The new standard for investment intelligence
Volume 3 • 2016
DISRUPTION
IS CHANGING
E VERY THING.
Find your way.
04
IN CONVERSATION
With futurist Chris Riddell
This publication is not for circulation to retail investors
06
ROUNDTABLE
Advisers talk volatility
21
IN PROFILE
Fund managers discuss disruption
Volume 3 • 2016
WELCOME TO the latest edition of NAB Asset Management’s
Benchmark magazine – Disruption is changing everything. Our
aim is to bring you thought-provoking investment articles and
information on the key issues and product developments that are
shaping the investment management and advice industry.
Disruption is a catchphrase we’re all familiar with. Across all
industries, not just financial services, disruption and innovation
go hand-in-hand. As investors, disruption plays a key role in the
growth and success of the companies and industries we invest
in. And being able to identify the companies and technologies
which are going to be successful disruptors to the status quo is a
key aim of many of our fund managers.
In this edition we speak with acclaimed futurist Chris Riddell,
to hear his views on disruption and innovation in the financial
services industry. Our own Head of Investment Communications,
Jason Hazell, interviews industry heavyweights and Australian
financial services innovators Dick Morath and Jeremy Duffield on
their own personal experiences with disruption and innovation.
Ongoing market volatility is also top of mind for our industry
this year and we’ve brought together a group of financial advisers
and industry experts to discuss strategies for managing client
portfolios and also, importantly, expectations.
Also, a number of our fund managers have provided their
own views and strategies on disruptors and innovation in their
respective fields and sectors.
I hope you enjoy the latest Benchmark magazine. We will
continue to deliver you the most up-to-date and relevant
information for you, your business and your clients.
Welcome
Yours sincerely,
Garry Mulcahy
Executive General Manager,
NAB Asset Management
Editorial directors Kimberley Gaskin and Jason Conabere
Deputy editor Annick Kinsella
Art director Ollie Towning
Brand Rachael Dickinson
Designer Russell Nelson
Writers Kimberley Gaskin, Josephine Phillips, Jason Hazell,
Katie Whiffen
Benchmark is produced for NAB Asset Management by Six Black Pens
04
06
12
20 CASE STUDY
Knowing what the future holds
Cover type Bruno Capezzuoli
02 BY THE NUMBERS
Disruption: growth and
opportunities
Future insights — fact or fiction? Unpicking
the reality of investment forecasting.
A snapshot of disruptors and their impact
on different markets and industries.
12 IN CONVERSATION
Harnessing disruption
04 Q&A
The shape of things to come
Industry veterans Dick Morath and
Jeremy Duffield give their insights into
the future of wealth management.
Futurist Chris Riddell answers key
questions around disruption and innovation.
06 ROUNDTABLE
Advising clients and managing
business through volatile markets
A discussion between financial advisers
and industry experts about changing and
challenging markets.
21 IN PROFILE
Fund managers Altrinsic, Fairview, JBWere
and Pengana discuss disruption.
26 MATRIX
Fund intelligence
14 CASE STUDY
The power of disruptive innovation
An indepth comparison of the key
features of select funds and SMAs.
A case study on how disruption brought
about the structural decline of Fairfax
Media.
28 CASE STUDY
A new climate for change
Max Cappetta, CEO of Redpoint
Investment Management, considers the
impact of climate change on investing.
16 CASE STUDY
The curious case of the slightly
disruptive cows
The long and winding road to a successful
new market in milk.
18 FEATURE
Disrupting retirement advice
What will ‘comprehensive income
products for retirement’ (CIPRs) mean for
retirement advice?
02
BENCHMARK • VOLUME 3 • 2016
1
growth and opportunities
Each day new disruptors are emerging – changing markets and creating
opportunities. Successful disruptors have an innate ability to anticipate a future
we haven’t yet imagined. All disruptors are innovators but not all innovators are
disruptors. Innovators enhance what already exists; disruptors permanently alter
an industry or market. We’ve identified some significant disruptors and trends in
key markets to show you how they’re changing the world and investment
landscape as we know it.
Consumer
objects
Connects
Industrial
equipment
Increase
efficiency
Enables
information
gathering and
management
via software
19
2020
Enable new
services
Health, safety,
environmental
benefits
Connected people
50%
of information
technology will
be in the cloud
within 5-10 years.4
In just 10 seconds…5
TWITTER
110 accounts created
57,000 tweets
23,140 video hours watched
20 video hours uploaded
NETFLIX
3,860 hours watched
LINKEDIN
1,820 user searches
SKYPE
BY THE YEAR2
4 BILLION
More than
YOUTUBE
INTERNET OF THINGS1
Devices
T H E D I G I TA L R E V O L U T I O N
231,480 minutes used
AMAZON
US$4 TRILLION
Revenue opportunity
510 items purchased
$23,590 spent
FA C E B O O K
521,960 likes
549,760 posts
60 GB of data
25,000,000
APPLE
6,340 app downloads
25+ MILLION
25+ BILLION
50 TRILLION
Apps
Embedded and intelligent systems
GBs of data
GOOGLE
46,080 searches
$16,020 ad revenue
$11,000,00
The Internet of Things will have a total economic impact of up to US$11 trillion by 2025.3
1. http://www.goldmansachs.com/our-thinking/pages/iot-infographic.html, September 2014, as at 22 February 2016. 2. Mario Morales, IDC, September 2015. 3. The Internet of Things: Mapping the value beyond the hype, McKinsey Global Institute,
June 2015. 4. http://mashable.com/2015/05/11/cloud-computing-infographic/, Mashable, Inc., as at 22 February 2016. 5. http://www.visualcapitalist.com/tech-giants-visualizing-profits-for-every-10-seconds/, as at 22 February 2016.
6. Definition according to: Cutting through the noise around financial technology, McKinsey & Company, February 2016.
2
BENCHMARK • VOLUME 3 • 2016
2,000
FINTECH
H E A LT H C A R E
Fintech includes start-ups and other companies
that use technology to conduct the fundamental
functions provided by financial services,
impacting how consumers store, save, borrow,
invest, move, pay and protect money.6
Healthcare is now one of the world’s largest industries. Disruptors have recognised the
opportunity and are changing the face of healthcare.9
Fintech investment in Asia-Pacific
skyrocketed in 20157
All of 2014
US$880
million
Mobile health app adoption has doubled in the last two years
Percentage of consumers with at least one medical, health or fitness app on
their mobile devices.10
Fintech start-ups6
First nine months of 2015
2013
2015
Nearly
US$3.5 billion
800
The global medical robotic systems market was worth US$5.48 billion
in 2011 and is expected to reach US$13.6 billion in 2018, growing at a
compounded annual growth rate of 12.6% from 2012.11
2011
US$5.48 billion
US$13.6 billion
2018
The world's pharmaceutical
giants are projected to lose
US$17 BILLION
from expired patents in 2016.12
Telehealth mental services for the
Snapchat generation
Percentage of consumers willing to use
telehealth services, such as
videoconference, to consult with a mental
health provider instead of an in-person visit.13
Projection for
the value of the
digital advice market
in 2020
43%
18-44
year olds
for 45+
April Today
2015
00,00
0
US$500 billion
8
72%
7. https://www.accenture.com/_acnmedia/Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Dualpub_12/Accenture-Fintech-Innovation-Lab-Asia-Pacific.pdf#zoom=50, as at 22 February 2016.
8. Robo advising: Catching up and getting ahead, KMPG LLP, 2016. 9. The Companies Disrupting Healthcare In 2015, Forbes, June 11, 2015. 10. HRI Consumer Survey, PwC, 2015. 11. Medical robotic systems market to reach $13.6 billion by 2018,
Robohub, 13 September 2013. 12. From vision to decision: Pharma 2020, PwC, 2012. 13. HRI Consumer Survey, PwC, 2015.
BENCHMARK • VOLUME 3 • 2016
3
The shape of
things to come
With the retail digital experience now shaping consumer
expectations about how financial services are delivered, futurist
Chris Riddell discusses the power of disruption and innovation
and how the industry can adapt to a quickly changing world.
CHRIS RIDDELL
FUTURIST
How do you define ‘disruption’ and
‘innovation’?
These are words that have been
overused in the last few years. Everyone
wants to be disruptive but no one wants
to be disrupted. However every business
faces disruption. The landscape of
industries, including financial services, is
changing dramatically on a daily basis at
an unprecedented pace. We are hyperconnected now and the pace of change
and globalisation means the nature of
disruption itself is being disrupted.
Many businesses say they want to be
4
BENCHMARK • VOLUME 3 • 2016
disruptive, but very few have the special
ingredients needed to be truly disruptive.
One of the most important is having the
right culture.
It’s not necessarily about coming up
with the next big idea, but thinking about
the ‘how’. How are you structuring your
business today to be responsive in the
new era? You need the right people in the
right roles with the right capacity to do
things. These may be roles that did not
even exist five years ago.
For example, the Customer Experience
Office (CXO) is now a key role that is
directly accountable for the end-to-end
customer experience – from using your
app to visiting your store. This experience
now needs to be frictionless and all
businesses need to be ahead of the curve
on this or customers will simply walk away.
Chief Digital Officer is another key role.
Marketing used to be responsible for
advertising and websites etc; now the
digital experience is not just a marketing
role, or a technology role but a hybrid
of the two.
What key trends will define the future of
business over the next 12-24 months?
The next five years?
We’re in a world of super connectivity
where everything we do is connected
online. This is allowing businesses to
connect with consumers 24/7, 365 days
per year and drive deep customer insights.
We used to only connect when in store
or through the phone. Now we see how
customers sleep, when they walk into their
house, go to work and their health and
fitness regime. We can now gather all this
data and customers trust us more than
ever to use it in a non-invasive way to
drive personalised experiences.
The launch of the MLC On Track
program which utilises smartwatch
technology allows them to track their
insurance customers’ health and lifestyle
information. This is a great example of
how a large bank has understood what
consumers want and is meeting that need.
Many
businesses
say they
want to be
disruptive,
but very
few have
the special
ingredients
needed to
be truly
disruptive.
How is the financial services sector
responding to disruption – specifically
in the arena of financial advice and
investment?
Historically, financial services have been
complacent at best, but the global financial
crisis changed this. It has reframed the
way the younger generation views banks
particularly. Trust is now very different and
financial service providers have had to
transform how they approach people and
their whole experience. Relationships are
not as sticky and tangible as they used
to be – when something goes wrong the
ability to change to another provider is easy
now, so everyone has to work in a different
way to keep relationships functioning well.
Customers are also now expecting
the same experience from their financial
services provider as they get from
iTunes or Amazon. Apple changed the
way we transact and Millennials have an
expectation that every interaction with any
business should be like Apple.
You can no longer generically profile
people; you need to make sure everyone
has a personalised experience and we now
have the technology platforms available to
do so.
How will the advent of automated advice
impact the sector?
The automation of advice will not replace
the financial adviser – it’s there to
help create a relationship earlier in the
customer’s financial journey and take
away the monotonous, low value part –
paperwork and processing. Ultimately it
should benefit advisers because it will
create a longer relationship.
Can smaller financial services businesses
adapt without major investment?
All these ideas are scalable. Smaller
businesses have a larger capacity to
be responsive. They’re more agile and
they have more opportunity to create
a truly personal experience. They can
make decisions more quickly than large
organisations, which are often entrenched
in old processes and systems.
There are low cost options – you don’t
have to build a bespoke app. The first
step is to look at what you already have
and how you can adapt it. Email is still the
most effective form of communication
and you can now personalise en masse
through easily available and sometimes
even free platforms, such as MailChimp and
Salesforce, to drive deep personalisation.
BENCHMARK • VOLUME 3 • 2016
5
ADVISING
CLIENTS
AND
MANAGING
BUSINESS
THROUGH
V O L AT I L E
MARKETS
In February 2016, NAB Asset Management brought together
financial advisers and industry experts to discuss what’s
changing about how they are advising clients and managing
their business in the current low return, higher volatility market
environment. The discussion was moderated by Jason Huddy,
Head of Sales, NAB Asset Management.
6
BENCHMARK • VOLUME 3 • 2016
1. David Wright,
Zenith Partners
1
2
3
4
5
6
7
8
9
10
2. Martin McIntosh,
Planning
Partners
3. Matthew
Scholten,
Scholten Collins
McKissock
4. Russell Walsh,
Stantins (FSP)
5. Gemma Dale,
Head of NAB
SMSF Solutions
6. Jason Huddy,
Head of Sales,
NAB Asset
Management
7. Bill McGee,
Meritum
Financial
Planning
8. Tom Schubert,
Garnaut Private
Wealth
9. Marguerite
Arendtsz,
MLA Advisers
Photography Paul Doig
10. Margaret Mote,
Bongiorno
& Partners
Financial
Planning
Huddy: Volatility. It’s a bit of a déjà vu moment for most of us here
and higher market volatility is the new black – again. You have
all gone through a few cycles and learnt lessons about handling
volatility and low returns for clients. How are you insulating client
portfolios from spikes in volatility, are you making any changes?
Walsh: I haven’t changed portfolios. One of our biggest challenges
is clients in pension phase who are conservatively balanced. We’re
trying to generate at least a 5% income from their portfolios while
moderating volatility and building some capital growth.
McIntosh: And you’re not going to deliver 5% return if you’re in
bonds. Some portfolios need rebalancing but most of that would be
buying equities not selling them. You don’t sell into this kind of noise.
We’re trying to find the positives about what’s going on, which is easier
now than during the GFC thanks to the obvious business benefits of
low oil prices, for example.
In my view, there’s way too much risk taken into retirement in many
portfolios, particularly with clients with less than $2 million. Often
the portfolios that come to us are too equity biased and perhaps too
Australian equities biased. That makes the migration to retirement a
really challenging one. Being in pension phase, at least they get some
CGT relief to make that alteration in the portfolio.
Scholten: We’ve changed portfolios slightly. Not from an asset
allocation point of view, but certainly managers. We don’t use a lot
of indexed managers in the equities space but we are favouring
managers with a more defensive tilt to them that potentially do better
in volatile markets.
Huddy: David, your vantage point on our industry is a different one.
Has Zenith seen any recent move to more defensive or indexed funds?
Wright: Obviously in a low return environment there’s massive
pressure on fees. So there has been a move to indexed funds and
that’s unfortunate timing in our view. I think a lot of people who have
gone to indexed or passive fixed income haven’t realised they’ve
increased the potential for capital volatility within their portfolios
because the indexed duration of the global fixed interest benchmark
itself has lengthened quite considerably.
BENCHMARK • VOLUME 3 • 2016
7
Scholten: Our fixed interest exposure
used to be indexed across Australia and
internationally. But four years ago we took
every dollar out and put it into active fixed
interest for those very reasons.
Schubert: A lot of the ‘active’ funds you
see out there are not truly active. They
have plus or minus 2% in Commonwealth
Bank shares (CBA) for example and then
people will diversify by having two or three
active managers, which neutralises the
active positions back towards an index
exposure. We take a different approach
with our active managers - more absolute
return in style and very benchmark
unaware. These managers tend to run
more high conviction stock portfolios
and, if there are limited opportunities or
risk is elevated, they can move to cash
and protect capital. Unfortunately a lot of
those strategies get put in the alternative
bucket simply because they may be
classified as hedge funds.
Huddy: Are you finding the truly active
fund managers you’re describing, Tom?
Schubert: Australia has world class
fund managers and we believe we have
a good portfolio of absolute return funds
but are always on the lookout for other
opportunities. There are many quality
alternative fund managers overseas that
look at the Australian market and are
perplexed by the fee budgeting discussion
we have. The focus for these strategies
should be net returns on a risk adjusted
basis but unfortunately the Australian
market has become more interested in
the fee first and as a result we are missing
good investment opportunities.
Wright: I think another result of our
fee obsession in terms of some of the
global managers is that they won’t offer
8
BENCHMARK • VOLUME 3 • 2016
Clockwise
from above:
Gemma Dale,
Russell Walsh,
Marguerite
Arendtsz, Martin
McIntosh and Bill
McGee.
some of their best investment capabilities
to the Australian market (particularly
capacity constrained strategies) because
they can charge higher management
fees in other parts of the world. Our
obsession with investment management
fees is actually denying us exposure
to some of the best funds. We find that
most of the market don’t realise that
Australian investment management fees
are some of the lowest in the world.
McIntosh: It’s true that fees are being
compressed but there’s also recognition
that clients in the retail space aren’t
asking for the cheapest, they’re asking
for the best return. And in 10 or 12 years
time, they’ll be saying, “well you gave me
the cheap option but where’s my return?”
Walsh: It’s also the case that if you use
active funds in a portfolio in a constructive
way, they can actually enhance the
portfolio without adding to the volatility.
Wright: I think that’s a great point.
Advisers need to be really clear about
what their value proposition is and have
a defined investment process to support
it. What we’re seeing is that advisers
can be confused about what their own
investment process and beliefs are. You
get this mix of indexed and active or
active asset allocation by the adviser with
active funds underneath and sometimes
they can intersect badly. You could be
saying “small caps are overvalued” and
reduce exposure from asset allocation
perspective but your underlying fund
managers are increasing their weight
to small caps. So advisers need to be
quite clear about what their investment
philosophy and process is.
Arendtsz: The need to have more
choice in the ‘alternative’ space is
definitely required to enable advisers to
construct portfolios in different market
conditions. Approved Product Lists
(APLs) however may also fall short of
reasonable choice and/or be slow to
include them, possibly due to the lack of
understanding in the alternative space.
Lowly or anti-correlated to traditional
assets like equities, strategies such as
alternative beta strategies with a focus
on risk management are beginning to be
discussed and challenged by researchers,
however advisers who are looking for this
choice continue to be hampered.
Huddy: Another alternative space is
unlisted assets. Are you allocating them
in your portfolios?
Mote: About 90% of our clients are
medical professionals and they often own
their practice premises in their SMSF. That
gives them an allocation to unlisted assets.
McIntosh: For us, not being in the high
net worth space, there’s not enough to
allocate to unlisted. Trying to provide
liquidity in an unlisted asset doesn’t work.
Unless you have a client who has $2030 million and can physically buy the
property – we just can’t go there.
Walsh: We have money in commercial
properties and that’s it for our exposure.
Schubert: Unlisted assets, particularly
high quality commercial property
trusts have very low volatility. We have
established our own property funds
management business to deliver these
investment solutions to our clients and
the stable income stream coupled with
low volatility is providing a solid anchor to
portfolios during these times.
Huddy: Is there anything different in
what and how you’re communicating to
clients today?
Walsh: I’m trying to change clients’
expectations. With the 10-year government
bond rate at 2.77%, clearly there’s an
understanding that low growth is here for
the medium to longer term, and that’s a
challenge. How we show past returns has
to be done in such a moderate way now –
you don’t want to set false expectations.
Your communication needs to ramp
up when things get volatile too. We did
165 personal reviews after Christmas.
We wanted to let clients know that
we understand the markets are being
hammered but show them that they
can hold their nerve because they have
diversified portfolios.
Mote: What we’re saying hasn’t
changed but the way we’re delivering the
message has. We’re using video – and
we’ve just combined videos of each of
our advisers with a major fund manager
so they’re getting our message with an
impartial third party’s point of view.
Dale: Yes, we’ve found with SMSFs if we
post a video and its transcript, we get 10
times more hits on the video and they’ll
watch it to the end. And they love hearing
from a fund manager who can give them
a bit of insight, even if it’s not actionable.
And the next time that person is on, they’ll
get double the number of views. I think the
fact that you’re presenting to a large group
showcases your expertise. You shoot a
good video and suddenly that’s the person
everyone wants information from. Two
to three minutes is the sweet spot and
they’re not expensive to execute.
McIntosh: There’s a component that
can never be scalable and you’ve got to
own it – the one-to-one relationship. Get
on the phone. Particularly as people get
older, there’s a reassurance that they find
in one-to-one comms.
McGee: If a client gives you a call in
relation to market volatility, it should be
viewed as a positive thing. The clients that
don’t call you when they’re worried are the
ones at risk of being lost to your practice.
Also, during these times, you need to
take client calls right away. You can’t sit
on them and return calls after 4 o’clock,
as the client’s anxiety will only amplify
during the day. Generic newsletters don’t
help much in volatile markets from my
experience. Personalised information
aimed at the client level of understanding
works better.
Dale: You’re competing with lots of
different information sources; you have
them and your clients have them too. So
to choose you as their source of truth,
clients have to really trust you.
Wright: What we’ve communicated has
changed enormously but it’s not because
of volatility. There is so much information
investors can get for themselves via the
internet these days that we see our role
as arming the adviser with information on
the client’s portfolio that the client can’t
obtain directly themselves. As an example
we now provide full look-through to the
individual stock exposures (Australian and
global) that the funds in a portfolio hold.
Huddy: I’m curious about your
thoughts on the more self-directed
clients. Have you seen changes in their
risk profiles in today’s environment?
Schubert: We’ve had a lot of new clients
who were unadvised. The traditional
options for the self-directed have gone
with the outlook for residential property
muted and term deposit rates declining
below 3%. In addition, common direct
equity portfolios consisting of the four
banks, Telstra, BHP and Woolworths
got hurt badly last year and so you are
finding more clients seeking professional
investment advice. Volatility has increased
BENCHMARK • VOLUME 3 • 2016
9
and looks here to stay, so we would
expect more unadvised clients seeking
advice in this environment.
Dale: A lot of self-directed clients tell
you they’re self-directed but as soon
as you start talking about something
alternative that they don’t know much
about, they’re very keen to hear more and
take advice on at least that component
of their portfolio. We have really strong
data that shows choosing what to invest
in is their number one problem. And it’s
not “I’m worried about loss” it’s “where’s
the opportunity going to come from? I
can’t see any upside. I can’t see anything
that looks interesting”. And we’re finding
that the advisers growing in this space
are the ones who offer alternatives. We
have heaps of clients who’ll manage $1
million on nabtrade themselves and put
another $1 million with an adviser. As
long as you’re adding value, they’re very
happy with that.
Arendtsz: My role over the years has
evolved into being more of a financial
coach for my clients. It’s almost the
position of CFO in their lives. It might have
eventuated as a result of our ramped
up educational program to them since
the GFC. We communicate frequently
with them on the effects of changing
global macro dynamics and the impact
of disruptive industries and technology.
Research is central to our daily process
which is continually communicated with
our clients. We have found that clients
trust the process now and are preconditioned to the reasons for the advice
and consequently do not make knee jerk,
ad-hoc decisions based on fear.
McGee: Within the fee for service
environment, acting like a CFO for clients
is a growing trend. We’re now investing
directly outside platform, or collaborating
with brokers if that’s the client preference.
We’re also adding value by bringing in
outside experts. We have accountants for
tax issues, lawyers for estate planning,
mortgage brokers and even real estate
agents assisting us to deliver holistic
service.
Dale: Some CSIRO research came out
recently that confirms our experience.
They were looking at SMSF portfolios
in particular and found that they don’t
drawdown in pension phase. They treat
it as a wealth protection and estate
planning vehicle. Their asset allocation isn’t
changing at all. 50% of SMSF assets are
now in pension phase; they’re the larger
funds, and they’re just treating it as an
accumulation vehicle. They’re drawing
down but their capital appreciation is more
than sufficient to accommodate that.
Huddy: And what about the future?
Where is your next wave of clients coming
from?
Walsh: As a mature business, I think it’s
more of the same – ongoing referrals from
clients, accountants and mortgage brokers.
Schubert: We’ve had a lot of clients
selling businesses and transitioning to
retirement and this certainly drives growth
in our business but is also leading to an
increase in intergenerational planning.
These clients have a lot of capital and
are thinking about how to engage with
their children to ensure that the wealth
is transitioned sensibly through the
generations. So we spend time setting up
Clockwise from
Left: Matthew
Scholten, David
Wright, Margaret
Mote, Jason
Huddy and Tom
Schubert.
10
BENCHMARK • VOLUME 3 • 2016
advisory boards and engaging with the
next generation.
Mote: Our younger clients traditionally
seek income protection insurance advice
and that tends to be our first financial
planning engagement. Clients can make
huge mistakes if they buy insurance online.
Scholten: You need to be proactive to
capture the next generation of wealthy
people. We’re developing a joint venture
that uses technology to engage younger
people. At the end of the day, you have
to communicate in ways that people are
comfortable with.
McIntosh: We’re growing in the
intergenerational and philanthropy
spaces. For the younger clients, we added
a mortgage broking element about three
ADVICE FOR NEWER PRACTICES ON MANAGING VOLATILITY
ARENDTSZ: As independent advisers
you need to be able to choose
alternative strategies yourselves
and you can’t depend on your dealer
principal to provide all the information
you need. You’ve got to do your macro
economic and risk strategy research on
an ongoing basis. A new group needs
to have a clear view of what investment
choice they wish to, and are capable
of offering. The choice of the APL then
becomes critical, however continuing
research and education will be the key
to attracting new informed clients.
WALSH: New advisers really need to
understand not only their own advice
proposition but the commercial realities
of business as well. You need to balance
the commercial demands of running a
licensed business and how that supports
your value proposition, or doesn’t.
MCINTOSH: As a business owner,
over time I’ve learnt you’ve got to get
a consistent message out to not only
your clients but to your planners and
staff so that they can best support
clients. When markets become volatile
and clients get nervous, everyone is
under pressure and that consistent
conversation with clients has to happen
more regularly and not be confusing.
WRIGHT: Yes, that’s it. Be really clear
about what your value proposition is and
have a defined investment process that
is consistent with it. You need greater
consistency in your messaging but
years ago and that’s been just so easy
and seamless to bring in.
Huddy: There’s a louder aged care
discussion that’s been building for a little
while now, is this an opportunity for client
and business growth?
McIntosh: It’s difficult to create a
business case in this space. Every aged
care facility has their own corporate rules
and regulations. It’s intensive and you’re
dealing with a whole lot of new people
– the children of the clients. There are
opportunities there but they are under
time pressure and emotional pressure.
Scholten: We always have a client
that’s facing exactly that scenario. Of
course we’re not charging for it. And
sometimes you get some money from
property sales or whatever but it’s tricky.
And it’s not going away.
McGee: It’s a complicated area, clients
have no hope of working it out for
themselves and every scenario is different.
It’s a massive opportunity for annuity
providers, as their product suits strategies
designed to lower aged care costs and
maintain income. You’re able to set up an
arrangement that covers the fees and
living expenses and is relatively set and
forget. These clients don’t want to take
risks, and are well past investing for the
long-term. It is difficult for a planner to
generate good revenue from aged care
advice but it can be profitable. Aged care
planning is a high touch area of advice
especially in the first 12 months where
also in the way your portfolios work for
clients. Make sure your portfolios are
doing what you’re telling clients you’ve
designed them to do.
MCGEE: With the fee for service
environment, we’re acting like a CFO
for larger clients and bringing in outside
experts to provide a more holistic service.
SCHOLTEN: Manage expectations.
We don’t talk about returns at an
individual investment level. On a
practice level, we’re also removing key
person dependency so clients have
multiple points of contact that they are
comfortable dealing with.
DALE: There’s not a single solution for
clients. You need multiple products
and multiple touch points. Some of our
clients want a single relationship or
product, others want multiple experts
or products. You have to service them
in whatever way is appropriate to the
individual.
MOTE: Make it easy for your clients to
deal with you. Paper based fund admin
can be a real issue for clients. We are
endeavouring to manage this by using
better technology, client portals and
electronic signatures wherever possible.
SCHUBERT: The easy traditional
investments for self-directed investors
have gone. You’ve got to offer an
active alternative solution to them.
Find investments which have a low
correlation to your core portfolio and
don’t be afraid of quality unlisted assets.
financial issues are at their most complex.
Walsh: You park a portion in cash for
those first few years. But you also think
about how you get that capital exposure
and manage the drawdowns.
Mote: That’s what we do. We tend to
have two or three years in cash to help
them manage sequencing risk.
McGee: When investing for aged care
clients you do have to alter your allocations
because the average life span is around five
years at the time the client enters an aged
care facility. You’re not investing for the
long-term any more. If you have someone
in their 80s, you’re not going to give them
a high growth portfolio and must instead
focus on protecting capital and generating
sufficient income.
BENCHMARK • VOLUME 3 • 2016
11
Harnessing
JASON HAZELL
HEAD OF INVESTMENT
COMMUNICATIONS,
NAB ASSET MANAGEMENT
“WHAT YOU really should have done
in 1905 or so, when you saw what
was going to happen with the auto
industry, is you should have gone short
horses. There were 20 million horses
in 1900 and there’s about four million
horses now.” Warren Buffett made this
comment in a speech to University of
Georgia students in 2001. He went on
to point out that there were 2,000 auto
stocks in 1900 and only three survived
to the 1920s and none of them are
making cars today.
Disruptive innovation was a phrase
coined by Harvard professor Clayton
Christensen in 1997. He describes a
12
BENCHMARK • VOLUME 3 • 2016
situation whereby incumbent marketleading companies, whose success has
been driven by their ability to continually
innovate their products and services to
retain their biggest and most profitable
clients, find themselves in a position
where a new competitor is taking away
their smallest and least profitable clients.
The company therefore faces the
prospect of having to defend its lowest
margin business. This is a challenging
decision for any company to make.
While this continual innovation from
the incumbent market players creates
products or services that are well
suited to their large profitable clients,
it is not necessarily well suited to their
smaller clients who may not value the
complexity or sophistication of the
offering. This creates an opportunity
for disruptive innovation by new market
entrants with new technology that
There were 20 million horses
in 1900 and there’s about
four million horses now.
allows them to lure these smaller clients
away from the market leaders while still
making good margins due to their lower
cost bases.
As we turn our attention towards
the wealth management industry for
insights into disruption and potential
game changers for 2016 and beyond, I
have spoken with two industry veterans
who are very well known to our business
to provide a perspective on the past and
to offer their insight into the future of
our industry.
When looking forward into 2016, the
conversation moved to the disruptive
impact of big oil price moves. Dick made
the point that when oil prices rose from
US$15-20 per barrel in 1998 to over
US$130 market commentators saw
disaster looming for the global economy.
Now, with oil prices plummeting to around
US$30, again market commentators are
fretting about the potentially significant
geopolitical impact of such a fall. While
there is no doubt that significant moves
in prices of key commodities will have an
impact on the global economy, like the
classic Australian poem by bush poet
John O’Brien about farmers lamenting
disaster at every turn, Dick cautions
against interpreting all moves as negative.
“We’ll all be rooned”, said Hanrahan,
“Before the year is out”.
“WE’LL ALL BE ROONED,”
SAID HANRAHAN
DICK MORATH
Dick is very well known to many of us
through his long career with the MLC
business. In 1989, Dick joined MLC; in
1993, he became CEO of the Retail
Funds Management business of MLC
and in 1996 he was appointed CEO of
the Corporate and Institutional Funds
business of MLC. He is currently the Chair
of the MLC Advice Board.
“Disruption has always existed in
our industry” he says, summing up his
involvement with the Australian wealth
management industry for over 40 years.
His first experience was in 1986 when
MLC introduced the MLC Equity Credit
product, which enabled households to
re-draw from their home loans over the
phone. This disrupted banks’ net interest
margins at the time, causing a significant
decline in margins, which meant that the
end customer remained a winner.
However, the most profound disruption
that Dick has witnessed was the
introduction of the fee for service model
for the advice industry. “Things have
changed radically since the introduction
of fee for service; this was a great
disruption.” MLC took a strong leadership
position in the market on fee for service,
which has significantly changed the
industry since and brought the cost of
advice to light.
The move to fee for service across the
industry also had broader ramifications.
This was due to commissions strongly
supporting the link between financial
advisers and managed funds. This has
evened the playing field and has since
enabled the rise of other forms of product
structures (such as LICs, ETFs, SMAs and
mFunds) in the Australian market, where
historically managed funds dominated the
industry. Add to this the significant move
of self-directed investors towards self
managed super funds (SMSFs) over the
same period and we see a clear disruption
in industry dynamics as the fee for service
model is adopted across the industry.
REFERENCES
The Innovator’s
Dilemma: When New
Technologies Cause
Great Firms to Fail
Clayton Christensen
1997
claytonchristensen.com
Said Hanrahan
John O’Brien
1921
en.wikipedia.org/wiki/
Said_Hanrahan
Disruptive
Technologies,
Catching the Wave
Joseph Bower &
Clayton Christensen
1995
hbr.org
Speech to University
of Georgia Students
Warren Buffett
2001
nasdaq.com/article/
warren-buffett-speechto-university-ofgeorgia-students-part1-cm238914
THE SURFER’S GUIDE TO
BUSINESS MANAGEMENT
JEREMY DUFFIELD
Jeremy is well known to many of us as
the former CEO of Vanguard Investments
Australia. He has over 35 years of
experience in our industry in both
Australia and the US. He is currently the
Chair of NAB Asset Management and the
co-founder of SuperEd, which is focused
on helping super fund members plan for
their retirement through the provision of
affordable online advice solutions.
A discussion with Jeremy Duffield
about his career path is an interesting
case study in itself regarding disruptive
innovation, particularly from his time in
the US. The surfer’s guide to business
management, his personal business
philosophy, centres around positioning
your business to either catch a strong
growth wave, riding a wave better than
others or most relevant for this discussion
on disruption, creating a new wave
altogether. His earliest example was from
the introduction of discount brokerage in
1975 in the US.
“Jack Bogle’s introduction of the first
index fund into the US market in 1976
was the start of a significant disruption
to the investment management industry.”
This example from Jeremy’s time at
Vanguard has all the hallmarks of a
classic disruptor; slow to take off but
over time developing a foothold with a
new segment of clients who were looking
for lower cost access to investment
markets. The addition of ETFs and the
ability to directly distribute made possible
by the internet during the 1990s, has
massively accelerated the growth in
passive investment, which has grown to
over US$5 trillion or an estimated 20% of
investment markets over 30 years.
When looking forward into 2016,
Jeremy identifies fintech start-ups,
particularly in the advice space, that
could drive major change over the coming
years. “Digital advice is exhibiting signs
of being a classic disruptive innovation
within the wealth advice space.”
Just as the ‘democratisation’ of
technology transformed computing
from mainframe computers accessible
to only a select few to smart phones
available to almost everyone in around
30 years, are we witnessing the start
of something similar with digital advice?
Jeremy thinks so and with only 15%
of Australians getting advice, digital
advice could ultimately lead to better
tools and support for financial advisers
to drive a greater take up of Australians
seeking advice.
CUSTOMER THE WINNER
There is no question that our industry
is at an intriguing inflection point with
the move to self-directed investing
and nascent digital advice offerings.
Disruptive innovation, while the latest
buzzword, is an important part of a
normal functioning market place and
perhaps the only surprise is really how
quickly innovation is accelerating due to
digital enablement.
Of critical importance though, is
that generally disruption in wealth
management is difficult and often
doesn’t persist due to the significant trust
barrier involved when customers make
decisions about money, particularly their
life savings. We hope that if history is a
guide, disruptive innovation will ultimately
guide the market to a result that provides
a better outcome for our clients.
BENCHMARK • VOLUME 3 • 2016
13
The power of
disruptive innovation
SUSTAINING OR
DISRUPTIVE INNOVATION
From a corporate perspective,
technological change and innovation
can be either ‘sustaining’ or ‘disruptive’.
This distinction is important as the
implications of these two types of
innovation are very different. Sustaining
innovation occurs when a company
improves or updates its existing
products or services. This can involve
big leaps in technology and significant
improvements in the company’s market
share and profitability, but it only affects
their current products and markets, so
the market is maintained.
14
BENCHMARK • VOLUME 3 • 2016
DISRUPTING CURRENT
MARKET DYNAMICS
A great example of disruptive innovation
in an Australian context is the structural
decline of Fairfax Media (FXJ). Fairfax
was the dominant player in classified
advertising, which was coined its
‘rivers of gold’. FXJ’s problem was that
it underestimated the impact of the
internet and the way in which smaller
companies like carsales.com (CAR),
REA Group (REA) and Seek (SEK) would
exploit this new technology to create a
completely new operating environment.
Chart 1 shows the revenue losses
experienced by FXJ since 2008 – around
CHART 1: FXJ’s huge loss represents
gains for CAR, REA and SEK
$3,500
$3,000
Revenue (A$m)
INNOVATION IS all around us and
constantly changing the world in which
we live. When companies are considered
as investment propositions, innovation
– both current and potential – must be
analysed as it can have a huge impact
on long-term investment returns.
Disruptive technology is that which
creates new markets or new value
networks. This sort of innovation
displaces the existing technology and
completely disrupts current market
dynamics. A disruptive innovation can
take years or even decades to become
dominant, so there is usually time for
existing companies to respond. But
history suggests they rarely do. Existing
companies often know about the
innovation, and in some cases, they’ve
actually invented it! The problem is,
they are often so locked into the way
things are currently done, that they
place insufficient value on new ways
of operating. Disruptive innovations
are usually exploited by smaller, more
efficient or more flexible companies
who can see the long-term benefits
of significant change.
$2,500
$2,000
$1,500
$1,000
$500
$0
FX
J
F
F Y2
Lo XJ 00
F
st
8
FX Y 2
01
J
Re 5
ve
nu
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SE R FY
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(D 201
)F
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RE Y 2
01
A
FY 5
Cu 20
m 15
ula
tiv
e
ANDREW HAMILTON
HEAD OF RESEARCH,
ANTARES EQUITIES
Source: Antares Equities Research, company
data is cumulative since 2008-2015.
A$1 billion – and the corresponding
revenue gains that have accrued to its
competitors in the classified space –
CAR, REA and SEK. These competitors
were successful because they had pure
play advertising models, they operated
online so their advertisements were
cheaper to produce and provided more
scope for content, and there was better
accessibility for those looking to buy
their products.
Such questions are important as they
highlight that disruptive innovation
doesn’t just create investment
opportunities, it creates investment
risks as well. Working out which
companies stand to lose from a new
innovation is just as important from
a portfolio perspective as investing
in those companies that have the
potential to gain.
For more information,
OPPORTUNITY OR THREAT
From an investment perspective,
analysing the potential for disruptive
innovation has to be an important part
of the research process as it has such
far-reaching implications for multiple
companies. For example:
• The Innovator – do they choose
to exploit the new technology or
undervalue its potential and miss out
on the opportunity?
• The Beneficiaries – which companies
can leverage the new innovation and
will they do it successfully?
• The Losers – which companies
stand to lose the most from the new
innovation and will they respond fast
enough to avoid being left behind?
visit www.antarescapital.com.au
TABLE 1: Disruptive innovations and the ASX
This table provides a couple of examples of the views held by Antares Equities on
the potential opportunities and threats of some current disruptive innovations.
Disruptive
innovation
Some potential
beneficiaries
Some potential
losers
Internet of Things
– the increased
connectivity
of devices and
everyday items
to the internet
and cloud based
applications.
Telecoms with networks
(Telstra, TPG, Vocus
Communications/M2
Group), data storage
(NEXTDC) – significantly
increased data
downloads and internet
usage.
Electricity generators
and distributors (AGL,
Origin, Ausnet, Spark
Infrastructure) – smarter
homes, grids and cities
should have lower base
load energy demands.
Private health insurers
(Medibank Private,
NIB) – software enabled
medical devices
should make diagnosis
easier, enabling earlier
treatment and shorter
hospital stays.
Gene therapy
– the ability to
replace faulty
genes in cells
without the use
of medication.
Potential to
eradicate certain
genetic illnesses.
Companies that
develop the technology
successfully.
Private hospital
operators (Ramsay
Health Care,
Healthscope) - software
enabled medical devices
will make diagnosis
easier, enabling
earlier treatment, and
potentially less demand
for hospital beds.
Companies that
treat existing genetic
conditions (eg Cochlear
– genetic deafness;
CSL – genetic
haemophilia).
Source: Antares Equities Research.
BENCHMARK • VOLUME 3 • 2016
15
THE CURIOUS
CASE OF THE
SLIGHTLY
DISRUPTIVE
COWS
The A2 Milk protein
phenomenon proves
it’s possible for
yesterday’s loser to
be today’s winner.
KATIE WHIFFEN
PORTFOLIO SPECIALIST, NAB ASSET MANAGEMENT
SINCE LISTING on the ASX in March last year the A2 Milk
Company share price has risen 200%.1 Since launching its
main product – A2 Milk – it has taken nearly 10% of the
grocery store fresh milk market. More recently, sales of the
company’s A2 Platinum baby formula have exploded in the
Australian market. The brand is also growing in the Chinese
market for baby formula and adult milk, and has just entered
the UK and US markets.
Historically milk has been an entirely homogenous product. For
the last 15 years there has been no legislative control in Australia
over the price that milk processing companies must pay farmers
for their milk.2 While there are over 80 different brands of milk
available in Australia, the homogeneity of the product combined
with the power of processers and supermarkets, has driven down
prices for consumers.3
One litre of plain milk is currently sold in supermarkets for A$1;
yet A2 Milk sells alongside it for A$2.35 per litre.4 While this is an
impressive premium that consumers are willing to pay, the path to
achieving it has not been easy.
How could this brand grabbing market share happen to one of
the most boring products in the world – plain white milk?
Back in the 1990s, a scientist from New Zealand discovered
that cows naturally produce two types of beta-casein proteins
in their milk – A1 and A2. Further research suggested that many
people who experienced ‘discomfort’ after drinking milk were not
affected in the same way if the milk they drank was made from
cows that produced only the A2 protein. They built a company
and a simple genetic process to determine if a cow was only
going to produce the A2 protein in its milk.
16
BENCHMARK • VOLUME 3 • 2016
The opportunity opened to innovate and differentiate a brand
of milk based on this discovery. First, they needed to find supply
– and that meant convincing dairy farmers to selectively breed
those cows with only the A2 protein milk; and pay for the genetic
testing of the herds in order to achieve this. In addition, the dairy
farmers would need to pay to have their milk supply regularly
tested to ensure that it contained only the A2 protein.
HARD YARDS
In early 2000, deregulation was unleashed on Australian dairy
and farm gate milk prices fell. Paying for significantly higher
input costs via this testing and the time to selectively breed an
appropriate herd was going to be a hard sell.
But the A2 Milk Company did manage to convince some early
adopters that it was worth the upfront effort and ongoing costs.
The company made arrangements to pay a higher price for this
specific type of milk – approximately 11 cents a litre more than for
normal milk – and a handful of dairy farmers came on board. From
there, the A2 Milk Company milk supply started to increase.
In March 2003, a Jersey cow herd near Lismore in NSW was the
first in the world to have its milk bottled and sold purely as A2.5
But there was a problem. Part of the developing marketing
strategy was aimed squarely at undermining the existing quality
and dietary impact of regular milk. This did not sit well with Dairy
Australia – the dairy industry body – nor the Queensland Health
Department, who fined the A2 Dairy Marketers in Australia (who
had bought the rights from the A2 Milk Company in New Zealand)
for making false and misleading claims about the health benefits
of A2 milk. Shortly after being fined, the Australian A2 Dairy
Marketers went into liquidation, owing farmers and processers
tens of thousands of dollars. A Federal Government grant of A$1.3
million that had been awarded to the company in August 2004 as
part of the Regional Partnerships Programme was cancelled.6 The
future looked bleak for the early adopting producers, with no one
interested in buying what they were supplying.
RESILIENCE PAYS OFF
But they persevered. The patents, brand and marketing rights
were sold to a company in Singapore and the A2 milk supply
and distribution was rebuilt, with the A2 milk available in 600
supermarkets in four states in Australia. But three years after
first being sold, A2 milk was a tiny share of the overall market
in Australia. In March 2006, the patents, brands and marketing
rights were bought back by the A2 Milk Company in New
Zealand. Just prior to this transaction, shareholders in the A2 Milk
Company were told not to expect any profit for three years.
Since that time, the A2 Milk Company changed the way it
marketed its milk. It concentrated more on the benefit it provided
to consumers rather than discussing any negative side effects
from other dairy products. The company focused on increasing
its supply – it only had six farmers producing 13 million litres a
year in 2006 – and increasing its range of product.
By 2010, 40 million litres of A2 milk was produced by 12,000
A2 certified cows across Australia; and yoghurt made with A2
milk first appeared in April 2010.
In February 2011, A2 Corporation announced that it had made a
profit for the first time. In the six months ending December 2010, it
announced it had made slightly less than A$900,000. In December
2012, it announced that it would list on the New Zealand stock
exchange in an attempt to raise A$20 million to expand its business
in China and the UK. The company listed on the ASX in March 2015.
There are now 44,000 A2-tested cows providing milk for the A2
Milk Company. With the company holding 10% market share in
Australia, and pushing hard into global markets, shareholders will
These curious cows show that
while companies can be disruptive
and innovative the path to
success is not always clear.
be delighted with the company’s performance over the last year.
Even competitors, who do not necessarily agree with the science
of the proteins, are now labelling their milk ‘contains naturally
occurring A2’.7
These curious cows show that while companies can be
disruptive and innovative the path to success is not always clear.
The patents for A2 gene testing start to expire in 16 years. It
will be fascinating to see how the dairy industry develops and
innovates into the future.
This is not a recommendation to purchase A2 Milk Company shares, nor to
change your diet, nor does it try to suggest that the science regarding the A2
proteins impact on digestion is clear!
Past performance is not a reliable indicator of future performance. The value of an
investment may rise or fall with the changes in the market.
1. ASX and New Zealand Stock Exchange. A2 Milk (stock code ATM) has been listed on
the New Zealand Stock exchange since 20 April 2004 and the ASX (code A2M) since
30 March 2015. 2. Industry achieved full deregulation on 1 July 2000. Source: Dairy
Australia as at 3 February 2016 - www.dairyaustralia.com.au/Industry-information/
About-the-industry/Deregulation.aspx. 3. Choice August 2014 - https://www.choice.
com.au/food-and-drink/dairy/milk/buying-guides/milk. 4. Coles online shopping as
at 3 February 2016 - http://shop.coles.com.au/online/national/dairy--eggs-meals/
dairy-eggs/milk. 5. ABC Landline 2006. 6. Australian Finance and public administration
references committee report on regional partnerships and Sustainable Regions
Programme, October 2005. 7. The Lion owned Pura and Dairy Farmers milk products
have used this labelling on some of their milk since August 2014.
BENCHMARK • VOLUME 3 • 2016
17
Disr
Disrupting
D
srupting
in
ng
Retirement
Retire
R
etirement
Advice
A
dvic
ice
Imagine a future where
on retirement, all super
fund members are
automatically defaulted
into a retirement
income product.
What would it mean
for your business?
KATIE WHIFFEN
PORTFOLIO SPECIALIST,
NAB ASSET MANAGEMENT
Why is this potentially simple
adjustment to a super fund disruptive
to advice?
Having a super fund default retirement
income option with a clear product
design will provide significant ease
for members transitioning from
accumulation to drawdown on their
super. The unintended consequence
for the advice industry is that a key
While most financial advisers
work hard on their Customer Value
Propositions, a CIPRs environment will
continue to drive the need for advisers;
to be able to clearly demonstrate the
specific client benefits that will be
derived from their financial advice and
any enhancements to the retirement
income product portfolio.
But what will a CIPR default look like?
The legislation “would require
superannuation trustees to pre-select
a comprehensive income product for
members’ retirement. The product would
commence on the member’s instruction,
or the member may choose to take their
benefits in another way.”
“The pre-selected option should be
a comprehensive income product for
retirement (CIPR) that has minimum
features determined by Government.
These features should include a regular
and stable income stream, longevity risk
management and flexibility. CIPRs would
be low-cost and include a ‘cooling-off’
period. Their design could vary with the
member’s known characteristics, such as
the size of their superannuation benefits,
and take account of the possibility of
cognitive impairment at older ages.”1
Will super fund members’ behaviour
change with the introduction of a CIPR?
There are some likely interesting
behavioural finance implications for
CIPR
18
BENCHMARK • VOLUME 3 • 2016
CIPR
THE MURRAY Inquiry into Financial
Services was far-reaching, but one of
the most interesting and disruptive
opportunities for superannuation
funds – that will have a spill over
impact for financial advisers – was the
recommendation regarding retirement
incomes. The Federal Government,
and judging from their responses to
the Inquiry, most super funds, want to
establish a default-style comprehensive
income product for retirement, a CIPR
for short (pronounced ‘sipper’).
Their aim is to make the transition from
working life to drawing down on super
savings easy to understand and easy to
execute. By creating a retirement income
default, the government will take some of
the confusion around product selection
away from super fund members, and also
provide an interesting benchmark from
which to compare alternative retirement
income options.
milestone in a member’s life when
people seek advice could be eroded.
Many people from age 50 onwards
seek advice to prepare for retirement.
This is a time where individuals feel they
have enough money to afford advice,
and know they’re running out of time
to prepare for an adequate retirement.
The benefits of a CIPR, and the likely
income that such a product will create
for a member, will be continually
communicated by their super fund.
If they feel they have clarity for their
retirement needs, will the member
still feel the need to actively seek
personalised, bespoke financial advice
and pay an additional fee for the advice?
Of course, we know the value of advice
for the member and their financial
planning, but it will be up to the advice
industry to ensure that the value of
advice continues to be known and
sought by super members throughout
their lives. But the disruptive effect is
that a key milestone where people seek
advice could be eroded.
Another impact from having a CIPR
available from a super fund is that the
CIPR will act as the anchor for all other
choices. The problem for advisers is that
even when presented with potentially
more appropriate product options
and strategy choices for retirement,
members will be more likely to anchor
their choice around their current
default opportunity.
CIPR
super members, specifically around
trust, social proof and anchoring.
Trust: More than 90% of members of
APRA regulated funds stay invested in
the default option of their fund, despite
many of the funds offering up to 400
alternative options.2 It is misleading to
assume that these members are lazy.
Studies have shown that while remaining
in a default fund, members feel a strong
degree of trust in the decisions of their
Trustee; and feel that their default
fund must be appropriate for them. If
this is the member’s approach during
accumulation, then it’s likely they will be
predisposed to trust the decision making
and default provided by the Trustee for
their retirement needs as well.
Social proof: Another of the reasons
that members accept a default option is
that default options provide social proof
– a signal as to what everyone else is
doing with their money. One of the issues
around retirement is the lack of social
proof for decisions. At present, retirement
discussions around money – how much
you earn, where you spend it, how you
invest – are still taboo. The issue of “how
much do I need in retirement” has to
some extent been addressed by industry
benchmarks such as the ASFA Retirement
Standard Budget Breakdown and industry
conventions of aiming for 60-70% of a
member’s pre-retirement income.3 But
how other people are achieving their
income needs, remains a mystery. By
having a well understood benchmark for
what a default retirement portfolio looks like
will mean that all super fund members have
a much better anchor for their retirement
product decisions and their alternatives.
Defaults create anchoring: One of the
benefits and downsides with any default
arrangement is that it creates a decision
anchor. Members are more likely to make
decisions based on the ‘do nothing’
approach i.e. maintaining the default
retirement income product, rather than
making an active choice that may well be
more appropriate for them.
How can an advice practice prepare for
this change?
The first piece of good news is that the
government decision around the underlying
requirements for a CIPR default have
not been determined nor legislated. It
is currently merely a recommendation.
Advisers have plenty of time to stay ahead
of the curve and make sure more clients
use the adviser’s retirement approach
as an anchor, rather than their current
superannuation fund’s offer.
The second piece of good news is that
all the features that would be combined in
a CIPR are already available for clients. For
those advisers who move to ensure that
their advice solutions can be executed
through a product solution, they’ll be able
to stay ahead of large industry competitors,
and take advantage of the change rather
than being a victim of it.
WHAT ABOUT
LONGEVITY RISK?
One of the likely crucial features
of a CIPR that is currently not
included in many retirement plans
will be longevity risk management.4
This means that the default will
have to have some of the account
balance exposed to a product that
guarantees that the member’s
income will last as long as they
do. Due to market innovation,
fortunately this no longer just means
locking the member’s money away
in a lifetime annuity.
More flexible options are now
available which allow members to
insure their account based pension,
so that some or all of their retirement
income will last as long as they
do, while still providing the growth
and flexibility that account based
pensions are renowned for.
1. The retirement phase of superannuation:
Recommendation 11 | Financial System Inquiry (2016)
- www.fsi.gov.au. 2. APRA - http://www.apra.gov.au/
Super/Publications/Pages/superannuation-fund-levelpublications.aspx 3. ASFA - www.superannuation.asn.au
4. ASIC Shadow Shopping Survey 2012. One of the key
reasons many plans were downgraded was lack of
discussion around longevity and the impact of running
out of income during retirement. 5. Part of the National
Australia Bank Group of Companies.
BENCHMARK • VOLUME 3 • 2016
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KNOWING WHAT
THE FUTURE HOLDS
DR SUSAN GOSLING
HEAD OF INVESTMENTS, MLC
ARE THE best investors those who
have the most accurate insight into the
future? If so, can that insight be learned
or is it a rare and elusive skill? These are
important questions. If the answer to
the first question is ‘yes’ and insight is
innate rather than learnable, then past
performance is, after all, an indicator of
future performance – and if your star
manager leaves, you will need to move
your money.
Ability to forecast depends on both
the potential that exists to generate
insight into the future, and the
ability of the investor to extract that
insight. A recently published book,
Superforecasting by scientist Philip
Tetlock, can help us answer these
questions and understand the extent to
which investors are extracting insight or
have crossed the boundary into illusion.
He makes the crucial observation that
predictability depends on what is being
forecast, over what time frame and
in what circumstances. For example,
weather forecasts are fairly reliable a few
days into the future, but predictability
rapidly diminishes as time increases.
And financial market outcomes over a
matter of hours or days are relatively
more predictable than over say one year.
Generally, unpredictability increases
with time, but not always. For financial
markets, investor behaviour creates
circumstances in which outcomes are
more predictable over multiple years
than over a single year. The propensity of
financial markets to overshoot fair value
for extended periods of time has been
observed countless times across many
markets. This is a key observation.
INSIGHT OR ILLUSION?
The most important questions for
investment managers are firstly what
are the sources and extent of their
insight into the future; and secondly,
what are they trying to achieve with
that insight. For example, is it possible
20
BENCHMARK • VOLUME 3 • 2016
to reliably predict when a bull market
or speculative bubble will end? While
there is almost guaranteed to be a
pundit who will have predicted each
crisis, there is no evidence that this can
be done with any reliability. That a bull
market will end is predictable, but the
timing is not. This creates a conundrum
for investors – do they position for the
inevitable or ride the wave? There is no
easy answer to this. But typically, many
investors do not perceive the dilemma
because behavioural and perception
biases underlie periods of market
irrationality. Misperception, extrapolation
of past trends, and an apparent ability
to rationalise anything on the part
of investors, create these market
divergences and make rational investors
appear irrational. Relatively long periods
of irrationality are a clear demonstration
that investors, like everyone else, are
vulnerable to illusion. They can be
seduced into believing that they know
more than they really do and believing
the wrong things.
TWO SYSTEMS OF THOUGHT
Psychologists explain misperception as
being a consequence of the way we all
think which involves the product of two
systems: first, automatic perception and
understanding; and second, conscious
thought - which may or may not override
the first system. In Tetlock’s book he
poses the question: if a bat and ball cost
$1.10 and the bat costs $1 more than the
ball, what does the bat cost? System
one’s intuitive non-thinking answer is
typically $1; which on reflection your
system two will then tell you is incorrect.
The reliability of intuition depends on
the extent of relevant experience, but
your mind will jump to conclusions on
the basis of thin air. And even where
someone has a wealth of experience, the
future is never entirely a reflection of the
past, so it’s always important to try to
identify what part of past patterns won’t
fit the future. No doubt system one has
served an important evolutionary role
and works well in many circumstances,
but it mostly does not provide a
sound basis for investment even by
experienced investors. How can you tell
whether your investment manager is
too reliant on system one for decision
making? One simple indicator is to find
out how confident they are in their
perspective on the future – high levels
of confidence are suggestive of a lack
of in-depth thinking. Even a well-defined
coherent confident story can provide
more entertainment than insight.
Genuine insight into the future requires
that investors are open-minded and
curious, they must be seekers of truth
(not entertainment), and sceptical –
particularly of the extent of their own
insight – always seeking to uncover what
remains to be known. And when they talk
about the future, the best investors tend
to focus on the risks and uncertainties,
and they will talk about the ways to
hedge positioning so that regardless
of what markets deliver, investment
outcomes are as robust as possible.
And in judging investment outcomes, it
is important to remember that rational
insightful investors can look wrong
for extended periods of time. As the
renowned economist Rudiger Dornbusch
famously and insightfully said: “The crisis
takes a much longer time coming than
you think, and then it happens much
faster than you would have thought”.
At MLC we understand that the
future is always uncertain and
that forecasts of the future are
always unreliable. Genuine
insight requires that we
remain sceptical, that we
focus on understanding
the possibilities, and
always seek to uncover
what remains to be
known. We believe
these are the keys
to delivering the real
returns that investors
need.
For more information, visit
mlc.com.au
XTYX
XZPT
1230
1220
1210
TPWX
XTYP
PFTW
ZQWP
H/L
AZWP
XPTY
APWT
IN PROFILE
FOUR FUND MANAGERS
DISCUSS DISRUPTION
1. Altrinsic Global
Advisors
2. Fairview Equity
Partners
3. JBWere
4. Pengana Capital
On the edge of a biological cusp
ANDREW WAIGHT
PRINCIPAL & ANALYST,
ALTRINSIC GLOBAL ADVISORS
‘IMAGINE BEING a table to re-writ the
genetic kode of any organism including
tumans.’
This sentence obviously makes no
sense. Now imagine these spelling
mistakes occurred in your genetic code
(genome). Your genome is made up of a
four letter alphabet, consists of three
billion letters and resides in every one
of the cells in your body. It defines who
you are. To put this in perspective, the
Complete Works of William Shakespeare
is based on a 26 letter alphabet and
has about six million letters. Of the
three billion letters in your genome,
roughly 10 million can change between
individuals. These changes can have no
apparent effect, result in different eye
colour, for example, or cause disease.
There can be additions and deletions to
these three billion that can also cause
disease. Now imagine trying to find and
fix these typos in your 500 copies of
Shakespeare. Hard enough with a 26
letter alphabet; near impossible with a
four letter alphabet.
THE FLY IN THE OINTMENT
For several years now we have been
able to ‘speed read’ genomes at a
reasonable cost. This has allowed us to
characterise many of the differences
between individuals and the differences
associated with disease. However, we
had no ability to fix the mistakes. We did
try. Severe combined immunodeficiency
(SCID) is a rare disease where children
are born without an active immune
system due to errors in their genome.
We tried to put in a correct copy of the
letters but they went into the wrong
location. This made part of the genome,
like the first sentence, nonsensical. The
result of this disruption was cancer.
Recent attempts to treat SCID and
other genetic diseases have been to
22
BENCHMARK • VOLUME 3 • 2016
Clearly we need tools that can
replace the error and only the
error, in all locations of that error.
We now have them.
add a ‘footnote’ to the genome. This
consists of delivering a good copy of
the sequence to the genome but not
actually inserting it. It works but is not
as effective as replacing the defective
letters. Clearly we need tools that can
replace the error and only the error,
in all locations of that error. We now
have them.
THE POWER OF THE SOLUTION
They go by exotic names like Zinc
Fingers, TALENS or CRISPR but each
genome editing tool operates by the
same principle. Each is able to find a
specific sequence of letters out of the
three billion and replace it with another
sequence of letters. We can do this in
plants, animals and humans. Of course
we have been selecting desirable
characteristics and cross breeding
plants and animals for years. But this
is a slow process that risks diluting out
one desirable characteristic for another.
Like everything else in this age, genome
editing tools allow us to do it quicker
and more precisely. For example, three
letters have been changed in the pig
genome to allow the pig to survive an
infection that causes African swine
fever. Despite the name, there have
been outbreaks in Eastern Europe.
Sticking with pigs, Chinese researchers
knocked out a growth hormone
receptor in Bama pigs to make smaller
‘micropigs’ for research purposes.
However, they proved to be so ‘cute’
that the real demand is for them as
pets. Sticking with China, researchers
modified pre-implantation human
embryos to fix the gene responsible
for B-thalassaemia, a potentially fatal
blood disorder. While the attempt was
not 100% successful, the fact is they
tried. You can see the slippery slope we
have just stepped onto. The technology
is disruptive but it comes with a lot of
moral strings attached.
By its very nature, disruptive
technology is impactful. It is the job of
Altrinsic to identify and understand the
disruptive technology, to decide if and
when an investment should be made
and, perhaps most importantly, to identify
the impact on existing holdings and
companies within the value chain.
Now, imagine being able to re-write the
genetic code of any organism including
humans.
Next generation sequencing is affecting
Altrinsic’s investment decisions today
and will continue to do so into the future.
Altrinsic currently gains exposure to these
biological advances through their holdings
in Roche, Biogen and Sanofi.
For more information, visit www.altrinsic.com
Any opinions or analysis expressed should not be
considered a recommendation or solicitation to purchase
or sell any security. It should not be assumed that any
investment in this security was, or will be, profitable.
The small cap opportunity
EXECUTIVE DIRECTOR/PORTFOLIO
MANAGER, FAIRVIEW EQUITY PARTNERS
FAIRVIEW SEES 2016 as a gamechanging opportunity for investors
as we believe there will be a greater
divergence between investor returns
accrued from large cap companies
versus their small cap peers.
RELATIVE GROWTH
While large cap stocks significantly
dominated small cap stocks between
2011 and 2015, more recent activity
indicates a decline in this trend. Chart 1
shows the relative outperformance of
the S&P/ASX 50 Leaders Accumulation
Index versus the equivalent S&P/ASX
Small Ordinaries Index.
YIELD CARRY TRADE
MAY BE OVER
Since 2011, the performance of large
caps has been driven by yield whereas
small caps has not. But Fairview believes
the yield trade has now run its course.
Its slowdown coincides with modest
forecasted earnings growth of 0.8%
for the S&P/ASX 50 Leaders stocks for
the calendar year to December 2016.1 In
contrast, the market forecast is for the
S&P/ASX Small Industrials Accumulation
Index to deliver around 9.3% earnings
growth for the same period.1 Large cap
institutional investors are therefore
expected to place increasing pressure
on the management teams of these
lumbering listed behemoths over
the course of this year to lift their
earnings growth.
GROWTH TILTED TOWARDS
SMALLER STOCKS
Over the calendar year to December
2016 S&P/ASX Small Industrials are
forecast by the market to deliver superior
revenue growth. Significantly, the S&P/
ASX 50 Leaders is forecast to deliver a
median filtered revenue growth of 4.2%
as compared to the S&P/ASX Small
Industrials which is expected to grow
8.8% over the same period.2 This is to be
expected as Small Industrials are typically
earlier in their revenue growth journey.
EBITDA GROWTH LEVERAGE
The superior growth of small cap
companies can be attributed in part to
static cost bases, lower energy prices
and the exploitation of other efficiencies.
The impact has been magnified at
the earnings before interest, taxes,
depreciation and amortization (EBITDA)
level. Over the calendar year to
December the market forecast is for the
S&P/ASX 50 Leaders to deliver a median
filtered EBITDA growth of 5.3% whereby
the S&P/ASX Small Industrials Index is
expected to deliver 11.0%.2
ENORMOUS DEBT CAPACITY
Another encouraging consideration
is that we believe large cap listed
companies have the impetus and
desire to increase their very pedestrian
earnings growth this year through
mergers and acquisitions (M&A) activity.
They have the capacity to accelerate
earnings growth through potentially
acquiring small cap businesses.
This increase in demand would lead
to increased valuations. In a variation
to the previous comparisons, we have
widened the sample size in our analysis
to include mid caps as we believe they
also have increased M&A appetite. We
have included all non-financial stocks in
the ASX’s largest 100 companies and
found that the debt serviceability ratio
(median net debt/EBITDA) forecast is
1.58 x. This is significant, as any number
under 2.5 x demonstrates high latent
capacity in our view.
Current market conditions – low
interest rates, a declining currency and
easy global corporate credit availability
– are not dissimilar to those in the early
90s, which saw a surge in M&A. Strongly
growing small cap companies were
acquired by rivals and offshore bidders
during this period. If history is to repeat
TABLE 1: Market expectations for revenue growth for 20162
The table below shows the companies with the highest forecast growth in each
index (again we’ve excluded the outliers) and highlights the expected revenue
growth advantage for small caps.
S&P/ASX 50 Leaders Index
Sonic Healthcare
11.0%
S&P/ASX Small Industrials Index
Gateway Lifestyle
35.0%
Sydney Airport
9.4%
Nanosonics
34.0%
James Hardie
8.7%
iProperty
33.0%
Mirvac
8.6%
Estia Health
33.0%
Goodman
8.1%
Tassal
28.0%
Source: FactSet and Fairview2
CHART 1: Relative outperformance of S&P/ASX 50 Leaders
Accumulation Index vs the S&P/ASX Small Ordinaries Index*
200
Performance (%)
MICHAEL GLENANE
180
160
140
120
100
80
2010
2011
2012
2013
2014
2015
2016
Source: FactSet, 5 November 2010 to 5 February 2016.
itself, and the market’s expectations
for earnings are met, Fairview expects
that future organic earnings growth for
larger listed companies will be anaemic
outside M&A debt fuelled growth. As
such, Fairview believes that the market’s
forecasted superior revenue and profit
growth within the small cap sector
during 2016 will be rewarded by upward
re-ratings and M&A activity.
For more information,
visit www.fairviewequity.com.au
*Past performance is not a reliable indicator of future
performance. The value of an investment may rise or fall
with the changes in the market. Any forecast or forward
looking statement in this document is provided for
information purposes only. No representation is made as
to the accuracy or reasonableness of any such forecast
or statement or that it will be met. Actual events may
vary materially.
1. Source: Factset and Fairview. 2. Source: Factset and
Fairview. Fairview have excluded the top and bottom
10% of the companies in the indices.
BENCHMARK • VOLUME 3 • 2016
23
How technology and product
enhancements are delivering more
portfolio solutions for investors
DANNY WONG
PORTFOLIO MANAGER, JBWERE
and sophisticated diversified objectivesbased strategies across various client
risk profiles.
On a global basis, the range of portfolio
solutions within the managed accounts
framework has increased substantially
over the past few years. Multi-asset
strategies are the fastest growing
products across the SMA/MDA space.
The global ETP industry has grown to
approximately US$3,000 billion and has
grown at an annual compound growth
rate of 15.1% pa over the past five years
(Chart 1). In Australia, the ETP industry is
now approximately A$21 billion, having
grown by A$6.4 billion (up 42%) since
2014.¹ There are now approximately 150
ETPs available on the ASX.
TECHNOLOGY ENHANCEMENTS
have been responsible for a number of
key investment product improvements
over the past decade. These include
the growing relevance of exchange
traded products (ETPs) for example,
exchange traded funds (ETFs) and
exchange traded commodities (ETCs),
and the increasing importance of
separately managed accounts (SMAs)
and managed discretionary accounts
(MDAs). SMAs are a growing part of the
broader global discretionary managed
accounts investment solution and are
technology driven disruptors to the
traditional funds management business.
Technology now provides the
opportunity for investors to choose
diversified multi-strategy listed solutions
whereby a portfolio can be created to
hold listed investment solutions across
all major asset classes. These include
both broad and sector domestic and
global equities including ETPs, listed
government and corporate bonds,
enhanced yield, equal weighted and rulebased ETFs. These ‘portfolio tools’ have
enhanced the ability for fund managers
to construct tax-effective, transparent
KEY DRIVERS
CHART 1: Global ETP assets by year
3,000
Fixed Income
2,000
Commodoties & Others
1,500
2,959
2,744
2,355
1,923
1,506
1,463
1,139
772
851
598
319
428
218
20
00
20
0
20 1
02
20
03
20
04
20
0
20 5
06
20
0
20 7
08
20
09
20
10
20
11
20
12
20
13
20
1
DE 4
C
15
0
146
500
109
1,000
79
Total assets (US$bn)
Equity
2,500
Source: BlackRock Global ETP, December edition.
24
BENCHMARK • VOLUME 3 • 2016
Another important development has
been a focus on the expansion of
the Australian listed corporate bond
market by both the Australian Federal
Government and the ASX. This has been
established under the framework of
allowing retail investors to gain access
to the bond market with the desire
to increase Australian self-managed
super funds’ (SMSFs) exposure to listed
government and corporate bonds.
Key drivers of listed multi-asset class
portfolios not only include technology
enhancements but also the growing
use of self-directed superannuation
solutions (which represents 30% of the
Australian superannuation market).2
The requirements of the increasingly
educated client are also making an
impact. This includes clients who are
extremely cost conscious, require a
high degree of transparency, seek tax
efficiency and have a focus on risk
management. The combination of asset
allocation across various objectives
and risk profiles, together with a range
of listed investment solutions fulfilling
those asset classes allows the delivery
of listed multi-asset portfolios in the
discretionary SMA/MDA space.
HELPFUL TOOLS
The advantage to investors is that listed
multi-asset solutions are being provided
with a transparent, competitively
priced feature where the volatility
can be lowered to a level that is more
comparable to that of a traditional
managed funds portfolio. The range
of ‘portfolio tools’ now available will
represent a growing source of portfolio
solutions for cost conscious investors.
We expect that listed multi-asset
SMAs will be a growing feature of the
Australian investment landscape over
the next decade.
A series of objective based multiasset SMAs covering a range of client
objectives and risk profiles are being
manufactured by a variety of industry
participants, including the major global
ETP manufacturers and more niche ETP
providers. Other manufacturers include
the major global wealth management
businesses that deliver more standard
multi-asset portfolios and tailored
core plus satellite SMA solutions. It’s
likely that a growing feature will be
the increased competition from these
players on the more traditional managed
funds businesses where pricing
pressure will continue to be a major
theme over the next decade. It’s early
days, but disruption is a given.
For more information, visit www.jbwere.com.au
1. BetaShares Australian ETF Review: Year end 2015.
2. ASFA Superannuation Statistics, December 2015.
Disruption and Darwinism
RHETT KESSLER
SENIOR FUND MANAGER,
PENGANA CAPITAL
MUCH WAS written about the
attraction of ‘disruption’ by investment
analysts during 2015. How new
technology is enabling smaller, smarter
and nimbler start-ups to build disruptive
business models by achieving the
‘magical trifecta’ of better service to
more customers at a lower cost.
Investing in a ‘ten bagger’ by picking
the next Google or Facebook is harder
than it seems. Survivorship bias
means we remain focused on the
few companies that ‘make it’ rather
than the multitude of ones that don’t.
Furthermore, rapidly growing disruptors
carry additional investment risk. This risk
may include a lack of any cash earnings
Collaborative software allows
many users to share information by
collaborating on a common platform
eg Uber and Aconex.
The network effect exists when
a rise in the number of users with
a common denominator, usually
location, creates an exponential
increase in efficiency eg Airbnb and
Domino’s online.
First-mover advantage suggests
that the first company to establish
critical mass and meaningful scale
gains an extremely strong position
eg Google Search and carsales.
Global operational leverage occurs
when businesses can spread their
cost base over a global customer
base providing a cost advantage
over localised competitors eg
Netflix, Amazon and Aristocrat’s
online games.
Investing in a ‘ten bagger’ by picking the next
Google or Facebook is harder than it seems.
Survivorship bias means we remain focussed
on the few companies that make it rather
than the multitude of ones that don’t.
to underpin a valuation as the business
grows its way to scale; as well as a lofty
multiple of future earnings, EBITDA,
revenue or even addressable market
share, depending on how hot investor
sentiment is at the time.
The preference at Pengana has been
to find existing companies with proven
robust business models and competent
management at the right price who are
using technology to either grow their
addressable target market; lower costs
through efficiencies or strengthen their
customer service proposition.
TWO PERTINENT EXAMPLES
ResMed is a home-grown global
medical device company that designs,
manufactures and distributes flow
generators and masks to treat sleep
apnea. By connecting each flow
generator through a network similar
to Amazon’s Whispernet for the
Kindle, the company has successfully
connected patients, sleep doctors
and equipment suppliers to a common
database that enhances efficient
and effective service at substantially
lower cost. First-mover advantage has
provided sales momentum in excess of
40% per quarter while simultaneously
establishing a closer brand connection
with its customers and end-users.1
Tatts Group, the domestic lottery
provider, has successfully increased
its distribution of products by offering
them online. Previously, lottery
tickets were sold exclusively through
newsagencies. For every $109 spent by
the consumer on tickets, $9 stayed
with the newsagent as a distribution
fee, $60 went to players as prizes,
$30 went to the government and
$10 remained with the operator to
cover costs and profit.2 The online
offering has broadened the company’s
target market without requiring
an intermediary or increasing its
associated distribution costs; while
simultaneously creating a direct
interaction with its customers.
The Darwinism of modern capitalism
continues to allow the strong players
to survive (and even flourish) while
whittling away the inefficient. Our
challenge as investors is to be able to
identify and back the winners while
reducing the risk of being led down an
evolutionary dead end. Be careful, it
really is a jungle out there.
For more information, visit www.pengana.com
1. Resmed, March and June Quarterly Earnings Report.
2. Numbers as per company meeting notes.
Any opinions or analysis expressed should not be
considered a recommendation or solicitation to purchase
or sell any security. It should not be assumed that any
investment in this security was, or will be, profitable.
BENCHMARK • VOLUME 3 • 2016
25
Fund intelligence
Fund name
Investment return objective
Benchmark
MLC Wholesale Inflation Plus Assertive Portfolio
6% pa above inflation (before fees) over seven year periods by limiting the risk of negative returns
over that time frame.
Consumer Price Index
MLC Wholesale Inflation Plus Moderate Portfolio
5% pa above inflation (before fees) over five year periods by limiting the risk of negative returns
over that time frame.
Consumer Price Index
MLC Wholesale Inflation Plus Conservative Portfolio
3.5% pa above inflation (before fees) over three year periods by limiting the risk of negative
returns over that time frame.
Consumer Price Index
Altrinsic Global Equities Trust
Aims to deliver long-term capital growth and to outperform the Benchmark over rolling five-year
periods, before fees and taxes.
MSCI All Country World Index (ex-Australia)
Net Dividends Reinvested ($A)
Antares Listed Property Fund
To outperform the Benchmark (before fees) over a rolling 5-year period.
S&P/ASX 200 A-REIT Accumulation Index
Fairview Equity Partners Emerging
Companies Fund
Aims to earn a return (after fees) which exceeds the Benchmark over rolling five-year periods.
S&P/ASX Small Ordinaries
Accumulation Index
Pengana Australian Equities Fund
Aims to achieve over the medium to long-term an investment return, including capital appreciation,
dividends and interest, in excess of the risk free rate (i.e. the Reserve Bank of Australia’s Cash
Rate Target) plus a margin to compensate investors for the extra risk associated with investing in
Australian equities (this is known as the ‘Australian equity risk premium’), with a volatility of return
less than the Australian equity market.
The average of the daily target Australian
Cash Rate used by the RBA
Redpoint Global Infrastructure Fund
Aims to deliver a return (after fees) that exceeds the Benchmark over rolling 5 year periods.
FTSE Developed Core Infrastructure Index
(hedged to Australian dollars) with net
dividends reinvested
Antares Dividend Builder Model Portfolio1
The primary objective is to regularly deliver higher levels of dividend income on a tax effective
basis than the Benchmark. The other objective is to achieve moderate capital growth in a tax
effective manner over a rolling 5 year period.
S&P/ASX 200 Industrials
Accumulation Index
JBWere Listed Multi Strategy SMA2
To provide long-term capital growth by investing in a broad selection of Australian listed
investments, across a range of asset classes.
Morningstar Multi-sector Growth
Market Index
Multi-manager funds
Single-sector based funds
SMAs
All information unless otherwise specified in this table is correct as at 25 February 2016. No investment is free from risk. You should obtain a Product Disclosure Statement (PDS) relating to the financial product/s mentioned
in this communication and consider it before making any decision about the product. A copy of the PDS is available upon request by our call centre on 1300 738 355 or on our website at nabam.com.au.
1. This is the investment objective and strategy specified in the MLC Navigator Separately Managed Account PDS prepared on 1 May 2015.
2. This is the investment objective and strategy as stated in the Praemium SMA PDS dated 22 December 2015.
26
BENCHMARK • VOLUME 3 • 2016
An indepth comparison of the key features of select funds and SMAs.
Key features
Platform availability
Distribution
time frame
• An outcome-focused real return seeking portfolio with a flexible asset allocation that includes mainstream and
alternative investments.
• Extensive forward-looking scenario testing to manage downside risk and identify opportunities.
BT Panorama, BT Wrap, BT Super Wrap, CFS First Wrap, Hub24,
MasterKey Fundamentals, Macquarie Wrap, MLC Navigator, MLC
Wrap
Annually
• An outcome-focused real return seeking portfolio with a flexible asset allocation that includes mainstream and
alternative investments.
• Extensive forward-looking scenario testing to manage downside risk and identify opportunities.
Hub24, MasterKey Fundamentals, Macquarie Wrap, MLC
Navigator, MLC Wrap
Semi
annually
• An outcome-focused real return seeking portfolio with a flexible asset allocation that includes mainstream and
alternative investments.
• Extensive forward-looking scenario testing to manage downside risk and identify opportunities.
CFS First Wrap, Hub24, MasterKey Fundamentals, Macquarie
Wrap, MLC Navigator, MLC Wrap
Semi
annually
• The Trust aims to provide long-term growth of capital by investing predominantly in publicly traded global
equity securities (unhedged to the Australian dollar).
• Altrinsic searches developed and emerging markets to uncover companies with unrealised value.
• By taking a long-term view Altrinsic aims to capitalise on cross-border dislocations across the full market-cap
spectrum.
MLC Wrap, MLC Navigator, MLC MasterKey Fundamentals, CFS
FirstWrap and FirstChoice, Asgard, Hub24, Macquarie Wrap and
the Oasis Investment menu
Annually
• A low turnover, concentrated, yet well-diversified portfolio of Australian listed property and property- related
securities.
• A fund that seeks to provide long-term tax efficient growth and income.
• A fund designed for investors who wish to benefit from the returns and diversification benefits provided by
listed property and property related securities.
MLC Wrap, MLC Navigator, AMP WealthView, AMP Personalised
Portfolio, OnePath Oasis, AMP North, BT Wrap and BT Super
Wrap, BT Panorama, IOOF IPS, IOOF Pursuit Select, Macquarie
Wrap, Netwealth Wrap, Praemium SMARTwrap, BT Panorama,
Hub24
Quarterly
• An actively managed fund that aims to provide long-term capital growth and some income by investing
primarily in a diverse portfolio of smaller companies listed, or expected to be listed, on the Australian Securities
Exchange.
• Fairview is a core active investment manager that employs a disciplined, multi-faceted strategy for stock
selection.
Asgard, AMP North, AMP Summit, AMP iAccess, Asgard
E-Wrap, Asgard Personal Choice Private, BT Wrap and BT
Super Wrap, BT Panorama, CFS FirstWrap, Hub24, Macquarie
Wrap, MLC Wrap, MLC Navigator and MLC MasterKey
Fundamentals, Praemium SMARTwrap, JBWere
Annually
• The fund invests principally in listed Australian equities. If Pengana cannot find appropriate securities that
meet its investment criteria, the Fund’s assets are held in cash or cash equivalents.
• Principally targets listed Australian companies capable of generating sustainable underlying cash earnings
yields of 6 to 8% per annum with growth of 10 to 15% per annum. In addition, for capital preservation purposes,
the company valuation is assessed with a margin of safety. This may be in the form of a strong underlying
intrinsic asset valuation, low earnings multiple, regulated monopoly or other factors.
Personal Choice Private, BT Wrap, Macquarie Wrap, Netwealth
Wrap, Hub 24, MLC Navigator, MLC Wrap, Asgard, UBS, TPS
self-managed super fund, AET self-managed super fund,
AET small APRA fund, Portfolio Management Service, CFS
FirstWrap, AMP North, Federation Managed Accounts, BT
Panorama, OneVue, Powerwrap, Mason Stevens
Semi
annually
• The fund invests in a well-diversified global portfolio of listed companies that are focused on building or
operating infrastructure assets, such as pipelines, energy grids and telecommunications networks and is
substantially hedged to the Australian dollar.
• The fund has the potential to generate returns that are less volatile and tend to be considered more defensive
than the broader listed equity market; generally have low correlation with mainstream asset classes; and can
provide a long-term hedge against inflation.
• Redpoint believes it can achieve better risk and return outcomes than the Benchmark over rolling 5-year
periods. This is achieved by making long-term investments where exposure to risk is properly managed and
adequately rewarded and ensuring that investment decisions are implemented efficiently.
MLC Wrap, MLC Navigator
Quarterly
• The Model Portfolio invests in a diversified portfolio of high yielding Australian securities that aim to grow their
dividends over time.
• Emphasis is placed on securing franked income and minimising security turnover to keep net realised capital
gains low.
• Securities with a dividend yield return in the top quartile of the Index are generally selected.
Antares Direct SMA, MLC Wrap, MLC Navigator, Macquarie
Wrap & BT Panorama
• The Listed Multi Strategy Model Portfolio focuses on delivering above average after tax income, but
predominantly, capital growth returns to investors.
• As the Model Portfolio invests in securities listed on the ASX, investors need to be comfortable with investing
directly in listed investments across various asset classes.
• The Model Portfolio has a growth bias and will have Model Portfolio filters for Australian equities that include
high ROE trends, attractive ROFE/ PEG, strong EPS revisions or potential to do so, above average pricing
power characteristics and dominant industry positions with the ability to restructure and consolidate
fragmented industries.
Praemium
BENCHMARK • VOLUME 3 • 2016
27
886
A new climate for change
“This one trend, climate change, affects all trends.”
Barack Obama
UN Climate Change Conference
Paris, 2015
TNT
Expeditors
8,585
6,565
Scope 1
(tonne CO2)
1,266,926
6,767
Scope 2
(tonne CO2)
49,342
44,153
1,316,268
50,920
153
8
402,163
6,185,674
166
886
Revenue
(US$m)
Total (Scope 1
and Scope 2)
Scope 1 & 2
carbon intensity
Scope 3
(tonne CO2)
Trucost carbon
intensity
Source: Redpoint Investment Management and Trucost.
Data from 2014. Carbon intensity: calculated for each
company as metric tonnes of GHG emissions (in carbon
dioxide equivalents – CO2e) divided by company
revenue in millions of US dollars.
28
BENCHMARK • VOLUME 3 • 2016
ASSESSING CARBON INTENSITY
GHG emissions of companies are typically
characterised as:1
• Scope 1 emissions: direct GHG
emissions from sources owned or
controlled by the company;
• Scope 2 emissions: indirect GHG
emissions resulting from the
company’s consumption of electricity,
heat or steam; and
• Scope 3 emissions: all other indirect
GHG emissions excluding Scope 2
caused by the business but released
from sources not owned or controlled
by the company.
Data from Scope 1 and Scope 2 is
required to be reported by companies
if they are to comply with the GHG
Protocol corporate accounting standard.2
Scope 3 reporting is an optional
disclosure. Given the high-level of
company compliance with the minimum
requirements of the standard, Scope
1 and Scope 2 data is often used to
calculate carbon intensity.
UK based Trucost Plc, experts in
environmental data capture and analysis,
Carbon
intensity
TNT
Expeditors
166
TABLE 1: TNT vs Expeditors
WHY IS EXTENDED REPORTING
IMPORTANT TO INVESTORS?
8
REDPOINT INVESTMENT Management
believes that one of the greatest
challenges facing investors today is
the impact of climate change. Since
the first Intergovernmental Panel on
Climate Change (IPCC) Assessment
report in 1990 the issue of greenhouse
gas (GHG) emissions has evolved from
a government reporting matter to
recognition of climate change as a key
investment risk.
The investment challenge of climate risk
is multi-faceted. The current focus has
been on portfolio exposure to stranded
assets. A more complex consideration
is the exposure of all companies to
GHG emissions in their processes and
supply chains. While the almost certain
imposition of a cost in relation to those
emissions will ultimately impact asset
values, the timing and mechanism for this
is uncertain.
STRANDED ASSETS
The concept of a ‘stranded asset’ is not
new. Think of the transition from fixed
line phones to mobiles and from cellulose
film to digital cameras. At present,
companies that own fossil fuel deposits
may face a similar demise based on
either government imposed extraction
quotas or competitive and technological
substitution by companies that utilise
such fuels.
The identification of assets with the
potential to be stranded by policy or
competitive forces of climate change is
non-trivial, but reasonably straightforward.
Coal mines and mine-owning utilities are
such examples. So, to more accurately
and effectively reduce a portfolio’s
exposure to carbon risk requires deeper
analysis.
153
MAX CAPPETTA
CHIEF EXECUTIVE OFFICER, REDPOINT
INVESTMENT MANAGEMENT
has been assessing the economic impact
of the dependence that companies have
on natural resources for over a decade.
Trucost’s preferred measure extends to
incorporate those Scope 3 emissions
that arise from direct service providers
within a company’s supply chain. This
allows for more accurate comparisons
between companies with similar activities
underpinning their outputs, but with
different degrees of outsourcing. It is
supported by a mix of modelling and data
collection to determine Scopes 1, 2 & 3
where the data is not directly reported by
the companies themselves.
Scope
1&2
Trucost
The differences between carbon
intensity estimates is highlighted
by comparing two similar logistics
companies: delivery specialists TNT and
Expeditors International.
Table 1 highlights the quite different
conclusions that can be drawn based
on the choice of intensity measure.
Using only Scope 1 and Scope 2 data,
Expeditors appears to have significantly
lower carbon intensity than TNT. Trucost’s
measure, which includes the bulk of Scope
3 emissions, reveals Expeditors having a
vastly higher carbon intensity. This impact
is due to Expeditors’ business model: being
a non-asset global logistics provider that
outsources its transportation needs.
This depth of analysis and insight will
become more important for investors
as they seek to understand their
investments in the context of climate
risk. Consideration of stranded assets is a
valuable start but insights into the carbon
intensity of all companies will assist
innovative investors to more effectively
account for this important social and
financial risk; and improve risk and return
outcomes.
1. The latest carbon footprint data is sourced
from Trucost, which maintains the world’s largest
database of greenhouse gas (GHG) disclosures.
See http://www.trucost.com/ for further details.
2. The Greenhouse Gas (GHG) Protocol, developed by
World Resources Institute (WRI) and World Business
Council on Sustainable Development (WBCSD), sets the
global standard for how to measure, manage, and report
greenhouse gas emissions.
Adviser contacts
NSW
VIC
QLD
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Investment Specialist
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Investment Specialist
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Investment Specialist
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E [email protected]
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Investment Specialist
NAB Asset
Management
Level 21
NAB House
255 George
Street
Sydney
NSW 2000
nabam.com.au
M +61 (0)455 086 053
E [email protected]
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Investment Specialist
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E [email protected]
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Business Development Associate
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Investment Specialist
Client Services
1300 738 355
WA
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Investment Specialist
M +61 (0)409 177 071
E [email protected]
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Business Development Associate
P +61 (0)8 9215 5549
M +61 (0)411 255 062
E [email protected]
P +61 (0)3 8634 4676
M +61 (0)457 514 628
E [email protected]
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