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.

The post Former ANZ executive joins van Eyk Advice appeared first on AdviserVoice.

Stephen Richards

Ability Capital has demonstrated a new approach to tackling one of the most intractable problems facing superannuation investors in its white paper: The Search for El Dorado: New Strategies for Better Superannuation Outcomes.

The white paper shows how a new type of equities strategy offers an effective solution to the problem of sequencing risk, which is increasingly recognised as a major threat to super funds’ investment objectives and therefore the retirement outcomes of millions of workings Australians.

Sequencing risk is the risk that the timing and order of investment returns is unfavourable. The timing of returns can have a dramatic impact on super account balances, particularly for investors in the retirement phase who need to draw down on their savings.

Ability Capital CEO Stephen Richards said sequencing risk was overshadowed by threats like the GFC but could be much more devastating in the long term. “People approaching retirement are really facing a sequencing risk lottery,” he said.

An analysis in the paper shows that for super fund members, sequencing risk can result in a difference in account balances of up $1 million by aged 70, even though the average return for each member is very similar.

Mr Richards said it was widely recognised that investors needed to maintain a substantial exposure to equities in order to produce the kind of returns needed to fund a dignified retirement, but they also needed to be able to manage the risks.  “This is especially true if you consider that people are living longer and will increasingly need that exposure to growth assets to see them through their retirement,” he said.

The paper discusses a new variety of downside protection strategy for the Australian equities component of a portfolio that substantially reduces sequencing risk but without the prohibitive cost that undermines the effectiveness of other derivatives-based strategies.

The analysis finds that when such a strategy is appropriately implemented, a superannuation fund member would be more than four times as likely to achieve a $500,000 balance by age 70, assuming equities met their long term return assumptions. Even if equities experienced a prolonged period of low returns, the so-called “New Normal” future many believe we are facing, the investor was still more than twice as likely to reach $500,000 than if they adopted a passive equity strategy.

“The new approach in this paper gets us much closer to the investment ‘El Dorado’ of higher returns with low volatility and low sequencing risk,” Mr Richards said.

Ben Samild, Director of Alternatives and Fixed Interest at the Future Fund, said Ability Capital’s approach to downside protection was a real innovation.  “The strategy could be of be of great appeal not just to institutional superannuation portfolios but also to endowments, private ancillary funds and retail SMSFs if they can get access to it,” Mr Samild said.  “I see a lot of strategies every year and I really haven’t seen anything like it.”

This inexpensive downside protection strategy has been implemented in Ability Capital’s Turquoise Downside Protection Fund, recently awarded an “A” rating by leading investment research house van Eyk Research, which has also invested in the Fund through its Blueprint multi-manager series.

van Eyk CEO Mark Thomas said the Turquoise Fund had a compelling investment thesis – inexpensive and tax effective downside protection with an aligned fee structure. The strategy has delivered as expected and as promised.

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Also known as the “Halloween indicator”, the strategy is based on the belief that the share market tends to begin falling away in May and that market returns are usually considerably stronger in the November to April period than between May and October.

This indicator has relatively strong statistical evidence behind it but it does not occur every year. Since 1970, the May to October period for the All Ordinaries index has returned an average of only 1.15%, while the November to April period has returned 6.14%.

van Eyk senior portfolio manager Otto Rieth said that while the Australian share market did indeed drop away sharply in May and June this year—the All Ords index dropping to almost its lowest closing price for the year—the forces driving the market higher have tended to overwhelm other factors.

“While investors are still apprehensive about the economy and the battles over the US debt ceiling, there has also been an unmistakeable, if modest, improvement in global macro indicators and monetary policy remains extremely accommodative, with unprecedented amounts of quantitative easing from the US and Japan” Mr Rieth said.

“Investors are also continuing to give strong support to stocks that offer a healthy yield given the relatively poor returns available from bonds and other assets.”

Mr Rieth said some easing of short term concerns about a slide in Chinese economic growth and the temporary resolution of the standoff in Washington over the debt limit had also helped to support the market recently, although he noted it had been climbing fairly steadily since June.

He also noted the typically close relationship between the AUD/JPY currency pair and the ASX300 (see chart). “If Abenomics continues to push down the value of the yen, investors will be increasingly tempted to take advantage of the carry trade and borrow cheaply in yen to invest in higher yielding assets offshore, like Australian shares,” Mr Rieth said.

Chart: AUD/JPY vs the ASX300

Source: Bloomberg

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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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Unlike a market crash, which is quite evident, recoveries are more subtle in their nature and less easily identifiable. In these circumstances it can be tempting to latch onto one statistic to justify our belief one way or the other. But reality is almost always more complicated than that.

Take the US housing market for example. There is an increasingly popular view that the market, which is regarded as an essential driver of economic growth, is in recovery. The statistics people most often cite is the growth in home sales. It is true that sales have recovered substantially.

Chart 1 highlights some key statistics related to the US housing market (latest available data).

The shaded blue area in Chart 1 represents sales of existing homes on an annualised basis. Sales peaked at about 7.25 million dwellings in September 2005 but by November 2008 they almost halved to as low as 3.77 million. The spikes evidenced in mid-2009 and early 2010 relate to stimulus in the form of tax credits, made available to qualified first-time home buyers.

These credits expired in November 2009 and were subsequently extended to April 2010. Existing home sales then bottomed to 3.39 million dwellings in July 2010. But since that time, sales of existing homes have gradually recovered to their current level of around 4.98 million dwellings as at February 2013. This is near the level of existing home sales prior to the housing boom of 2002–2007.

However, while housing sales have improved over the last three years, prices are yet to show any substantial improvement. The dark blue line in Chart 1 represents US house prices. Since January 2009 there has been little meaningful recovery in housing prices and they continue to remain well below their pre-GFC peak.

House prices are a key part of housing’s importance to the broader economy. Without prices rises, the consumer does not benefit from the “wealth effect” which makes homeowners feel richer and encourages them to spend and borrow more. The bad news is that there is unlikely to be any sustainable recovery in housing prices until there is a fall in the number of home foreclosures and distressed sales, which put downward pressure on prices.

The good news is that we are beginning to see some improvement in these measures. For example, Chart 2 shows that foreclosure rates have been trending down from their 2009 and 2010 peaks, albeit they have some way to go before they return to more normal levels.

While an increase in existing house sales is an indicator of improving economic conditions, it is housing construction that tends to have a greater multiplier effect on economic activity, and is probably more important to the sustainability of a US economic recovery. The green line in Chart 1 represents US housing construction starts.

At their peak, US housing starts reached an annualised figure of 2.27 million dwellings in January 2006 but by April 2009 they had bottomed to just 478,000 starts. A more “normalised” level of housing starts is in the range of 1-1.5 million.

While the improvement in the green line appears minimal, housing starts have been trending above 900,000, annualised, in December 2012 and January 2013 and broke through 1 million in March 2013. This is a positive sign and getting close to a more normalised volume of construction.

So while there is evidence of a recovery in US housing, it is unlikely to be reflected meaningfully in prices until distressed inventory clears through the system, nonetheless things appear to be trending in the right direction.

Furthermore, while an improvement in the housing market is a key component of US economic recovery, housing by itself can’t cement the recovery, there also needs to be a sustained improvement in employment and growth in household incomes.

This article originally appeared in the van Eyk View, the investment newsletter of van Eyk Research. You can download the iPad version here:
http://itunes.apple.com/au/app/the-van-eyk-view/id476210180

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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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