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Exchange traded products

ETP demand grows, fees stable

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Exchange traded products (ETP) are charging fees disproportionately to the dramatic growth in assets and number of products available, according to Rainmaker data.
Between March 2013 and 2017, ETP funds under management quadrupled from $ 7.2 billion to $ 27.2 billion, while the number of products in the market doubled from 79 to 155.
EPT products have gained sufficient size to counteract the effect of lower fees on the original product and kept the overall weighted Management Expense Ratio (MER) the same, the quarterly ETP report said.
It found BlackRock, Vanguard, State Street, BetaShares, Magellan, Van Eck, Russell and ANZ ETFs comprise 98% of the market and among them, charge a wide range of MER of 0.18% per annum, followed by State Street at 0.25%. Magellan’s weighted MER is six times that of Vanguard’s across three of its actively managed ETPs.
What the data ultimately shows is there “is no correlation between a manager’s ability to gather assets and fees being charged.”
“The largest asset gatherers ran the gamut of fees structures and product types. What this does show, however, is that the Australian EPT market is continuing to evolve into the product offering the associated fee structure,” it said.
In the 12 months to March, ETP FUM rose 28% to $27 billion, with a marked shift to international equities and fixed interest assets classes.
International equity ETPs were the most active during the period with 72 products launched, followed by Australian equities with 46, fixed interest with 17 and commodities with 11.

[via FINANCIAL STANDARD]

How super investment option fees vary

How super investment option fees vary

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Superannuation members who have selected an investment option other than their fund’s balanced option may be paying more in fees than they realise, according to research by Rainmaker.

The Researcher said investment management fees generally account for around half of the total fees paid by members.

However this is based on the average member who remains in the default investment option (around 40%) there is a range of members who elect to choose their own option, and for these members, the investment management fees vary significantly.

A review of the option specific fees across 30,000 individual investment option within Rainmaker superannuation database shows fees varied significantly by asset sector and by type of fund. the analysis also shows the fees for selected options were significantly higher than the fees for the default investment options within workplace funds.

The average investment management fee for workplace super is currently at 0.62%. However, once you step out of the MySuper default options, the comparative investment fee increases meaningfully.

The average fee for a diversified option is 0.84%, over 20 bps above the fee for the workplace default option.

Growth diversified options carry a slightly higher average of 0.87%.

The price of diversified options for retail superannuation funds is on average around 25 bps above diversified options for not-for-profit superannuation funds.

The range of investment fees is wider in respect to asset specific options. While cash and fixed interest options are, on average, below 0.5%, the average fees for equity options are 1.1%. Above these, options for alternative and hedged assets average 1.2% and 1.9% respectively.

[via FINANCIAL STANDARD]

ING Direct FPA

ING DIRECT inks deal with FPA

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ING DIRECT has signed a referral deal with one of Australia’s top financial planning associations that will benefit customers of its Living Super product.

Professional practices which are certified by the Financial Planning Association (FPA) will provide comprehensive financial advice to ING DIRECT Living Super members who ask for it, under a nine month pilot that starts next month.

“We see professional, independent, face-to-face financial advice as increasingly important to our customers in preparing for retirement,” ING DIRECT national partnership manager of residential and wealth, Tim Hewson said.

“In recent years we’ve seen an uptick in super consolidation and switching and increased demand for transparency and control. Australians want to get ahead with their super, which aligns with our proposition about helping our customers to get ahead through value, fairness and transparency.”

FPA chief executive Mark Rantall said that the partnership has been modeled on the one that the association recently signed with Cbus.

“It will help the FPA open more pathways to connect Australians to quality financial advice,” Rantall said.

The deal “strengthens our ties with the superannuation sector and brings us one step closer to achieving the FPA’s vision that through our members, we stand with Australians for a better financial future.”

The first FPA adviser consultation will be at no cost for Living Super customers and only a limited number of places for FPA Professional Practices will be available in the pilot stage.

Initial participation in the pilot referral program will be limited, based on geographic requirements.

via [Financial Standard]

Aussie consumers

Advice beats direct insurance for Aussie consumers

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The majority of Australian consumers prefer to purchase insurance policies through financial advisers rather than directly.

This is the conclusion of Asteron Life’s Attitude to Life Adviser Insights report, which surveyed 1,515 Australians across every state. It found that 90% of respondents found life insurance too complex to navigate on their own, and consequently 65% were purchasing policies through financial advisers.

The report also showed that generation Y consumers are a high growth area for insurance advice; while only 21% in that category said they regularly saw an adviser, the report argued this presented a major opportunity as these consumers grow older and their financial risks increase accordingly.

“As more Australians move online to research and match their needs, there is, and will continue to be a need for personalised and professional advice,” said Asteron Life executive manager Mark Vilo.

“It’s essential for advisers to have an online presence and be seen where your clients are researching. By factoring this into your business strategy and the way you provide your service, you can use the power of the internet to help grow your business.”

He added, “As advice practices wind down for the holiday season there’s an opportunity for a period of reflection and some time to work on the business plan for the year ahead. Many Australians also use this time to reflect on their lives from both a personal and business perspective.

“Understanding the generational needs of your clients will facilitate meaningful conversations around their individual needs. It’s a good idea to segment your client base according to a combination of risk, income, generation and life stage and build this into discussions.”

via [Financial Standard]

Women in super

Women own less than 40% of super assets: ASFA

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The share of superannuation assets held by women has plateaued over the past four years according to Australian Bureau of Statistics (ABS) data exclusively compiled for the Association of Superannuation Funds of Australia (ASFA).

Women now hold 36.4% of Australia’s superannuation assets but this number has remained steady in the four years to financial year 2013/2014. Women have also experienced a lesser percentage increase than men in average balance at the time of retirement, with the average balance for men increasing by 48.5% over the two years to 2013/14 compared to 31.6% for women.

ASFA chief executive Pauline Vamos said this reflected the different work patterns and earnings levels of men and women in their pre-retirement years.

“Even though account balances are increasing overall for women, the statistics still show that men are more likely to have superannuation than women, and also that men on average have a higher account balance. In many cases, broken work patterns and lower average wages still impede on women’s ability to save for retirement,” Vamos said.

Average superannuation balances have increased for both men and women according to the ABS data.

The average balances in 2013/2014 for all persons aged 15 and over were $98,535 for men and $54,916 for women. This is about a 20% increase from two years’ prior where average balances were $82,615 and $44,866 for men and women respectively.

Average superannuation balances at the time of retirement have also increased, to $292,500 for men and $138,150 for women in 2013/2014 from $197,000 and $105,000 respectively in 2011/2012.

Vamos said gender disparity in superannuation balances is now on the agenda, and the next step is for government, employers and individuals to take action.

“ASFA has proposed a number of options for improving the economic security of women in retirement, including raising and broadening the Superannuation Guarantee, retaining the Low Income Superannuation Contribution Scheme and amending annual contribution caps to enable people with broken working patterns to ‘catch up’ their superannuation contributions,” Vamos said.

For individuals in their early 30s, average balances rose to $36,400 for men and $25,550 for women in 2013/2014, almost two times the average balances of $20,000 for men and $14,000 for women two years earlier.

According to the ASFA Retirement Standard, a single person will need a minimum of $545,000 in superannuation at retirement to live a comfortable lifestyle. This is assuming that they will draw down all of their capital over the duration of retirement, and that they will receive a part Age Pension.

Interest Rates

Interest rates, the yield curve and investing

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On the face of it yield curves tell us what interest rates are. They merely represent, after all, the term structure of yields at a given moment of time. But look behind the curtain and they tell a dramatic story of huge forces at work, all the while shaping the investment landscape in new and unusual ways.

With all the media focus on daily moves in sharemarkets or whether reserve banks are about to raise or lower cash rates it is easy to lose sight of the things that speak loudest and clearest. Understanding interest rates and the yield curve is crucial to creating logical and effective investment strategies, yet they remain one of the most misunderstood of investment concepts.

By taking snapshots of the Australian yield curve at different points in time over the past six years we illustrate the different investment environments we have been through and anticipate those to come.

Yield is the income earned for a given price. It is the same concept whether the asset is cash, a fixed coupon bond, equities or property. The yield is meant to compensate the investor for the risk of holding the asset. Therefore, the more risky the asset, the higher the yield should be. The yield curve is the line that plots the interest rates at a point in time of bonds having equal credit quality but different maturity dates. Normally, they are upwards sloping, with cash having the lowest yield and long dated bonds the highest. Cash returns the least because there is no risk of capital loss (although there is a risk of real capital loss, once inflation is taken into account) and it is the definition of liquidity.

Cash is also directly set by the central bank in the service of its economic objectives, such as price stability or economic growth. Longer dated bonds are more risky because their price is more volatile. They may pay a regular guaranteed coupon but the longer they have to go before maturity the more risk there is that things can go wrong. Interest rates generally might rise, meaning that the capital value of the bond will fall. The longer dated it is, the more it would fall. If interest rates fall, the price of the bond will rise. Investors want to be compensated for this uncertainty.

But yield curves in the real world are not all upwards sloping. They come in all shapes and sizes, and they tell a fascinating story. In this story we look at three Australian yield curves, three years apart and see what they tell us about the investment landscape at the time, and of the future.

The following chart shows an upwards sloping yield curve from September 2009. It signals that things are good economically and expectations for the future are high. The cash rate was 3%. The Reserve Bank had been cutting rates from a peak of 7.25% one year before. The stock market was in the midst of a bull run that had just seen it rise 46% int he previous seven months and still had a long way to go. The economy was robust and commodity prices were high. Oil was US$65 a barrel and iron ore was US$80 a metric tonne, up from US$38 five years previously, and the Australian dollar was on the rise, buying US$0.88 at the time.

Australian government bond yield curves

Fast forward three years to 2012 and the yield curve looks completely different. So does the world. In the intervening period the Reserve Bank has increased cash rates to as high as 4.75% in an effort to slow growth and then started reducing rates to 3.5%. The yield on a 15 year government bond has dropped more than two percentage points from 5.5% to 3.3% indicating growth for the future looks subdued. The yield curve is now inverted and negative. The fact that cash rate is higher than longer term government bonds is extremely worrying and clearly signals that the Reserve Bank will continue to cut short term interest rates.

Meanwhile the Australian Dollar has already reached its peak against the US Dollar of US$1.10 but is still worth US$1.04, 18% higher than three years previously. Crude oil has risen 70% in three years and is worth US$112 a barrel. Iron ore, meanwhile, is US$100 a tonne, down around one third in four short months but still massively higher than the long run average.

The Australian sharemarket had risen 10% in four months, and as interest rates are lowered, is about to go on a tear and add about 24% in the next 12 months.

Fast forward again to the end of September 2015. Economic prospects for the country are much more subdued, the sharemarket is down around 13% from its 2015 peak — nearly all of this in the previous two savage months. The cash rate is sitting at 2%, as it has done for five previous months, and doesn’t look like going anywhere except down for the foreseeable future. There doesn’t appear to be much risk of recession, but not a lot of economic growth in the medium future either. The iron ore price has collapsed to US$57 a metric tonne, but remains volatile. The Australian Dollar is now buying US$0.70. The yield curve has had a huge parallel shift down. It’s flat for five years and then slightly positive from 10 to 15 years. The one and three year rates are lower than cash, indicating that expectations for economic growth are very low.

[via Financial Standard]

SMSF direct property investment

SMSF direct property investment jumps 60%

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The value of self-managed super fund (SMSF) investment in residential real estate has jumped 60% in the last four years, according to figures from the Australian Securities and Investments Commission (ASIC).

In its submission to the Parliamentary Inquiry into Home Ownership, the primary financial markets regulator revealed that as of March 2015, the value of residential real property investments through SMSFs was $21.78 billion, or 3.7% of total Australian and overseas assets.

This is up from $19.49 billion, or 3.6% of total Australian and overseas assets, in March 2014.

Albeit from a relatively low base, there has been an increase in the value of investment in residential real property through SMSFs of 11.78% in the 12 months to March 2015, and an increase of 58.69% since March 2011.

While it is feared that SMSFs ability to borrow money to buy residential property via limited recourse borrowing arrangements (LRBAs) is helping to fuel the housing bubble, SMSF Association technical and professional standards director Graeme Colley said it is misleading to use these figures to conclude that SMSF investment in residential property is rapidly expanding.

“I’d be interested to see the whether there’s been much of an increase in the actual numbers of properties that have been bought. The rise in market value of residential property is likely to account for most of the increase,” Mr Colley said.

Colley also accused ASIC of stepping outside of its remit in drawing attention to the numbers.

“ASIC’s responsibility is to look at the provision of advice for SMSFs rather than these sorts of figures. I’m surprised to see them commenting”

The Financial System Inquiry (FSI) has recommended banning LRBAs, a move which was drawn criticism from industry quarters.

The Association of Financial Advisers dubbed a potential ban “draconian” at the SMSF Association Annual Conference back in February.

At the same conference, AMP SMSF head of policy Peter Burgess said: “So few funds use LRBAs, the effect is immaterial. Any problems should be addressed with legislation, and the effects measured before we scrap them off hand.”

[via Financial Standard]

Bond investors

Bond investors warned not to overlook

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While most fixed income investors recognise the need to take a more flexible approach to finding return in a threatening interest rate environment, T. Rowe Price head of international fixed income Arif Husain believes that most investors are overlooking fixed income’s role in protecting portfolios from equity market shocks.

With record low interest rates and the 30-year bond market bull rally coming to a close, returns in fixed income markets are becoming increasingly hard to find. That is why many fund managers have successfully marketed so-called unconstrained bond funds which do away with traditional benchmarks and are instead free to use any market, any security, and any means to find value.

But while using currency markets, negative duration, derivatives and so forth to achieve higher returns is all very well, it only deals with one part of the fixed income story.

Speaking to Financial Standard, Husain said: “The unconstrained world is a garden of both good and evil. The majority of folk out there have taken that broader flexibility and used it to try and find return. To borrow an American expression, they go on offense.”

“We’re using all that extra flexibility to try and find new ways to go on defence.”

Husain wants his bond fund, the T. Rowe Price Dynamic Global Bond Fund, to behave like bond funds used to behave – to be a store of value, or even post positive returns when equity markets fall.

“We want to provide a bit more liquidity, a bit more simplicity and a bit more transparency. We don’t want to use all the funky derivative structures that are out there,” Husain added.

“I used to be a derivatives trader so I know there’s nothing wrong with them, but I don’t think every client wants them in their portfolio.”

What Husain and his team look for when buying bond markets is three characteristics: low volatility; little probability of what the bond expert calls ‘jump risk’, or a regime change in volatility; and a relatively steep yield curve.

Regionally that approach has seen the fund take a relatively negative view on the US, where Husain believes a rate hike will come sooner than most investors expect; a very positive view in Asia, especially in lower volatility countries like South Korea; and a negative view on Europe, where the outcome from Greece’s debt crisis remains uncertain.

The strategy is unique in that it was built for the Australian market. Unusually, it launched here first (in February 2014) and was then released to the US market later. It is only just being made available to European investors now.

The fund has not had its defensive characteristics fully tested yet as the equity market has performed well in the 18 months it has been running but Husain did note its rolling correlation with equities over that period has been close to zero, if not a little bit negative.

Further, in short, sharp periods where the equity market has faced drawdowns, the fund has done exactly what it’s aimed to do – either staying stable or posting positive returns.

“The coming months up until and a little bit after the Fed rate hike are going to be a real testing ground for these types of strategies. When we see negative returns across traditional bond funds, you’ll want to see these strategies at least at zero and hopefully positive,” Husain concluded.

[via Financial Standard]

Future of Financial Advice

FoFA among top 20 global regulatory nightmares

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The Future of Financial Advice (FoFA) reform is one of the 20 most challenging pieces of regulation globally, according to a survey of 600 compliance professionals across the world.

The ‘Cost of compliance 2015’ report by Thomson Reuters asked compliance professionals from financial services firms all over the world to name the regulation that poses the greatest challenge for the coming year.

FoFA was listed along major regulatory changes such as the Basel III rules that will require banks to hold more capital, or the Volcker Rule in the United States that limits the bank’s relationships with hedge funds and private equity funds to prevent them from making speculative investments.

The US Dodd-Frank Act, a major regulatory reform following the GFC that has been compared to FoFA, is also listed among the most difficult regulatory challenges.

However, the UK’s equivalent piece of legislation, the Retail Distribution Review (RDR) was not part of the list.

The research also found that compliance officers are experiencing “regulatory fatigue and overload in the face of snowballing regulations.”

As many as 70% of the firms are expecting regulators to publish “more” regulatory information in the next year and 28% expect that the increase will be “significantly more.”

More than a third of the firms surveyed spend at least a whole day every week tracking and analysing regulatory change.

“Global regulatory change is creating the biggest challenge due to inconsistency, overlap and short time frames,” the report said.

“Understanding regulators’ expectations and requirements and being able to interpret and apply them is as great a challenge as keeping abreast of the changes.”

As a consequence, regulatory risk and costs are both expected to rise in 2015, with 68% expecting the compliance budget to be slightly or significantly higher than today in 12 months’ time.

[via Financial Standard]