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Tim Wong: Our confidence in Magellan has grown with each passing year. The investment team and the process have been tested over a sustained period of time now. Throughout this they faced a wide variety of market conditions and the team especially has demonstrated great research insight in understanding companies and also in assessing the risks in the market.
Another aspect to consider is that the portfolio manager Hamish Douglass has trained himself to be astute in understanding both micro-level company-specific issues as well as broader, bigger picture macroeconomic issues when looking to build his portfolio.
Given that it's a Gold-rated strategy we do believe that the team is very strong. For starters, it has grown quite dramatically over time and the firm has been able to attract some really top-notch individuals. Such growth can be problematic if it's not managed well, but we believe that Magellan has actually planned really well for their needs.
In addition, we have seen the team evolve over time. They have promoted some key individuals like Dom Giuliano and Nikki Thomas to deputy CIO and head of research, respectively. Those two individuals as well as other senior members make sure that the research process is thoroughly adhered to and implemented appropriately.
A large book of assets can be difficult to manage because it is easier to be more nimble when you are smaller. However, Magellan has traditionally stuck to relatively large high-quality companies when building its portfolio. It's also taken a relatively long-term timeframe when investing. This helps to offset concerns about size hampering how it actually is able to invest. Rising assets also require additional client servicing responsibilities for the investment team to manage. However, we believe Magellan has done a really good job in hiring associated sales, distribution staff, as well as broadening out its investment team to make sure that its key decision makers aren't overly burdened by these responsibilities.
Magellan Global is a relatively concentrated portfolio that takes meaningful stock-specific risks. As a result, mistakes can hurt. So we believe it's best for investors to use this in a supplementary capacity within a broader global equities portfolio.
23/08/2017 Brian Han remains reasonably positive on the telco giant even after some disappointments in the FY17 earnings announcement. How slashed Telstra dividend affects our outlook Glenn Freeman 23/08/2017 http://video.morningstar.com/aus/video/
Brian Han: The fiscal 2017 result was actually in-line with our expectations. But that was a complete sideshow to the 29 per cent cut to forward dividend estimates by the company and the magnitude and the abruptness with which the cut was announced came as a real surprise to us.
We were previously expecting Telstra to gradually ease its dividends over the next few years to about $0.25 per share by the end of fiscal 2021. Telstra bit the bullet and cut it straightaway to $0.22 per share from next year. So, that was a real surprise. And furthermore, we thought it was quite conservative the quid pro quo that Telstra is planning to give shareholders in return for the dramatic dividend cut.
For instance, it plans to return only 75 per cent of the one-off NBN receipts that are coming to Telstra over the next few years. And also, it plans to only monetise 40 per cent of the recurring NBN receipts that Telstra is going to receive over the next few years.
Now, with a strong balance sheet and still pretty strong cash flow, we would have thought that could return much more of those NBN receipts back to shareholders. Obviously, our dividend forecasts have been cut and also our fair value estimate has been reduced by about 4 per cent to $4.60 per share. Shares are still trading at a pretty good 14 per cent discount to our fair value estimate.
And yes, we still remain relatively positive on Telstra as shown by their 14 per cent discount to our intrinsic assessment and we still believe management is on the right course to address their $3 billion NBN-inflicted hole in its earnings. And also, even at $0.22 per share on current stock price that equates to about 5 per cent, 5.5 per cent fully franked dividend yield. So, we think that's a good starting point for shareholders.
18/08/2017 Aside from a few high-profile earnings guidance misses, large-cap stocks are doing okay as FY17 reporting season passes halfway, says AMP chief economist Shane Oliver. Earnings season FY17 mixed bag so far Glenn Freeman 18/08/2017 http://video.morningstar.com/aus/video/
Glenn Freeman: I'm Glenn Freeman for Morningstar, and I'm joined today by Shane Oliver, chief economist with AMP Capital.
Shane, thanks for joining us today.
Shane Oliver: It's a pleasure to be here.
Freeman: Now, Shane, just firstly, back in April, you said you didn't see Australian companies as particularly cheap nor were they overly expensive. Is this still the case?
Oliver: It's pretty much still the case. I would regard the Aussie share market is around fair value. If you look at traditional metric of the price to earnings multiple, it's a little bit above fair value. If you look at indicators which allow for the low level of interest rates, low bond yields, it's a little bit cheap, little bit under fair value.
So, on that basis, I'd say, it's in the ballpark of around fair value as things currently stand. And oddly enough, for much of this year, the last few months or so, we've really just been bouncing up and down, and that's perhaps partly an indication that investors are finding it hard to find undervaluation or overvaluation.
Freeman: And we're now around halfway through the annual earnings season. What's your take so far?
Oliver: I guess it depends on how you assess it. If you look at the number of companies surprising on the upside and good news stories coming out, I'd say it's a mixed bag. There's actually been slightly less companies surprising on the upside than it was, say, back in the February reporting season. So, that's a bit of a disappointment. And there have been some high-profile misses in there.
Flipside though, is that profits are up roughly 18 per cent over the last financial year. A big driver of that, of course, is the resources sector where profits are up about 130 per cent, 135 per cent on the back of the surge in commodity prices.
And of course, if you strip them out, profit growth in the overall market excluding resources is around 5 per cent, 5.5 per cent. So, in that sense, it's sort of okay. Profits have gone from a situation of two consecutive years of declines to an environment where they're now rising again.
The other thing, of course, is that if it's dividend you're after, then you're still seeing increases in dividends. So, not only are profits up, but companies are paying out more dividends. About 80 per cent of the companies have increased their dividends on my count so far. So, mixed bag, but good news is that profits are up and the dividends are continuing to rise.
Freeman: In terms of currency, how much of a risk does the rising Australian dollar pose for the Australian economy and how can local investors position themselves in this regard?
Oliver: I think the rising Australian dollar that we've seen over the last month or so, where we sort of pushed up above $0.80 at one stage, that is a bit of a concern for the local economy. We're still in an environment where mining investment is still falling. Sometime over the next year housing construction will start to top out and that will become a bit of a drag on the economy as housing construction starts to slow down. And consumer spending is a bit subdued for a whole a bunch of reasons, low wages being the most well-known of one of those reasons. But all of those things just be still need help from a lower Australian dollar to drive sectors like tourism, manufacturers who are still with us, and higher education, in other words, to boost the competitiveness of the Aussie economy. So, if the Aussie dollar starts going up, that could actually be a bit of a drag on the Australian economy.
How should investors play this? I guess, what the Aussie does is very important for investors. Not only does it affect the performance of the Australian share market and Australian companies that are affected by moves in the currency, but also affects your investment overseas. Given my view that the Aussie dollar will tend to go down rather than up over the next 12 months because I think the Reserve Bank is still set to leave interest rates on hold, whereas the Fed is more likely to raise them. So, we are going to see this continuing narrowing in interest differential between Australia and the U.S. which works against the Aussie dollar. So, given that view, the Aussie dollar, I think, will more likely fall rather than rise. It still makes sense for investors to have a decent exposure to offshore assets, offshore shares, for example, and do that on an unhedged basis. So, I think, that's the key message in terms of the currency for investors at present.
Freeman: We hear a lot about passive investing and that's for all types of investors, including for SMSF trustees. Do you see this as something of a shorter-term trend or is a long-term shift?
Oliver: I think the shift towards ETFs is part of a long-term shift. It reflects the evolution of investment markets, but it's also partly cyclical. But I think as we move into a world where eventually interest rates start to rise again, that could bring active management back into vogue and therefore, this shift towards ETFs, passive ETFs, in particular, will take a bit of a pause. So, yes, it's a part of a long-term trend, ease of access, lower fees and lower costs, those sorts of things, but there's also a cyclical aspect to this and I think at some point that cycle will swing back the other way and active management will come back into favorite for a while.
Freeman: And lastly, property is also always in the mix for SMSF trustees. You said around a year ago that you're favoring commercial property over residential. Is this still your view?
Oliver: My view on property hasn't changed. A year ago, I favored commercial property over residential because I thought commercial offered high yields, that's the basic – or the rental yield you get or the income flow you get from that investment, high yield compared residential property. And the main reason there was because residential property prices have been pushed through the roof in Sydney and Melbourne. And so, if always the prices have gone up, rents haven't kept pace and the rental yields have gone down. Whereas commercial property, values have gone up but nowhere near as much and that's left the rental yields looking relatively more attractive. And that remains the case. So, I'd still favor commercial over residential.
But of course, there's pockets of the residential market. I was probably a bit too early a year ago saying that commercial was the place to be. Residential, if you invested in Sydney and Melbourne would have still outperformed commercial, although commercial has done pretty well over the last 12 months. But I do worry that the Sydney and Melbourne property markets have become a bit too hot that I know – we've been saying this for many years now, but sooner or later, particularly with the Sydney property market up 70 per cent-odd over the last five years, the Melbourne market up nearly 60 per cent over the last five years, sooner or later there will be a cooling down of those markets and the money will flood somewhere else.
Freeman: Thanks very much for your time today, Shane.
Oliver: My pleasure. Thank you.
Freeman: I'm Glenn Freeman for Morningstar. Thanks for watching.
10/08/2017 An interim result of US$3.9 billion in net profits after tax for one of the world's largest mining companies was positive but slightly weaker than expected, even alongside a record dividend, explains Morningstar's Mat Hodge. Rio Tinto posts mixed result for 1H17 Glenn Freeman 10/08/2017 http://video.morningstar.com/aus/video/
Transcript to be available shortly./video/transcript/2732 mailto: ?subject=Rio Tinto posts mixed result for 1H17&body=http://www.morningstar.com.au/video/story/2732 Kerr Neilson on why global investment exposure is key
07/08/2017 There are two types of investors, regardless of market noise, imputation credits, diversification approaches and market indices, says the managing director of Platinum Asset Management. Kerr Neilson on why global investment exposure is key Glenn Freeman 07/08/2017 http://video.morningstar.com/aus/video/
Glenn Freeman: Our most recent webcast brought you a discussion between Platinum's co-Founder, Kerr Neilson and Morningstar's director of manager research, Tim Murphy. In a broad-ranging discussion, they touched on a number of macro topics, including emerging markets, geopolitics and currency. Here Kerr discussed some of the larger emerging market economies and some of the opportunities in India which are often overlooked in favour of China.
Kerr Neilson: Would you believe that credit is growing at the slowest rate since independence in 1947? So, credit is growing at the level of 4 per cent a year and yet the economy is growing at 7 per cent. I throw that in to remind people of what linkages they think are real or not real. So, everyone has a view that if China contracts – you'll see where I'm going – if China has a slower growth rate of credit, then it has to go into very slow growth. It's not necessarily true. Here we have a working example of a very interesting economy, growing at 7 per cent real with credit growing at slightly more than half that rate.
Freeman: Kerr also discussed the ongoing commentary around interest rates, particularly within the U.S. and just reminded investors that they shouldn't be unduly distracted by this.
Neilson: Again, it's the constituents. So, I'd rather look at the individual markets rather than the index and the index, which is 54 per cent weighted by the US, I think is a little more challenged than the individual opportunities outside the US. Sorry to bang on about that, but it is to try and get people to think more broadly about here is an index but it doesn't represent the world's activity. It gives more context to the problem of investing, which is, either you are indexed-led or you are opportunity-led. Where we see the rates moving in the States is upward and real rates are starting to now lift. So, this is the inflation-adjusted rate.
Freeman: And in the resources space, Kerr discussed oil, including the supply and demand dynamics and different price scenarios.
Neilson: A lot of oil and oil development is being deferred. And the problem we have here is that we have a decay. So, the world uses about 95 million barrels a year. Electric cars will cut into that, but of course you've then got to factor in a greater use of petroleum products as these other parts of the world, the Vietnamese, the Indonesians and so on grow with their two wheelers and so on. So, I don't think you can look to electric vehicles removing much demand from the demand for oil. So, for the moment, I think you want to work on the basis that 90 million to 95 million barrels a day is what we will be needing.
Freeman: Kerr also discussed global currency movements, including describing how Platinum plays currency and what retail investors can learn from this.
Neilson: Where we think one should be as much more willing to earn the underlying currencies than we would have for quite a while now, because the yen and the euro have moved a lot and have been weaker for quite a while now and we think they tend to go stronger. So, I think the point I'm trying to get across is it's not a daily decision. You decide what are the driving factors behind a currency. You observe the day-to-day fluctuations, but it doesn't change your inherent view.
And historically, what happens with the US currency and this is what makes it a bit more difficult this time around is that as soon as the US starts really growing faster than its normal pattern, you get rates kicking up and that tends to result in the currency weakening because of two things. One is, it drags in imports because the US has a chronic current account deficit. And the interest rate doesn't quite fully compensate. So, right now, you could argue that the dollar has to go stronger because the rates are rising, but it doesn't always follow that, because it's the sucking in of imports that means a lot of funding is required.
Freeman: And in a theme that was emphasised throughout, Kerr also explained why he believes Australian investors should have a higher allocation to global equities.
Neilson: (Indiscernible) did some work on this and he showed that the franking credit looms large in mind but small in fact. So, the large impact is that imputation gives you huge benefits and why you should have a lot of money here. But in fact, it's about 1.5 per cent extra benefits you receive versus international equities. We worry that people become so comfortable with the idea that there's low risk and there's plenty of opportunity here. But this is a very crowded market. Whereas you look at global markets, and there is far better value from what we can see and there's much better choice and those are what give you longer-term better returns in our view. But it doesn't feel like there are too many investors unfortunately.
02/08/2017 Slowing economic growth in the US and parts of Europe emphasises the need to carefully select credit opportunities, says Vincent Reinhart, chief economist, Standish Mellon Asset Management. Finding fixed income opportunities in new paradigm Glenn Freeman 02/08/2017 http://video.morningstar.com/aus/video/
Vincent Reinhart: The big picture, just stepping back, that just about everyone should appreciate about the economic landscape is, in advanced economies potential output growth is slowing.
We are older populations; we are growing less quickly; we are participating less in the organised labour market and we are not adding as much extra output for each extra hour worked. That's slowing.
We are also slowing not just over time but relative to emerging market economies. There is growth out there. It's in China; it's in India. The relative footprint of emerging market economies is growing relative to advanced economies. 30 years ago, we were talking closer to under 40 per cent. Now, we are talking about 60 per cent of world real GDP takes place in the places we call emerging markets.
So, there's a couple of aspects of that major force potential output growth slowing. One of it is as EM gets bigger, they need us less. And so, in the 2000s, emerging market economies were running very large current account surpluses, i.e., they were buying the securities of advanced economies. That's allowed us to run current account deficits, i.e., bringing in more goods and services than sending out, means you have to be increasing IOUs.
What's happened over the last couple of years is, emerging market economies current account surplus has moved into deficit. They are funding themselves, not us and that's a problem for advanced economies over time because we still have large levels of government debt, we still have deficits. Advanced economies as a total are running budget deficits of 2 per cent to 3 per cent, relative to their gross domestic product. That means they got to sell those securities to somebody, less so to emerging markets than before.
So, obviously, it's a losing proposition to make forecasts about currencies, but there are some basic forces at work that may at least give you a sense over the medium and longer-term where currencies should go.
And again, it goes back to that feature – advanced economies growing more slowly than emerging market economies. If your potential output growth is slower, real rates are lower, too, because how fast your potential output growth is, determines the profile of how fast households think their future income will grow.
If you expect your income to increase less, you should save more. Firms, profile of expected future earnings, if they expect less earnings in the future, they should invest less. Market outcome, more savings, less investment, lower real rates. So, that's lower real interest rates in advanced economies, higher real interest rates in emerging market economies.
That's a recipe for secular appreciation in the exchange rate of the emerging markets relative to advanced economies. We think in terms of the US dollar, mostly the depreciation, we've seen in the last couple of months against the centers, Europe, Japan are behind us. We move sideways. There's still a little scope for the dollar to depreciate against emerging market economies. It's where real rates are higher and it's where there's more scope for delivering better policy.
When you're talking about credit, you are also talking about careful. You have to be selective. And that's importantly, because a lot of the opportunities have already been eroded away.
Risk spreads whether for high-grade corporate or high-yield corporate, have shrunk a lot. Risk spreads in emerging market sovereigns have shrunk a lot. And so, there are still some spreads out there but you have to be really careful.
You have to be selective. We think looking at current valuation, there's probably better values relatively in US high-yield than in corporate. When you're talking about high-yield, you have to be selective.
I always go back to this same point. Potential output growth is slowing? How come? Advanced economies had aging populations, participating less and less in work. That means that those people as investors have to appreciate that they need a more secure set of returns. And so, fixed income should be an increasing proportion of a portfolio as you get older, because you want to be able to have a more predictable stream of future income.
20/07/2017 Insights on Australia's housing market, China's effect on domestic banks, and cyber-security readiness, in the final instalment of Brian Hartzer's interview with Morningstar's David Ellis. Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 3 David Ellis 20/07/2017 http://video.morningstar.com/aus/video/170704_Westpac_Hartzer_Interview_Part3_AUDIO.mp4
David Ellis: Westpac and major bank peers have got relatively high retail customer satisfaction ratings as researched by the Roy Morgan Research house. So, those satisfaction ratings have increased over the last decade or so and they approximately ran 80% of retail customers are either satisfied or very satisfied with their bank.
So, how has Westpac improved their retail customer satisfactions ratings and where to from here?
Brian Hartzer: Well, the first thing to say is, we are not perfect and we still have plenty of work to do. But you are absolutely right. I remember, when I was working in banking in Australia back in the early 2000s, the customer satisfaction rates were typically in the high-60s or low-70s and there has been an enormous shift up. I'd attribute that to a few things. I think it's the recognition that many of our processes were falling over and were making too many errors, so a real focus on that.
For Westpac, it's been a real focus about putting power back into the community, the role of the bank manager being very important. We talk about that our objective at Westpac is to be one of the world's great service companies, not just a great bank. And we reinforce that in using training with our people that we've taken from Disney and Ritz-Carlton and some of the great service businesses in the world and we've tried to make changes in the way we pay our people, the way we train our people to make sure that we're constantly emphasizing service. We've also had a real focus on complaint reduction, understanding the root causes of complaints and getting in and fixing them. That's been tremendously successful as well.
There's no question we have more work to do. I should also say that I think the advent of technology and particularly, mobile banking technology, has been a real boon. So, for Westpac, for example, we had a real focus on that. And last year, we were recognized as having the world's best mobile banking app, which we're very proud of. Those sorts of things make a difference to our customers as well. But it's an ongoing challenge. We still make mistakes. We still have staff members who occasionally don't treat customers the way we like them to be treated. So, it's just an ongoing focus for us to make sure that build that genuine emotional connection into conversation that we have with customers and that our products, our processes, our technology live up to that standard as well.
Ellis: If we can turn to the housing market now and obviously, it's very topical issue in Australia and also in other big gateway cities around the world, similar sort of concerns. So, what's your view, what's the bank's view on the outlook for the Australian housing market and particularly, around affordability? And obviously, there's a lot of interested parties talking about how to solve the affordability issue. How do you see that can be achieved?
Hartzer: Well, at a general level, and I think it's important, first of all, to recognise that there are regional variations. Australia is a big place and we have certain parts of the country like Western Australia and parts of Queensland that have been affected by a slowdown in mining and they've got particular regional challenges. But the major markets, Sydney and Melbourne, in particular, the housing market is very strong. Prices have been very strong. And the main reason for that has been an excessive demand relative to supply. And what I mean by that is there has been a lot more household formation than there has been construction of homes and that's been going on for a long period of time. So, the run-up in prices that we've seen, the predominant driver of that has been not enough housing. And so, the affordability issue has been that people want to buy but the houses aren't there, interest rates have been low, so people have used debt to be able to buy the houses they want.
The good news about that is that it means there is underlying support for demand for housing. And as more supply comes online and there is a lot more construction that's been happening, that supply is coming online over the next couple of years, we're beginning to eat into that excess demand and that will mean that house prices will probably not rise from here anywhere near the way they have been. We think that will start to go sideways and that demand will get gradually soaked up.
In terms of the potential for a downside, which is obviously something that people are concerned about given the level of debt and there's no question that consumer debt is high in Australia, I think the real question there is about unemployment. And as long as people are employed, then they can continue to pay mortgages, continue to pay rent and you don't have the catalyst for a big decline in housing.
And in that a couple of points I would make, particularly for international viewers who are trying to think about the Australian housing market. One is that as the mining boom has come off and as the Australian dollar has come down, the offset to that has been a rise in service exports. So, here I'm taking about tourism, education, healthcare in particular. Those are all industries that employ lots of people. So, as the demand for those services in Australia has gone up, so too the demand for employment in those industries has gone up. And so, that's been a positive. Despite the mining boom coming off, actually the mining boom didn't employ that many people other than in construction and a lot of our service industries are doing very well now and that is increasing employment. So, that's quite important.
Another thing to remember, there are two very fundamental differences about how the Australian housing market works against, say, how the US housing market works. The first is that you can't walk away from your home loan in Australia the way you can in the US. So, in the US, when house priced started to fall, people had an incentive to sell fast. That brought more supply into the market and drove prices down. In Australia, it doesn't work like that. If you walk away from your home, you've still got the loan. So, people are incented to stay in their home and try and find ways to continue to make the payments on their home. So, that's quite important as well. And the second – so it's full recourse home lending, which is a really important distinction.
The other point is that Australian banks don't securitise their mortgages away. I mean, there's some securitisation that goes on, but overwhelmingly, the big Australian banks hold their loans on their balance sheets. What that means is, we are inherently conservative because we eat what we kill. And we don't have the prevalence of big credit-scoring bureaus like you do in the U.S. where people can use bunch of data to make a loan knowing that they are going to sell the loan onto somebody else. Doesn't work like that here. We thoroughly assess every customer. We are very conservative about our loan-to-value settings, conservative with big buffers on interest rates, in our underwriting and we know that we're going to hold that loan. So, we have a tremendous incentive to get it right, doesn't mean occasionally loans for that of course. But what you see for many, many years now in the low level of losses in the Australian banking sector is I believe andinherent conservatism in the way that we go about our lending.
Ellis: Talking about employment and unemployment and the economic outlook in Australia, how big of role do you see is the health of the Chinese economy. If China had experienced an economic downturn, how much of an impact would that have on Australia and in particular, the Australian major banks?
Hartzer: Well on the Australian economy, it would certainly have an impact. Australia's economy has absolutely benefitted from China, both initially from the demand for our mineral resources, but increasingly from a service point of view as well and there is no doubt that some of the demand in housing has been Chinese investors who – many of whom have children who are being educated in Australia or have an aspiration to retire here down the road. That has certainly driven some of the demand for housing. And from a tourism point of view, from an educational point of view, Asia in general and China in specific are certainly important. So, if China were to have a major downturn, yes, that would have an impact on Australia.
On the Australian banks, well obviously, we're leveraged to the overall economy, but the Australian economy is actually pretty diverse and from a direct exposure to investment property held by Chinese investors and the like, that's now really quite small.
Ellis: And looking at cybersecurity, obviously very topical at the moment with what's happened around the world recently. How does Westpac approach cybersecurity? Obviously, the financial records of Westpac customers are obviously paramount to the Group, so what's the Group's position on that?
Hartzer: Well cybersecurity is a major issue, and every individual and every company should be taking it very seriously and we've seen in recent days some of these threats. It's something that we talk about all the time. We have a large team of information security analysts and people here. We've invested tens and tens of millions of dollars in upgrading security on every aspect of our systems. We – I mentioned earlier that we travel a lot. Our information security people are very plugged in. We use a number of major providers around the world to give us technology and consulting on how to better protect our customers and our data. We're also – Australia being a relatively small country, we're very well plugged in with the government as well, and the Australian government, the Australian security, intelligence agencies are of course very well connected with their U.S. counterparts. We're very well connected with them and there is quite a lot of sharing of information that goes on as well. So, thankfully, we haven't had any significant issues around those lines and – but it's something that we – like banks all around the world are extremely live to and it's very important for all of us.
Ellis: Well, thank you, Brian. I really appreciate your time and sharing your thoughts and views with us. And hopefully we can have another interview at some later stage.
Hartzer: Thank you, David. I've enjoyed it.
17/07/2017 While it faces what Morningstar equity analyst Brian Han describes as a whirlwind of negatives, he suggests investors shouldn't hang up on Telstra. Telstra won't be blown away by headwinds Glenn Freeman 17/07/2017 http://video.morningstar.com/aus/video/170714_Han_Telstra_AUDIO.mp4
Glenn Freeman: I'm Glenn Freeman for Morningstar. I'm joined today by our senior equity analyst, Brian Han.
Brian, thanks for joining us today.
Brian Han: Thank you, Glenn.
Freeman: Now, Brian, just firstly, what can shareholders expect to hear from Telstra in its upcoming fiscal 2017 earnings result?
Han: Yes. First of all, operationally, I think Telstra will reiterate that the competitive intensity in the telco market is intensifying, especially in mobile and fixed-line broadband. But secondly, and perhaps more critically, we expect Telstra to shed some more light on its capital management review and actually say a few more words on what it intends to do with the dividend payout ratio and whether ahead of the NBN challenges whether it can still pay out more than 90 per cent of its earnings in dividends going forward. So, those will be the two areas that will be particularly focused on.
Freeman: And Brian, in your recent report on Telstra you talk about a whirlwind of recent negatives for the company. Can you just recap some of those for us?
Han: Sure, Glenn. Firstly, it's their competitive intensity, rising competitive intensity, that I just spoke about. The second thing is this NBN. So, we are gradually seeing the impact of the NBN increasing on Telstra. And when NBN is fully rolled out in about four or five years' time, it will punch a $2 billion to $3 billion earnings hole in Telstra and that is quite significant considering that Telstra has about $10 billion-$10.5 billion of EBITDA earnings per year. So, that's the second headwind.
And the third headwind is, back in April we found out that TPG will enter the Australian mobile telephony market because they laid out $1.3 billion to buy the spectrum. Now, that obviously will have an impact on Telstra's own mobile business and that Telstra's own mobile business accounts for about 40 per cent of Telstra's earnings. So, those are the three negative headwinds that I'm referring to.
Freeman: And this NBN earnings hole that you speak about, are you still confident that Telstra is able to plug this shortfall?
Han: Yes, we are, in due course. We are confident because, number one, we do believe that there are a lot more productivity benefits and cost savings to come at Telstra. Secondly, we do believe that they will get extra returns from the incremental $3 billion of capital expenditures that they are going to spend on the infrastructure over the next couple of years. And then thirdly, we do expect earnings growth from businesses such as network application services and global connectivity and also, earnings growth from a myriad of businesses that they have interest in, in areas such as e-heath and cybersecurity. So, when you consider all of that, we do believe that in due course they can mostly plug that $2 billion to $3 billion earnings hole caused by the NBN.
Freeman: And Brian, just lastly, you also speak about TPG's entry as a fourth major mobile network player. How confident are you that Telstra can maintain its position in the face of the additional competition?
Han: Glenn, there is no hiding the fact that TPG's entry will be negative for Telstra. But I do believe that the impact on Telstra won't be as severe as most people think. And I say that because I think the relative impact will be greater on the likes of Vodafone and Optus. The reason why I say the impact will be relatively limited on Telstra is because, number one, I think the number of years it's going to take TPG to roll out their mobile network and to fully ramp up to full operation will be many, many years and probably not until fiscal 2026 that we are going to see a fully ramped-up TPG mobile network.
The second reason is, I think TPG's mobile network will be inferior to the likes of Telstra and Optus simply because they have already said their target coverage is 80% and as you know, Optus and Telstra, they are almost 100%. So, network inferiority is another reason why we think impact will be limited.
And the third reason is, TPG doesn't have the infrastructure or the amount of cell towers and cell sites, nor the amount of capital expenditure behind them to maintain these networks. So, because of that inferiority in terms of the infrastructure breadth it means that network inferiority will be a limiting factor in TPG getting a reasonable penetration into the business and corporate mobile market because as you can appreciate, business and corporate customers network superiority and network coverage are very important considerations. So, those are the reasons why we believe that TPG will have an impact but the impact won't be as severe as most people think.
Freeman: Thanks very much for your time today, Brian.
Han: Thanks, Glenn.
Freeman: I'm Glenn Freeman for Morningstar. Thanks for watching.
13/07/2017 Westpac CEO Brian Hartzer joins Morningstar banking analyst David Ellis to discuss digital disruption, regulatory change and Australian banks' social license. Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 2 David Ellis 13/07/2017 http://video.morningstar.com/aus/video/170704_Westpac_Hartzer_Interview_Part2_AUDIO.mp4
David Ellis: Just looking at digital disruption. How is the bank coping with that? And what do you see as the key risks and the key opportunities for Westpac?
Brian Hartzer: Well, I certainly believe that financial services is going through one of the biggest changes that we've seen certainly in Australia in 30 years since deregulation. And the impact that technology is having on how customers want to do their banking and how banks can use technology to run themselves internally is dramatic.
For us we're tackling it in a number of ways. I like to say that we're the original 200-year-old startup. So, we try and build the mindset of the startups into the way the company adapts and I constantly like to reinforce that the reason you survived for 200 years is because you adapt. So, we are trying to really embrace the techniques that the technology community has used like Agile project management and customer centered design and use of cloud computing and these sorts of things role. We're all using those internally to run our business.
We are also engaging with smaller companies both as customers and as business partners. So, we have a business development activity function that is linking up with small companies and we're doing deals where they are helping us build out our offering to customers and put some really exciting things in payments that we've done around that.
We've also got a venture capital arm called Reinventure, where we are taking direct investments in fintech startups. All at a bit of an arm's length, we don't consider ourselves to be a great venture capitalist. But this does give us an ability to build connections with companies that potentially down the road have a strong link to our business and it gives us a tremendous insight into some of the developments there. So, we are engaged heavily and I think it's certainly part of our future.
Ellis: That leads into my next question to do with competitive advantage. Morningstar allocates a wide economic moat to Westpac and to the other major Australian banks, due to their strong pricing power and cost advantages. Brian, how would you describe as the bank's strongest competitive advantage.
Hartzer: Well if I start with the industry, and I think an important element for people to understand is the structure of the Australian bank industry. Australia is a relatively small country economically, I think we have GDP of about $1 trillion, 25 million people.
And yet the expectations on banks, the cost of running a bank, the regulatory impasse mean that you need to have a reasonable level of scale in order to meet expectations. So, the market has ended up being concentrated with four large retail banks in the market. I think the fact that we've got those scale economies and the ability to meet all the regulatory requirements, both from capital and technology and the like, is very important and that gives us a bit of a sustainable advantage.
For Westpac ourselves I think we have a number of advantages. We have a very strong brand in the market. We have a strong affinity as a result of the sustainability position that we've been talking about.
We are well respected by the government, by the customer bases as being a company with a long-term view. We also have a multiple brand strategy which is something that is different from the other bank. So, we operate the Westpac brand in retail and commercial. We also have a series regional brands, St. George, Bank of Melbourne, The Bank of South Australia and RAMS. Which give us a position in respectively Sydney, Melbourne, Adelaide, Brisbane as well. That gives us some ability to differentiate on price and target slightly different segments for the people who don't want to bank with a big bank. So that's something that's different about the way we go about things.
We also have a wealth management business called BT, and I have run wealth businesses and banks in three different banks. And one of the things that I have learned is that to make the wealth management proposition really work, it helps to have a distinctive brand that has credibility as a wealth manager. So we've got the best of both worlds in that BT has a really strong position as an asset manager, from an asset platform point of view in this market.
But it's also integrated with our online banking. So, a Westpac customer can manage all of their money both their banking and their wealth through one login. And we've just invested in a system called Panorama, which is the best investment management system in the Australian market and we think it's going to give us a great advantage, both with our customers and in providing that platform to financial advisers outside of the bank.
So we have a couple of things like that that we think give us great advantage. Finally, and I know some people will maybe discount this, but I really believe from my experience that the culture and the quality of people you are able to attract is one of the things that allows you to consistently execute over time. We have a very strong culture here at Westpac, with people with a genuine dedication.
Ellis: So, talking about people and culture obviously leadership takes many different roles, but how does Westpac do, and Brian and how do you specifically, do the development and the nurturing of talent, particularly the senior management talent and leadership talent?
Hartzer: Well one of our key agendas within the bank is what we call the workforce revolution which is really adapting the leadership and the way we manage our people to the new reality of what's expected of banks. And within that one of the objectives that I like to talk about internally is that we want Westpac to be a talent factory.
I want this to be a place where we bring in people from a diverse set of backgrounds. We give them an investment in their development. We give them rotation around different aspects of the business and we create an environment where those people can rise and thrive. It's a work in progress, but I think it starts with the quality of the leadership team I have got and in my executive team are people with decades of experience who have done lots of different things within banking so they bring quite a wide perspective to the challenges that we face.
And we are crystal clear on the values and behavior that we expect in the company and unashamed about our dedication to diversity and inclusion. For example, we're currently 49 per cent of leaders across the bank, at all levels, are female and by the end of this year we have a target of getting to 50 per cent women in leadership.
We'll be the first large company in Australia to achieve that. That's been a very deliberate strategy it has huge halo effect on the quality of people we're able to bring into the company. And over time I think that plus all the investments we are making in training and the like really are important to company success.
Ellis: Just getting back to disruption and looking at some of the recent political and regulatory changes and developments that have occurred. How do you see that unfolding over the future? Do you see there's been a complete change in the landscape of the major banks in Australia following the Federal Government's budget bank levy?
Hartzer: Well, clearly ever since the global financial crisis the expectations on banks have been rising and to an extent I think rightly so. My own view is that many banks around the world forgot why they exist. They started thinking they were like any other enterprise whose job was just to maximise profits in a short term.
And actually, banks operating under banking license have a responsibility to support economic growth and to make the right tradeoffs between the strength of their balance sheet. Their returns, how they serve their customers, their productivity and their growth. And we haven't always got that right as an industry.
One of the things we've seen in Australia is that news travels. And an interesting feature which we clearly find a little frustrating is that the regulators here and the governments here are looking around the world at initiatives that have happened in other markets and other circumstances and applying them here. And we certainly are seeing a bit of that of late.
The Australian banking system got through the financial crisis with flying colors, no banks were bailed out. In fact, the banking industry made a positive contribution to the Federal Government budget because we paid a bunch of fees for deposit guarantees which were only brought in because they had happened in other countries. Our banks are very strong. We are well positioned we've taken steps to improve conduct and compliance. We are not perfect, but I think the bank system here is very much on the right path. And we'll just continue to do what we need to do to run our business the way it builds trust with our customers.
Ellis: So perhaps I could summarise some of that by describing it as having a social license and of course Australia's Prime Minister has referred to on a number of occasions about the banks operating under a social license. So, what do you think that means a social license and how do you think Westpac has undertaken or carried out its responsibilities in that regard.
Hartzer: Well, the way I think about it is that a banking license is a privilege and with that privilege comes the responsibility to support the economic development of the country in variety of aspects. We are supporters of people's ability to buy homes. We support millions of businesses. We support tens of thousands of our own staff across the country and we make enormous contributions to the community. The crux of it is this recognition that banks have – banks are not like the other companies. They have a responsibility to support the country and I think from a Westpac point of view we feel that we've absolutely done that. And during the financial crisis we kept lending. We kept the doors open. We supported our customers. And we have a balance sheet that's strong and we're profitable off that balance sheet in a way that means that whatever stresses may come our way in the global economy or domestically. We can continue to fulfill that role, and I think that's in my mind the crux of what we have to do.
If we don't make decisions that support the development of long-term relationships with customers. If we run ourselves in ways that are antithetical to customers interest. If we don't fix things, when we get them wrong and of course in the case we do get them wrong than that's a problem. But certainly from a Westpac point of view we're entirely clear about why we're here and what we need to do and I am very proud that we do meet those standards.
12/07/2017 Look for companies that sit outside the cycle; heed the lessons of history; and remember the power of compounding, says Bennelong's Neale Goldston-Morris. The home-truths of investing Glenn Freeman 12/07/2017 http://video.morningstar.com/aus/video/170705_Neale_Goldstone_Harris_MIC_AUDIO.mp4
Glenn Freeman: During the session, you were talking about, obviously it was focused on Australian equities, and where should investors be looking now given that commodities and materials and resources are under pressure and the banks as well. What sort of sectors should people be looking at?
Neale Goldston-Morris: What we are seeing is a major transformation in our market a lot of the largest companies are now very mature in the 20 Leaders, the retailers, the banks, insurance companies, things like that. What we are seeing is new companies coming through quickly and always because of some sort of major drivers, not just management by itself, but it might be an ageing demographic, demand for hospitals: Ramsay Healthcare. Or just the medicines themselves like CSL. Or it's simply changing technology and the companies like Aristocrat or Domino's et cetera.
And this is exactly the sort of process that's been occurring in America. You've seen all the new companies coming through, whether it'd be Amazon or Google or Facebook or whatever and the old companies, or some of the old companies, slowly sliding away. That's not to invalidate some of the older ones but nevertheless when you get big it gets harder to grow, and we are seeing this transformation at the moment.
Freeman: And also, you made the point in there about. You mentioned two rules of finance, there was around the cycle always prevails, and the golden rule of compounding. Can you just expand on this, a bit for us?
Goldston-Morris: So the cycle lives on in finance and life in every way. Markets get oversupplied, market gets undersupplied, prices go up, prices go down. The importance with companies is you want to be in companies that are not dependent on the cycle so much, because that is very dangerous. If you are in a company which is purely dependent on the cycle you will get the timing wrong, you know,ou buy high you sell low. You want companies that can grow through the cycle because they offer the customer something different. It might be a new technology, might be a brand name. It might be some appeal to new market segment. You don't want to be just a prisoner of a mature market and just the cycle.
And the second is the magic of compounding. As you all know,you compound anything at 20 per cent, you'll have a serious amount in a relatively short period of time. You compound at 2 per cent, and you won't. The secret to all companies is this: if a company can make a return in excess of its cost of capital it will grow over time. If it can't, it won't. And if you are achieving a high return that will compound and compound very substantially on any reasonable investment time period. Whereas the cycle could whip you up, and whip you down, and whip you up again.
Freeman: You referred to the historical trends. And it kind of occurs to me that you were talking there about the importance for investors in understanding the historical trends that have been before in the market, and how important that is in identifying new areas of opportunity.
Goldston-Morris: Yes, I mean history tends to repeat itself. We tend to think our era is unique. Well it's not, it never is. Yes some of the ingredients might be a little bit different, but I'll give you two very quick examples. In 1830 if you were invested in the biggest stocks in the market, the canal operators, and you dismissed the new steam engine, the new-fangled thing, within 10 years all those canal operators were either bust or very small, and steam engines took off. Now that's an extreme.
The same in 1900. If you were a business that operated horses and wagons, you were out of business within 20 years as cars came in.
Well it's the same today. And the fascinating thing in history is very few companies make the transition from the old technology to the new. Because they remain in denial, 'oh, no it's not going to affect me very much ,I can make the transition when its proven. I have to tell you by the time its proven, the companies that are committed to that new way of doing things are leagues ahead, and the old company never catches up.
06/07/2017 Brian Hartzer, CEO, Westpac joins Morningstar senior analyst David Ellis to discuss his role leading Australia's oldest bank, how Westpac can continue to grow value, and its commitment to sustainability. Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 1 David Ellis 06/07/2017 http://video.morningstar.com/aus/video/170704_Westpac_Hartzer_Interview_Part1_AUDIO.mp4
David Ellis: My name is David Ellis. I'm Morningstar Australia's senior banking analyst based in Sydney. Today, I am joined by Mr Brian Hartzer, Westpac Banking Corporation's chief executive officer.
Good morning, Brian and thank you very much, and we appreciate your time.
Brian Hartzer: Pleased to be here.
Ellis: Congratulations on Westpac 200th year anniversary. So how do you see your role as a CEO of Australia's oldest bank and oldest company, and in particular, custodian of the institution's future.
Hartzer: Well, it's an incredible honour. And the role that Westpac or the Bank of New South Wales as it was originally known has played in this country for the last 200 years is really extraordinary. Our history is really the history of the Australian economy and we really take that to heart. There is this recognition that we are stewards of the company more than anything.
When we look back at that history, and there are not many banks in the world that are 200 years old. Let alone a new world organisation.
The lessons that are really taken from that are that we have an obligation that banks exist to support economic growth and in our case that is fundamentally why the bank was created. We were created to create a private economy in Australia, before that there was no currency. There were no banks. And the Governor at the time saw the need for a bank to support economic growth. So, we try and stay focused on the fact that our job is to support economic growth of the nation. To build long term relationships and to be willing to adapt over time to the many changes that come and go through an economy.
Ellis: Let's turn to the bank's multi-faceted responsibilities. So how do you rate the bank's long-term performance in balancing responsibilities of shareholders, customer, staff, regulators and particularly the bank's social responsibility funding the economy.
Hartzer: Well, I go back to that first point about why the bank exists. We really believe at Westpac that our fundamental purpose is to support the economic growth and sustainability of the country and our customers.
So, we think about how we run the company very much from a long-term perspective. Ironically, I think about it as being entirely consistent with shareholder value. And when I was studying and learning about how you think about value creation in the bank. One of the things that you realise very quickly is that most of the value in a bank like Westpac is about our ability to sustain returns over time. And that – so we – I like to describe our job as management as being about growing the long-term value of the company, within the constraint of acceptable returns along the way.
So, we need to maintain credibility with the markets. We need to show that we are managing the environment well year-in, year-out. But our primary obligation is to grow the customer franchise, make the business efficient, build relationships that can last the test of time. And when you start to think about that growing the value over time you realise that there is no conflict between doing the right thing for customers, doing the right thing for the community and doing the right thing for shareholders. It's actually a myth that those things are in fundamental conflict. Maybe in the short term they are, but that's not really how you grow value in the long term.
Ellis: You mentioned when you were studying, and I understand you studied at Princeton University in the US and you've obviously worked in a number of different senior banking roles around the world. So, with your experience, what do you see differentiates Australia compared to many other countries in the world.
Hartzer: Well, Australia is a wonderful place. It's a country with vast resources, it's a country with a very welcoming and open and industrious people. And a place where innovation is appreciated. And where there is a real – I think because of the distance of getting here -- I mean anyone who's traveled to Australia knows it takes a long time to get here. But what that meant is that the business community has always been very interested in what's going on in the rest of the world.
So, this is a recognition that we're at a bit of distance. So Australian business people tend to travel a lot – Australians tend to travel a lot, as many people would know. So, over the years we've constantly been curious to learn from the US, to learn from US banking system to more recently to go to Silicon Valley and understand what's going on there. To go to the UK and see what's happening there, to look at Scandinavia, to look at Canada which is a similar market.
We've been very keen to import ideas. Not necessarily without changing them a little bit, but to be alert to the need to not be insular. And I think that's led to a pretty vibrant financial system here and it's meant that in many respects the banks have ended up being quite innovative as well.
Ellis: Now let's turn to sustainability and Westpac is a world leader in sustainability and is ranked highly by the Dow Jones Sustainability index and Sustainalytics and other global ratings businesses. So, what do you see is the importance in that. What's the importance of embedding sustainability in Westpac's business model?
Hartzer: Well, it's been a long-term commitment of the bank. I think we had our first statement on sustainability in the early 90s. We were one of the first banks in the world and the first bank in Australia to sign the Equator Principles back in 2002. W
e've had a climate policy since 2008 and we continue to update that every three years. But we also focus on engaging with the community, support for indigenous Australian advancement. Lots of other aspects of what we think about sustainability. The philosophy really comes back to the idea that it is part of our business strategy and that we are, we see ourselves and our ability to be successful and create value in the long term as being a pillar of supporting the economic advancement of Australia.
And when you approach it in that way, you realise that a commitment to advancing the community and a commitment to healthy environment. And we have made a virtue out of recognising that broader obligation, and demonstrating we are taking long term view of our future, not just being a profit seeking company that also has a social responsibility thing that we do off on the side. What I always say to people is that at Westpac, it's part of who we are. We attract people who want to work for a company that has a long-term perspective.
Ellis: Looking at getting the Westpac message across globally. Obviously, Westpac has US listed ADRs sponsored by BNY Mellon, in New York. How do you see the role of those securities in getting the investment case across to on a wider scale to international investors?
Hartzer: Well, it's very important and we're very proud of being the only SEC registered Australian bank in the US and that is an important piece for us. I know as an American myself that investing overseas has this kind of element of fear and concern about it and lots of people view it as very risky.
And of course, there is always currency risks that you take when you invest outside U.S. But it gives us, it forced us to a high standard of reporting and it gives us a vehicle to talk to potential investors and help them understand, actually, this is a very solid country with an incredible track record of economic growth. And we have as the oldest company in that country and as the second largest bank with a massive market share and a number one and number two position in every one of our businesses. We've got a low risk strategy. We're a very I would argue compelling long-term investment for people who are looking for a safe reliable well positioned financial services entity. We try and keep ourselves nice and simple and easy to understand and we think that access to the US market and sophisticated investors is important to us.
03/07/2017 There are a few common pitfalls in running a self-managed super fund that mean trustees shouldn't go it alone entirely, says BT Financial Group's head of financial literacy, Bryan Ashenden. Self-managed super is not Do-it-yourself Glenn Freeman 03/07/2017 http://video.morningstar.com/aus/video/170630_Ashenden_BT_AUDIO.mp4
Glenn Freeman: I'm Glenn Freeman for Morningstar. I'm joined today by Bryan Ashenden, head of financial literacy and advocacy with BT Financial Group.
Bryan, thanks for joining us today.
Bryan Ashenden: Pleasure to be here.
Freeman: Now just firstly, Bryan in the past you've spoken quite a bit about the risks and challenges that SMSF trustees face. What would you see as the number one risk.
Ashenden: I think with the amount of change that is being going on particularly from the 2016 Federal Budget. The biggest risk that most SMSF funds would face today is actually those who aren't getting the appropriate advice and are almost thinking that a self-managed super fund is DIY fund. Now there is complexity in legislative changes, let alone the normal day-to-day functions of running a fund. But it really is complex and so people who aren't getting the right advice and haven't been getting along the way, right now are probably facing the biggest challenges, about trying to get themselves ready for the first of July and what that actually means for them.
Freeman: And how much understanding is there exactly what SMSF trustees can legally hold in their SMSF and what they can't.
Ashenden: I think most SMSF trustees probably got a good idea about what it is they can and can't, because I think there is a lot of literature out there that says a self-managed super fund, you've got fairly wide range as to what you can actually invest into. The biggest issue for complexity that probably comes up and spices around property and what type of property you can invest into and actually what you are going to do with it once you've invested into it.
Freeman: In your experience is there an over-exposure to property within SMSF's in Australia and how diversified are SMSF portfolios?
Ashenden: Well, certainly there has been I think a lot of talk about how self-managed super fund seemed to be heavily invested into the property market, and is that part of the issue that's leading to concerns around property (bowls) and sales around the prices and so on. If you look at statistics that the tax office puts out self-managed super funds aren't actually overweight into property themselves. But it does come back more to an individual fund by fund analysis because there will be some self-managed super funds where maybe the only asset or the most significant asset they have is property. And not that that's not all out but it comes back to the question of when you look at things like the investment strategy for the fund. Is there appropriate diversification which doesn't mean you have to be diversified, but you also need to make sure that you have got enough liquidity to pay the bills of the fund or pay up pension payments when they are required.
So, it's not I think about having too much of an exposure to property, but people really need to understand what implications are. Because if you need to sell an asset it's lot easier to sell shares and managed funds you can get your money back a lot quicker than it is to sell a property. And if you are forced into quick sale are you getting back the real value for the property that you otherwise would have wanted to have.
Freeman: Now Bryan the federal government has devoted quite a bit of time in recent years to keep an eye on the level of gearing held by SMSFs. What's your view on this?
Ashenden: It has always been a focus, since the government changed the rules and allowed superannuation funds and particularly its self-managed super funds to actually borrow to invest. There has been a lot of focus about have the rules gone too far and should they be tightened up or are they being used for the right purpose for the intended purpose that they were brought in. Now I think the government's pretty much been on record at saying. They are not looking to get rid of the ability of funds to borrow, but they want to make sure that the rules are bit tighter or there is more control over there. So we don't see super funds getting to a position where they have overleveraged. And that's really critical that we don't get to that because this is people's retirement funds. And whilst in a self-managed super fund you can chose as to how you want to invest your money it's still important to remember that that money is there for retirement purposes. I think that's the big concern that the government has been focusing on. Not the fact that funds can borrow, but making sure that they don't over borrow and that everything is done on a market basis.
So, I think we'll always see the government focusing into that space a little bit. They made some announcements in the 2017 federal budget about how some rules will change if you have your own borrowing within a fund but that's the sort of change that will impact people in terms of how much they can actually contribute into super. And how much they can transfer across into a pension and some of these are rules that the government is still talking about. The rest of them to the extent they being legislated. They only relate to new borrowings from the first of July.
Freeman: And Bryan just going back to that first question what are some of the other risks that SMSF trustees face.
Ashenden: Look I think there is a few things that trustees need to watch out for. One of those is to always make sure that your funds documentation and here we are particularly talking about things like trustee and the investment strategy are up to date and reviewed on a regular basis. So if we look back to again the 2016 federal budget there are lot of changes that were announced and it's really important for trustees to have a look at their trust and see does anything need to change. Because the government's saying we're going to change legislation in one way doesn't necessarily reflect well into your self-managed super fund if it's got some sort of rule that says you can't actually do that. So, number one you are going to make sure you trustee and your investment strategy and how you invest is up-to-date.
Part of that goes back to the don't think about self-managed super fund as a DIY fund. So if you are getting the right advice along the way these things should be addressed on a constant basis. You shouldn't be facing into major hurdles at this time of the year. And one other one I think that a lot of trustees really need to think about is actually around the estate planning or succession planning within their fund and when there is always a lot of focus on how do we get death benefits right. And do we put in place binding nomination. Do we need to have binding nomination that says when I pass away my money is going to go to my spouse or to my kids.
But with an SMSF one of the other things that's really critical to understand is how is the fund going to operate after you pass away. Because the remaining members of the fund if there are other members might want the fund to continue, but in terms of appointing new trustees making sure the fund can continue to operate and its not an extra burden left behind for those who stay. It's really critical to make sure that there are right plans in place to address that.
Freeman: And just finally is it becoming more or less complex to run an SMSF.
Ashenden: Well running a self-managed super fund is always a complex environment there are lot of rules, lot of regulations, lot of obligations that as a trustee you are responsible for and you need to understand it. So, I don't think it's going to get any less complex. But also I don't think it's becoming more. I think it's really a case of just working at how do you actually look to run your fund, to make it the most efficient process that it can be. So is that the use of certain types of investments we can get to consolidate reporting coming through. Is it just a question of how many different types of investments you have what sort of expertise do you bring in to actually assist you along the way. Those things can make a difference to I guess the day-to-day efficiency of running the fund. Complexity will always exist, it's just how do we manage that in the best way.
Freeman: That's great. Thanks very much for your time today, Bryan.
Ashenden: Thank you.
Freeman: I'm Glenn Freeman for Morningstar and thanks for watching.
30/06/2017 There are investment strategies you can adopt to mitigate volatility-linked fear and uncertainty in markets, explains Roy Maslen, chief investment officer – Australian equities, AllianceBernstein. Investing to protect on the downside Glenn Freeman 30/06/2017 http://video.morningstar.com/aus/video/170623_Maslen_AB_AUDIO.mp4
Roy Maslen: So, when we think about market volatility, it's ultimately when you see the market having rises and falls day-to-day. And why does that matter? Well, it's because it's often associated with fear or uncertainty in markets and it can lead to market falls. In fact, in Australia, in two out of three years we do see falls of 10% or greater in Australian equities.
Now, many investors want to invest in equities because they like the return potential for capital growth and income and franking credits. And when they get those falls in markets, a number of investors can find that a pretty painful experience.
Yes, I think that is a risk, but let me put that into a broader context, because if you build a portfolio of strong, stable stocks that are diversified in nature, then our research has indicated that they can fall less than the market when it's down. Conversely, when the market rises, they may not capture all of that upside.
But if you look here on Australian equities over the past, since 1990, if you've invested in a strategy that could fall half as much as the benchmark when it was down, but when the market is up, even it only captures 80% of that upside, then in the long run you'd have outperformed the benchmark by more than 3%. So, if you can have that downside protection, you can get good long-term returns albeit in periods of strong market rallies you may lag a little. But the benefit is, you help protect on the downside.
28/06/2017 Being benchmark agnostic is the most effective approach to fixed income investing, according to Anujeet Sareen, portfolio manager, Brandywine Global. Don't overdo benchmark consideration Glenn Freeman 28/06/2017 http://video.morningstar.com/aus/video/170623_Sareen_MIC_AUDIO.mp4
Glenn Freeman: During your session, the point was raised about fixed income investors being benchmark aware rather than benchmark driven. Can I just get your thoughts on that?
Anujeet Sareen: Sure. So we are definitely of the view that the most effective approach to fixed income is actually be benchmark agnostic and what I mean by that is to recognize the fact that most of these indices way they are built doesn't make a lot of sense for investors, right. They are rewarding the most indebted, most fiscally irresponsible countries in the world. Is that where you want to allocate capital? We think otherwise. We think you really ought to think about where you have the highest potential for return risk adjusted. Where are the opportunities, build portfolios up from a bottom up perspective in that fashion and focus less on what some of these indices are kind of forcing themselves to own in portfolios.
Freeman: And so where do you see some of the greatest threats and conversely some of the opportunities for fixed income investors.
Sareen: Maybe I'll start with opportunities. We think the most attractive opportunities are really in emerging markets these days and I mean local emerging market exposure. Mexico for example is a country where you can get a 30-year bond today at 7.5 per cent yield. Inflation long term is around 3 per cent to 4 per cent, that's pretty attractive real yield.
So, we have pretty significant exposure there. Places like Brazil is also very interesting, inflation has fallen a lot and they are doing all the right reforms that we think will allow them to continue to perform in the period ahead. Some of the risks I think really are more associated with places, that might change their policies we think in a negative fashion. So, we worry about China. China is doing pretty well today and we expect it to continue to do well, but the risk is that they really tighten some of their policies on the monetary side and also on the fiscal side and that might derail growth in 2018 but that's a risk it's not the whole case.
26/06/2017 Investors should consider style-exposures--such as value, defensive or yield-- they would like in their portfolios, explains Jonathan Shead, head of portfolio strategists – Asia Pacific, State Street Global Advisors Factor-based investing using ETFs Glenn Freeman 26/06/2017 http://video.morningstar.com/aus/video/170623_Shead_MIC_AUDIO.mp4
Transcript available soon./video/transcript/2720 mailto: ?subject=Factor-based investing using ETFs&body=http://www.morningstar.com.au/video/story/2720 Volatility plays to active manager strengths
-- The climate of political volatility in the US holds important implications for investors and the funds they invest in, particularly around Donald Trump's ability to pass legislation through Congress, says Pimco's Libby Cantrill. Volatility plays to active manager strengths Glenn Freeman -- http://video.morningstar.com/aus/video/170621_LCantrill_MIC_AUDIO.mp4
Glenn Freeman: Now, Libby, just firstly, has there always been this much interplay between politics and financial markets or is it something that's more – is it just that we're seeing more in the headlines and it's more front of mind now or what are your thoughts on that?
Libby Cantrill: Yeah, I mean, I think the U.S. politics has always mattered to financial markets to a certain extent. But I would argue that after the financial crisis, after we saw really unprecedented regulations, so more involvement in the US government in companies, in markets and we saw more fiscal expansion, that arguably politics actually had more of an impact on financial markets.
I think an example of that was the debt ceiling crisis in the United States in August of 2011. I think that was sort of proof positive to investors that, yes, they actually hadn't paid attention to what was going on in Washington because it could move markets.
Freeman: And given there is changeability in the political scene how difficult does that make that for companies like PIMCO and for investors to make sort of medium-term and long-term calls?
Cantrill: Yeah, I mean, I think that's a great question. And certainly, this environment is more difficult; there is more uncertainty. But we would argue from an active management perspective it actually creates a lot of opportunity. And our investment process really sort of feeds into this type of market in that we get together on a quarterly basis to talk about what's going on in the next three to nine months. And then once a year, we all come together and talk about what's happening over the three to five years. So, we have a lot of opportunities for us to test both our medium-term and long-term thesis. And then of course, in between those our investment committee is meeting on a regular basis. So, we would say that, yes, a lot of uncertainty, yes, a lot of volatility, but it's sort of the sweet spot, we would argue for a manger like PIMCO.
Freeman: And so, again, for retail investors what do you as perhaps the greatest risk facing them, just on a macro level over the next 12 months?
Cantrill: Well, from a political perspective, which is of course what I cover, there are lots of different political risks, whether it's geopolitical risks with increasing tensions with North Korea, whether it's potentially more increased protectionism from the administration or whether it's something as extreme as draconian as impeachment, which is not certainly what our base case is, but is definitely a possibility with any administration.
What we think is more likely, however, to play out is that President Trump will just see that there are more obstacles to getting his agenda through Congress. So, our base case is that less actually happens, but that some of these draconian risks actually don't come to fruition either.
16/06/2017 Ten years on from the pre-crisis FTSE 100 high, Morningstar UK's Emma Wall examines how UK stocks have fared Is the FTSE 100 Facing Another Market Crash? Emma Wall 16/06/2017 http://video.morningstar.com/aus/video/
Transcript to be available shortly./video/transcript/2718 mailto: ?subject=Is the FTSE 100 Facing Another Market Crash?&body=http://www.morningstar.com.au/video/story/2718 How to guard against retirement threats
16/06/2017 As retirement approaches, even the best-laid plans can go awry, as Tim Steffen tells Christine Benz, Morningstar US. How to guard against retirement threats Christine Benz 16/06/2017 http://video.morningstar.com/aus/video/
Transcript to be available shortly./video/transcript/2717 mailto: ?subject=How to guard against retirement threats&body=http://www.morningstar.com.au/video/story/2717 PIMCO Global Credit Fund
07/06/2017 The PIMCO Global Credit strategy receives a Morningstar Analyst Rating of Silver due to its sizeable and highly capable credit research team. PIMCO Global Credit Fund Tim Wong 07/06/2017 http://video.morningstar.com/aus/video/170605_PIMCO_Global_Credit_Fund_AUDIO.mp4
Tim Wong: PIMCO Global Credit capitalises on its sizable and highly capable credit research team very effectively. We regard long-time portfolio manager Rob Mead highly, while backup manager, Mark Kiesel, has been highly influential in harnessing and applying the team's global credit research views. These key decision makers have been involved for many years and delivered excellent long-term returns. Mead and Kiesel have profited from both opportunistic and defensive calls at different points in the cycle, while ensuring that the best analyst calls form the bedrock of this portfolio.
To start with, analysts examine securities in a highly rigorous fashion. The firm's large credit research team facilitates its rigorous approach. Analysis of security-specific and industry-related issues is the principal step in building this portfolio. While analysis of macroeconomic issues is less influential, PIMCO is nonetheless among the leaders in formulating these views. As a result, it's the firm's rigorous approach at multiple levels that gives us confidence in the repeatability of this process.
PIMCO Global Credit benchmarks itself against the Barclays Global Aggregate ex-Treasury Index and its duration will typically stay within the narrow range about this benchmark. Its duration has typically been about 4.5 to 5 over the years. By contrast, the duration of many competing credit strategies is typically close to zero as they often use a cash or cash-like benchmark.
As a result, PIMCO Global Credit will be influenced by moves in both credit spreads and risk-free interest rates, whereas many other competing credit strategies will be almost wholly influenced by moves in credit spreads. So, in a period when risk-free interest rates are rising, PIMCO Global Credit may trail many of its competitors and vice versa when interest rates are falling. That said, risk-free interest rates and credit spreads do tend to be negatively correlated which can help the smooth PIMCO Global Credit's returns compared to other credit strategies that don't have any interest rate duration.
We believe that credit strategies such as this are best used in a supplementary role in a broader portfolio./video/transcript/2715 mailto: ?subject=PIMCO Global Credit Fund&body=http://www.morningstar.com.au/video/story/2715 PIMCO Income Fund
07/06/2017 Morningstar's Tim Wong looks at the strengths and competitive advantages of this Silver-rated strategy. PIMCO Income Fund Tim Wong 07/06/2017 http://video.morningstar.com/aus/video/170605_PIMCO_Income_Fund_AUDIO.mp4
Tim Wong: PIMCO Income's strengths start with its people. It's managed by highly-qualified long-tenured staff. While the Australian vehicle has only been operating since 2015, group chief investment officer, Dan Ivascyn, has been in charge of the US version of this strategy since 2007 with Alfred Murata, his co-manager, since 2013.
Ivascyn has been highly successful making some astute big-picture calls. He has managed to do so without incurring excessive volatility while continuing to meet the fund's objectives of a regular and steady income distribution. Furthermore, Ivascyn and Murata are supported by a highly capable and deep credit research team, which is particularly helpful in a sector such as mortgages.
PIMCO Income has favoured a variety of credit sectors over time with occasionally meaningful exposure to government-related securities. This fund has historically invested heavily in mortgage-backed securities. Notably, its exposure to non-agency mortgages has often reached more than a quarter of the overall portfolio since 2010. Meanwhile, exposure to emerging markets debt and high-yield credit has grown significantly since 2012. Physical securities and derivatives such as interest rate and credit default swaps are also used in this portfolio.
This fund's rapid growth is an issue that we are monitoring but not one that we see as a meaningful hindrance. We believe that the main complication is this fund's ongoing ability to continue investing significantly into non-agency mortgages, a sector that has been shrinking since the 2008 financial crisis due to a lack of issuance as well as the natural amortizing characteristics of these types of instruments. PIMCO Income has benefited greatly from this call and continuing to sustain its exposure there even as the fund's assets have swelled.
That said, there is more to this fund than non-agency mortgages. Exposure to high-yield credit and emerging markets debt has grown over time, while this fund also has the ability to take currency positions as well as invest into other securitized debt in order to continue meeting its performance objectives.
PIMCO Income is best used as supplementary role in a broader portfolio given its potentially high sensitivity to credit markets./video/transcript/2713 mailto: ?subject=PIMCO Income Fund&body=http://www.morningstar.com.au/video/story/2713 3 pockets of opportunity in fixed income
07/06/2017 The head of PIMCO Australia portfolio management explains his views on active management in fixed income and outlines where he sees most value in this space. 3 pockets of opportunity in fixed income Glenn Freeman 07/06/2017 http://video.morningstar.com/aus/video/170605_Mead_PIMCO_AUDIO.mp4
Glenn Freeman: I'm Glenn Freeman for Morningstar Australia. I'm joined today by Robert Mead, managing director and head of portfolio management with PIMCO Australia.
Robert, thanks for joining us today.
Robert Mead: My pleasure.
Freeman: Now, what's your view on the role of fixed income within retail investment portfolios? Has this changed in recent times?
Mead: I think it's a really good question and the way I sort of think about it is, Australian investors are thinking about three really important issues when they build their portfolios.
The first one is, 'do I have too much exposure to equities or Australian residential property?'.
Second one is, how am I going to generate income in retirement.
And the third one is, there's general fear about interest rates going up even though so far, they have been very steady and actually in more recent times going back down.
So, when you think about the role of bonds or fixed income more broadly in that context to address those three issues, I would say an actively-managed bond portfolio and having that as a part of the mix ticks all three boxes.
So, it's negatively correlated or at least lowly correlated versus other risky assets like property equities.
Bonds generate a stable income stream. And also, if you actively manage bonds, then if there is the fear or there's the likelihood of interest rates going up, the manager can then take preemptive action and start to de-emphasise interest rate risk as a part of that portfolio.
Freeman: Now, Robert, in the current market, do you see any particular pockets of value for retail fixed income investors?
Mead: The high-quality credit part of the marketplace, we think, is still attractive whether that be at the senior level or even further into the subordinated sectors.
In terms of the overall portfolio, I think it's still important to ensure that there is diversification. So, while there is nothing wrong with, say, an Australian bank hybrid, they are fine investments to have as a part of the portfolio mix, they are correlated with other things that we know are in portfolios.
So, again, we always keep stressing that as long as there's diversification in the overall portfolio, that's the most important element.
The other thing we like are things like securities that are backed by US housing, which is much more robust in terms of its price outlook than the very expensive Australian housing market.
We also like looking at the global banking sector, some of that in the subordinated sense, really given the fact that some of the European, Swiss banks, other jurisdictions were really penalised post-crisis and they have had to recapitalise very aggressively since. So, that would stand out as another one of the parts of the credit spectrum.
Finally, we still like Australian high-quality, even Commonwealth government bonds in the three to five-year sector. The RBA is not going anywhere.
We think 1.5 per cent will remain the cash rate and the policy rate for the balance of 2017. And there's enough noise out there to suggest that some really high-quality duration in a portfolio sense makes perfect sense in the mix.
Freeman: What are your thoughts on the quality of Australian credit issuers? Are the prices accurately reflecting the risk?
Mead: I think so. So, if you split the market into industrials and financials, the industrials, many of which they issue in Australian dollars, look like at least fair value, if not marginally cheap versus their global peers.
But when you look at the Australian banks, especially at the senior level, spreads are getting quite tight. So, I would be sort of thinking about the market more bifurcated from industrials to financials, with a preference in Australian dollars more into the industrial space at the moment.
Freeman: What's your view on the active versus passive management debate? How is that reflected within the fixed income environment?
Mead: Yeah, it's a great question. It's obviously a hot topic and there's lots of different views out there. So, I'd make a couple of comments.
First thing is that based on all of our independent data analysis, there's a compelling view based on the data that the fixed income universe of managers has done a lot better job in terms of outperforming their designated benchmarks than in the equity universe. So, then you ask yourself, why. We do think there are some inherent reasons why.
So, first of all, central banks own a large share of various bond markets around the world. They are less focused on outperforming any benchmark. They are really focused on just absorbing some of the bond supply in a quantitative easing scene. So, there are some noneconomic players that are participating in bond markets, much less so in equity markets.
And also, bond markets, bond portfolios, bond indices change quite dramatically. So, every time a new issuer comes to market with a new bond, or a bond matures, the universe changes. So, it's constantly changing, which provides opportunity.
The final thing I would say is, active management is still not easy. So, finding managers that can consistently outperform, I think the role of those managers in portfolios is going to become even more important as some of the other components of an asset allocation move towards passive.
Freeman: Thanks for your time today, Robert.
Mead: It's a pleasure. Thank you.
Freeman: I'm Glenn Freeman for Morningstar. Thanks for watching.


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We attain the fundamental materials required for the life-sustaining activities such as the renewal of our cells and the function of our organs, by means of various food and beverages. Yet, each food we consume has to be dissolved into these basic materials in order to be used in our bodies as a result of fundamental changes. During this process, stomach has a very significant role. The stomach, which is itself indeed a type of meat, releases a type of acid in order to digest meat – yet it never mistakenly digests itself. In order to provide this, there is a particular system created in the stomach.
How does the acid strong enough to digest a razor become inactive in the stomach?
Stomach has a very splendid structure where each stage serves a complex purpose. The food we consume reaches the stomach after passing through the gullet. The digestion process is different than that of mouth. In stomach, very strong acids are activated. As soon as the food reaches the stomach down from the gullet; the cells on the surface of the stomach start to release plasma called gastric acid. At the same time, chemical digestive liquids called pepsin and hydrochloric acid are also released. These acids are strong enough to digest a razor blade. These acids have to exist in order to digest the hard-to-digest materials such as proteins. However, there is a very significant detail, here. The stomach itself is consisted of proteins. Then, how come an acid capable of digesting a razor blade does not harm the stomach's itself, at all?
This is one of the unique examples of creation in human body. The stomach does not digest itself, thanks to its indented structure. In the deep indents of the stomach walls, there are cells having features different than one another. In a very fine-tuned balance, while the particular cells are releasing acids, the other cells around them release a kind of sticky plasma. This plasma called "Mucus" covers the surface of the stomach and protects the stomach wall against the acids like a shield; and thus it prevents enzymes to hurt stomach. Mucus not only prevents the proteolytic enzymes from entering into the cells, as well as the viruses causing infection and other microorganisms; but also eases the movement of foods in the canal and thus functions as a lubricant.
Stomach Acid is Strong Enough to Pierce a Carpet
How do these proceedings happen and how is this protective environment formed in the stomach? Could it be possible that the cells in the stomach decide to produce these materials on their own and that somehow they discovered the formula of these protective materials? Let us consider what the cells might need in order to be able to do so:
First of all, in order to produce these materials required for digestion, some particular cells must be aware of that food need to be digested. The same cells must know that they would actually need a material such as acid for the digestion. Later on, they need to find the formula of the most suitable type of acid and then start production in accordance with this formula. For the production of protective material, some cells need to determine that this acid might hurt the stomach itself and then need to examine the samples they collected from the acids in the lab and thus need to develop a formula to stop the effect of the acid. In the meanwhile, even a single drop of this acid, is strong enough to pierce the carpet. Therefore, a single mistake in the formula would result in that the stomach would be digested by the acids completely.
It is for sure that the formation of the materials stabilizing one another in the stomach is not that easy, at all. Finding the correct formula for the materials is a significantly difficult issue, on its own. Nevertheless, it is not possible for a cell – so tiny that even the eye can't see- to develop chemical formulas and thus to form materials by compounding these formulas. It would be irrational to claim that a cell consisted of unconscious atoms is capable of having such a reasoning and talent.
Besides, even if we accept being irrational and assume that the acid in the stomach is somehow formed; it will be impossible to expect the formation of the stabilizing material in time. This is because, the acids that are strong enough to digest a razor blade would destroy the stomach's itself in a very short time. Therefore, it would be impossible to expect the acids waiting in the stomach not only for millions of years but also even for 2 or 3 days. (Harun Yahya, Miracle of Man)
Any changes that might happen in our body system would cause the distortion of all complex systems, the incapability of performing duties fully and sometimes it would result in damaging the body. Nonetheless, thanks to the wonderful creation by Our Lord, these proceedings continue constantly and regularly and within a great harmony. All these proceedings are only one of the innumerable examples of the perfect creation and order in Allah's supreme creation.
Allah created the human body in the most perfect way as a whole: In a verse of the Holy Quran:
"To Him be glory throughout the heavens and the earth: and He is Exalted in Power, Full of Wisdom!." (Surah Al-Jathiyya, 37)

subset: commoncrawl


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