Jonathan Howie

With the popularity of Exchange Traded Funds (ETFs) growing amongst Australian investors, their biggest challenge can be in choosing between different ETFs that may look very similar, and choosing the right ones for them, says Jonathan Howie, Head of iShares Australia.

“A report released this week by Zenith showed that the ETF sector in Australia has grown 47.5 percent over the last 12 months, from $8.4 billion in July last year, to $12.3 billion at 31 July 2014.

“From this ever-growing universe, it can be difficult to work out the right option to invest in, but the good news is that there are some simple questions that will help investors narrow down the selection.

“Investors may have different reasons for considering ETFs.  Most commonly, we see them being used in three main ways: for specific exposure to an asset such as international equities; to build entire portfolios; or used in a blended approach when combined with actively managed funds.

“Regardless of their reasons, five key questions can help investors make the right choice,” Mr Howie says.

The five questions are:

What is in the ETF?

Mr Howie says this question looks at the exposure of the ETF – whether to the Australian market or an international one, to a single developed market or emerging market, or to a specific sector or industry.

“Investors should also ensure they are aware of the index that the ETF seeks to track, as there may be multiple indexes to choose from.

“In addition, they should assess the index methodology (such as whether it includes initial public offerings), how long the index has existed, the predicted tracking error, whether it employs leverage, and the ETF’s method for tracking the index.”

Can I trade when I need to?

Understanding the real liquidity of the ETF, through both its market volume and the liquidity of the underlying securities, will help investors assess whether the ETF suits their needs, says Mr Howie.

It includes looking at how the ETF liquidity has reacted during stressed markets and what support the ETF issuer provides investors to achieve the best possible execution when buying and selling ETFs. Issuers with strong relationships with market participants may be better able to foster deep and liquid ETF markets and provide investors and advisors the support to access them.

What is the ETF’s structure?

Mr Howie says this area is often overlooked by investors, but is critical.

“A transparent structure minimises unintended risks or costs for investors.  Investors should be able to see the assets under management of the ETF, the type of securities it holds, the diversification guidelines, the redemption process and the tax implications.”

Who are the people behind the ETF?

Those managing the ETF should have experience in the ETF market, in both developing, managing and supporting ETFs as well as in their relationships with market participants, index providers, the stock exchange and the regulator.

“Investors should assess the size, scale, and track record of the ETF provider, and in particular their risk management processes,” Mr Howie says.

What does it really cost?

Last but not least, investors should consider the total cost of ownership – ask questions about the expense ratio, trading costs, average spread, transaction costs, and tax efficiency of the ETF.

“Investors should seek institutional grade ETFs focussed on maximising liquidity, tax efficiency and transparency while minimising transaction costs for investors,” says Mr Howie.

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Pru Bennett

As part of its analysis of gender diversity and policies in Australia’s largest listed companies, BlackRock has also reviewed the guidelines of the organisations that advise large institutions including superannuation funds on how they should respond to proposed board resolutions.

BlackRock’s research has found three of the most widely-used proxy advisors in Australia – CGI Glass Lewis, ISS Governance and Ownership Matters – have now disclosed that diversity is an issue and would consider changing their recommendations to achieve diversity.

In all, 18% of ASX200 companies have no gender diversity on their boards – 38% of companies without any gender diversity on their boards are from the resources industry.

Pru Bennett, BlackRock’s Corporate Governance and Responsible Investment Director – Head of Asia Pacific, said: “Proxy advisors give recommendations to a broad array of institutions, including those representing superannuation funds.

“These proxy advisors are now strengthening their stand on achieving diversity. For example, CGI Glass Lewis has said it will consider recommending voting against the chair of the nomination committee, or the equivalent, at the company’s AGM if a company’s record on diversity is poor.

“The Australian Council of Superannuation Investors (ACSI) also refers to diversity in the discussion of core principles of board composition in their guidelines.

“Our conclusion is that gender diversity can have clear positive ramifications for return on investment over the medium- to long-term. However, some investment is required, backed by clearly detailed and implemented policies, to kick start gender diversity’s virtuous circle.

“Unfortunately, our research says policies and reporting surrounding gender diversity among ASX 200 companies remain piecemeal.

“The majority of companies are also still applying a largely minimal standard mindset to the reporting of their diversity obligations.

“In the three years since our first report on diversity in Australia’s 200 largest listed companies, there has been some improvement but there is scope for more.”

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The addition of a highly experienced global active equity capability is Nikko Asset Management’s latest move in fortifying its investment offering to clients, the company announced yesterday. The Tokyo-based firm has brought in a team of six portfolio managers, led by William Low, who previously managed the high-alpha equity team at Scottish Widows Investment Partnership (now owned by Aberdeen Asset Management).

“We are excited that we have been able to attract this highly successful investment team in an area where we believe we can add value to clients’ portfolios,” said Yu-Ming Wang, global head of investment at Nikko Asset Management. “The track record that Will Low and his five colleagues have assembled demonstrates that they are exceptionally qualified as active global equity managers, and we look forward to their contribution to our European business.”

In 2001, while at BlackRock, Low formed and led an EAFE* team that was known for its strong alpha track record. In 2011, Low joined Scottish Widows Investment Partnership, where he led the formation of a global equity team that included Stephen Corr, James Kinghorn, Greig Bryson, Iain Fulton and Johnny Russell. From its inception, the team provided an excellent alpha track record in global equities in addition to continuing to manage EAFE mandates.

“We are delighted that Nikko Asset Management will be the new home for our team. We clearly share a vision for making global equities a key source of growth for the overall firm,” Low commented. “We’ve been impressed with Nikko Asset Management’s commitment to providing world-class investment products to clients, and this arrangement allows us to do what we do best, which is concentrate on well-researched, high-conviction ideas to deliver alpha in global equity strategies for our clients.” The team, which manages benchmark-agnostic, long-only global equity portfolios, will continue to be based in Edinburgh, Scotland, and will work closely with Nikko Asset Management’s full-service European headquarters in London, covering sales and marketing, client service, operations, information technology, legal and trading functions.

Nikko Asset Management has been expanding its investment capabilities recently. In October 2013, it acquired a specialist Asian equity team from Sydney-based Treasury Asia Asset Management, and in March 2014 it brought in a multi-asset capability, which is based in Singapore.

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Pru Bennett

78% of ASX200 companies’ gender diversity reporting is perfunctory or worse, according toBlackRock.

BlackRock’s review of the 2013 annual reports of companies included in the Standard & Poor’s/ ASX200 stockmarket index has ranked 3% of disclosures surrounding gender diversity as ‘excellent’, 19% as ‘good’ and the others perfunctory, poor or generally non-disclosing.

This investigation is the third BlackRock has undertaken into the gender diversity policies and disclosures of Australia’s top 200 listed companies. It is based on information revealed in response to gender diversity disclosure and policy principles required by the Australian Securities Exchange (ASX) in its Corporate Governance Principles.

Pru Bennett, BlackRock’s Corporate Governance and Responsible Investment Director – Head of Asia Pacific, said: “Companies such as Mirvac Group should be applauded for their continued commitment to disclosure.

“However, the majority of companies are still applying a largely minimal standard mindset to the reporting of their diversity obligations.

“In the three years since our first report on diversity in Australia’s 200 largest listed companies, there has been some improvement but there is scope for more.

“To simply state a company has a diversity policy, list some objectives and disclose some statistics does not equate to good disclosure.

“We believe gender diversity can have positive ramifications for return on investment over the medium- to long-term.

“However, our findings show – despite the recommendations of the ASX on gender diversity – the current commitment to gender diversity is piecemeal and they could definitely do better.

“It appears from the board down, gender diversity is not included in the DNA of most companies.”

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Investors need to look for true diversification: BlackRock

Diversification can provide one of the most effective methods of limiting risk, while maximising returns lies in adjusting portfolios to take advantage of the best current global opportunities. But how do you hit that sweet spot between true diversification among all asset classes and opportunity? According to BlackRock Australia’s David Redford-Bell, CFA, it’s the ultimate question without a definitive answer.

“Not only must investors first identify the opportunities, they need to be able to access them – and from there must be able to continually make the kind of portfolio adjustments that keep them in the sweet spot between risk and return,” he said.

“History shows that equity markets can perform well over the long term, but when big shocks like the global financial crisis come along, investors are left vulnerable unless they have genuinely diversified in a manner that can limit the damage to their portfolios.

“To paraphrase former United States Secretary of Defence, Donald Rumsfeld, there are ‘unknown unknowns’ out there, possible black swan events that can affect portfolio performance unless intelligent exposure to the range of asset classes is achieved.”

Mr Redford-Bell went on to explain that the issue for Australian investors has been that gaining exposure to the kinds of global markets and securities that can provide true diversification has not been easy. They often don’t have access to the information they need or the local knowledge required to make informed decisions about offshore investments. Nor is it easy to invest in foreign currencies or share markets.

“A number of offerings available in Australia are rigid in their asset allocations. Investing in three different equity funds based on the same index would not appear to be true diversification, yet many investors believe that they are ‘covered’,” he said. “To achieve true diversification they need to start looking wider and thinking more deeply than that.”

According to Mr Redford-Bell, the BlackRock Global Allocation Fund (Aust) has been developed over time with the aim of addressing precisely these issues.

“By being flexible in what we do, being patient with investors’ capital and looking for value across an incredibly diverse array of securities, it is our aim to provide investors with a truly diversified global investment.”

BlackRock runs approximately US$90 billion globally in the Global Allocation strategy, which has been operating for some 24 years. In Australia, the BlackRock Global Allocation Fund (Aust) provides exposure to the Global Allocation strategy and the fund is open to both retail and institutional investors.

Since the Global Allocation Fund’s (GAF) inception in Australia in July 2005 to the end of October 2013, Class D units in the fund have returned around 8.5% a year, net of fees (and distributions reinvested), with approximately a third less volatility than the MSCI World ex-Australia Index (hedged). In fact, the portfolio’s Sharpe ratio, which measures the risk-adjusted performance of the portfolio as a means of determining whether returns should be attributed to good investment decisions as opposed to excess risk, was 0.71 for the 3 years to 30^th September 2013. A positive Sharpe ratio indicates lower levels of risk.

Mr Redford-Bell went on to explain the rationale and investment philosophy that underpins the fund. “While our “neutral” asset allocation is a 60% allocation to equities and a 40% allocation to fixed income and cash, the fund is incredibly flexible,” he said. “There are very few hard and fast allocation rules, so as market conditions vary it can hold anywhere between 0-100% of its investor’s capital in equities, fixed income or cash and cash equivalents.

“We are currently allocated 63% to equities, 19% to fixed income and 18% to cash, because our view is that equity valuations are still attractive compared with fixed income, where we see issues with both duration and credit quality. We are also cautious about the potential effect of the winding back of quantitative easing in the US.

“The GAF is managed by a team of over 40 investment professionals, has a portfolio of over 400 securities and the three most senior portfolio managers have 80 years of investment experience between them. That can’t be easily replicated – and we think it set the funds apart,” he said.

Investment decisions in the fund are driven by extensive bottom-up research, with long-term themes explored and overlaid onto specific stock research.

“Our ability to make portfolio adjustments in line with our view of market dynamics demonstrates the value of running a flexible, global fund,” he said. “We can generally go anywhere we see opportunity and value, which, in reality, is something that the majority of investors can’t achieve on their own.”

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Financial advice highly valued but Australians are still reluctant to seek professional advice: BlackRock

Australians rank the state of the economy as their number one concern, and only half of all Australians feel confident about their financial future.

These were some of the key findings from BlackRock’s inaugural Global Investor Pulse Survey released yesterday.

The survey of 17,600 respondents, including 1,000 Australians, was commissioned by the world’s largest investment manager, BlackRock, to test consumer attitudes and opinions about savings, investments and superannuation.

Key findings, outlined below, shed light on Australia’s retirement hopes, use of financial advice and approach to property.

Financial advice conducive to good financial health

Despite the fact that financial advice is highly valued when it is used, many Australians are still reluctant to seek professional advice, and only 15% of Australians use a financial adviser.

Of those that do, two thirds feel positive about their financial future, compared with only half of Australians in general.

So why do so few Australians seek financial advice when the benefits are so clear?

Not surprisingly, income plays a key role. Twenty-five percent of those who earn in excess of $150,000 (or with household income in excess of $160,000) use a financial adviser, compared with only 10% of those on lower incomes.

Mark Oliver, BlackRock Managing Director, commented: “As the survey shows, financial advice is still the preserve of a small minority, but those who use it value it highly. For instance, in Australia, 89% of advised investors said that professional financial advice was good value for money (compared to 84% globally), while 93% said that it helped them to select the right investment products for their needs (compared to 87% globally).”

“However, the survey also highlighted that the use of financial advice was highest among the 55-64 age bracket, or those approaching retirement. It is well known that the earlier we start planning for retirement, the better the outcome, so we would encourage young Australians as well as those approaching retirement to engage with a financial adviser.”

When asked what concerns Australian investors when it comes to the security of their financial futures the state of the Australian economy ranked as the top reason, followed closely by job security, having to spend more than they earned and healthcare costs. Drilling down it was clear that those on lower incomes were most concerned with spending more than they earn. Unlike those who were more affluent they were very concerned with changes to government pensions and social security as well as housing costs. In contrast, those who were more affluent were preoccupied with the state of the Australian and global economies and also were more interested in tax policies, changes to interest rates and stockmarket volatility.

Property is a priority

Australia’s love for property was evident in the survey, with a clear difference between Australia’s attitude towards buying and saving for property compared with the rest of the world.

We spend more of our planning time on purchasing a new home (20% of time in Australia compared to 17% globally), and are more interested in paying off the mortgage on our homes (28% compared to 23% globally). We are also more interested in saving for a deposit for a new home (17% compared to 13% globally).

Investment property ownership in Australia sits at 15% of those surveyed, which is well above the European and North American averages, where rates of ownership were 10%.For more affluent Australians the rate of ownership increased to 35%.

Mr Oliver said that it was no secret that Australians have always had a love affair with property.

“However, investors need to be mindful that while property has its place in the asset class mix, they should ensure they have a well-diversified portfolio.”

Planning for retirement

According to the survey, Australians are more enthusiastic about their need to plan for a comfortable retirement than their global counterparts, with 76% of retired Australians believing in saving for retirement as early as possible, compared with 65% globally. Seventy-two percent encouraged a long-term approach to retirement saving, compared with only 55% globally.

“While Australia has made great progress towards self sufficiency with the superannuation guarantee, it is widely recognised that more needs to be done to fund a comfortable retirement. It’s not surprising to see that the majority of retirees recommend that we should start saving earlier and take a long-term view when it comes to retirement planning, Mr Oliver said.

“At BlackRock we echo those thoughts and encourage Australians to be positive about our increased longevity. Investing for a long retirement is complicated but a few simple steps may help your longevity work to your financial benefit: for example, investing early …and often, allotting small amounts over time could potentially be easier to bear than having to play catch up. Also, consider all your investment options, including alternative investments, and combining indexed and active strategies to manage diversification and costs along the way.”

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Client investments implemented through the sophisticated application of ETFs

ETFs help advisers simply asset allocation.

A growing number of advisers are turning to ETFs as a tool to deliver simplification and scale to their business. However, according to BlackRock’s leading ETF business, iShares, it is the way that ETFs are being applied in clients’ portfolios that heralds an underlying shift for ETF usage.

“Interestingly, despite the relatively young market in Australia, we are now also seeing increased sophistication of ETF use among advisers,” said Jonathan Howie, Director and iShares Specialist at BlackRock.

“ETFs are now being used to their full potential, because they are no longer viewed as just a core exposure instrument, but are increasingly being applied at a more granular or thematic level.

“Similar to experiences in other markets, ETFs are also being increasingly used by advisers in a range of ways – as a rapid access tool for dynamic asset allocation; blended together with stocks, other ETFs and with active funds to deliver a robust portfolio outcome for clients and to reinforce the advisers’ value proposition.

“A benefit of including ETFs in a wider portfolio today is that advisers are able to truly express a broader range of views for their clients, for example in looking at particular segments of a given market or the globe, all the while offering greater flexibility and often lower cost. This ultimately means that advisers have the means to demonstrate greater value to clients.”

According to Mr Howie, advisers are leading the charge in Australia for the adoption of ETFs and this has helped deliver a year of strong growth.

“It has been a big year for ETFs, with the ASX ETF industry seeing over $A1.4bn in new client money flows for 2013 year-to-date, which is higher than any prior full calendar year. And it looks as if this growth is set to continue with advisers at the wheel.

“Asset flows this year certainly show a preference for international equity exposures, as advisers and their clients recognise that investment opportunities are truly global. With ETFs, investors now have a toolkit to match the global nature of markets. They can easily and quickly access exposures in the investment themes they want and can mix-and-match these to create a truly tailored client portfolio.

According to iShares data, investors seeking access to international markets have been a key driver of the increase in ETF use by advisers.

“As an industry, the main theme based on ETF net flows this year has been international equities, which equated for 57 per cent of new money; and also Aussie equity income which saw 24 per cent of new money flows,” he said.

Mr Howie went on to say that as the ETF journey enters an age of more sophisticated use, advisers can note these instruments have to date done what they have been designed to do through market gyrations.

“As a result, ETFs have earned even greater trust and this in turn has helped to drive growth,” he said.

Mr Howie concluded: “With greater understanding of the opportunities that ETFs present as part of the broader investment toolkit, we expect to see greater use of ETFs to complement active funds and individual stocks, as investors build more efficient and flexible portfolios.”

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Despite their growing popularity, particularly in the institutional space, many investors are still unsure what alternatives really are, let alone how they can best be used to diversify risk in a portfolio.

These are the views of Andrew Landman, Head of Client Business for BlackRock.

“Alternatives may be less well understood than traditional asset classes, but the fact is that they can offer great diversification benefits to portfolios struggling in the new, more volatile return environment.”

Mr Landman went on to say that many investors are of the view that traditional portfolio models, such as the 60/40 growth/defensive assets just aren’t working in the current environment, in which returns are down and volatility is up in a way not seen in the past. The question they are asking is how to address this situation.

“There is a growing realisation among more experienced investors that alternatives can offer a way of diversifying by risk source that is potentially very attractive,” he said. “In fact, institutional exposure is rising sharply, and alternatives now account for 16% of the global institutional market.

“Despite this, there remain a number of myths surrounding alternatives, and these may be holding some investors back from seriously considering them,” he said. “At BlackRock, we thought it was timely to de-bunk some of these.”

Mr Landman concluded by saying that when used properly, alternatives can play a vital role in the portfolio.

“A well-constructed portfolio of alternative investments can offer a number of benefits, including downside and inflation protection, diversification along time horizons and a low correlation to traditional market indices,” he explained.

“The key is to be sure to do your homework first. Making portfolio construction decisions in line with your personal risk and return objectives is a sensible way to invest, whether that be in alternatives or any other asset class.”

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Where to from here? 2013 mid-year update

Ever-larger doses of monetary stimulus, spiced with a touch of complacency about risk, have driven up asset values around the world, while June’s market volatility provided a reality check for investors.

BlackRock Investment Institute’s (BII) recent report Exit, entry and overshoot: 2013 outlook mid-year update debates what’s ahead for global policy and markets.

Download the full report here.

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The following highlights some of the key discoveries, ascertained in the review process of the 2013 annual reports and in talking to the C-suite of these companies.

The 2013 BlackRock report Glacial Change in Diversity at ASX 200 Companies – Can Corporate Australia Escape the Imposition of Diversity Quotas key findings include:

• While the growth of representation of women on boards continues, it does so at an alarmingly slow pace.
• Disclosures made by ASX 200 companies regarding their gender policies point towards boards not appearing to take the issue seriously.
• Companies BlackRock identifies as providing good disclosure of their approaches to diversity include: CSL Limited, Computershare Limited, Graincorp Limited, Mirabela Nickel Limited, Mirvac Group, Pacific Brands Limited.
• The percentage of non-executive women on boards was 17.8% compared with 14.4% from BlackRock’s 2012 research. This increase is welcome.
• Although the level of women on boards has increased slightly, there has been little change in the level of diversity among Key Management Personnel (KMPs).
• 65% of diversity disclosures were considered perfunctory, with most organisations applying a largely ‘minimal standard’ mindset to the reporting of their diversity reporting obligations.
• Given the relatively poor rate of change in the statistics coupled with poor disclosure of policies, corporate Australia is open to our political leaders imposing quotas of women on listed companies.

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