Flynn, who was most recently head of operations for ANZ’s Aligned Licensees, has joined van Eyk Advice as operations manager and will report to Paul Bray, van Eyk director and head of strategy.

He will oversee the day-to-day management of van Eyk Advice including business operations and risk management.

Flynn has also been appointed head of finance for van Eyk Advice’s parent company van Eyk Research.

Bray described Flynn as an “exceptional hire”.

“David is an experienced professional and he will resonate well with the financial advisers we wish to target,” he said

“David will oversee the appointment and on-boarding of high quality advisers and practices which value independent investment research, want to grow and have around $100 million in funds under advice.”

Flynn, who has over 20 years’ financial services experience working for companies including ANZ, ING, Zurich and AXA Ireland, said he was attracted to van Eyk Advice’s unique value proposition.

“van Eyk Advice stands out as a non-aligned licensee that is truly committed to helping advisers provide objective advice and grow their businesses,” he said.

“In an environment of regulatory uncertainty and consolidation, van Eyk Advice is an attractive alternative to institutionally-owned dealer groups. Quality investment research is an integral part of the van Eyk DNA and is a key plank in the van Eyk Advice value proposition.

“Our advisers will also have access to van Eyk’s portfolio construction and asset consulting capabilities and best of breed multi-manager investment solutions.”

Bray added that the current economic environment would continue to be challenging for advice businesses.

“Advisers can’t rely on strong markets to drive growth in their businesses,” he said.

“We believe our value proposition to advisers, which includes direct access to our practice management subsidiary The Encore Group, can help advisers win new clients and boost productivity, and build highly successful and profitable practices.”

Flynn will also work closely with van Eyk Advice’s practice acquisitions and recruitment manager Anthony Vaiente.

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Mark Thomas

van Eyk has awarded five funds its top AA rating from a strong pack in its Australian Equities Review 2013 after one third of funds failed to clear the first hurdle.

The assessment of long-only Australian equities funds considered a total of 69 strategies. Five funds were invited to take part in the review but declined (some of these received a poor rating last year) while 19 funds were screened from the review because van Eyk considered them not sufficiently competitive.

van Eyk believes it is crucial that in investment research there be transparent disclosure of the complete sample of products from which the recommended ones are eventually chosen. This assists financial planners and other research users in judging how selective the ratings process was and therefore the quality of those findings.

van Eyk chief executive Mark Thomas said he was pleased to see this issue highlighted in the recent report on “gatekeepers” in the financial system by the Federal Parliamentary Joint Committee on Corporations and Financial Services. “It’s important that planners can see the outcome for all the funds that were considered in a review” he said. “This also helps discourage ‘ratings shopping’ by fund managers.”

In addition to the five AA ratings, the review awarded 19 A ratings, 18 BB ratings and three B ratings. Ratings of BB and above are considered by van Eyk to be investment grade.

van Eyk Head of Manager Research Matthew Olsen said the key negatives for managers culled in the initial screening process were insufficient levels of active risk in the portfolio, insufficient manager skill and an investment process that was not significantly different from the majority. “A lack of active risk means managers are much less likely to generate meaningful excess return for investors,” Mr Olsen said. “These factors also featured in the reasons for downgrading a number of funds this year.”

A range of investment styles was represented among the recommended managers, with growth, neutral, value and one quantitative manager in the group. Fund details from this review are available to paid subscribers to van Eyk’s research.

van Eyk currently has a “medium” risk rating on the Australian equities asset class.

In van Eyk’s view, the Australian share market has normalised since the GFC but further risks loom on the horizon. In particular, there are risks around the potential for a further slowdown in Chinese economic growth, the weak Australian manufacturing sector and the fact that local banks are trading at a valuation premium compared to their global peers. Good risk control and risk awareness by managers continue to be highly regarded in this asset class.

Lead analyst on the review, Varun Venkatraman, said that over the next two to three years, returns in Australian equities may be lower than long run averages. “While our long term strategic asset allocation recommends 28 per cent of a balanced portfolio be allocated to this asset class we are currently recommending a lower tactical exposure,” Mr Venkatraman said.

van Eyk’s tactical allocations are updated monthly in its Investment Outlook Report.

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After the Reserve Bank cut the cash rate to a record low last week of 2.75%, with the possibility of more rate cuts to come, many investors will be wondering whether to heed the call of some commentators and put more of their money into higher yielding stocks to boost their income.
 
van Eyk Head of Manager Research and Deputy CIO Matthew Olsen said many investors were still wary of the share market but also recognised that current rates on bank deposits and government bonds were not enough to provide them with an adequate income. “We see in our business that many financial advisers and their clients are still particularly sensitive to any further volatility in shares four years after the onset of the global financial crisis,” Mr Olsen said.
 
van Eyk recently highlighted that, despite the relatively healthy yields still available on “quality” yield stocks, the ratio of the performance of quality stocks to the “value” end of the Australian market was the highest for ten years, suggesting there was an elevated risk that the trend will reverse.
 
Mr Olsen said the Absolute Equities asset class was an alternative worthy of consideration for investors who wanted exposure to the higher returns on offer in equities but at a reduced level of volatility or risk. The volatility of returns over time is the standard way of measuring the riskiness of an investment (van Eyk also carefully considers asset valuations and the potential for capital losses).

Fund managers in the Absolute Equities asset class aim to produce positive returns regardless of the direction of the share market, in part by adjusting their exposure to the market as conditions change.

“Absolute Equities have matured signicificantly as an asset class in Australia in the last five years and van Eyk’s highly rated managers in this sector have been producing healthy, positive absolute returns with lower volatility than pure shares,” Mr Olsen said.
 
Absolute Equities will almost always underperform a strongly rising share market but many investors will find that to be an acceptable trade off because they are significantly less risky than a fully invested or “long-only” position in shares.
 
van Eyk’s Blueprint Absolute Australian Shares Fund, for example, achieved a return (after fees) of 9.28%  during the twelve months to March 2013 compared to cash (UBS 90 Day Bank Bills), which had a return of only 3.58% in the same period. While it had a lower return than equities, the Blueprint Absolute Australian Shares Fund delivered its gains with less than half the volatility of the share market return.
 
“That means the Fund is much less vulnerable to drawdowns than the share market, or a long-only Australian shares fund, when equities fall,” Mr Olsen said. “So it offers investors a degree of downside stability while allowing them to participate in the upside potential offered by shares.”
 
Absolute Equities come under the umbrella of “Alternative” investments. van Eyk recommends investors have an exposure to Absolute Equities as part of a well diversified investment portfolio.

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The new IEQ review examined 43 managers. Lead analyst Nimalan Govender said this year’s group was a more competitive field of managers than in the previous review.
 
“Managers needed to show they had the ability to deliver returns in excess of the benchmark given the heightened risk of volatile market conditions going forward.” Mr Govender said.
 
This was reflected in the spread of ratings. Nine managers were screened from the review because they were not sufficiently competitive. Four managers received van Eyk’s top AA rating, whereas no managers received the top rating in last year’s review. Fifteen strategies received an A-rating but three previously A-rated managers had their ratings downgraded.
 
Mr Govender said that given central banks had shown they were prepared to continue to pump huge volumes of liquidity into the banking system in an attempt to sustain economic growth, there was a higher risk of market volatility and managers needed to have an investment process that could handle this.
 
This meant managers had to demonstrate a clearly articulated investment process and show a particularly thorough understanding of the stocks and industries they were investing in.
 
“You need managers who can see through this volatility and have the conviction to choose quality stocks for the long term and avoid the stocks that will get an undeserved lift from the effects of the  liquidity flood,” Mr Govender said. “If you don’t believe in your process you will chop and change stocks in this market environment.”
 
This kind of strong, “bottom up” research built investment ideas from the ground level and was more likely to lead to the original investment insights that enabled managers to find sources of return missed by the broader market. “These people don’t just pick up the Financial Times in the morning for their ideas,” Mr Govender said.
 
Managers which rated highly in the review had proven their ability in this area by delivering those excess returns and most with a level of volatility lower than the benchmark, he noted. A good example was the Platinum International Brands Fund, which has achieved annualised returns 5.41% in excess of its benchmark on a rolling 3-year basis.
 
Mr Govender said there was no clear majority view among the managers reviewed about the outlook for different regions. Some were underweight the US and overweight Europe while others had the opposite leaning. “It’s more a case of stockpicking rather than sector tilting among managers at this stage,” he said. “If there’s any trend it’s towards quality stocks with sustainable cashflows.”
 
van Eyk’s model balanced portfolio currently recommends an overweight exposure to international equities because their valuation is less than the long term average and they are better value than the Australian share market at the moment. However, van Eyk favours defensive stocks given the heightened risks in international markets.

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van Eyk’s proprietary database of fund manager holdings shows only six managers were overweight value stocks by five per cent or more, compared to the benchmark.
 
This compares with 47 strategies which had a 5 per cent or greater overweight to quality stocks. The average bias towards quality was 8.3 per cent.
 
van Eyk chief executive Mark Thomas said the tilt towards the quality end of the market had been the right strategy since the GFC because the rise in the market had been driven by only a relatively small number of stocks. In fact, 80 per cent of the rise in the ASX200 index for the 12 months to February 2013 was due to just 10 stocks – including the major banks, Telstra and other defensive stocks like Woolworths.
 
“Investors who are still bruised by the bear market have naturally been crowding into stocks that have a history of good yields, strong balance sheets and solid dividends because they have been perceived as a safer exposure to shares,” Mr Thomas said.
 
Mr Thomas said there were two important conclusions to draw from these data. First, investors are still not wholly convinced of the durability of the share market rally or that we are yet in a sustainable bull phase.
 
This is also demonstrated by the US STALSTOX index, which shows the collective view on asset allocation by Wall Street firms. “This shows the allocation to stocks is only about 45 per cent,” he said.

“Remarkably, this is much lower than the 50-55 per cent during the depths of the GFC,” he said.

“This suggests there is still a wall of money waiting on the sidelines.”
 
Secondly, it implies there may be an opportunity being missed by many managers to take a contrarian stance and re-assess some of the cyclical stocks that have underperformed the market because of the strong focus by investors on quality.
 
Mr Thomas noted the ratio of the performance of cyclical stocks to defensives appeared to be at a cyclical low (see chart).

“This four year trend of quality outperforming cyclicals may have reached some sort of historical extreme, one not seen since 2003 when the Y2K bear market bottomed out and cyclical stocks started to outperform the expensive defensives,” Mr Thomas said.

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Olsen told delegates that making many small gains on a relatively large number of stocks could be just as legitimate a strategy as investing in a smaller number of stocks and holding them for the long term, as long as the manager had a disciplined investment process.

In fact, it was a strategy particularly suited to current conditions on stocks markets where beta (or the movement of the market) would not necessarily be a reliable provider of returns in the future.

“We are not shy of high turnover strategies, particularly in volatile markets,” Olsen said.

“We think it has the ability to give you more excess return.”

Olsen likened the difference between the high turnover manager and the deep value manager as the difference between the supermarket giant Woolworths and bionic ear maker Cochlear. The first generated high net profits by making small profits on many thousands of different products while the second company had only a few products but made high margins or profits on each one sold.

When evaluating fund managers, Olsen said it was van Eyk’s job to strip out the differences between the two approaches and isolate the “information coefficient” or the manager’s skill at turning each investment decision into a winner.

Michael McCorry, chief investment officer at Blackrock, spoke as an advocate of the high turnover, low margin approach but also counseled investors and advisers in the room that they should free managers from the long-only constraint and allow them to “fully express” their view on a stock by shorting it if necessary.

“If you love a stock you want to be three per cent overweight, if you hate a stock you want to be three per cent underweight,” McCorry said.

This was especially valuable with small companies where it was often impossible to express an adequately negative view of a stock by being underweight.

“(In long-only investing) the most you can do is not hold the stock,” McCorry said.

If the stocks was one per cent of the index for example, it was impossible to be three percent underweight the stock without using shorting.

“The more active risk you take (in a portfolio) the more the long-only constraint holds you back,” he said.

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The sale process was first announced in January 2013 by the vendor, Pyne Gould Corporation Limited.
 
van Eyk chief executive Mark Thomas said the Perpetual companies and van Eyk were a good strategic fit and would build upon van Eyk’s experience in the New Zealand market.
 
“We are very excited about the purchase of the Perpetual wealth management companies and the opportunities that this presents us in New Zealand,” Mr Thomas said. “van Eyk has been assisting New Zealand investors for some years and we look forward to working with the Perpetual businesses to grow the combined entity into a strong financial services group.”  
 
Perpetual Asset Management Limited, which has approximately $NZ380 million in funds under administration, was established in New Zealand in 2010 as the funds management division of the Perpetual Group. Perpetual Portfolio Management Limited is the personal wealth management division of Perpetual. These businesses will increase the van Eyk Group’s consolidated gross annual revenues by 50%.
 
Mr Thomas said the purchase follows other recent strategic initiatives by van Eyk, including the purchase of practice management consultancy The Encore Group and the launch of financial advice arm van Eyk Advice.
 
The details of the Perpetual transaction differ somewhat from those previously announced. It was initially proposed that van Eyk would also purchase trustee company Perpetual Trust Limited from Pyne Gould but this will no longer proceed.
 
The Perpetual companies are unrelated to the Australian company Perpetual Limited.

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van Eyk has just released an additional 10 fund ratings in the Alternatives sector, identifying a further five A-rated managers covering the absolute return, commodities and global macro sectors. 

The Alternatives asset class is being increasingly recognised as a means by which investors can generate additional sources of return uncorrelated with equities and bonds and enhance the long term returns of a balanced portfolio. Globally, pension funds increased their allocation to Alternatives from 5 per cent to 20 per cent between 2005 and 2011.

van Eyk was one of the first in Australia to identify the importance of this asset class and has recommended a 20 per cent allocation to Alternatives in its model balanced portfolio since 2008. 

van Eyk Head of Manager Research and Deputy CIO Matthew Olsen said funds in this sector rated highly by van Eyk received their rating partly due to their ability to protect investors from equity market falls and produce absolute returns. 

“The Alternative funds that van Eyk has recommended have been performing true to label,” Mr Olsen said. 

An example is the Aspect Diversified Futures Fund. This fund is a CTA or Managed Futures strategy which seeks to exploit returns in alternative asset classes (chiefly hard and soft commodities but also bonds and currencies) when equity markets are volatile. 

On the basis of five-year rolling returns, this fund has outperformed the ASX200 index 70 to 80 per cent of the time. 

Furthermore, during the period between the top of the Australian equity market in 2007 and the bottom of the bear market in March 2009, this strategy outperformed equities by 70 per cent. 

“This fund will cushion the blow of falling equities and reduce volatility if used in conjunction with equities or as part of a balanced fund,” Mr Olsen said. 

Mr Olsen said it was important when examining these funds to look at them over the long term. “I have seen some analyses of these types of funds which try to assess them over time periods as short as 12 months,” he said.  “This does a great disservice to investors who have the right approach and try to invest for the long term.” 

Also, it was vital to have the expertise to sift the better funds from the rest, perhaps more so than traditional asset classes because of the relative complexity of some investment strategies. “More managers are seeking to enter this space but van Eyk recommends only the cream of the crop,” Mr Olsen said.

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This follows the completion of the establishment phase of van Eyk Advice earlier this year. 

van Eyk chief executive Mark Thomas said industry consolidation driven by the buying up of independent advice groups appeared to have emphasised to advisers the value of a research-driven advice group not tied to a big institution. 

He said the results of a recent sounding of the financial planning community had been very encouraging and van Eyk Advice would step up its efforts to attract and engage with more advisers.  

“van Eyk Advice can fill a gap in the marketplace for a non-aligned advice group that develops and follows through on its own ideas,” Mr Thomas said. “It will be an attractive proposition to like-minded planners who are not comfortable being part of a large conglomerate,” Mr Thomas said. 

Among the advisers van Eyk spoke to, the most common reasons cited for being unhappy with their current dealer group were a lack of investment expertise, poor communication and a lack of practice management and support. 

Mr Thomas said van Eyk Advice, which currently has a small number of authorised representatives within a dealer group structure, was a natural evolution of the van Eyk brand and its core values, which centre on delivering quality investment research to financial planners and their clients and helping Australians secure their financial futures. 

He said van Eyk’s advantages for the client-focused adviser were its proven commitment to independent thought and integrity in investment research, a strong brand name, freedom from institutional ownership and the comprehensive suite of products and services available to advisers to assist them in servicing their clients. 

“van Eyk Advice offers financial advisers the opportunity to work with a respected brand which is committed to pursuing its own path and has a history of putting investors first,” Mr Thomas said.  

van Eyk Advice also offers advisers professional development and practice management expertise through van Eyk’s wholly owned subsidiary, The Encore Group. Encore has been at the forefront of assisting Australian planners build sustainable businesses compliant with the Future of Financial Advice reforms. 

The development of van Eyk Advice has no impact on van Eyk’s existing clients and services. van Eyk will continue to provide the same high quality and level of service to all its valued clients in the financial planning industry, including institutionally owned dealer groups, independent dealer groups and boutique advisers.

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iRate is the online portal for van Eyk’s clients to access its fund manager and shares research, portfolio constructions tools and model portfolios. It is used daily by thousands of financial advisers across Australia. 

Version 4.0 introduced a number of improvements, including major enhancements to the portfolio construction tool. 

The Interactive Tactical Allocation Model (ITAM) assists advisers in making tactical asset allocation decisions and allows them to easily build investment portfolios that take account of changes in markets and the economic outlook. 

van Eyk chief executive Mark Thomas said the new tool reflected van Eyk’s strategic outlook, which recognised the importance of active investment management within a long term strategic asset allocation. 

“Investors should expect ongoing market volatility given the global debt burden and extreme monetary policies and cannot rely solely on market trends to deliver superior returns,” Mr Thomas said. “While we still think strategic asset allocation is very important, we also stress the importance of taking advantage of the shorter term opportunities that a volatile market is going to present.” 

Advisers can follow van Eyk’s tactical asset allocation recommendations for different risk profiles, but the tool also allows them to make adjustments to the underlying assumptions and see the results graphically on a client’s portfolio.

The release of iRate 4.0 is the first milestone in a major development program which will culminate in the release of iRate 5.0 in the first quarter of 2013. 

iRate 5.0 will feature a significantly enhanced user interface fully compatible with smartphones and tablets. 

van Eyk has engaged an additional five software developers to work on the upgrade program. 

Versions 4.1 and 4.2, which will be released over the next two months, will roll out major changes to the presentation of fund research and reporting which will make it easier for advisers to include information in a Statement of Advice. 

An upgrade to the database of managed fund research will provide even more detailed information on the more than 16,000 funds iRate covers and introduces powerful new search and sorting tools. 

New Portfolio Reports will provide an “at a glance” analysis of investment portfolios, including performance data and analysis of asset allocation, manager holdings and fee structures. 

iRate Product Manager Ilona Oshana said the development drive recognised the growing demands on the busy financial adviser. “Advisers need ever more efficient and powerful systems to support them in providing a superior service to their clients,” she said.

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