Magellan Global Infrastructure Funds

Magellan was formed in Australia in 2006, by Hamish Douglass and has grown to manage over $76bn in assets for institutional and retail investors around the world. The group employs 30 analysts and specialises in global equity and infrastructure investments allowing them to focus on identifying global markets where they can add the most value for domestic investors, rather than operate in a flooded Australian market.

Why Magellan? The Magellan team have been focusing on infrastructure investing since 2007 when this fund was launched, which has allowed them to build a competitive advantage through networks, deal flow, proprietary data and in-house modelling. The fund has grown from $0 to $1.7bn in 2019 through strong performances (16.6% p.a. over 10 years),  Magellan manages nearly $10billion in infrastructure assets when you include institutional mandates.   The Portfolio Manager of the fund is Gerald Stack. Gerald spent a substantial amount of his career at CP2, a specialist infrastructure investment manager and has a great deal of experience, understanding, forecasting and analysing the strengths and weaknesses of businesses in this sector. Magellan differentiates its approach to most competitors in the sector by limiting the investment universe to those infrastructure assets that are essential to the efficient functioning of a community and not sensitive to competition. They understand that investors are seeking the CPI + 5.0% returns that come from monopoly-like assets, not the volatility that comes with cyclical businesses. Therefore they avoid companies subject to political and sovereign risk, whose income is impacted by commodity prices or which require excessive population and usage growth to justify their valuations.  We looked at a number of other fund in the listed infrastructure funds, including Rare Infrastructure, Invesco, Macquarie etc. However, the portfolio makeup of each seem to very correlated to commodity prices over time, which is understandable when you look at the make up of the index that they all try to outperform, while Magellan tried to minimize this risk, resulting in the main reason the investment committee approved the Magellan Fund over the rest.

Why Thematic Bucket? There is a growing trend of underinvestment in infrastructure assets across the developed world, which offers a substantial opportunity and value for those monopoly assets that already exist. The assets owned by Magellan are unique and can never be replicated or disrupted with one such example being a network of 40,000 telecommunication towers that are now relied upon to deliver data by all businesses and consumers in their daily lives. This means they will become increasingly important as the global population grows and put the owners in the position to benefit from increased spending and demand. The infrastructure sector benefitted from falling bond rates around the world, which inflated valuations, with many investors now concerned about the prospect of increasing rates. The weaker economic outlook for 2019 and 2020 has shown that bond rates may not increase as quickly as expected, increasing the value of the regulated income streams of true infrastructure assets. The Investment Committee believes one of the greatest risks facing asset markets in the next decade is an inflation spike caused by higher wage growth and the loose monetary policy of recent years. As highlighted in the past, very few asset classes offer a true inflation hedge, with infrastructure, particularly listed, one of the only investments that has delivered in the past through its combination of consistent demand and regulated income. Importantly, it is those assets that provide this type of hedge that Magellan focus on identifying.

Performance & Top Holdings: The Global Infrastructure Fund invests only into world-class listed infrastructure companies, with a preference for those who deliver reliable and predictable earnings, from consistent demand. This means they avoid businesses relying on such inputs as energy prices, population growth etc. to generate higher returns. The fund has performed strongly since inception, adding 8.6% per annum, compared to the Infrastructure Index which delivered 5.7%. More recently, it has returned 16.6% over the last 10 years and 14.9% over the last 12 months, both 5% above benchmark. This has been driven by a number of factors, including falling bond rates, but most importantly the recovering global economy since the end of the GFC. At present, the fund is well diversified, with 36% invested in the US, 24% in Asia and 23% in Europe. The largest allocations are to Airports (17%) and Toll Roads (16%) considered the kings of infrastructure assets, with Gas Utilities (13%), Integrated Power (11%) and Energy Infrastructure (11%) the next largest. Each asset is an industry and regional leader including Aena Airports in Spain, which manages 46 airports in Spain and 17 globally including London Luton, Aeroports De Paris, Crown Castle in the US, which owns 40,000 mobile phone towers including 5G, and Transurban the monopolistic toll road provider in Australia.

Reasoning: We understand that it is important to own assets and companies that are difficult to replicate, and which provide the most secure income streams possible to investors. Investing in infrastructure assets, including evolving electricity grids, cleaner energy sources, telecommunications and other utilities offer investors an opportunity to be part of the foundations on which the future global economy will be built. Whilst interest rates will remain important for valuations they are far less important for listed infrastructure assets than unlisted ones like those owned by industry super funds. This is because listed infrastructure assets are revalued daily by the market, whilst unlisted assets can be valued as rarely as every 1 to 3 years providing the illusion of security. This affords the ability to both profit from mis-pricings that regularly occur as well as achieve more diversification than the substantial size of unlisted assets allows. The underlying exposures can also be changed quickly should one particular asset or sector become more or less attractive. We believe the consistent and regulated income streams of true infrastructure assets, have an increasingly important role for Australian investors, particularly in the event that franking credit refunds are outlawed. There are two common concerns about investing in infrastructure, being the debt burden and ability to negotiate higher revenue. Most of Magellan’s underlying investments have utilised historically low interest rates to extend their debt facilities (as far as 10 years) at incredibly low levels, reducing the risk of increasing bond rates, whilst the key focus of management has been to purchase only regulated assets that have the ability to demand higher compensation should inflation increase and focus on those that are integral to daily life. For instance, the fund avoids energy generation and retailers in preference for transmission and distribution assets. The fund charges a competitive management fee of 1.05% per annum, along with a performance fee of 10% of outperformance over the higher of the S&P Global Infrastructure Index or the 10 year Australian Government Bond Rate.

Boiler rooms are back…..

We generally prefer to rely on our own writers and advisers for content for this newsletter, however, we thought Christopher Joye’s recent piece on how broking and advisory firms around the country are flaunting commission bans was particularly relevant following the Royal Commission.

We have outlined on many occasions our views and a detailed analysis as to why so many companies and managers have been flooding the market with listed investment companies and exchange traded funds; they provide a guarantee amount of capital to invest and on which to charge fees. However, we have spent little time on analysing why these are so popular with the major stock broking houses and investment newsletters. Christopher Joye’s article takes a deep look into the sector and why you should question why you have been recommended the latest IPO. As always, where Wattle Partners cannot avoid the receipt of this type of commission, it is refunded to clients.

Boiler rooms’ are back as listed investment companies raise $6b

Fund managers have figured out how to circumvent the vital Future of Financial Advice (FOFA) consumer protection laws to pay gigantic sales commissions worth more than $150 million to brokers and advisers despite FOFA being implemented to prevent precisely this practice. Parliament originally introduced the FOFA reforms to stop product manufacturers, mainly fund managers, paying conflicted sales commissions to advisers and/or brokers – or anyone with a financial services licence – providing advice to retail investors. FOFA does not apply to wholesale (as opposed to retail) investors, nor to any normal business issuing shares, senior bonds, subordinated bonds or hybrids (preferred equity) to raise money to fund their operations. In these cases, conflicted commissions are permitted.

When these laws were introduced in 2012, they applied to all investment entities, including listed and unlisted funds and investment companies. In 2014, however, sustained industry lobbying convinced politicians to exempt listed investment companies and trusts from FOFA’s all-important reach. Fund managers are now simply shifting their capital raising efforts on to the ASX to allow them to side-step FOFA completely. As a consequence, there has been a tsunami of new listed investment companies (LICs) and listed investment trusts (LITs) launched since 2017, raising more than $6 billion for fund managers who have paid brokers/advisers enormous sales commissions of up to 3 per cent of the value of the capital contributed by mums and dads. This includes big names such as Wilson Asset Management, Magellan, Platinum, VGI, and many others.

COMMISSIONS

In dollar terms, fund managers have paid more than $150 million in conflicted commissions to get brokers/advisers to push their products to retail investors, often in incredibly short time frames. For the vast majority of fund managers rushing to exploit this huge loophole, there is zero chance they could secure this volume of capital as quickly as they can on the ASX through normal FOFA-compliant channels.

And there is a real risk that advisers and brokers incentivised by large sales commissions promote complex strategies to retail investors who do not properly understand the products. Take the example last year of the leveraged “long short” equity hedge fund strategy managed by L1. Historically a product that had been mainly used by sophisticated high net worths and institutions, L1 appointed no less than 13 different brokers/advisers to spruik an ASX-listed investment company offering its strategy to punters.

The six joint lead managers promoting the L1 LIC earned a management fee of 1.25 per cent plus a selling fee of 1.5 per cent, for total commissions of 2.75 per cent. In total, L1 paid at least $37 million in fees to the brokers/advisers flogging their hedge fund to retail investors, which would not be possible under FOFA. After a one-month marketing campaign, L1 raised $1.35 billion for a strategy that could be leveraged up to three times the portfolio’s net asset value. That is a seriously racy hedge fund. Through FOFA-compliant channels it would normally take five to 10 years to source this volume of capital assuming you could maintain its returns. Unfortunately, L1 could not. Within eight months of listing on the ASX, the L1 product had lost 36 per cent of the value of its clients’ money (or almost $500 million). While there is no suggestion that there was any mis-selling in this transaction, that is always the worry with conflicted remuneration.

LARGE AMOUNTS

Beyond equity hedge funds, a second fad has been for fund managers to use enormous sales commissions to quickly raise large amounts of money for illiquid, risky and often complex fixed-income strategies with extraordinarily expensive fees as high as 1.5 per cent annually (similar to the sorts of fees investors pay hedge funds). I myself have been approached by players in this space wanting us to launch an LIC or LIT of this kind. Since the end of 2017, there have been billions raised on the ASX for high-yield funds, direct-loan funds, and mortgage-backed securities portfolios with many of these assets having no credit rating or being rated below investment grade with questionable or no underlying liquidity.

Creating the appearance of liquidity by listing a portfolio of illiquid assets on the ASX and flogging them to retail investors by promising returns of 8 per cent to 10 per cent annually (while slugging them with 1.5 per cent annual fees) seems to be a recipe for disaster if these assets start defaulting.

It is one thing asking mums and dads to buy the subordinated bonds and hybrids issued by highly rated banks that they all know well and transact with daily, and which have decades of proven credit risk-management expertise. It is quite another flogging them illiquid loans to companies they have never heard of and that do not have the benefit of deposit guarantees, RBA emergency liquidity backstops, and APRA supervision.

Without paying conflicted sales commissions, these fund managers would not raise a cent on the ASX and it would take years to originate the same quantum of capital through FOFA-compliant channels (on the proviso their returns persisted over the period in question).

CLOSED

A second problem with LICs/LITs is that they are closed, which means investors cannot redeem their shares/units. They are therefore providing fund managers with incredibly valuable permanent capital carrying high fees, which is why they have been so eager to exploit the FOFA loophole for listed products. To get out, investors need to find someone willing to buy the shares/units, which results in LICs/LITs often trading materially away from the portfolio’s actual net asset value.

This is a new source of risk for retail punters that they do not face with traditional unlisted managed funds or listed ETFs where you can create and redeem shares/units. It would be surprising if the Australian Securities and Investment Commission is not already investigating this dysfunction, and if Labor in particular, which historically has been stronger than the Liberals on FOFA, does not close the loophole.

Why the best investment decision is nothing when it comes to franking credits

We know that the majority of dinner and coffee table discussions have been revolving around franking credits lately. There is so much mis-information and misunderstanding for a policy that still requires a change of Government and successful negotiation through the Senate. We have overheard any number of strategies, from moving to a union super fund and hoping they have some franking credits left over, buying property or trying to find something that can yield 10%. Yet the best action for all investors is to simply do nothing.

The proposed policy will apply to anyone not receiving an Age Pension, but primarily to those who have around $900,000 to $1,100,000 in superannuation who receive a tax refund each year. This is due to the fact that these refunds are generally made up of 100% franking credits. For those with balances exceeding $1.6m, the available tax refunds were vastly reduced following the introduction of the pension cap on 1 July 2017.

As a first step, it’s important to stress that there is a low probability that markets or individual shares will fall substantially following a Labor party victory (outside of listed investment companies.

This is due to a number of reasons including:

  • The substantial portion of major Australian shares owned by foreign institutions that already have no use for franking credits. This is evidenced by the fact that most major dividend companies share prices fall only by the amount of the dividend upon announcement, not the amount of the associated franking credits.
  • The majority of Australia’s largest investors, particularly institutions and pension funds will still receive the full benefit of the franking credits as a deduction against their income tax, meaning it is unlikely their portfolios will change. This is due to the fact that a large portion of most union super fund members are in accumulation phase and therefore paying tax. The franking credits received on your pension account are therefore used to reduce the tax payable on these accumulation accounts.
  • The increased involvement of pension funds in what has been the DIY investor dominated preference share sector, with Uni Super’s $200m bid for the latest NAB preference share a perfect example. This shows the value in the fully franked dividends paid by these products and an increasingly large market in the country.
  • It is likely to be the major listed investment companies (LICs), which pay investors consistent fully franked dividends by virtue of paying tax at the company rate that feel the brunt of any volatility as opposed to managed funds, which are structured as unit trusts and simply pass the associated income onto the investor.

There is no doubt the implications for those receiving franking credit refunds will be substantial, yet we believe the legislation is unlikely to be approved in its current form with a cap on refunds the more likely result.

The proposed change and concern around income levels has lead us to important discussions around income needs and the ability to produce the required income in an ultra-low interest rate environment.

Whilst the proposed change will have a substantial impact for some, there is no simple solution to replacing this lost income should the legislation pass. For example, consider the dividend currently offered from Westpac Banking Corporation shares (WBC), which is around 7.2% before franking credits are applied and 10.3% after.

There are very few assets around the world that offer yields of 7.2%, let alone 10.3% without requiring the investor to take on a substantial amount of risk. Potential examples include mezzanine debt, peer to peer personal loans, highly leveraged assets or even Turkish Government bonds (14%). Investments of this risk level are simply not suited those in or saving for their retirement in most cases.

So with an increasing income required to be drawn from superannuation, but lower interest rates, less franking credits and slower economic growth, the question of sustainability has come to a head. Investors can simply not expect to achieve an income of 6, 7 or 9% without either taking an extreme level of risk or giving up either the potential for capital growth, or capital in its own right.

We have always believed that the more appropriate strategy in this environment is for investors to seek total returns, from both growth and income, rather than focusing solely on income. We have already seen the implications of companies paying out the majority of their profits in dividends, becoming akin to a bond or term deposit, whereby their share prices simply stagnate.

At this point it is important for those investing through superannuation to keep in mind that the entire system was set up to ensure that your superannuation balance is withdrawn overtime so that it eventually becomes taxable. It was not intended as an estate planning tool, hence why the minimum pension payments increase regularly as you age from 4% to 5% at 65 and reaching a maximum of 14% in your 90’s. That does mean you should not seek to maximise your balance through sound investing and strategic advice.

Federal Budget 2019

As noted earlier, the Coalition announced on the 2nd of April that it had delivered a budget surplus for the first time in 12 years supported by stronger iron ore and coal prices as exports continue to grow.

As the Federal Government is seeking re-election it was unlikely that any major changes would be proposed, and as expected most announcements were centred around tax cuts and reform to the marginal tax rate system with a view to increasing after tax pay for low and middle income earners. This was achieved by extending the Low and Middle Income tax Offset to those earning up to $126,000 and increasing it to $255 for those below $37,000 and $1,080 for those below $90,000 in annual salary.

This was combined with an increase in the income thresholder for the 19% tax bracket to $45,000 in 2022 and the reduction in the 32.5% bracket to 30% in 2024. There is no doubt this is a positive for lower income households with more money immediately into their pockets, yet the media coverage was focused on the potential $11,000 tax reductions for those earning over $200,000. Unfortunately, it seems that those covering the changes seem to ignore the fact that these people pay at least $60,000 to $70,000 in tax each year.

There were limited changes to superannuation, as the previous $1.6m cap was a key driver of the Coalitions poor showing at the last election. With some small proposals including the following:

  • Allowing SMSF trustees to choose their preferred calculation to determine their tax exempt component;
  • No longer requiring an actuarial certificate where the entire SMSF is in pension mode;
  • Bringing the requirement to meet the work test in line with the Age Pension Age, moving to 66 immediately and 67 in 2010;
  • Increasing the age limit for spouse contributions to 74.

In general, it was a positive budget with a focus on both winning votes but not losing its core constituency. Given the size and scale of the Labor Party’s tax reform and the unfortunate timing as the property market continues to fall, it would seem this election could be closer than many expect.

Investment Review – Platinum Brands Fund

Following positive feedback from readers of Unconventional Wisdom, in all Monthly issues going forward we will be providing a review and outlook on each of the managed funds that form part of Wattle’s Model Portfolio.

Hopefully this gives readers an opportunity to understand what each fund is invested into, why we continue to believe it is an appropriate investment and how it has performed. The first such fund is the Platinum International Brands Fund which forms part of the Thematic Bucket of portfolios.

What’s the fund?

The Platinum International Brands Fund is one of the specialist, sector funds offered by Platinum Asset Management, one of Australia’s most successful international equity managers. Platinum has around $24bn in assets under management across its eight core funds and listed investment companies. 9 portfolio managers share ideas between the various funds and are supported by over 20 investment analysts.

The Platinum International Brands fund specifically seeks to invest into global companies with well recognised consumer brand names in both their own market and around the world. Their portfolio typically includes a combination of companies from a variety of industries from iconic luxury goods brands like Louis Vuitton, to producers of food and beverages, personal care products, household appliances or other consumer staples businesses from retailers with strong regional presence to financial service providers with global branding. The target market results in the fund offering investors exposures to some of the fastest growing companies in the fasting growing economies around the world.

Where does it fit in your portfolio?

The International Brands Fund is included into the Thematic Bucket within the Model Portfolio due to the exposure it providers to one of the most important themes of our generation. The aim of the Thematic Bucket is to seek investments and exposure to unstoppable societal, environment or economic trends that are occurring around the globe on the basis that it is these changes, like the introduction of the smart phone, that deliver the greatest compound returns over the long-term.

In the case of the International Brands Fund, it provides an exposure to the explosion in the middle class around the world, but particularly in Asia. Our view and a commonly accepted view around the world is that the increasing wealth in Asia, particularly India and China, will result in substantial changes to the order of the global economy. Take for instance the fact that of the next 1 billion people to enter the middle class around the world, according to Brookings Institute, 88% will be from Asia. Whilst China is important to this figure, 380m will come from India.

The number of people in the middle class is expected to reach 3.2bn by 2020 and 4.9bn by 2030 with figures suggesting 60% of these people will be in Asia. This provides an incredible platform for consumer brands and related businesses as consumption patterns change. We know that China and India combined are already contributing more to consumption that the US middle class, but this is expected to grow exponentially over the next 20 years to represent some 39% of global consumption.

What does this mean for investors? It means that consumption patterns will change significantly throughout Asia as the transition occurs. The many things we take for granted in Australia, like car ownership, public healthcare, social security, smart phones etc. will see substantial growth in China and India as more people have more wealth and demand better products and services. Generally when people move into the middle class their consumption patterns change with a more towards higher quality protein rich foods, like meat and fresh food, and a focus on services rather than goods. The penetration of car ownership in the China and India is still a long way behind the US offering room for substantial growth, as is the level of domestic and overseas travel.

With more people able to spend more money any number of sectors will have access to these theme from day-to-day housing products, to leisure activities, better healthcare, aged care of ailing parents, financial services as people seek to invest or save money, IT and smart phones and eventually a demand for cleaner energy like that which is occurring in the developed world. One of the major pressures will be on infrastructure as more people seek to travel internationally, more people own cars and more goods are required to be imported. The opportunities are huge. As an example, consider that Starbuck’s has 30,000 locations worldwide and already 3,000 of these are in China after only really beginning the expansion this decade. This is expected to double by 2021 as demand grows.

What does it invest in?

The International Brands Fund offers a well-diversified portfolio with a focus around consumer companies as can be seen in the chart that follows:

The portfolio is also diversified across many countries, but with a focus around China and greater Asia, which represent around 45% of the portfolio today.

What are the major holdings?

The top holdings provide an interesting insight into the approach of Platinum, combining the well-known consumer brands Facebook and Alphabet, that generate most of their revenue by offering ads on their platforms, with a range of retailing, media and consumer staples businesses. It’s important to keep in mind that this portfolio is actively managed, meaning investments may be in the portfolio for as long as several years and as short as just a few months.

Facebook and Alphabet are owned due solely to their global penetration and the fact that both have only really scratched the surface in China and India. They offer incredible value for the size and quality of the underlying businesses which meet Platinum’s focus on buying undervalued companies.

China Zhengtong Auto Services are one of the largest distributors and servicing providers of premium brands in the Middle Kingdom. Their portfolio includes the distribution of Porsche, BMW, Land Rover, Jaguar, Audi, Mercedes Benz, Volkswagen, Toyota and even Cadillac. Unfortunately, the weak performance of the Chinese economy in the December quarter impacted on the share price of Zhengtong and the performance of the fund but has since recovered strongly.

Schibsted is a Norwegian media group who own a series of newspapers but most important is one of the world’s leading online classifieds businesses reaching over 200m through their 18 countries of operation in parts of Europe and Asia. More recently they have expanded to invest into ambitious growth companies seeking to disrupt the media sector around the world.

Sina Corp is the owner of Chinese twitter-like business Weibo, which has over 50% of the micro-blogging market in the country from over 500 million users. The company is adding 20 million users per month as the growth in smart phone penetration in China continues. The company also offers a mobile network and digital sports media through ownership of the rights to a series of major global sports like the Premier League, Champions League, Tennis and PGA Tour.

Jiangsu Yanghe Brewery fits the consumer brands mould as the producer of one of China’s 8 famous spirits, with some 500 years of history. The brand targets the younger demographic through its aspirational marketing and products, not unlike the success of craft breweries in Australia. Alibaba speaks for itself being one of the largest businesses in the world, offering e-commerce, retail, internet and technology services to the Chinese population and eventually to the world. The company is like the Amazon and eBay of China, as well as offering cloud computing services, financial products and bank accounts through its subsidiary Ant Financial.

How has it performed?

The fund struggled towards the end of 2018 due to its large Chinese exposure and the significant market falls that occurred there as the US-China trade war appeared to impact export growth, delivering a return of -10% for the quarter ended December 2018 and -8% for the year.

However, it has rewarded investors patience in 2019, delivering a return of 7.7% in February, above the benchmark of 5.2% and 13.7% for the 3 months, well above the 5.7% of the index. Most importantly the fund has a track record of consistently outperforming its benchmark delivering 14.7% per annum compared to just 3.1% since 2000. This sort of consistent outperformance doesn’t come with luck, nor is it a smooth process, but we continue to have confidence in both the theme behind the fund and its investment team to deliver for investors.

What income does it provide?

The performance of managed funds is consistently misunderstood by many investors, as a result we thought it worth providing a refresher on their operations.

A managed fund is structured as a unit trust, which is similar to a typical family trust, in that all profit that is generated, including realised capital gains and dividends must be distributed to unit holders at the end of each financial year. If there is no profit, due to either investments being sold at a loss or no investments being sold at all, then the fund may not make a distribution to unit holders for any given period.

Throughout each financial year the unit price of the fund will increase and decrease in line with the value of the underlying share portfolio, priced on a daily basis. Investors are able to redeem their investment for this price at any time with funds payable in just a few days.

When it comes to distributions, Platinum generally pays these only on the 30th of June each year and they can be substantially, with around 20% of capital distributed in June 2018 after the fund had an exceptionally strong financial year. When this distribution is announced, the unit price of the fund reduces by the same amount, as the cash is no longer part of the portfolio, rather it becomes that of the unit holder. This is no different to a stock going ex-dividend and falling by the dividend amount.

The result of the fund being required to distribute all gains is that the unit price will generally stagnate around your purchase price as any positive performance is paid out in cash each year. The last few years distributions are worth noting:

  • FY 2018 – 0.5999 cents per unit or 20% of the unit price;
  • FY 2017 – 0.3151 cents per unit or 11% of the unit price.

As you can see, the performance has been strong but with a significant amount of capital paid out to unit holders meaning the unit price shown on Portfolio Valuation Report appears to have reduced.

What we Liked and Disliked

What we liked

  • Both the ASX (10.9%) and S&P 500 (13.6%) delivered the strongest quarters since 2009 as global sharemarkets reacted positively to a synchronized loosening of monetary policy in the developed world. Whilst the rally came following reporting season, it correlated little with the weak results reporting across the period, with mining (17.8%) and technology (20.7%) the key contributors once again.
  • Australian GDP surprised to the downside, with the economy growing just 0.2% in the final quarter of 2018 as the property slowdown began to bite. Talk of a per capital recession was overdone and irrelevant for most Australian’s who are more concerned about increasing utility and living costs. Australia’s history has been one boom coming after another, with the mining boom following by the residential construction boom in recent years. What will be the next boom? All signs point to infrastructure and public spending, as Government’s turn the switch to fiscal policy following years of accommodative monetary policy.
  • The telecommunications sector, including TPG and Telstra, was a key driver of market returns, adding 16.9% in the quarter. The period saw increasing pressure placed on the Government and NBN Co. to cut the wholesale access rates they charge internet service providers. TPG saw its first half profit drop 76% and pushed back at the NBN suggesting it’s popular $50 per month plan will need to be removed without some accommodation from the NBN.
  • The Coalition delivered it’s early budget and thankfully there were no major surprises. The headlines were a return to surplus for the first time in 12 years, since before the GFC, and a combination of tax cuts for low and middle income families and energy supplements for social security recipients. As detailed later in this report, superannuation and investment markets came through reasonably unscathed as the Government kicks off its election campaign on the front foot.
  • Not that we like the man, but the handing down of the Mueller Report confirming that there was no evidence of collusion between the Trump Presidential Campaign and Russian agents should put this sideshow to bed and allow Congress to move forward with governing. Trump has put forward a pro-business candidate for the upcoming Federal Reserve seat and appears to be refocused on his mandate for refreshing the US’ ailing infrastructure.
  • Woolworths combined some good news with bad news, announcing a $1.7bn off-market buy back using the proceeds from the sale of its Petrol business, at the same time indicating that at least 30 Big W stores would be closed around Australia following consistently poor performances. The off-market buy back includes a capital component of just $4.79 allowing management to return excess franking credits before a potential Labor victory.

What we disliked

  • The intra-super war took another step forward during the month as the union owned Australian Super declared war with the SMSF sector suggesting funds with less than $500k should be closed down. CEO Ian Silk stated that ‘The fact that industry funds emerged largely uncriticised from the royal commission process, and certainly in better shape than the retail sector, is no cause for triumphalism,’ yet the Royal Commission was targeted at banking, not specifically financial services or superannuation. This comes at the same time that union super board are under increasing pressure about what constitutes the ‘best interests’ of their members and whether they push labor market reforms from their position of power.
  • Unfortunately it appears both parties have caved in to the lobbyists when it comes to the Royal Commission’s recommendation to remove these conflicted payments. The sales commission system occurs throughout financial services and many other industries like travel agencies and car sales, neither of which has anywhere near the regulation or prosecution that financial advisers do. We’d suggest regulation should be extended to any potentially conflicted commission, particularly when it relates to the largest purchase of most people’s lives.
  • Standard & Poor’s released their annual SPIVA Scorecard for 2018, which saw the typical headlines across the media suggesting 87% of all Australian equity funds had failed to outperform their benchmarks. Their conclusion? ETFs and index fund, the same ones that fell over 50% during the GFC. As always, it’s important to look deeper into these reports, take for instance that independent research house Morningstar only rates 52 Australian equity funds as actually being investable, so we’re not sure where 323 come from?
  • This is probably both a positive and a negative but the Australian 10 Year Bond Rate, or the so-called ‘Risk Free’ rate hit an all-time low of 1.72% during the month. The cause was a combination of a slowing property market, hitting an overleveraged consumer and resulting in weaker than expected economic data for the final quarter of 2018. Most economists are now pricing in at least two rate cuts in 2019, we suggest rates will more likely remain on hold.
  • The Brexit delays continued into April, after the 28 March deadline was extended to 12 April and then to 30 June. Prime Minister Theresa May continues to seek the support of the British Parliament, offering a plethora of options, including a series of surveys, but with little in the way of progress. Without an agreement in place straight break from the UE without appropriate agreements and deals in place would be chaotic, particularly for multi-nationals, yet the spectre of a revote is growing more popular by the day.
  • There couldn’t be anything more negative than the Christchurch mosque shootings that occurred during the month, bringing home the importance of spending time with family and friends. The subsequent media coverage and tit-for-tat between commentators has been disappointing as was the reaction of the Turkish President in relation to his comments about the ANZAC’s travelling to Turkey.