Sustainability and Investment


As the globe faces a range of sustainability challenges, there is an understandably growing awareness and interest within the community when it comes to the alignment of personal values or beliefs with one’s own investments.

These global challenges include but are not limited to; resource scarcity, population pressure, social disparity, land and water degradation; the list goes on.  Various industries will face change as a matter of necessity and once more expensive sustainable pathways are approaching a tipping point from a scale and cost perspective.  At this point Ethical style investment and sustainability themes become very much linked.

As discussed at our recent Briefing at the NGV in August, the landscape in this investment space has evolved rapidly in recent years with many styles and structures available and widely marketed.  While this is of course a positive, navigating and making sense of the options can be challenging.

APC recognises that these themes will be of primary importance to some of our clients.  Ensuring we can talk to you about how these concepts translate through various investment types will be important, as well as being in a position to put potential options forward where there is an interest.

 

What have we considered?

A core component of APCs investment philosophy is that diversification is essential.  In considering various sustainability-focussed investments, it was important to ensure that this and other key tenets are not “traded-off” in the pursuit of another outcome.  This meant looking to managed funds who invest in a broad number of underlying companies and sectors.

The definition of what is sustainable or ethical can be interpreted quite broadly at the investment level.   It can for example mean a particular focus on the efficient use of resources, lowering average carbon emissions across the portfolio, the delivery of essential goods and services, more effective waste management and so on.  It may also mean excluding particular companies or sectors for negative behaviours (think sectors like weaponry production, tobacco, gaming, big polluters, etc) and focussing on those companies or sectors whose activities and practices it is believed will ultimately replace existing unsustainable practices and are contributing positively in some way.

We considered investment managers who – together with having a strong track record and investment fundamentals – integrated “ESG” factors into their stock selection and investment process.  That is Environmental, Social and Governance.

 

Examples of the ESG factors

 

 

 

 

How can these themes be incorporated into portfolios?

We have developed a sustainability investment focussed ‘pod’ which can be incorporated into or alongside the existing Classic Portfolio approach.  This group of managed funds are global equities based.  The pod seeks to blend differing styles and approaches to sustainability and portfolio construction thereby delivering what we believe to be an acceptable level of diversification.

APC commits to ongoing investment consideration, so will continually look at what is available and what might assist our clients to best meet their individual objectives.   That may also mean looking beyond the global equity space specifically in time.

 

Where to from here

APCs investment philosophy remains unchanged, that is that discipline is rewarded and practicing smart diversification is essential.  A portfolio can however be tilted to better align with certain values without necessarily taking on undue investment risk.

The incorporation of these investments will be very much individual so if there is an interest or you would simply like to know more, please talk to us at your Regular Planning Meeting.

KEEP CALM AND CARRY ON…. FACTS OF INVESTMENT


So here we are, near 10 years after the Global Financial Crisis (GFC) and experiencing the longest ‘bull market’ in history – surely it’s going to end … surely?  The answer is ‘yes’, it will, but should that impact upon your investment decisions?

Let’s take a look at some key facts about investing that will hopefully alleviate some concerns that you may have about where we currently are situated in the ‘investment cycle’.

 

 

 

 

 

 

 

 

 

 

 

Whilst the above illustrates the share market movements in the US, there has been a strong correlation over time between the US share market and the Australian share market and as such, the darker grey areas representing market corrections in the US would also align (to a large degree) with corrections in the Australian share market. 

What this graphic shows is that share market ‘corrections’ (being a decline of 10% or more) are quite commonplace and are often over before you even know it with only around 1 in 5 corrections turning in to a ‘bear market’ (a period of two or more months of declining share prices).

The problem that has confounded investors for so long is knowing when a fall in the share market is a somewhat common ‘correction’ or is it the start of a more serious but less common ‘bear market’?

And the truth of it is that nobody can predict consistently whether the market will rise or fall in the short term.

It would be nice to think that there are ‘investment gurus’ out there that can predict market movements but the fact is that this is just not the case – at least not consistently.  It is difficult to observe any rhyme nor reason to these annualised returns:

 

 

 

 

 

 

 

 

 

 

What the above illustrates is that it is nearly impossible to predict the market performance in any given year however history tells us it will be up more than it is down.  While it may be tempting to take a tactical approach to miss or limit those downside movements, staying the course will see you rewarded over time.  In fact, as will be shown further below, trying to miss the downside poses a real risk and can materially detract from your overall performance in the (more likely) event of getting it wrong.

The media (and many fund managers) suggest that they are ‘in the know’ with quotes like these that I’m sure you have been exposed to over the years:

  • ‘Asian Economic Outlook “Bleak”’, 30 March, 2009; CNN
  • ‘Housing Market a “Time Bomb”’, 15 June, 2010; The Australian
  • ‘Stock Markets Face “Bloodbath”’, 26 Aug, 2010; Telegraph UK
  • ‘Europe’s Debt Crisis Puts Australia at Risk’, 10 Nov, 2011; News.com.au
  • ‘Australia May Be on the Brink of a New Collapse’ 18, Aug, 2013; Guardian
  • ‘Are We Facing Another Financial Crisis?’, 18 Nov, 2014; The Conversation
  • ‘Australia Faces 50% Chance of Recession By 2017’, 25 March 2015; SMH
  • ‘Why China’s Stock Market Meltdown Could Hurt Us All’, 8 July, 2015; Time
  • ‘Brexit to Bring Recession and Contagion’, 27 June, 2016; Business Insider
  • ‘A Trump Win Would Sink Stocks’, 24 Oct, 2016; CNN
  • ‘Storm that May Cause the Next Crash is Brewing’, 16, Oct 2017’; The Street

 

The fact is however that this is all just ‘noise’ designed to do one thing; to get your eyeballs to hover over the advertising that surrounds the ‘news’ article. It is the paying advertisers who are the real customers of the media, not you who read or watch the news.  So, the bigger the headline, the bigger the advertising sales.

So what can we do, as investors, to minimise the risk of inevitable market falls?  Investing comes with risks but having a strategy in place for market downturns is critical and you need the discipline to follow it. 

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insight or inside information.  What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” 

(Warren Buffett – the “Oracle of Omaha”)

The fact is, once a bear market ends, the following years can provide some significant investment return ‘rebounds’:

 

 

 

 

 

 

 

 

And these crucial market gains often occurring quickly – miss these gains, and you may as well have stayed in cash:

 

 

 

 

 

 

 

 

Unfortunately, nobody rings a bell at the top or the bottom of market cycles so the only way to access the critical market ‘up’ days is to stay invested otherwise your investment returns can be slashed – there would be nothing worse than riding the market all the way to the bottom only to then switch to cash and miss the upside returns.

For some, it can be hard to hold your nerve and stay invested (let alone invest more) during times of market volatility as emotions are high and it is human nature to ‘do something, anything’. 

APC’s advice is to accept that markets will rise AND fall and remain committed to the strategy that was put in place during less emotional times.

Do Industry Super Fund Investors Know What They’re Investing In?


Author: Robert Sarafov, Research: Loan Do

In our last E-News we published an article entitled ‘What the Royal Commission should have focused on but didn’t’.  It touched on some issues of importance particularly in relation to Industry Super Funds.  In this article we dig a little deeper to shine some light on some specific industry super fund practices and how all is not what it seems.

As an investor there are a few things that are important to know and understand when deciding to invest in, or remain invested in, a financial portfolio asset. 

These include;

  • What is the overall asset allocation of my portfolio?
  • Is the investment risk within my comfort level?
  • What are the specific investments I am invested in?
  • What are the costs of my investment choice?
  • What are my investments returns?

In an article published by ABC News on October 11th, 2018 the Hostplus Balanced Fund was heralded as the #1 ‘Balanced Fund’ in the market to June 30, 2018.

The article headlined ‘No retail funds make the top 10’.  ‘Retail’ in this context means pre-packaged diversified portfolios marketed mainly by Banks, AMP and some others.  As an aside, APC does not use these funds in any way, preferring to use lower cost wholesale investments.

Let’s consider these questions as we look more closely at the Hostplus ‘Default’ Balanced fund.

 

What is the overall asset allocation of my portfolio?

It is important to understand what is understood to mean ‘balanced’ in the Australian investment marketplace.  It is a portfolio with an allocation to ‘growth’ assets (Shares, Property, Private Equity, Alternatives) of approximately 65%-70%.  The remaining 30% – 35% is allocated to ‘defensive’ assets which the Australian Securities and Investment Commission (ASIC) defines as Cash or Bonds.

What allocation does the Hostplus Default ‘Balanced’ fund allocation look like?  The yellow asset classes are considered by Hostplus to be growth and the blue are considered defensive.

 

 

 

 

 

 

 

 

The Hostplus Default Balanced Fund appears to have 75% allocated to growth assets however if you look at what Hostplus characterise as a defensive asset, Infrastructure and Direct Property are included which is simply not accurate.  So this fund now has 90% in growth!

Additionally, it was impossible for APC to determine what ‘Other Assets’ and ‘Credit’ actually are.  What we do know, from the Hostplus Default Balanced Fund allocation is that there is no allocation to the two assets that ASIC actually define as defensive, which is Cash and Fixed Interest assets.  

So in reality, the Hotplus Default Balanced Fund is in fact a ‘High growth’ fund with a similar mix of growth and defensive assets to the APC Classic 100 portfolio.

 

Is the investment risk within my comfort level?

Given this disparity, Loan Do of APC contacted Hostplus on November 1st to query this and was told

‘PROPERTY AND INFRASTRUCTURE ASSETS ARE CONSIDERED DEFENSIVE DUE TO THE INCOME GENERATING NATURE OF THE PROPERTIES

The position that because an asset generates income is therefore considered a ‘defensive’ asset is absurd.  If this were accurate you’d consider Telstra and the Banks as defensive because of their current high yield! 

Interestingly, on pages 74 and 82 of the Hostplus 2017 Annual Report Hostplus themselves characterise (correctly) that their own property sector investment risk is ‘High’ and that the investor should expect ‘a negative return 4-5 years out of every 20’.  Does that sound defensive?

On the issue of the fact that their default ‘Balanced’ portfolio has no allocation to Cash or Fixed Interest assets at all Loan Do of APC was told ‘CASH AND FIXED INCOME IS 0% AT THE MOMENT BECAUSE THE  PORTFOLIO MANAGERS BELIEVE THAT THERE ARE OTHER INVESTMENTS THAT ARE MORE VALUABLE TO INVEST IN’.

Presumably this is the ‘Other Assets’ that we are unable to find a description of what they actually are.

Given that 90% of Hostplus investors are in their ‘default’ balanced portfolio, do they understand that the ‘Balanced’ fund they are invested in is in fact a ‘High Growth’ fund with very different risk characteristics?

To put this into an APC context, this would be like a client who is invested in a Classic 70 portfolio being changed to a Classic 100 without their knowledge!  It would simply not happen and would be completely inappropriate if it did.

 

What are the specific investments I am invested in?

As an investor, it is important to be able to understand what you are actually invested in.  This goes beyond a high level understanding of the ‘Strategic Asset Allocation’ of your portfolio to having a deeper knowledge of individual investments that make up your portfolio.  This information should be easy to access and understand.  APC highlights this information in our Regular Planning Meetings.

Hostplus identifies some of this information on page 94 of their 2017 annual report which an investor needs to download and then review.  It includes an investment list for Australian / International equities and Infrastructure. The Private Equity and Property information is high level only with geographic location and overall strategies or sectors covered but no specific investments.  Alternatives, Other Assets and Currency (10% of the portfolio) has no information at all other than a generic series of paragraphs on page 108.

However what is not disclosed anywhere are the specific assets of the Hostplus Default Balanced Fund.  It is simply not possible to understand if you are an investor in this portfolio, beyond a high level strategic asset allocation, what you are actually invested in.

It is a similar experience for other major Industry Super Funds.

 

 

 

 

 

 

 

Unlisted Assets

In addition to the issue of deceptive asset characterisation, the extensive use  of ‘Unlisted Assets’ in Industry Super needs to be canvassed as an investor.  Loan Do of APC confirmed with Hostplus that 40% of the Hostplus Default Balanced Fund is invested in Unlisted Assets! APC’s own review of the current Strategic Asset Allocation put that figure at 45% (see table below).

Investing in Unlisted Assets is in and of itself not an issue and is a legitimate investment strategy.  However allocating such a significant portion of a portfolio to unlisted assets is something APC would not advise given the importance liquidity and investment flexibility play in a portfolio. Illiquid assets by their very nature are difficult to manage when economies and markets become volatile.  For this reason APC would advise to not allocate more than 15% of a portfolio to this type of investment.

What was also not clear was the valuation methodology being used and its frequency.

Hostplus confirmed they used the Net Asset Value (NAV) methodology but could (or would) not elaborate on the basis used to determine the current market value of unlisted assets in their portfolio. So an investor cannot determine if the value of their share of an unlisted asset in their portfolio is in fact an accurate reflection of the value of that asset in an open market.

An example of how this can play out badly for investors is best illustrated by the Industry Super Fund MTAA which at the height of the GFC had approximately 60% of its portfolio invested in Unlisted assets. Not surprisingly it was top of the performance charts when listed markets were falling in value.  However it went from the top of the performance table soon after the GFC to the bottom quite quickly after the Australian Prudential Regulatory Authority (APRA) introduced new rules to force Industry Super funds to re-value unlisted assets more frequently.  MTAA (and other Industry Super and large corporate funds) simply chose not to revalue unlisted assets while the listed market was falling post the GFC.  In this environment it was easy to understand why relative performance of funds that behaved in this manner was superior but it was a false dawn and many investors got caught.

Are the other large Industry Super Fund Default investment options any different to Hostplus?

 

 

 

 

 

What are the costs of my investment choice?

Investment cost is an important consideration.   Many Industry Super funds negotiate with investment managers a lower Indirect Cost Ratio (ICR) in exchange for an investment manager ‘performance fee’.  This was Industry Super’s dirty little secret before regulators forced industry participants to expressly declare it.

Let’s compare the Hostplus Default Balanced Fund and the APC Classic 70’s total investment fees.

 

 

 

 

* APC’s Investment Management Fee is based on a portfolio balance of $1m.  As portfolio values change this percentage changes.  For example with a portfolio value of $500,000, the APC Investment Management Fee is 0.42%. At $1m the APC Investment Management Fee falls to 0.31% and at $2m to 0.22% beyond which it attracts no Investment Management Fee at all.  The Hostplus fees remain consistent irrespective of portfolio balance.

 

What are my investments returns?

So, if we take a look of an ‘apples for apples’ comparison or the Hostplus Default Balanced Fund (which we know is a high growth fund) and the APC Classic 100 how do they perform to June 30th 2018?

 

 

 

**Performance is net of all fees with a portfolio value of $1m.

Recently there was an article in The Financial Review titled  ‘Unions Challenge Labor to turf banks out of super’

A statement from the article was of particular interest.

“Industry (Super) fund members enjoy lower fees and are free from conflicted financial advice.  The industry fund investment philosophy emphasises long term value and trustee diligence.”

Let’s deconstruct the various components of this statement;

  • Industry (Super) fund members enjoy lower fees Well that depends on what you are comparing them to. If comparing to high cost retail funds, which quite frankly are easy targets, the statement may be true.   However when compared to wholesale investment management fees this is simply not the case.
  • free from conflicted financial advice – If you call Hostplus (or any of the Industry Super funds), can you get advice about any other investment in the marketplace other than their own product? For example, would they advise you to take a look at another Industry Super fund product because it has lower performance fees? 

The answer is clearly no.  Is this not conflicted?  Is this not the very vertical integration model that is being levelled at the Banks as being conflicted?

  • The industry fund investment philosophy emphasises long term value – Industry Super funds invest in direct property via an Industry Super fund owned investment vehicle called the ISPT or Industry Super Property Trust. Mr Jack McGougan (former head of property at AustralianSuper) is currently suing his former employer for unfair dismissal. McGougan claims he was ‘pressured’ to invest member’s funds in the ISPT rather than other property assets which he presumably felt were a better (or lower risk) investment. 

Irrespective of the outcome of the case, it raises some questions;

  • Is it a conflict for Industry Super funds to invest member’s super into an investment vehicle that Industry Super funds own?
  • Is this similar to the conflict that exists for Bank adviser’s recommending bank owned products?
  • How is this conflict reconciled with an investment philosophy which aims to deliver ‘long term value’ for the interests of members exclusively?

 

  • and trustee diligence – Industry Super has been fighting the Government tooth and nail to resist the call for independent directors sitting on Industry Super Fund Trustee Boards…why? All trustee boards, irrespective of whether they be overseeing the management of Industry, Retail or Corporate Super funds should have a representation of independent board members to ensure member interests come first.

Would an independent board member of an Industry Super fund approve of the donation of millions of dollars to the union movement?  Is this in the interest of the Industry Super fund members?

 

Summary

Given the amount of analysis required by APC to better understand the answers to the questions canvassed in this article, it is highly unlikely an individual investor would have clarity around these issues.

Yet they are important and in Australia for whatever reason there is a compliant and apathetic media not addressing them nor a regulatory environment that seems interested.  The banks and AMP are the obvious focus of the Royal Commission at this moment in time.

APC prides itself on transparency and providing as much information to our clients as possible such that they may better understand their strategy and investments in order to make informed and educated decisions.

As always, we welcome any queries from our clients and encourage you to make contact.

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Annual Client Briefing – Winter Masterpieces: MoMA


Recently we held our Annual Client Briefing at the National Gallery of Victoria, taking in the art of the modern world that usually would only be reserved for those who are visiting New York’s Musuem of Modern Art. In case you were unable to attend Rob, Hayden and Carol’s presentation we have made it available below;

 

APC’s Client Survey


Recently we completed our 2018 survey which we shared some of the results at our recent Annual Client briefing at the NGV.  For those clients who took the time to complete the survey we are most grateful as this information is taken very seriously by our team and is used to improve our service to you.

Our scores were again very strong in this survey and APC outperformed the national average in all of the nine Key Performance Indicators and ranked in the top quartile in all of the headline areas.  Remember it is only the better firms that actually are willing to survey their clients in this way. 

Overall our results were also well up on our 2016 survey.  All scores are out of 5 and some highlights of the survey were;

  • Our response rate was 69% which is phenomenal and well above the national average of between 30%-35
  • 93% of our clients are willing to refer APC to their friends, family and associates which is outstanding and something we are very appreciative of. Our growth only comes from referrals
  • APC’s average score across all categories was 4.73 as compared to the benchmark average score is 4.21 which puts APC in the top quartile of businesses in this survey’s national benchmarking group
  • APC’s clients scored us most highly for the Standard of Support Staff with an average score of 4.85. We are very proud of the work Luke, Calypso, Hiro and Petra do in providing excellent service to our clients.  Although the survey refers to ‘Support Staff’ our view is and will always remain that we are all one cohesive team working together to deliver the very best service to our clients and to represent their best interests at all times
  • APC’s second highest scores were 4.81 measuring Business Relationship (which measures the level of trust you feel with APC) and Professionalism (of APC)
  • APC’s greatest result above the national benchmark average was the Financial Review Process or what you would know as our Regular Planning Meetings (RPMs). APC’s score was 4.71 vs the national benchmark average of 3.97.   Our clients continue to tell us that they value our RPMs greatly and feel at the end of our meetings they have real clarity about their overall strategy and how they are tracking to their personal goals

 

Younger Clients

In this survey we scored 4.60 for Range of Financial Services.  Whilst the benchmark average is 4.13 our offering to a younger client has been identified as an area where we would like to improve.  We have been developing our Foundation Client Service which assists a younger person who is post university and/or are early in their working lives.  It is designed to help build good money management behaviours as early as possible.  Many of our clients who have been with APC for many years have said that had they engaged APC earlier in their working lives they would be in an even better position now.

If you would like to discuss the Foundation Client Service and how it may assist your child please contact a member of the APC advice team.

Charts of all 9 Key Areas from our Client Survey

 

 

 

 

 

 

 

 

 

 

 

 

 

Understanding

 

 

 

 

 

 

 

 

 

 

Business Relationship

 

 

 

 

 

 

 

 

 

 

Financial Knowledge

 

 

 

 

 

 

 

 

 

 

Range of Financial Services

 

 

 

 

 

 

 

 

 

 

Implementation of Services

 

 

 

 

 

 

 

 

 

 

Professionalism of Practice

 

 

 

 

 

 

 

 

 

 

Standard of Support Staff

 

 

 

 

 

 

 

 

 

 

Financial Review Process

 

 

 

 

 

 

 

 

 

 

Communication

APC Team News – Luke Price


It is with great pride that APC announces to you that Luke Price is transitioning from his current Para Planning Team Leader role to that of Financial Adviser.

Luke joined APC in 2012 and it was self-evident early on that Luke possessed a great work ethic with a sincere focus on excellent client service.

It won’t surprise you that Luke’s transition to this new role has been in APC’s planning for several years.  APC believes that if our firm can align our business needs with the personal and professional aspirations of our team then we have the best chance of maintaining our team composition as well as having a happy team.  We do not believe that unhappy staff can deliver great service for our clients.

Luke’s new role is that of Financial Adviser and Team Leader.  Over this current financial year he will still have responsibility for the day to day management of APC’s para planning team, however he will also start to manage some client Regular Planning Meetings.

Over the next couple of years he will progressively relinquish his Team Leader responsibilities and move to the role of Financial Adviser full time.

These are very exciting times for Luke who is going to marry his fiancé Amy in January 2019. Amy and Luke purchased their first home together last year and being a passionate Melbourne fan, the Dees first finals campaign in 12 years is icing on the cake.

We are all very proud of Luke.  He is a valued member of our team and we are delighted his professional and personal life is so positive for him.

Congratulations Luke!

The Royal Commission – What they didn’t look at but should have!


by Robert Sarafov – Director of APC

In our recent Annual Client Briefing at the NGV, we mentioned in our presentation that the Royal Commission highlighted many examples of reprehensible behaviour on the part of the banks and AMP.  However their review of Industry Super funds had much to be desired and focused on somewhat trivial issues such as HostPlus’ use of the Australian Tennis Open to reward staff.

A far more concerning issue relates to the arbitrary definition applied by some super fund asset managers of defensive assets in their portfolios, which allows the inaccurate description of a ‘high growth’ portfolio as a ‘balanced fund’.

This inaccurate description, which is perpetuated by ratings agencies and the media, then provides a level of legitimacy to the portfolio performance which investors accept as gospel.

It is a situation which is being allowed to continue by ASIC, APRA and the ACCC and is completely unacceptable and should have been reviewed by The Royal Commission, but wasn’t.

Why? 

The information contained in this article has been drawn from an article written by Chris Brycki in July of this year.  

Defensive assets

ASIC defines defensive assets as cash or government bonds. Cash is defensive because when the market falls it holds its value.  High grade bonds can do one better and rise when share markets fall. History backs this up too; in each of the 6 times Australian shares had a down year in the past 20, bonds rose to cushion the impact.  If this is ASIC’s definition, which APC would fully support and agree with, why is it that this definition is not mandated to be adhered to by super fund asset managers?

Can other assets be defensive?

This very much depends on the opinion of the fund manager and there is strong history to demonstrate why their opinions might not end up as fact.

High income stream and low growth assets

Just because an asset delivers a big income stream does not make it inherently defensive. Take Telstra. Most of Telstra’s returns come from regular fully franked dividend income but its share price has dropped 60% since 2015.

Creative definitions of defensive assets

In recent times many super funds have invented their own definition of a defensive asset which has helped to push them up the ratings. Let’s look at how some funds do this in practice.  The following Industry Super default ‘balanced fund’ claims a 24% allocation to defensive assets.

The fund’s website explains that in addition to cash and fixed income “some asset classes, such as infrastructure, property and alternatives may have growth and defensive characteristics”.

Their self-defined defensive assets include infrastructure, credit, property and alternatives. These make up 22% of the 24% portfolio allocation to ‘defensive assets’. Government bonds make up just 2% and there is zero cash!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This enables the fund manager to publish a return that is included in the ‘Balanced’ table of returns however the portfolio is in fact 98% growth!   As you could imagine, when compared to true Balanced Funds, it’s performance looks very good…however this is a fabrication.

Many of the top funds counted some other assets as defensive to make the Balanced fund table.

The Productivity Commission asked many super funds about returns for individual assets. Only 5 of 208 funds were prepared to disclose them!

Unfortunately and some would say amazingly, super funds aren’t required to disclose how they classify their investments on their website or to anyone. Not to members, nor the Australian Prudential Regulatory Authority (APRA) or ASIC! They also aren’t required to share how each asset has performed or even what it is. This allows fund managers to play the ratings game without anyone holding them to account.

By all means fund managers should be free to invest in illiquid unlisted infrastructure, alternatives and property assets.  There are very real diversification benefits in doing so.  Just don’t call them defensive assets!

Compare this behaviour to APC’s transparent approach where we publish each individual asset within the Defensive and Growth components of our portfolios AND their individual performance.  This information is provided to our clients every six months in your Regular Planning Meetings.

How fund managers sell the ‘success’ of their balanced default fund

An Industry Super fund chief executive when asked about their ‘balanced’ fund’s performance cited active management!

“Over the past three years our balanced option did 10.16 per cent, while the index balanced option did 7.29 per cent, so that’s almost a three percentage point differential.

The [active] balanced option has outperformed across every time horizon” he says. It’s absurd to compare an accurate indexed balanced fund option which has an allocation of 25% to cash and bonds to a pseudo default balanced option with an allocation of just 2%.

How ratings agencies support the misleading self-reporting

The ratings agencies don’t properly query the allocations reported by the funds. This provides no check as to the real risk of the self-reported defensive assets.

Valuation of unlisted assets

Many infrastructure and property assets are held in unlisted vehicles which raises 3 concerns:

  • The value of the investment is quite often based on the opinion of the fund manager and there is no way of knowing whether that value is credible given that there is no open market for the asset.  This happened a lot in the aftermath of the GFC
  • The financial structure may see a return of capital reported as an income distribution.
  • The investment is very illiquid and a sale is often extremely constrained by agreements with co-investors, including first right of refusal and so-called ‘tag-and-drag’ conditions. One critical characteristic of a defensive asset is to be able to sell it in a deep and open market.

During the Financial Crisis some super funds stopped members from transferring money out because they were unable to sell illiquid unlisted assets.   This can be done for good reasons such as protecting investor capital by not allowing ‘fire sale’ prices and therefore large losses if a manager is a forced seller in a falling market.

One industry super fund lost $1.6 billion due to poor hedging of unlisted assets. It lost its spot as one of the best performing funds in 2008 to become the second worst according to Super Ratings.

Conclusion

The fact that the Royal Commission did not even attempt to review this situation at all is quite frankly unbelievable.  It represents a manifest misunderstanding of risk, as it applies to member investments.  For this reason alone it should have been reviewed and the issue addressed.

However, further to this most important point, there are questions to be answered in relation to the cosy relationships between ratings agencies and the funds that they rate.  The inherent conflict of interest that exists here due to the fact that the funds themselves pay the ratings agencies for their services is a structural fault of the system and does not lead to reviews of funds without ‘fear nor favour’.

We should not forget that it was the inaccurate ‘head in the sand’ approach of ratings agencies’ reviews of Collateral Debt Obligations (CDOs) that lead to the GFC.  You would think that given this recent history, the Royal Commission would have allocated appropriate time to understanding and addressing this issue.

The Royal Commission has performed an important community service in highlighting shoddy practices in the financial services industry. However it has passed up the opportunity to shine a light on this particular systemic conflict of interest in the financial services sector, which is a real shame.

The lack of accuracy of portfolio information and how Growth assets are defined as Defensive  impacts on the level of risk taken by unsuspecting super fund members.

This issue is gaining some traction in the media, so stay tuned.

Some Good Books


Suzanne Duncan’s inspiration to help others, especially single parents, comes from her own very personal awareness of the challenges facing all parents today. Suzanne truly never imagined she would be living as a single parent, but she was thrust into that challenge when her husband tragically lost his battle with cancer in 2011. With her husband’s death, Suzanne has raised her children on her own, and she has an inherent understanding of the difficulties single parents face. Promoting a strong, loving relationship between children and parents became the focus and is the topic of her latest book.

All by Myself & Rocking It! (How to Be Successful at Single Parenting) is not just another single-parenting guidebook, but rather it provides insightful, practical, doable ideas to help you manage life as a single parent and teaches you how to look after yourself while nurturing your children, how to raise children with a good sense of self-esteem, and how to find the inner courage to be successful at raising happy, healthy children on your own.

The book has been an unqualified success in helping those who need support. As one single parent said, “I needed a book like this to help me, to inspire me, and remind me I wasn’t completely alone with everything, and that life can get good again.”

Suzanne Duncan had been interviewed on many notable radio and podcast shows namely The Positive Phil Show, Twelve Minute Convos with Engel Jones, Mom Talk Radio, School for Startups, and The Timeless Family Podcast. She has also been featured and is a regular contributor to various media outlets such as She Savvy, Family Capers, WOW Magazine – Women of Worth, Carol Roth Business Unplugged™, and The Coaching Institute.

The Author

Suzanne Duncan started her own coaching consultancy, Discovery Within, as a single mother of three. She holds a science degree, a graduate diploma in education, and is an accredited coach. She routinely draws on her own experience to inform, educate, and support others to rediscover their potential, embrace their learning opportunities, and generate positive relationships.

 

Betrayed, Released and Free to Fly

An Unconventional Path to Freedom

A few days before Christmas, some years ago, Evelyn’s husband confessed that he had committed corporate fraud and was likely to go to jail.  She was flabbergasted as she had no inkling of these activities.  At that time he was a recently retired partner of a globally recognised accounting firm in Melbourne.

Ostensibly, Evelyn was living in a comfortable home, married to a man who had experienced the rewards of professional success.  They had two older children in tertiary education, and she was looking forward to a life of semi-retirement. The fraud amounted to seven figures.  The legal process was confronting and painful.  The adjustment to a less comfortable lifestyle was emotionally and physically exhausting.

At the time, the prevailing (and unspoken) attitude was to cover over the activity and just move on: adopt the “stiff upper lip”.  Obviously the accounting firm did its best, successfully, to avoid any publicity.  Evelyn feels that while her experience was not unusual, her response was unique.   She wanted to share to empower others.  Many women have found themselves in similar situations.  Interesting that now the #MeToo movement is encouraging women to speak up about abuse at all levels.

In her book, Evelyn talks about some of the unconventional tools she used to not only help her deal with her situation, but also propel her forward into a happier, more stable and fulfilling life. She would like to encourage others who face difficult situations to find the strength within and move through the pain to a better place. Evelyn’s book about her experiences, “Free to Fly” was released in 2014.

At the time of the confession, she recalls that her thoughts were “Oh $%#@@, I have always said to others that it is not what happens, but how you deal with it that counts.  What are you going to do now, Evelyn?”.  Despite the trauma, she forced her thoughts to fly to the future and how that might look for her.

In time she gathered together her past life collections and gave away, sold or threw out that which no longer served, including the large family home.  Fortunate to have connections with Michael Tratt through the University of Melbourne, she was drawn to APC for advice and support to manage what she had been able to salvage financially.

Today she lives on the Gold Coast, having created a new way of life, new friends and businesses.  In reviewing the experience, it has been a gift that has allowed her to find the strengths she did not know she had.

The Author

 

Born overseas, like so many in our amazing Australian population, Evelyn came to live in Melbourne with her family when she was 11 years old. Educated at Camberwell Girls Grammar School on a scholarship, she went on to complete an Arts degree at Monash University, majoring in Latin and Greek.  From Monash, she was recruited into the same Computer Programming Course as Michael Tratt, with the organisation that is now Telstra. 

A career in IT followed, during which she also completed an MBA at Melbourne University.  Leaving full-time employment while raising her family, she pursued a number of part-time activities before returning to study a Post Graduate Diploma of Internet Software Development in anticipation of returning to the work force full time.

As a result of her husband’s activities, she found herself back in the workforce more quickly than anticipated.  Full time employment allowed her time to gather some resources while at the same time completing her Yoga Teacher Training for which she had enrolled prior to her husband’s confession.

Alongside her conventional education, Evelyn studied Yoga, Astrology and Esoteric studies from her mid-teens.  As the general population is now more open to these concepts, Evelyn is sharing her knowledge through Yoga and Astrology, whilst addressing the needs of the ageing physical body with supportive products. Evelyn enjoys life in Queensland, and still finds time to connect regularly with her son and his family in Melbourne and her daughter in Vancouver.

More information about current activities can be found on her website www.qalma.com.au.

Free to Fly is available on-line through Booktopia, Amazon;  hard copies can be obtained by contacting Evelyn directly at evelyn@qalma.com.au.

2018 Federal Budget


The focus of this year’s budget was on reining in spending, cutting taxes for middle Australia and small to medium sized enterprises, and giving older Australians a bit of love.

The Government revealed a seven-year personal income tax plan for “lower, fairer and simpler taxes” with relief for low and middle income earners, starting 1 July 2018. The measures will also tackle bracket creep. From 1 July 2018, the Government will provide a tax offset of up to $530 for tax payers in the 2018-19, through 2021-22 financial years. Those earning up to $37,000 who currently face a 19 per cent tax rate will have their tax bill reduced by up to $200. These savings will increase incrementally between $37,000 and $48,000 to a maximum saving of $530 for those earning between $48,000 and $90,000. The benefit will then gradually reduce to zero at an income of just over $125,000.

Bracket creep measures will see the upper threshold of the 32.5% tax bracket increase from $87,000 to $90,000 from 1 July 2018 and to $120,000 from 1 July 2022. The Low Income Tax offset will also increase from $445 to $645 from 1 July 2022. This will be followed by a flatter personal tax system by 2024-25 where the 37 per cent tax bracket will be abolished completely. Australians earning more than $41,000 will then pay only 32.5 cents in the dollar all the way to the top marginal tax rate threshold that will be adjusted to $200,000.

The top marginal tax rate of 45 per cent will apply to incomes above $200,000.

Small to medium sized enterprises

Attention to small to medium sized enterprises was targeted at keeping them competitive globally. The Government extended the $20,000 instant asset write off for a further 12 months to 30 June 2019 for businesses with a turnover of up to $10 million.

Tax cuts for small business began in 2016-17 when companies with a turnover of less than $10 million had their tax rate cut to 27.5%. This rate was extended to companies with annual turnover less than $25 million in this financial year and from 1 July 2018 will be expanded to include companies with annual turnover less than $50 million. The Government also announced tough new antiphoenixing measures to stop businesses who deliberately go bust to avoid paying their bills and potentially affecting other businesses through their demise.

Superannuation

The focus on superannuation was on lost super and allowing Australians to build their super balances by saving unnecessary fees and unwanted insurance. The ATO will be given powers to send lost super to people’s active super accounts. Fees on accounts with balances of less than $6,000 will be capped at 3 per cent and superannuation fund exit fees will be abolished for those wanting to switch funds.

For superannuation fund members aged under 25, they will need to opt in should they wish to have insurance within their super policies.

For SMSFs, the maximum number of members will increase from 4 to 6 people from 1 July 2019. This will allow for greater flexibility for larger families. In addition, the audit requirements for SMSFs will move from annually to three year periods for funds with a history of good record keeping and compliance.

For Older Australians

The Pension Loans Scheme will be open to all Australians, including full rate pensioners and self-funded retirees to enable them to boost their retirement income by up to $17,800 pa for a couple, without affecting their eligibility for the pension or other benefits.

An expanded Pension Work Bonus will allow pensioners to earn an extra $1,300 a year without reducing their pension payments. This will also be extended to self-employed individuals who can now earn up to $7,800. People aged 65-74 with a total superannuation balance below $300,000 will now be exempted from the work test for voluntary contributions for the first year they would otherwise fail to meet the work test.

Aged Care, Skills Training, Medicare and the PBS

For older Australians who would like the choice to remain in their homes and avoid residential aged care facilities, there will be a total of 74,000 high level home care places funded by 2021-22.

A new Skills Training Incentive will provide mature aged workers with the opportunity to update their skills. And, employers will be incentivised with $10,000 wage subsidies for employing mature workers.

Extra funding into Medicare and the PBS will see new medications being funded including those to treat spinal muscular atrophy, breast cancer, refractory multiple myeloma and relapsing-remitting multiple sclerosis and an HIV preventive drug.

Our Team