News & Insights Archives - Page 27 of 34

Should retirees fear an RBA quantitative easing program?

The possibility of the RBA undertaking a quantitative easing program could have major ramifications for retirees, who may be forced to increase their exposure to equities if interest rates continue to spiral downwards.
It’s been an eventful month for markets – the Coalition won the federal election in a surprise upset, the RBA cut rates to record lows, and US-China trade tensions re-emerged with a vengeance. Domestic markets reacted positively to the Coalition win, with some of the pessimism surrounding the housing market subsiding. The RBA’s rate cut was not unexpected, with most analysts having already priced in the cut and potentially another.

Interestingly, the market narrative has turned to the possibility of the RBA undertaking a quantitative easing (QE) program domestically, similar to what we have seen in Europe and the US. This would involve the RBA buying government and corporate bonds using cash on its balance sheet, effectively flooding the market with liquidity while keeping rates low. Should rates continue their downward trajectory and QE become a reality, it may force investors into equities, providing a tailwind for markets as we have seen in the US and Europe in recent years. This is particularly relevant for retirees, who may be increasingly forced to lift their exposure to Australian equities as a source of income.

While it’s difficult to know exactly what the relationship is between large-scale asset purchases and the stock market, evidence in the US and Europe suggests there is a positive correlation. The launch of QE in the US resulted in significant share market gains, in part because the market anticipated an improvement in macroeconomic conditions. Proponents of QE tend to be critical of the US Fed for undermining the effectives of the program through its forward guidance (which made the program less open-ended by emphasising the eventual exit from QE), as well as not going hard enough for long enough. Critics of QE claim that large-scale asset purchases inflate asset values, which can lead to a stock market bubble and greater inequality. Yet others believe that monetary policy is entirely fruitless, and fiscal policy is the only effective mechanism.

The precise effect of QE is difficult to determine. While some claim it has been responsible for lowering interest rates, the evidence suggests it might in fact have led to an increase in yields during those periods where it was in effect (see chart below). Bond purchases raise the price of these assets, resulting in a fall in yields, which negatively impacts the return of safe assets like Treasuries, high-quality corporate debt, and cash. This is bad news for retirees who rely on these safe assets to preserve capital or generate a secure income stream. However, if QE manages to raise expectations for long-term growth, this would lead to a rise in longer-term yields, reflecting the prospect for higher growth and inflation.

QE episodes in the US have coincided with a rise in the 10-year yield

Source: FRED, Lonsec

How seriously the RBA is considering QE is unknown, but given the challenges facing conventional monetary policy with interest rates nearing zero, it must be something the bank is thinking about. If the RBA does go down the QE path, it will be difficult to satisfy the critics on both sides of the QE divide. According to economist Stephen Kirchner, the US experience with QE suggests the RBA would need to buy securities equivalent to around 1.5% of GDP to achieve the same effect as 25 basis point reduction in the official cash rate. This would represent a QE program of significant scale for Australia.

If retirees are worried about QE, the RBA is likely just as reluctant to pull the trigger. The not-so-subtle comments from Phillip Lowe and others about the need for structural reform should be heeded by Canberra to avoid placing too great a burden on monetary policy. This is critical given the challenges facing the global economy, including the current trade tensions between the US and China, which continue to adversely impact markets and are contributing to bouts of volatility. The longer the trade wars drag on, the higher the probability that we will see a longer-term impact on global growth.

This is a challenging period for investors, where factors other than fundamentals are having a material impact on the trajectory of markets. In such an environment, we believe selective valuation opportunities will present themselves for long-term investors, however ensuring that your portfolio is diversified will be very important in navigating an increasingly volatile market environment. It’s also a timely reminder that complex macro issues can play a large role in determining the right asset allocation in retirement portfolios, which requires an experienced investment committee with a range of skills and knowledge. This is especially important when it comes to the construction of retirement portfolios, where complex macro issues can have dynamic effects on outcomes.

June 21, 2019/by Lukasz de Pourbaix

Super funds look to move past forgettable financial year

A world-beating performance from Australian shares has been overshadowed by the re-emergence of geopolitical uncertainty and a wave of risk aversion in global markets, leading to softer performance for super funds in the final stretch of the financial year.

According to estimates from leading superannuation research house SuperRatings, the typical balanced option return was -0.7% in May as funds were dragged down by falls in international shares triggered by the re-emergence of the US-China trade conflict and uncertainty surrounding central bank policy.

The bright side has been the resilience of Australian shares and property, both of which saw a brief boost from the Coalition’s surprise election win, but this was not enough to save super funds from a month of negative performance.

Markets have since recovered following May’s weakness, but members should not expect a bumper end to the financial year. The year-to-date return is sitting at 5.1% for the median balanced option, which is below the 8.5% per annum return achieved over the past ten years.

Estimated median Balanced option returns to 31 May 2019

Period	Accumulation returns	Pension returns
Month of May 2019	-0.7%	-0.7%
Financial year return to 31 May 2019	5.1%	5.8%
Rolling 1-year return to 31 May 2019	4.8%	7.3%
Rolling 3-year return to 31 May 2019	6.8%	8.1%
Rolling 5-year return to 31 May 2019	6.6%	7.6%
Rolling 7-year return to 31 May 2019	8.7%	10.5%
Rolling 10-year return to 31 May 2019	8.5%	9.7%
Rolling 15-year return to 31 May 2019	7.5%	8.1%
Rolling 20-year return to 31 May 2019	6.8%	–

Interim results only. Median Balanced Option refers to ‘Balanced’ options with exposure to growth style assets of between 60% and 76%. Approximately 60% to 70% of Australians in our major funds are invested in their fund’s default investment option, which in most cases is the balanced investment option. Returns are net of investment fees, tax and implicit asset-based administration fees.

Members in the median growth option, which includes higher weightings to growth assets like Australian and overseas shares, suffered a larger fall of 1.2% in May, while the median International Shares option fell 4.0% and the median Australian Shares option held firm, returning 1.4%.

“It’s been a disappointing end to the financial year for super, but long-term performance remains robust,” said SuperRatings Executive Director Kirby Rappell. “The median balanced option return over the past 10 years is around 8.5%, indicating that super has delivered solid returns even in a low interest rate environment.”

Downside risks to the Australian economy, including weak inflation, falling home prices, and tighter credit conditions are taking their toll on consumer confidence, while the geopolitical risks in the form of US-China trade negotiations have also contributed to market volatility.

SuperRatings Index return estimates to 31 May 2019

Source: SuperRatings

However, the Australian market has held up reasonably well over the financial year to date, with the S&P/ASX 200 Index returning 7.6% so far to the end of May, outperforming global share performance of 6.3% measured by the MSCI World Ex-Australia Index. Listed property has been the leading asset class so far this financial year, with the S&P/ASX 200 A-REIT Index returning 14.5%. Both property and shares saw a modest boost in May with the negative gearing debate now effectively put to bed following the federal election.

“Labor’s negative gearing proposals were thought to favour developers by limiting tax concessions to new stock, but so far the improvement in sentiment has outweighed any negative impact, which may give some super funds a temporary boost to their property portfolios,” said Mr Rappell.

Long-term super performance steady

The negative performance for super funds in May has been reflected in a slight fall in the Balanced and Growth option indices for the month but long-term performance remains strong. According to SuperRatings’ data, $100,000 invested in the median Balanced option in May 2009 is estimated to have reached an accumulated $217,391 today.

The median Growth option is estimated to be worth $230,873 over the same period, while $100,000 invested in domestic and international shares ten-years ago is now worth $244,382 and $258,181 respectively. In contrast, $100,000 invested in the median Cash option ten years ago would only be worth $129,748.

Growth in $100,000 invested over 10 years to 31 May 2019

Source: SuperRatings

Release ends

June 17, 2019/by Kirby Rappell

News & Insights

Trade fears reignited

Markets continued their upward trajectory during April which has largely continued unabated since the so called ‘Powell Put’ earlier in the year, with the US Fed chair signalling a pause to further rate hikes. However, market volatility has picked up as the US-China ‘trade war’ has been reignited and the US seeks to precent Chinese telecom manufacturer Huawei from accessing US suppliers.

At the recent Lonsec Symposium, geopolitics was a key topic of discussion and specifically what it means for investors. While we would argue that basing investment decisions on geopolitical issues is problematic, understanding the broader implications of such issues is important, particularly if they have the potential to impact global growth. At a minimum it creates market volatility and, as evident in recent years, we believe that we are experiencing more frequent bouts of volatility attributed to geopolitical issues.

From an investment perspective, while we believe that most markets look to be priced at the fair to expensive range, pockets of relative value are appearing. An example of this is our current active tilt to emerging markets versus developed markets. We also continue to believe that alternative investments have a role to play within a portfolio as a source of diversification. While some parts of the broad alternatives sector have been challenged in terms of performance, if we head into a different market environment, accessing alternative sources of risk and return will become increasingly important. We have been also seeking to further diversify our Multi-Asset portfolio exposure to value style equities via active managed funds. While value has materially underperformed growth in recent years, the addition of a specialist value manager further diversifies the portfolios and, given that we believe that we are getting closer to the cycle, we will see more value opportunities appear.

May 27, 2019/by Lukasz de Pourbaix

News & Insights

WAAAX, FAANG, and the market’s bucket mentality

Behavioural finance tells us that herd behaviour is hard wired into our brains. As investors we don’t want to miss out on opportunities, especially when we see others taking advantage of them. Herd behaviour and a fear of missing out is what drives asset bubbles, which means as investors we need to be on guard to ensure our emotions take a back seat when we make buy and sell decisions.

Investors are familiar with the FAANG stocks (for the uninitiated FAANG stands for Facebook, Apple, Amazon, Netflix and Google). Some of them are among the highest valued stocks in the world (Apple became the first company in the world to reach a market cap of $1 trillion but has since fallen below this level due to falling iPhone sales). In Australia we have our own acronymised technology cohort called the WAAAX stocks, which include WiseTech, Altium, Appen, Afterpay and Xero.

While hardly on par with the US tech giants in terms of size, these businesses have managed to capture people’s attention and imagination in a similar way. But like the FAANGs, the WAAAXs are certainly not a homogenous group. While each has seen eyewatering growth in recent years, they are essentially very different businesses with different growth drivers and risks.

WAAAXing fortunes

It’s sometimes easy to forget how parochial the Australian share market can be. The WAAAX phenomenon is undoubtedly a good thing, especially given that the ASX remains dominated by banks and miners. Australia’s tech sector may still be small, but its growth is helping to provide some much-needed diversification. While only 2.4% of the ASX 200’s total market cap, there are now 15 names in the tech sector with a combined market cap of over $75 billion.

WAAAX share price returns (12 months to end March 2019)

Source: FE, Lonsec

When you look at the stellar growth of these shares, it’s easy to see why they’re considered the Australian FAANGs. But how useful is it to group shares together in this way? Certainly in the US, the FAANGs don’t always behave as a group. While the return of risk appetite contributed to their strong performance in the March quarter, most were unable to make up for earlier losses due to the ongoing impact of idiosyncratic issues plaguing each stock.

Facebook continues to be scrutinised for their lax privacy policies, Amazon is facing a challenging earnings outlook, Apple’s revenue and product launches have fallen short of expectations, Netflix faces increasing pressure from new competitors, and Alphabet (Google) received another fine from the European Union for violating antitrust laws.

In Australia, the diversity of the WAAAX stocks poses a similar challenge for investors. To give a sense of how different these businesses are, let’s have a quick look at two of them: Appen and Afterpay. These are among the most popular shares over the past two years, but they have fundamentally different core businesses. For Appen, revenue is driven by the growth in AI and machine learning solutions, with Appen providing quality datasets that help make these products smarter. In contrast, Afterpay’s extraordinary growth has been due to the company’s ability to take advantage of a potential step change in consumer behaviour, with a younger generation of consumers favouring digital payments and more flexible spending.

Source: Lonsec

While these stocks are different, there is no denying the extraordinary growth of the WAAAX group, which is indicative of some of the disruptive trends taking place in the digital world. This is reflected in the sales and EBITDA growth of Afterpay and Appen, which becomes starker when compared to other popular sector peers Seek and Carsales. Clearly there are good reasons to be optimistic, but the question is how best to take advantage of these opportunities in your broader portfolio.

Source: FE, Lonsec

Using WAAAX shares in your portfolio – key things to note

When incorporating the WAAAX shares in your portfolio, the most important thing to remember is that they are not homogenous, which means you shouldn’t group them together. While these shares may grow together in a risk on environment, each face their own set of risks and opportunities which could see results diverge significantly.

The second thing to note is that these are capital hungry businesses with a mandate to grow, which means you should not expect a steady stream of hefty dividends. Because they are long duration assets, they will also be more sensitive to movements in interest rates.

Thirdly, while each of these stocks appears to enjoy significant upside, there are always risks around valuation and potential bubble-like behaviour. Valuing things like network effects can be difficult, while forecasting consumer trends and the role of AI require a host of assumptions to hold true. When it comes to technology, there is usually a significant degree of uncertainty involved, not to mention the regulatory risks faced by successful disruptors.

Our view of the WAAAX stocks is that you want to take advantage of the growth opportunities they represent, but don’t fall into the trap of bucketing them together. Understand the drivers of each business and let the winners run, but be sure to carefully monitor the market and regulatory risks of each business.

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.

May 27, 2019/by Peter Green

News & Insights

Cracking the advice gap

When industry funds first came on the scene in the 1990s, the member contribution rate was three percent of wages and there was one investment strategy that applied for all members. The last thing trustees were thinking about was the need to cater to the increasingly complex advice needs of their members before and after retirement. Fast forward to today and the situation is very different. As fund membership grows and average account balances rise, the need to support advice is becoming critical.

To get a sense of how significant the advice challenge is across the whole super industry, consider how membership has changed over the past decade. As the chart below shows, there has been a steady decline in the proportion of benefits accruing to members under 65, while the proportion accruing to older members, including those over retirement age, has been rising.

Proportion of member benefits by age group – all fund types

Source: SuperRatings

For industry funds this means there is a need to adapt to the increasingly sophisticated needs of their members in retirement. Industry funds are now keeping more post-retirement members in their fund, rather than seeing them shift to a retail fund or SMSF. The larger the member account, the more likely the member is to consider leaving their money in the fund during the retirement phase. While the average account balance across all industry funds is not incredibly high, there is significant variation across individual funds.

Average accounts – industry funds 2018

Source: SuperRatings

In the 70-74 age bracket, the average account balance is well under $200,000, but there are funds out there with significantly higher average balances, with the largest ranging as high as $600,000. This gives rise to a range of different product and advice needs depending on the member’s situation. For members with relatively low account balances, the age pension can be used to manage investment risk. For members with larger account balances, their advice requirements will be closer to those in an SMSF.

The reality is that member advice needs are moving well beyond the capacity of the inhouse advice provided by the funds themselves. To meet the advice challenge, funds are increasingly turning to third party advice, but there is still some reluctance to support members in accessing advice outside the fund.

In the past there has 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.

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 to ensure their advice is in their clients’ best interest. The limitations of many advice businesses have been laid bare by the Royal Commission and there will likely be significant turnover in coming years, with more advisers distancing themselves from aligned groups. This provides an opportunity to support and build traction within the new advice landscape.

Many funds are already recognising this opportunity, but generally industry funds still have a way to go in embracing third party advice. According to SuperRatings’ data, only 59% 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 46% compared to 68% of Retail Master Trusts (RMTs) – which is essential for enabling advisers to provide a competitive service.

Industry fund support for third party advisers is lagging

Third party adviser servicing	Not for profit	Retail master trust	All funds
Formal relationships	59%	84%	69%
Third party adviser panel	15%	15%	15%
Dedicated servicing team	46%	68%	55%
Adviser portal	12%	57%	29%
Ability to transact	15%	73%	38%
Access to client reports	38%	92%	60%
Facilition of fee payments	67%	92%	77%
Provision of data feeds	8%	81%	37%

Source: SuperRatings

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 eye, they can’t afford to allow their differences to get in the way of the vast opportunity staring them in face.

May 27, 2019/by Bill Buttler

News & Insights

Most retirees can’t define risk, but they know it when they see it

When you ask clients how they think about risk in retirement, you are unlikely to get a textbook response. Instead, you’ll probably get a list of their deepest fears: running out of money, leaving their children with nothing, living too long, retiring during the next GFC, or not having enough cash on hand to pay for necessities.

When we define investment risks, we don’t define them in these terms, but these are the eventualities we’re attempting to guard against when we construct retirement portfolios. There are any number of objectives your client might be aiming to achieve, and each will come with their own set of risks.

Is it the chance of your investments going down? Is it asset class volatility? Is it not achieving the returns you need to meet your required income? In the end, risk is getting your investment strategy wrong by not understanding the relationship between your client’s competing objectives and associated risks.

For this reason, we believe there is a need to focus on retirement investing as a separate strategy. Even moving from the accumulation to the drawdown phase means you are managing a different set of trade-offs. The role of the financial adviser is not to eliminate the existence of these trade-offs but to manage them prudently in line with their client’s preferences and risk tolerance.

Source: Lonsec

Each of these competing objectives requires different investment strategies to achieve. For example, a rental property will provide the most consistent income but at the expense of liquidity. If we’re worried about market volatility we might be tempted to move to a more defensive asset allocation, but by foregoing growth we increase the chance of running out of money. In short, clients will always be exposed to various types of risk.

The problem with determining a client’s most important objectives is that often they are all equally important. Consider the following examples:

Paying the bills

Certainty of income is usually the key concern for retirees, but don’t discount the others. When you ask advice clients what their most important objectives are, the most common answers are things like relaxation, travel, family, and leisure. These all have a price associated with them. Liquidity is also a major consideration for retirees. Not having enough cash on hand for things like motor vehicle repairs and other essential spending can result in significant stress and prevent retirees from enjoying the things they were looking forward to after their working life.

Leaving a legacy

Most people wish to enjoy a comfortable life in retirement but also make sure their children and loved ones are left with some extra wealth. A 2017 ASFA study found that households are retiring with an average super balance of $337,000 (the gender breakdown is $270,000 for men and $157,000 for women). Leaving a meaningful inheritance or bequest would mean there is barely enough left over to support their own needs.

Maintaining purchasing power

As any basic economic textbook will tell you, different asset classes will perform better or worse in different inflationary environments. Inflation of 2% per year will erode more than half of your purchasing power over 35 years, which is the equivalent of a single GFC event. Managing inflation is just as important as managing sequencing risk or the risk of a large drawdown, even in periods where inflation is relatively low.

This adds an additional consideration to the construction of retirement portfolios. Real assets are a proven way of managing inflation risk, while fixed income is potentially the worst asset class for this purpose, with the exception of products like inflation-linked bonds.

Different assets perform differently depending on the inflationary environment

Source: Lonsec

Guarding against a crisis

If successfully timing the market seems more like luck than skill, then timing your retirement is no different. While market bumps are nothing to be feared when you’re building your wealth, a sudden major event like the GFC can spell disaster for those entering the decumulation phase. Sequencing risk refers to the order in which investors experience returns, and it can matter a great deal for retirement. Withdrawals during a falling market have the potential to accelerate the depletion of your asset base.

To see how this works, take a look at the returns from Lonsec’s balanced portfolio over the last 20 years. If you reverse the order of returns, there isn’t really much difference for those in the accumulation phase – both sequences deliver the exact same results over the long term. But for those drawing down on their investments, the reversed sequence results in the retiree running out of money much sooner.

The sequence of returns can mean the difference between having enough cash and running out

Source: Lonsec

Addressing sequencing risk requires advisers to look at a wider range of solutions, including variable beta or absolute return strategies, and even some more illiquid options to reduce volatility and manage drawdowns. Once again, there is a trade-off involved in making these decisions.

The reason we struggle to precisely define risk is that there simply isn’t a single source of risk that can be effectively managed or reduced to zero. Managing risk means understanding the often complex relationships between different retirement objectives. Effectively managing these relationships is the purpose of your investment strategy.

When we talk about risk at Lonsec in a portfolio context, what we are really talking about is the risk that the overall investment strategy is wrong or is not properly tailored to the client’s needs and preferences. This informs the approach we take to the management of our model portfolios as well as the selection of individual products to achieve a particular objective. We think this is the proper way to think about risk without being constrained by a single textbook definition, and it is the way in which advice clients intuitively understand risk as well.

May 23, 2019/by Veronica Klaus

News & Insights

2019 Fund Manager of the Year Awards

Last week, we partnered with Money Management to recognise the best performing funds at the annual Money Management and Lonsec Fund Manager of the Year Awards Dinner. A full list of winners can be found below.

Congratulations to all of our award winners and nominees!

Category	Winner
Australian Large Cap Equities	AB Managed Volatility Equities Fund
Australian Small Cap Equities	Perennial Value Microcap Opportunities Trust
Global Equities	Generation Wholesale Global Share Fund
Global Emerging Market Equities	Fidelity China Fund
Long/Short Equities	Solaris Australian Equity Long Short Fund
Responsible Investments	Australian Ethical Australian Shares Fund (Wholesale)
Australian Property Securities	Pendal Property Securities Fund
Global Property Securities	Quay Global Real Estate Fund
Infrastructure Securities	Magellan Infrastructure Fund
Direct Property	Australian Unity Retail Property Fund
Australian Fixed Income	Janus Henderson Australian Fixed Interest Fund
Global Fixed Income	Colchester Global Government Bond Fund Class I
Alternative Strategies	Partners Group Global Value Fund (AUD) – Wholesale
Multi-Asset	BMO Pyrford Global Absolute Return
ETF Provider	Van Eck
SMA Provider	AB Concentrated Global Growth Equities Portfolio
Listed Products (LICs & LITs)	Australian Foundation Investment Company Limited
Retirement and Income Focussed	Legg Mason Martin Currie Real Income Fund
Emerging Manager	Lennox Australian Small Companies Fund
Fund Manager of the Year	AllianceBernstein

May 21, 2019/by Libby Newman

Media releases, News & Insights

Lonsec helps advisers tackle conflicted advice

Leading research house and managed account provider Lonsec will work with financial advisers seeking to transition from conflicted advice models and introduce a greater degree of independence in their investment decisions.

Lonsec is offering to acquire in-house managed portfolios from advice licensees to enable them to take advantage of best practice governance principles and Lonsec’s experienced team of portfolio construction experts.

With a shift currently taking place in the advice industry in the wake of the Royal Commission into Financial Services, Lonsec said advisers are acutely aware of the need to present a professional, conflict-free advice environment for their clients.

“Advice models have come under a great deal of scrutiny by the Royal Commission as well as the regulators and the community,” said Lonsec CEO Charlie Haynes.

“The Royal Commission may have stopped short of a ban on vertically integrated or conflicted financial advice, but advisers know they need to start moving quickly in this direction to meet community expectations.”

While it is becoming increasingly unpalatable for licensees or advisers to charge portfolio management fees for in-house managed accounts, advisers are also cognisant of regulatory developments.

An empowered ASIC is investigating how platform providers ensure the integrity of managed accounts constructed by advice licensees who might lack the expertise or resources to act as specialist investment managers.

For many advisers, the question is how best to manage conflicts, either by outsourcing the portfolio construction process or introducing a greater degree of independence in their investment decisions.

Lonsec is proposing to acquire the investment management rights from existing managed account providers, enabling them to focus on the provision of advice without conflict.

Licensees have the flexibility to retain their existing branding, investment mandate and platform, or transition to Lonsec’s own professionally managed portfolios incorporating best ideas and insights from Australia’s leading investment product research house.

“An outsourced managed account solution is becoming increasingly popular, not just in order to reduce conflicts but to allow advisers to focus on their clients’ needs and aspirations while leaving the investment process to specialised portfolio managers,” said Mr Haynes.

May 6, 2019/by Gordon Toy

Lonsec Retirement Perspectives, Media releases, News & Insights

Lonsec’s Retire program to focus on helping advisers withstand the coming retirement storm

With Australia’s economic expansion under threat, house prices falling, and a wave of people set to retire over the next decade, financial advisers are under pressure to provide advice and solutions that can withstand Australia’s future retirement challenges.

Lonsec’s Retire program addresses the growing need for the financial services industry to work together to come up with those solutions and strategies.

Lonsec has been running its successful Retire program for more than five years, and it continues to go from strength to strength. The schedule of content and events planned for the next 12 months is the largest yet, with nine Retire Partners now on board to deliver in-depth retirement insights, including:

Alliance Bernstein	Fidelity	Legg Mason
Allianz Retire+	Invesco	Pendal
Challenger	Investors Mutual	Talaria

Lonsec’s Retire Partners will be providing a wealth of content to help advisers understand and deal with a range of issues faced by advisers and their clients.

The program will really kick off on May 7^th with the major Lonsec Symposium event at the Westin, Sydney. With more than 600 advisers and wealth managers already registered, along with an impressive line-up of high-profile speakers and industry leaders, this is a must-attend event for all retirement professionals.

April 30, 2019/by Rob Hardy

News & Insights

How Australian listed property defied the odds to become the best performing asset class

Mention the property market to Australian investors and the first thing they probably think of is the collapse in residential property values. These price falls are the result of a number of factors, some of which have also negatively affected Australian listed property (or A-REITs), while themes such as low wages growth and higher household indebtedness have had a significant impact on retail businesses and their landlords. The rise of online juggernauts like Amazon have further added to the pressure. But despite the challenges, listed property has held up remarkably well as a diversified source of income and capital growth.

The S&P/ASX 300 A-REIT index overall has delivered an impressive 26% return over the year to March, outperforming local and global shares. With retail assets representing almost 46% of the index, the underperformance of this sector is certainly more pronounced. With retail sales growth currently around 3.0% per annum—well below peak years over the last decade of over 5.6% and the average 3.6%—this is translating into weaker rental growth and higher capital expenditure to improve patronage at shopping centres. In general, the super-regional centres will continue to adapt well and neighbourhood (food-based) centres are also reasonably placed, while it is the smaller shopping centres and retail strips that are most vulnerable.

But while retail has struggled, other sectors have stepped up. Leading the way in terms of A-REIT earnings has been the diversified and industrial REITs, particularly those with funds management businesses. Charter Hall Group (+38% for the March quarter) and Amazon’s landlord Goodman Group (+26%) came out on top following similar gains over calendar year 2018. Lonsec notes that the elevated earnings of funds management (boosted by performance fees from cyclical high returns) and development activities can disappear when the cycle turns, as can the premium ratings for such stocks.

Nevertheless, Australian commercial property is being underpinned by a growing economy and infrastructure spending is benefiting the Sydney office sector in particular. Income growth of around 5.0% is expected for FY19, however the outlook is for some easing in rental growth (Sydney and Melbourne) with signs of recovery in Brisbane and Perth. Capitalisation rates are now at or below previous cyclical troughs (pricing peaks) and the next supply wave is 18–24 months away (new space predominantly pre-committed).

A-REITs versus shares (growth of $10,000 over five years)

Source: Financial Express, Lonsec

Even those A-REITs with residential exposure are still expecting a better second half of FY19 from previous sales coming through. However, the market is expecting a 10–20% fall in FY20 sales given the soft secondary residential price market, tighter lending, and potential changes to negative gearing for investors should the Labor Party win government at the 18 May federal election.

Nonetheless, Australia remains attractive for international and local investors, with one of the highest REIT market dividend yields of 4.7% and a +2.9% spread to 10-year bonds. The Australian dollar has been relatively steady during the March quarter. Given the recent in rise in A-REIT prices, valuations overall for the sector are around a 10% premium to NAV3 (although the pricing between sectors has retail/residential at a discount and office/industrial at a premium).

A-REIT member price gains (12 months to 31 March 2019)

Source: Bloomberg, Lonsec

Turning to the overseas market and Lonsec has observed some similar themes, but the macro setting has had a major influence, with bond rates continuing to soften in the March quarter and expectations of interest rate rises pushed back. As China-US trade war tensions eased, listed markets recovered from the December quarter pullback and more than made up for the negative returns of calendar year 2018. The discount that listed property markets were trading at has now dissipated and the sector is trading more in line with private market valuations.

The fundamentals in developed property markets remain much the same, with demand from tenants in retail assets the weakest and major retailers sporadically trimming outlet numbers or completely closing down. Investment performance from retail shares continues to lag, especially the industrial and logistics sector, which is attracting investment to improve the supply lines on the back of expanding online channels.

It is yet to be seen whether counter-cyclical investors that are chipping away at the deep value offered by retail property shares (especially the higher quality ones) will reap the benefits of an eventual normalising of relative values. Some fund managers believe there has been a permanent shift in investor valuations towards the industrial/logistics property sector. Lonsec is still of the view that global property markets are in the mature part of the cycle, although the tail end is being extended while inflation and interest rate pressures are kept at bay.

Some investors baulk at the thought of investing in listed property in an environment of rising interest rates, a softening residential housing market, and the rise of competition from the online world. While listed property is traditionally a defensive asset class with a negative correlation to bond yields, the sector has shown it is able to deliver in this environment, and the asset class has remained critical to investor portfolios as a means of achieving diversification and reliable income streams. While some sectors have certainly come under pressure, as a whole listed property has been a truly understated performer.

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

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April 30, 2019/by Kevin Prosser