Archive for year: 2019

There has always been an element of tension between super funds and financial advisers. From the super fund’s perspective, the adviser is a possible threat to member retention and can disrupt the fund’s engagement process. For the adviser, the super fund can sometimes seem like a closed shop, unwilling to give up control of the advice experience or shed any real light on its investment process, structures and strategy. At face value, the two should be natural enemies.

While there will inevitably be some antagonism between the two, the reality is that both funds and advisers need each other – now more than ever before. In a post-Royal Commission environment, the most successful super funds will be those that actively engage with third-party adviser networks, giving their members the flexibility to choose how they access financial advice. For advisers, success means rising to the challenge of ever higher standards and increased scrutiny, which requires them to have the information and tools to justify investment decisions based on their client’s best interest.

Finding a common path will require a big shift in thinking but the rewards will be more sustainable growth for funds and advisers, as well as better member outcomes. With the median fund currently providing one financial adviser for every 14,230 members, the ability to access scale is crucial for future growth. Third party advice networks facilitate greater reach through their advice channels, while concerns over quality control can be managed through the delivery of accurate and timely information to advisers and dedicated monitoring.

While funds must be prepared to give up some control, advisers will need to work harder than ever to ensure their advice is in their clients’ best interest. The limitations of many advice businesses have been laid bare by the Royal Commission. There will likely be significant turnover in coming years, with more advisers distancing themselves from aligned groups. This provides a significant opportunity to support and build traction within the new advice landscape.

Overcoming the ‘us vs them’ mentality

SuperRatings found that funds with a dedicated strategy focused on servicing third party advice networks have been rewarded with improved member retention, which can aid membership growth. These relationships can be mutually beneficial for funds and advisers, with funds able to service and engage with more members, and advisers able to access a broader client base and a more diversified pool of funds.

Which is why it’s surprising that many funds are yet to fully take advantage of these opportunities. According to SuperRatings’ data, only 53% of Not for Profit (NFP) funds have formal relationships with advisers, which have traditionally been the domain of retail funds through vertically integrated business functions. Even fewer NFPs have a dedicated servicing team for third party advisers – only 27% compared to 79% of Retail Master Trusts (RMTs) – which is essential for enabling advisers to provide a competitive service.

Third party adviser network trends (% of Not-for-Profits)


Source: SuperRatings. Data to 30 June 2017

When it comes to being open and transparent with advisers, super funds also have a lot of work to do. SuperRatings’ analysis shows that only 5% of NFP funds provide data feeds to third party advisers, compared to 73% of RMTs, while 30% of NFP funds (92% of RMTs) provide access to client reports, which enable advisers to provide timely, informed advice to their clients. Funds are also reluctant to allow advisers to transact on behalf of their members, with only 25% of NFPs offering this capability, meaning there are still significant barriers for advisers to effectively engage with funds and provide a streamlined service.

Empowering advisers means more opportunities for funds

Funds and advisers need each other, but how can they go about creating mutually beneficial and trusting relationships? The answer is by sharing information and being transparent about members’ needs. For advisers, this means having access to high quality investment product research that enables them to efficiently assess a wide range of NFP, retail and corporate funds, and ensures they have an in-depth understanding of how each fund stacks up. Equally, super funds need to support this process by giving advisers the information they need to make decisions in their client’s best interest. Transparency is no longer a radical strategy for super funds – it not only reduces friction for the adviser and their client by making it easier to do business, it means that the adviser is in a position to assess the product and consider it for their client. Communicating third party assessments, such as Lonsec’s well recognised investment option ratings, also helps advisers to easily identify and justify high quality superannuation offerings. We expect to see significant changes in funds’ external advice offerings in coming years, particularly as funds continue to report growing success in this area. SuperRatings is supporting this evolution by making its specialised superannuation research available to financial advisers via Lonsec’s market leading iRate platform, giving advisers the tools to make in-depth fund comparisons and ensure that they can fully justify their fund decision on a best interest basis.

With potential risks over default models and concerns about the sustainability of the old model, it is impossible for funds to ignore these opportunities. While funds and advisers might not always see eye to ey, they can’t afford to allow their differences to get in the way of the vast opportunity staring them in face.

Thankfully my kids have moved on from their ‘Frozen’ phase and the tunes of ‘Let it go’ are well and truly buried away in the back of the DVD cabinet. As professional investors, one of the biggest challenges we face is when to ‘let it go’. When we make an investment into a stock or managed fund the investment rationale is clear, attractive valuations, positive earnings growth, solid investment team, appropriate investment style. However, what happens when our investments don’t follow the course we anticipated and perform poorly? An even more difficult decision is when to let go of a ‘winner’?

Behavioural factors play a big role in terms of how people react to events and the subsequent decisions they make. The belief that things will turnaround, the comfort of the pack (we all go down together), ‘falling in love’ with an investment. Such emotions impact all of us even the most experienced investor. The main line of defense to minimise the impact of behavioural factors in a decision making process is to always point back to your investment philosophy and the underlying process which underpins that philosophy. If your overall philosophy is one of generating returns with lower downside risk than the market do the underlying investment align to this philosophy? have they provided downside protection? if not, why? (are there cyclical reason for this or is there something structural impact the return profile). If an investment has provided this type of return profile what have been the factors contributing to this e.g. certain sector or country exposures, and do you expect these factors to work in the future? If we use a managed fund as an example it is important to look out for any changes to how the manager is managing money which may be reflected in a change in the risk and return profile of a fund. Is there a change in how the manager positions their investment approach to what they communicated a few years ago?

The main forum for our manager and stock decisions for our managed portfolio are our Manager and Security Selection Investment Committees.  The committees are made up of senior members of our Research and Investment Consulting teams, our CIO as well as our external experts. Decisions to ‘let an investment go’ are made via the committee process. Investment recommendations are supported by qualitative and quantitative analysis. If we use managed funds for example this would include meeting with the manager (outside of the formal annual review process) focusing in on the issues at hand and targeted quantitative analysis which may provide a clue as to where the problem rests, an example being where a manager has taken stock-specific risk which is uncharacteristic of the manager.

Australia’s small cap shares have rarely failed to capture investors’ imaginations, not least for their ability to generate eye-watering returns when company narratives become reality. Since the start of 2016, sustained growth from small industrials combined with a rallying mining sector have produced remarkable performance for investors willing to move outside Australia’s biggest names.

Now, confronted with a rolling bear market, small cap managers are experiencing a period of pain and possibly some introspection. The past three years have taught us that dreams can be kept alive, even if they don’t always come true. Looking back, it’s fair to say that small cap outperformance was not a broad-based phenomenon. But even in an environment of elevated volatility and with market risks tilted to the downside, this does not necessarily mean that opportunities have dried up.

Taking a look at Lonsec’s peer group of small cap managers, past returns have shown significant dispersion due to a range of different sector and stock exposures. As we now know, the small cap rally was led by a narrow group of shares over the preceding six months to January 2018, and this trend continued through the second half of 2018, albeit with increased volatility.

The range of small cap fund manager returns has been wide
(returns to October 2018)

Returns based on Lonsec’s small cap fund manager peer group

Source: Lonsec

For the 2018 financial year the Small Ordinaries Index returned +24% (wouldn’t that be nice!) but this is not representative of the performance of the broad range of small cap stocks. Closer analysis reveals that 20 stocks delivered 60% of these gains, while the median stock in the index returned a more down-to-earth +9% for the year.

These top 20 hot stocks that drove the small cap index over the last 12 months are essentially companies with exposure to three themes which have dominated small cap strategies. That is, stocks exposed to the Chinese ‘Daigou’ distribution channel, resource stocks exposed to the emerging battery technology theme, and emerging technology companies.

Small cap darlings have been driving performance (FY19 P/E ratio)

Source: Lonsec, Bloomberg

Looking at the largest 20 shares in the small cap index, eleven had a P/E ratio of over 20x and the average P/E of this group was 30x. Among these were a number of market darlings which have delivered strong returns for investors but due to their popularity saw their valuations pushed ever higher. Prior to the start of Lonsec’s annual review of small cap managers, the FY19 P/E ratio of the ASX Small Ordinaries Index was in excess of 19x versus the historical average of around 13x, indicating a large part of the index gains have come from multiple expansion more so than earnings growth.

Small cap sectors have seen significant divergence
(period returns to end November 2018)

Source: Lonsec, FE

Most recently, those fund managers that have held up better than the peer group average (in the face of significant declines in share markets) have done so due to a significantly higher cash weighting in their portfolios. Managers generally anticipate volatility in equity markets will remain elevated in the medium term. As the price of risk is reassessed, valuations remain lofty and earnings growth remains elusive.

But all is not lost. Managers continue to see a broad range of attractive investments across the smaller company sector, with funds able to provide exposure to a number of niche opportunities and fast growing emerging trends, including the impact of growth in IT spending and the transition to cloud based computing, as well as quality domestic franchises expanding into larger global markets.

Add to this the disruption we have seen in financials as new business models compete with established players, along with the recovery in certain commodity markets from cyclically depressed levels, and there still plenty of themes to capture investors’ attention. The rally in small caps may be over for now, but opportunities remain for those managers who can identify the emerging trends.

To find out more about Lonsec’s Australian equities research, sign up for a free research trial or get in touch with our client services team.

IMPORTANT NOTICE: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL 421 445 (Lonsec).

Please read the following before making any investment decision about any financial product mentioned in this document.

Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation to update this document after the date of publication. Past performance is not a reliable indicator of future performance. Any express or implied recommendation, rating, or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general advice” (as defined in the Corporations Act (C’th)) and based solely on consideration of data or the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person.

Warnings and Disclosure in relation to particular products: If our general advice relates to the acquisition or possible acquisition or disposal or possible disposal of particular classes of assets or financial product(s), before making any decision the reader should obtain and consider more information, including the Investment Statement or Product Disclosure Statement and, where relevant, refer to Lonsec’s full research report for each financial product, including the disclosure notice. The reader must also consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, hold, redeem or sell any financial product(s), and the reader should seek independent financial advice before investing in any financial product. Lonsec may receive a fee from Fund Manager or Product Issuer (s) for reviewing and rating individual financial product(s), using comprehensive and objective criteria. Lonsec may also receive fees from the Fund Manager or Financial Product Issuer (s) for subscribing to investment research content and services provided by Lonsec.

Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the information.

Copyright © 2018 Lonsec Research Pty Ltd, ABN 11 151 658 561, AFSL 421 445. All rights reserved. Read our Privacy Policy here.

2018 was marked by a notable increase in market volatility and a decline in global economic growth from its previous high in the first part of the year. This has been reflected in a pull-back in most equity markets and an increase in expected volatility.

This article is intended for licensed financial advisers only and is not intended for use by retail investors.

Welcome back and we wish you all a healthy and prosperous 2019.

2018 was marked by a notable increase in market volatility and a decline in global economic growth from its previous high in the first part of the year. This has been reflected in a pull-back in most equity markets and an increase in expected volatility.

The increase in volatility has been the culmination of a number of factors including:

  • increased geopolitical tensions, primarily in the form of protectionist measures by the US with its key economic partners China and Europe,
  • a normalisation of interest rates in the US,
  • tightening of liquidity, and
  • idiosyncratic issues impacting specific stocks and sectors such as the technology sector, which was a key growth engine of the US market.

On the home front we have seen house prices decline causing concerns on the possible impact on the broader economy.

The current environment comes off a period of extraordinary market returns supported by accommodative monetary policy, liquidity being pumped into global markets via quantitative easing as well as some sugar hits in the form of corporate tax cuts in the US. We believe that we are in the late stages of the cycle. However, late cycles can vary in their duration. According to analysis conducted by Heuristics Analytics, who input into our Lonsec investment committee process, late cycles have lasted as long as five years in the 1960s when productivity was strong and wages and inflation were low, and more than three years in the 1990s. Beyond these long late cycle environments typically late cycles have lasted for 12 to 18 months.

While we see economic and liquidity conditions becoming more challenging we do not think that we have reached the tipping point in terms of the economic cycle. We are also beginning to see some value appear in markets however we think it is too early to allocate to some of these areas at this point. From a portfolio perspective we have maintained our active tilt to alternative assets with a neutral allocation to equities. The exposure to alternative asset is intended to provide additional diversification where volatility has increased in traditional asset classes.

From an investment selection perspective we continue to look to further diversify our portfolios. Within our direct equity portfolios, we are seeking opportunities to diversify stock and sector exposure, recognising the concentrated nature of the Australian equity market. We have also taken advantage of the increased market volatility to invest in what we believe to be quality companies at attractive prices. An example of this has been the allocation to Costa Group, which we invested into after the stock retreated by approximately 30%. Within our multi-asset portfolios we have been focusing on fund managers with active strategies that we believe will be able to take advantage of the increased market dispersion.

By Lukasz de Pourbaix

This article has been prepared for licensed financial advisers only. It is not intended for use by retail clients (as defined in the Corporations Act 2001) or any other persons. This information is directed to and prepared for Australian residents only. This information may constitute general advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs.

The housing market continues to dominate the headlines in Australia. Housing prices fell 4.8% in 2018 according to CoreLogic, driven by sharp falls in the Sydney (-8.9%) and Melbourne (-7.0%) markets. Price falls are now also evident in the middle and lower segments of the market, while auction clearance rates and volumes are trending lower. Lending to investors and ‘upgraders’ has slumped as banks tighten lending criteria. Suggestions that a potential credit crunch will lead to further significant declines in house prices has some commentators projecting that Australia’s record 27-year run without a recession is coming to an end.

Monthly % falls in Sydney and Melbourne house prices

Source: CoreLogic

The RBA sees the correction in house prices and the tightening of lending conditions as a healthy development, reducing financial stability risks and potentially prolonging the cycle. Investor loans have decreased, interest only loans have declined, and loan-to-value ratios are lower. The RBA recognises, however, that the high levels of household debt and falling house prices could amplify a downturn in the case of an external shock to growth.

IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd (Lonsec), ACN 608 837 583, a corporate authorised representative (CAR number 1236821) of Lonsec Research Pty Ltd, ABN 11 151 658 561, AFSL 421 445.

Please read the following before making any investment decision about any financial product mentioned in this document.

Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation to update this document after the date of publication. Past performance is not a reliable indicator of future performance. Any express or implied recommendation, rating, or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general advice” (as defined in the Corporations Act (C’th)) and based solely on consideration of data or the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person.

Warnings and Disclosure in relation to particular products: If our general advice relates to the acquisition or possible acquisition or disposal or possible disposal of particular classes of assets or financial product(s), before making any decision the reader should obtain and consider more information, including the Investment Statement or Product Disclosure Statement and, where relevant, refer to Lonsec’s full research report for each financial product, including the disclosure notice. The reader must also consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, hold, redeem or sell any financial product(s), and the reader should seek independent financial advice before investing in any financial product. Lonsec may receive a fee from Fund Manager or Product Issuer (s) for reviewing and rating individual financial product(s), using comprehensive and objective criteria. Lonsec may also receive fees from the Fund Manager or Financial Product Issuer (s) for subscribing to investment research content and services provided by Lonsec.

Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the information.

Copyright © 2018 Lonsec Investment Solutions Pty Ltd, ACN 608 837 583, a corporate authorised representative (CAR number 1236821) of Lonsec Research Pty Ltd, ABN 11 151 658 561, AFSL 421 445. All rights reserved.

With 2019 upon us, SuperRatings shares some tips that will help get your superannuation off to a flying start in the new year. Here are the six questions we think every member should ask themselves if they want to get the most value out of their retirement savings. If you’re looking for a new year’s resolution that will have a real impact on your future, getting your super in shape should be high up on your list.

Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to “General Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the merits of the superannuation or pension financial product(s) alone, without taking into account the objectives, financial situation or particular needs (‘financial circumstances’) of any particular person. Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances, or should seek independent financial advice on its appropriateness.

If SuperRatings advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Product Disclosure Statement for each superannuation or pension financial product before making any decision about whether to acquire a financial product. SuperRatings’ research process relies upon the participation of the superannuation fund or product issuer(s). Should the superannuation fund or product issuer(s) no longer be an active participant in SuperRatings research process, SuperRatings reserves the right to withdraw the rating and document at any time and discontinue future coverage of the superannuation and pension financial product(s).

Copyright © 2018 SuperRatings Pty Ltd (ABN 95 100 192 283 AFSL No. 311880 (SuperRatings)).

This media release is subject to the copyright of SuperRatings. Except for the temporary copy held in a computer’s cache and a single permanent copy for your personal reference or other than as permitted under the Copyright Act 1968 (Cth.), no part of this media release may, in any form or by any means (electronic, mechanical, micro-copying, photocopying, recording or otherwise), be reproduced, stored or transmitted without the prior written permission of SuperRatings. This media release may also contain third party supplied material that is subject to copyright. Any such material is the intellectual property of that third party or its content providers. The same restrictions applying above to SuperRatings copyrighted material, applies to such third party content.

Important information: Any express or implied rating or advice is limited to general advice, it doesn’t consider any personal needs, goals or objectives.  Before making any decision about financial products, consider whether it is personally appropriate for you in light of your personal circumstances. Obtain and consider the Product Disclosure Statement for each financial product and seek professional personal advice before making any decisions regarding a financial product.