Financial Standard Volume 18 Number 24

www.financialstandard.com.au

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AXA IM Rosenberg Equities.

Retirement Income Review

Investment

Opinion:

Featurette:

Opinion:

Product showcase:

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Rob Tyson Mining International

RIR open door for super disruptors Eliza Bavin

he Retirement Income Review (RIR) implied T what many superannuation funds hoped it would not; that the planned increase to the Superannuation Guarantee (SG) was not needed and there were other more important factors for Australians to have a comfortable retirement.

This finding was of course to the dismay of many super funds who have been avidly campaigning for the increase to go ahead.

But what it has done is create an opening for alternative approaches to saving for retirement.

One example comes from Stake; self-managed super fund technology aimed at young investors who wish to gain control of their retirement savings.

Stake head of product - super Kris Kitto says that, for self-directed investors, the system is broken.

“Large funds thrive off members who are apathetic toward how their savings are invested. This apathy is a systemic problem created not just by the funds but also the policy making,” he says.

Kitto says despite this more Australians each year are waking up and wanting to take ownership over their super.

Traditionally in Australia the SMSF space has been reserved for those with larger sums of money, and the Australian Taxation Office (ATO) has warned those with balances below $1 million against leaving APRA-regulated funds.

However, with the RIR concluding that there are more effective means to ensure a comfortable retirement, SMSFs can seem a little more appealing.

“The hallmark of the ambitious members of the new generation is taking action to progress themselves further, on their terms,” Kitto says.

“They’re also more engaged and educated compared to previous generations and don’t just want transparency, they demand it and expect companies to use technology to deliver it.”

However, Fox and Hare financial adviser Glen Hare says the struggle for clients to understand their super is still very much real.

“The majority of our members are between 25 and 45 years of age… Many of them come to us not really understanding what their super is invested in, what the performance of their existing fund is or even what fees they are being charged,” he says.

Still, there are benefits to what Stake is offering the younger generation.

“What I like is that it is engaging for younger demographics who aren’t as active with their super,” he says.

“However, I am conscious of the fact that with an SMSF you need to consider if millennials who take up this offer are going to be across all their obligations as a trustee to that fund and are they going to be able to manage the complexities around an SMSF.” Hare said despite having some reservations about encouraging less-experienced people to go into SMSFs that doesn’t necessarily mean they must remain with industry super funds either.

“In terms of things we consider, definitely cost and obviously something that we feel will perform well. Then, of course, ESG,” he says.

“Looking at whether the investment the super fund is making is in line with our members values. That could be anything from sustainability, gender equality, human rights or animal cruelty.”

Looking to make its mark in Australian super, Wells Fargo head of international distribution Deirdre Flood says feedback from funds constantly centres on ESG. “We’re very proud of what we’ve done in the firm in terms of ESG and we probably haven’t been singing it from the rooftops,” Flood says.

“But I think clients are pleasantly surprised when we engage with them and they can see that we have been very thoughtful about that.”

Flood says Wells Fargo will be creating model portfolios for big super funds which all have an ESG element; gone are the days of having just one specific ESG option.

Whether it be reducing carbon emissions in portfolios by 50%, keeping in line with the Paris Climate Agreement or ensuring the portfolio will help reduce global emissions by 2%, Flood says Wells Fargo has developed options for it all.

“It is so integral to our beliefs that a better understanding in core ESG risks allow us to make better investments,” Flood says.

“Every team and investment portfolio decision we make is with that awareness. Every team is going in with their eyes wide open and with all the tools to be aware of those risks that come with various ESG dimensions.”

It is well documented that ESG is important to the younger generation and as time goes on, and they begin to take more interest in their retirement savings, incumbent funds will need to have kept pace with their member base or risk losing them to new entrants. fs

07 December 2020 | Volume 18 Number 24 www.financialstandard.com.au 20 January 2020 | Volume 18 Number 01

News:

Feature:

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Estate planning

Dante De Gori FPA

Super reforms closer to law Karren Vergara

Deirdre Flood

head of international distribution Wells Fargo

The federal government has released its draft legislation for the Your Future, Your Super reforms, opening the consultation period until December 24.

The package of reforms, which was unveiled in the 2020-21 budget, has four main components that will introduce an underperformance test, stapling, a comparison tool, as well as accountability and transparency obligations that will put trustee spending under the microscope.

Treasury Laws Amendment (Measures 4 for a later sitting) Bill 2020: Best 5 Financial Interests Duty will force trustees to be more accountable to how member money is used to operate on a day-to-day basis and how it is invested.

The regulation aims to curb “inappropriate expenditure” on items like advertising, sponsorships and corporate entertainment, which “risks compromising member outcomes and eroding retirement incomes”.

The new law will regulate both trustees of super Continued on page 4

LBGTI+ leaders list 2020 revealed Elizabeth McArthur

The Outstanding 50 LGBTI+ Leaders 2020 list includes some big names from the financial services industry who have been highlighted for changing perceptions and creating inclusive workplaces.

The list was produced by Deloitte in partnership with Energy Australia and Google to highlight LGBTI+ people who are leaders in their fields and work to facilitate positive change.

Along with media and sports personalities, politicians, police officers and activists, a number of financial services leaders made the list.

Director and co-founder of independent financial services firm Chimaera Capital, Rochelle Pattison made the list. On top of her career at Chimaera, Pattison is treasurer of Transgender Victoria and Carlton Pride.

“I used to call ahead to warn people that I was transgender – but now my gender identity is a non-negotiable object of pride!” Pattison said.

“Early on, I was advised to always keep doors Continued on page 4

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News

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

Wells Fargo sets sights on superannuation industry

Editorial

Eliza Bavin

Jamie Williamson

W

Editor

In what feels like the blink of an eye, 2020 is all but over; though its impact will continue to be felt for some time.

This time last year, none of us could have imagined the turmoil that awaited us around the corner. Unfortunately, for many in our industry, COVID-19 was just one more straw on the camel’s back. For the financial advice community in particular, it was added pressure that couldn’t have come at a worse time.

Rainmaker analysis of the ASIC Financial Adviser Register shows 3647 advisers have exited the industry since this time last year.

There’s no doubt that when we run the numbers again in January, more will have fallen off the register.

For comparison, just over 5000 advisers exited the industry in 2019.

Sadly, it’s a trend that’s unlikely to dissipate in 2021, with greater regulatory reform anticipated in what is the final year existing advisers can sit the Financial Adviser Standards and Ethics Authority exam.

One positive amid it all however, is how the adviser community has come together to celebrate each other’s successes.

On LinkedIn alone we saw it when our annual Power50 was announced, when advisers were preparing for the FASEA exam or after they’d received their results, or when they celebrated milestones in their personal lives; a child’s graduation, a wedding anniversary in lockdown.

It’s that same sense of community that has underscored this crisis and has, so far, seen us through to the other side.

And because there’s nothing more important at this time of year than family and friends, we are also celebrating community in our own way in this, the final edition of Financial Standard for 2020.

On the flip side of this magazine you’ll find our annual FS Cooking Guide, packed full of recipes from the likes of Sunsuper chief economist Brian Parker, Russell Investments’ Jodie Hampshire and Maple-Brown Abbott chief executive Sophia Rahmani.

This year, we’re also honouring some of the pets that kept us company while we worked from home; may we never forget the comfort and support they, perhaps unwittingly, provided as co-workers. Some of the familiar faces you’ll find include AMP chief economist Shane Oliver, Pinnacle’s Ian Macoun and Tribeca’s Jun Bei Liu. We hope you enjoy reading and getting to know some of those in the industry a little more, just as we hope you’ve enjoyed reading throughout the year, as we’ve enjoyed bringing you the news.

In what has been a crazy year, the Financial Standard team thanks you for continuing to make time for us.

Here’s wishing you a safe and happy holiday season, and here’s hoping for a smoother ride in the year to come. fs

The quote

We really think that our experience around the world can really come to bear in Australia, and in particular within the superannuation industry.

ells Fargo Asset Management is gearing up to make its mark on the Australian superannuation system, confirming to Financial Standard that it has been in discussions with major super funds.

Wells Fargo head of international distribution Deirdre Flood said the firm has been in talks with some super funds for some time as it gears up to solidify itself as a major player in the Asia Pacific.

“The Asia Pacific region has been one of our fastest growing regions in the last five years,” Flood said.

“We see the Australian market as particularly interesting. It’s a very sophisticated market, and we acknowledge that, but we really think that our experience around the world can really come to bear in Australia, and in particular within the superannuation industry.”

Flood said for the moment the global firm is focused on providing ESG-centric small cap, all cap and global small cap options.

“We have both fundamental equity as well as systematic equity so we can definitely deliver alpha strategies,” Flood said.

“The strategies that we have been most active with in our conversations on the ground in Australia have been around emerging market equities, both all cap and small caps, and global small caps.”

Flood said as these sectors are all “less efficient” parts of the market, an active fundamental approach is will be of critical importance – something she said is a shared belief with potential clients in Australia.

Flood added that the super funds Wells Fargo has been in conversation with made it clear ESG is highly important to the Australian market.

“We’re working with clients towards more outcome-oriented investments, not just looking at the component parts but taking it all the way through to the end outcome to client is looking to achieve,” Flood explained.

“Many of the Australian superannuation funds are also engaged in this dialogue. So, we are in a knowledge sharing stage on our multiasset engagement which is around asset allocation and portfolio construction.”

Flood said Wells Fargo has been focused on engaging within the Australian market with clients directly for some time.

“At this stage I would say we are laying the foundations and building trust with clients whom we feel over time will lead to doing a lot more work with them,” she said.

“One thing they are certainly interested in is asset allocation and portfolio construction, so we have definitely engaged with them on that and those dialogues are ongoing.”

Flood said the current aim is to partner with the large and established super funds in Australia, but when asked if a Wells Fargo retail fund could be in the future she took a ‘never say never’ approach.

“That’s not something we have on the table at the moment; it’s not the immediate plan. We are really focused on being a partner to those on the ground and bringing to the table what we do best,” Flood said. fs

End of the road for legacy financial advice qualifications Jamie Williamson

Described as the ‘end of an era’, the Diploma of Financial Planning and Advanced Diploma of Financial Planning have been removed from the national regulator’s register of vocational education and training.

On November 3, the Australian Skills Quality Authority (ASQA) deregistered the FNS50615 Diploma of Financial Planning, FNS60415 Advanced Diploma of Financial Planning and a further three Tier 1 personal advice units of competency in financial planning, margin lending and superannuation.

While those already enrolled in the courses can continue their studies, the courses are no longer available for new enrolments as they do not meet the minimum requirements for entry into financial advice as set by the Financial Adviser Standards and Ethics Authority.

However, AQSA will introduce three new courses: FNS60920 Advanced Diploma of Paraplanning, FNS40920 Certificate IV in Superannuation and FNS50720 Diploma of Superannuation.

The paraplanning qualification will provide a benchmark qualification to raise the level of

knowledge and skills to that of the Australian Qualification Framework (AQF) level 6.

Meanwhile, the Certificate IV in Superannuation is designed for those looking to work in customer services and administration roles in superannuation, and the Diploma of Superannuation is suitable for those seeking specialist technical operational and research analyst roles in the super and SMSF spaces.

Knight said the new qualifications are designed to benefit the industry, with individuals learning both in-depth knowledge and technical skills, and the necessary skills to develop and maintain compliant back-office procedures.

“This will allow financial advisers and superannuation specialists to devote more of their time and expertise to delivering bestpractice advice and service to their clients,” he said.

“The industry is focused on supplementing its talent pool over the coming years, so these qualifications will provide an accessible and suitable pathway for those who want to enter the financial services sector. They will also provide an ideal opportunity for career changers in this challenging economic environment.” fs

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www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

01: Damian Graham

Your Future, Your Super reforms

chief investment officer Aware Super

Continued from page 1 funds and SMSFs, prohibiting certain payments unless certain conditions are met.

In quantifying financial benefits to members and as part of the decision-making process, trustees must consider a threshold that needs a “robust quantitative and qualitative evidence to support their expenditures”.

If the expenditure goes towards systems, risk management, governance and are essential to operations, it would likely be regarded to be in the best financial interests of members.

Money spent on building a brand, promoting awareness of the fund or supporting external activities, which are not supported by an identifiable and quantifiable financial benefit to members, articulated in a clear business case, are unlikely to satisfy the requirements of the best financial interests obligation, the draft law states.

Treasury Laws Amendment (Measures 4 for a later sitting) Bill 2020: Addressing 5 underperformance in superannuation will subject MySuper funds to an annual performance test graded against designated benchmark.

Products that fail an annual performance test must notify members. Two consecutive years of failures prohibits the super fund from accepting new members.

In notifying about poor performances, trustees must alert members to the YourSuper comparison tool to help them compare and select a superannuation product that meets their needs. fs

Aware Super cuts carbon emissions by 40% Elizabeth McArthur

ustralia’s second largest super fund has A managed to reduce the carbon footprint of its equities portfolio by 40%

The quote

Removing some of these companies from our benchmarks enables us to lower the carbon footprint of our portfolio, with only a modest change to our investment mix.

LBGTI+ leaders list 2020 revealed Continued from page 1 open and never burn bridges. Consequently, the decision to transition was extremely difficult as I could envision that it would, likely, close doors and destroy many bridges.”

Mercer product owner Lauren Wilkerson looks after superannuation operational communications for the firm’s clients and customers. Wilkerson is also chair of the Mercer Pride Business Resource Group, which means they are responsible for creating a safe and inclusive culture at Mercer.

Caitriona Fay, Perpetual Private managing partner and GiveOUT Australia board member, was recognised for her philanthropic efforts. GiveOUT directs funding to “rainbow communities” and Fay also leads Perpetual’s Community and Social Investment business, which focusses on working with for-purpose organisations and Aboriginal and Torres Strait Islander communities.

Suncorp executive manager, personal injury assurance Shay Johnston was highlighted for her involvement with the firm’s employee resource group for LGBTI+ staff as well as her work as chair of Open Doors Youth Service – a Queensland youth service for LGBTI+ young people and their families.

Also making the list was QBE Insurance head of technology Lisa Hilton, who was described as a trailblazer by peers.

PwC partner, financial advisory Cherie Mulyono was one of the founders of Shine women’s network and is an active member of Be (PwC’s diverse cultural background network). She earned her place in the list of 50 leaders for her passion for educating others on discrimination and privilege. fs

The $130 billion industry fund (formerly First State Super) has created a series of new listed equities benchmarks that will support the fund’s goal of net zero emissions by 2050 by excluding the highest carbon emitters.

By creating the benchmarks, Aware’s passive and systematic investment managers can implement their strategies in line with lower carbon emissions.

The benchmarks were rolled out to Aware Super’s investment managers in October 2020.

Since then, the fund’s Australian and global equities exposures have carbon emissions 40% below that of the baseline of 31 December 2019.

Aware said this reduction is ahead of its goal.

“The creation of our Aware Super carbon constrained benchmarks is one way we are working to ensure we can continue to deliver strong, sustainable returns for our members not just today, but for decades to come,” Aware

chief investment officer Damian Graham01 said.

“We know that globally the top 60 emitters are responsible for more than 50% of the greenhouse gas emissions of share market-listed companies. Removing some of these companies from our benchmarks enables us to lower the carbon footprint of our portfolio, with only a modest change to our investment mix.”

He added that the highest Australian listed carbon emitters excluded by Aware’s new benchmarks returns an average of 7% per annum over the past 20 years, compared to an 8.5% return for the ASX overall.

“In just the first month we have already seen a 40% reduction in carbon emissions from our listed equities portfolio, a trend we expect to continue,” Graham said.

“The development of the new Aware Super benchmarks means we can help safeguard our members’ funds from the risks associated with holding assets that contribute to climate change, including those with the potential to become stranded assets.” fs

Insurance in super is confusing: Consumers Jamie Williamson

Consumers engaging directly with their super fund on insurance matters are often left confused and overwhelmed by the information provided and upset they cannot get guidance specific to their circumstances, an ASIC report shows.

A third of unadvised superannuation fund members participating in ASIC’s research into member experience when making changes to insurance arrangements reported feeling confused, overwhelmed or uncertain after interacting with their fund.

“They found insurance complex and difficult. Some discovered information they did not understand or did not know how to respond to,” ASIC said.

“This often caused them to delay in engaging further with their fund on insurance after their initial interaction.”

Prepared by Susan Bell Research, the report draws on 50 in-depth interviews with members who had engaged with their super fund around group insurance within the last year.

Completed between May and June, some of the participants were already thinking about the impact of COVID-19.

The research found that the process of gaining information about insurance arrangements or making changes to insurance presents several potential hurdles due to limited knowledge and a lack of confidence brought on by the complexity of web-based information.

Most members expected this to be a simple self-service process but found that was not the case, the research states.

Another reason respondents felt dissatisfied with their experience was because they had not received information that was specific to their circumstances.

While none of the respondents used the word ‘advice’, many

said their reason for contacting their fund was to find whether they had “enough” insurance cover, whether they should have two of the same policy or how much cover they should have. These are the members that reported having the most difficulty and were frustrated to find their fund could not tell them without referring them to a financial adviser.

This demonstrates members only have a vague idea about the information super funds can provide and do not understand the demarcation between the two, the research states. It also notes that it is possible the members did receive advice but were unaware that they had.

In all, only half of the respondents reported achieving the goal they had set out to when making contact with their fund.

Some were able to do so in one contact session.

“Some members discovered during this process that they had default insurance which did not seem to be adequate for their needs. Some discovered that their cover was much less than they thought it was,” the research states.

“Some discovered that they were paying for insurance inside super when they already had some outside super.”

The research suggests many of the problems encountered by members could be avoided if information was easier to find online and easy to understand.

“There is now a fairly general expectation that the super website will contain such information, but the level of accessibility varies with the fund,” it reads.

“The challenge is for the super funds to prioritise a straightforward approach to answering the most common questions and to test the usability of their approach. There are also tools that can enhance the experience and generate confidence and understanding.” fs

News

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

We’ve done our part: Lowe

01: David Atkin

deputy chief executive AMP Capital

Eliza Bavin

Reserve Bank of Australia (RBA) governor Philip Lowe has had to remind the Standing Committee on Economics that the RBA is not solely responsible for economic recovery and the federal government also needs to pitch in.

Lowe explained that while the economy is recovering better than initially expected, the RBA is limited with the tools it has at its disposal to spur economic activity.

“I believe we can get back to the inflation target and acceptably low unemployment rates, some time over the next half decade,” Lowe said.

“I’m not confident we are going to be able to do it tomorrow, but we can do it over time if we have the right policy settings in place.”

Lowe said that while the central bank is doing what it can in keeping interest rates low and having a steady supply of credit available, it is structural change that is needed to ensure recovery.

“There are a whole bunch of structural reforms the government is focused on, like training, the digital economy, there’s a process for industrial relations reforms. So, these are the types of things we need to focus on to make sure that the road to recovery is a strong one,” he said.

“We built the bridge through income support and incentives, but for us to continue to outperform other economies, which is a big ask, but we can do it, requires structural reforms.

“If we don’t have structural reform we will just travel along this road just as every other country has travelled along the road – at a not very fast pace.”

Lowe said he believes Australia has the capability, resources and capacity to do a better job than it is currently doing to come out of the pandemic in a good position. fs

Future Fund appoints CIO Australia’s sovereign wealth fund has confirmed the appointment of a chief investment officer after Raphael Arndt, who previously held the role, was appointed chief executive.

Sue Brake has been confirmed as the chief investment officer of the Future Fund.

Brake has been acting as chief investment officer since July, when former Future Fund chief investment officer Arndt moved into the chief executive position.

She will have overall responsibility for developing and implementing the investment strategy of the Future Fund and five other public asset funds which together are valued at $210 billion.

“Sue is a globally recognised investment leader,” Future Fund Board of Guardians chair Peter Costello said.

“Markets and economies are operating in very unusual circumstances and her experience and expertise will be invaluable as we navigate this environment and seek to maximise long-term riskadjusted returns.”

Arndt also welcomed Brake’s official appointment to the role.

“Sue has added enormous value to our thinking and processes since she joined us. She combines deep understanding of our culture and how we work with new perspectives and ideas,” he said. fs

5

Former Cbus chief takes prime role at AMP Capital Kanika Sood

I The quote

David will bring his accumulated experience of wealth and investment management and of reshaping organisational culture.

ndustry superannuation fund Cbus’ former chief executive David Atkin01 is joining AMP Capital as its deputy chief executive.

The appointment is effective December 7.

“Atkin will assume operational leadership of AMP Capital in an interim capacity until June 2021, while AMP continues its search for a permanent [chief executive] to drive AMP Capital’s growth strategy,” AMP Capital said.

Atkin will report to AMP chief executive Francesco De Ferrari, who is currently the interim chief of AMP Capital, as it conducts a portfolio review.

“David is a highly regarded leader within our industry, and I’m pleased we have been able to appoint an executive of his calibre into this interim role to help drive our transformation and deliver our strategy,” De Ferarri said.

“Having led three major superannuation funds in the Australian market, David brings a deep knowledge and understanding of clients and their expectations. He has delivered improved and sustainable results in each of the organisations he has led and achieved respect through a values-based approach.

“David will bring his accumulated experience of wealth and investment management and of reshaping organisational culture, including

expertise in building diverse and inclusive leadership. We are pleased he will join us immediately, strengthening AMP Capital’s leadership team as we implement our strategy.”

Atkin was the chief executive at Cbus for 12 years during which it went from being a $12 billion fund to $57 billion in assets under management. He tendered a surprise resignation in January this year.

“AMP Capital is a high-quality asset management business, which has earnt the respect of its clients around the world over many years. I look forward to supporting Francesco deliver AMP Capital’s transformation strategy and working with the highly capable team to take the organisation forward,” Atkin said of his appointment.

Atkin grew up in Papua New Guinea and while at university, wrote a research paper on how unions use masculinity to create hierarchies, Financial Standard reported in a 2014 profile of him. He spent a decade working in trade unions before taking up a job as a communications officer at AustralianSuper’s predecessor Superannuation Trust of Australia (STA).

He joined Cbus in 2008 and had previously served as the chief executive of Emergency Services and State Super (ESSSuper) and Just Super (now Media Super considering a merger with Cbus). fs

Funds’ net-zero ambitions collide with Santos Elizabeth McArthur

Australian oil and gas company Santos’ carbon reduction plan has been heavily criticised, with critics pointing out many super funds invested in the company have made declarations on climate change that don’t match their actions.

According to Rainmaker analysis, as of 30 September 2020, Aware Super had $93 million invested in Santos representing 0.52% of the fund’s Australian shares exposure.

In light of Aware’s recent announcement that by introducing new benchmarks that take carbon emissions into account it had cut the carbon footprint of its equities portfolio by 40%, Financial Standard asked the fund whether this holding in Santos had been reduced.

Aware confirmed these September figures are still the most up-to-date numbers and said that if anything, the holding in Santos was likely to have grown a little due to market movements.

As at 30 June 2020 AustralianSuper, the country’s biggest fund, had just $31 million in Santos.

At the same date, Cbus had 0.57% of its Australian shares holdings in Santos, coming to $76 million.

Also in June, MTAA Super’s investment in Santos represented a larger portion of its Australian shares exposure at 1.11%, but only amounted to $3 million.

Hostplus, meanwhile, had a $62 million holding in Santos as at 31 March 2020.

Santos currently appears in the top 20 holdings of Equipsuper and used to appear in the top holdings of for CareSuper, LGS and Statewide in 2019 but not anymore due to reduction in allocation or divestment.

Aware Super, AustralianSuper, Cbus and CareSuper have all made commitments to have net-zero carbon emission portfolios by 2050.

On December 1, Santos made the bold announcement that it would net-zero by 2040.

The company’s plan involves reducing scope one and scope two emissions as defined by Australia’s Clean Energy Regulator.

These scopes refer to emissions from trucks, manufacturing, mining, burning coal and consuming energy that was created by burning coal.

These emissions would be reduced through operational efficiencies, using solar panels and battery storage in company facilities and through carbon offsets.

The emissions from the oil and gas Santos sells to customers would fall under scope three, not addressed in the plan.

Santos is also injecting tonnes of carbon dioxide deep underground into depleted gas reservoirs as part of its Moomba Carbon Capture and Storage project. In a public statement, the company said this project was the “real game-changer”.

The Australian Centre for Corporate Responsibility (ACCR) expressed dissatisfaction with Santos’ plan. fs

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News

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

ASIC takes action against CBA

01: Simon O’Connor

co-chair Australian Sustainable Finance Initiative

Elizabeth McArthur

In the Federal Court, ASIC will allege that CBA charged a rate of interest on business overdraft accounts substantially higher than what its customers were advised.

ASIC’s case alleges that between 2011 and 2018 CBA provided customers with terms and conditions for certain credit facilities that stated an interest rate to be charged or that had been charged of, in most cases, 16% per annum.

CBA then allegedly sent periodic statements to these customers referencing that rate, usually of 16%, but due to a systems error more than 2200 were charged a different, higher rate on overdrafts. ASIC said that in most cases, the higher rates were 34%.

ASIC’s investigation found that the total overcharged interest exceeded $2.9 million.

According to ASIC’s statement of claim, the average amount customers were overcharged was approximately $1,476.90 in relation to the CBA Simple Business Overdraft products and $3,965.30 in relation to CBA Business Overdraft products, per customer.

The highest known amount overcharged to a single customer was $17,522.34.

CBA has remediated approximately $3.74 million to 2,269 customers in relation to the error.

ASIC is alleging that between 2014 and 2018 CBA contravened financial services laws a total of 12,119 times. fs

Insurers must cover COVID-19 The NSW Court of Appeal has ruled pandemic exclusions are invalid, and insurers will have to cover COVID-19; a ruling that has seen IAG go into a trading halt.

IAG entered a trading halt on the back of the news, with the ruling possibly meaning insurers could face a flood of claims.

The court declared that COVID-19 is not a quarantinable disease under the Quarantine Act 1908. Business insurance policies generally exclude the impact of quarantinable diseases.

The Quarantine Act 1908 was repealed in 2016 and replaced by the Biosecurity Act 2015. The court has now ruled that references in insurance policies to quarantinable diseases under the old act and subsequent amendments should be construed as a reference to listed human disease under the Biosecurity Act. The test case was brought by AFCA on behalf of a tourist park business that experienced interruption due to the ongoing COVID-19 pandemic. The Insurance Council of Australia (ICA) defended the case and has said it will appeal.

QBE responded to the ruling in a release to the ASX. It estimated the next cost of any business interruption claims in Australia is likely to be limited to $5 million per occurrence.

“The ICA has already taken steps to fund and progress a further test case through AFCA to provide clarity on whether policy coverage triggers in certain business interruption policies, including QBE business interruption policies, are satisfied in the unprecedented circumstances of COVID-19,” QBE said. fs

Australian Sustainable Finance Initiative launches Rachel Alembakis

A The quote

These are complex, system-wide challenges we’re trying to address, which can only be addressed with system wide responses.

coalition of more than 80 organisations including banks, insurers, superannuation funds and other stakeholders has released an ambitious list of recommendations to transform Australia’s financial system to sustainable outcomes.

The Australian Sustainable Finance Initiative has released its final roadmap, outlining 37 recommendations to enable the financial services sector. In conjunction with regulators and governments, it aims to “strengthen Australia’s financial system with the aim of recovering from the impacts of COVID-19 and delivering a transition to a net zero, resource-efficient and inclusive economy”.

The 37 recommendations are structured around four pillars - embedding sustainability into leadership; integrating sustainability into practice; enabling resilience for all Australians; and building sustainable finance markets.

“Our goal and our vision can’t be achieved without achieving each of those four pillars in our view,” ASFI co-chair Simon O’Connor01 said.

“These are complex, system-wide challenges we’re trying to address, which can only be addressed with system wide responses.”

The roadmap was developed by working groups of more than 140 participants from over 80 organisations, including financial institutions, civil society, academia, regulators and government, and supported by APRA and ASIC, in observer roles.

“I think the process we went through to develop the roadmap, being really collaborative, really broad and really inclusive was necessary

for us to come up with a plan to solve a broad, system-wide challenge,” O’Connor said.

Delivery of the roadmap will be driven by a permanent sustainable finance body, to be established in 2021. The permanent sustainable finance body is meant to play a “triage” role to organise the workflow relating to the 37 commitments and the various stakeholders that will contribute to achieving those commitments, O’Connor said.

“We’ve recognised that having a forum that brings together the full spectrum of financial services, academics, regulators, government, and civil society is incredibly valuable,” he said.

“There is a space for that collaboration to occur, to work thru the challenges and the work that’s required as set out in the roadmap.”

The sustainable finance body will not duplicate the work of other industry bodies such as the Responsible Investment Association Australasia, the Australian Banking Association, the Insurance Council or the Investor Group on Climate Change, but will be informed by those groups, he added.

“The intention is to establish that permanently, constituted with a board by the middle of next year to deliver the work of that roadmap, to start deliver a working group around taxonomy, guidance on [Task Force on Climate-related Financial Disclosures] TCFD recommendations, to start convening a project group around the Task Force on Nature-related Financial Disclosures] TFND and being the body that joins the dots of the activity that exists,” O’Connor said. fs

Financial adviser reference checks under regulatory scrutiny ASIC has released a consultation paper seeking feedback on reference checking protocols for financial advisers and mortgage brokers.

Requiring financial advisers to have reference checks was one of the recommendations to come out of the Royal Commission. During the inquiry it was found licensees were not doing enough to communicate with each other on the background of advisers they were employing.

The Financial Sector Reform (Hayne Royal Commission Response) Bill which has been introduced to parliament includes obligations for AFSLs to comply with an ASIC reference checking and information sharing protocol.

Now, ASIC has developed a draft protocol and is consulting with the industry on its implementation. Stakeholders have until 29 January 2021 to provide feedback.

In particular, ASIC is seeking consultation on how far back reference checks should go, proposing that a reference from

the adviser’s current or most recent licensee does not suffice, or whether all licensees the adviser has been attached to in the last five years is more appropriate.

ASIC is proposing that licensees be able to request more than one reference from a referring licensee before offering employment to an adviser. In providing an additional reference, the referring licensee must provide a complete response and not rely on the information already provided in the previous reference.

Licensees are not obliged to provide information on conduct that occurred more than five years ago, but may volunteer any information they are privy to that they feel is relevant.

It also is suggested that all references be provided within 10 days of the request. It may take longer where agreed between both licensees but cannot take any more than 20 days.

In March this year, the Financial Planning Association of Australia threw its weight behind the proposed protocol. fs

Product showcase

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

7

01: Gideon Smith

chief investment officer AXA IM Rosenberg Equities

What to consider when developing a strategy for sustainable investing nce an obscure, easily dismissed ideology O sparked by a 2005 call to action from then United Nations Secretary General Kofi Annan, a recent report from Opimas revealed the value of global assets being managed with consideration for environmental, social and governance (ESG) factors has almost doubled every four years to hit US$40.5 trillion this year.

Underpinning this, the 2020 EY Global Alternative Fund Survey found 88% of investors worldwide are regularly questioning fund managers on ESG. Investment houses are rapidly responding to this demand, and the number of products available has ballooned; for some firms it’s something new they’re integrating into their existing offerings, for others it’s just business as usual.

AXA Investment Management (AXA IM) falls into the latter category, with more than 20 years’ experience in responsible and impact investment.

The AXA IM Sustainable Equity strategy was launched in August 2014 in Australia and is managed by the firm’s systematic equity team Rosenberg Equities, one of the first quantitative managers to fully integrate ESG considerations into all its portfolios.

Since inception, the strategy has recorded an annualized return of 12.92% net of fees1 , and the team has achieved this by doing three key things, AXA IM Rosenberg Equities’ chief investment officer Gideon Smith 01 explains.

Firstly, the team focuses on stocks with lower risk or less volatility than the market. They then target stocks with higher earnings quality that deliver a higher level of profitability and more sustained earnings. Finally, the team tailors the portfolio to improve its ESG positioning; emphasising stocks with better credentials and reducing or removing those without.

“When we build the portfolio, we’re using a transparent and systematic, quantitative investment process,” Smith explains.

“We’re constantly adjusting the weights of stocks based on our assessment of their volatility, their quality and their ESG characteristics, and when we do this, we leverage a huge amount of proprietary data to do that analysis.

“The goal is to build a portfolio that provides drawdown protection when markets are falling and participation when markets are rising.”

And that is exactly what it did during the COVID-19 volatility that wreaked havoc on markets earlier this year, with 2020 providing an acid test for the strategy.

“In the first quarter as the crisis took grip, markets fell precipitously, and the strategy did exactly what we’d hope for. That drawdown protection kicked in, and the strategy outperformed as those markets fell,” Smith says.

When the markets recovered in the second and third, the strategy participated in the rally.

“Basically, the strategy did exactly what we would hope for – it kept pace with markets when they were rising and was resilient when they fell,” he says.

The strategy in large part benefited from its many technology holdings, including Microsoft, Apple, Amazon and Facebook, and its holdings in pharmaceuticals such as Procter & Gamble and Johnson & Johnson. In fact, Smith and his team increased the strategy’s exposure to technology as it looks to improve quality and lower risk.

At the same time, Smith says, exposure to financials has been reduced as risk profiles begin to deteriorate. It has also reduced allocations to the energy sector, with Smith saying it is the sector that remains most out of favour due to its weak earnings, above-average risk and poor ESG characteristics.

He adds that many of the trends that have emerged during COVID-19 were already evident to factor investors – they were just on the periphery.

“What we’ve observed is that the COVID crisis may have accelerated some of the trends that we’ve been observing in factor investing for some time, particularly with regards to the technology and consumer technology areas,” Smith says.

Aware that they aren’t typically the kind of stocks investors would associate with low-risk investing, Smith says these industries have become more defensive in nature, and therefore more attractive to low-risk investors.

“Pre-COVID these segments of the market started to deliver higher quality earnings, more consistent and predictable earnings, and that led to the stock price behaviour becoming less volatile… that has become more pronounced,” he says.

Smith adds that the short-term volatility of several consumer technology stocks has been lower than in the past.

“Intuitively that makes sense; they’re well positioned to withstand the COVID shock, and in some cases, they’re going to be real beneficiaries of a more virtual, more digital world,” he says.

And, while not typical of the Rosenberg Equities’ team’s style of investing, Smith says: “If these trends persist, we think these stocks will increasingly have a place in our portfolio.”

The quote

Basically, the strategy did exactly what we would hope for – it kept pace with markets when they were rising and was resilient when they fell.

But the AXA IM Sustainable Equity strategy is not the only one of its ilk out there, and they all do things differently, making it very difficult for financial advisers to know what’s best for their clients.

Breaking down the options available, Smith places them into two distinctive buckets, saying it’s important to distinguish between the two.

On one side, you have the highly thematic funds which might seek to target a specific issue or sector, such as gender diversity. On the other you have the more core-like offerings which, while primarily seeking to build a robust investment strategy, do also seek to integrate ESG considerations in their investment decisions.

It’s the latter solutions that financial advisers should be focused on, Smith says.

“It’s easy for fund managers to adopt a simplistic approach, excluding a few stocks or sectors and providing a little ESG polish to the final portfolio. But we’re not sure that actually meets advisers’ or their clients’ needs or aspirations,” he says.

If advisers consider just one thing, it should be how much commitment fund managers demonstrate to responsible investing; “Is ESG an afterthought or is it tightly coupled with their investment decision making?”

“In our strategy, when we’re talking about targeting companies with higher earnings quality, we think that management diversity has a bearing on companies’ profitability and their ability to deliver those earnings. Consequently, we build diversity metrics into our investment models and measures of quality,” Smith says.

“We don’t talk about responsible investing as something distinct or separate, for us responsible investing is simply investing.” fs 1 Source: AXA IM, as of end of Oct 2020. Strategy Inception date: Aug 7, 2014.

Past performance is not a guide to future performance.

This document is issued by AXA Investment Managers Asia (Singapore) Ltd (ARBN 115203622) (“AXA IM Asia”). AXA IM Asia is exempt from the requirement to hold an Australian Financial Services License and is regulated by the Monetary Authority of Singapore under Singaporean laws, which differ from Australian laws. AXA IM Asia offers financial services in Australia only to residents who are “wholesale clients” within the meaning of Corporations Act 2001 (Cth).

This document is for informational purposes only and does not constitute an offer to buy or sell any investments or services, and should not be considered as solicitation or investment, legal or tax advice. Information contained herein is subject to change without notice. Reliance upon information in this document is at the sole discretion of the recipient. This document does not contain sufficient information to support an investment decision. Investment involves risks, and . past performance is no guarantee of future returns. © 2020 AXA Investment Managers. All rights reserved.

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News

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

FEAL executive of the year named

01: Karen Chester

deputy chair ASIC

Jamie Williamson

The Fund Executive Association Limited’s Fund Executive of the Year was awarded at an intimate dinner in Sydney.

UniSuper chief executive Kevin O’Sullivan has been recognised for his contribution to digital innovation, corporate strategy, and his leadership throughout COVID-19.

O’Sullivan has been chief executive of UniSuper for more than seven years, overseeing $83 billion in retirement savings on behalf of 495,000 members.

“Kevin’s outstanding leadership of UniSuper and his contribution to the industry over many decades makes him the perfect recipient for this award,” FEAL chair Jane Perry said.

“His passion for digital innovation in particular has helped UniSuper’s members become more engaged with their superannuation and goals for retirement.”

Also commenting, FEAL chief executive Joanna Davison said O’Sullivan’s dedication to providing the best possible service to UniSuper members while contributing to positive change in the super industry.

This is the 19th time the honour has been awarded, with Perry saying it serves to recognize outstanding leadership as an important pillar of the system in building confidence and improving retirement outcomes. fs

Funds management in regulatory spotlight Eliza Bavin

A The quote

It is a truth universally acknowledged that competition in and of itself doesn’t ensure good consumer outcomes.

Zurich adds to leadership team Zurich Life & Investments has bolstered its leadership team, including a new chief distribution officer.

Zurich will welcome three new executives: a chief distribution officer, head of customer and digital and head of strategy.

Kieran Forde has been promoted to the role of chief distribution officer as of the end of this month. He joined Zurich in 2018 following the acquisition of ANZ OnePath.

Currently head of bancassurance and direct and head of Zurich Propositions, he held a range of roles over his 11 years with ANZ including head of ANZ Financial Planning.

Meanwhile, Allianz Retire+ executive Jacqui Lennon will join the insurer in the New Year as head of customer and digital.

Zurich said she is well placed to lead Zurich’s proposition development and design, as it responds challenges facing disability income insurance and seeks to offer sustainable products.

“Both Kieran and Jacqui have a reputation for collaboration and creativity. Their appointments, alongside those of our other executives and the distribution leaders we have in Nathan Taggart and Tim Atley, will support our commitment to partnership and adviser service,” Zurich chief executive Justin Delaney said.

Finally, TAL integration insurance business director Shaneen Marshall will join as head of strategy. She has been with TAL for over four years and has previously held roles with FNB South Africa and PwC. Zurich said Marshall will lead several critical enterprise wide projects and will drive long-term strategy. fs

review of competition in the Australian funds management industry is underway, with the corporate regulator appointing Deloitte Access Economics to conduct the underpinning research.

ASIC acting chair Karen Chester01 made the revelation in a speech to the AFR Banking and Wealth Summit, saying the review seeks to identify where “competition is effective, where it is not, and if not, why not”.

“There is over a trillion dollars’ worth of assets under management in Australia, invested across retail investment products and wholesale funds.

Deloitte Access Economics is working with us on the underpinning research,” Chester said.

“It is a truth universally acknowledged that competition in and of itself doesn’t ensure good consumer outcomes. It is also a truth universally acknowledged that good consumer outcomes are more likely where competition is robust and effective.”

Additionally, Chester labelled managed funds as “opaque” and said it was a growing area of concern for the regulator.

“Investors (retail and wholesale) are ‘far from the paragon of textbook finance theory’ and the growth in housing asset prices and super balances have seen many unsophisticated

investors become wholesale investors,” she said.

“The act of asset management (the real stewardship of capital allocation) is challenged more than ever as risk-free rates flatline. At the same time, asset managers on the hunt for yield (starved of that yield in government bond markets) are moving to where others retreat (the banks) from private debt.”

Chester said investment funds have become overly complex, and that, combined with old fashioned product disclosure, has made comparing funds “difficult at best”.

“ASIC is responding by requiring responsible entities to have ‘true to label’ marketing and labelling, and releasing comparative data to support healthy competition,” Chester said.

She added that with the inevitable uptick in insolvencies and extreme macro forces being experienced, investment managers will face greater liquidity challenges.

“As underlying assets come under stress so will the managed funds that invest in them.

Some investors will likely be surprised to find they are unable to withdraw from previously liquid managed funds,” she said.

“So we are working with Treasury to ensure we have (and can publicly share) much greater data on retail management investment products, wholesale funds and non-bank lending.” fs

Top fund managers rank low on ESG Elizabeth McArthur

New research from Morningstar looked at more than 100 strategies and 40 asset managers to provide a Morningstar ESG Commitment Level score of leader, advanced, basic or low.

The largest cohort, 16 out of the 40 asset managers, were ranked as having a basic commitment to ESG. Six firms earned leader status, including Calvert and Robeco.

A further six were ranked as having an advanced commitment to ESG including AXA Investment Managers and Schroders.

Those that were identified as having a low commitment to ESG included some of the largest asset managers in the world – Vanguard, Fidelity, American Century, BetaShares, Dimensional, Harris Associates, Greencape, Geode and Dodge & Cox. The Vanguard Group as a whole received a low Morningstar ESG Commitment Level because its ESG efforts were found to not stand out upon closer inspection.

“ESG strategies have a long history at Vanguard, but they amount to only a fraction of assets under management and most use negative screens to exclude companies in controversial industries and those that run afoul of ethical and environmental standards,” Morningstar said.

“In practice, the screens of Vanguard’s ESG passive strategies do not differentiate the funds from their broader universes as much as peers that explicitly integrate ESG criteria to select companies with positive ESG characteristics.”

And, Vanguard was pulled up for personnel turnover.

Between late 2019 and early 2020, three senior leaders left Vanguard to start their own governance firm and in September a new head took over, Morningstar pointed out. The effect of this new management remains to be seen.

BetaShares’ earned a low score, with Morningstar saying its ESG specific ETFs do not contain enough ESG characteristics.

“Nevertheless, the four specific ESG ETF strategies, which track custom indexes, do contain reasonable ESG characteristics,” Morningstar said.

“Most of the screening within these ETFs are in line with core ESG principles and cover many of the usual suspects including fossil fuels, gambling, tobacco, and environmental damage.”

Another manager to earn a low score was US firm Fidelity Investments. Morningstar described ESG as being on the “fringe” of the firm’s investment culture. “…The firm created a centralised team of ESG specialists that would supplement the fundamental research conducted by the core equity and fixed-income analyst teams,” Morningstar said.

“Led by Nicole Connolly and David King, both of whom lacked ESG experience prior to taking their current posts in 2017, a small team of five ESG analysts leverage sustainability data from third-party vendors and collaborate with the assetclass analysts to assign companies ESG ratings that take the form of a six-tier, alphabetical, sector-relative scale.” fs

Opinion

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

9

01: Rob Tyson

managing director Mining International

Mining and superannuation ining and superannuation funds: they ‘go M together like’ that impossible to remember line from the hit movie Grease. However, in this instance we’re not talking about you and your particular fund, or explaining why it’s important to have a super or pension fund.

Rather we’re talking about the huge growth in these funds, the unprecedented power the big guns of the pension and superannuation industry can now wield, and the effects of this on industries like mining.

Today, superannuation and pension funds are among the biggest shareholders on the world’s stock exchanges. Notably, Deloitte believes around 60% of shares on the ASX will be owned by super funds within the next two decades. There’s also growing consensus that over the next 10 years we’ll see the emergence of a handful of mega funds created by mergers, and takeovers of smaller funds.

When that happens, it could well change some of the fundamentals that underpin many economies.

When it comes to the potential effects of super fund growth on industries like mining, Australia is probably one of the best countries to study.

It’s a major mining economy with a huge superannuation pool. However, similar scenarios would be playing out elsewhere where there are both large mining industries and large pension or super pools.

On the mining front Australia ranks second behind China, whilst its super pool is now the fourth largest in the world. As of 31 August 2020, it was worth AUD$2.9 trillion.

The lucky country Thus far Australia has remained largely insulated from the shocks of global recessions, living up to its reputation as ‘the lucky country’.

Therefore its mining and other core industries have been able to continue carrying out business almost as usual, a huge boon during these times.

This could be about to change though...

Australia’s super funds themselves are certainly not among the biggest in the world. Nonetheless they are already outgrowing the local economy and increasingly looking overseas for investment assets. Such investments will see Australian capital take on a bigger role in international asset markets, particularly lucrative mining stocks.

However, it will also bring new risks to the Australian economy by making it more vulnerable to the ups and downs of those global assets.

Therefore investing funds are looking for companies that are stable, well managed, and able to demonstrate that they have clear environmental, social and governance (ESG) criteria in place.

That will place a lot of pressure on companies, particularly in the mining industry where adequate ESG can be a weak link in the chain.

Indeed, there’s little doubt that as super funds ramp up their investment in businesses, it’s going to flush out those whose ESG and asset management isn’t up to par. Investors expect results. They’re going to invest in companies that have clear business strategies, and are investing in research and development that will back up those strategies. The ones that don’t will either have to shape up, or lose out.

Wielding big sticks When it comes to exercising clout, industry and public sector funds in particular are renowned for it. These funds have championed the push for companies to have more female board members for instance. They are also noted for jumping on board with environmental, humanitarian, social and governance causes because their own members expect it.

After all, in the highly competitive world of pension funds and superannuation, these funds want members. That increasingly means adopting policies that are deemed important and currently climate and environment are right at the top of that list. Then there’s the fact that many of the board members themselves have strong leanings in this direction.

That can make for an uncomfortable relationship between super funds and mining companies. Notably, Australian industry and public sector super funds use an ‘equal representation’ model of governance. In other words, their directors are a roughly 50/50 mix of representatives from member unions and employer groups.

This eclectic mix can and does cause problems for conservative companies when their interests and activities don’t dovetail with those of the super funds investing in them!

Granted, many super funds say they prefer to remain neutral. Their business after all is not telling the businesses they’re investing in how to run those businesses. But ... super funds ARE in the business of making money from their investments. If those businesses aren’t doing that then yes, super funds will increasingly have the clout to throw their weight around.

Should executives be worried?

When super funds own a large proportion of the share market, it gives them unprecedented powers to call the shots as they see fit. Australia’s biggest super fund AustralianSuper for instance recently informed the Minerals Council of Australia that its policies on climate change are ‘not good enough’ and that it ‘needs to do more’. Among other things, the fund is unhappy about the council’s continued support for the coal industry.

Mining major BHP has also been put on notice by investors that their membership of the

The quote

Deloitte believes around 60% of shares on the Australian Securities Exchange will be owned by super funds within the next two decades.

Minerals Council, while BHP has announced it will be reviewing its membership of industry groups to ensure that the ones they are members of are aligned with their own goals around ESG. BHP isn’t/won’t be alone in facing this challenge. The mining investment community is becoming increasingly concerned about humanitarian, climate and environmental issues so the pressure is on for companies to lift their game around these issues. If they don’t, investors will walk away and take their money with them.

When the biggest investors are super funds, you begin to see the type of clout this industry will have! It’s also possible that mega super funds will have get enough shares in companies to demand seats on boards, thus increasing their influence.

Overseas companies won’t be immune either.

As the anticipated mega funds begin to emerge around the world, they’ll be seeking global investments. That means a mining company in South Africa for instance could wind up with an Australian super fund as a majority shareholder (and vice versa). If that super fund is committed to certain environmental, climate and humanitarian goals, it may put pressure on that company to comply with its agenda.

Furthermore, a group of some 450 global investment funds have formed Climate Action 100+. According to their website, it is “an investor initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.” Loosely translated, that means ‘clean up your act or we aren’t interested in investing in you.’ Collectively the group members control over $40 trillion in assets.

The group has identified 161 companies globally that are contributing over 60% of global industrial greenhouse gases via Scope 1, 2 and 3 emissions. Not surprisingly, several of the big miners made that list - BHP, Rio Tinto, Glencore, Vale, Anglo American et al. Another of the group’s current priorities is taking on industry associations over their climate change agendas when those agendas don’t meet the goals of their member companies. According to investors, inconsistencies like that pose a business risk for them.

So yes, miners should be mindful of the growing influence super and pension funds have via their investment portfolios. They should also be aware that a growing number of those funds, in response to the concerns of their own membership, are committed to a range of environmental and humanitarian causes that in the past would likely have put them on a collision course with the mining industry. In a nutshell, super funds are getting choosy about who they invest in, and given their growing clout in investment circles, that’s something the industry needs to take heed of. fs

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News

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

Give the people advisers: RIR

01: Josh Frydenberg

Treasurer

Elizabeth McArthur

After the Royal Commission exposed deep flaws in Australia’s financial advice sector the industry has faced a crackdown from regulators, but now the Retirement Income Review has called for greater access to financial advice.

One of the key observations of the report was: “The retirement income system is complex.

There is a need to improve understanding of the system… People need better information, guidance and good, affordable advice tailored to their needs.”

The need for more affordable financial advice can be seen throughout the report.

For example, considering how superannuation assets could be used more efficiently accessing equity in homes could boost retirement incomes without the need for additional contributions, the report found professional advice was needed.

“A range of measures could help people have the confidence to use their assets more effectively, including focusing retirement planning on income streams rather than balances, better quality and more accessible advice and guidance,” it said.

It said there was a clear need to improve the understanding of the system and that this lack of understanding was being exacerbated by a lack of advice and guidance.

One of the retirement income conundrums the report attempted to untangle is what exactly should be the objective of Australia’s retirement system.

It suggested the objective should be: “To deliver adequate standards of living in retirement in an equitable, sustainable and cohesive way.” fs

Fifth pillar considered

Frydenberg unveils Retirement Income Review Karren Vergara

T The quote

We will consider this report and other views and we will make a decision in light of current circumstances before that scheduled increase takes place.

he federal government’s landmark review into the nation’s retirement income system left on no stone unturned in observing the “complex” structure but fell short of short of making any recommendations.

In releasing the 648-page report, Treasurer Josh Frydenberg01 presented “evidence-based, independent” findings of the Retirement Income Review with Minister for Superannuation, Financials Services and Financial Technology Jane Hume that will form the foundations of future policies.

The review went through the three pillars being the Age Pension, compulsory superannuation and voluntary savings with a fine tooth comb.

Frydenberg said the review has established a fact base that will improve understanding of how the retirement income system operates, better informing public policy and the retirement outcomes delivered to Australians.

Frydenberg stopped short of confirming that the legislated superannuation guarantee (SG) will not go ahead next year, citing that “we are living in a different economic environment” thanks to the global pandemic.

“We will consider this report and other views and we will make a decision in light of current

circumstances before that scheduled increase takes place,” he said.

The SG is meant to increase from 9.5% to 10% on 1 July 2021. On 1 July 2025, it is slated to reach 12%.

The coronavirus has sent economic shock waves that have impacted wages, the economy, and labour markets, he said, adding that the government needs to make a decision on the economic facts at the time.

Frydenberg took into account arguments from the Grattan Institute and the governor of the Reserve Bank of Australia to consider carefully the tradeoff in increasing SG and having less money in people’s pockets.

Hume flagged that better retirement income products are on the way and that the financial advice industry will play an important role in helping members navigate the complexities of the system.

Most Australians do not have financial advice for a number of reasons, she said, as the cost of advice is expensive and many distrust the system.

The government is looking to improve these elements at the moment, she said, working with the advice industry and ASIC to reduce the red tape and increase the professionalisation of financial advisers.

Pointing to the super gender gap, Hume does not see the gap closing but narrowing over time. fs

Eliza Bavin

The review noted that currently Australia has three pillars: the Age Pension, compulsory superannuation and voluntary savings.

Additionally, many have pointed to household capital and home ownership as an important fourth pillar, which the RIR also discussed at length.

However, the RIR takes it a step further, saying several submissions suggested more pillars, ranging from work in retirement, non-financial arrangements, Jobseeker Allowance for the involuntarily retired, private intergenerational transfers and health and long-term care.

“The World Bank proposes a five-pillar framework that includes social transfers in kind outside the formal pension system,” it said.

“Social transfers in kind are a significant factor influencing retirement outcomes. All sources of income and support that people can draw on to support their standard of living in retirement are important and should be considered.”

The RIR said social transfers in kind are an important factor in influencing retirement outcomes to helping to achieve a minimum standard of retirement.

“All sources of income and support that people can draw on to support their standard of living in retirement are important and should be taken into account,” it said. fs

Superannuation Guarantee verdict: Choose your own adventure Kanika Sood

In a catch 22, the final report says keeping SG at 9.5% will shrink Australian’s final retirement balances by 12-18%, but increase working-life income by 2%.

Australians will retire with 12% to 18% thinner final balances if the government sticks with its plan to increase superannuation guarantee to 12% from 9.5%, the report says.

Its modelling found lower-income earners would be harder hit, with their balances at retirement projected to be 16-18% lower under a 12% SG regime (from the current 9.5%). Middle and high-income earners will see their balances shrink by 14-15%.

The report relies on five variables in predicting this 12-18% decrease: salary sacrificing, contributions tax, fees and insurance, compounding on investment returns, and interaction.

In simple terms, a median Aussie earner would have $45,000 less in dollar-contributions going into their retirement pool under the 9.5% rate than the 12% rate.

If investment returns on this are considered, it comes to $67,000 after compounding and

interaction of the factors. However at the same time, he/she will also be more likely to make voluntary contributions, and pay lower taxes and fees.

“The degree to which the above factors offset the forgone superannuation contributions would vary by income level. They are estimated to offset almost two thirds of the forgone SG payments for income earners in the 99th percentile, falling to about 20% for lower income earners,” the review concluded. The report’s modeling is based on a 40-year career.

However, the report concludes that SG staying at 9.5% would mean that people keep more of their total remuneration as wages instead of SG contributions. It puts this at 2% higher working-life incomes, giving them “higher living standard in working life”.

“If people efficiently use their assets, then with the SG rate remaining at 9.5%, most could achieve adequate retirement incomes when combined with the Age Pension….Maintaining the SG rate at 9.5% would improve the sustainability of the system,” the report states. fs

News

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

Age Pension overhaul needed

01: Eva Scheerlinck

chief executive Australian Institute of Superannuation Trustees

Annabelle Dickson

The long-awaited Retirement Income Review (RIR) acknowledges the Age Pension as providing a safety net for those who do not have the means to create their own minimum standard of living in retirement and secondly as a buffer for retirees whose incomes fall.

The review found groups such as renters are less likely to achieve the minimum standard of living.

“The system should ensure a minimum standard of living for retirees with limited financial means that is consistent with prevailing community standards,” it said.

As at June 2019, around 71% of people aged 65 and over received Age Pension or other pension payments with over 60% of these on the maximum rate.

For most households aged 65 and over the family home is their main asset with superannuation making up a small share of their net wealth. But retirees who are renting require additional assistance.

Many stakeholders suggested to the panel a specific increase to maximum rate of rental assistance by 40%.

“Increasing the rate of Commonwealth Rent Assistance will only have a small impact. A new approach is required,” the report said.

In addition, the RIR found this increase would “not be sufficient to significantly reduce income poverty among retiree renters” and would narrow the income poverty rate between renters and homeowners.

“This reflects that even after the increase, Commonwealth Rent Assistance would be a small proportion of the housing expenses faced by renters compared to homeowners,” it said.

“However, and consistent with the indications of retirees in financial stress, retiree renters on the Age Pension have income poverty rates well in excess of other retirees and working-age groups.”

In addition, the inequity gap may increase as the cost of the Age Pension is expected to fall from 2.5% of GDP to 2.3% by 2060, while superannuation tax breaks will rise from 2% to 2.6% of GDP. fs

System fails First Australians Elizabeth McArthur

In 2018, the median super balance for Aboriginal and Torres Strait Islander men was 59% lower than that of all men - $25,000 as opposed to $60,635. Aboriginal and Torres Strait Islander women had balances 50% lower, $19,000 as opposed to $38,000.

And, those figures do not capture the portion of the population that does not have any super at all.

Only 58% of Aboriginal and Torres Strait Islander women have a super account (83% of all women do) and 74% of Aboriginal and Torres Strait Islander men (as opposed to 85% of all men).

The way JobSeeker (unemployment benefits) are structured does not help this inequality.

The report found that Aboriginal and Torres Strait Islander people are over-represented in the Community Development Program – a remotearea community scheme where participants receive JobSeeker. fs

11

SG rise no real benefit to women: Review Jamie Williamson

T The quote

We should be trying to lift those falling through the cracks to the adequate levels en­joyed by others in the system.

he review has stated that consideration should be given to whether the retirement income system is exacerbating or compensating for inequities people experience in their working lives when comparing those with low or lower retirement incomes, such as women, to others.

The review concluded that the gap in retirement savings and retirement incomes for women is the accumulated result of the economic disadvantages they face while working. These include lower wages than men, more career breaks, and more part-time work.

Breaking down the suggestions of stakeholders in improving system equity, the review states that increasing the SG would not reduce the super gap as it would benefit men more than women.

The higher life expectancy of women means their super balances at retirement need to go further and, while the gap will narrow in the years to come, it will not close so long as gaps remain in earnings and workforce participation, the report states.

But not everyone agrees.

The Australian Institute for Superannuation Trustees said halting the increase to SG will see women, and low-income earners generally, suffer.

“Low and many middle-income earners, don’t have savings or home equity to fall back

on if their super isn’t adequate. This is particularly true for women, and those who have had to drain their super accounts to get through the COVID lockdown. The increase to 12% super is critical for them to have financial security in retirement,” AIST chief executive Eva Scheerlinck01 said.

It was also suggested that super tax concessions be reduced for higher-income earners.

The review states that while this would reduce the gender super gap it would only be to the degree that gender gaps in working-life incomes translate into super balances.

Inequity in the system should be dealt with directly, through addressing the distribution of tax concessions, rather than leaving women with a shortfall by delaying or freezing the super increase, causing even more women to retire in poverty,” Scheerlinck said.

“We should be trying to lift those falling through the cracks to the adequate levels enjoyed by others in the system.”

Other suggestions put forward by stakeholders included: removing the $450-a-month threshold; paying super on both employer parental leave and government parental leave pay; disclosing super balances in retirement and increased support for lower-income retirees that rent, with more women renting in retirement than men. fs

Homeowners given preferential treatment: RIR Eliza Bavin

The Retirement Income Review found the treatment of housing in the Age Pension assets test provides more support to homeowners compared to non-home owners.

The review found the preferential treatment given to home ownership leads to inequities in the retirement income system.

“The exemption of the principal residence in the assets test particularly benefits age pensioners with high-value homes,” it said.

“Around 15% of retirees on the Age Pension own homes worth more than $1 million.

The RIR noted that the larger free areas in the assets test for non-homeowners benefit only a small share of retirees who are renting.

“About 6% of non-homeowner Age Pension recipients have a level of total assets above the homeowner thresholds and below the non-homeowner thresholds and could benefit from this preferential treatment,” it said.

“Even the limited number of renters who benefit from the higher assets test free areas and hold their wealth in forms other than a home are still at a disadvantage relative to homeowners.”

The review said, compared to a homeowner with identical total wealth, a renter receives about $4000 less Age Pension per year.

“Compared with the Age Pension, Commonwealth Rent Assistance is more targeted to lower-wealth households,” it said.

“About 20% of Age Pension expenditure goes to the top two wealth quintiles, while close to 90% of Commonwealth Rent Assistance expenditure goes to the bottom wealth quintile.”

The report noted that homeowners and renters have large differences in their income and wealth accumulation during their working life.

“While working, home owners generally have higher incomes than renters. They typically have higher educational attainment and longer employment history, in part due to the requirements for down payment and ongoing servicing of mortgages,” it said.

“Home ownership also serves as a savings commitment device. Working-life differences result in different retirement outcomes for home owners and renters.”

The review found that despite home owners and renters have about the same income in retirement due to government payments to lower-income households, home owners have lower housing expenditure and therefore higher disposable incomes.

“Home owners are less likely to face financial stress and poverty in retirement. Apart from working-life differences, some government policies affect home owners and renters differently,” the RIR said.

“The Age Pension assets test treats retirees in similar economic circumstances differently based on their home ownership status.” fs

12

News

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

Hannover exits group insurance

01: Debby Blakey

chief executive HESTA

Kanika Sood

More than 10 superannuation funds could soon be looking for a new group life insurer, as Hannover Re reverses out of the segment to focus on reinsurance.

The German insurer currently has insurance mandates for large superannuation funds like Equipsuper and Sunsuper as well as for smaller ones such as Mercy Super and AvSuper, according to Rainmaker Information data.

Hannover Re Australia general manager finance David Tallack said there wasn’t a set date for the exit from the segment.

“We are working with the trustees in their interest and in interest of the members. It is a strategic shift to focus on reinsurance,” he said.

Hannover has two main businesses in Australia: working directly with superannuation trustees to provide group insurance to funds, and a reinsurance business. fs

Look to China: Research Eliza Bavin

Willis Towers Watson (WTW) has called for greater investment in China despite rising tensions between Australia and China which has led to several trade disputes and ongoing vitriol between leaders.

The two research papers from WTW said Chinese assets should build up to 20% of global investor growth portfolios over the next decade, compared to the current 5% exposure.

WTW said analysis from the research shows that Chinese capital markets provide diversification benefits and attractive alpha opportunities for global investors.

It said the research demonstrates why asset owners should consider Chinese equities as a stand-alone allocation.

“Geopolitical tensions and negative rhetoric are overshadowing the fundamentals of the business environment in China,” WTW director, investments research Liang Yin said.

“Ongoing US-China tensions, the movement towards de-globalisation and continuing fallout from the coronavirus pandemic are all to some extent deterring investors from allocating to China.”

As well as the US-China trade war launched

by US President Donald Trump, China has begun rejecting Australians goods or imposing heavy duties on Australian products.

So far, China has targeted Australian barley, lobster and coal. Most recently, it imposed duties of up to 212% on wine exports.

Despite this, Yin said, global investors with a long-time horizon should not be deterred from investing in the nation.

“Rather than weaken the case, these factors actually reinforce the need to own more Chinese assets to make portfolios more resilient in a changing and uncertain world,” Yin said.

“Local financial market reforms have also continued throughout the past few years, making China more attractive and easier to access for global investors.

“While some setbacks are unavoidable, over the long run the opening up of the Chinese capital markets is expected to continue.” fs

HESTA partners with Australian Unity Elizabeth McArthur

T The quote

As patient, long-term investors we see an exciting opportunity to invest in the fastgrowing ‘care’ economy that can generate strong returns for HESTA members.

he $56 billion industry superannuation fund for health workers has partnered with Australian Unity to establish a new capital source for the For Purpose, Mutual sector in Australia.

HESTA has committed $20 million as a cornerstone investor in Australian Unity’s inaugural issuance of Mutual Capital Instruments (MCIs).

The super fund is making this investment through its Social Impact Investment Trust, managed by impact investment manager Social Ventures Australia.

This trust aims to create a pipeline of impact investments designed to both earn returns and have positive, measurable social impact.

Legislative change in 2019 enabled the creation of MCIs, providing the opportunity for mutual entities like Australian Unity to access permanent capital without compromising their mutual status.

“We’re very excited to be the first investors to support Australian Unity to bring MCIs to market as we both share a long-term interest in building this country’s social infrastructure,” HESTA chief executive Debby Blakey01 said.

“As patient, long-term investors we see an exciting opportunity to invest in the fast-growing ‘care’ economy that can generate strong returns for HESTA members while helping to create growth and jobs in the industries where they

work. Investing in the health and community services sector will also support a faster, higherquality COVID recovery and the long-term resilience of our economy.”

Australian Unity said the capital raised would be used to pursue a range of opportunities including growth opportunities within the business.

“The use of proceeds may also extend to merger and acquisition opportunities across our business platforms – to increase investment in social infrastructure and to help support business consolidations in important mutual sectors such as private health insurance, banking and friendly societies,” Australian Unity Group managing director Rohan Mead said.

“We’ve seen extraordinary growth in Australia’s social impact investment market over the past few years. Much of this growth has come from unlisted assets classes. The sources of investment for these opportunities have come mainly from family offices, high net worth individuals and institutional investors, but this raising by Australian Unity can also be accessed by retail investors.”

“Bringing this MCI to market with an organisation with the expertise and deep community links of Australian Unity provides the potential for the development of an entirely new social impact investment product that’s available to both small and large investors alike.” fs

QSuper bets on new retirement product Karren Vergara

QSuper is building a new retirement product that guarantees a lifetime income, combatting longevity risk and fears that retirees will run out of money.

Chief executive Michael Pennisi told a recent member update that the product, while still in the works, complements the Age Pension and other superannuation earnings.

The idea was conceived because he worries about the significant risks retirees face: running out of money or having to live frugally.

APRA June 2019 data shows that an overwhelming number (83%) of accounts in retirement phase are in account-based pensions that do not manage the risk of running out of money at retirement.

Pennisi said the product still has a long way to go before launching. He did not divulge any details other than it “is looking quite promising.”

The Retirement Income Review found that a large gap exists in providing members advice and assistance in making better informed decisions in retirement phase.

Super funds are uniquely placed to provide advice and guidance to members who must contact their provider to commence a retirement income product, the review found, but conflicts of interests exist between putting the interest of

members first and retaining member money to maximise funds under management.

Many industry stakeholders are calling for simple regulated products akin to MySuper products.

The federal government is aiming to create a framework for Comprehensive Income Products for Retirement (CIPRs).

Such products will meet minimum standards and provide higher income than an account-based pension drawn down at minimum rates.

The review found the use of annuities in Australia remains “very low” and do not fully curb longevity risk. Modeling of three retirement income products found allocating 100% of assets to a group self-annuity starting at 67 would yield the best results of $44,000 in average retirement income.

Pennisi told an audience of members during one session: “We absolutely believe that there is a place for our members to get a more reliable income stream that they may be able to use with a QSuper income account and they may be able to get benefits from the pension.” “[We] need to now go through all the work that we need to do in the background to make sure that when we bring it to you, we can stand behind it and, like every QSuper product, you can believe in it.” fs

News

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

13

Products 01: Santiago Burridge

Advice tech solutions opens raise A financial software as a service (SaaS) platform that gives advisers the tools to provide advice based on client goals has opened a crowd source equity raise.

Lumiant, a holistic client experience management solution founded by Implemented Portfolios chief executive Santiago Burridge01, has opened a $1.5 million raise via crowd source equity platform Equitise.

Lumiant’s platform allows advisers to drive measurable, meaningful and repeatable experiences which break down barriers, provide clarity, and increase communication while meeting the requirements of the best interest duty.

It starts with a questionnaire which will help advisers and clients understand the client’s current levels of confidence across a range of important issues related to their financial well-being.

The adviser will then meet with clients to take time to understand their values and their needs to tailor an investment strategy that maps these values and goals.

Burridge believes this product fills a gap in the market as there are not enough great technology solutions available within the advice industry.

“These advice businesses — including sole traders, partnerships, and larger adviser networks — remain underserved and undervalued by the traditional financial institutions, and are often constrained by legacy business models, technologies, and procedures,” he said.

“Advisers are tired of having to manage their business via a patchwork of ill-conceived, product-based technologies. It is costing them time, money and adding to the stress of running an advice business.”

The information will be captured in the Lumiant Lifebook which helps clients helps track their progress toward their goals.

The company has reached the minimum funding target of $250,000 with the raise closing on December 16.

CFM fund to wind up The French quant manager is shutting an Australian fund, after returns slipped into negative territory and fund size stagnates.

The CFM Institutional Systematic Diversified used a multi-strategy quantitative approach to target positive returns over the long term with a low correlation to traditional asset classes.

Its responsible entity Perpetual Responsible Entity Services attributed the closure to the small size of about $10 million, based on which it and CFM think the trust can no longer accomplish its purpose.

In its five-year life, the fund delivered -4.2% p.a. since its inception in November 2015 to October end. It has only had one calendar year of positive returns, which was a 6.5% in 2017.

This year, the returns have been -17.24% p.a. so far.

The fund used a combination of strategies including long-term and short-term trend following (31% and 8% respectively of the strategy’s total

Bloomberg indices rebrand Bloomberg will rebrand one of its widely-referenced indices on 24 August 2021.

The Bloomberg Barclays fixed income benchmark indices will soon be known as the Bloomberg Indices.

The move is part of a co-branding agreement with Barclays Risk Analytics and Index Solutions (BRAIS), for an initial term of five years.

Bloomberg acquired BRAIS in August 2016.

Also part of the acquisition, Bloomberg was the calculation agent for Barclay’s quantitative investment strategy index business and strategy indices.

Other fixed-income benchmarks like the US, Euro, Asia Pacific, global aggregate, US municipals, high yield and emerging markets will be included in the rebrand. Bloomberg Barclays MSCI indices will be known as the Bloomberg MSCI indices.

assets), universal value and carry (17% each) among others.

In March, the fund dropped its minimum investment size from $50,000 to $20,000.

The strategy will still be available to Australian investors via the overseas vehicle.

CFM’s other strategy for local investors is the CFM ISTrends Trust, which uses long-term trend following to invest in commodities, currencies, fixed income, short-term rates, equities and credit.

ClearView streamlines underwriting ClearView Wealth has adopted Munich Re’s digital platform to streamline the underwriting process and manage compliance obligations.

ALLFINANZ Cloud, which was launched by Munich Re in 2019, will provide the cloud-based underwriting rules engine to speed up the underwriting process.

The use of predictive modelling and machine learning aims to create efficiencies when onboarding new customers and reduce the number of underwriting questions.

ClearView general manager of wealth management Deborah Lowe said the firm continues to invest in IT infrastructure to build a complete end-to-end digital solution that delivers a superior adviser and client experience, with the ability for customers to self-service in the future.

“Financial services in Australia is one of the most regulated industries globally and our decision to implement ALLFINANZ Cloud ensures ClearView is able to dynamically manage its compliance obligations and any regulatory changes while pursuing long-term sustainable growth,” Lowe said.

Other life insurers that have adopted ALLFINANZ Cloud are Prudential Thailand, Generali Indonesia, Hong Leong Malaysia and FT Life Hong Kong.

US technology firm Omniscience announced in April that it has developed an underwriting function that accelerates life insurance decisions one thousand times or more.

Omniscience co-founder and chief executive Sunil Rawat said: “Our customers, many of whom are in Asia, are reporting that they are experiencing a dramatic increase in their workloads. There are both many more claims due to the pandemic and more applications for life insurance than in the past.”

Magellan axes currency hedging in trust A Magellan trust has removed its currency hedging strategy to reduce the downside risk to the portfolio when equity markets and the value of the Australian dollar are both declining.

Magellan High Conviction Trust will move to an unhedged approach to foreign currency exposures while retaining the flexibility to reduce the impact of identified event risks.

The trust said its portfolio managers, Magellan co-founder Hamish Douglass and Chris Wheldon, implemented the active hedge in 2015 reduce the impact of foreign currency exposure when the Australian dollar traded outside its historical range.

02: Matthew Drennan

Wheldon told Financial Standard one of the reasons to remove the strategy was over the oneand three-year periods through 30 Sep 2020 the active currency hedge was a “marginal detractor” from returns.

“Over the five-year period to 30 September 2020, it was a marginal contributor to returns. That is, it’s had very limited impact either way on client outcomes,” he added.

The $983 million trust invests in eight to 12 of Magellan’s highest conviction ideas. Currently its largest five holdings include Alibaba Group, Alphabet, Microsoft, Starbucks and Tencent.

Magellan is restructuring its retail global equities funds to create a $15 billion fund that will combine the unlisted, ETF and LIT versions of the Magellan Global Fund.

Wheldon said it was the restructure that Magellan used as an opportunity to adopt the unhedged approach to the High Conviction Trust.

Zurich launches new fund Zurich Investments has launched a new fund based on the structural changes that will change the way we live over the next decade.

The Global Thematic Focus Fund will consist of three to six high conviction investment themes with a portfolio of 35 to 50 stocks that directly relate to them, rather than a benchmark.

The investment team currently foresees the structural drivers as geopolitics, monetary policy, sustainability and technology.

From these, the team has identified investment themes that fit within and will benefit from the structural changes.

The themes will evolve over time and currently include asset efficiency which are companies that deploy operating systems for efficiency; bits of chips which are the components that enable the digitisation of transport and other industries and empowered consumer by investing in consumerfacing companies.

It also includes software as a standard which are companies that are automating white collar jobs; digital runway, the emerging fintechs; and data, networks and profits which is capturing returns from artificial intelligence.

Zurich Investments head of savings and investments Matthew Drennan02 said advisers can now provide clients with the upside potential of global structural change.

“This high conviction, long-term style of investment has been high on the wish-list for financial advisers for some time now, and we are pleased to bring this strategy to Australian investors during a period of historic global challenge but also significant investment opportunity,” he said.

“Instead of consensus positions and shorttermism, these proprietary themes, based on real world observations, can evolve to capture the best ideas within a changing world.”

The fund’s strategy also has a fully integrated approach to sustainability, including theme alignment with the UN’s Sustainability Development Goals. fs

14

Roundtable| Estate planning Featurette

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

Mortality, morality and the $3tn transfer With Millennials and Gen Zs set to inherit a gargantuan $3 trillion over the coming decades, experts say COVID-19 has unwittingly helped to ready Australians like never before.

Ally Selby writes.

A love of the great outdoors is passed down from generation to generation, and sees Australians routinely pack their bags to cross state and territory lines and board arthritis-inducing flights in our thirst for exploration.

When COVID-19 reached our shores in late January, Australians - perhaps many for the first time - were forced to leave this all behind for self-isolation, and instead, reflect on what else we pass down to our loved ones in the case of our demise.

Research conducted by law firm Maurice Blackburn in 2019 found that 54% of Australian adults did not have a will. Of these respondents, less than half knew what would happen to their estate if they died.

Oh, how much can change in a year.

In a survey of Australians in October, social researcher and demographer Mark McCrindle 01 found 47% of Australians had thought more about their mortality in the face of the pandemic. This, he says, saw many Australians reflect on the future of their estate.

“Pre-COVID, Australians were busy travelling and lifestyle was a big pursuit; they focused on the journey rather than any sense of financial destination or intergenerational wealth planning,” he told Financial Standard.

“COVID-19 rattled Australians and forced them to think about financial planning, worst case scenarios, their future and that of their children.

“For a nation that's not known to be particularly reflective on such things – for almost half of the

population to have thought about mortality in these times, that’s dramatic.”

This confrontation with one’s own mortality has helped kickstart conversations around estate planning, DLP Life Design founder and financial adviser Donna Lee Powell02 says.

“It’s not about your social status, your wealth, or your lifestyle; everyone is susceptible to it,” she says.

“I think the uncertainty of the virus has struck a chord with almost everybody; people are now more engaged and more open to discuss and implement estate plans.”

McCrindle is not alone in this finding; Australian Unity Trustees Legal Services national manager of estate planning Anna Hacker 03 says she saw a 60% increase in client numbers in April and May, in the midst of the lockdowns.

“People realised this was something that could directly affect them; that could strike them down, so it made a lot of people either do their wills for the first time or stop procrastinating and tick estate planning off their ‘to-do’ list,” she says.

Similarly, Maurice Blackburn saw more than a 30% increase in enquiries for wills in the first three months of the COVID crisis.

“The health crisis prompted people to think about their mortality and get their affairs in order just in case,” Maurice Blackburn wills and estates principal Andrew Simpson says.

Interestingly, the law firm also saw increased interest in estate planning from younger generations – as people, young and old, confronted the ramifications of being wiped out by the virus.

“While the largest interest was obviously from the 55-to-64 age bracket and beyond, the second biggest area of interest was from the 25-to-34year-old cohort,” Simpson says.

“That was something that we didn't expect.”

A (temporary) digital revolution

We did see people shift away from giving to charities and focus a bit more on their families, because I think there was concern around protecting wealth for that next generation.

Anna Hacker

This sudden influx of clients coincided with what Hacker describes as the “greatest change in estate planning law” in over a decade, with New South Wales, Victoria and Queensland introducing temporary measures to digitalise the estate planning process.

This legislation provided lawyers, financial advisers and their clients with the flexibility to virtually sign and witness wills and enduring documents – but in practice, digital witnessing was fraught with difficulty.

“While video conferencing really is amazing, most people don’t have the scanners that allow you to feed the document into the printer, so they would have to individually scan up to 50 pages,” Hacker explains.

“If it's a husband and wife or two partners you would have to do that scanning process twice and then, while on video, you send it to the first witness, and then that person has to do the exact same thing to send it to the last witness, and then they send it back to the client.”

She also notes that there was a shortage of printers and scanners available for people to buy in Victoria, making the virtual witnessing process impossible for some.

Estate planning | Featurette

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

Similarly, Simpson and his team faced a variety of issues when facilitating the virtual witnessing of wills.

“We had clients in aged care facilities who didn't have access to technology, and other clients who were in hospital and no one was able to take documents into them because no one was allowed to come in contact with them,” he recalls.

For some of these clients – those infected by COVID-19 – Simpson and his team could do nothing but wait.

“In one instance, hospital staff would not offer any assistance in setting the client up with an iPad or a phone, so we just had to sit and wait and hope that the client would pull through,” he says.

Nevertheless, Simpson believes virtual witnessing and signing has helped change estate planning for the better.

“It’s created greater flexibility in the way you take instructions and the way you sign estate planning documents; it’s been a great change and if it’s all wound back, I think that will be a shame,” he says.

COVID-19, in a way, has made the law more accessible to more people, Simpson says, including those living in remote areas, as well as those who can’t travel or are immobile.

“People have been able to access lawyers in ways that we hadn’t contemplated prior to COVID19. I think it would be a shame if it was unwound and those people missed out,” he says.

While Hacker agrees, she doubts that virtual witnessing will have a permanent place in estate planning law.

“When wills go to be probated and if there is no increased allegations of fraud or undue influence or all those things that are of concern with the lawyer not being in the room with the client, maybe that will shift,” Hacker says.

“But at this point, I believe it will just go back to the way it was; the meetings will still continue to be much more virtual than they were before, but the signings unfortunately will not.”

For better or worse According to Simpson, COVID-19 and its entwined market volatility has irrevocably impacted retirees’ perception of wealth.

“They are concerned, quite rightly, that the value of their overall wealth has deteriorated over COVID,” he says.

“People have stopped and reconsidered what they're doing, and in some cases, have actually revised their estate plans because they’re concerned about their ability to fund it.”

Powell believes this has resulted in a reduction in philanthropic donations.

“Clients are looking after themselves first, perhaps because of the uncertainty of their own future, investment markets and the economy,” she says.

“There has been less of that giving and donating. It’s still happening, but it has reduced.”

Hacker agrees, noting that with many Australians moving home, her clients have shifted to focus more on preserving their wealth for their family.

“We did see people shift away from giving to

01: Mark McCrindle

02: Donna Lee Powell

03: Anna Hacker

social researcher and demographer McCrindle Research

financial adviser DLP Life Design

national manager of estate planning Australian Unity Trustees Legal Services

charities and focus a bit more on their families, because I think there was concern around protecting wealth for that next generation,” she says.

However, McCrindle has found that some of the larger charities and religious groups have actually reported increased donations during what has been an irrefutably tumultuous year.

“Bushfires, droughts, COVID – whatever the disaster, Australians feel that it is a responsibility for us to step up and give. It’s remarkable, but it does show the generosity of Australians during tough times,” he says.

“Interestingly, we also found that faith groups who typically donate to churches, ministries and outreach programs - have continued to give even with churches shut. So, if anything, Australians have been extra generous this year.”

Protecting wealth in COVID-19 Hacker notes that following the GFC there was an increase in the number of clauses added to wills to be clear that an executor wasn’t liable for losses.

“It’s a balancing act because the beneficiaries want an estate administered quickly; they want their money, but that’s really hard if prices are down; house prices, share prices – everything,” she says.

“The executor is then in this position where they have to say: ‘Well I can sell it now, but you’re not going to get as much’. And of course, when they don’t get as much as they’re expecting – who do they blame? The executor.”

Due to current market uncertainty, Hacker says beneficiaries increasingly prefer the assets themselves; equity, property, you name it – rather than the executor selling the assets for cash.

“People want to ride out this wave, and hopefully, the asset prices will increase later,” she says.

“From a planning point of view, it's about flexibility. You want to make sure that if your executor found themselves in the middle of a pandemic, they're not forced to do anything; they can sit back and wait.”

Meantime, Koda Capital partner and adviser Sabil Chowdhury says he has noticed a greater interest around testamentary trusts.

“In case something happens, the estate’s assets are protected in a tax efficient manner, and there are no major issues with asset protection or bloodline protection in case that wealth gets in the hands of someone who it wasn’t intended for,” he says.

The next generation Experts say we are on the precipice of the biggest intergenerational wealth transfer that we will see in Australia, with millennials expected to inherit around $3 trillion over the coming decades.

“This is one of the biggest wealth transfers that we are going to see so it’s important to put structures in place to not only protect wealth, but also protect children from being exploited,” Hacker says.

In fact, 90% of Australian Unity’s wills would include some sort of testamentary trust, Hacker says, not only for tax minimisation but also to

Advisers need to move from thinking about their Boomer or Gen X clients and think about the emerging Gen Z and meeting their needs …

It’s a risk, but it’s also a massive opportunity.

Sabil Chowdhury

15

ensure there is a gatekeeper to help the child make “sensible decisions” with this wealth.

“We work really closely with financial advisers and we talk a lot about intergenerational transfer of wealth; parents want to make sure that the financial adviser that they trust still has a part to play and will help their kids to make good decisions,” Hacker says.

“But in our experience, as soon as someone inherits this wealth, they generally think they can do it themselves.”

McCrindle agrees, noting that Millennials and Gen Z are “pretty empowered” to go out on their own.

“Whether it be making sourdough, diagnosing their own medical issues – or managing money – they will educate themselves and use the tools, apps and support that is out there to save money,” he says.

While Chowdhury agrees that the younger generations’ different attitudes towards wealth management may become a threat to the advice profession, he argues a focus on relationship building could minimise this risk.

“If advisers are intimately involved in the family relationship and have helped solve complex problems - not just about investments, but also asset protection and tax optimisation - then it isn’t much of a risk,” he says.

“There is a risk, however, if the advisers have never met the next generation, because now with proliferation of do-it-yourself options and easy to access information on the internet, they can try to do it themselves.”

He believes there is a real opportunity for financial advisers to connect with younger generations through financial education.

In this way, when the transfer of wealth happens, the younger generations already have a steadfast relationship with their adviser, he says.

McCrindle also encourages financial advisers to focus on the younger generations to take advantage of Australia’s $3 trillion intergenerational wealth transfer.

“Advisers need to move from thinking about their Boomer or Gen X clients and think about the emerging Gen Z and meeting their needs … It’s a risk, but it’s also a massive opportunity,” he says.

To do so, he argues, advisers will need to reshape their communications, offerings, and fee structures to engage with a generation who think differently to their elders.

“It has to be something that empowers people… younger generations want to feel more in control, but also have that backing of a financial advisor to make sure that it's actually the right thing to do,” Hacker adds.

And Australians need advisers help now, more than ever, Powell says.

“It’s more important than ever to seek advice and understand your underlying investments and the impact the economy may have on them moving forward,” she says.

“COVID-19 has actually enriched the discussion with new clients coming on, from the quality of investment assets, to liquidity, diversification and estate planning. We have never been busier.” fs

16

Feature | Investment

INSURER SEEKS RETURNS Leading insurer seeks extra sources of return in a low-rate world • Should tackle low rates • Fixed income preferred • But will look at other classes • Nothing too crazy, as restricted by regulatory capital requirements • Speak to our investment chief now • Kanika Sood reports

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

Investment | Feature

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

A

IA is the largest listed life insurer in Asia Pacific.

Its 18 offices in the region employ internal investment management teams that include portfolio managers, credit ana-

lysts and actuaries.

Together they invest in $386 billion worth of assets to meet $307 billion in liabilities, as at June end.

Historically, AIA’s 18 units have stuck to their home countries while investing premiums. Now, its local office is taking little steps out of Australian dollar assets.

The insurer is looking at adding foreigncurrency-denominated debt to its otherwise all-Australian portfolio of assets, AIA general manager direct investments AU and NZ Alison Murray explains.

“There is opportunity, something that we're doing a lot of work on at the moment to look at foreign currency denominated assets, and how to do that on a fully hedged basis in a capital efficient way,” Murray says.

“Not all Australian companies issue bonds in Australian dollars, many of them go to offshore markets, because they are deeper and more liquid and they can get longer tenor borrowings.”

As an example, she cites Australian miners who may have USD receivables and who raise debt in that currency to hedge the AUD. “But they are Australian names and so we do know them, we do our due diligence and our investment research on them in any case, so that also provides an opportunity for us tap into another pool of potential issuers,” she says, adding that the decision comes against a backdrop of demand-supply imbalance in bond markets in Australia after this year’s stimulus.

Insurers are much more conservative investors than superannuation funds because they promise policyholders to pay out eligible claims down the line.

Often their portfolios are 90% or more fixed income assets. They also must hold enough regulatory capital to cover their liabilities — and then some more for any additional risk they take.

Typical return targets are usually in the 1% range or a small margin above the Consumer Price Index or the Ausbond Government Index, depending on the nature of liabilities.

After years of low rates, and declining yields in safer assets, the industry faces a dilemma of where to find returns. Each step away from government bonds swells the buffer capital they must hold (Figure 1).

In the year ending September, investment earnings across Australian insurance segments was down significantly (Table 1).

The challenging macroeconomic is playing

01: Denis Walsh

02: Elie Saikaly

senior investment consultant Mercer

principal consultant Frontier

out against other dynamics, including competition and claim events.

For example, general insurers have been affected by bushfire and storm claims; health insurers have seen an increase in flow-on claims from COVID-19; life insurers have faced a rise in disability income payments.

The many forces at play have been ref lected in insurers’ plummeting profits. As an example, the life insurance industry’s net profit after tax was down 95.6% to $18 million in the September quarter, according to APRA.

Insurers and COVID-19 Investment consultant Denis Walsh01 is insurance client segment leader at Mercer. His job incudes consulting with insurers (life, general, health) on asset allocation, manager selection and implementation.

He says insurers took a vastly different approach to risk during COVID-19.

“One end of the spectrum, we see some reducing the risk… In general, we have seen more insurers seeking to enhance their returns from their existing portfolio and we have seen some move further down the path in fixed income, to include private market debt like Australian senior loans,” Walsh says.

He says the insurers that he has seen reduce risk levels in their investment portfolios over the last 12 to 18 months are typically the ones facing greater uncertainty from an underwriting or operating environment perspective, of which COVID-19 is a part.

Frontier principal consultant and head of liability driven and government investors Elie Saikaly02 , who works with general and health insurers, says these insurers have seen their prescribed capital drop from about 2 in September 2017 times the liabilities to 1.67 range on the back of COVID-related investment shocks and claims [APRA on November 11 confirmed PCR of 1.74x for general insurers at September end].

“These insurers are less funded after COVID than they were before,” Saikaly says.

“And as you know, with the expectation of bond returns to be lower or perhaps negative — and these portfolios have a much larger allocation to bonds — that makes for a much more challenging environment for general insurers to earn a return.”

At AIA, Murray says the life insurer reduced some risk going into COVID and was able to redeploy the redeemed capital.

“It’s been a really challenging year and a lot of volatility, particularly in the in the first half of the year. Strategically going into that, we'd actually taken a little bit of risk off the table.

So, we were well positioned when we went into that to take some opportunities as they presented themselves,” Murray says.

“The liquidity that's in the system has meant

In general, we have seen more insurers seeking to enhance their returns from their existing portfolio and we have seen some move further down the path in fixed income.

Denis Walsh

17

that asset prices just more generally have really increased and credit spreads have contracted, base yields and investment spreads have really collapsed. So, it is a little bit of a challenge.”

Other life insurers ClearView and MLC Life Insurance were also in risk-off mode during COVID. MLC Life Insurance’s treasurer Simon Martin 03 , who looks after the investment, capital management and liquidity of its $5 billion investment portfolio, says the insurer did not increase the risk in the portfolio either before or during COVID-19.

“We took off some proprietary strategies… and reduced risk in the portfolio because we were still of the view the impacts of COVID-19 done yet. There are a number of risks ahead of us,” Martin says.

“We've worked out that we can stimulate the economy through central bank activity, but we haven't worked out yet how to withdraw that.

And we haven't really withdrawn some of that stimulus from the last round of stimulus during the GFC. “So, if you're a long-term investor like us, there's still reasons to be cautious. And we remain of that view,” he says, adding the uncertainty in how QE will be withdrawn triggered a modest change in investment strategy back towards fixed income.”

ClearView’s chief investment officer Justin McLaughlin 04 says its $360 million life insurance portfolio is invested completely in fixed income, across a mix of interim deposits, short duration, floating and fixed rate fixed interest.

The goal is to generate a little over 1% in returns to match its mix of short-tail and longtail liabilities whose weighted average duration is about 8.5.

“The single biggest change we've had over the last little while is adding some longer duration assets as our liabilities have evolved,” McLaughlin says, adding it too did not see COVID-19 as an opportunity to add growth assets.

Lacking incentive Most life insurers match their assets to their liabilities. For, example if they have long duration liabilities, they buy long duration assets to match it.

This has proven to be wise so far during falling interest rates, as even though your liabilities increase so too do your assets.

“When you discount liabilities at a lower risk-free rate, you get a higher liabilities value. If your assets are matched, then if your liabilities go up so does the value of your assets for your existing book of business,” McGing Advisory & Actuarial managing director Sean McGing05 explains.

At MLC Life, the board-set remit permits taking matched risks. In reality, it does not often use it.

Feature | Investment

18

“We have the ability to take mismatched risks but we think in the current environment, with very low rates and very high volatility, those strategies are not rewarded from a perspective of looking after shareholder capital,” Martin says.

“Generally speaking, we will try and match as closely as possible. But we will run credit risk where that makes sense and where we can deliver a good return on capital.”

Where do insurers invest?

Northern Trust's annual asset class return predictions for five-year returns published in August painted a gloomy picture for investors.

It forecast annualised returns of 4.9% for equities (lower for developed markets), 1% for

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

03: Simon Martin

04: Justin McLaughlin

treasurer MLC Life Insurance

chief investment officer ClearView

from 10-year US Treasury Bonds and 5.6% for global high-yield fixed income.

"Low but steady interest rates should translate into low but positive returns over next five years [in fixed income]. High yield stands out as an alternative to global equities with its higher yields, higher expected total returns and lower risk profile," the study’s authors, led by Northern Trust chief investment officer Bob Browne 06 , wrote of insurers’ favourite asset class.

In real estate, it is expecting total returns of 3.6% p.a. from natural resources (down by 1.5% on outlook of slow growth and environmental impact scrutiny), 6.3% p.a. from global real estate (down by 2% on permanent impairment of property types like retail and office) and 5.8% from global listed infrastructure (steady).

Table 1: Investment earnings for local insurers dropped in year ending September

Type General insurance Private health insurance Life insurance

Net investment income at 30 September 2020

Change from 12 months ago

$1.2 billion

68.20%

$239 million

58.45%

$3.3 bilion

121.01%

Getting into equities is the last thing we would do. Before you go into equities, there's quite a long way to go into the fixed interest markets to increase returns.

Justin McLaughlin

Source: APRA, ASIC Note: Life data refers to investment revenue, while other two refer to investment incme

Figure 1: Asset risk charge (ARC) in moving 1% from cash using Frontier's Equilibrium returns.

9 3. Equities 8 7 6 2. Real Assets

5 4 3 1. Fixed income & Alternative Debt

2 1 0

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In Australia, between March 19 and November 3 this year, the Reserve Bank of Australia went from targeting a yield of 0.25% on three-year Australian government bonds to just 0.1%.

This is just one local example of the squeezing yields in investment grade fixed income universe, and the challenges that insurers face in investing future money.

The highest yielding assets on Northern Trust’s list are also the most out of reach for most insurers after APRA’s revised Life and General Insurance Capital Standards (LAGIC) guidelines that came into effect in 2013.

LAGIC, which was born out of European Solvency II guidelines, asks insurers to increase the regulatory capital they hold for the risk they add to portfolios.

Consequently, insurers must think twice before adding any risk. Frontier estimates half of general insurers hold little to no growth assets.

“If an insurer has a PCR target of 1.6x and if they added 5-10% to equities it would add 0.1 to that PCR target whilst adding return hopefully” Saikaly says, who thinks equities are still a good addition as an inflation hedge for insures who can take the capital expense.

ClearView is of a similar view on equities – they are too capital intensive.

“We're certainly doing research and trying to understand if we wanted to increase the risk profile. But getting into equities is the last thing we would do. Before you go into equities, there's quite a long way to go into the fixed interest markets to increase returns,” McLaughlin says.

AIA has been investing in real assets, infrastructure and private loans for a long time, accounting for about 5-10% of its portfolio.

But it stays away from equities. The only equities exposure it has is from legacy policies.

“In an order of magnitude, investment grade is sort of in 5% and 10% kind of numbers [in PCR requirements]. Then you get into equity and it’s 30% and 40%. So, it's a three- or four-times incremental increase in the capital,” Murray says.

Without citing specific numbers, she says it's material and meaningful, “which is why we sort of focus on investment grade, high quality, credit, and non-investment grade has a similar kind of capital intensity as equity”.

As Figure 1 shows, it is less capital intensive for the insurers to add real assets and infrastructure to their portfolio than to add equities.

Murray points to public infrastructure in Australia and New Zealand as nice longerduration assets that are good additions.

“Illiquidity premium” especially for insurers like life insurers, who have longer-duration liabilities can be a significant value add.

Saikaly says real estate sub-sectors outside of the retail and commercial sectors may be able to provide a hedge against core and super-

Investment | Feature

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

imposed inflation and good returns for general and health insurers.

He says illiquid assets like property and infrastructure can be 5-10% of an insurer’s portfolio if they can afford the additional capital requirements.

“Insurers should think about sector hedges to inflation. For example, a health insurer whose future liabilities are linked to healthcare inflation (which may rise faster than headline inflation) they can hedge some of their liabilities by investing in [real] estate assets like hospitals, medical and life sciences offices, student accommodation, and affordable and social housing,” Saikaly says.

External versus internal teams Whatever investment decisions they make, insurers take different approaches to structuring their teams.

“Life insurers tend to have deeper internal resources than general and health insurers.

They have their own actuarial teams, large businesses and many of them parts of international groups,” Saikaly says.

ClearView employs four people on the internal team, who do asset allocation, fund manager selection and short duration investing. The investment management is outsourced to one manager.

Its larger counterparts, AIA Australia and MLC Life, have very different models from each other.

Murray’s team of five in Melbourne invests directly. In the past, when it added private loans and infrastructure, they were able to use their internal talent pool.

Colonial Mutual Life Assurance Society Limited, which AIA acquired, outsources investment and is focused on hedging, asset liability management and overlays.

“It’s a group-wide approach, and it's something that's strategically important and aligned,” she says of the internal investment management model.

“We want to be able to be responsive, nimble, flexible and aligned to the needs of the business and aligned with longer term strategic objectives. Managing our assets in house gives us that flexibility.”

In contrast, MLC Life has chosen to keep its investments (except cash) externally managed. And Martin says there are no plans to change this.

“We've done [some] work on this and looked at our competitors. One of the reasons we have an external function is because we're part of a very strong group in Nippon Life [in 2016, NAB sold 80% of its interest in MLC Limited (MLC Life Insurance) to Nippon Life] and we have always had the support of NAB,” he says.

“The question you've got to ask yourself is whether you can manage investments more effectively in house. And for us, the answer is no.”

Insurers’ ownership structures affect investment decisions in other ways too.

For example, at ClearView the decision to stay away from capital-intensive assets like equities is also shaped by the fact that ClearView is a younger business that is growing, and the business-wide growth gives shareholders better returns than taking risks with surplus capital.

What could MMT mean for insurers?

This year has seen a resurgence of Modern Monetary Theory (MMT) via US democratic presidential candidate Bernie Sanders and his economic adviser Stephanie Kelton who backs it.

While still theoretical, MMT says governments can spend freely so long as they control their currency and can print more of it. It puts into question the utility of government deficits (popularised in Australia by former liberal treasurer Peter Costello) and restricted spending.

Sceptics point to MMT’s potential to cause hyper-inflation in prices, which its backers say is not an issue if there is still some unemployment.

ClearView’s McLaughlin says if MMT (which he compares to conventional aggressive fiscal stimulus) were to come into play, insurers would have to work harder to find immediate returns.

But they may like the rising interest rate environment it could bring.

“It [increased government spending] would potentially lead to higher rates and ultimately, inflation is a medium-term risk. That's not the end of the world for life insurance company, but it just does make you need to understand to make sure your assets are appropriately managed,” he says.

“So, it probably would mean interest rates would rise across the yield curve. And for life company that has an asset liability mismatch, that would mean they probably lose money on their assets, and gain money on their liabilities.”

He says short-term effects would be increased volatility in fixed income markets, with big sell offs that may impact life insurance portfolios with no equities.

“At the end of the day, it probably won’t be a huge problem for a lot of companies,” McLaughlin says.

“Because it means life insurers and banks are kind of back into a sort of normal world and the normal interest rates are at reasonably high levels, which in the long run is probably a good thing for the insurance in the banking industry.”

05: Sean McGing

06: Bob Browne

managing director McGing Advisory & Actuarial

chief investment officer Northern Trust

19

At MLC Life, which has Nippon Life’s pockets to tap into for regulatory capital, the decision to stay away from equities has also been driven by differences in financial reporting in Australia and Japan.

“There's a lot of differences between the accounting that might happen in the Australian environment, and the accounting that might happen in a Japanese environment,” Martin says.

“I think the Japanese investment accounting is basically buy and hold, there's no mark to market, which means there's less volatility.

“They expect stable investment returns. If we have a significant volatility in equity markets, that will come as a surprise that’s not aligned to our core business of life insurance.”

Preparing for low returns

Insurers need to ask themselves what risk they are taking on and if they are charging appropriate[ly] for it in premiums.

Sean McGing

Looking forward, how will insurers remain commercially viable in a low-return world?

Mercer’s Walsh says insurers may also have to review the other levers at their disposal including improving operational efficiencies which reduce the fees and costs of implementing an investment strategy, how insurers manage risk from an underwriting perspective - including reinsurance arrangements, and setting premiums at appropriate levels.

In one example of adding operational efficiencies, a company called Nearmap pitches aerial imagery capabilities to insurers to help them identify catastrophe damage such as that from recent hailstorms in Queensland to make their claims processing faster.

McGing says the move to lower interest rates has already moved some insurers away from capital-guaranteed products to unitised products, which have lower capital requirements.

But they have to price their premiums appropriately and cave under competitive pressures.

“Insurers need to ask themselves what investment risks they are taking on and if they are appropriate for the premiums they are charging while endeavouring to keep costs down,” he says.

All the consultants interviewed for this said the likelihood of an insurer going insolvent (aka when its liabilities exceed its assets) is very low even as returns become hard to find.

The last time this happened in Australia was in 2001 when HIH Insurance collapsed, triggering stronger risk and governance requirements from APRA. But they will have to look for new investment opportunities within their capital risk budget, which may include newer areas in fixed income, infrastructure and pockets of real estate and infrastructure.

Some may even have to raise capital to make up investment losses or to add flexibility, like Insurance Australia Group which raised $750 million to service business interruption claims arising from COVID. fs

20

Between the lines

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

Endowment awards mandate

01: Ashish Swarup

portfolio manager Aikya Investment Management

Annabelle Dickson

Equity Trustees has won a mandate to manage half the investment portfolio of an endowment fund which supports vulnerable children and families in Australia.

The $18 million OzChild endowment fund is committed to improving the lives of at-risk children through foster care and kinship care support.

OzChild chief executive Lisa Griffiths said the mandate was awarded due to EQT’s expertise and depth of experience in the not-for-profit sector.

EQT currently provides services on behalf of over 650 philanthropic trusts and for-purpose clients, with total charitable funds under management of $2.5 billion.

“As a for-purpose organisation, a key factor in our selection process was the value-added services Equity Trustees offers in combination with its investment services,” Griffiths said.

EQT’s approach to deliver performance for clients is through in-house Australian equities and fixed income along with external domestic and international funds.

EQT head of asset management, Darren Thompson said EQT is delighted to support OzChild in its goal of seeing that all children and young people are safe and nurtured.

“The mandate appointment demonstrates that our work in the philanthropy sector, combined with our asset management services, is a compelling offer to for-purpose partners looking for a values-aligned partner with strong governance, investment management track record and valueadded offerings,” he added. fs

Pinnacle boutique wins super fund mandate Kanika Sood

A The quote

The team has many years’ ex­perience investing in emerging markets, hav­ing worked together through previous market cycles.

n industry fund has awarded $170 million to an emerging markets strategy from Pinnacle’s latest boutique partner.

Aikya Investment Management will manage the amount in its global emerging markets strategy for legalsuper, which has been revising its external manager lineup under new chief investment officer Norman Zhang.

London-based Aikya is an emerging markets boutique led by former Stewart Investors and Fidelity investors.

Aikya’s Global Markets strategy invests in 30 to 35 companies, with a focus on stewardship and ESG. “We are pleased to be partnering with a forward-thinking Australian superannuation fund, with a sound reputation for investment acumen and responsible investing,” Aikya portfolio manager Ashish Swarup 01 said.

“We follow a disciplined investment process

that focuses on identifying businesses with the highest quality of stewardship, which requires deep understanding of the various jurisdictions where we invest. The team has many years’ experience investing in emerging markets, having worked together through previous market cycles.”

Pinnacle has a 32.5% stake in the business, and announced the partnership in May this year.

“Aikya’s experienced investment team is a global leader when it comes to emerging markets and after just a few months since coming together as Pinnacle’s sixteenth investment boutique we are delighted to secure this major mandate,” said Pinnacle Investment Management director institutional distribution Wes Campbell.

“Importantly, legalsuper members can rest assured Aikya’s intensive focus on stewardship and ESG factors means funds will not flow into companies with negative social utility such as coal, gambling, tobacco and arms manufacturers.” fs

OPINION

2020 marked a critical turning point for financial planning inancial planners were helping AustralF ians through stressful situations long before COVID-19. But the positive stories about finanDante De Gori

chief executive Financial Planning Association of Australia

cial planners were seldom told before 2020. Good news about the profession was inconsistent with the negative narrative that has plagued it for years.

Thankfully, that narrative is now changing.

In 2020, professional advice practices across Australia have simply continued to service their clients as they have for many years. Financial advice has not changed, but its value has clearly risen in the eyes of those facing significant challenges. In times of great uncertainty Australians have sought out financial advice. A growing number of them are now discovering that financial planners can help them in more ways than one.

The bushfires of late 2019 and early 2020, followed almost immediately by the COVID-19 pandemic, created unprecedented demand for help in various forms. Financial planners were there for the communities ravaged by the bushfires. They were there for their clients – old and new – when they lost their jobs or had to consider accessing their superannuation to keep the lights on.

Over the past 12 months financial planners have helped Australians impacted by the bushfires get back on their feet; guided thousands of everyday Australians through the financial stress created by the COVID-19 pandemic;

supported young Australians save for their first home; advised baby boomers on their retirement options and supported older Aussies considering aged care.

Financial planning clients may come from different backgrounds and require different solutions, but they are all provided one thing that is rarely recognised: peace of mind. The value of advice can be measured in many ways, but in 2020 it was serenity that became a critical benchmark for many of us. As any financial planning client will tell you, having a trusted professional guiding you through life’s difficulties is priceless.

Building on a fresh foundation As we look towards 2021, it is important to recognise the achievements our profession has made over the past year. Financial planners have stepped up to further support their communities in 2020, just as they have in previous years.

The dark cloud of the royal commission has finally passed, and clearer skies are finally allowing the positive stories of our profession to be heard. Financial planners deserve their day in the sun.

2020 marked a crucial turning point for the profession and the Financial Planning Association of Australia is confident that a fresh

foundation had been laid for a bright future for financial planning in Australia. Australians are experiencing the positive changes financial planners can make in their lives. In a year characterised by uncertainty and hardship, financial planners have offered hope and support.

The challenges of 2020 highlighted the value of advice. In 2021 it is imperative that we improve the accessibility of advice to ensure those who need it most can receive it.

The legacy of the royal commission and increased regulatory reform has been a rise in the cost of advice and a reduction in the number of financial planners in the profession. These are two major barriers for Australians seeking help and they must be overcome if we are to continue providing support and guidance to our communities.

The FPA is committed to reducing the cost of advice by working with the government and key stakeholders to reduce unnecessary red tape and the duplication of regulation. These continue to stifle the growth of the profession and are detrimental to the financial wellbeing of Australians.

In an increasingly uncertain world, financial planning has never been more important.

Advice will only become more valuable as we emerge from the COVID-19 pandemic seeking answers to the important questions about our own financial affairs. fs

International

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

US employers to cut pay

01: Adewale Ogunleye

head of sports and entertainment - Athletes and Entertainers Strategic Client Segment UBS Global Wealth Management

Kanika Sood

Over a quarter of US employers say they plan to pay employees based on the location of remote workers for all jobs in 2021.

Willis Towers Watson surveyed 344 organisations in North America with 4.83 million employees between October 6 and 21. About 14% worked in financial services.

About 61% said they expect to pay fully remote workers the same as in-office employees regardless of a worker’s actual locations for all jobs.

However, about 26% of the polled employers said pay will be based on remote location for all jobs.

Most organisations said they did not expect flexible/remote work policies to substantially impact pay and benefit budgets for 2021.

However, about 36% expect budget reductions in real estate and 40% expect reduction in commuting expenses.

Approximately a quarter of organisations expect to see an increase in allowances and subsidies for working from home in 2021 (26%) and over the next three years (27%).

Overall, the survey indicated about 59% were working remotely. Employers expected this number to fall slightly to 52% of their worked in first quarter of 2021.

Nearly half of the employers thought the pandemic-induced change in working arrangements called for a hybrid reward model.

“As companies continue to evaluate the cost benefits of alternative work arrangements, many indicate that the workplace changes as a result of the pandemic are here to stay,” said Willis Towers Watson North America Rewards practice leader Catherine Hartmann. fs

AMP Capital appoints NZ lead

21

UBS launches dedicated unit for athletes, entertainers Jamie Williamson

U

The quote

At UBS, we are always adapting to the needs and wants of current and prospective clients rela­tive to today’s financial landscape and societal shifts.

BS Global Wealth Management launched a new business unit, catering exclusively to clients working in the sports and entertainment industries.

The Athletes and Entertainers Strategic Client Segment aims to bring a fresh approach to the unique and often complex financial needs of professional athletes and entertainers in the United States, UBS said.

It will be led by former professional footballer Adewale ‘Wale’ Ogunleye 01, who played for the Miami Dolphins, Chicago Bears and Houston Texans before retiring and turning to a career in financial advice. Ogunleye was previously head of sports and entertainment at UBS Global Wealth Management.

Working closely with financial advisers, Ogunleye’s experiences on and off the field will help shape the unit’s strategy, UBS said.

Ogunleye said he joined UBS to create a sports and entertainment business that educates and speaks to clients in an authentic and relatable manner.

“Far too often we see stories of athletes and entertainers making poorly guided financial decisions, which leads to a loss of personal wealth and trust in those who can provide

sound financial advice and guidance,” he said.

When Ogunleye was playing he lost money in bad real estate deals and startups that failed.

He was one of several professional athletes that were burned by an alleged Ponzi scheme, and was also convinced to buy five apartments in one building prior to the Global Financial Crisis and US housing market crash in 2008.

Ogunleye said: “Our main priority is to change that narrative and help athletes and entertainers build a path to long-lasting financial success.”

The unit will raise awareness of the importance of financial literacy and wealth management, helping athletes and entertainers develop a financial plan to maintain their current lifestyle while also preparing for their future.

“At UBS, we are always adapting to the needs and wants of current and prospective clients relative to today’s financial landscape and societal shifts,” UBS Global Wealth Management head of strategic client segments Jane Schwartzberg said.

“Wale’s real-life experience in professional sports and knowledge of the wealth management industry combined with our leading platform creates a competitive and dynamic offering that will provide our clients with the opportunity to build generational wealth.” fs

Eliza Bavin

AMP Capital has appointed a new managing director and head of clients for its New Zealand business.

Rebekah Swan, currently NZ head of product and ESG investment specialist, is set to step into the role having been with AMP Capital for close to 19 years.

AMP Capital global head of fixed income and chair of AMP Capital NZ Grant Hassell said he was excited to appoint someone of Swan’s calibre to the role.

“Rebekah is a highly valued and respected member of the AMP Capital team and has been central in bringing many of our global products and capabilities to our local clients,” Hassell said.

“She is held in the highest regard by our clients as well as the market more broadly and is involved in many industry groups, supporting responsible investing.”

Hassell said in the combined role Swan will focus on continuing to grow, develop and support the changing needs of AMP Capital’s NZ clients.

“I’m also excited to further imbed my deep passion for responsible investing across the business, especially considering the critical role of ESG in driving positive investor outcomes as well as for future generations of New Zealanders,” Swansaid. fs

Fidelity launches one-stop-shop wealth platform Karren Vergara

Fidelity Investments has launched a one-stopshop wealth management platform that helps investment advisers streamline the advice and portfolio construction process.

Fidelity Managed Account Xchange (FMAX), which launched on November 16 in the US, allows advisers to develop a financial plan, invest, execute trades and generate reports. It also provides access to investment solutions, research and consulting, and a single point of contact to help advisers resolve issues.

The platform is integrated with industry technology providers, including eMoney and Envestnet, enabling functionalities like single sign-on and data pre-fill to eliminate manual processes and potential errors.

FMAX is being rolled out under Fidelity subsidiary Fidelity Institutional to wealth management firms, including registered investment advisers, family offices and brokerdealer firms.

Fidelity Institutional head of investment and managed solutions Gary Gallagher said advisers have been waiting for this solution.

“Our research suggests that investors are increasingly looking to their advisers to help with the moments that matter most in their lives, not only selecting investments. We’re helping advisers streamline investing so that they can focus their time and energy on having those important conversations with their clients – particularly now,” said Gallagher.

The firm asked advisers about what they value most in portfolio construction. They found asset allocation guidelines, capital markets assumptions, portfolio diagnostic tools, and investment product research and recommendations are important.

Gallagher said Fidelity’s broad set of services, FMAX’s open architecture and its research provides a differentiated combination that can help advisers increase efficiency and potentially grow assets. fs

22

Economics

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

We’re not there yet Ben Ong

urb your enthusiasm.”

C This was the overriding message from the world’s top three central bankers at the annual ECB Forum on Central Banking 2020.

The head honchos of the US Federal Reserve (Fed), the European Central Bank (ECB) and the bank of England (BOE) collective cautionary missive comes amid a backdrop of recent COVID-19 vaccine optimism and the rising cases of infections and deaths in their respective domains.

Fed chair Jerome Powell thinks that while the US recovery had been better than expected and continues to progress, it remains uneven and incomplete while at the same time cautioning that the next few months would be challenging.

“The vaccine is certainly good and welcome news for the medium term, although significant challenges and uncertainties remain about timing, production, distribution and the efficacy for different groups,” he said.

Powell’s correct to be concerned. Worldometer figures show the US tops the COVID-19 list in terms of total cases of infections, new cases, total deaths, new deaths and total active cases to date.

“We've got new cases at a record level, we've seen a number of states begin to reimpose limited activity restrictions, and people may begin to lose confidence that it's safe to go out," he said.

“We've said from the beginning that the economy will not fully recover until people are confident that it's safe to resume activities involving crowds of people.”

ECB president Christine Lagarde echoed the Fed’s concern: “I don't want to be exuberant about this vaccination.”

In her introductory speech, Madam Lagarde

stated that, “The nature of the pandemic also affects the transmission of monetary policy. In normal times, normally, an easing of financial conditions boost demand by encouraging firms to borrow and invest and encouraging households to bring forward future income and consume more. In turbulent times, monetary interventions also removes excess risk pricing in the markets. But these are not normal times. When interest rates are already low, and private demand is constrained by design as is the case today, the transmission from financing conditions to private spending might be attenuated. This is especially true when firms and households face very high levels of uncertainty, leading to higher precautionary saving and deferred investment.”

BOE Governor Andrew Bailey also acknowledged the uncertainty surrounding the UK central bank’s forecasts and therefore, the appropriateness of policy responses.

“Gradually as we get more news on the vaccine situation I hope that not only will it give it encouragement and hope, it will also start to begin to reduce the level of uncertainty over the outlook for the future,” he said.

We're not really there yet, but that is important for monetary policy because we are having to make monetary policy in conditions of extreme uncertainty.”

All agree that, in Madam Lagarde’s words, “these are the times when fiscal policy has the greatest impact…”

Lagarde nominated two reasons: “First, fiscal policy can respond in a much more targeted way to the parts of the economy affected by health restrictions …”

“Second, fiscal policy can break paradox of thrift dynamics in the private sector when uncertainty is present.” fs

Monthly Indicators

Oct-20

Sep-20

Aug-20

Jul-20

Jun-20

Consumption Retail Sales (%m/m)

2.02

-1.52

-3.99

3.18

2.72

Retail Sales (%y/y)

7.29

5.17

7.08

12.04

8.52

Sales of New Motor Vehicles (%y/y)

-1.50

-21.77

-28.78

-12.84

-6.44

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

178.82

-42.50

165.17

119.15

227.82

Job Advertisements (%m/m, sa)

9.35

8.30

2.77

17.38

41.13

Unemployment Rate (sa)

7.00

6.91

6.81

7.48

7.44

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

-

9.70

4.38

9.16

-5.00

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

-

15.44

-2.26

11.74

-3.74

Housing Finance Commitments, Number (%m/m, sa) - Housing Finance Commitments, Value (%m/m, sa)

-

Survey Data Consumer Sentiment Index

105.02

93.85

79.53

87.92

93.65

AiG Manufacturing PMI Index

56.30

46.70

49.30

53.50

51.50

NAB Business Conditions Index

1.49

-0.21

-6.04

-0.10

-7.35

NAB Business Confidence Index

4.72

-3.80

-8.20

-14.22

0.61

Trade Trade Balance (Mil. AUD)

-

5630.00

2618.00

4362.00

Exports (%y/y)

-

-19.73

-22.49

-21.72

-16.75

Imports (%y/y)

-

-22.27

-14.98

-16.76

-20.30

Sep-20

Jun-20

Mar-20

Quarterly Indicators

7826.00

Dec-19 Sep-19

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

-

17.74

9.02

2.18

7.53

% of GDP

-

3.79

1.78

0.43

1.49

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

-

14.97

1.44

-3.47

-1.15

Employment Average Weekly Earnings (%y/y)

-

-

-

3.24

-

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

0.08

0.08

0.53

0.53

0.53

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

0.53

-0.08

0.38

0.45

0.92

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

0.45

0.00

0.45

0.45

0.83

Inflation CPI (%y/y) headline

0.69

-0.35

2.19

1.84

1.67

CPI (%y/y) trimmed mean

1.20

1.20

1.70

1.60

1.50

CPI (%y/y) weighted median

1.30

1.30

1.60

1.20

1.20

Output

News bites

Employment The Australian Bureau of Statistics’ (ABS) reported that 178,800 workers found employment in October – a pleasant surprise to markets that were expecting total jobs numbers to drop by 40,000 over the month in response to the government’s scaling back of its JobKeeper subsidy payments.

The latest employment number has reduced the total jobs lost this year from more than 917,000 to just around 195,000 – a 79% improvement.

Even better, the latest stats revealed strong gains in both full-time and part-time employment in October. Full-time employment increased by 97,000 workers while part-time hires jumped by 81,800. Sure, the unemployment rate inched up to 7.0% from 6.9% in September but this was due to the sharp increase in the participation rate to 65.8% in October.

Wages Total wages “growth” slowed to 1.4% in the year to the September 2020 quarter from 1.8% in the previous one. Annual private sector wages growth slowed to1.2% from 1.7%. Public sector wages slowed to 1.8% from 2.1%. This is hardly a surprise to most Australians who have seen their pay slips over the past quarter, but generally – and as the ABS wage price index report shows – pay packets have still grown from a year ago. It’s only the rate of growth in wages that has slowed. The Morrison government’s “Jobkeeper” scheme has shortcircuited the lagged negative correlation between wages growth and the underemployment rate.

Business confidence, conditions Australian business confidence jumped to a reading of +5 in October – the highest level since May 2019 – from -4 in the previous month and the record low reading of -66 in March 2020. Confidence improved in most industries except for mining and transport & utilities.

Business conditions in the country increased to +1 in October from September’s 0 reading – the sixth straight month of improvement, the highest level since December 2019 and a sharp turnaround from the record low reading of -34 in April 2020 – driven by gains in trading (+8 in October from +4 in the previous month) and profitability (+4 from +1). fs

Real GDP Growth (%q/q, sa)

-

-7.00

-0.26

0.55

Real GDP Growth (%y/y, sa)

-

-6.26

1.56

2.28

0.51 1.82

Industrial Production (%q/q, sa)

-

-3.42

0.19

0.48

0.67

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

Financial Indicators

-

-5.89

-2.06

-2.68

-1.33

20-Nov Mth ago 3 mths ago 1yr ago 3yrs ago

Interest rates RBA Cash Rate

0.25

0.25

0.25

0.75

1.50

Australian 10Y Government Bond Yield

0.87

0.76

0.86

1.08

2.54

Australian 10Y Corporate Bond Yield

1.32

1.50

1.61

1.86

3.03

Stockmarket All Ordinaries Index

6739.9

5.36%

7.47%

-1.29%

11.81%

S&P/ASX 300 Index

6514.7

5.63%

7.03%

-2.46%

10.41%

S&P/ASX 200 Index

6539.2

5.73%

6.85%

-2.73%

9.98%

S&P/ASX 100 Index

5397.2

5.99%

6.91%

-3.12%

10.14%

Small Ordinaries

2988.4

3.15%

8.14%

3.15%

12.77%

Exchange rates A$ trade weighted index

59.50

A$/US$

0.7311 0.7055 0.7163 0.6804 0.7555

60.70

61.90

60.00

64.90

A$/Euro

0.6167 0.5963 0.6049 0.6149 0.6431

A$/Yen

75.89 74.47 75.88 73.92 84.92

Commodity Prices S&P GSCI - commodity index

373.87

364.79

356.31

415.38

422.82

Iron ore

122.84

121.51

123.74

83.35

62.30

Gold

1857.35 1898.40 1927.15 1471.70 1286.20

WTI oil

41.74

41.37

42.62

56.71

Source: Rainmaker /

56.21

Sector reviews

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

Australian equities

Figure 1: U nderemployment rate & wages 14.5

RATE %

Underemployment rate (leading by 1 qtr)

12.5

Wages - INVERTED RHS

9.5 8.5

1.0

-200

3.0

6.5

4.0

5.5

5.0

2006

2008

2010

2012

2014

2016

2018

2020

0 -100

7.5

2004

100

0.0

2.0

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].

ACTUAL MONTHLY CHANGE '000’S

200

-1.0

11.5

2002

300

-3.0 -2.0

10.5

Prepared by: Rainmaker Information Source:

CPD Program Instructions

Figure 2: Employment growth (seasonally adjusted) ANNUAL CHANGE %

13.5

-300 -400

Part-time

-500

Total Full-time

-600 -700

JAN19

MAY19

SEP19

JAN20

MAY20

SEP20

Wages slow but still grow Ben Ong

T

he September quarter is generally a quarter of solid wage growth, however, the impacts of the COVID-19 pandemic contributed to a subdued rate of wage growth in September quarter 2020.

Organisations continued to adjust to the economic uncertainty, recording fewer end of financial year wage reviews and delaying enterprise bargaining agreement increases. This led to a significantly reduced number of jobs recording wage rises when compared to previous September quarters.

“Additionally, the staggered implementation schedule of the Fair Work Commission annual wage review moved some regular September quarter wage rises to later quarters.”

This was how Andrew Tomadini, head of price statistics at the Australian Bureau of Statistics explained the slowdown in Australian wage growth in the September 2020 quarter.

This comes as no surprise to most who have

International equities

seen a lower dollar figures on their pay slips over the past quarter, but generally – and as the ABS wage price index report shows – our pay packets have still grown from a year ago. It’s only the rate of growth that has slowed.

Total wages “growth” slowed to 1.4% in the year to the September 2020 quarter from 1.8% in the previous one. Annual private sector wages growth eased to1.2% from 1.7%. Public sector wages decelerated to 1.8% from 2.1%.

The Morrison government’s Jobkeeper scheme has short-circuited the lagged negative correlation between wages growth and the underemployment rate. We would have seen negative wages growth otherwise.

Slowing, albeit continued growth in wages means that consumers still have money to spend and with the recovery in consumer sentiment, spend they will.

The latest Westpac-Melbourne Institute Consumer Sentiment survey showed confi-

Figure 1: S&P 500 and DJIA

S&P 500 DJIA

3000

180

29000

160

27000

140

25000

2750

23000

2500

2000

19000

1750

17000

1500

15000

JAN14

12000

THOUSAND PERSONS

10000 New daily cases -LHS

120

8000

Total cases -RHS

100

6000

80 21000

2250

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

31000 DJIA INDEX

S&P 500 INDEX

3250

dence rising by 2.5% to a reading of 107.7 points in November from 105.0 in the previous month and sharply above the record low 75.6 reading in April 2020.

But the bullish headline consumer sentiment figure is tempered by the survey’s “Unemployment Expectations Index” which increased to a reading of 132.0 in November from 122.2 in the previous month – indicating that more respondents expect higher unemployment).

Consumers expecting job losses would go slow on shopping and save before slow wages growth become nil wages.

However, labour market stats released after the consumer sentiment survey provides optimism.

The ABS reported that 178,800 workers found employment in October – a pleasant surprise to markets that were expecting total jobs numbers to drop by 40,000 over the month in response to the government’s scaling back of its JobKeeper subsidy payments. fs

JAN15

JAN16

JAN17

JAN18

JAN19

JAN20

60

4000

40

2000

20 0 MAR20

0 APR20

MAY20

JUN20

JUL20

AUG20

SEP20

OCT20

NOV20

DEC20

A better vaccine Ben Ong

not even December yet but Wall Street’s alIas t’sready “Rockin' Around the Christmas Tree” news of a better COVID-19 vaccine sent both the S&P 500 index and the Dow Jones Industrials Average soaring to new record highs.

Moderna announced that that its coronavirus vaccine candidate is 94.5% effective based on an interim analysis of Phase three data and it is expected to remain stable at standard refrigerator temperatures of 2-8 degrees centigrade for up to 30 days. This is better than Pfizer and BioNTech’s candidate which reportedly is 90% effective and needs to be stored at around minus 70 degrees centigrade.

Who would have thought that after dropping to a four-year low of 18,213.65 points back in March (as economic activity froze in most nations around the globe), the Dow is now just a whisker away from 30,000 points – it closed at 29,950.44 points for a whopping 64.4% surge

Australian equities CPD Questions 1–3

1. Which wages growth measure slowed in the year to the September 2020 quarter from the June quarter? a) Total wages b) Private sector wages c) Public sector wages d) All of the above 2. How many workers found employment in the month of October? a) 40,000 b) 81,800 c) 97,000 d) 178,800 3. Australia’s unemployment rate rose in October. a) True b) False

Figure 2: US confirmed Covid-19 cases

3750 3500

23

from the March low. Similarly, the S&P 500 index has soared by 65.5% from March.

A week earlier, US Fed chair Jerome Powell told fellow central bankers at the annual ECB Forum on Central Banking that: “The vaccine is certainly good and welcome news for the medium term, although significant challenges and uncertainties remain about timing, production, distribution and the efficacy for different groups.”

Powell was referring to the Pfizer and BioNTech vaccine candidate – and its shortcomings – back then. Moderna’s discovery should partly assuage some of Powell’s concerns.

Still, it’ll be a race against time. Will the vaccine be produced and distributed in time to slow/halt the exponentially growing cases of infections and deaths in America?

This is not lost on Jerome: “We've got new new cases at a record level, we've seen a number of states begin to reimpose limited activity

restrictions, and people may begin to lose confidence that it's safe to go out.” …and they have. According to the Wall Street Journal: “States are slapping new restrictions on daily life amid a resurgence of the coronavirus that some officials say is the most widespread and intense since the pandemic struck in March.”

Since then, Reuters reports that “Michigan and Washington state … imposed sweeping new restrictions on gatherings, including halting indoor restaurant service … North Dakota joining 35 other states over the weekend in mandating masks and Iowa this week requiring them in certain circumstances.”

While recent reports note that US presidentelect Joe Biden favour targeted measures visà-vis a nationwide lockdown, infections and deaths are overwhelming America’s hospitals and healthcare workers, and could leave Biden with no other choice but to freeze social and business activity to contain the outbreak. fs

International equities CPD Questions 4–6

4. Which drugmaker announced a vaccine candidate that is 94.5% effective? a) Moderna b) Pfizer c) BioNtech d) All of the above 5. Which US equity market index reached record highs on vaccine news? a) S&P 500 index b) DJIA c) Both a and b d) Neither a nor b 6. The US has the most number of cases of infections in the world. a) True b) False

24

Sector reviews

Fixed interest CPD Questions 7–9

7. What was the BOJ’s decision at its October meeting? a) It cut its benchmark interest rate b) It kept interest rates unchanged c) It increased QE d) It raised its benchmark interest rate 8. What was the BOJ’s action on its FY2020/2021 GDP forecast? a) It downgraded its GDP forecast b) It maintained its GDP forecast c) It upgraded its GDP forecast d) It decided not to issue any forecast 9. Japanese private sector activity remains in contraction. a) True b) False Alternatives CPD Questions 10–12

10. What was/were behind the recent increase in crude oil prices? a) Vaccine optimism b) E asing of US political uncertainty c) Both a and b d) Neither a nor b 11. What threatens further gains or cause cheaper oil prices? a) OPEC decision to increase supply b) Reimposition of restrictions to contain second wave in Europe and in the US c) China’s recession d) All of the above 12. The IEA downgraded its 2021 global oil demand forecast. a) True b) False

Go to our website to

Submit

All answers can be submitted to our website.

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

Fixed interest

Figure 1: Japan confirmed COVID-19 cases 2.5

Figure 2: Japan Consumer Sentiment & Consumer Perception Indices 140

THOUSAND PERSONS

120

2.0 New daily cases -LHS

100

Total cases -RHS

1.5

1.0

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

0.0 APR20

MAY20

JUN20

JUL20

AUG20

SEP20

OCT20

NOV20

40 35 30

0

MAR20

45

60

20

DEC20

INDEX

50

80

40 0.5

55

25

Overall livelihood

Income growth

20

Willingness to buy durable goods

Employment

Consumer confidence

15 10 2012

2013

2014

2015

2016

2017

2018

2019

2020

Japan’s third wave Ben Ong

M

ore infections equals more monetary policy easing and more fiscal spending.

Like the Fed and the ECB, the Bank of Japan (BOJ) also kept monetary policy unchanged – target rate at -0.1% and target for the 10-year Japanese government bond yield at around 0% — at its October meeting.

“For the time being, the Bank will closely monitor the impact of the novel coronavirus (COVID19) and will not hesitate to take additional easing measures if necessary, and also it expects short- and long-term policy interest rates to remain at their present or lower levels.”

The BOJ downgraded its fiscal year 2020/21 GDP forecast to a contraction of 5.5% from (July’s prediction for a 4.7% decline) but adjusted the following year’s economic projection to growth of 3.6% from +3.3% forecast three months earlier.

The BOJ’s 29 October decision would have been fairly acceptable at the time it made them

Alternatives

because new cases of infections had been declining. Fast forward less than a fortnight later and the country found itself in the midst of a third wave.

Japanese prime minister Yoshihide Suga, himself, noted surging new cases in Hokkaido, Kanagawa, Tokyo, Osaka and Aichi. While still hesitant to re-declare a state of emergency, Suga renewed calls for ministers to implement concrete measures to control the infection.

This comes only a few days after the prime minister directed his Cabinet to prepare another stimulus package to cushion the negative impact on the economy of the virus’ resurgence.

Japan’s economy minister Yasutoshi Nishimura announced that the package would be delivered as soon as possible and spending would be geared on measures “that will attract private investment”.

It couldn’t come soon enough. For despite rebounding from multi-year lows in recent months, the Markit/Nikkei PMI surveys show

that private sector activity in the country remains in contraction – the composite and services PMI since February 2020 and the manufacturing PMI since April 2019.

The same goes for consumer confidence. While sentiment and consumer perception have improved, they remain below pre-COVID-19 levels.

Japan’s domestic challenges are being compounded by the second wave in the US and in Europe via their impact on the Japanese yen exchange rate.

The resurgence of infections have already prompted both continents to reimpose restrictions and sparked safe-haven yen purchases.

The yen has appreciated to ¥105.00 per US1 – up 6.8% from this year’s low of ¥112.11 and by 4.4% from the start of 2020.

As well as eroding Japan’s export competitiveness and becoming an extra drag on growth, the higher yen would put downward pressure on Japan’s already very low/negative inflation. fs

Figure 2: World oil demand & supply & the oil price

Figure 1: Crude oil prices 100 US$/BARREL

25

'000 BARRELS PER DAY

US$/BARREL

15

60

75

-5 Brent

20

-15

West Texas Intermediate

0

-25

-20

-35

-40

-45

JAN 19

100

5

40

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

125

80

APR 19

JUL 19

OCT 19

JAN 20

APR 20

JUL 20

OCT 20

2011

50

Demand less supply (12mth moving average) Sep

IEA forecast

Brent oil price -RHS

25 0

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Lockdowns threaten renewed oil slip Ben Ong

N

ews that a COVID-19 vaccine is nigh has injected optimism in the world economies, financial markets and commodity markets, including oil.

Oil prices jumped to two-month highs – WTI oil to US$41.36 per barrel; Brent oil to US$43.61 – following reports of encouraging COVID-19 vaccine test results.

The easing of US presidential election uncertainty, topped by Joe Biden trumping Trump has also helped as it’s expected to repair/re-start the Trump-induced damage to international trade relations.

But a more lasting gush in oil prices could be a 2021 story – after Biden’s formally sworn as POTUS in January 2021 and earthlings are inoculated against COVID-19 (thought to be around March).

In the meantime, crude oil prices will continue to languish at current levels, if not lower.

The second wave of coronavirus infections currently doing the rounds in Europe – and the subsequent re-imposition of lockdown rules in most countries there – has again grounded/ prolonged the grounding of planes, trains and automobiles (and cruise liners) and re-frozen factory activity.

Worse (for oil prices, at least), the US is set to tighten restrictions even more when Biden takes his seat at the Oval Office.

Already, New York Governor Andrew Cuomo announced the closure of bars, restaurants, gyms at 10pm and limited indoor gatherings to 10 people.

Given the persistent record increases in rates of infection in America – and the strain these are putting on the hospital system – more states are bound to follow.

As such, the International Energy Agency (IEA) has downgraded its global oil demand forecasts, saying“The global oil demand fore-

cast for 2020 is revised down by 0.3 mb/d …

For 2021, oil demand growth is expected to grow by 6.2 mb/d, y-o-y, representing a downward revision of 0.3 mb/d compared to last month’s [October] assessment”, despite supportive demand from China.

OPEC+ may have to limit production again to put the oil supply-demand equation back into a balance that would favour of higher prices (at best) or stable prices at current prices (at worst).

They’ve done this before. The eventual agreement by OPEC+ at the 10th (Extraordinary) OPEC and non-OPEC Ministerial Meeting on 12 April 2020 to adjust downwards overall crude oil production by 9.7 million barrels per day – equivalent to 10% of global supply – along with, according to OPEC, a “conformity level of 95% in June 2020” have helped support crude oil prices in the middle of this year. fs

Sector reviews

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

25

Property

Property

CPD Questions 13–15

Prepared by: Rainmaker Information Source: UBS Asset Management

final real estate outlook for 2020, UBS Itiousnhasitsaswarned APAC investors to remain cauCOVID-19 continues to wreak havoc on markets.

Having successfully, to date and in comparison to other regions, contained the spread of COVID-19, most APAC economies are forecast to see positive growth in 2021; China leads the way at 7.6%.

However, UBS head of real estate research and strategy – APAC Toh Shaowei, said: “APAC needs the global economy to improve in lockstep… Pressure will pile up in the coming months if there is still no sign of medical progress.”

“While the descent may appear to be less bumpy now, being prepared to break the fall and recover is important if APAC economies and real estate markets are to stand on their feet once again.”

In the retail sector, Shaowei said the lack of inbound tourists in the near-term and weak retailer sentiments will nullify the relaxation of social restrictions as domestic consumers spend less.

“We are forecasting a drop in prime retail

Forewarned is forearmed: Commercial property outlook Jamie Williamson

rents in the range of 6-10% in most APAC markets in 2020. Hong Kong will fare worse and is likely to end the year with rent levels at twothirds of what it was in early 2020,” he said.

“We continue to prefer the barbell model in retail, favouring essential retail on one end and prime retail on the other end of the spectrum.”

Turning to the office sector, UBS anticipates the Japanese office market will prove the most resilient in the region. With vacancy rates at less than 2.5% and limited supply pipeline, Japan is bolstered by corporates with strong balance sheets, the report reads.

Closer to home, and less positively, Shaowei said: “Sydney and Melbourne have had a good run over the last few years, and affordability concerns on the back of a weakening business environment now threaten to be a key drag on their office markets.”

And the flow-on impacts of the US-China trade war is bearing fruit for APAC and its investors, with Chinese technology companies who would have otherwise sought premises in the US now seeking new pastures in the region.

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However, the negative impacts of the trade war are being felt by the industrial segment, with the effects shifting from the supply side to demand.

“This puts a dampener on overall rent growth in the industrial sector in the near-term. Postpandemic we can expect to see greater regionalization of supply chains, and even the on shoring of production. The latter probably will be more prevalent in countries with bigger domestic markets such as Japan and Australia, in fact increasing the demand for industrial real estate,” Shaowei said.

He said the common view is that consumption moving online will effectively cement the role of logistics in the new normal. While consumers are unlikely to shop online so much in future, COVID-19 has been the catalyst leading to a greater adoption of e-commerce amongst the wider population.

In Japan and Australia where e-commerce penetration is not deep by the developed world standard, Shaowei said, untapped potential in the logistics sector is yet to be fully exploited even as investment interest has run ahead. fs

13. What does UBS predict for the office market? a) J apan will be the most resilient b) H ong Kong is set to recover c) S ydney’s bad run will ease d) Melbourne’s good run will accelerate 14. What effect has the US-China trade war had on the industrial sector? a) T he impact has moved to the supply side b) Supply-chain regionalisation has decreased c) T he impact has moved to the demand side d) China will avoid setting up premises in the APAC region 15. By all accounts, the logistics sector has peaked in the developed world. a) True b) False

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www.financialstandard.com.au

07 December 2020 | Volume 18 Number 24 www.financialstandard.com.au 20 January 2020 | Volume 18 Number 01

Holiday Guide 01:

03:

06:

COVID companions

Delicious recipes to try at home

Top quotes from the back page

FS Pets

FS Cookbook

Quotable quotes

1

FS pets

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

01: Kate Samranvedhya and Brownie

03: Arian Neiron and Smoochie

Jamieson Coote Bonds

VanEck

02: Garreth Innes and Artemis

Aberdeen Standard Investments

05: Jun Bei Liu and Poppy

Tribeca Investment Partners

04: Jamie Williamson and Reba

06: Shane Oliver and Thea

Financial Standard

AMP

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obody benefitted more from the move to work from home than our furry friends. Having never seen so much of their humans, our pets also became our colleagues.

01:

My sister adopted Brownie when she was a kitten. Brownie naps all

day, then wakes up to spy on her neighbours at sundown. She has feline asthma and takes her inhaler through AeroKat once a day, while half closing her eyes dreamily. At night, Brownie has been guarding me through the press conferences by Draghi, Yellen, Lagarde, and Powell. She patrols her home to catch geckos and bugs as a hobby.

02:

For anyone that says inflation doesn’t exist, simply have a look at the price

of pets during the COVID-19 lockdown period!

Upfront valuations were steep and a cat is clearly a negative-yielding asset, but the intangible upsides our family have earned have justified the upfront premium (and then some). Artemis has taken to getting very comfortable in my lap while I work from home, and I must admit that at times I feel like Doctor Evil with him purring away while I execute bond and swap trades. Artemis has been a wonderful addition to the family and keeps us entertained with his Arctic Fox-like jumps!

03:

05:

Smoochie was our trial baby. We have had her for over 10 years. She gets overexcited when new people come to visit, which is typical of a Cavoodle. She is a very wellbehaved dog and is the first one in the house to greet me when I come home from work. She can also stand on her back legs for over a minute, which I think is her attempt at being human.

I have an adorable bunny rabbit named Poppy, who has just ticked over four years of age. She has been with us since my second child turned three, and she is almost like my third child.

Her favourite treat is an apple, and it is always fun to watch her nibbling away at the core.

Poppy is a special rabbit and is very attached to us, she will run straight to us when she sees us. She also has a distinctive black tip on her nose which makes her super cute.

04:

Reba came into our lives by a welltimed stroke of luck. After months of looking, we had applied through the RSPCA to meet another dog. After calling and calling but not hearing back, we had agreed that it wasn’t meant to be. Then, not even five minutes later we got a call; a friend of a friend was down from Lightning Ridge with a litter of pups looking for their forever homes. The litter were all named after country music singers and, much like her namesake, Reba was a standout.

Now nine months old, we can barely remember life pre-Reba. Coming home after a long day feels completely different when you’re greeted by the waggiest tail that ever wagged.

Reba wasted no time in making herself at home either; every night she creeps onto the foot of our bed and by morning she’s sharing my pillow with me.

Most beautiful of all is the relationship our six-year-old has with her. They are the ultimate partners in crime, with our daughter now too happy to be sent to her room as she knows full well Reba will do the time with her.

The quote

At night, Brownie has been guarding me through the press conferences by Draghi, Yellen, Lagarde, and Powell.

Kate Samranvedhya

06:

Thea turns four this month and is a friendly, little Cavoodle! She loves to play, especially in the mornings when I’m catching up on what’s happened in the markets overnight. It’s been great working from home and spending more time with her during the year – she loves to pop down to the study a few times a day to check in on me, thoughtfully even ‘knocking’ on the door if it’s closed. Our family think Thea’s very wise and a bit of an old soul – and with all the attention we’ve been showering her with over the year, it’ll be hard for us when we start getting back into the office (and going back to uni for my son and daughter) more!

07:

Molly has been with us for 13 years and has grown up with our kids.

Molly was very confused at first during the lockdown as to why we were all at home all the time; she’s never been walked so much in her life.

At her age I’m not sure she appreciated the extra

FS pets

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

2

07: Andrew Martin and Molly

09: Daniel Micallef, Rocky and Charlie

Alphinity Investment Management

Aoris Investment Management

08: Hamish Tadgell, Noodle and Remy

SG Hiscock

12: Kanika Sood and Beanie

Financial Standard

10: Ian Macoun and Maximus

11: David Pace and Izzy

Pinnacle Investment Management

10:

activity, but it sure helped us. It was fantastic to spend time with the family and do lots of exercise together. Molly has always been a ‘go-to’ for the kids when they have a tough day – she’s heard all their problems and been cuddled within an inch of her life. She has a sixth sense when she is needed and just appears, tail wagging. During lockdown she would rotate between the kids’ rooms and my study while we all worked away – checking in on us. Everyone wanted her in their room for company. Maths Online was apparently a lot easier with Molly at their feet!

08:

I have two miniature dachshunds that have been enjoying my company working from home. However I sometimes need to mute Zoom when someone comes to the door as they can get a bit excited.

09:

Not many pets come close to the value that my beloved alpacas offer.

Rocky and Charlie have been helping me mow the lawns during the spring. They are both highly sociable, gentle and curious. Alpacas are great guardians, they protect their territory by staring down and chasing predators out of the paddock.

Apart from the annual trim and pedicure they are low maintenance pets, and will live to 20 years of age. Interestingly, Rocky and Charlie create a communal loo pile in the paddock rather than go randomly. Very neat and tidy! They are not allowed in the house yet but we’ll see.

Greencape Capital

The quote

As the household slowly woke, Izzy would follow me into my study, where she dutifully lay at my feet in a show of solidarity.

David Pace

This is Maximus. It means ‘greatest’ - a name selected tongue-in-cheek because he’s quite a small dog.

Full disclosure, I must admit Max is actually my ‘grand-dog’. He belongs to our daughter Alice and her husband Yianni. As I suspect may be similar to many other parents reading this, my wife and I find ourselves minding him, very frequently.

Our family has always been a dog loving family. When our children were growing up we had Domino, a Cocker Spaniel. I always got tremendous joy and relaxation from Domino, both when our family was together (and he became center of attention) and when we were alone. The same occurs with Max. Taking Max for long walks is something I love doing. While working a ‘virtually all-consuming’ job, Max brings me joy and peace.

11:

I’m your classic Dad, opposed to getting a pet despite the protestation from my kids. However, I finally conceded and Izzy the Cavoodle arrived and I quickly became her human.

Through the pandemic in Melbourne, mornings typically begun at 5.30am. I’d creep downstairs and make a strong coffee which more often than not was Izzy’s cue to bark gently under her breath to let me know she was up ever respectful of the neighbours.

As the household slowly woke, Izzy would follow me into my study, where she dutifully lay at my feet in a show of solidarity.

She saw me at my best, but on many days at my ebb. On those tough and perplexing days, she would look at me empathetically, from which I drew strength - she’s incredibly intuitive.

During office hours I jokingly referred to her as Betty (the inept and hapless PA from Hey Dad!) - “Izzy when are you going to get to that filing?”.

Together we found light heartedness on days where it was needed most. I’d be lost without her.

I do worry for Izzy when I finally return to the office - someone needs to develop an antidepressant for canines.

12:

Beanie is an eight-year-old beagle who showed up in my life via a Gumtree rehoming in September. He is a calm being, with more gravitas than I have ever seen in a human.

His favourite thing is catching a smell and investigating it until he figures out the source, a bit like a journalist. I love the look of trance-like concentration on his face when he is doing this.

We love introducing him to Indian things like his basic commands in my first language, and Indian sweets and customs on Diwali!

Beanie has taught me many things, but most importantly that it is okay (and even enjoyable) to put my time and effort into things that don’t have a tangible reward – he won’t ever brush my hair, make my bed or cook my dinner but I still get great satisfaction out of doing it for him! Or that every walk doesn’t have to have a spectacular waterfall at the end of it. He is a great dog to train a human. fs

3

FS cookbook

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

Financial Standard Holiday Cookbook From finance gurus to foodies

As the holidays approach, Financial Standard wonders how we are all going to spend our seasonal down time.

So we present here some of the industry’s favourite experts (who also happen to be amateur chefs) with their best recipes for you to try out over the festive period!

Crispy, crunchy baked potatoes

BBQ pulled pork

Charred garlic baby octopus and prawns

Maria Falas

Anthony Doyle

Eugene Ardino

head of mental health & wellness, life insurance Zurich

cross-asset specialist Fidelity International

chief executive Lifespan Financial Planning

I have an unashamed love of crispy, crunchy, baked potatoes and I learned from the best - my mum and my late mother-in-law. I cook this dish at least once a fortnight with roast lamb, BBQ’ed chicken and salad but it’s also a Sunday family favourite with BBQ souvlakia, pitta bread and Greek salad. It’s simple, delicious and takes me back to holidaying in Cyprus where I eat potatoes almost every day!

A few years back I travelled through the deep south of the USA and was bitten by the BBQ bug. This pulled pork recipe, with your own home-made rub, is sure to impress.

Like any good investment, it will take time to produce results and requires some fundamental prep work first.

And remember, if you’re lookin’ you ain’t cookin’!

This is a recipe that I have adapted from how my mother cooks baby octopus. It is one of my family’s favourite dishes, which my kids and wife enjoy alike. It has become a bit of an event when we decide to cook it, with both of my children joining in to help prepare the marinade.

When my little daughter Arya was two or three years old - and a very fussy eater - it was one of the few things outside of red meat, chicken and cucumber that she would eat.

She had this funny and joyful way of shouting “Polvinho”, which is an affectionate way to say little octopus in Portuguese. It always made us all laugh, and I think we all just loved hearing her laugh and yell Polvinho!

Ingredients 20 chat potatoes halved 2 chicken wings (so juices flavour the potatoes) Olive oil Lemon Salt and pepper Method 1. Place chat potatoes and chicken wings either end of a baking dish. Add a generous amount of olive oil and the juice of two lemons, salt and pepper.

2. Bake for 1 hour at 180 degrees.

3. Serve hot with Greek yoghurt and channel the beautiful Mediterranean!

Satay Dawn Thomas

senior financial adviser Wealthwise Satay is the great connector of people to exchange stories and celebrate moments. It is unbelievably easy to make, cost effective, with impressive results.

Ingredients 1 kg of chicken thigh or pork rashers 1 medium onion 6 cloves of garlic 100 ml Kicap Manis 2 tbsp peanut oil or other vegetable oil ½ tsp salt 1 tbsp ground coriander 2 tsp turmeric powder 2 tbsp brown sugar or palm sugar Chilli optional Skewers (soaked in water to avoid burning when cooking) Method 1. Cut meat into smaller pieces that will be easy to skewer later on 2. Blend the rest of the ingredients and use this marinade on the meat for between 2 hours to 2 days 3. Satays can be skewered when the marinade is added or after the marination process 4. Cook on BBQ or grill.

Ingredients 4-5kg pork shoulder 200g sea salt 140g soft light brown sugar 25g fennel seeds, toasted 25g black pepper, ground 10g sage leaves 10g rosemary leaves 25 garlic cloves Method 1. Blitz all the ingredients in a blender and spread on a clean tray to dry. Blitz again, then store in an airtight container.

2. Skin the pork shoulder, reserving the skin for scratchings 3. Prepare your bbq (I have a wood charcoal Big Green Egg) for smoking and set the temperature to 105C. 4. Massage the meat with the rub, then smoke it on the bbq, making sure it is skin side up.

5. Depending on the size of the pork, it can take between 12-14 hours to be ready. If you want to speed the process up, wrap in foil after about 5 hours with some apple juice and honey. Just remove the foil when the internal temperature starts to approach 75C. 6. The pork is ready when the internal temperature reaches 88-90C. You will need a meat probe to check. Once it hits this temperature, the pork will have a thick bark and be very dark. It will not be burnt, and will not taste burnt, so don’t panic.

7. Remove the pork, wrap in foil, and let it rest for half an hour.

8. Unwrap the pork and begin to work the meat and pull it apart. Be careful as it will be hot, so use some forks. Make sure to keep it in big chunks and strands, an over pulled pork shoulder will be mushy.

9. Add a little more rub to taste, and some bbq sauce, and serve immediately with some bread rolls, pickles, scratchings and coleslaw.

10. Enjoy!

Ingredients 2kg baby octopus 12 medium-sized peeled prawns 700ml sweet white wine 140ml extra virgin olive oil ¾ of a cup of fresh oregano A few leaves of fresh basil 90g of garlic paste 2 fresh limes Method 1. Put the baby octopus into a pot with the sweet white wine and 100ml of extra virgin olive oil. Add three quarters of a cup of oregano (fresh is best, but dried will do), the basil leaves, either a full crushed head of garlic or 60g of garlic paste and the juice of two fresh limes. Mix well.

2. Marinate for up to a day if possible. It’s fine to do it spontaneously as I generally do, just boil it a bit longer.

3. Add about two cups of water and bring the pot to boil. Boil for 30-45 minutes depending on how tender you want the octopus, stirring occasionally.

4. While boiling, take the dozen peeled prawns and mix them in a bowl with 40ml of olive oil, half a head of crushed garlic or 30g of garlic paste, and a sprinkle of oregano.

5. Once the baby octopus has been boiled, remove it from the marinade and heat either a frying pan or BBQ to a high temperature.

6. Pour a small amount of olive oil on the BBQ plate/ pan and add a medium amount of crushed garlic to the plate. Once the garlic starts to sizzle, fry the baby octopus.

7. Char the baby octopus for about 1-2 minutes and then turn and repeat. Again, this depends on how charred you want the baby octopus, the above works for our family but others might like it more charred.

8. At about the same time as you are charring the baby octopus, cook the prawns for about three minutes on each side.

FS cookbook

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

Seafood paella Kate Samranvedhya

deputy chief investment officer Jamieson Coote Bonds Seafood paella is such a fun dish to share with family and friends. It looks very festive, tastes amazing and can be served in the pan directly on the table as the centrepiece.

I like to prepare the broth in advance and while this is simmering, decorate the table and get dressed up for the party. Just prior to my guests arriving I add the rice to finish off the dish.

Ingredients 2 cups of short-grain rice, ideally Spanish rice, though Japanese rice works too.

3-4 cups of chicken or seafood stock, room temperature or warm 4-8 prawns with heads and shell One fillet of 200-300g fish Some mussels or clams, depending on your pan size Half onion, roughly chopped 3-4 cloves of garlic, roughly chopped A cup of tomato, roughly chopped One red bell pepper, roughly chopped. Green or yellow bell pepper works too.

A few teaspoons olive oil 1 cup of wine, preferably white or rosé 1 cup of passata or canned tomato 1 cup of sugar snap pea, optional A few sprigs of English parsley, finely chopped, for garnish 3 tsp of smoked or sweet paprika, your preference A few strands of saffron Salt and pepper Lemon wedges

Seafood preparation 1. Rinse prawns well in salty water and drain. Try to remove each prawn shell in one piece and keep the shells for flavouring the broth. Remove the black intestine. Try to preserve any liquid from the head with the body. Season with salt and pepper.

2. Scrub mussels or clams and remove their beards, if any. Rinse well to remove sand. Soak them in cold salty water until ready to use.

3. Cut fish fillet into 4 pieces, season with salt and pepper.

3.

4.

5.

Broth preparation 1. Heat a flat cast iron pan or a paella pan on low/ medium heat. Add olive oil, prawn shells, onions, garlic, bell peppers, and tomatoes. Stir for a few minutes, then lightly salt and pepper. Keep stirring until the sofrito (this vegetable mixture) is soft, but not burnt. Keep on low heat, sprinkle with paprika and stir well.

2. Add wine, let it simmer until you cannot smell alcohol. Remove the prawn shells.

3. Add saffron, tomato puree, and 3 cups of stock.

Season with salt and pepper to taste. Bring to simmer for a few minutes.

4. You can prep the broth in advance up to this point.

You can turn off the heat and cover it until you’re ready to cook the rice.

Method 1. Start this process 30 minutes before when you’d like to serve the paella. Bring the broth to a simmer on medium heat. Add and distribute the rice and peas evenly in the pan. The rice should completely submerge under the broth. We will not disturb the rice mixture anymore after this. Cover with lid on medium heat for 10 minutes.

2. Turn heat to low. Test the doneness of the rice. It should taste almost cooked but not quite. If the mixture looks too dry, add more stock, but not higher than the level of the rice.

6.

4

Arrange fish, mussels and clams nicely on the surface. Cover with lid again for 5 mins. Add prawns, cover with lid again on low heat for 5 mins.

Turn off the heat and throw away any unopened shellfish. At this point, all seafood should be cooked.

Your rice should be just cooked enough to develop socarrat, which is the tasty brown bit on the bottom of the pan, but not burnt. The texture of the rice is softer than al dente, but not mushy. The balance can be achieved by adjusting the amount of stock and the heat on the pan. It will come with experiences.

If the seafood is almost cooked, but the rice is ready, keep the lid on, no heat, for 5-10 minutes.

There should be enough residual heat and steam from the pan to cook the seafood.

Garnish with chopped parsley and lemon wedges.

Serve immediately.

Green shakshuka Arian Neiron

managing director, Australia and New Zealand Van Eck Ingredients Olive oil 2 x garlic gloves 1 x leek chopped 1 x zucchini sliced 2 x bunches of kale 2 x bunches of silverbeet/spinach 1/2 cup frozen peas 1 x bunch of snow peas 1x teaspoon cumin seeds 1 x bunch parsley 1 x teaspoon coriander Salt and pepper 4 x eggs Optional - goats cheese (I am dairy free so I don’t include)

Rum Ball Rumble Jodie Hampshire

Sophia Rahmani

managing director, Russell Investments

chief executive, Maple Brown Abbott

For my family, Christmas would not be Christmas without rum balls, panettone and trays of mangoes and cherries. Friends get upset if I don’t gift them enough rum balls. You don’t want to think about the health aspects, but a massive bowl of these would be my death row meal. The world’s best rum balls – seriously, make at least 4x these quantities.

My Mum grew up in Roma (in country Queensland) and Granny’s rum balls were always a Christmas staple for her, as they became for us growing up (though I’m sure we didn’t get started too young!!) both at home in Canberra and during the countless Christmases we spent with family up north. These are a favourite with family and friends, and definitely made the Queensland way!

Ingredients

Ingredients

Packet of Milk Arrowroot biscuits 1 cup desiccated coconut 1 tin condensed milk (I’ve used reduced fat and still tastes good) 2 tbsp cocoa 120g Copha (melted) 1/2 tbsp vanilla essence Extra coconut (to coat)

8 Weet-Bix 1 cup of raisins ½ cup of desiccated coconut 1 tin of condensed milk 3 tbsp of rum (Bundy of course) ¼ - ½ cup of desiccated coconut for coating

Method

Method

1.

1.

2.

3.

4.

5.

2.

Recipes tend to say 2 tsp rum. I put in glugs and glugs of rum. Perhaps 3 tbsp at a minimum. I don’t drink much but you want these strong.

Whizz up the biscuits, add everything else in, mix well, roll into small balls and roll in the extra coconut. I keep tins of these in the freezer and life is exceptionally good through December and January as a result! Eat from the freezer or a very cold fridge, the colder the better.

Crush Weet-Bix and finely chop raisins Combine all ingredients in a large bowl and mix well Cover and refrigerate for at least half an hour Roll into balls and then roll balls in coconut Store in an air-tight container in the fridge

5

FS cookbook

Method 1. In a large pan heat oil on medium 2. Sautéed leek until cooked 3. Add grated garlic gloves and zucchini 4. Once zucchini is cooked add silverbeet, kale, snow peas and peas and spices 5. Add 1 tbsp of olive oil and stir. Then season to taste.

6. Reduce heat to low and make sure the green mixture is cooked well and evenly spread in the pan 7. With the back of a wooden spoon make 4 indentations in the green mixture. Crack the eggs one by one into a cup and pour individually into the indentations. Cover the pan with a lid and cook for about 7 mins or until the egg whites are cooked but yolk is still runny.

8. Uncover and serve with toast (I have with gluten free toast). Sour dough is great.

9. Optional is to sprinkle goats cheese on just before you cover the pan with the lid.

Gin cured salmon served with horseradish crème Tim Elliott

group executive- finance, strategy and transformation Aware Super Salmon is a perennial favourite for my family at Christmas.

Its takes a bit of effort, but the result is so rewarding for Christmas lunch, and is even better with a glass of champagne. I like to finish my salmon off with a little smoke to give it extra depth in flavor.

Ingredients: Cure Mix Side of salmon, skin on 150g salt 130g caster sugar Zest of 1 orange and 1 lemon 20 juniper berries crushed Bunch of dill ½ cup of gin Horseradish Crème Horseradish cream Crème fraiche Method 1. Mix all spices, dill and gin together.

2. Place half of the spice mix in the bottom of glass or ceramic container lined with plastic wrap.

3. Place salmon skin side down 4. Spread remaining spice mix over salmon.

5. Wrap tightly in plastic.

6. Place in fridge for at least 24 - 48 hours (longer cure will produce a firmer result), check every 12 hours and remove any excess water.

7. Unwrap and wipe salmon clean.

8. Sprinkle salmon with a mix of dill, chives and lemon zest. Slice thinly and serve on your choice of blinis, bagels or toasted sourdough baguette topped with horseradish crème.

9. Additional step: If you want a slightly smoky taste, use a cold smoke (not direct heat). Place salmon in a container with another container underneath containing ice. Place in oven or BBQ with a roasting hood, bring some smoking pellets to a smolder and place in with salmon for 30-45 ins until desired amount of smoke is obtained. Check regularly to ensure salmon remains cold.

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

Chicken, spinach and chickpea curry

Nan’s Christmas pudding

Brian Parker

Laird Abernethy

chief economist Sunsuper

managing director, Australia & New Zealand GQG Partners

As this recipe is provided by an economist, please take the amounts taken here as a bit of a guide. In other words, one teaspoon of chilli powder could be interpreted as a tablespoon on the upside, down to none. Anyway, here goes…

Nan’s Christmas pudding has been a staple of our family Christmas lunch for as long as I can remember. In early November 2015, I spent a Saturday with my grandma Nan learning how to make it. Unfortunately that Christmas would be her last. I can’t say yet that I’ve successfully passed this recipe onto my daughters, however every second Saturday of November since then, they’ve helped me prepare the puddings, which is becoming a tradition within itself.

Ingredients 1 brown onion – chopped into a reasonably fine dice.

1 knob of ginger, peeled and chopped finely or grated into a paste.

3 garlic cloves, chopped finely or minced (maybe one or two more if you like).

750g chicken thighs, chopped into chunks.

10g ground coriander seed 10g ground cumin 10g turmeric powder 1tsp chilli powder A decent glug or vegetable, canola or rice bran oil 1/2 cup of water 400g peeled and chopped tomatoes 400g chickpeas, drained and rinsed in running water.

500ml chicken stock Lentils (optional) – maybe a couple of handfuls. Not fussed which colour lentils you use, or if you use them at all. I like red or French green (du puy).

1 sweet potato (optional) 250g spinach leaves 270ml coconut cream Rice to serve.

Method 1. In a large, preferably non-stick pot, chuck in the oil and fry the onions, ginger and garlic on a moderate heat for a few minutes, stirring constantly. You just want to soften them really rather than brown them.

Then add all the spices and at this point you’ll probably need to add a bit of the water, just so the spices don’t stick to the pan. Stir for 30 seconds or so. Then add the chicken pieces, stirring to ensure al the pieces are coated in the spice garlic onion and ginger paste. Let it sit and fry for another 30 seconds or so.

2. Then add the tomatoes and stir it all up. Add maybe half the stock, then the chickpeas and (if using) the sweet potato and the lentils. You don’t want the end product too runny so be careful how much liquid you add. Just make sure there’s enough to be able to cook the sweet potato and lentils. Cover and simmer on a low-ish heat until the sweet potato, lentils and the chicken are cooked. At this point, add the spinach. Add the whole bag, which will look like too much, but only for a few minutes until the spinach wilts away. After the spinach is wilted, add a glug of the coconut cream if using. It adds a nice creaminess and takes the edge of the chilli a little if you went overboard earlier in the process! Stir it all in and simmer for a minute or so. If at this point the whole thing has too much sauce or seems to runny, you can thicken it with some cornflour, but it’s not critical.

3. Serve with steamed basmati rice.

4. Amount shown are normally enough for a family of four, with some leftover.

5. Enjoy!

Recipe to cook 2 x puddings Make the puddings in early November for best results Ingredients 560g butter 750g raisins, chopped 375g brown sugar 750g sultanas 6 eggs 190g currants 375g soft bread crumbs 375g dates, chopped 375g plain flour 190g mixed peel, chopped ¾ teaspoon salt 190g glace cherries, chopped 6 tsp mixed spice 3 tsp nutmeg ¾ tsp bi-carb soda 20 tbsp brandy Method 1. Prepare the fruit the day before, once all fruit is chopped, mix together with 6 tablespoons of brandy and refrigerate overnight 2. Grease two 2 litre pudding tins, cut out a circle of grease proof paper to fit the bottom of each pudding tin and stick down.

3. Cream the butter with the sugar until light and fluffy.

Add the eggs one at a time, beating well after each addition. Make sure you use an extra large mixing bowl.

4. Stir in the breadcrumbs, prepared fruits and sifted dry ingredients.

5. Stir in 6 tbsp of brandy and mix thoroughly using your hands.

6. Place mixture into the 2 pudding tins, cover with grease proof paper and tie securely with string.

7. Add an additional layer foil and then cover each tin with pudding tin lid.

8. Place pudding tins into 2 large saucepans of boiling water, make sure you have a plinth between the bottom of the saucepan & pudding tin so the bottom of the pud doesn’t overcook.

9. Boil for around 5hrs with saucepan lid on. Top up the water every half hour to ensure the water level remains half way up the tin.

10. After 5 hours take puddings out of the saucepans, drizzle 4 tbsp of brandy over each pudding and allow to cool.

11. Once cooled take puddings out of their tins tin, wrap in foil and refrigerate.

12. Reheat on Christmas Day and serve with ice cream, custard or my favourite, brandy butter! fs

6

Quotable quotes

www.financialstandard.com.au 07 December 2020 | Volume 18 Number 24

Finan c the q ial Stand ard r uota e the y ble quote views ear t s hat w from as.

I think Australians have generally been either unaware or skeptical about the power of ethical investing and I’ll confess, for a long time, I was personally indicative of exactly that skepticism.

John McMurdo, chief executive, Australian Ethical

We want people who think and act like business owners rather than approaching their job as hired people who are there to just clip the coupon… We are pretty diligent. I’m trying to keep the bureaucracy out of what we’re doing.”

Brett Cairns, chief executive, Magellan Financial Group

I believe in divine fortune, but sometimes you’ve got to make your own luck; you’ve only got one life and it’s not a dress rehearsal.

We use the power of money to invest, advocate and campaign. And we want to bring that together in a package so that members can get really excited about what their money is doing, excited enough to talk to their friends about super.

Kirstin Hunter, chief executive, Future Super

Arian Neiron, managing director, Australia & New Zealand, Van Eck

The Aussie broking industry and the Aussie exchange industries are really small. If you want to be an arsehole, it’ll come back to bite you… This industry is full of really good people, there are some egos, but there are so many really good people.

Vic Jokovic, chief executive, Chi-X

The ambition to professionalise financial advice and regulate to ensure that people were getting advice that was in their best interests… it’s something that I’m very proud of.

Through the years it wasn’t always a popular set of reforms, but I know it’s had an impact.

We are unashamedly Australian and unashamedly Muslim. The two are not mutually exclusive. What we want is to contribute to the social fabric of Australia, and for all Australians not just Muslim Australians.

Talal Yassine, managing director, Crescent Wealth

Robbie Campo, group executive – brand, advocacy and product, Cbus Hard work is no guarantee that you’ll get to where you want. But if you don’t work hard you can bet your bottom dollar that you won’t get there.

Marsha Beck, managing director, Australia, AMP Capital

6

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The outlook for sustainable investment

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Roundtable | Thought Leadership Series

www.fssustainability.com.au November | 2020

Editorial Rachel Alembakis managing editor

As this most unusual year draws to a close, this roundtable presented a unique opportunity to gather a panel of experts from a diverse range of backgrounds – asset owners, asset managers, consultants and industry bodies – to discuss how sustainable investing has grown, evolved and responded to profound global shifts in recent years.

Held as an online roundtable, this in-depth panel discussion covered a breadth of topics ranging from standards and definitions to the reasons behind why looking at positive impacts can become a tool for measuring investments as well as engaging with members and other stakeholders.

We would like to thank our panellists and our roundtable partner, FTSE Russell, for their time and the considered analysis they brought to the table.

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With the Responsible Investment Association Australasia reporting that in 2019 more than $1 trillion in assets under management was invested using responsible investment strategies, we hope that this discussion drives more investment professionals to consider best practice in this fast-evolving sector of the industry.

If this is the first time you’ve come across this publication, FS Sustainability is a weekly digital publication that reports on environmental, social and governance (ESG) issues that affect how investors and Australian companies manage, disclose, and communicate their material risks and opportunities. Originally launched in 2011 as The Sustainability Report, it was acquired

by Rainmaker Information in 2019 and was rebranded FS Sustainability in September this year.

020 has been the year that sustainable investing not only came to the fore, but outperformed against traditional benchmarks. Mainstream interest in strategies that integrate environmental, social and governance (ESG) information was catalysed to new heights after a horrendous bushfire crisis in eastern Australia. The COVID-19 pandemic further brought prominence to the sector as ESG, responsible investment, and sustainable investment strategies had relatively stronger performance. This was due in part to their lower weighting towards fossil fuels and higher allocations to IT and healthcare.

Evidence from both a quantitative and a qualitative perspective has shown that sustainable finance can walk and chew gum at the same time.

Far from demoting climate change further down the agenda in this year of global health and economic strife, a growing number of asset owners pushed to set targets and goals to align their portfolios to a net zero carbon future.

Analysis and integration of human rights considerations have helped demonstrate the companies that are resilient to the health and safety of their employees, communities and wider society, and what policies are necessary to promote recovery. Announcements like that from the European Union (EU) with its green recovery package provide a roadmap to future investment preferences as well.

At an FS Sustainability roundtable recently hosted by FTSE Russell, industry experts discussed how the sustainable finance industry will continue its momentum into 2021 and beyond, with particular reference to meeting the challenge of mitigating, managing and adapting to climate change.

FTSE Russell’s head of sustainable investment Asia Pacific Helena Fung noted that the drive for sustainable investment, particularly around climate risk, is rising to a pinnacle through a combination of forces. This includes regulatory and policy settings such as the EU's

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green post-COVID recovery plan and its new taxonomy to increase sustainability disclosure amongst financial products, a number of countries setting net zero carbon targets for 2050, the work of institutional investors through collaborative engagements such as the Climate Action 100+ coalition, and wider work leading to a convergence on stewardship of retirement savings and fiduciary responsibility.

“2020 is the year the training wheels came off for the responsible investment sector,” Responsible Investment Association of Australasia (RIAA) chief executive Simon O'Connor said.

“I think it's really been a fascinating year. This is a process of professionalising our industry that has been around for 20 or 30 years in some cases, but this is the year where we're now being embedded in regulation, standards, [and expressed in] the need for consistency and frameworks.”

This drive is coming across the board, with fund managers and asset owners setting targets around sustainable finance, regulatory bodies such as APRA and ASIC explicitly discussing the risks and material concerns of climate change, and consumers demanding more products and better services from the investment industry across a range of environmental, social and governance issues.

Definitions matter: Being clear on what sustainable investment means As the sustainable investment industry grows and evolves in sophistication and depth, there is also a push to be clear on what sustainable investment is, how it is communicated, and how it is evaluated in both portfolios and in underlying assets.

“There's a myriad of terms being used in the industry – impact, ESG, ethical, responsible, sustainable,” Australian Ethical Investment chief investment officer David Macri said.

“I think people are starting to get a little bit confused and are simply putting everything in the one bucket. It would be good to have consistency and perhaps come up with a taxonomy to help.”

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Thought Leadership Series | Roundtable

www.fssustainability.com.au November | 2020

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Panellists

Joey Alcock

Tim Batho

Helga Birgden

Lou Capparelli

Mary Delahunty

Helena Fung

Frontier

FTSE Russell

Mercer

UniSuper

HESTA

FTSE Russell

Emma Herd

Louise Lew

David Macri

Steve Monnier

Simon O'Connor

Rachel White

IGCC

Willis Towers Watson

Australian Ethical

BlackRock

RIAA

Vanguard

UniSuper’s manager, sustainable portfolios and governance Lou Capparelli noted that he is a member of the User Advisory Committee of the Australian Accounting Standards Board which is working on a guidance framework in relation to sustainability reporting for companies, and that many of the issues facing the investment industry are also facing the corporate world at large.

“Ideally we'd love companies to consider all their ESG and sustainability issues as they apply to them individually rather than force them into some sort of cookie-cutter approach,” Capparelli said.

“We have accounting standards to force [companies] to disclose in a certain way so that things are uniform, but also to avoid gilding the lily and obfuscation.”

HESTA head of impact Mary Delahunty said it is useful to think about the language of the ecosystem of sustainable finance.

“ESG is a set of risks that we would consider just business as usual now,” Delahunty explained.

“We should stop talking about ESG risk management as though it's some sort of amazing future and just consider it as something good stewards of capital, especially long-term capital, do.”

There will never be a Tolkien-esque one framework to rule them all in the sustainable investment universe, but rather a series of tools that support differing goals – ESG risk integration, sustainable investment, and impact investment.

“What you're seeing is different activities, supporting different intent,” Investor Group on Climate Change (IGCC) chief executive Emma Herd said.

“We're getting different tools, both from reporting perspective, but also product development and across different asset classes and through different investment activities to support different goals.

Some funds are principally focused on impact and performance.

Some are principally focused on risk management as in, whether it's carbon or social risk management or sustainability risk management.

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Setting the policy then leads to the tools an asset owner or asset manager will adopt, and will determine which frameworks and measurement used to monitor performance, Herd added.

Evolution of indices and benchmarks As data relating to ESG has increased, and as investors are becoming more sophisticated in product development, investment policy and asset allocation related to sustainable finance, so too have benchmarks and indices evolved.

“I would like to reflect on the incredible race that we've seen among index providers and asset managers to develop climate transition indices,” Mercer global business leader, responsible investment Helga Birgden said.

“There's been this transition from first-generation indi­ces, which weighted equity and fixed income indices away from high carbon companies, to second generation. This included the opportunity side and allocation to green revenues... to index solutions that are really progressing allocation to companies with a long term plan on transition and focus on all sectors... aligning to the EU taxonomy if European focused, having some measures around the 1.5 degree economy up to 2050, etc.”

This new development of indices is not based on a common consensus around methodology or data sources, which can lead to a wide dispersion of index composition, explained Rachel White, senior manager, product strategy at Vanguard Investments Australia.

“That's challenging, because of data differences and inconsistencies in methodologies, that is going to be something we have to manage,” White said.

“By moving to the second evolution and being clear around what the purpose of the product or the strategy is and what it's trying to achieve, and then our ability to actually report on that and provide the value that the product provides to investors is just as important.”

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Roundtable | Thought Leadership Series

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The challenge really now is how do we scale up, and how do we continue to develop solutions which will deliver on sustainable expectations.

Asset owners and asset managers have to set objectives first, before selecting the right benchmark as the end point in investment strategy development, Frontier principal consultant and chair of Responsible Investment Group Joey Alcock said.

“It should be based on the requirements of your broad range of stakeholders,” he said.

“One of the challenges that certainly we've seen across our client base of institutional investors is balancing those different parameters, those different constraints.

“You may well want to decarbonise your portfolio and you've got APRA, for example pushing regulatory direction in that way, to sort of focus on climate, but then you've got Treasury in the last budget pushing towards a standardised approach around traditional benchmarks.”

It is possible to use an index to create the settings for meaningful impact and investment stewardship over a wide base of capital investment, Fung noted, a point that BlackRock Investment Management’s sustainability specialist Steve Monnier reinforced.

“We have an independent centralised function for investment stewardship,” he said.

“That group of more than 45 professionals is dedicated to engaging with companies directly, including proxy voting, that sit within the respective indices, and is the voice of the index investor. So, as a fiduciary, the buck actually stops with them when it comes to holding board directors accountable and making voting decisions for those index investors.”

The rise and meaning of impact As the investment industry evolves beyond integrating ESG risk into investment decisions, there is gathering momen-

Sustainable finance and authenticity Inherent to the risk of greenwashing is a belief that an investor is not matching lofty words around investing to minimise environmental and social harms or maximise positive impacts.

HESTA's Mary Delahunty points out that being a sustainable investor means taking actions across an entire fund that are coherent and aligned.

“It speaks to the maturity of the concepts of sustainable finance, and speaks to the reputation risk or that authenticity risk that we have as stewards and as people who try and prosecute the argument that sustainable finance deserves greater, if not all our attention in terms of the way we assess impact,” she said.

Because Australian institutional investors are universal owners – that is, they own a slice of the entire Australian economy by virtue of the size of their asset base and the makeup of their membership base – collaborative action can be an authentic expression of impact, IGCC's Emma Herd said.

“Part of the reason why we've seen so many investors joining Climate Action 100+ is because it's very much a recognition that there is a core group of companies who are in almost everyone's portfolio that are responsible for the vast majority of carbon emissions in listed markets globally,” she said.

“And if you can get them to transition, the whole market's systemic and portfolio risk is reduced.”

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www.fssustainability.com.au November | 2020

tum on linking investment activities to their economic, social and environmental impact on stakeholders and society.

“We've been talking to our clients about the three dimensions of risk, return and impact,” Willis Towers Watson head of sustainable investment, Australia Louise Lew said.

“There's no such thing as a neutral investment portfolio – all have either a positive or negative impact on the environment and on society, but that’s something we haven't always measured before. So it comes back to measurement and how we measure the impact of our portfolios.”

Macri noted that measuring impact at an individual actor level is complex and involves activities such as engagement, which can be difficult to quantify.

“As an industry, we might be able to generate some meaningful impact and change corporate behaviour,” he said.

“I think we need to elevate it so that it's an industry wide impact, because the more capital behind an issue, the more chance you have of successful engagement.”

Defining manager skill in generating impact can further be complicated by a lack of metrics, transparency and disclosure because this is a topic that has only garnered mainstream attention in recent years. Birgden explained that she looks to manager skill, traditional financial metrics and how a manager communicates its impacts when assessing them for an impact mandate on behalf of an asset owner client.

The United Nations Sustainable Development Goals (SDGs) can provide a narrative tool with consistent language that can assist super funds who are classifying their investment impact, Delahunty said. “[The SDGs] help to have a consistent approach in the way decision-making is prioritised,” Delahunty said.

“It's a global set of ambitions, but it’s also a map of global policy, which you're not going to get in many other frameworks. Underneath that there are different ways you can measure how you're going against those ambitions. Some of the ambitions will be more relevant to our country, our members, our remit, and some of them won't be, so we've identified a subset of seven that we think have a material impact.”

Aligning decision making and communication of that process to members and other stakeholders can also be a sound business decision. O’Connor noted that consumer research from RIAA shows 75% of young people want their funds to take more action on climate change, so being able to communicate the impact of a portfolio towards reaching net zero carbon emissions targets by 2050 can align with burgeoning consumer demand in this area.

If 2020 is the inflection point for sustainable investing – as it appears to be from both a fund performance and new net inflows from institutional and retail investors – Fung concluded that “the challenge really now is how do we scale up, and how do we continue to develop solutions which will deliver on sustainable expectations” by using all the ambitions and goals expressed by the panel to continue forward. fs

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