MCFS Annual Report 2019

MONASH CENTRE FOR FINANCIAL STUDIES

2019 Annual Report

ABOUT MCFS

Previously known as the Australian Centre for Financial Studies (ACFS), the Centre was founded in 2005 by a consortium of Australian universities.

Since Monash University acquired ACFS from its partner universities in 2016, the Centre has undergone a major structural review and transformation, culminating in its full integration into the Monash Business School late in 2018.

The restructure was formally recognised in August 2019 with a name change to the Monash Centre for Financial Studies (MCFS).

In its vibrant new home base in the Melbourne CBD, MCFS is building upon its reputation as a vital hub for engagement between Monash University and CBD-based finance industry professionals and other stakeholders – including executives, industry associations, regulators, policymakers and others. MCFS conducts leading-edge research into Australian and world financial markets. Our research is both academically rigorous and practical, with an industry-relevant approach aimed at generating knowledge and insights for the benefit of Australian businesses, regulators, policymakers and other interested stakeholders.

Through our ongoing collaborative research projects, we aim to facilitate a valuable two-way transfer of knowledge and expertise between academia and industry and, by extension, contribute meaningfully to vital national policy debates and Australia’s financial sector’s future integrity and prosperity.

Find us online monash.edu/business/mcfs

MESSAGE FROM OUR DIRECTOR

In a landmark year for the Australian Centre for Financial Studies, a comprehensive review and restructure of the organisation has been largely completed, and we have successfully begun the next chapter in our history as part of the Monash Business School in Melbourne.

As a result of the restructuring, we have settled into impressive new headquarters in the Melbourne CBD and, in August of this year, changed our name to the Monash Centre for Financial Studies (MCFS), reflecting our full integration with Monash University.

In our new CBD location, we are working in close proximity to a large and vibrant financial community comprising headquarters and major offices of banks, pension and sovereign wealth funds, investment companies, consulting firms, regulators, policymakers, government departments and technology businesses. This greatly assists our researchers and other faculty staff in interacting frequently and efficiently with the practitioner community.

Amid the momentous changes of the past couple of years, I am delighted to report that three outstanding academics joined our research ranks in 2019.

Dr Ummul Ruthbah, a PhD in Economics from the Massachusetts Institute of Technology, was appointed a Senior Research Fellow. Dr Yolanda Wang joined the Centre as a Research Fellow in February. Dr Wang has a PhD in Finance from the

University of Melbourne. She was joined in May by Dr Bei Cui, who has a Doctorate of Philosophy in Finance from the University of Hong Kong, also as a Research Fellow.

While changes associated with our restructuring have unavoidably caused some temporary disruption to our research output, I am excited to report that our new researchers have hit the ground running, with each now working on major projects (mentioned in the Highlights section and outlined in this report) that will bear fruit in the coming months and years.

With our new organisational structure, a new home base, a new name for our Centre and, most importantly, a newly expanded team of talented researchers, I have never been more ambitious and optimistic for our future.

PROFESSOR DEEP KAPUR Director, Monash Centre for Financial Studies

HIGHLIGHTS

1Dr Ruthbah, in collaboration with Senior Advisor Roger Cohen, has already completed a project highlighting anomalies in Australia’s retirement income system.

2At the end of the year, the Centre was commissioned by the Federal Treasury to research on behalf of the Retirement Income Review Panel. The work will commence in 2020

3Dr Nga Pham, who, after completing two ground-breaking investigations relating to pension funds in 2019, is researching the phenomenon of Japanese shareholder activism.

EXPANDING THE TEAM

Ummul Ruthbah, appointed Senior Research Fellow, holds a PhD in Economics from MIT. She was an IMF Scholar and worked under the supervision of Professor Esther Duflo and Professor Abhijit Banerjee. She also has an MA in Economics from McGill University. Before joining MCFS, she was at the Centre for Development Economics and Sustainability at Monash Business School. Before that, she was an Associate Professor of Economics at Dhaka University in Bangladesh. She has over ten years of experience teaching graduate and undergraduate-level microeconomic theory and econometrics courses at MIT and Dhaka University. She also designed and delivered executive education programs on research methodology for the Central Bank executives in Bangladesh and was an editor of the annual report for the Central Bank of Bangladesh. Ummul’s industry experience includes five years of consulting for the World Bank.

Yolanda Wang joined us as a Research Fellow on 1st February after completing her PhD in Finance at the University of Melbourne. She completed her master’s degree in financial mathematics from

Johns Hopkins University and a bachelor’s degree in Finance from Wuhan University, China. Her main research interests include corporate finance, corporate governance, mergers & acquisitions, investment and portfolio management. Before her PhD studies, Yolanda worked in the international finance department of Societe Generale in China.

Bei Cui joined us as a Research Fellow on 20 May 2019 after receiving a Doctor of Philosophy in Finance from the University of Hong Kong. She is a trained finance researcher capable of conducting rigorous industry-relevant academic quality research. Her primary interests include sustainable investment, climate finance, Chinese and foreign capital markets, superannuation funds and market microstructure. Her works have been presented at many international conferences, published in peer-reviewed international finance journals, and addressed in major media outlets. Besides her research work, Bei is passionate about teaching and has delivered finance, investment, and financial economics courses at undergraduate and postgraduate levels.

We welcomed three new talented researchers to our Monash Centre for Financial Studies team in 2019.

RESEARCH PROJECTS

ROGER COHEN, UMMUL RUTHBAH

The Australian retirement system is highly regarded by world standards. Despite this, there are anomalies in the system that could be removed or improved to produce better outcomes for both retirees and the government. This paper illustrates how the three pillars of the Australian retirement

system – the age pension, superannuation and savings – interact. It is well known that this interaction can lead to unintended outcomes relating to savings and investment behaviour which, ultimately, can be detrimental to retirees and increase the fiscal burden on the government.

We introduce a framework for potential alternatives that address some of these anomalies and lead to better outcomes for retirees and the government. The main proposal is to use superannuation to fund a compulsory defined benefit scheme, which, coupled with government assistance, could fund a universal pension.

 View details

PITFALLS IN THE RETIREMENT SYSTEM AND SOME THOUGHTS ABOUT RISK, REWARD AND REMEDIATION

Despite the disruptions associated with the restructuring of our Centre, our researchers published papers on a number of major research projects during 2019 (see below). They launched a series of new projects that will be the subject of further papers in the months and years ahead (see under ‘Ongoing research projects’).

GROWTH ASSETS OF PENSION FUNDS AND PENSION SYSTEM’S ADEQUACY AND SUSTAINABILITY

NGA PHAM

This paper investigates the possible downside of the trend towards ESG by examining how this approach to investing might affect market efficiency. Consistent with salience theory, this over-emphasis on ESG results in the market overreacting to news about ESG controversies. Contrarian investors are likely able to profit from the unpopular strategy of buying stocks after bad ESG news is released.

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ASSET ALLOCATION OF PENSION FUNDS: MMGPI 2018

NGA PHAM

The primary objective of funded pension arrangements is to provide adequate incomes for retirement. Pension contributions and the investment returns accumulated in a fund during an individual’s working life and retirement years are the key factors that affect retirement incomes. The asset allocation

of pension plans drives long-term pension investment returns.

As asset allocation strategies of pension funds around the world are so diverse, ACFS dedicated a special report to the asset allocation of pension funds based on data collected by the Melbourne Mercer Global Pension Index (MMGPI) project from 2009 to 2018. The report’s main objective is to enhance understanding of this diversity, its drivers and implications.

 View details

ONGOING PROJECTS

SHAREHOLDER ACTIVISM – MECHANISMS AND IMPLICATIONS

NGA PHAM

Shareholder activism is on the rise in Japan, with potential impacts on the behaviour and performance of listed Japanese companies.

THE ROLE OF INTERNET QUALITY ON MARKET LIQUIDITY AND TRADING COSTS

BEI CUI, PAUL RASCHKY

In this project, we investigate the effects of internet speed differentials on stock market liquidity and gains from trading. Modern stock markets are characterised by competition on speed differential among traders to gain an

However, our investigation finds that shareholder activism in Japan has not yet developed to the same degree or in the same ways as in the United States and Europe, where investors are increasingly focusing on so-called ESG issues – environmental, social and governance. In Japan, by contrast, shareholder activism has been mainly concerned with governance and financial performance.

advantage over other rivals. Consequently, internet quality may affect stock market liquidity and trading costs.

Previous research has yielded ambiguous results on the effects of speed differentials on market quality. On the one hand, speed may reduce adverse selection and inventory costs faced by liquidity providers, which improves liquidity. Conversely, fast traders taking advantage of speed may take liquidity, which may have the opposite impact. Our empirical analysis will help to disentangle the theoretical predictions and contribute to the ongoing debates in the academic literature.

STOCK PRICE OVERREACTION TO ESG CONTROVERSIES

BEI CUI, PAUL DOCHERTY

There has been substantial growth in incorporating environmental, social and governance (ESG) issues into investment decisions. This trend has been motivated by the societal benefits of socially responsible firms having access to cheaper capital.

While the benefits of ESG investing are apparent, we investigate the possible downside of the trend towards ESG by examining how this approach might affect market efficiency. ESG is now a highly salient aspect of investors’ information sets. Given cognitive limitations, investors might devote substantial resources to examining ESG characteristics to the detriment of other firm fundamentals.

THE RETIREMENT PUZZLE

UMMUL RUTHBAH

Present-day retirees may not be as well off as they expect to be during retirement. Given the current state of the world – higher life expectancy, close to zero real interest rates, and the economic turmoil caused by the COVID-19 pandemic, a superannuation

SELF-MANAGED SUPER FUNDS

YOLANDA WANG

fund balance as large as $545,000 may not be enough to support a comfortable lifestyle. Besides, the means-tested age pension results in cases where spending at retirement does not increase proportionally with assets, providing incentives for a broad spectrum of people to deplete their superannuation in the early years of retirement, with significant negative consequences for government finances.

This project analyses the investment performances of tens of thousands of selfmanaged superannuation funds over seven years. The research reveals that Australian equities portfolios of self-managed funds had low levels of diversification and liquidity, and many did not beat the market.

RETIREMENT INCOME REVIEW CONSULTATION

UMMUL RUTHBAH, NGA PHAM, BONSOO KOO

The Federal Treasury has commissioned our Centre to work on the following two consultation projects for the Government’s Retirement Income Review. These projects are aimed at helping to establish the fact base for the review panel.

THE RELATIONSHIP BETWEEN VOLUNTARY SAVINGS AND CHANGES TO THE SUPERANNUATION GUARANTEE

UMMUL RUTHBAH, NGA PHAM

This study examines how the compulsory employer superannuation system interacts with voluntary savings. The study focuses on the extent to which the existence of compulsory superannuation – and increases in the compulsory superannuation rate – might affect voluntary savings.

This report examines empirical evidence on the impact of the superannuation tax concessions on voluntary private savings in Australia. Do superannuation tax concessions lead to reductions in other forms of savings? And what are the net outcomes?

UMMUL RUTHBAH, NGA PHAM

HOW EFFECTIVE ARE SUPERANNUATION TAX CONCESSIONS IN ENCOURAGING ADDITIONAL SAVINGS?

ENGAGEMENT

SMSF ASSOCIATION NATIONAL CONFERENCE

20–22 FEBRUARY 2019

Nga Pham attended the SMSF Conference at the Melbourne Exhibition Centre hosted by the SMSF Association. There were industry presentations by various stakeholders in the SMSF sectors on the investment strategies and performance of SMSFs, as well as regulatory changes affecting the industry.

FUTURE OF FINANCE SEMINAR, CFA INSTITUTE

7 MARCH 2019

The seminar, which was organised by the CFA Society Melbourne and Nga Pham attended, presented the outcomes of the Future of Finance research and how finance professionals should be prepared.

Q-GROUP COLLOQUIUM 2019

29 MARCH 2019

Deep Kapur participated in a panel discussion about factor trading strategies and convergence or divergence of ESG data. The Monash Centre organised the event for Quantitative Finance and Investment Strategies. Nga Pham also attended the event.

ACFS SEMINAR ‘TECHNOLOGY STRATEGY

SECTOR’

10 APRIL 2019

The Centre organised a free seminar presented by Professor Pinar Ozcan - Warwick Business School (UK), and Associate Professor Pitosh Heyden, Department of Management, Monash Business School. The speakers discussed how the longterm future of incumbent firms in the financial sector might depend on how successfully they develop and execute an appropriate technology strategy that deals with threats from new players.

IN THE FINANCIAL

Members of our team engaged widely at events with industry and academic partners throughout 2019, helping to lift the profile of our organisation and sustaining the two-way exchange of knowledge between academia and industry that underpins our industry-relevant, results-oriented approach to finance research.

[i3] INVESTMENT STRATEGY FORUM 2019

9–10 MAY 2019

Deep Kapur was invited to the two-day forum. During this forum, discussions were held on global best practices in investment governance, investment implementation, innovation, risk parity and much more.

INTERNATIONAL CORPORATE GOVERNANCE NETWORK (ICGN) ANNUAL CONFERENCE

16–18 JULY 2019

Nga Pham attended the ICGN Annual Conference in Japan. The conference, co-hosted by Japan Exchange Group and the Tokyo Stock Exchange, was themed “Re-focusing Corporate Governance for Sustainable Value Creation”. The conference included panel discussions with listed companies, domestic and overseas institutional investors, and market participants that discussed recent initiatives and issues regarding corporate governance and investors’ stewardship activities.

TOKYO STOCK EXCHANGE SEMINAR

19 JULY 2019

Nga Pham attended this one-day seminar; ESG analysis, engagement, stewardship, and active ownership were discussed.

CFA INVESTMENT CONFERENCE

25 JULY 2019

Nga Pham attended the CFA Investment Conference in Japan that discussed investing in an aging economy. The topics discussed were drawdown strategies, longevity risks, and integrating wealth and health products for retirees.

24TH MELBOURNE MONEY AND FINANCE CONFERENCE

22 JULY 2019

The Melbourne Money and Finance Conference has been conducted since the late 1980s. This unique conference series brings together academics, industry participants and regulators under Chatham House rules to discuss specially prepared papers on emerging matters of significance in the finance sector. The Australian Centre for Financial Studies (now Monash Centre for Financial Studies) has been hosting the conference since its inception in 2005.

DIVERSITY AND INVESTMENT SEMINAR, CFA INSTITUTE

9 OCTOBER 2019

The event’s topic was the Diversity and Inclusion (DI) of Australian companies and if DI is a factor that explains stock returns. It also discussed ways investors should engage with portfolio companies to improve their DI.

MELBOURNE MERCER GLOBAL PENSION INDEX LAUNCH

21–22 OCTOBER 2019

Deep Kapur and Nga Pham attended launch events for the Melbourne Mercer Global Pension Index on 21 October in Melbourne and 22 October in Sydney. Supported by the Victorian Government and produced in partnership with the Monash Centre for Financial Studies and Mercer, the Melbourne Mercer Global Pension Index has been widely recognised and accepted as one of the most comprehensive benchmarks of global pension and superannuation systems.

SINGAPORE FINTECH FESTIVAL 2019

15–19 NOVEMBER

Yolanda Wang and Ummul Ruthbah attended the Festival jointly organised by the Singapore FinTech Festival (SFF) and the Singapore Week of Innovation and TeCHnology (SWITCH) centred around FinTech and deep technology. During the week-long events and activities, the researchers interacted with the industry pioneers using machine learning and artificial intelligence in finance and explored potential collaboration opportunities.

CONFERENCE ON RANDOMIZED CONTROL TRIAL

11–12 DECEMBER

Ummul Ruthbah presented her paper at this international conference in Melbourne, jointly organised by the Centre for Development Economics and Sustainability and the Centre for Global Business. The conference brought together researchers from developed and developing countries conducting randomised control trials in finance, health, education, energy and labour.

OUR PEOPLE

MCFS STAFF

PROFESSOR DEEP KAPUR

Director, Monash Centre for Financial Studies

DR UMMUL RUTHBAH Senior Research Fellow

DR NGA PHAM Research Fellow

AFFILIATED FACULTY MEMBERS

SIMON WILKIE

Head, Monash Business School Dean, Faculty of Business and Economics

PAUL RASCHKY

Associate Professor, Dept of Economics

KLAUS ACKERMANN

Lecturer, Department of Econometrics and Business Statistics

DR BEI CUI

Research Fellow

DR YOLANDA WANG Research Fellow

IOANNA ZOGRAFOU

Executive Assistant to Deep Kapur

SENIOR ADVISORS

SYD BONE

Chief Executive Officer, CP2 Limited

ROGER COHEN

Founder at C2Zero

SIMON ANGUS

Associate Professor

MARIANO PITOSH HEYDEN

Associate Professor, Department of Management

BONSOO KOO

Senior Lecturer, Department of Econometrics and Business Statistics

DAMIEN LAMBERT

Lecturer, Department of Accounting

RANJIT AJIT SINGH

Assistant Director, Monetary and Capital Markets Department, International Monetary Fund (IMF)

MONASH BUSINESS SCHOOL

Monash Centre for Financial Studies

Monash Business School

Monash University Level 13, 30 Collins Street Melbourne, VIC 3000 Australia

T: +61 3 9903 8315

E: mcfsinfo@monash.edu

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monash.edu/business/mcfs