investors would not be high, but said it would depend on their portfolio selection. fs

Super fund awards global equities mandate Eliza Bavin

The quote

To us, Neuberger Berman appears to be meaningfully ahead of the curve in building and implementing this approach.

S

tate Super has handed Neuberger Berman an undisclosed sum, following a tender process to identify managers that could play a differentiated role in State Super’s Global Best Ideas satellite manager portfolio.

“We ran a lengthy open search process to take stock of, and potentially allocate to underexplored investment ideas with long term alpha potential,” senior investment manager Andrew Huang said.

“Neuberger Berman responded to us with a unique and compelling proposition.”

Huang said Neuberger Berman was successful with its Global Equities Data-Science Integrated (GEDI) flagship strategy.

“Neuberger Berman’s GEDI strategy integrates investment insights gleaned from data-science disciplines to strengthen the firm’s existing ESG and fundamental research processes,” he said.

Rainmaker Mandate Top 20

“To us, Neuberger Berman appears to be meaningfully ahead of the curve in building and implementing this approach.

“We believe that supporting fundamental research with a solid data-science and ESG discipline will be a growing advantage over time.”

Neuberger Berman added a data science segment to its team of nearly 650 investment professionals three years ago.

The firm manages US$330 billion with US$83 billion in listed equity investments.

Lucas Rooney01, head of institutional business for Neuberger Berman in Australia, praised the companies GEDI portfolio manager and chief investment officer of research funds, Hari Ramanan. “[Ramanan] designed this global equities approach at our research epicenter to take active positions by uncovering long horizon insights, including from innovative uses of data science,” Rooney said. fs

Note: Latest equities investment mandate appointments

Appointed by

Asset consultant

Investment manager

Mandate type

AustralianSuper

Frontier Advisors; JANA Investment Advisers

Dimensional Fund Advisors

International Equities

1,114

AustralianSuper

Frontier Advisors; JANA Investment Advisers

UBS Asset Management (Australia) Ltd

International Equities

254

AvSuper Fund

Frontier Advisors

WaveStone Capital Pty Ltd

Australian Equities

86

Building Unions Superannuation Scheme (Queensland)

Frontier Advisors

First Sentier Investors

Australian Equities

131

Christian Super

JANA Investment Advisers

Alphinity Investment Management Pty Ltd

Australian Equities

76

Construction & Building Unions Superannuation

Frontier Advisors

Realindex Investments Pty Limited

Emerging Markets Equities

313

Construction & Building Unions Superannuation

Frontier Advisors

GQG Partners (Australia) Pty Ltd

Emerging Markets Equities

312

First State Superannuation Scheme

Willis Towers Watson

Sanders Capital, LLC

International Equities

First State Superannuation Scheme

Willis Towers Watson

Investors Mutual Limited

Australian Equities

540

First State Superannuation Scheme

Willis Towers Watson

Sustainable Growth Advisers, LP

International Equities

293

Hostplus Superannuation Fund

JANA Investment Advisers

Other

Australian Equities

158

Hostplus Superannuation Fund

JANA Investment Advisers

Other

International Equities

147

Maritime Super

JANA Investment Advisers; Quentin Ayers

IFM Investors Pty Ltd

International Equities

163

Maritime Super

JANA Investment Advisers; Quentin Ayers

Ninety One Australia Pty Limited

International Equities

103

Maritime Super

JANA Investment Advisers; Quentin Ayers

Other

Australian Equities

86

Mirae Asset Global Investments (Australia) Pty Ltd

Other

Australian Equities

446

MTAA Superannuation Fund

Whitehelm Capital

State Street Global Markets

Australian Equities

198

Statewide Superannuation Trust

JANA Investment Advisers

Paradice Investment Management Pty Ltd

Australian Equities

329

Sunsuper Superannuation Fund

Aksia; JANA; Mercer Investment Consulting; StepStone Group

Hermes Fund Managers Limited

Ethical/SRI Australian Equities

WA Local Government Superannuation Plan

Willis Towers Watson

River and Mercantile Asset Management LLP

International Equities

Amount ($m)

2,767

99 179 Source: Rainmaker Information

News

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

25

Products 01: Kris Walesby

New ETFs succeed as UBS suspends funds New research from ETF Securities has revealed that three new exchange traded funds (ETFs) saw tens of millions in inflows during the second quarter, while six UBS products exited the market.

The products included ETF Securities’ ETFS FANG+ ETF on March 2, BetaShares’ S&P/ASX Australian Technology ETF launched March 4, and Van Eck’s Emerging Income Opportunities Active ETF February 13.

ETF securities chief executive Kris Walesby 01 said the interest in these new products reflect investor’s confidence in the asset class, despite COVID-19 spurred volatility and disruption.

“These new funds have seen capital inflows of over $60 million to date,” he said.

“This trend gives us confidence that Australian investors will continue to seek new opportunities in the ETF market to capture attractive buying opportunities.”

However, May 11 saw the removal of six UBS ETFs from the ASX. These included the UBS IQ MSCI Asia APEX 50 Ethical ETF, UBS IQ MSCI Australia Ethical ETF, UBS IQ Cash ETF and the UBS IQ Morningstar Australia Quality ETF. Still, interest in ETFs has increased dramatically, Walesby said.

“According to recent data from the Australian Stock Exchange, pre-COVID-19 crisis ETF trades accounted for approximately 4% of total trades on the ASX but during the COVID-19 pandemic, this ballooned to about 10% of total trades,” he said.

“This may be a reflection of the appeal of diversification and versatility that ETFs can offer to investors.

“They realise that they can access a variety of asset classes at a relatively low cost and can be used as the building blocks of multi-asset portfolios.”

During the early stages of the pandemic, investors rushed to ETFs with exposure to traditional safe havens – like precious metals, gold, and broad-based market ETFs, Walesby said.

However, more recently investors had shifted to ETFs with exposure to Australian equity and property, he said, as well as an increase in shorterterm trading activity, with traders turning to cash, commodities and geared funds.

“We believe the ETF sector will continue to perform strongly– despite pressure from extreme market circumstances,” Walesby added.

AMP, Pendal launch new managed portfolio AMP has launched a new managed portfolio through its MyNorth platform to be managed by Pendal’s multi-asset team in partnership with the AMP research team.

The new retail offering will have an ESG focus with investments adhering to a responsible and sustainable framework.

AMP said the MyNorth Sustainable Managed Portfolio will be one of the first of its kind to be offered on a wrap platform in Australia.

BlackRock iShares launches two ETFs iShares listed two exchange traded funds on the ASX that invest in Australian corporate bonds.

The iShares Yield Plus ETF (IYLD) tracks a customised Bloomberg index that measures the performance of the Australian corporate bond market after excluding issuance from the big four banks.

IYLD is targeting 0.75% to 1% yield margin over the RBA cash rate and will charge 12bps per year as fees.

The second launch, iShares Core Corporate Bond ETF (ICOR), invests in Bloomberg AusBond Credit 0+ Yr Index and will charge 0.15bps per year in management fees.

Outside of the index, BlackRock will use ESG screens for both ETFs to exclude companies involved in controversial weapons, fossil fuels, tobacco, civilian firearms and UN compact violators. They will also exclude securities like convertible notes, zero coupon notes, private placements, CDOs, CBOSs, hybrids.

The launches take iShares’ fixed income product suite to eight ETFs in Australia.

The portfolio will be guided by three principles: transitioning to a low-carbon economy; avoiding thermal coal, tobacco, gambling, pornography and controversial weapons; and encouraging sustainable social and environment outcomes for the community in a positive way.

These principles were set by AMP in consultation with Regnan, a responsible investment advisory owned by Pendal.

The MyNorth Sustainable Managed Portfolio has an investment management fee of 0.20% per annum and estimated indirect costs of 0.69% per annum.

The fees are no higher than equivalent managed portfolios offered through MyNorth. For example, the Lonsec Balanced Portfolio charges a 0.25% investment fee plus weighted total indirect costs of 0.76%.

“MyNorth’s rapid growth over the previous year and a half reflects the investments and enhancements we’ve made to the platform, including significant fee reductions, technology upgrades and launching a range of new managed portfolios,” AMP managing director, superannuation, retirement and platforms Lara Bourguignon 02 said.

“We’ll continue to target our investment and enhancements for MyNorth toward the three aspects we know advisers and clients most value in a wrap platform: investment capability, administrative performance and value for money.”

AMP director of wrap product Shaune Egan said there is demand from financial advisers for sustainable and ethics driven investment products.

“Research shows that over half of Australia’s population are considering making ethical and responsible investments in the next five years.”

Egan said.

“Nine out of 10 Australians also believe it’s important that their financial institution invests responsibly and ethically across the board.”

ING rejigs super, closes balanced option ING’s Living Super offering is putting the lid on its balanced option after feedback from members that it’s too similar to the growth option, and will add two more defensive options.

From July 1, Living Super will shut its balanced option to new members but will allow old members [for the option] to continue making contributions.

“As a result of a review of the Living Super investment menu and member feedback, it has been identified that the balanced option, with an allocation of 62% to growth assets is too similar to the growth option’s allocation of 70% to growth assets,” it said in a significant event notice.

Balanced options at superannuation funds have copped advisers’ ire in recent months, questioning their high allocations to illiquid assets, low cash and fixed income holdings and high exposure to growth assets.

ING Living Super has $2.88 billion in total assets at end of last financial year, according to its FY19 annual report.

02: Lara Bourguignon

About 40% of this was invested in the balanced option which is set to be closed for new members.

It currently offers four options: high growth (90% shares), growth (70% shares), balanced (62% shares) and menu-based customisation.

From July 1, as it closes the balanced option, it will introduce two new options: moderate (45% fixed interest, 5% cash, 5% in property and the rest in local and global equities) and conservative (60% fixed interest, 10% cash, 2% in property and the rest in shares).

Net return target for the moderate option is 1.5% above CPI per year over rolling six-year basis and, for the conservative option is, 0.75% above CPI per year on a four-year basis.

Sydney boutique shutters fund Triple3 Volatility Advantage, run by former Goldman Sachs, Merrill Lynch and JP Morgan Singapore options trader Simon Ho, was terminated on Saturday by a GFSM Funds Management subsidiary which acts as its responsible entity.

The fund’s assets dwindled by $3.21 million from March end to April end.

Clients who invested in the fund at its inception in May 2014 and stayed until April end would have lost 2.71% of their assets after fees.

VIX, also commonly called the fear or greed index, started the year at 12.47 and averaged 19.63 in February, 57.74 in March and 44.12 in April.

Triple3, in its investor updates for last two months admitted to having missed the volatility spike for March. “[After rallying to February], as the coronavirus pandemic spread around the world, the S&P 500 suffered a horrendous -35% decline within a month, by far the steepest drop from an all-time high in the history of the US stock market,” it said in a March update.

“The VIX index spiked over 80, matching levels during the GFC. This was a black swan event that our proprietary model did not forecast.

“The switch from a low volatility regime into an extreme volatility regime was very abrupt. We did hold a modest VIX tail hedge, but it was closed out prematurely mid-way through the crash as the market became oversold and remained as such since early March.”

In April, it posted -2.45% returns for the month, as S&P 500 returned 12.68% (in USD) after rallying in the month.

“The VIX index declined from the 50s back into the 30s [in April]. The fund went long the market via S&P calls and VIX puts in late March. Due to the rich premium in VIX options, the VIX index did not fall fast enough for the position to turn positive at the April expiry,” it said.

“By mid-month, the market was deemed overbought by our proprietary model. We took profits in the S&P calls and started accumulating short positions via S&P puts and VIX calls. These defensive positions are currently experiencing losses as the market rallied strongly into month end.” fs

26

Managed funds

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11 PERIOD ENDING – 30 APRIL 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

IOOF MultiMix Growth Trust

608

1.3

1

6.7

1

6.6

1

Macquarie Capital Stable Fund

31

7.5

6

5.9

2

4.5

4

Vanguard Growth Index Fund

5,536

-0.9

2

4.9

2

5.3

4

IOOF MultiMix Moderate Trust

556

1.3

3

4.9

3

5.0

1

Vanguard High Growth Index Fund

2,803

-3.2

3

4.9

3

5.5

2

BlackRock Scientific WS Diversified Stable

Fiducian Growth Fund

127

-3.7

4

4.3

4

5.5

3

Vanguard Conservative Index Fund

MLC Wholesale Horizon 6 Share Portfolio

229

-4.5

8

4.1

5

5.1

5

IOOF MultiMix Conservative Trust

BT Multi-Manager High Growth Fund

10

-6.6

14

3.9

6

4.6

7

Fiducian Capital Stable Fund

BT Multi-Manager Growth Fund

38

-5.9

13

3.6

7

4.3

10

Perpetual Conservative Growth Fund

MLC Wholesale Horizon 5 Growth Portfolio

480

-3.8

5

3.5

8

4.3

8

93

Morningstar Growth Fund

272

-4.3

7

3.0

9

4.1

11

19

-5.6

12

2.9

Pendal Active High Growth Fund Sector average

634

-4.9

10

3.3

4.0

Sector average

BlackRock Scientific WS Diversified Growth Fund

SSGA Passive Balanced Trust Fiducian Balanced Fund Vanguard Managed Payout Fund Responsible Investment Leaders Bal Zurich Managed Growth Fund Ausbil Balanced Fund Sector average

2.4

2

4.8

4

4.6

3

3.0

4

4.6

5

4.5

5

656

2.4

10

4.1

6

4.3

6

282

1.0

7

3.6

7

3.7

8

335

1.3

9

3.6

8

3.6

10

1.1

23

3.2

9

3.0

16

472

-2.4

16

3.1

10

4.0

7

33

-0.8

19

2.9

11

3.0

17

2.9

3.3

336

0.0

CREDIT

IOOF MultiMix Balanced Growth Trust

BlackRock Tactical Growth Fund

Dimensional World Allocation 50/50 Trust BT Multi-Manager Conservative Fund

BALANCED

Vanguard Balanced Index Fund

UBS Tactical Beta Fund - Conservative

59 2,341

683

4.5

1

6.7

1

6.3

1

Principal Global Credit Opportunities Fund

1700

2.2

2

6.3

2

6.1

2

Metrics Credit Partners Div. Aust. Senior Loan Fund

143

11.9

1

6.1

1

5.7

1

2,350

4.9

3

5.1

2

4.9

2

424

-0.4

4

5.7

3

5.8

4

Vanguard Australian Corp Fixed Interest Index

239

4.0

6

4.8

3

4.4

4

Pendal Enhanced Credit Fund Vanguard Aust Corporate Fixed Interest Index ETF

169

4.3

5

4.8

4

4.4

5

325

3.8

7

4.5

5

75

0.0

19

4.0

6

4,775

1.3

3

4.9

4

5.0

7

442

-1.9

8

4.7

5

4.0

12

72

-2.1

11

4.6

6

5.1

6

Yarra Enhanced Income Fund

5.2

5

PIMCO Australian Short-Term Bond Fund

345

3.4

8

3.4

Franklin Australian Absolute Return Bond

292

2.2

10

3.3

PIMCO Global Credit Fund

543

3.3

9

3.2

Mason Stevens Credit Fund

544

1.1

13

2.8

Sector average

717

0.8

300

-2.3

12

4.3

7

29

-3.3

18

4.0

8

993

-3.0

17

3.8

9

77

-2.9

15

3.7

655

-2.9

3.6

10

3.3

4.0

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

17

4.7

3

7

3.1

14

8

3.5

9

9

3.7

7

10

3.7

6

2.4

2.9

Source: Rainmaker Information

We’re looking at China the wrong way around his year is a landmark year for the Middle T Kingdom. Not just because of the devastation of the coronavirus but because it’s the first

Brumbie

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

time in decades the Chinese government has not declared a hard GDP growth target.

Recall that since 1989 China has doggedly pursued GDP expansion at almost any social or environmental price. This has driven up its economy 15-fold or by 9.3% p.a., from less than US$1 trillion 30 years ago to US$15 trillion today.

This rate of growth is four-times faster than experienced by the US economy, which grew only 4.4% p.a. in the period, from US$6 trillion to about US$22 trillion. Mind you, Australia fared better, growing 5.6% p.a. for a five-fold increase.

With the China National People’s Congress meeting this month where they were set to celebrate the successful completion of their 2010 goal to double the nation’s economy by this year, to not be lauding a GDP growth target is really a sign of a weak economy, say analysts.

This reinforces growing perceptions that while China may outwardly appear to be growing in aggressive confidence, it is actually the opposite; it is lashing out to mask its vulnerabilities.

China’s economic indicators paint a dismal picture. It is estimated that in the first quarter of this year its economy shrank 6.8%. Worse still, this dampening economic growth comes at the end of a long line of disappointing eco-

nomic news that has seen annual GDP growth fall from 15% in 2007 to where it now has to battle to stay above 6% pa.

Some analysts expect that even if a recovery of sorts occurs post-COVID, growth in 2020 could still be a sanguine 3%. It must be said however that 15% growth in 2007 comes in at the same nominal dollar value as 3% growth in 2020.

But given China’s exports are expected to collapse 18% this year, it may miss even this subdued target. Real unemployment being up to 16% combined with job vacancies being down 17% fuels this fire.

Reinforcing this, profits from China’s biggest industrial firms are down 27% year on year, according to South China Morning Post reports.

This follows reports in May that the China producer price index fell 3% in April, its lowest level since 2016. No surprises that China’s inflation has fallen one quarter to 3.3%.

This shines new light on China’s threats to selectively impose tariffs and trade restrictions on Australian resources and agricultural imports, notwithstanding it is encouraging Chinese traders to steer away from buying US agricultural produce.

And if China’s faltering economy wasn’t enough to make it nervous, its energy market realities sure should. It is estimated it has to import three quarters of its 16 million barrels

of daily oil consumption making it the world’s largest oil importer. It is meanwhile reliant on coal for two-thirds of its national energy consumption yet even though it imports less than 10% of this it is still both the world’s largest coal producer and importer.

All this makes China wary of disruptions to its supply routes. In 2013 this spurred it to launch its Belt and Road Initiative (BRI) to create alternatives. With 80% of its energy imports and 40% of its total trade sailing through the disputed South China Sea each year, this has meanwhile forced it to also develop its own blue-water navy.

This is making other global powers and China’s regional neighbours nervous, particularly as China has linked BRI to its expansionist global ambitions.

However, it must be asked how much of this nervousness is because just as China is expanding its global influence, the incumbent world power, the US, has retreated? That is, China is playing into emptying space that is being ceded to it by default.

This has forced Europe to decouple its foreign policy from that of the US. For example, the European Union is now negotiating its own free trade deal with China, further isolating the US. This is why strategists with their smart money are looking afresh at India. More on this later.

Giddyup. fs

Super funds

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11 PERIOD ENDING – 30 APRIL 2020

Workplace Super 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

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

3.6

1

7.1

1

7.0

1

AAA

UniSuper Pension - Sustainable High Growth

4.2

1

7.9

1

7.9

1

AAA

Equip MyFuture - Growth Plus

-2.6

43

5.9

2

5.8

13

AAA

Australian Ethical Super Pension - Growth

-1.4

9

6.6

2

5.3

39

AAA

Australian Ethical Super Employer - Growth

-1.5

12

5.9

3

5.0

36

AAA

Equip Pensions - Growth Plus

-3.5

40

6.5

3

6.3

17

AAA

First State Super Employer - High Growth

-1.0

7

5.9

4

6.0

10

AAA

Media Super Pension - High Growth

-2.0

18

6.1

4

6.8

6

AAA

AustralianSuper - High Growth

-1.8

17

5.6

5

6.4

3

AAA

First State Super Pension - High Growth

-1.3

8

6.0

5

6.3

14

AAA

Club Plus Industry Division - High Growth

-3.8

72

5.5

6

6.3

5

AAA

AustralianSuper Choice Income - High Growth

-2.1

20

6.0

6

7.0

4

AAA

Media Super - High Growth

-2.0

19

5.5

7

6.0

9

AAA

TASPLAN Tasplan Pension - Growth

-0.9

7

6.0

7

6.3

18

AAA

Equip MyFuture - Growth

-1.4

11

5.3

8

5.4

22

AAA

Vision Income Streams - Growth

-2.8

28

5.9

8

6.4

13

AAA

NGS Super - High Growth

-1.8

18

5.2

9

5.9

12

AAA

Equip MyPension - Growth

-2.2

21

5.8

9

5.8

24

AAA

First State Super Employer - Growth

-0.4

3

5.2

10

5.4

23

AAA

Equip Pensions - Growth

-2.2

21

5.8

9

5.8

24

AAA

SelectingSuper Growth Index

-4.3

SelectingSuper Growth Index

-4.1

3.6

4.3

BALANCED INVESTMENT OPTIONS

4.1

4.8

BALANCED INVESTMENT OPTIONS

UniSuper - Sustainable Balanced

4.1

1

6.3

1

6.0

5

AAA

UniSuper Pension - Sustainable Balanced

4.7

1

7.2

1

6.9

4

AAA

Australian Ethical Super Employer - Balanced (accumulation)

0.7

6

5.8

2

5.2

24

AAA

Media Super Pension - Growth

-0.7

36

6.4

2

7.0

2

AAA

HESTA - Eco-Pool

0.4

9

5.8

3

7.1

1

AAA

HESTA Income Stream - Eco

0.1

18

6.2

3

7.6

1

AAA

Media Super - Growth

-1.0

28

5.6

4

6.1

3

AAA

Australian Catholic Super RetireChoice - Socially Responsible

1.7

4

6.0

4

5.1

40

AAA

State Super (NSW) SASS - Growth

0.5

7

5.5

5

5.7

9 Not Rated

Australian Ethical Super Pension - Balanced (pension)

2.0

2

6.0

5

5.4

32

AAA

AustralianSuper - Balanced

-1.0

31

5.5

6

6.2

2

AAA

AustralianSuper Choice Income - Balanced

-1.3

54

5.9

6

6.7

5

AAA

Australian Catholic Super Employer - Socially Responsible

1.3

4

5.3

7

4.3

50

AAA

PFAP - IOOF MultiMix Balanced Growth Trust

1.7

3

5.9

7

5.6

27

AAA

VicSuper FutureSaver - Growth (MySuper)

0.1

10

5.2

8

5.2

25

AAA

Media Super Pension - Balanced

-0.6

33

5.8

8

6.5

8

AAA

9

AAA

AustChoice Super ABP - IOOF MultiMix Balanced Growth Trust

1.6

5

5.8

9

5.5

29 Not Rated

AAA

TASPLAN Tasplan Pension - Balanced

0.7

9

5.8

10

6.0

15

TASPLAN - OnTrack Sustain

0.8

5

5.1

Mercy Super - MySuper Balanced

-1.7

59

5.0

SelectingSuper Balanced Index

-2.2 3.5 4.1

10

5.6

11

SelectingSuper Balanced Index

CAPITAL STABLE INVESTMENT OPTIONS

-2.1

3.9

AAA

4.5

CAPITAL STABLE INVESTMENT OPTIONS

VicSuper FutureSaver - Socially Conscious

4.0

1

5.9

1

5.4

2

AAA

QSuper Income - QSuper Balanced

QSuper Accumulation - QSuper Balanced

0.6

37

5.3

State Super (NSW) SASS - Balanced

2.4

8

4.8

TASPLAN - OnTrack Control

1.6

14

4.8

4

AustralianSuper - Conservative Balanced

0.5

40

4.7

5

5.3

StatewideSuper - Conservative Balanced

-0.3

66

4.5

6

5.0

TASPLAN - OnTrack Maintain

2.4

9

Australian Ethical Super Employer - Conservative

3.5

HESTA - Conservative Pool

6.1

1

6.4

2

5.7

1

AAA

Cbus Super Income Stream - Conservative Growth

1.9

3

4.9

5 Not Rated

AustralianSuper Choice Income - Conservative Balanced

0.5

9

5.7

2

6.3

2

AAA

37

5.3

3

6.0

3

AAA

AAA

UniSuper Pension - Conservative Balanced

1.7

12

5.1

4

5.7

4

AAA

3

AAA

TASPLAN Tasplan Pension - Moderate

2.7

5

5.1

5

AAA

4

AAA

Cbus Super Income Stream - Conservative

3.4

1

5.0

6

5.2

10

AAA

4.4

7

AAA

Australian Ethical Super Pension - Conservative

3.3

2

4.8

7

3.8

43

AAA

2

4.4

8

3.5

47

AAA

StatewideSuper Pension - Conservative Balanced

-0.4

66

4.8

8

5.5

5

AAA

1.4

17

4.4

9

4.6

9

AAA

Media Super Pension - Stable

2.3

8

4.7

9

5.0

13

AAA

Virgin Money SED - Enhanced Indexed Conservative Growth

3.2

3

4.3

10

AAA

NGS Income Stream - Balanced

-0.5

68

4.7

10

5.3

8

AAA

SelectingSuper Capital Stable Index

-0.3

SelectingSuper Capital Stable Index

-0.3

3.0

3.2

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

1.0

22

3.1

1

AAA

3.4 Source: SelectingSuper www.selectingsuper.com.au

28

Economics

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

Powell blamed for slide on Wall Street Ben Ong

W

as it something I said?

Yes sir, Mr. US Federal Reserve chair Jerome Powell, it was. The headlines not only infer, but blame your words for the big drop on Wall Street on May 13 – the day you talked about “Current Economic Issues” at the Petersen Institute.

This from the Wall Street Journal: “The Dow Jones Industrial Average dropped more than 500 points Wednesday after Federal Reserve Chairman Jerome Powell said further stimulus could be needed to support the economy’s recovery from the coronavirus-induced contraction.” …and from Bloomberg: “Powell Slams Door on Trump’s Negative Rates ‘Gift’”.

“It’s an unsettled area, I would call it,” he said. “I know that there are fans of the policy, but for now it’s not something that we’re considering. We think we have a good toolkit, and that’s the one we’ll be using.”

Its biggest fan, of course, is none other than US President Donald Trump, who, only a day before, again took to Twitter, tweeting “as long as other countries are receiving the benefits of Negative Rates, the USA should also accept the ‘GIFT’.”

From where I sit, this is just the normal (well, abnormal given current coronavirus conditions) day-to-day volatility on Wall Street. The VIX index – the fear gauge – may have risen by 6.8% on that day, but at a reading of 35.28, it’s waaay down from the record high of 85.47 hit in midMarch this year.

For what Powell said in his speech at the Peterson Institute for International Economics are already what former United States Secretary of Defense Donald Rumsfeld would call “known knowns” and “known unknowns”.

“The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II. We are seeing a severe decline in economic activity and in employment, and already the job gains of the past decade have been erased.”

“The current downturn is unique in that it is attributable to the virus and the steps taken to limit its fallout. This time, high inflation was not a problem. There was no economy-threatening bubble to pop and no unsustainable boom to bust.”

“While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks. Economic forecasts are uncertain in the best of times, and today the virus raises a new set of questions: How quickly and sustainably will it be brought under control?

Can new outbreaks be avoided as social-distancing measures lapse? How long will it take for confidence to return and normal spending to resume? And what will be the scope and timing of new therapies, testing, or a vaccine? The answers to these questions will go a long way toward setting the timing and pace of the economic recovery. Since the answers are currently unknowable, policies will need to be ready to address a range of possible outcomes.”

Even the Fed’s aversion to negative interest rates had been conveyed by other Fed officials – the Fed presidents of Atlanta (Raphael Bostic), Chicago (Charles Evans) and, Minneapolis (Neel Kashkari) – days before.

The bottom line is that with financial markets still highly sensitive to what they deem as negative news, markets haven’t bottomed out yet. fs

Monthly Indicators

Apr-20

Mar-20

Feb-20

Jan-20 Dec-19

Consumption Retail Sales (%m/m)

-17.88

8.47

0.60

-0.41

Retail Sales (%y/y)

-9.41

10.07

1.83

1.95

-0.79 2.60

Sales of New Motor Vehicles (%y/y)

-48.48

-17.85

-8.22

-12.52

-3.76

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

-594.28

0.68

22.92

15.82

Job Advertisements (%m/m, sa)

-53.12

-10.05

1.55

-3.41

0.70

6.22

5.23

5.10

5.28

5.06

Unemployment Rate (sa)

32.81

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

-

-1.16

-0.39

0.22

1.47

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

-

-3.98

19.38

-13.65

3.97

Housing Finance Commitments, Number (%m/m, sa) - Housing Finance Commitments, Value (%m/m, sa)

-

Survey Data Consumer Sentiment Index

75.64

91.94

95.52

93.38

95.10

AiG Manufacturing PMI Index

35.80

53.70

44.30

45.40

48.30

NAB Business Conditions Index

-34.00

-22.00

1.00

1.17

2.15

NAB Business Confidence Index

-46.00

-65.00

-2.12

1.07

-4.86

Trade Trade Balance (Mil. AUD)

-

10602.00

3865.00

5046.00

Exports (%y/y)

-

7.60

-8.19

-1.99

7.33

Imports (%y/y)

-

-8.59

-6.66

-2.25

5.63

Mar-20

Dec-19

Sep-19

Jun-19

Quarterly Indicators

5292.00

Mar-19

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

-

0.96

6.50

4.58

-1.88

% of GDP

-

0.19

1.29

0.92

-0.38

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

-

-3.45

-0.61

4.46

2.07

Employment Average Weekly Earnings (%y/y)

-

3.24

-

3.02

-

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

0.53

0.53

0.53

0.54

0.54

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

0.38

0.45

0.92

0.38

0.39

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

0.45

0.45

0.83

0.46

0.46

Inflation CPI (%y/y) headline

2.19

1.84

1.67

1.59

1.33

CPI (%y/y) trimmed mean

1.80

1.60

1.60

1.60

1.50

CPI (%y/y) weighted median

1.70

1.30

1.30

1.30

1.40

Output

News bites

Eurozone PMI The flash IHS Markit Eurozone Composite PMI increased to a preliminary reading of 30.5 in May after dropping to a record low of 13.6 in the previous month. While this is better than consensus expectations, the latest reading indicates that private sector activity in the single currency region remains in deep contraction territory. The manufacturing PMI improved to a preliminary reading of 39.5 in May (from 33.4 in April) and the rate of contraction in the services sector eased with its PMI rising to 28.7 in May (from 12.0 in April). Markit expects Q2 GDP “to fall at an unprecedented rate, down by around 10% compared to the first quarter” and “to slump by almost 9% in 2020”.

US PMI The gradual reopening of the US economy has led to some improvement in the latest PMI surveys. The flash estimate of the IHS Markit US Composite PMI improved to a reading of 36.4 in May from April’s record low of 27.0 as the rate of contraction in both the manufacturing and services sectors slowed. The manufacturing PMI increased to 39.8 in May from 36.1 in the previous month.

The services PMI rose to 36.9 from 26.7 in April.

However, according to Markit: “We anticipate that GDP will decline at an annualised rate of around 37% [not a typo] in the second quarter, and it will take the economy two years to regain the prepandemic peak.”

Japan PMI The flash estimate of the au Jibun Bank Japan Composite PMI indicated that the rate of contraction in the country’s private sector activity has eased to a reading of 27.4 in May from the record low of 25.8 in the previous month.

The services PMI improved to a preliminary estimate of 25.3 from April’s record low reading of 21.5 but the manufacturing PMI continued to deteriorate, falling to 38.4 in May – the lowest since March 2009 – from 41.9 in April. Based on the April and May PMI readings, Markit Economics expect the Japanese economy for the third straight time, “with the hit to Q2 likely to be potentially as large as 20% on the previous year”. fs

Real GDP Growth (%q/q, sa)

-

0.53

0.55

0.60

Real GDP Growth (%y/y, sa)

-

2.19

1.82

1.62

0.50 1.75

Industrial Production (%q/q, sa)

-

1.53

0.48

1.37

0.39

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

Financial Indicators

-

22-May

-2.79

-0.44

-0.93

-1.76

Mth ago 3 mths ago 1Yr Ago 3 Yrs ago

Interest rates RBA Cash Rate

0.25

0.25

0.75

1.50

1.50

Australian 10Y Government Bond Yield

0.87

0.83

0.92

1.64

2.49

Australian 10Y Corporate Bond Yield

2.00

2.15

1.69

2.47

3.10

Stockmarket All Ordinaries Index

5608.8

6.35%

-22.43%

-14.99%

S&P/ASX 300 Index

5470.0

5.61%

-22.88%

-15.32%

-3.48% -4.31%

S&P/ASX 200 Index

5497.0

5.28%

-23.00%

-15.57%

-4.75%

S&P/ASX 100 Index

4523.9

4.53%

-23.55%

-15.87%

-5.60%

Small Ordinaries

2539.0

14.66%

-17.26%

-10.97%

7.65%

Exchange rates A$ trade weighted index

57.80

A$/US$

0.6524 0.6313 0.6632 0.6876 0.7486

54.70

58.10

60.50

64.50

A$/Euro

0.5990 0.5831 0.6111 0.6164 0.6655

A$/Yen

70.11 68.05 74.08 75.85 83.12

Commodity Prices S&P GSCI - commodity index

297.92

236.80

400.54

436.07

393.67

Iron ore

91.42

84.13

86.42

97.04

62.70

Gold WTI oil

1733.55 1710.55 1643.30 1273.80 1258.85 33.56

13.64

53.36

61.42

Source: Rainmaker /

50.81

Sector reviews

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

Australian equities

Figure 1: Business & consumer confidence 50 INDEX

NET BALANCE %

120 110

20

12.5

10

11.5

-30

Prepared by: Rainmaker Information Source: Thompson Reuters /

2004

2006

2008

2010

2012

2014

2016

2018

0.0 1.0 2.0

7.5

3.0

-60

6.5

4.0

-70

5.5

-50

70

-1.0

Wages - INVERTED RHS

8.5

-40

Business confidence - RHS

Underemployment rate (leading by 1 qtr)

9.5

-20

Consumer confidence

-2.0

10.5

-10

90

ANNUAL CHANGE %

RATE %

13.5

0 100

-3.0

14.5

40 30

80

CPD Program Instructions

Figure 2: Underemployment rate & Wages

130

5.0

2002

2020

2004

2006

2008

2010

2012

2014

2016

2018

2020

Fake unemployment news Ben Ong

T

he Australian Bureau of Statistics’ (ABS) report showing that the country’s unemployment rose from 5.2% in March to 6.2% in April surely is a pleasant dream considering the nightmarish backdrop of the long and winding queues at Centrelink offices seen over the past two months, along with business closures and social restrictions.

The ‘dreamy’ unemployment rate is explained by the sharp drop in the participation rate from 66.0% in March to a 15-year low of 63.5% in April – those dropouts aren’t classified as unemployed.

Likewise, the ABS explained that unlike in the US and Canada, which “treat all people formally stood down ‘on temporary layoff’ as being unemployed … Australia limits to four weeks the length of time that someone can be effectively attached to a job without pay, and still be classified as employed”.

The ABS estimates that Australia’s unemployment rate would have jumped to 11.7% in

International equities

April, roughly applying the metrics used in the US and Canada.

The drop in the participation rate from 66.0% in March to a 15-year low of 63.5% in April also helped keep the overall unemployed low – i.e. those who have merely been stood down are not counted as unemployed.

But enough with the technicalities. The Morrison government’s JobKeeper Scheme has, no doubt, limited the nightmare scenario for the Australian labour market.

This, together with the JobSeeker payments, should keep Australian household incomes afloat and therefore, mitigate a much sharper decline in consumer spending.

The gradual easing of social distancing and lockdown restrictions in the country – barring a second wave – would also help.

This is reflected in the recent sharp improvement in business and consumer confidence – The NAB business confidence index rebounded

to a reading of -46 in April from -65 in March; the Westpac/Melbourne Institute Index of Consumer Sentiment jumped by 16.4% to 88.1 in May from April’s 75.6 reading.

The consumer sentiment survey also showed that consumers’ expectations for “Economic conditions next 12mths” surged by 32.6% in May at the same time that the ‘Unemployment Expectations Index’ dropped by 13.4%.

Australia’s heading in the right direction but there are still domestic challenges ahead.

One such challenge is the lead from the surge in the underemployment rate to a record high 13.7% in April. Its lead and negative correlation with wages – up 2.1% in the year to the March 2020 quarter – indicates more pay cuts ahead (of up to 2.5% year-on-year).

Under current circumstances, a pay reduction is a dream compared with unemployment … in isolation. fs

Figure 1: Unemployment rate

Figure 2: US stock market indices

Bureau of Labour Statistics (BLS) released actual non-farm payrolls numbers, underscoring the bother Uncle Sam finds itself in.

The US unemployment rate soared to 14.7% in April — its highest level on record – from 4.4% in the previous month.

The jump in the jobless rate happened despite the participation rate dropping to 60.2% (the least since January 1973) from 62.7% in March.

The fact that this is better than market expectations for an increase to 16.0% explained the rise on Wall Street.

Similarly, total non-farm employment dropped by 20.5 million.

Never mind, that’s still better than the 21 million expected to be handed pink slips. Never mind, too, that the March employment num-

CPD Questions 1–3

1. What was Australia’s unemployment rate in April? a) 4.2% b) 5.2% c) 6.2% d) 7.2% 2. What would have been Australia’s unemployment rate if the ABS applied the same metrics used in Canada and the US? a) 6.2% b) 9.5% c) 11.7% d) 13.9%

INDEX (JAN 2020 = 100)

RATE %

13

100

11

90

9

80

7

70

5

60

International equities CPD Questions 4–6

S&P 500 DJIA Russell 2000

50

3 1975

1980

1985

1990

1995

2000

2005

2010

2015

JAN-20

2020

FEB-20

MAR-20

APR-20

MAY-20

JUN-20

Bad news is good news is back all Street rallied – S&P 500 up 1.7%; W DJIA up 1.9%; Nasdaq up 1.6%; Russell 2000 up 3.6% — on the same day that the US

Australian equities

110

15

1970

Ben Ong

The Financial Standard CPD Program has been developed for professionals governed by the Corporations Act 2001 and hold an AFS Licence which provides an obligation to undertake continuous professional development (CPD). Test your knowledge with the following questions.

[See next page for instructions on how to submit your answers].

3. Australia’s underemployment rate fell in the month of April. a) True b) False

Nasdaq

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

29

bers showed there were even more workers out of work that month – 870,000 unemployed versus the initial estimate of 701,000.

To top these all, the CBOE VIX index – the fear gauge – has fallen to a reading of 27.98 on the day which is the lowest reading since February 26 (two weeks before the World Health Organisation declared COVID-19 a pandemic).

Then again, in the current world of high volatility, one day’s gain could be wiped out the next.

Still, the US equity market’s benchmark equity indices are showing renewed strength at the margin.

For the month ended May 8: the S&P 500 is up 6.5%; the DJIA is up 3.8%; the Nasdaq is up 12.7%; the Russell 2000 is up 11.6%.

This year-to-date, the Nasdaq composite index has produced a positive return of 3.9%.

Although still in the negative, the other three indices have sharply reduced their losses: the S&P 500’s down by just 8.5% (after dropping by as much as 30.7%); the DJIA’s down 14.3% (from

a 34.9% loss); and the Russell 2000’s loss more than halved to 18.8% (from 40.6%).

What gives? What gives, of course, is the Fed and Trump’s largesse.

The US Congress has passed its fourth coronavirus relief package – worth US$3 trillion — and the Fed has pulled out all the stops to ensure liquidity keeps flowing.

Equity market investors can justify the rise and rise in stock prices by expecting businesses to go on a cost-cutting spree to defend their profit margins.

Lower interest rates would also help.

However, the same cost-cutting measures financial markets expect companies to implement to shore up profits are the same ones that would raise the unemployment some more, reducing consumer spending and decreasing sales and profits.

A recent report showed peoples’ savings in the US have risen by 33% on the back of the crisis. fs

4. What is the US unemployment rate in April? a) 4.4% b) 10.5% c) 14.7% d) 16.0% 5. How many jobs did the US economy lose in April? a) 21 million b) 20.5 million c) 870 thousand d) 701 thousand 6. Wall Street dropped sharply when the US non-farm payrolls report was released. a) True b) False

30

Sector reviews

Fixed interest CPD Questions 7–9

7. What was the BOE’s policy decision at its May meeting? a) It kept monetary policy settings unchanged b) It took the Bank Rate to negative c) It increased QE d) Both b and c 8. What is the BOE’s GDP growth forecast for end-2020? a) -3% b) -14% c) -25% d) -30% 9. The BOE expects the unemployment rate to reach 8% by end-2020. a) True b) False Alternatives CPD Questions 10–12

10. Which oil futures contract price dropped to negative in late April? a) Brent oil futures for May delivery b) W TI oil futures for May delivery c) Both a and b d) Neither a nor b 11. What is the reason behind the recent recovery in oil prices? a) T he IEA’s upgrade of its global oil demand forecast b) Reduced oil production c) Both a and b d) Neither a nor b 12. Oil stockpiles remain plentiful. a) True b) False

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

Fixed interest

All answers can be submitted to our website.

12

ANNUAL CHANGE %

RATE %

8.5

6

7.5

3 0

6.5

-3 5.5

-6

BOE forecast

-9

Prepared by: Rainmaker Information Prepared by: FSIU Source: Trading Economics Sources: Factset

4.5

BOE forecast

-12 3.5

-15 05

06

07

08

09

10

11

12

13

14

15

16

17

18

19

20

21

05

22

06

07

08

09

10

11

12

13

14

15

16

17

18

19

20

21

22

More horrible than annus horribilis Ben Ong

“Annus Horribilis” made the headlines in 1992 when Queen Elizabeth used this Latin phrase – meaning horrible year – in her speech at Guildhall to mark the 40th year anniversary accession.

Her royal majesty was, of course, referring to the “horrible” events which happened to the royal family back then but she might as well have described the state of the UK economy.

UK GDP growth shrank for the seventh straight quarter in June 1992 and the pound sterling was forced out of the Exchange Rate Mechanism (ERM) on September 16 of the same year – sending the British currency crashing by 18.2% and making George Soros tons of money for betting against the pound.

I don’t know what the Latin term is for a year that’s worse than “annus horribilis” but 2020 would be it.

Alternatives

While the Bank of England (BOE) to keep monetary policy settings unchanged at its May meeting – the Bank Rate at a record low 0.1% and purchases at £645 billion – it’s also predicting that Britain would experience its worst recession in 300 years.

Brexit was a stroll on Hyde Park compared with COVID-19. Ex-BOE governor Mark Carney must be thanking his lucky stars he only had to deal with the GFC and Grexit and Brexit.

Andrew Bailey, who succeeded Carney effective 16 March 2020 (three days after the World Health Organisation declared the coronavirus as a pandemic) is now looking at the mother of all recessions at least in our lifetime.

According to the BOE’s May missive: “The unprecedented situation means that the outlook for the economy is unusually uncertain. It will depend critically on the evolution of the pandemic and how governments, households, businesses and financial markets respond.”

We already know this. What we don’t know is how low the BOE could go in forecasting the coronavirus’ impact on the economy.

The BOE predicts UK GDP to drop by 3% in the first quarter of this year and by a whopping 25% in the second quarter before rebounding later this year but still leaving national output 14% lower by the end of 2020.

The central bank also expects the unemployment rate to double from a near 45-year low of 4.0% (February 2020) to 8% by the end of this year.

It’ll be better in 2021. The BOE’s illustrative scenario forecast GDP to rebound by 15% in 2021 and the unemployment rate to decline slightly to 7%.

Then again, it acknowledges that the risks remain “skewed to the downside,” declaring “it stands ready to act to ensure price stability and support households and businesses in a way that helps to minimise longer‑term damage to the economy. fs

Figure 2: World oil demand & supply & the Oil price

Figure 1: Crude oil prices 100

15

US$/BARREL

80

'000 BARRELS PER DAY

US$/BARREL

IEA forecast

5

125

100

60 -5

75

40 -15

20

50 -25

0

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

Brent

-20

-35

25

Demand less supply (12mth moving average) Brent oil price - RHS

West Texas Intermediate

0

-45

-40 2015

2016

2017

2018

2019

2020

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Easing restrictions narrows oil demandsupply equation N

Submit

Figure 2: UK unemployment rate 9.5

9

Ben Ong

Go to our website to

Figure 1: UK GDP growth 15

ot too long ago oil producers were practically paying buyers to come and take their stocks off them.

This was on April 20, one day before the WTI oil futures contracts for May delivery dropped to minus US$36.98 per barrel. The price of Brent oil remained positive but still plummeted to a 34-year low of US$9.12/barrel.

Sinking oil prices came despite the belated agreement (around mid-April) by OPEC plus to chop 9.7 million barrels per day – equivalent to 10% of global supply – in May and June.

But with planes, trains and automobiles – and cruise liners – all at a virtual standstill, factories and non-essential businesses in lockdown, OPEC plus could lop another 10% off global supply and the world will still be drowning in the black stuff.

What a difference a month makes. Easing containment restrictions in an increasing number of countries has improved the outlook for crude oil.

The price of crude oil has now risen to US$29.65 a barrel and that of Brent increased to 32.84/barrel.

This is affirmed by the International Energy Agency’s (IEA) upgraded 2020 demand forecast for the commodity from a decline of 9.3 mb/d to a smaller contraction of 8.6 mb/d.

At the same time:“Global oil supply is set to fall by a spectacular 12 mb/d in May to a nineyear low of 88 mb/d, as the OPEC+ agreement takes effect and production declines elsewhere.

For some OPEC countries, e.g. Saudi Arabia, Kuwait and the UAE, lower May production is from record highs in April. Led by the United States and Canada, April supplies from countries outside of the deal were already 3 mb/d lower than at the start of the year.”

The again, oil prices will still be climbing a slippery slope until stockpiles are reduced.

According to the IEA: “OECD data for March show that industry stocks rose by 68.2 mb (2.2 mb/d) to 2961 mb. Total OECD stocks stood 46.7 mb above the five-year average and, due to the weak outlook, now provide an incredible 90 days of forward demand coverage. Preliminary data show that US crude stocks built by 53.7 mb in April (1.8 mb/d), and crude inventories in Europe and Japan also rose by 3.1 mb and 3 mb, respectively. In April, floating storage of crude oil increased by 9.9 mb to 123.8 mb.”

There’s also the not so small problem of a second wave of infection that could prompt governments to lockdowns and social restrictions and that eternal difficulty of getting OPEC plus members to comply with output cuts. fs

Sector reviews

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

31

Property

Property

CPD Questions 13–15

Prepared by: Rainmaker Information Source: Rural Bank

he median price of Australian farmland T increased by 13.5% in 2019, marking the sixth consecutive year of growth and defying bushfires and ongoing drought.

According to Rural Bank’s annual Australian Farmland Values report for 2020, Australian farmland has emerged as a stable and consistent driver of agricultural value over the past decade, despite climate-related challenges.

On a median basis, one hectare of Australian farmland will set you back $5271, according to Rural Bank.

Queensland was one of only two states to see a drop in values, with a 0.8% drop following an increase in 2018 of 15.8%. Here, one hectare of farmland would now cost $4650.

Tasmania also saw a decline in value, though far more pronounced than that of Queensland, with a drop of 53.9%. This followed an increase of 135.5% in 2018, however Rural Bank said this was more indicative of the mix of properties sold between the two distinct categories of land type – top end and cattle regions – and the low number of transactions (48.7% less

Farmland values defy bushfires, drought Jamie Williamson

than 2018) rather than a change in the market.

Meanwhile, Western Australia had a record year of growth at 28.2% ($2569), and South Australia recorded growth of 18.4% ($4943).

New South Wales saw a 17.2% ($5066) increase while Victoria and Tasmania both recorded growth of 12.1%.

Farmland remains the most expensive in Victoria and Tasmania at $7587 and $10,930 a hectare, respectively. This also marks a record high for farmland values in Tasmania.

However, the growth in value was offset by a decline in transactions – down 13.2%.

For example, transactions in NSW were down 14.5% year on year and 12.9% in Victoria, while those in South Australia fell by 8.3% to 693 in 2019.

These are the lowest levels seen in 25 years, Rural Bank said.

That said, land with consistent access to water outperformed the market, showing climate risk and reliable rainfall is still driving investment and value.

Rural Bank chief executive Alexandra Gart-

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mann said the findings show the remarkable consistency farmland offers as an asset class, particularly for those taking a long-term view.

“While land values change from year to year, Australian farmland has delivered an average compound annual growth of 7.5% over the past 20 years,” she said.

Gartmann added that the trend of higher values and fewer transactions is expected to continue.

“This may mean opportunities to expand become less frequent as fewer properties come on the market,” Rural Bank said.

“Tightening access to suitable parcels of land, and increased competition for fewer parcels will play a role in driving increased values.

“We expect farmland values will continue to rise, underpinned by strong demand for agricultural assets and increasing profitability of farming operations in an environment of low interest rates and strong commodity prices.”

The report tracks every farmland sale over the last 25 years in Australia, drawing on more than 262,000 transactions amounting to 303.9 million hectares. fs

14. Farmland has delivered what level of growth over the past two decades? a) Average annual growth of 13.5% b) Annual growth of around 10% c) Average compound annual growth of 7.5% d) Average decline in annual growth of 3.5% 15. The trend of fewer transactions and higher values is expected to continue. a) True b) False

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13. Which of the following reflects Rural Bank’s commentary? a) The median price of Australian farmland decreased in 2019 b) It is expected that farmland values will continue to rise c) Farmland has experienced declining growth over the past decade d) Climate-related change has caused much instability in agricultural value

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Profile

www.financialstandard.com.au 9 June 2020 | Volume 18 Number 11

BUILDING BLOCKS Stepping into her first chief executive role at Maple-Brown Abbott in October last year, Sophia Rahmani was ready to once again forge her own path. Eliza Bavin writes.

hen Rahmani was approached by former W colleague, Andrew Maple-Brown, the son of Maple-Brown Abbott’s (MBA) founder, to take on the chief executive role at one of the country’s oldest boutiques, she jumped at the opportunity.

“And my response to him was, ‘I’d love to but I actually live in Singapore and I’m six months pregnant’,” she says.

A few weeks later, she returned to Australia and they met for coffee.

“I was just about to go on maternity leave when I met with him and a few members of the board, so they gave me a great deal of time, more than I was going to have, before jumping in,” she says.

Rahmani’s career actually started in the graduate program at King Wood & Mallesons, one of the country’s biggest law firms.

“I was pretty blown away when they offered it to me, my law marks were okay, but I was a stronger commerce student,” she says.

KWM offered her a clerkship when she finished her degree, and she began working in the M&A department after spending the better half of a year backpacking around Europe with her girlfriends.

“It was such a privilege to be there, but I would be working on an M&A transaction for someone and I’d be thinking I’d really rather be on that side of the table,” she jokes.

“That person would get to go off and build that business and actually see it follow the business plan and see all the hopes and ambitions for that business come true.”

Rahmani says that nagging feeling in her didn’t go away, so when she was approached by Macquarie, having worked with them through KWM, she jumped at the chance.

“They asked if I wanted to come in as an inhouse lawyer or if I wanted to go straight into investment banking,” she says.

“And I took that chance to make the change and went into a banking role.”

Rahmani joined Macquarie in 2005, and it took only three months for her boss to see her potential and offer her another lifechanging opportunity.

“She said since all the deals I had been working on were in the United Stated, why don’t I just move to New York,” Rahmani says.

“Three weeks later and I was off, which was amazing. It was 2006 and I was in my mid-20s, so such an amazing time to be living in New York.”

Rahmani was in the US for a little over four years, during which time she was tasked with helping Macquarie build its fund management business in North America.

Then the GFC happened.

Luckily, Rahmani says, her co-workers at the time were of a similar age and at a similar point in their careers which she says helped them all navigate the crisis.

“It felt like we were almost just observing a lot of the US firms going through it,” she says.

“We weren’t faced with a lot of the same issues that the big firms were going through.”

She recalls the weekend before Lehman Broth-

ers went down, her and several of her friends had actually bought Lehmans shares thinking it was going to be a fairly predictable outcome.

A week later, the government decided against bailing the investment bank out.

“There was a lot of that, and it surrounded you, but again I was very fortunate to be with Macquarie because it gave them some opportunities.”

Not one to shy away from a challenge, Rahmani got to work helping Macquarie find bigger acquisition opportunities and was eventually tasked with working on the US$428 million Delaware Investments acquisition.

Rahmani was planning to return to her home shores, when now chief executive of Macquarie Shemara Wikramanayake asked if she’d be interested in helping establish the new business.

“It was a really hard assignment, but I learnt a lot and we achieved a lot. It was really challenging but I think it’s one of those things that you do that helps propel you and your career and development,” she says.

After wrapping up that assignment Rahmani returned to Australia as Macquarie’s head of strategy business development and communications, working for Wikramanayake, as well as taking on the role of head of strategy and marketing for the investment management arm of the business.

Macquarie had just restructured half of its business, so it was back to the building blocks as she helped the Sydney-based business rebuild.

Despite the long list of achievements, Rahmani longed to have a greater impact.

In 2013, she was approached by Rob Adams about a role at Henderson Global Investors.

“At that point he had just accepted the role [head of Henderson’s Australia business] and was working part-time, so I think I was actually the first permanent full-time hire for Henderson Australia,” Rahmani says.

“It was exciting for me because it was a build from scratch situation, and I had a fantastic time being a part of it.”

One of the biggest lessons she took from her time in the US, she says, is that it’s okay to not know everything, so long as you have the right people around you.

“We started with a small team [at Henderson] and we certainly didn’t all know everything but together we were all doing our best and it was awesome, we had so much fun,” she says.

Soon after, Henderson merged with Janus Capital, creating Janus Henderson, and Rahmani again worked on integrating the businesses in her role as chief operating officer Pan Asia.

The opportunity at Maple-Brown Abbott, was exciting on a different level, Rahmani says.

“MBA just celebrated its 35th anniversary last year, so I see my job as being to make sure we make the right strategic decisions to ensure we’re around for the next 35 years,” she says.

Rahmani is the first non-investment chief executive of MBA and the first woman.

Previous to her, those running the business had been chief executive and chief investment officer.

MBA just celebrated its 35th anniversary last year, my job is to make sure the right strategic decisions are made to ensure we’re around for the next 35 years.

Sophia Rahmani

“The board made the decision that it was time to have someone who was dedicated to running the business and strategy, so I get the opportunity to forge a new path in the history of MBA,” she explains.

“It’s a remarkable opportunity, and those don’t come around very often.”

One of the things she enjoys the most is being able to speak so closely with shareholders, which has been helpful during the outbreak of the COVID-19 pandemic.

“We’ve got very patient long-term shareholders, who really do want to invest for the long term,” she says.

“It’s obviously an incredibly challenging time for everybody, but I’m hoping a silver lining, once we get through the gravity of what this is, is that flexible work might be better understood and accepted.”

When that time comes, Rahmani says, she has some exciting ideas for sprucing up the office.

“I did an interior design course at Parsons while I was in New York, which is just an incredible design school,” she says.

“I really loved it because it tested my mind and my creativity.”

Her intrigue for design didn’t fade either, completing a second course when she moved back to Australia and then again just before joining MBA. “I’d never become an interior designer because I’m too structured and mathematical, but I really enjoy being around the different people and industries,” she says.

Rahmani says that while she doesn’t know what the future holds, she is excited to be forging her own path along the way. fs

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