Catherine Lavender and Jason Goodacre have joined Midwinter as Senior Business Development Managers. The appointments reinforce Midwinter’s keen focus on supporting Independent Financial Advisers with established and trusted advice technology.

Catherine, based in Melbourne, has more than 24 years of experience in financial services, most recently serving as Head of Distribution at Centrepoint Alliance. Her proven track record at ClearView Wealth and Colonial First State equips her with deep expertise in adviser-centric distribution strategies and product value alignment.

Jason, based in Sydney, brings over three decades of experience in enterprise software sales and financial market solutions having worked for Praemium, Iress, BT Financial Group and Thomson Financial. With a background spanning business development, client engagement, and strategic management, he will play a key role in accelerating Midwinter’s go-to-market initiatives and driving growth.

Joining them is Leica Urrutia as Senior Manager, Service and Operations. With 23 years in client success and operations across banking, insurance, and technology, Leica is focused on scaling service delivery, further enhancing client experience and supporting ongoing and sustainable growth of the business across IFA and Enterprise markets.

In addition to new hires, Midwinter has promoted key talent from Bravura to bolster product leadership and client delivery. Michelle Lusty, who has worked extensively across various Bravura product development roles for nearly two decades is now heading up Midwinter’s Advice Product team, bringing a wealth of proven industry experience and vision.  Roshan Ranasinghe has expanded her remit as Head of Client Delivery across both Midwinter and superannuation products for enterprise program delivery, including digital advice.

“These appointments mark an important milestone in Midwinter’s growth journey,” said Paul Dunn, Chief Executive for APAC at Bravura Solutions.

“As we double down on innovation and regional expansion, bringing in and elevating top-tier talent ensures we’re not only meeting market demand, but leading the way in advice technology.”

Midwinter’s talent strategy is directly aligned to its broader growth agenda, with an emphasis on expanding distribution, accelerating product development, and delivering an exceptional client experience across its expanding footprint within Australian’s financial services sector.

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Paul Dunn

Bravura Solutions, a global leader in financial services technology, has reached a groundbreaking milestone, with over 6 million Australian super fund members having the opportunity to access its market leading advice tools.

Bravura’s milestone affirms its leadership in empowering funds to support members as they navigate retirement and beyond. This achievement reflects the industry’s trust in Bravura’s proven technology, that has supported superannuation administration and financial services in Australia for over 20 years.

Paul Dunn, Chief Executive Officer for APAC at Bravura Solutions, comments: “The momentum behind digital advice technology is accelerating as more super funds embrace proven solutions to deliver guidance and advice to members. While this digital shift underscores a dynamic new chapter for the superannuation sector, the success in enabling better retirement outcomes hinges on delivering personalised advice at scale in a format that members want to engage with.

“We’re at the early stages of the digital advice revolution within super, and funds are naturally cautious and diligent about getting digital advice right. In our experience, they want a trusted partner who deeply understands their business, their members and has a proven ability to implement enterprise programs.”

Bravura is leveraging its proven financial services Midwinter technology for its hybrid advice model to deliver guidance and advice to members and importantly to build a member’s financial confidence through its advice model and tools.

In close collaboration with its clients, which include some of Australia’s largest super funds, Bravura is continuing to invest and innovate its digital advice offerings.

Aware Super, in collaboration with Bravura since 2020, has pioneered digital hybrid Advice solutions with the launch of its My Retirement Planner in 2023. The tool, which helps members set personalised retirement income goals and create action plans to improve their retirement savings, has transformed retirement planning for its 1.2 million members. The fund has successfully achieved over 68,000 Statements of Advice (SOAs) in just 20 months, with over 12% of eligible members aged 45+ actively engaging with the digital advice tool—far surpassing the 2% industry standard.

Rest Super’s collaboration with Bravura, which began in 2017, has proven successful in reaching members who don’t traditionally seek financial advice. In the last three years, Rest’s digital advice tools have been used about 30,000 times per year by members, making up nearly 9 in 10 of all advice interactions in that time. Rest credits digital advice for making the super experience simpler for its more than 2 million members, providing advice at the right time to help them with complex choices so they are better prepared for the future.

AMP Super, Bravura’s latest collaboration, recently launched its Retirement Health Check, an innovative digital advice solution designed to boost financial confidence and guide members to make better decisions about their superannuation and retirement. AMP’s selection of Bravura followed a highly competitive bidding process, reinforcing Bravura’s position as an industry leader in digital financial advice. AMP Super is also set to release a range of other digital advice solutions for its members this year, including investment choice, super contributions, insurance and pension management.

The scale of adoption and the powerful outcomes already being generated from these collaborations, and other projects where Bravura is partnering with major super funds across the super value chain, highlights that regulatory uncertainty is not impeding investment and action in enhancing member services.

Michelle Lusty, Product Manager for Advice at Bravura Solutions, comments: “The super funds we are engaging with have indicated they are moving forward with business cases and execution of their advice strategies.

“It’s not just regulatory pressure that’s driving this trend – there’s real, tangible benefits to both super funds and their members. Bravura’s clients consistently tell us that members who engage with the digital advice tools feel more confident about their retirement.”

Bravura expects the design and delivery of digital advice solutions to remain a top priority for super funds this year and to gather pace as funds focus on service outcomes for their members and meeting their retirement income covenant obligations.

“The ability for operating models to adapt and deliver advice at scale as unprecedented numbers of superannuation members seek guidance and advice regarding their retirement in the next decade is critical for funds and the broader industry to achieve better member outcomes and experiences,” Lusty said.

As superannuation funds continue to evolve their responses to regulatory shifts and member expectations, Bravura Solutions stands at the forefront of this transformation—delivering better technology that not only improves member outcomes but strengthens the broader retirement system.

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Melinda Howes

AMP has announced the launch of a new digital advice solution, providing AMP Super members with simple, intuitive and secure retirement advice, with no extra fees.

The digital Retirement Health Check provides members with an online advice journey to find out when they can access super, how much is enough to retire and an estimate of their income in retirement.

In a market first, members can personalise their desired retirement income goal and then compare it with other key benchmarks including the age pension and ASFA’s Retirement Standards. Members also receive a Retirement Income Score and My Retirement Report, and through the solution can model different scenarios and strategies to improve their score.

If members wish, qualified advisers are on hand at no extra fees to discuss their results and help them take the next best step with their super and retirement planning. If advice requirements are more complex, a pathway to more comprehensive advice is also available.

Flexible access

Members can access the digital advice solution securely through My AMP online, from the comfort of their own home, at any time. The solution will also be available through the My AMP app in the coming weeks. Through My AMP members can also view their superannuation balance, switch investment options and manage insurance.

More to come

Developed in partnership with leading software provider, Bravura Solutions, the Retirement Health Check is the first of a range of digital advice journeys AMP Super is set to launch for members in the coming months. These solutions will cover pre-retirement and post-retirement strategies, including investment choice, super contributions, insurance and pension management.

Melinda Howes, AMP Group Executive Superannuation & Investments said: “We’ve drawn on AMP’s deep understanding of financial advice to create an intuitive, personalised digital experience for our super members.

“The Retirement Health Check – the first of our new advice journeys to come to market – recognises that Australians need help navigating a retirement system they often find daunting and overly complex.

“The solution aims to cut through this complexity and provide simple guidance and advice to help our members maximise the retirement income they generate from the super savings they’ve worked hard to build.

“We want to give our members greater control and financial confidence in retirement, and help them unlock a better quality of life.”

Paul Dunn, CEO APAC, Bravura Solutions said: “AMP’s Retirement Health Check is an outstanding example of how leading super funds are stepping up to better support their members achieve their retirement outcomes using digital advice solutions. Using Bravura’s Midwinter technology, this collaboration means AMP members have an easy-to-use digital advice solution to empower them on their superannuation journey.”

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Paul Dunn and Chris Spencer will take up their new roles as CEOs of APAC and EMEA business units, respectively, with immediate effect. Both will be responsible for the end-to-end financial management and operational delivery for their regions, with a focus on driving growth and improving client outcomes. Chris and Paul will report into Group CEO and Managing Director, Andrew Russell.

Andrew Russell, Group CEO and Managing Director, Bravura, said: “This is a crucial step in the evolution of Bravura, helping us further streamline our business and form ever closer relationships with our clients.

“Since joining the business earlier this year, I’ve been hugely impressed with the impact Chris and Paul have made in their regions and both will play important roles in aligning our organisation with our markets, products and clients moving forward. Our new structure will set ourselves up for future success and ultimately ensure we continue to provide a suite of industry-leading solutions throughout the wealth value chain to help our clients unlock value, create scale and achieve operational efficiency gains.”

In addition, Bravura has named Chris Biddick as Managing Director, Transfer Agency. In his role, Chris Biddick will report into Chris Spencer, CEO, EMEA, and be responsible for growing the business with current clients and prospects.

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Paul Dunn

Superannuation funds that fail to engage their members through digital advice could find their products are no longer competitive as rivals increasingly build a more holistic suite of services.

The need to deliver quality financial advice at scale is growing as superannuation funds strive to close the advice gap for young members and offer accessible advice options to a larger percentage of their member base.

“Super funds’ have an important and fundamental role underpinning the retirement lifestyles of all Australians,” according to Bravura Client Relations and Sales Director – APAC, Paul Dunn.

“Offering greater levels of support delivered through scalable digital advice is becoming an important way for funds to engage and educate members. We are currently working with major super funds to ramp up their digital advice offerings.”

As well as helping members plan for retirement, digital advice can also help funds improve member retention.

“Older members with higher balances naturally seek financial advice, often prompting them to switch to a new fund or a self-managed super fund. This undermines the scale of the fund they are leaving, which is critical to keeping fees and other costs low. Digital advice delivered at scale is part of the solution.”

Rising scale underpins digital advice

The prudential regulator is driving a new wave of consolidation across the $3 trillion super industry as a way to lower fees and improve retirement outcomes.

About eight super funds merged last financial year and about 15 more mergers are in progress, APRA Deputy Chair Helen Rowell told a Senate Estimates hearing in March^[1]. The mega scale of these funds has created a new impetus to offer digital advice at scale.

There are now at least seven super funds that each serve more than 1 million members, and more are likely to be created by mergers over the next 1-2 years. The relationship between funds and their members has largely been passive, partly because retirement funds are historically locked away for decades, but the situation is changing.

Midwinter Head of Professional Services Annie McCabe says its digital advice tools are becoming increasingly popular.

“The digital channel can help meet the significant unmet demand for financial advice in the community, particularly for those who would not otherwise seek advice due to its cost or because of inertia,” McCabe said.

Midwinter’s AdviceOS advice platform is used by financial planners and also integrated into Bravura’s registry system, Sonata Alta, which is used by super funds.

“AdviceOS powered advice delivered to more than 170,000 individuals across multiple channels in the last year. Digital advice is helping financial planners become more efficient and deliver high-quality strategic advice – now the same underlying advice engine is also helping super funds deliver advice to their members.”

A 2019 ASIC report on what consumers think about financial advice found that only 1% of survey recipients had received digital advice yet 19% were open to it^[2]. About 20% of Australians had considered getting financial advice in the last 12 months but had not gone ahead. Of those people, 37% were open to using digital advice.

“Those who expressed some interest in digital advice saw it as a potentially convenient, lower cost option,” the report found.

Why scalable financial advice is now a reality

Major super funds are now using their size to seamlessly integrate digital advice with their administration system, which needs to process member transactions quickly and accurately. However, this isn’t a major competitive differentiator between funds unless they can leverage it to also offer scaled advice to members when they need it.

“Funds should be the go-to destination for members during their ‘moments that matter’, such as approaching retirement. The technology now exists to integrate intuitive digital advice with an administration platform, creating quality advice at scale,” said Dunn.

“The advice is immediately executable by the member and produces a compliant Statement of Advice. A member’s relationship with their super fund could ultimately become as seamless and self-directed as the relationship they have with internet banking.”

This combination sets the foundation for straight-through-processing. It creates efficiencies and also allows members to track the status of any advice, such as an investment switch or change to life insurance.

Integrated digital advice is also highly customisable by super funds. For example, a fund can create triggers targeting advice towards certain member cohorts (such as those nearing retirement or those with large balances).

A number of major super funds are currently on this digital advice journey.

Rest Advice Online has been powered by Midwinter’s AdviceOS system since 2016 and gives members retirement advice that automatically generates a Statement of Advice. Rest Online Advice reported a 252% year-on-year increase in interactions over the 2019-20 financial year, with particularly strong take-up from younger members and women^[3].

Aware Super is also implementing an integrated ecosystem of Bravura products, underpinned by Sonata Alta and encompassing AdviceOS, Babel Superstream messaging and member and adviser digital offerings.

Bravura acquired Midwinter and its popular AdviceOS platform in August 2019, which has been integrated into Bravura’s broader wealth solutions.

———-

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Cody Harmon

Melbourne-based financial services firm Meridian Wealth Management is celebrating the news that 26-year old Financial Advisor Cody Harmon has been awarded the Financial Planning Association (FPA) Associate Financial Planner of the Year.

Announced yesterday afternoon at the FPA Congress in Perth, the award recognises academic excellence amongst budding financial planners around the country. The award also commends individuals and businesses that demonstrate a commitment to delivering excellent outcomes for clients, as well as making a notable contribution to their local community.

Meridian Wealth Management Managing Director and Principal Advisor Paul Dunn, said that the national accolade was incredibly well deserved and a testament to Harmon’s hard work and passion, for both his vocation and the industry itself.

“Since 2004 Meridian Wealth Management has strived to support and educate clients throughout their various life stages, to help them make the right financial decisions in order to achieve their financial and lifestyle goals.

“It’s an honor to have Cody recognised in this way and to know that his hard work, passion and knowledge is resulting not only in consistently great outcomes for our clients but also that the industry is acknowledging the dedication and expertise that he demonstrates daily.

“Cody’s acknowledgement as Associate Financial Planner of the Year shows that industry is taking notice of what our firm does as well as the high standards that Meridian Wealth Management is setting, and that’s something we’re incredibly proud of.”

The FPA is Australia’s leading professional organisation for financial planners. Together with over 12,000 members, they are shaping the future of financial planning to secure a better financial future for Australians.

Mr. Dunn is a Certified Financial Planner (CFP) and has been a part of the Australian financial services industry since 1995.

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From the introduction of retail unit trusts in the 1980s and the subsequent emergence of master trusts and access to wholesale unit trusts in the 1990s, the underlying theme of this evolution has been one of efficiencies underpinned by cost savings for both product manufacturers and investors. By the early 2000s unlisted index funds, both retail and wholesale, started to garner more presence in advisers’ portfolio recommendations. Roll forward to the second decade of this century and Exchange Traded Funds (ETFs) are now taking an increasing share of the capital deployment route for investors.

So what is it about ETFs which sees them receive a seemingly ever increasing flow of adviser recommendations for clients? AdviserVoice’s Ray Griffin spoke with John Hewison CFP of Hewison Private Wealth (Melbourne), Paul Dunn of Meridian Wealth Management (Melbourne), Tim Mackay CFP of Quantum Financial (Sydney) and Adrian Zoppa CFP of Hood Sweeney (Adelaide) in an effort to identify how advisers are using – or not using – ETFs in their advice to clients. He also then takes a close look at Exchange Traded Australian Government Bonds and how they provide access to government bonds in the retail market.

As the name suggests, ETFs are investments which can be bought and sold on an investment exchange and which can have a variety of underlying asset exposures. Shares both domestic and international, fixed interest (bonds), listed property, currencies and commodities exposure can all be accessed through ETFs. While the first ETF launched in 1989 in the United States was a passive share market passive index exposure, there is an emerging trend for ETF providers to market active funds.

In terms of equity ETFs, perhaps their closest relative is Listed Investment Companies (LICs) in that they are both bought and sold on, in the case of Australia, the Australian Securities Exchange (ASX). However, at that point they traditionally diverged with ETFs typically having been passive index exposure whereas LICs are investing in companies based on research and analysis which complies with the LIC’s investment strategy. Like LICs, ETFs provide low cost access to markets with Management Expense Ratios (MERs) as low as 0.05% p.a.

By early 2014, with the total number of ETFs being traded in Australia approaching one hundred, funds under management had reached circa $10 billion. According to a 2013 survey by BetaShares and Investment Trends, approximately half of the 102,000 ETF investors in Australia were SMSFs.  Globally, ETFs account for around US$2.4 trillion with more than 5,000 funds listed on 59 exchanges. With such numbers, ETFs are anything but the latest ‘fashion of the month’ investment.

ETFs more generally, tick both the efficiency and cost reduction boxes and are increasingly finding favour with both advisers and investors alike.  However one of their drawbacks, some advisers might argue, is that they can deliver exposure to assets which, given a choice, an adviser might not wish to recommend to clients.  In the case of index exposures, it could be argued that an ETF is a quasi-recommendation for all the assets which comprise the index; it’s a case of taking the good with the bad, as the adage goes. For actively managed ETFs it can still be the case that an investor is buying assets which they might otherwise prefer not to be exposed to. It has to be said however that this aspect applies equally to all managed investment products; at any one time a fund of any ilk might hold assets which if addressed in isolation might not carry a ‘Buy’ recommendation from an adviser.

Structure

The emergence of ETFs in the US in the late 1980s saw investment managers transfer components of/their entire share portfolios, heavily weighted to the S & P 500 Index, to fund managers who contracted to track and administer the performance of the holdings over time. The fund manager issued units and there was a relationship between the unit price and the value of the underlying shares.

In effect, rather than administering large numbers of share certificates, which in the US could mean hundreds of share certificates, institutional investors could hold a single asset which was units in a fund. The economics of this delivered lower administrative fees for investment managers.

Source:

http://www.ifa.com/images/articles/etf_concern_diagram2.jpg via http://www.betasharesblog.com.au/etf_creation/

The units are only available to wholesale investment managers; the Authorised Participants. The delineation sees institutions dealing in the wholesale, primary, market and individual retail investors participating in the secondary market.

 ETFs in Australian portfolios

While financial advisers have been using ETFs in Australia for many years, the strategic application in portfolios varies quite markedly.

Melbourne based Hewison Private Wealth specialises in managing and administering portfolios of direct investments.  Founder and Managing Director, John Hewison says his firm has been including ETFs in portfolio recommendations for around eight years. “We have used them for both index exposure to a sector such as REITs for example and for sector exposure such as International Emerging Markets or International Global Top 100 companies. We typically use ETFs in specialist areas where we would find it difficult to get direct access or prefer to utilise an index approach.” He said. “However, our typical allocation is small at around 10% of a portfolio.”

While Hewison Private Wealth will use LICs over ETFs for some sector exposures, Quantum Financial’s Tim Mackay cites the greater propensity for LICs to trade either side of Net Asset Value (NAV) as a reason to rank ETFs ahead of LICs. “We prefer them over LICs as they don’t face the same problem that LICS do of trading at a discount or, less frequently, trading at a premium to NAV.” he pointed out. Quantum Financial utilises ETFs to deploy a so-called thematic investment strategy on a client by client basis with no specific level of portfolio allocation. “We think that ETFs provide the ideal tools to easily and precisely construct portfolios based on asset allocation, enabling us to create efficient portfolios in a modular way as easily as snapping Lego pieces together. And they increasingly cover most asset classes and are cheap, liquid and reliable.”

Meridian Wealth Management’s Paul Dunn however notes that just like LICs there can be occasions when ETFs don’t trade at NAV. “They don’t always trade at NAV like an unlisted fund. Premium and discount factors always need to be considered.” Meridian Wealth’s portfolios can hold up to 20% exposure to ETFs subject to any active tilts in place. “We use them to provide specific exposure towards any strategic theme that we want included within a portfolio like, for example, CTN for microcaps or IOO for large global market caps and the like.” Dunn added. “We like the liquidity and broad based exposure and the biggest advantage is being able to buy and sell directly on the overseas exchanges where a lot more options are available.”

In contrast to the higher and more active use of ETFs at Quantum Financial and Meridian Wealth Management, John Hewison points out that ETFs do not fit Hewison Private Wealth’s investment philosophy. “We generally like to use direct investments so ETFs don’t really fit our broad philosophy of going direct to markets where we can. That said we typically use ETFs in specialist areas where we would find it difficult to get direct access or prefer to utilise an index approach.” He said.

Hood Sweeney’s portfolio allocations are based on a direct approach to assets along with strategic inclusion of managed funds with the usage of both asset types being centred on a value bias. “We’re active portfolio managers but we’re very focused on the long term and fundamental business valuations and we’re keen to understand the likelihood of continuing dividends.” Notes Hood Sweeney’s Adrian Zoppa CFP.  “While we’re yet to make substantial use of ETFs in portfolios, we believe that for some investors there is an argument for low cost, well diversified, equity ETFs that are consistent with the client’s investment strategy.” He added. “The return investors should demand from such ETFs should be at a high risk premium over the risk-free rate and the objective with the equity ETFs in the portfolios is that a 5-10 year time frame is adopted.”

While not all advisory firms are recommending ETFs in portfolios, in 2014 there is no shortage of choice in fund styles. While the original ETF raison d’être had been market cap funds with index or market segment exposures, increasingly so-called smart beta funds are being launched which are structuring funds based on non-market cap factors such as dividend yield and valuations. Put simply, the new breed of ETFs are far less sedentary than traditional market cap funds. 

“We’re closely watching the way this sector is developing and we’re quite interested in the more sector specific ETFs which are coming onto the market.” John Hewison said.

Tim Mackay’s Quantum Financial builds portfolios with as few as eight investments, all of them ETFs. “You can put together a wonderfully simple, diversified, cheap and coherent portfolio based on investment themes such as blue chip shares, broad index shares, high dividend/imputation shares, small cap shares, resources and so on.”

Tactically, Quantum Financial leans toward so-called ‘core and satellite’ construction techniques with cores comprised of diversified low cost ETFs and satellite investments based on high conviction positions in direct shares or funds they see as outperforming. “We see this as the best of both worlds.” Mackay said. “Clients save in fees in the core or passive components and this is complimented with the active satellite positions.”

According to Paul Dunn, Meridian Wealth uses ETFs to complement the firm’s active portfolio management style.  “They provide us with broad based exposure for portfolios as well as themed exposure to complement our active style. They provide very good liquidity especially when gaining exposure to market sectors that are often very thin or limited in size.”

In focus – Exchange Traded Australian Government Bonds (ET AGBs)

One of the more interesting recent developments in the ETF market in Australia was the launch of a facility on the ASX for trade in Australian Government Bonds (AGBs). Up until the mid-1980s, Australians were able to invest in AGBs in amounts as low as $20 via their local bank branch in over the counter transactions (OTC). In some respect, this was a carry-over from the issue of war bonds during the Second World War when citizens lent money to the government to fund the war effort. Some readers might recall the somewhat patriotic, flag waving, television advertisements of the late 70s and early 80s for ‘Aussie Bonds’. For several decades following World War 2, small OTC AGB investments were still possible in bank branches all over the nation.

However, by the 1980s the high cost of administering many tens of thousands of individual investments and the cumbersome, unreliable, nature of raising capital via that method, saw Treasury withdraw back to dealing only with large, authorised, institutions to fund the government’s Bond (medium to long term) and Treasury Note (short term) requirements.  As a consequence, direct access to investing (lending money to the government) in AGBs for the vast majority of investors disappeared. While most Australians had indirect access to AGBs via superannuation funds, life insurance policy statutory funds (i.e. so-called Capital Guaranteed funds) and managed (unit trust) bond funds, the primary market participants were only the very large authorised institutions.

Retail trade in bonds

In late 2012, as a first step in developing a broad and liquid corporate bond market under the Competitive and Sustainable Banking System (2010) policy, legislation was passed to facilitate retail trade in Federal Government Securities. The rationale for the change was to reduce the government’s reliance on foreign funding and a goal of reducing the prominence of equity and property allocations in superannuation funds which can be vulnerable to sharp market value declines with a corresponding sudden lapse of confidence in that form of savings retirement vehicle.

While the ‘paper’ or physical bonds are not traded on the ASX, the rights to the physical bonds are traded electronically as with any other security on that exchange. Austraclear is a subsidiary of the ASX and is the wholesale securities depositary which holds legal title to the AGBs. The holder of an Exchange Traded AGB holds the right to receive all interest (coupons) and principal payments applicable to the underlying bond; the beneficial ownership. This ownership takes the form of a CHESS Depositary Interest (CDI) and it is the CDIs which in effect link the wholesale bond market (institutions) with the retail market.

Types of Exchange Traded AGBs

The two types of ET AGBs are Treasury Bonds (eTBs) and Treasury Indexed Bonds (eTIBs) with each having a minimum one unit which is equivalent to $100 Face Value of the bond over which they are issued.

As with any interest bearing security being traded on an open market, the market price of Exchange Traded Australian Government Bonds (ET AGBs) is driven by its yield to maturity and it is also impacted by the prevailing inflation and interest rate expectations. The market price of the securities move above/below face value in accordance with such expectations.

Making a market

The Commonwealth Bank of Australia, JP Morgan and UBS are the three market makers appointed by the ASX to access liquidity in the wholesale bond market. These participants are also required to provide continuous Bid and Offer prices on all ET AGBs. The market makers must quote a minimum volume of ET AGBs and quote a maximum spread between the bid and offer price which is concomitant with the spread in the wholesale market. At present their obligations include quoting a minimum 50,000 Treasury Bonds and Treasury Indexed Bonds which equates to around $5 million (50,000 x $100) on the bid and offer.

Risk and reward?

The price for the perceived greater security of investing in a government borrowing with a high credit rating comes, in part, in the form of a yield which is low relative to some other types of securities. Governments with high international credit ratings can borrow at lower rates than those with lower ratings. For investors in AGBs this means that while the yield is low the risk of capital loss is low and it is these characteristics which see roles in portfolios for clients with lower tolerance for portfolio volatility.

The above comments about risk notwithstanding, it’s instructive to note that the GFC put an end to the view that government debt is risk free debt.

An ET AGB versus an Index Bond ETF?

As mentioned earlier, the purchase of any fund of investments bring with the possibility that some of the fund assets are, at a point in time, sub-optimal. In the case of an Index Bond ETF, understanding the average terms to maturity and yields are essential to gaining insight into how the market price might perform over time under various scenarios. In the case of an ET AGB, an investor is buying rights to a single bond not multiples of them. There is a single yield to maturity and but one term to maturity. The risk, it could be argued, is easier to identify when compared to a fund which has a bundle of bonds at various coupon rates and maturity dates. Bond fund managers would rightly point to the spreading of risk which a fund with a range of maturities and yields can provide.

In the case of a Global Index Bond Fund there is of course the issue of currency risks – a buoyant AUD and an unhedged fund does not bode well for capital stability.  In addition a global bond fund will, notwithstanding the principles of diversification and risk management, potentially hold government bonds in economies with less than stellar credit ratings.

These are some of the risk-reward trade-offs to consider when evaluating the two forms of exchange traded investments.

Exchange Traded Investments – Summary

For the time being at least, with a tailwind of relatively robust economic data from around the world, exchange traded investments of various types are gaining increased prominence in Australia investment portfolios. Their role in portfolios varies from passive index exposures for minor portfolio proportions to much larger and more active allocations which advisers will look trade as their outlook for a sector or commodity changes.  ET investments deliver reduced costs and under normal market conditions they provide liquidity.

While not strictly a ‘fund’ as advisers know them to be, Exchange Traded Australian Government Bonds provide retail access to investors for amounts as low as $100 per unit.   ET AGB investors do not have legal title to the underlying bond however they do hold the rights to all coupon and principal payments related to the bond.

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