Neil Rogan

A new, tax effective investment bond that combines an old-school investment vehicle with the best of modern investment thinking has been developed by Centuria Capital – and is already being speedily adopted by independent adviser groups seeking the best outcomes for clients, especially those considering tax effective options for investing outside super.

Centuria’s TaxAstute series of bonds appoints independent investment professionals to manage the bond’s underlying assets in line with their specific investment philosophy, while Centuria maintains management of the overall bond structure.

Typically, growth and earnings in the product are taxed at a maximum of 30%. Annual tax reporting is conducted by Centuria and tax is paid on behalf of investors directly from earnings. Investors pay no personal income tax on the investment during its term and, if they hold it for more than ten years, pay no tax on withdrawals

Neil Rogan, General Manager of Centuria’s Investment Bond Division, said that Centuria has spent the better part of a year working alongside boutique investment management company Implemented Portfolios to enhance the traditional insurance bond with a professionally managed multi asset portfolio using a blend of exchange traded funds (ETFs).

“The tax effectiveness of this product has strong natural appeal to investors who have already capped out their superannuation contributions. We also expect demand from those who are investing with specific goals in mind and who may need to retain some flexibility in when they can access the money – which they can’t do with super,” said Mr Rogan. “Whether it’s paying the children’s or grandchildren’s school fees, or helping them with life choices like funding a sabbatical.”

Implemented Portfolios have a distinctive dynamic asset allocation (DAA) investment process which uses ETFs to manage risk at low cost.

“Our focus on asset allocation as the driver of investment returns means that we do not expose investors to the risk of individual security selection. It allows us to more clearly focus on matching client goals and objectives with the portfolio outcomes” explained Santi Burridge, MD of Implemented Portfolios Mr Burridge said that working with Centuria to create the badged investment bond has brought together two key benefits for long term investors: efficient portfolio management and effective tax outcomes.

Neil Rogan described this by saying “the new release recognises the desire of independent investment managers to retain their hard-won integrity with clients and advisers”

“In the future no two Funds in the series will be the same,” he said. “Each will offer features to meet particular investor needs, in line with the individual approach of the investment manager concerned. So we can have a dynamic allocator with ETF expertise such as Implemented Portfolios, or a more conventional Aussie equities manager, or a credit specialist – it’s entirely open. What they will have in common is the enduring taxation and other benefits that will well and truly bring the insurance bond back into vogue.”

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The Vanguard MSCI Index International Shares ETF (ASX: VGS) and the Vanguard MSCI Index International Shares (hedged) ETF (ASX:VGAD) offer investors exposure to around 1500 securities across 22 overseas developed sharemarkets, excluding Australia.

The unhedged VGS tracks the MSCI World ex-Australia (with net dividends reinvested) in Australian dollars Index, and the hedged VGAD tracks the MSCI World ex-Australia (with net dividends reinvested) hedged into Australian dollars Index. Both widely used, broadly diversified benchmarks.

The launch of VGS and VGAD brings the number of ETFs offered by Vanguard for Australian investors and advisers to 12. With expense ratios of 0.18% per annum (VGS) and 0.21% per annum for the currency hedged version (VGAD), these funds are among the lowest-cost, locally managed international equity product offerings in the market.

Robyn Laidlaw, Head of Product and Marketing at Vanguard, said that with the addition of these ETFs, Vanguard offers a comprehensive range of low-cost* equities ETFs, providing advisers, retail and institutional investors with the core building blocks for a diverse portfolio – including developed, domestic, US, international and emerging markets.

“Australians are among the world’s most enthusiastic overseas travellers, however, when it comes to investing, our home country bias often comes at the expense of the valuable diversification of international investments.

“These new ETFs offer a simple way to tap into the diversification that international sharemarkets offer, through broad exposure to the world’s developed equity markets, while also giving investors the tools to manage their currency risk,” said Ms. Laidlaw.

The benefits of the local fund structure these products adopt include the flexibility to elect dividend reinvestment, simplified withholding tax administration, and no requirement for investors to complete the US W8-BEN tax form.

“VGS and VGAD provide straightforward low cost* access to international markets, whether hedged or unhedged, while keeping control of your reporting and investment management onshore,” said Ms. Laidlaw.

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“As investors and advisers focus on building portfolios that are optimized for risk, return and cost, the strategy is shifting to one that blends both active and index funds, rather than  one that focuses exclusively on one investment style,” Mr Oliver says.

“For example, active funds are best considered for asset classes that are difficult to represent with an index, such as some emerging and debt markets. An active management approach has the potential to take advantage of the many illiquid issues that are often part of such asset classes.

“Other asset classes, for example domestic equities, may lend themselves to indexing, as they can be more readily replicated and implemented. Indexing can also be utilised for asset allocation strategies.

“By blending both approaches, investors can harness the advantages of each and create a more flexible and diversified portfolio.”

Mr Oliver said that BlackRock is often asked by investors if there are certain economic or market conditions that favour one style over the other.

“Our research suggests that adopting a long-term, strategic framework governing the blending of active and passive, regardless of the economic cycle, is more productive than trying to flip from style to style,” he says.

“Each investment strategy offers its own advantages, suggesting that the most robust portfolio may result from a combination of both.”

Mr Oliver described this blending as similar to an ‘hourglass’ approach to portfolio construction, with greater use of unconstrained, higher return-seeking funds combined with  side low-cost passive exposures.

“Investors increasingly realise that attempting to time markets, and trying to trade in and out of stocks or bonds to minimise losses is difficult. Equally, trying to time an active managers’ performance is also difficult.

“Having identified skilled active fund managers, investors should be prepared to remain invested long enough, at least through one economic cycle, to give the manager enough time to generate the positive returns sought.”

Mr Oliver suggests investors should also look for active funds with broad mandates.

“One of the most useful formulas in finance is The Fundamental Law of Active Management, which basically states that an active manager’s ability to add value is a function of his or her skill and the “breadth” of the mandate.

“What this implies is that multi asset strategies – defined as those with a wide range of securities, countries, sectors or asset classes – provide more fertile ground for active managers.”

He noted that on the other hand, there are good reasons to use index funds at the same time.

“The main reasons to use passive funds are cost, precision and flexibility in implementing tactical exposures,” he says.

“For instance, investors may consider passive funds when they are aiming to achieve precise exposure to certain asset classes in a cost effective and tax efficient manner.

“Some narrow index benchmarks – such as large-cap value stocks or medium-cap growth stocks, as well as many fixed income markets – are generally easy to replicate with a passive fund.

“Additionally, exchange traded funds (ETFs) and other index products typically offer a low cost, transparent and tax efficient mechanism to gain exposure to such core asset classes.

“For investors looking for a tactical approach, such as adjusting their exposures to certain markets and asset classes, ETFs are also an excellent vehicle.

“They are liquid and cost effective, meaning it is easy to adjust portfolio exposures based on short-term market conditions.

“Of course, the right blend of index and active investments for each individual investor will depend on their particular risk tolerance and investing goals, but the criteria outlined here identify a worthwhile starting approach,” Mr Oliver concludes.

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Alex Vynokur

A growing number of investors are looking to capitalise on a potential further decline in the Australian dollar with trading data from BetaShares, a leading exchange traded fund (ETF) provider, showing significant inflows into its US Dollar ETF in September.

With the Australian dollar hitting seven month lows against the US dollar, BetaShares has seen approximately $30 million of net inflows into the BetaShares US Dollar ETF (ASX code “USD”) since the start of September. The fund is designed to provide exposure to the performance of the US dollar relative to the Australian dollar, meaning the value of the fund will go up as the US dollar appreciates, and vice versa. The fund now has over $200 million in assets under management.

BetaShares’ Managing Director, Alex Vynokur, said the rise in inflows into the USD ETF indicates that many investors expect the Australian dollar to continue its recent decline.

“We are currently seeing a sharp increase in the level of interest in the USD ETF, both in terms of incoming enquiries and net inflows, which seems to reveal an undercurrent of pessimism regarding the Australian dollar,” said Mr Vynokur. “With growing expectations around a potential US interest rate rise, as well as Reserve Bank modelling indicating the AUD is overvalued, investors are taking the opportunity to position themselves to capitalise on a potential long-term decline in the local currency.”

Commenting on the broader take up of exchange traded products in Australia, Mr Vynokur concluded: “As the ETF landscape continues to mature in Australia, there has been significant growth in the number of investors using exchange traded funds to execute tactical positions across asset classes as diverse as currency, commodities and international equities. It’s encouraging to see investors start to fully utilise the low-cost, transparent access that ETFs can provide.”

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Arian Neiron

The assets of Australian self-managed superannuation funds (SMSFs) surged in value to a record $557.1 billion in the June 2014 quarter, according to ATO data released last week, creating a huge opportunity for the local exchange traded funds (ETF) market to attract funds from this sector, according to Arian Neiron, Managing Director of Market Vectors Australia.

SMSF investment into listed shares increased to $177.6 billion in the June quarter, up from $174.8 billion in the March quarter accounting for around one third of all SMSF assets. Another $20.7 billion was invested in listed trusts (including ETFs) in the June quarter, up 2% from $20.3 billion in the March quarter.

SMSFs continue to amass record amounts into cash investments, which rose to a record $157.9 billion during the June 2014 quarter, up 1.7% from $155.3 billion in the March 2014 quarter. Those cash holdings represent 28% of all SMSF assets.

“SMSFs should consider investing greater amounts of their assets into ETFs, which are convenient, cost effective vehicles offering growth and diversification opportunities,” Mr Neiron said.

“Statistics show that SMSFs are increasing investment into listed trusts, such as ETFs, but there’s still a lot more work to be done.  ETF providers need to address the lack of awareness about the benefits of investing in ETFs to the SMSF sector, which is still largely sticking to the safety of cash.

“Many SMSF trustees are not aware how ETFs are creating new and easily accessible investment opportunities on the ASX. ETFs are ideal tools for SMSF trustees to build cost effective, diversified portfolios in asset classes such as international and Australian shares.  ETFs also offer flexibility to SMSF trustees,” Mr Neiron said.

Market Vectors recently launched an education microsite designed to provide a holistic overview ofinvesting in ETFs to help Australian advisers and investors better understand and navigate the ETF industry.

“We are fully committed to engaging with SMSF trustees and their advisers to help them better understand what comes with investing in ETFs. The ETF industry, like Self-Managed Superannuation, has come a long way and we hope both industries continue to grow. Education is a key part of that growth,” Mr Neiron said.

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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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Alex Vynokur

The growth of the Australian exchange-traded fund market continued in August to reach a new record high of $12.4B in assets under management according to the BetaShares Australian ETF Review – August 2014.

Total funds under management increased by around $200 million, the growth particularly striking as it was almost entirely attributable to new money flows during a month in which the Australian share market did not grow at all.

In what has been a recurring theme in the industry , investors continued to be attracted to high yielding Australian equities, with that product sector receiving the highest level of inflows for the month, with the BetaShares Equity Yield Maximiser managed fund (YMAX) receiving the largest amount of inflows in that category. ETFs focusing on broad Australian equities were also well supported.

In a month in which Australian stocks performed in a lacklustre fashion, the exchange traded products which delivered the best returns to investors were those that focused on natural gas and emerging markets equities.

“ETFs provide a convenient way to build sensibly diversified portfolios that include a wide range of asset classes. Their attraction is independent of the fluctuations in the Australian share market. As it happens, though, many ETF investors continue to seek yield – as they have done for much of the last year,” Mr Vynokur said.

Looking ahead, Mr Vynokur noted that that the growth in funds under management was expected to continue. “The recent development of the ETF market suggests that larger numbers of investors are becoming involved, investing money into established products. We expect continued inflows into existing products, however, we additionally expect industry growth to be assisted by new and innovative investment solutions that are anticipated to become available on the ASX through the last four months of 2014.”

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Emerging markets look good for the rest of 2014: Van Eck Global

Emerging markets economies are poised to offer higher economic growth for the remainder of 2014 than recent previous corresponding periods, according to Van Eck Global, the US parent company of its exchange traded fund business, Market Vectors ETFs. Van Eck Global currently manages over US$35 billion in assets.

David Semple, Portfolio Manager and Head of Van Eck Global’s Emerging Markets Equity Investment Team said, “The tide is turning for emerging markets, which outperformed the broad US market in the second quarter of 2014—an event we’ve not seen for some time. The asset class attracted particularly strong inflows in April and May this year, the highest inflows since March 2013.

“In the second half of 2014 we believe emerging markets will continue to perform solidly, providing better earning outcomes than we’ve seen in the past three years.”

According to Mr Semple, investors are beginning to warm up to emerging markets again as better earnings typically indicate a recovery. He believes the main risks for emerging markets in the second half of 2014 are geopolitical and interest rate sensitivity.

“Ongoing tensions in Ukraine have impacted the Russian economy and the escalation of sanctions will have a broader impact on a fragile European economy. The earnings impact from the sanctions as they exist today is fairly mild, but we think the cost of equity will rise as investors shy away from the possibility of further and more serious geopolitical tension, combined with the possible implementation of full sanctions on listed companies.

“China continues to provide a mixed picture. There is a wide range of opinions, and a great deal of scepticism about the China story,” Mr Semple said. “There is a continuing tug of war between significant positive and negative economic variables. We believe the ongoing modest and targeted stimulus is expected to continue and keep growth above the 7% to 7.5% level. Despite all that, it’s important not to forget the positives, such as the fact that China has the largest e-commerce economy in the world,” he said.

Despite geopolitical risk, Mr Semple believes most emerging markets countries have absorbed a significant amount of bad news. According to Semple, there are good opportunities in Taiwan, India and Latin America.

“The decisive win for the Bharatiya Janata Party (BJP) in India appeared to be beneficial for the stock market, although there are major hopes for better governance and acceleration of capital expenditure in the near-term. In Brazil, the outcome of the election in early October will be important. We expect a change of government will have a positive impact and will help reinvigorate the stagnant economy,” he said.

“Indonesia has some very significant long-run advantages in terms of demographics and resources, but has significant work to do to increase the return on those assets. This will mean increasing the ease of doing business, whether by investing in infrastructure, streamlining bureaucracy, reducing subsidies, and providing a level playing field for investments.

“We believe emerging market economies will continue to offer higher economic growth in the medium term, particularly as investors increasingly diversify away from their domestic economies and identify better value in stronger performing emerging market economies this year and into 2015,” Mr Semple said.

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Strong positive flows were seen across the US, Europe and APAC, with Australia based ETFs receiving $368m in flows – improving on last month’s record inflow of $354m.

The increasing escalation in the Ukraine, ongoing tensions in the Middle East, Argentina’s latest default and concerns about the Federal Reserve’s intentions did not deter global ETF investors from investing heavily in equities in July. Of the US$35.5bn invested in ETFs across globe during July, 82% of these flows were to equity-based ETFs in July.

Looking a little deeper into recent trends, we can see that Emerging Market equities have seen a rapid return to favour with ETF investors adding heavily in Emerging Market equities for the 3^rd month in a row.  This follows a period of significant outflows from the asset class due to concerns around the evolving political landscape and Chinese reforms concerns.

Unlike their global peers, Australian ETF investors remained cautious on emerging market equities with cash outflows over July the largest over the last 12 months.

While global ETF investors clearly favoured the attractiveness of higher growth emerging economies in recent periods, we expect continued convergence of economic growth from advanced and Emerging Economies due to an improvement in the advanced world and a stabilisation of Emerging Economies. Our expectations are that the global economy will expand 3.5% in 2014 and 3.8% in 2015.

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Alex Vynokur

BetaShares has announced a strategic alliance with WisdomTree Investments, Inc. a leading exchange-traded product sponsor and asset manager.

Under the terms of the agreement, BetaShares has been granted exclusive rights to market the full range of WisdomTree US listed ETFs in Australia and New Zealand to institutional investors.

In addition, BetaShares and WisdomTree will explore the development of products on the Australian Securities Exchange (“ASX”) with the aim of providing investors in Australia and New Zealand access to some of the innovative investment strategies pioneered by WisdomTree.

Alex Vynokur, Managing Director of BetaShares said: “Our collaboration with WisdomTree is an important milestone, opening up a large range of innovative investment solutions for investors in Australia and New Zealand.”

WisdomTree is the fifth largest ETF provider in the US, with funds under management of approximately US$35B and over 65 ETFs listed in the US covering a broad range of asset classes and exposures. WisdomTree is a leader in active ETFs and fundamentally weighted ETFs through products including the US-listed Emerging Markets Local Debt Fund, Japan Hedged Equity Fund and the Global Equity Income Fund.

Commenting on the relationship, Jonathan Steinberg, CEO and President of WisdomTree said: “As ETF adoption increases in Australia and New Zealand, we look forward to working with BetaShares to serve this growing ETF market with new investment solutions.”

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