Nathan Bell

Taking an ethical stance with your investment choices doesn’t condemn you to under-performance.

While there’s a long-held misconception that ethical investors pay dearly for the privilege of favouring companies committed to ESG (environmental, social and governance) principles, nothing could be further from the truth. Given that assets invested according to ESG-related strategies reached $30 trillion globally in 2018, Intelligent Investor senior portfolio manager Nathan Bell reminds investors that ethical investing can no longer be dismissed as a short-lived fad.

Here in Australia, Rainmaker research reported a 76 percent annual growth in ESG products (to $1.8 billion) in the three years to 30 June 2020 – almost three times the growth experienced by the rest of Australia’s exchange traded products market.

Bell also reminds investors that they don’t need to make a binary distinction between ESG and returns. “Taking account of environmental, social and governance considerations in an investment process is not only important, it can improve investment outcomes,” said Bell.

ESG linked to returns

There’s now irrefutable evidence of a clear link between ESG investing and more informed investment decisions, plus better risk-adjusted returns in the long run. Bell cites a renowned meta-study of 2,000 academic studies, which reveals a 90 percent non-negative link between the incorporation of ESG factors and corporate finance performance, while 63 percent identified a positive link.

Fast forward to 2020, and the Coronavirus and its aftershocks have put a greater spotlight on the importance of ESG issues, including income inequality, diversity & inclusion, social justice, employee welfare and climate change to name a few.

While some investors assume that ESG-investments are synonymous with sub-par returns, to date these fears, adds Bell have been unsubstantiated. For example, a recent study also reveals that in first quarter of 2020, over 90 percent of sustainable indices out-performed their parent benchmarks.

“What sceptics can take from this data is a clear reminder that if done right, ESG investing can be immensely profitable,” said Bell.

Intelligent Investor has top performing Ethical Share Fund
One ethical fund to out-perform its benchmark is the Intelligent Investor Ethical Share Fund (ASX: INES). Morningstar figures show that with a total return of 7.14 percent, INES is the number one ethical fund compared to 100 similar ethical managed funds benchmarked to the ASX/200 in the 12 months to 30 June 2020.

As the fund manager of INES, Bell attributes the fund’s out-performance, during one of the toughest markets in history, to its heavy focus on owner/manager businesses. He’s adamant that focusing on owner-managed companies, where the person running the business has most of their personal wealth invested – right alongside clients’ savings – is one of the most statistically reliable ways to out-perform the market. Bell attributes the out-performance of technology and healthcare stocks, both at home and abroad, to the founders’ ability to increase their competitive advantages during a downturn.

He says the decision by weaker rivals – worried about refinancing debt and losing customers – to pull back on critical investments and marketing during COVID, has reinforced the market positions of the better run insider-owner businesses. By offering superior service when it matters, adds Bell insider-owner businesses have been instrumental in taking market share off their competitors.

Given the concentration of technology and healthcare stocks – which have performed well during COVID – within ESG portfolios, Bell isn’t surprise at the market attention they’ve attracted in the last six months.

“Ethical funds by nature push investors into high quality businesses, which due to their strong growth trajectory, and robust balance sheets are often economically immune from cycles,” said Bell. “All that pays off in a crisis, which is why those stocks recover the fastest.”

Filtering for better returns

Listed in June 2019, INES is an active ETF designed for investors seeking a diversified basket of Australian companies with growing sustainable profits. The 20-plus stocks held within the fund, including the top five – Frontier Digital Ventures Ltd, Audinate Group Ltd, Seek Ltd, Pinnacle Investment Management and Carsales.com Ltd – are selected due to both their discount to valuation and their low risk of interruption from mounting threats linked to ESG factors.

Bell attributes much of the fund’s out-performance to only selecting from the ASX-300, stocks that pass the ESG filters – including a commitment to addressing environmental, social and governance challenges.

By excluding stocks that don’t pass the ESG filters, only stocks selected by Bell are those that behave in shareholders’ best interests. The fund generally won’t invest in companies that make most of their profits from non-ESG sources, like tobacco, gambling, alcohol and resource companies.

But what’s important to note, adds Bell is that by taking up this [ESG filter] process, investors are not giving up returns.

“When we applied the ESG negative screen to the 420 BUY recommendations made by Intelligent Investor since 2001, the average return from the companies that passed (the ESG screen) was 14.8 percent annualised, compared to 10.1 percent for those that didn’t,” explained Bell.

“Really good businesses aren’t resource companies, they’re the ones that can produce consistent long-term profits, control product pricing and this is why we’ve made such good returns.”

By Nathan Bell, Intelligent Investor senior portfolio manager

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Ron Hodge

Digital wealth provider InvestSMART has announced an industry-first pricing model that will enable advisers to offer their clients access to diversified portfolios at a fraction of the cost.

Using the InvestSMART’s recently launched Professionally Managed Account (PMA) platform, investors will pay no more than $451 per annum, regardless of the amount they invest.

Fees start at just $99 per annum for clients with lower balances of $10,000 to $18,000, capped at $451 for those who invest over $82,000, excluding brokerage costs and indirect costs.1 Investors can also benefit from low brokerage costs of $5.50 or 0.11% (whichever is greater) on buys and sells.

Commenting on the unique pricing structure, InvestSMART CEO Ron Hodge said: “We know from our discussions with financial advisers that servicing a broad range of clients in a cost-effective way is an ongoing challenge for the industry.

“This platform can assist advisers in delivering personalised service and value for money to all, from lower balance clients through to the more sophisticated.”

Personalised portfolios

Advisers can combine the underlying model portfolios in any proportion they choose, creating a portfolio that is tailored to their clients’ individual investment objectives.

“We are getting a lot of interest from advisers who would like to use the platform to run their own portfolios for their clients. InvestSMART PMAs cater for all types of financial advice businesses, allowing advisers to outsource investment management or take a more hands-on approach.”

Under InvestSMART’s PMA model, investors hold their shares directly, with an individual holder identification number (HIN) providing full transparency over the underlying assets. This differs from the traditional Separately Managed Account (SMA) model, where shares are held by a custodian.

“The HIN-enabled model is not only cheaper and less complicated but also offers real-time transparency, making it easier for advisers to keep track of their clients’ holdings,” Mr Hodge said.

In addition to the capped pricing, InvestSMART’s PMA platform gives advisers complete visibility over their clients’ portfolios. Through the PMA platform, advisers have the ability to generate reports and tax statements and can easily track transactions within the portfolio. They can also offer their clients 24×7 access to their portfolio with their own login.

“With improvements in technology bringing down fees across the board, we will continue to look for new ways to help advisers lower the costs of investing for their clients,” Mr Hodge said.

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Alastair Davidson

Digital wealth provider InvestSMART, has announced the launch of low-cost Professionally Managed Accounts (PMAs*), as part of its mission to help lower the total cost of investing for Australians.

Following the release of its recent whitepaper, ‘How fees can destroy your wealth: Understanding the total cost of investing’, InvestSMART has announced the launch of the InvestSMART PMA  – a new investment service which offers direct investors the benefits of professional portfolio management at competitive fees.

InvestSMART PMAs allow investors to create a unique portfolio of securities from a range of model portfolios, giving them greater control and transparency. Investors can also benefit from low-cost brokerage and administration fees, as well as receiving one tax report for all their holdings.

Commenting on the launch, InvestSMART Head of Funds Management, Alastair Davidson, said: “Our research shows that an accumulation of small fees including financial advice fees, implementation fees, platform fees and investment management fees can really eat away at investor returns. It is therefore essential that investors understand the fine print before investing.

“Taking advantage of recent advances in technology and our ability to source low-cost providers, InvestSMART has launched this new service to provide investors with greater visibility over how their money is being invested and where their fees are going.”

Greater control

The model portfolios in the PMA are all professionally managed and constructed by InvestSMART’s experienced investment team.

“Investors can combine our model portfolios in any proportion they choose, creating an account that is unique and tailored to their individual needs,” Mr Davidson said.

Under the PMA model, investors will hold legal ownership of their shares, with the ability to move securities and make regular contributions or withdrawals with ease. Investors can also terminate the arrangement at any time and keep their shares.

Cost savings

Unlike most other managed investment schemes, investors’ tax position will only be affected by the activity within their own account, so they will not inherit capital gains from other investors.

Investors can also benefit from low brokerage costs of $5.50 or 0.11% (whichever is greater) on buys and sells.

“We think this model will appeal to investors who want to build a portfolio of equities without having to continually watch the markets and make trading decisions,” Mr Davidson said

“The taxation and cost benefits are also highly attractive, giving investors the opportunity to keep more of their hard-earned capital in their pocket.”

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Ron Hodge

New research from digital wealth provider InvestSMART is putting the spotlight on the devastating effect high fees and costs can have on investor nest eggs.

Data modelling in InvestSMART’s new paper, How fees can destroy your wealth, shows someone who had invested $100,000 in Australian shares over the 30 years to June 2018 at a fee of 0.5% would have $1,207,807 at the end of the period, while a fee of 1.5% would have netted them just $896,508^[1] – almost 26% less.

From financial advice fees to platform and fund manager fees, the total costs involved in investing are having a significant impact on investment outcomes.

Commenting on the findings InvestSMART CEO Ron Hodge said in most cases, fees rather than returns make the biggest difference to investors’ quality of life in later years.

“What we found is that many investors are paying for outperformance and getting the opposite. Our research shows that on average fund managers are underperforming by the amount of their fees,” he said.

“We want to help investors to understand the depth and the extent of the fees they are paying and the impact it has on their savings over time, because a small number can make a big difference.”

The effect of ‘fee stacking’

According to Mr Hodge, the high total costs of investing are caused by ‘fee stacking’ – an accumulation of apparently small fees including financial advice fees, implementation fees, platform administration and investment management fees, which can easily add up to 2% per annum.

“The impact for investors is huge. The money is lost to fees, and the corresponding loss of the benefits of compounding ends up in the pockets of the middlemen and women of finance,” he said.

Mr Hodge encouraged investors to do their homework when it comes to fees, many of which are avoidable or reducible.

“There are now plenty of low-cost alternatives to financial advice, including scaled advice offered by super funds and independent research.

“Across the board, product fees are also coming down. If you’re heading down the passive route, just look for a low fee and if you prefer an active manager, make sure it has the performance track record to justify the fees being charged,” he said.

Take action

InvestSMART offers a range of products and resources to help investors to reduce their total costs of investing. These include a popular free online Portfolio Manager; low fee investment products independent research from an experienced investment team; and Compare Your Fund, an online resource that allows investors to compare the fees and performance of managed funds and superannuation funds.

“As technology continues to level the playing field for investors, we believe there is no reason anyone in this day and age should be paying excessive fees,” Mr Hodge said.

“That is why InvestSMART is currently investing heavily in a range of technology-based products to help investors lower the cost of investing.”

Download the paper, How fees can destroy your wealth here.

——–

[1] InvestSMART data, based on the average annual return of 9.2% p.a. over the 30 years to June 2018

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Paul Clitheroe

Research from digital wealth provider InvestSMART has shown many of the country’s biggest fund managers are charging fees for no, or underwhelming, performance.

InvestSMART modelling of Morningstar data shows over $414 billion of everyday Australians’ hard-earned cash is invested in underperforming funds. Analysing over 9,300 managed funds in Australia, the research revealed that out of the 5,297 funds with a 10-year track record, 78% have underperformed their respective benchmark indices by an average of 1.88%, with average fees at 1.74%.

Commenting on the findings, InvestSMART CEO Ron Hodge said fees were the most important part of any performance equation.

“It is pretty well known in the industry that over the longer term, most fund managers will underperform their benchmark by the cost of their fees. This is largely because a benchmark does not have any transaction costs – it is a hypothetical calculation.

“So why are benchmarks important? Benchmarks are a comparison metric, allowing investors to compare apples with apples when they are looking at a number of investment options. For example, there is not much use comparing an International fund to an Australian Equities fund or a property fund with a bond fund,” he said.

To help investors more easily compare their fund’s performance against its peers, including fees, InvestSMART recently launched an industry-first online tool, Compare Your Fund. The tool allows investors to compare a range of managed funds (including super and pensions).

You can’t control performance but you can control costs

InvestSMART Chairman Paul Clitheroe said while historically it had been difficult for investors to compare fund fees and costs, Compare Your Fund allows investors to really do their homework before investing.

“While you can’t control the performance of your fund, you can control fees and we believe this tool will help investors truly understand the fees and costs involved in investing,” he said.

“There are plenty of low-cost investment products out there, if you’re paying too high a fee, you’re giving away too much of your share of investment returns.”

Technology as an enabler

Mr Hodge said technological innovation was gradually levelling the playing field for investors.

“Fund manager fees have fallen globally over the past decade and we believe advances in technology, along with regulatory change, will continue to put pressure on traditional fee models,” he said.

“InvestSMART is currently investing heavily in new technology-based products and tools, with the goal of continuing to help lower the total costs of investing to help Australians grow and protect their wealth.”

In addition to the Compare Your Fund tool, InvestSMART also offers stock research and analysis to over 630,000 members, and a popular free online Portfolio Manager, which allows investors to track all their investments in one place and conduct regular portfolio health checks.

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Ron Hodge

Digital wealth provider InvestSMART, has called on the finance industry to stop confusing Australians with unnecessary jargon and to keep things simple.

InvestSMART has this week launched an enhanced offer and new-look brand as part of its mission to provide all Australians with access to the advice, tools and investment products they need and want.

The move follows quantitative and qualitative research* of over 1,600 InvestSMART members, which showed a strong preference for independent financial decision-making. The findings showed 96% like to be in control of their financial decisions and 74% prefer to do their own research. The qualitative survey also uncovered a wariness and, in some cases, an outright rejection of seeking financial advice, with fees and opaque commission structures among the biggest concerns.

InvestSMART CEO, Ron Hodge, said the current regulatory environment was only likely to further contribute to questions around trust.

“The Royal Commission has highlighted some questionable and unethical behavior from some well-known organisations.

“Australians have had enough of the finance industry using jargon and unccessarily complex ways of showing critical information. Our re-brand, new website and enhanced research services are all about keeping things simple, and being a trusted voice in a sea of uncertainty,” he said.

Useful services to help Australians get ahead

InvestSMART’s recently launched Compare Your Fund tool which allows investors to easily compare the fees and performance of nearly all managed funds, superannuation and pension products in Australia. The free to access tool analyses the long term performance of 9,580 funds against peers and industry standard benchmarks, and also allows investors to see the full cost of fees of each fund.

“Just as Australians are wary of the concept of fees for no advice, the Compare Your Fund tool exposes how some fund managers may be charging fees for underwhelming performance,” said Mr Hodge.

Additionally, the intuitive HealthCheck function of InvestSMART’s free to use Portfolio Manager, provides investors with a simple way to track their investments and rebalance their portfolios to meet their risk tolerance and financial objectives.

“These simple and easy to use tools are just some examples of how we are putting the power back into the hands of the investor to help Australians grow and protect their wealth,” said Mr Hodge.

As part of the re-brand, InvestSMART has embarked on an extensive multi-channel advertising campaign, which is set to be rolled out nationwide over the coming months.

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Alastair Davidson

InvestSMART Group Limited (ASX Code: INV) has debuted its first ASX listed fund – an active ETF – designed to deliver investors income without sacrificing capital gains.

The InvestSMART Australian Equity Income Fund (Managed Fund) (ASX:INIF) listing follows high investor demand during its initial application period. INIF attracted more than three times its funds under management (FUM) target, closing at more than $30 million FUM.

INIF commenced trading on the ASX today at a unit price of $2.50. It mirrors the group’s existing unlisted Intelligent Investor Equity Income Portfolio, which has an estimated income of 5.3% p.a.^ and has returned 11.5% p.a. since inception, significantly outperforming its benchmark of 7.9%*.

Commenting on the fund’s launch, InvestSMART Head of Funds Management Alastair Davidson said he was excited to see the group’s first active ETF trading on the ASX, giving every investor the opportunity to access the strongly-performing portfolio.

“The Intelligent Investor research team has been running a very successful equity income model for the last 17 years. The active ETF offers investors access to this model in an easy-to-buy, listed format,” he said.

Managing risk

With Australians living longer than ever before, longevity risk is one of the biggest risks facing investors today. Coupled with inflation, investors need to reassess their investment approach to avoid outliving their capital.

“Investors hunting exclusively for yield-based stocks can become caught up in companies that pay well initially but have poor long-term prospects,” Mr Davidson said.

“We believe it is imperative to consider both the growth outlook of a company and its ability to pay dividends. Therefore we focus on undervalued, cash-rich businesses with the expectation that they will produce strong cash flows to support dividends in the future.”

Underweight banks

INIF provides exposure to a concentrated portfolio of up to 30 Australian equities with a sustainable income, actively managed by a team that has a research track record of more than 20 years.

While the fund does hold some bank stocks, its exposure is currently less than 9%, compared to more than 22% in the ASX200. In InvestSMART’s view, having a large weighting to banks is imprudent, and in the current environment, risks in the sector are increasing.

INIF is a cost-effective solution with competitive fees and expenses of 0.97% and no performance-based fees. The listed structure also benefits investors who are seeking simplicity and less paperwork.

“The launch of the Active ETF will give investors access to a professionally-managed, strong-performance portfolio in a simple and cost-effective way,” Mr Davidson said.

^Including franking. *As at 30 April 2018, after admin and investment fees, excluding franking. Inception Date is 01 July 2015. The Fund will be managed in the same way as the Portfolio product.

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Alastair Davidson

InvestSMART Group Limited (ASX Code: INV) has announced it will launch an Active ETF, that delivers investors income without sacrificing capital gains.

InvestSMART has lodged the product disclosure statement for the InvestSMART Australian Equity Income Fund (managed fund), to trade under ASX code: INIF, with plans to launch an Initial Offer of units in the Fund at $2.50 each from May 14 before listing on the ASX in June.

The Active ETF will mirror the group’s existing Australian Equity Income portfolio, which has a strong track record of performance – returning 11.05% p. a. after fees (outperforming the S&P ASX 200 Accumulation Index by 4% p.a.) since inception in July 2015.

Commenting on the launch, InvestSMART Head of Funds Management Alastair Davidson said INIF aims to deliver both a stable income and capital growth by investing in a portfolio that’s light on the banks and focused on under-valued, cash producing companies.

“While the priority of the fund is delivering income, the portfolio is constructed in such a way as to allow investor to also benefit from capital gains,” Mr Davidson said.

“We believe everyone should have the confidence to control their future and it shouldn’t be hard or expensive to do so. The launch of the Active ETF will allow investors to access the strongly performing portfolio in a simple and cost-effective way.”

Underweight the banks

While INIF may hold some bank stocks, its exposure is currently less than 9%, compared to more than 22% in the ASX200. In InvestSMART’s view, the majority of Australian banks are overvalued, and in the current environment, risks in the sector are also on the increase.

Holding up to 30 stocks, INIF has a benchmark unaware approach with a bias towards under-valued companies that have a high certainty of generating cash, which can help produce excess returns during difficult or downward trending markets.

The ASX-tradeable portfolio structure afforded by the Active ETF benefits investors who are seeking ease of transacting and less paperwork. INIF is also a cost-effective solution with competitive fees and expenses of 0.97% and no performance-based fees.

Experienced investment team

Unlike passive Exchange Traded Funds (ETFs), Active ETFs bring the benefit of professional management by an experienced investment team.

INIF will be managed by James Carlisle, Head of Research at InvestSMART, who has been researching stocks for more than two decades and Guarav Sodhi, Deputy Head of Research, who has been with InvestSMART as an analyst for nearly a decade.

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