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EQUITY
STANDING UP FOR
SHAREHOLDERS
FEBRUARY | MARCH 2018
VOL 32 #2
Women and 06 11 17
retirement savings A three pronged
investment strategy
BlueScope Steel Limited
(BSL)
2017 AGM wrap
Why do women have less than half
RRP $10
www.australianshareholders.com.au
EQUITY
STANDING UP FOR
SHAREHOLDERS
FEBRUARY | MARCH 2018
Vol 32 #2 FEATURES THIS MONTH
04 Women and retirement savings
Australian women on average have approximately half the level of men’s
superannuation savings. This is the case both while women are at
work and also once women have retired. Karen Volpato, Senior Policy
Advisor at AIST, outlines some policies which could help address this
discrepancy.
06 A three pronged investment strategy
As the local share market has clocked off on 2017 with double-digit
percentage gains (all-in) for the second calendar year in a row, Rudi
Filapek-Vandyck, Editor of FNArena, wonders whether it is time for
investors to zoom in on what has been happening underneath the
surface of this unexpectedly robust bull market?
11 BlueScope Steel Limited (BSL)
BlueScope (BSL) has undergone an amazing transformation
since the company demerged from BHP in 2002. Rod McKenzie,
the Victorian Company Chairman, outlines the background and
prospects for this company.
03 07 08 10
From the CEO Call for director Top 7 myths about ETFs Can socially responsible
nominations 2018 busted investing and good returns
coexist? YES
12 16 17 18
AGM reports Brickbats and Bouquets 2017 AGM wrap Giving exposed
19 20 21 22
News desk Conference activities Intergenerational wealth Calendar of events
planning seminars
2 FEBRUARY | MARCH 2018 EQUITY
FROM THE CEO
By Judith Fox
BOARD OF DIRECTORS As an ASA member, you get more from your retail investment journey than if you go it
Diana D’Ambra BCom MCom FCA MAICD, Chairman alone, whether you’re a retail shareholder, an SMSF trustee or an individual investor.
Geoffrey Bowd BCom MCom
Alison Buxton BCom (Marketing) GAICD
With the ASA you can network and grow with a community of like-minded investors.
David Fletcher BAcc CA GAICD Our ongoing learning and education allows investors to hone their financial knowledge
Allan Goldin BA BLaw and investment skills.
Don Hyatt BAppSc DipEd M Ed MACE
Stephen Mayne BCom GAICD Helping educate investors to become more informed is one of ASA’s core missions.
For that reason, we have always believed that we have a role to play in improving
NATIONAL OFFICE
Judith Fox BA(Comm) MCA FGIA MAICD financial literacy in Australia. Last year we applied for a Financial Literacy Australia
CEO grant and, I am delighted to advise, our application was successful. We were advised
Fiona Balzer BComm SFFin GAICD in December 2017 that we would be awarded a grant of $110,186 to assist women
Policy & Advocacy Manager
Sarina Devi BBus(Acct) ADipBus
65+ to build confidence to participate in financial decision-making.
Administration Officer
Research indicates that typically women over 65 are not actively engaged in the
Silvana Eccles BA(Modern Languages)
National Operations & Education Manager management of their investment portfolio and/or self-managed superannuation
Kris Nuñez AdvDipBus(Advert) fund — often due to lack of confidence and low financial literacy levels. While this
Events & Marketing Officer is not true of ASA female members, who are already showing agency in financial
Kristy Wan BA(Comm) decision‑making, it is recognised in the research literature as being true of a large
Content & Design Officer
percentage of women of this age.
STATE BRANCHES As women tend to outlive men and inherit a financial plan, there is an imperative
ACT Edward Patching act@asa.asn.au
to improve older women’s financial investment knowledge and confidence. This is
NSW Richard McDonald nsw@asa.asn.au
QLD Bryan Moore qld@asa.asn.au because for women without basic investment knowledge, consulting a financial adviser
SA Brad Martin sa@asa.asn.au can be an overwhelming experience. Also, without agency over their financial futures,
VIC Don Hyatt vic@asa.asn.au older women may also be vulnerable to family members taking over and those family
WA Barry Nunn wa@asa.asn.au members may be incompetent, or worse, predatory.
EQUITY EDITOR
Silvana Eccles equity@asa.asn.au Our project addresses both the knowledge/information aspects and the emotional/
CONTACT DETAILS relational aspects of gaining financial agency. One goal is to empower older women
TELEPHONE 1300 368 448 whose partners have always managed the finances with an understanding of basic
02 9252 4244
investment and financial concepts knowledge. We aim to demystify these concepts
FAX 02 9071 9877
and assist women to understand them. Another objective is to give older women the
ADDRESS Suite 11, Level 22 confidence to have conversations with their partners, children and financial advisers
227 Elizabeth Street
Sydney NSW 2000 about how the investments and finances are structured. We want to help women explore
PO Box A398 the emotional triggers to which they may be vulnerable (such as guilt or shame) and
Sydney South NSW 1235 assist them to be able to deal with offers of assistance from family and friends with
ABN 40 000 625 669 regard to managing their financial affairs. Importantly, the aim is also to assist them
EMAIL share@asa.asn.au to find the confidence both to judge if they want to accept such offers and hold a
WEBSITE www.asa.asn.au discussion with professional advisers about their financial future.
www.australianshareholders.com.au
The pilot will be run in Victoria in 2018, with plans to run free workshops across the
DISCLAIMER
This material in EQUITY is provided for information country in 2019 after completion of the pilot. Evaluation is a significant aspect of the
only. No responsibility or any form of contractual, project — the grant provides for us to work with experts in evaluation to assess if
tortious or other liability is accepted for decisions
made on the basis of the information contained
we achieved the desired outcomes. Importantly, given the emphasis on evaluation,
herein. Nothing in EQUITY is intended or should results of the project will help inform ASA if the small behavioural workshop approach
be interpreted as being investment advice. we are undertaking in this project could be applied to different demographic groups
Investment advice can only be obtained from
persons who are licensed in accordance with and form part of our ongoing education.
the Corporations Act. Views expressed in articles
in EQUITY do not necessarily reflect ASA policy. We hope that our members will assist us in spreading the word — many of you may
The ASA does not endorse or favour any specific know women who could benefit from this project. We are recording expressions of
commercial product or company. The ASA is often
interest to participate now, with the proviso that the pilot workshops will only be run
able to negotiate discounts or benefits for ASA
members however the inclusion of discounts or in Victoria. But any expressions of interest will be retained for when we roll out the
advertisements in EQUITY, on the ASA website main project across the country — we will maintain confidentiality in relation to them.
or within other ASA communications does not
constitute an endorsement for the products, services I look forward to reporting to you on the evaluation of the pilot project. E
or companies mentioned.
COPYRIGHT
All material published in EQUITY is copyright.
Reproduction in whole or in part is not permitted
without written authority from the Editor.
All graphs for the AGM and BIG Reports derive from
Morningstar. Any correspondence regarding matters
covered in this magazine should be addressed to
the Editor.
EQUITY FEBRUARY | MARCH 2018 3
Women and retirement savings
Why do women have less than half?
By Karen Volpato Senior Policy Advisor, Australian Institute of Superannuation Trustees (AIST)
Money Management’s Woman of the Year Financial Services 2018
Australian women on average have approximately half the level roles women do compared with men, the level of support for
of men’s superannuation savings. This is the case both while child care costs).
women are at work and also once women have retired. Women • Life cycle constraints contributing to the superannuation
face a greater risk of poverty in old age when compared with gender gap (eg. child rearing, caring for aged parents, and
men. Over 30 percent of older women are living in poverty. unemployment).
These problems are exacerbated by women having higher life
• Superannuation system inequalities (eg. taxation, and a lack
expectancies than men.
of superannuation paid on parental leave).
The gender gap in superannuation savings results from the • Gender lens should be applied to policy development.
inequalities which women face over their lifetime. The gender
superannuation savings gap (what a woman’s superannuation
savings is compared with a man’s savings) is not only about
3. Workforce inequalities
superannuation. Superannuation is a combination of how much people save,
investment returns, what fees and costs deducted, and the impact
The superannuation gender gap experienced in Australia of superannuation policy settings (eg. taxation, and interaction
occurs elsewhere. The European Union has said the “gender with the age pension).
pension gap amounts to around 40 percent for the European
Union as a whole. This gap reflects gender differences in To help understand why women’s superannuation savings are less
employment — notably pay, working hours and career duration. than men’s, it is important to examine how women’s experiences
… Reducing the gap will require a combination of determined at work are different (including comparisons with peer countries).
equal opportunity policies across several fields before people Women’s workforce participation rates
reach pensionable age, but this will only have positive effects
Australia is closing the gap between women’s and men’s workforce
over the long term.”
participation rates. The gap has lessened from 17.8% in 2001-02
to 11.1% in 2016. While this is good news in terms of saving into
1. Women’s superannuation savings gap superannuation, Australian women do more part time work than
In addressing any issue, it’s first important to have orienting data. in other OECD countries. Gender equality in earnings will not
The following chart compares women’s and men’s superannuation happen unless there is more equal working time.
savings in Australia.
Women’s pay gap
Australia’s gender pay gap is currently 15.3%: this gap has wavered
between 15% to 19% for over 20 years. Australia sits roughly in
the middle of OECD countries in terms of the level of the gender
pay gap.
Job segregation
“Job segregation” means both what types of industries women
work in compared with men as well as the level of the roles women
work in within an industry.
A 2012 analysis of OECD data by K Rawstron found that in the
mid-1980s, “Australia held the title for the most sex segregated
labour force in the OECD area.” In 2015-16, the Workplace Gender
Equality Agency found that six in 10 Australian employees work in
an industry which is dominated by one gender. Job segregation
Source: Workplace Gender Equality Agency’s submission to the Senate Economics
Reference Committee – Economic Security for women in retirement 2015
impacts on levels of pay and therefore superannuation savings.
Level of support for child care costs
2. What are the key causes of the gap? Women’s workforce participation rate is, in part, linked to the degree
This is a quick snapshot of some of the key causes, which of financial support for child care. The International Monetary Fund
relate to employment issues, policy issues, and the nature of the has noted that if the price of child care is reduced by 50 percent,
superannuation system itself. the labour supply of young mothers will rise in the order of 6.5-10
• Workforce inequalities (eg. participating in the workforce, percent. The OECD has noted that Australia has a relatively low
pay, part time and casual work, and job segregation (work spend on early child hood education and childcare compared with
other OECD countries.
4 FEBRUARY | MARCH 2018 EQUITY
4. Lifecycle constraints Superannuation employer contributions on all wages paid
Unpaid time spent by women contributes to the superannuation Currently, employers do not have to pay Superannuation Guarantee
gender gap. Australian women spend more time on unpaid work contributions on wages of below $450 per month. This primarily
such as caring for household members or in doing housework affects women and other part-time and low income wage earners.
than women in other OECD countries. A kick-start
Women in Super and AIST advocate that an additional annual
$1,000 government contribution into super should be made for
low income earners, to better support those with inadequate
retirement savings.
Adequacy
The progressive increase to Superannuation Guarantee
contributions from 9.5% to 12% of wages has been put on hold.
6. A
gender lens should be applied to policy
development
In order to reduce a problem such as women’s superannuation
savings gap, it is important that:
5. Superannuation system inequalities 1. The problem should be recognised.
Women’s savings inequalities leading up to retirement are This could be done by including in an objective for the
highlighted and indeed exacerbated by policy settings. superannuation system that the system is well adapted to
meeting the needs of women and men.
Taxation
2. The problem should be regularly measured.
In 2013, the International Monetary Fund found that women are
more responsive to taxes than men. This could be applied to various This is occurring through the Workplace Gender Equality
areas which impact on the superannuation gender gap including Agency.
applying lower tax rates for secondary earners (eg. Canada), tax 3. Any proposed policy changes should be assessed to gauge
incentives to return to work, as well as to the superannuation whether the women’s superannuation savings gap would be
system itself. reduced.
Currently, the superannuation tax system disproportionately AIST has developed a method for addressing this — the
adversely affects women (as well as male part-time and low AIST‑Mercer Super Tracker. Policies can be put through the Tracker
income earners). This is because of the three stages of taxing to see whether the 10 key performance indicators are improved
superannuation: or adversely affected by the proposed policy. One of the key
performance indicators is the gender superannuation gap.
1. Concessional tax on money being paid into superannuation.
2. Concessional tax on money invested in superannuation. Concluding remarks
3. Zero tax on money being withdrawn from superannuation if This article has reported some of the key inputs which generate a
the person is aged 60 years or more. Previously, there was tax lower superannuation savings balance for women. Some solutions
on retirement moneys if they were over a certain threshold. — such as the $1,000 kick start contribution —
may be a faster item
to implement. Many other solutions — such as reducing the gender
Women who are generally paid less than men and accumulate less pay gap — may have a longer term timeframe. All of these key
money in superannuation than men are ‘hit’ by stage 1 and 2 and issues need constant monitoring. In 2015, the Senate Economics
usually do not accumulate sufficient money to have been affected References Committee for Economic Security for women in
by stage 3. The current taxation system favours those who earn retirement provided an extremely useful plan for helping to close
more and accumulate superannuation savings over a long time. the superannuation gender gap. Most of the recommendations
A re-distribution of tax concessions is needed. remain unimplemented at this stage E
Contributions while not working
In order to recognise that women do take career breaks (and,
indeed, to encourage women back to work), superannuation
payments should also be made on paid parental leave.
EQUITY FEBRUARY | MARCH 2018 5
A three pronged
investment strategy
By Rudi Filapek-Vandyck Editor, FNArena
As the local share market has clocked off on 2017 with double‑digit the ASX only a few years ago have already been disrupted before
percentage gains (all-in) for the second calendar year in a row, they managed to fulfil the promises upon which they became a listed
maybe it's time for investors to zoom in on what has been happening public entity. iSentia (ISD) comes to mind, as well as Freelancer (FLN).
underneath the surface of this unexpectedly robust bull market? Most importantly, just like the internet was real in the 1990s, very few
No doubt, this year's shareholders in a2 Milk (A2M), Mineral Resources of the original internet champions are still around twenty years later.
(MIN), WiseTech Global (WTC), et al cannot help but showcase a big Just because innovation and disruption are tangible and real today,
smile connecting ear to ear, but most Australians also have a large this does not mean that all emerging innovators and disruptors will by
exposure to banks, Telstra, Wesfarmers and other large cap companies default prove successful. Surely the dismal experience with OnePage
and those have largely been laggards over the past five years. serves as a stern warning about the risks involved in group three.
Since mid-2012, most indices in Australia have generated circa 7% For companies in group one, it's probably best investors resist
ex-dividends per annum. For the ASX20 that number drops to a looking over their shoulder into the past when trying to assess what
mere 5% per annum. the future might bring. On my observation, the past five years have
On my assessment, what we are witnessing here is the gradual but impacted through two very different scenarios for companies and/
undeniable impact from technological disruption, regulatory scrutiny or sectors affected.
and increased competition; factors that within the Australian context Under a best case scenario, share prices carve out an extended
were always going to impact hardest on sectors that not so long sideways channel of multi-year duration on price charts. Probably the
ago were dominated by well-entrenched duopolies that are by now best example of this is being provided by Wesfarmers whose share
forced to defend their turf, and to rethink their strategy. price has traded between mid-$30s and mid-$40s since late 2012. It
Witness recent restructuring announcements made by Telstra, QBE, doesn't take much imagination to see a similar trend on price charts
National Australia Bank, Santos, Origin Energy and AMP. for Australian banks, with the exception of Macquarie Group (MQG).
But, of course, none of the problems these companies are facing today Things look a lot worse in case of scenario number two whereby
started earlier last year. In each case there is but a valid argument to share prices end up being encapsulated inside a long term down
be made the operational environment started to get tougher back in trend. Take a look at a multi-year price chart of Coca-Cola Amatil and
2012. It takes a while before management teams acknowledge the you shall have no problem understanding what I am talking about.
new environment is here to stay. FlexiGroup is another example.
Then they still have to formulate a response. The experience from mining and energy stocks between 2012 and
early 2016 shows buying cheap stocks doesn't work when there's
It would be premature to now take the view these companies will
a persistent down trend. At least companies such as BHP (BHP),
remain operating under a huge cloud permanently, but at the same
Fortescue Metals (FMG) and Whitehaven Coal (WHC) have since
time, keeping the fingers crossed that tomorrow everything shall be
been rescued by a significant recovery in commodity prices. But
alright seems rather optimistic. Such challenges and processes take
what about Myer? Fairfax Media?
time and they seldom go hand in hand with excellent shareholder
return in the meantime. Investors trying to scoop up cheap looking stocks better make sure
they are not committing themselves to value traps dressed up like a
Which is why I am advocating investors adopt a risk-updated, three
long-term opportunity. Telstra (TLS) comes to mind too.
layered view of the local share market:
As far as group three is concerned, here there are always plenty of
Group one: companies that are under threat and need to review
promising, exciting stories, but many prove ephemeral as business
their modus operandi and their strategy to stay relevant in the future;
models are immature and unproven and the future remains as
Group two: companies that are not impacted by changing dynamics unpredictable as ever. Yet, the years past have also proven Australia
and might possibly even be beneficiaries; remains an outstanding breeding ground for high quality, fast growing,
Group three: upcoming companies that are inflicting the disruption sustainable new technology companies. Names like Wisetech Global
to existing market positions and business models. (WTC), Altium (ALU) and Appen (APX) are increasingly attracting
It goes without saying each of these three groups represents a different widespread praise and investor attention.
risk profile. In a generalised sense, companies in group one should There is every reason to assume these companies will be around
de-rate until more clarity is forthcoming about how each company is for a long while, and growing strongly for many more years. This is
dealing with the threats and challenges coming towards it. Companies how micro cap stocks become small cap stocks, then mid-cap. This
in group two should trade at a premium. They represent the least process is arguably well-advanced for the companies mentioned.
risk from a sustainable operational point of view. Admittedly, strongly rising share prices have excited ever more
Is it coincidence then that quality healthcare stalwarts like CSL (CSL) traders and investors and valuations seem a lot less attractive than
and Cochlear (COH) are trading at a premium to the broader market, they were only a short while ago, but an experienced investor knows
as well as to their own historical market premia? the importance of patience and of being ready when opportunity
Companies in group three offer lots of potential and excitement, but knocks. I suggest keep a list, do your research, add regular updates
many are in early stage development still and thus highly vulnerable and market observations.
themselves to sudden changes, incumbent responses and unforeseen But don't shy away as these companies represent Australia's, and
pitfalls. Note that in some cases young companies that IPO-ed at the world's, future.
6 FEBRUARY | MARCH 2018 EQUITY
Other names that come to mind at significantly lower valuations decade ahead. That's even better than the 11% average that has
include Integrated Research (IRI), Nanosonics (NAN), Class (CL1) been achieved over the decade past.
and, of course, one of my personal long-standing favourites, I note that Bell Potter too has now added TechnologyOne to its list
TechnologyOne (TNE). of top stock picks for 2018, alongside fellow tech stocks The Citadel
There are not many companies on the ASX that can boast double‑digit Group (CGL) and Appen, as well as emerging disruptors such as
growth in earnings per share in each of the years that make up AfterpayTouch (APT), OneVue Holdings (OVH), and others.
the past decade, with notable exception of the financial year just
passed when growth didn't exceed 9%. That was a bad year in Watch list of ASX-listed stocks & disruptors for long term investors
TechnologyOne parlance (!). Afterpay Touch APT Online lay-by (but it's about data really)
And boy did investors take notice. TechnologyOne shares have lagged Appen APX Speech technology and search algorithms
the broader market in 2017. In my view, share price weakness post Altium ALU Electronics design software for engineers
the stock going ex dividend in late November provides an excellent Class CL1 SMSF administration software
buying opportunity for investors looking for an attractive long term
Corporate Travel CTD Travel management for the corporate market
investment.
Hansen Technologies HSN Customer care and billing software
Analyst Gareth James at Morningstar is of a similar mindset.
Integrated Research IRI Diagnostics for business-critical computing
Morningstar has a stringent valuation based rating methodology
TechnologyOne TNE Enterprise software moving into the cloud
and below $5.22 the shares are on the cusp of being upgraded to
Wise Tech Global WTC Integrated supply chain logistics management
Accumulate from Hold, this despite the fact the PE multiple sits
around 29.6x on FY18 estimates. Xero XRO Cloud service for accountants E
Apart from the company's 99% customer retention rate, and a
By Rudi Filapek-Vandyck, Editor FNArena. FNArena offers unique tools and analysis
conservative and lazy balance sheet (no debt), Morningstar suggests for self managing investors at www.fnarena.com. ASA members can request a one
investors should zoom in on the projected 15% EPS CAGR for the month free trial via info@fnarena.com
CALL FOR DIRECTOR
NOMINATIONS 2018
In accordance with clause 43(c) of our All nominations must consist of the following:
constitution we are calling for nominations
to our Board of Directors. 1. A completed ASA director nomination form
Nominations can only be received at least eight 2. Your curriculum vitae highlighting your skills,
weeks, but no more than twelve weeks, prior to expertise, experience and a statement outlining
the AGM to be held in Sydney on Tuesday 22 how you can enhance the education offerings,
May 2018. advocacy and overall growth of ASA.
Nomination forms are available: All nominations must be received at the
www.australianshareholders.com.au/asas-own- registered office of the ASA by no later than
corporate-governance and is to be signed by two COB Tuesday 28 March 2018 or emailed to
other members. judith.fox@asa.asn.au.
Nomination period: For further information please call 1300 368 448.
Tuesday 27 February 2018 to
COB Tuesday 28 March 2018
Top 7 myths about
ETFs busted
By Arian Neiron Managing Director, VanEck Australia
Exchange traded funds (ETFs) have grown to become an increasingly $10 billion in 2012 to be around $35 billion, today of which only
popular investment vehicle for Australian retail and institutional around 40% is invested in Australian equities.
investors with around $35 billion invested in the sector. Despite So, ETFs represent just 1.7% of the stock market. Not nearly enough
their success, or likely because of it, there are a number of myths to move it let alone justify the claims they are creating the next
being spread about ETFs. This article provides the facts behind bubble. In the US, the story is similar as the graph below illustrates.
ETFs and busts some common myths.
Myth 1: ETFs are a fad
ETFs have, in fact, been on the scene for almost 30 years. The
world’s first ETF was launched in Canada in 1990, and the first ETF
listed in the US in 1993 and 2001 in Australia.
ETFs are passive funds that are traded on an exchange. They aim
to track a benchmark index, in contrast to active funds, which seek
to outperform a benchmark. The rise of passive investing since the
GFC has coincided with a significant decline in active investing. It
has been well documented that passive funds now far exceed flows
to active funds. This trend is reflected in in Australia.
Myth 2: ETFs are riskier than managed funds Myth 6: ETFs create bubbles
ETFs are in fact managed funds, that is, investors’ money is pooled Even though ETFs are a small part of US equities, According to
together and managed by a professional investment manager. Bloomberg, they account for around 30% of the trading volume –
Standard or ‘physical ETFs’ buy the investments such as stocks double what it was 10 years ago.
or bonds that are in the underlying index. If you invest in an ETF, Bloomberg claims “if more and more people stop trading stocks
you will own units or shares in the ETF just like a managed fund and bonds in favour of ETFs, it will drive up trading costs in the
and your main investment risk is the performance of the underlying underlying securities while potentially making it more difficult to
assets, that is, the risk that asset prices will rise and fall in line with exit on big sell-off days.”
market movements.
But currently in Australia ETFs represent just 2.5% of trading volume.
The difference with managed funds is that ETFs are traded on the This is nowhere near enough to distort share trading here.
ASX, which provides greater liquidity. They are fully transparent so
investors know in which assets they are invested. ETFs are generally Myth 7: ETFs inefficiently allocate resources
lower cost than equivalent unlisted managed funds. Another criticism of ETFs is that because of their large flows, ETFs
have been distorting the market by buying stocks that active fund
Myth 3: All ETPs are ETFs managers wouldn’t necessarily buy. The table below illustrates that
There are many new types of exchange traded products (ETPs) active funds are buying the same stocks as the market capitalisation
that are not ETFs. Products labelled ‘exchange traded managed index in almost similar proportions.
funds,’ ‘quoted managed funds,’ 'exchange traded commodities',
'exchange traded notes' or 'exchange traded securities' are not Top 5 holdings of S&P/ASX 200 and select Active
ETFs. A key feature of ETFs is the transparency of their portfolio Managers
holdings, which are reported daily.
Myth 4: ETFs are for short-term investors
A common myth is that ETFs are short term trading instruments only.
But like any listed security, ETFs can be bought on an exchange
and held for the long term. Investors buy ETFs to diversify and
position their portfolios to achieve particular investment outcomes.
A popular strategy is using ETFs as a core strategy and adding
individual positions, or satellites, around that core. Source: Morningstar Direct, as at 30 September 2017. Stock highlighted orange
appear in S&P/ASX 200 top 5.
Myth 5: ETFs create bubbles and inefficiencies The fact is, the ETF industry has recorded consistently high growth
A very common claim is that ETFs are responsible for market since its beginnings. As more ETF products are launched in Australia,
inefficiencies and create ‘bubbles’. This is a myth. In Australia, investor choice is set to increase which is great for ASX investors.
ETFs do not own enough of the stock market to move it in any However, as ETFs grow, more will be written about them and
meaningful way. The ASX’s total stock market value is $1.9 trillion, its important investors educate themselves to understand the
up from $1.5 trillion dollars in 2012. In that time ETFs grew from differences between myths and reality. E
This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’). This is not a solicitation to buy or an offer to sell shares of any investment in any
jurisdiction. It is general information only and not financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Before making an investment
decision in relation to any VanEck funds, you should read the relevant PDS and with the assistance of a financial adviser consider if it is appropriate for your circumstances. PDSs are available at
www.vaneck.com.au or by calling 1300 68 38 37.
8 FEBRUARY | MARCH 2018 EQUITY
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EQUITY FEBRUARY | MARCH 2018 9
Can socially responsible investing
and good returns coexist? YES
By Chad Slater Joint CIO, Morphic Asset Management
DO THE RIGHT THING.
IT WILL GRATIFY
SOME PEOPLE AND
ASTONISH THE REST.
Mark Twain
Source http://www.ussif.org/files/Infographics/Overview%20Infographic.pdf
Over the last few years, there has been a significant increase in the them. Put differently, the findings of the paper show that – at the
interest in environmental, social and governance (ESG) investing. very least – there is no performance penalty from screening out low
According to a paper released recently, over $8trn of the $40trn of ESG-scoring firms of each industry.
money managed in the USA is now under some form of Sustainable This is consistent with our own experience as portfolio managers at
and Responsible Investing (SRI) or ESG, up 33% since 2014 and Hunter Hall, where we were able to outperform against an all-inclusive
up fivefold from $1.4trn in 2012 for money run by fund managers. benchmark, despite having a restricted ownership list.
In many respects Australian fund managers have been caught unready Taking another tack, Nagy, Kassam & Lee (2016)3 wanted to see
for this change. If we look at the Mercer survey data for January if not only do highly rated ESG outperform, but do companies get
2017, the Global Equities strategy section contains 127 global funds rewarded for improving (going from OK to good)? The answer was
that are sold in Australia. Of this, only 5 are classed as SRI funds. yes and unequivocally yes. Both outperformed, but the improvers
It is somewhat better for Australian equities with 157 funds in the outperformed at double the rate.
survey, of which 13 are SRI. If we were to use the ratio of assets in
But the most interesting article is one by Statman and Glushkov
the USA, the number of SRI funds should be 27 and 34 respectively.
(2016)4. They created what they called “Top Minus Bottom” (TMB)
One reason could be that there is a view amongst many people (and where stocks were ranked on their ESG criteria and then modelled how
particularly fund managers) that “you can’t have your cake and eat it being long the ‘better ranked’ versus the ‘worse ranked’ performed.
too”: that SRI results in lower returns for investors and the investors This concept is similar to the studies above and could be called the
have to pay a price to be responsible. “good screen”.
In some ways this misconception, of accepting lower returns for being The innovation was to look at “Accepted Minus Shunned” (AMS)
ethical, goes against another tenant of conventional investing wisdom: separately. Here the authors looked at the returns from stocks
buy good businesses. The grandfather of long term investing, Warren commonly accepted in SRI funds versus those that are typically
Buffett, discusses a lot in his letters to shareholders the importance avoided – shunned companies are those with operations in the
of ethics and the quality of the character of the people running the tobacco, alcohol, gambling, military, firearms and nuclear industries.
businesses he owns. Call this the “negative screen”.
Implicitly he is saying that businesses that have an ethos and focus Like the earlier studies, it was found TMB outperformed the broader
on ‘doing the right thing’ by staff and customers, should generate market but interestingly the AMS (the bad screen) stocks didn’t
higher returns. Now admittedly he is discussing the character of outperform, i.e. the excluded stocks did better than the broader
the people rather than the nature of the business, and some people market.
would find owning Coca Cola unethical.
But here is the interesting thing: AMS under performed by less than
And it is this differentiation between good people and bad unethical the TMB screen outperformed, i.e. it was a net positive for investors.
businesses that opens an interesting next line of inquiry. I think it is this AMS effect that fund managers have focused on in
What do the statistics say? their view that SRI/ESG does not work.
UBS recently published an excellent summary of recent academic What does this mean for fund managers?
literature1 looking at this question of whether SRI negatively affects Investors globally are demanding more focus from their fund managers
investor returns. The conclusion was that it did not. on ESG issues. The implications of these studies is that ESG does
Verheyden, Eccles & Feiner (2016)2 wanted to look at whether not detract from returns and investors are therefore not irrational to
a portfolio manager would be put at a disadvantage in terms of ask for more focus on ESG and SRI issues by their money managers.
performance, risk and diversification if he/she were to start from a But it also says running a positive screen in combination with running
screen based on ESG criteria. The empirical evidence shows that a negative screen is a better way to generate returns for investors
all ESG-screened portfolios have performed very similarly to their whilst also satisfying investor’s ethical investment needs. E
respective underlying benchmarks, if not slightly outperforming
Chad Slater co-founded Morphic Asset Management in 2012. He was previously a Portfolio Manager and Head of Currency and Macroeconomics at Hunter Hall for five years.
He has worked at BT Investment Management, Putnam and the Federal Treasury over his 15-year career.
1
Academic Research Monitor: ESG Quant Investing. Dec 2016. Please email us if you’d like a copy of the paper.
2
ESG for All? The Impact of ESG Screening on Return, Risk, and Diversification. Verheyden, T., Eccles, R. G., & Feiner, A. Journal of Applied Corporate Finance, 28(2), 47-55, 2016
3
Nagy, Z., Kassam, A. & Lee, Linda-Eling. (2016) Can ESG Add Alpha? An Analysis of ESG Tilt and Momentum Strategies, Journal of Investing, Vol. 25, No. 2, pp.113-124.
4
Statman, M., & Glushkov, D. (2016). Classifying and Measuring the Performance of Socially Responsible Mutual Funds. Journal of Portfolio Management, 42(2),140-151.
10 FEBRUARY | MARCH 2018 EQUITYBlueScope Steel Limited
(BSL)
By Rod McKenzie Victorian Company Monitor Chairman, ASA
BlueScope (BSL) has undergone an amazing transformation since The BSL share price had risen nicely from a float price of $2.80
the company demerged from BHP in 2002. (unadjusted for issues and consolidation) in 2002, up to around $12
BHP had two major divestments in the early 2000s. In October 2000, prior to the Global Financial Crisis. Business conditions following
the long products components of BHP Steel’s business, including the GFC were tough and many construction projects were put on
the Whyalla Steelworks, the downstream market mills and the hold. Demand for steel dropped. The BSL share price dropped to
various steel distribution assets were separated and listed on the around 30c in mid 2012. In late 2012, BSL undertook a 1 for 6 share
ASX as OneSteel Limited (later renamed Arrium). In March 2001, consolidation.
BHP announced a merger with Anglo-African Billiton plc and that Following the 2014-15 strategic review and business restructure, the
BHP Steel was to be spun out as a separate company. share price has risen steadily from around $3 to around $16. Free
BHP Steel was listed on the ASX in July 2002 and changed its cash flow has improved significantly over the past several years.
name to BlueScope Steel at the 2003 AGM. The company has since The company has resumed paying dividends, and announced a
expanded through investments in Asia, the USA and Australasia. BSL capital management framework which entails paying consistent
is now the world’s largest producer of metal coated and painted steel dividends, given limited franking availability, in conjunction with
for building products, with key brands that include COLORBOND® ongoing on-market buy-backs. In the 12 months to 31 December
steel and ZINCALUME® steel. 2017, BSL bought back around $300 million of its shares. In addition
to the capital management initiatives undertaken, BSL is expected
Early in this decade, steel making in Australia was suffering due
to benefit from the recent changes in taxation rates in the USA.
to competition from cheaper imports, principally from China. The
company was losing money on their Australian operations and
was seriously considering closure of the steelmaking facilities at Improvement in free cash flow (op. cash flow less capex)
Port Kembla. BlueScope subsequently rationalised facilities at
Port Kembla and at Western Port in 2011 to significantly reduce its
production for export markets.
A strategic review of the business in 2014-15 resulted in the decision
to keep the Port Kembla steel mill operational. The company
restructured their business and following successful negotiations
with trade unions, suppliers and other key stakeholders, managed
to exceed their new productivity targets. This resulted in significant
cost reductions to the business and enabled continuation of steel
making in Australia and New Zealand, with the result that some
4,500 jobs were saved in Australia alone. Port Kembla is currently
producing approximately 3 million tonnes of steel per annum.
With the return to profitability, the company moved to full ownership
of the USA North Star operation. This steel plant is a highly efficient
electric arc furnace producing hot rolled coil. Current output is BSL Monthly Share Price Chart
approximately 2 million tonnes per annum. It is strategically located
near customers and is in one of the largest scrap markets of North
America. Over 40% of BSL’s profit comes from the North American
operations.
6%
NZ $103M
ASIA $191M
12%
41%
NTH AMERICA $641M
AUSTRALIA $638M
FY2017 underlying EBITDA
Total: $1,485.4M 41%
(including $87M of corporate costs
not shown in chart)
Continued on page 12
EQUITY FEBRUARY | MARCH 2018 11BlueScope Steel Limited (BSL)
Continued from page 11
Key risks to the business include the general economic climate, carbon dioxide, carbon monoxide, nitrous oxides and sulphurous
risks associated with dumping of cheaper overseas products, oxides. Emissions are around 2.2 tonnes of CO2 equivalent per
currency fluctuations and access to cheap, reliable energy for steel tonne of steel manufactured. The Port Kembla blast furnace is
making operations. Some of these risks can be offset via currency highly efficient and the company maintains close controls on
hedging but supply of raw materials and supply of energy are energy efficiency and emissions. Whilst closure of the Port Kembla
critical to the ongoing economic operation of the business. BSL blast furnace would have the immediate effect of reducing BSL’s
must maintain cost competiveness at Port Kembla to support a emissions, the equivalent steel production would have to be sourced
decision to reline the blast furnace in 10-15 years’ time. This major from overseas operators with potentially higher overall emissions
capital expenditure project will only be undertaken if the plant is and the loss of almost 4,500 Australian jobs.
profitable and the company can see a long-term future for steel Strong management has been the key to BSL’s transformation. CEO
making in Australia. & MD Paul O’Malley commenced in that role in 2007 and retired at the
Steel is used in just about everything that is manufactured in end of December 2017. Mr O’Malley was instrumental in restructuring
the country. This includes steel structures, steel reinforcement the business and returning it to profitability. The company is in a
in buildings, machinery construction and white goods. BSL – as much stronger financial position now than when he first took control.
a manufacturer of steel, is a major emitter of carbon dioxide. Incoming MD & CEO is Mark Vassella. The company is guided by
Conversion of raw materials to steel in a blast furnace involves a strong and experienced team of directors. The current chairman,
a mix of iron ore, coal and coke and flux (limestone) supplied John Bevan, took over from Graham Kraehe in 2015.
through the top of the furnace while a blast of hot air with oxygen The ongoing focus on costs and the restructured business, should
enrichment is blown into the lower section. The end products are see BSL power on through the next decade. E
molten metal, slag and flue gases. These flue gases are a mix of
Surprise! A bank chair and CEO who stressed
ANZ AGM the importance of non-financial
Happily very little time of the meeting was spent on past financial commentary. The chairman elaborated on
the theme that to rebuild trust, business has to step outside traditional role as solely shareholder‑focused
organisations, and work in new ways that also put our customers and our communities at the centre
of everything we do. The CEO carried this theme through with the statement our purpose is to shape
a world where people and communities thrive. He then spent time outlining a number of initiatives the
bank has undertaken with particular emphasis on utilising phones as mobile wallets and innovative
products for small business.
After balance date the bank paid $50m and accepted liability for collusion on setting of the bank bill
1 year chart swap rate (BBSW). Staff have been fired, bonuses clawed back and new measures implemented to
MONITORS: John Whittington,
ensure does not happen again. No answer was provided to the ASA question as to the magnitude of the
Allan Goldin attended AGM costs leading up to the decision to accept liability. Also after balance date the 20% holding in Shanghai
Rural Commercial Bank was sold which will result in a $1.5 billion share buyback. Responding to ASA
Date 19th December
2017 they will also consider some of the payments as special dividends. Although the sale won’t necessarily
improve ROE, it should mean overall improvement on returns as executives can now focus on the parts
Venue International
Convention Centre of the business they are good at.
Sydney
ASA believes that every shareholder should be given the opportunity to ask as many questions that
Attendees 301 shareholders they want, but 9 people asked basically the same two questions on climate change. Other questions
plus 130 proxy
dealt with tenure of auditors (30 years), last tender (never), the importance of treating staff better with
holders and visitors
change occurring (bigger retrenchment payments, more retraining).
ASA 8m shares
proxies (equivalent to 13th More explanation was given as to why if ANZ did nothing dividends would drop by 300 basis points
largest holder) from (amount and liquidity of capital that must be held plus bank tax). Target dividend rate was confirmed
1,956 proxies
as 60-65% of profit.
Value of $236m
proxies Under the remuneration resolution discussion, ASA said that although the main relative total shareholders
return hurdle for the long term incentive have not been met in 5 years, it was because the company
Proxies Yes
voted had not performed as well as the comparative group which was not a reason to lower hurdles which
CEO agreed with.
Market cap $83 billion
ASA voted for all the resolutions, with the final count of shares votes cast in favour in excess of 97%.
Pre-AGM Yes with chairman
meeting David GonskiChairman Roger Davis delivers good results to BANK OF
QUEENSLAND AGM
happy shareholders
Directors and executives socialised effortlessly with contented shareholders before the meeting over
tea and snacks. We chatted with Belinda Jeffreys, Group Executive People and Communications, who
told us the mood among staff was upbeat.
The meeting itself followed the usual formal protocol. Chairman Roger Davis spoke enthusiastically
about BOQ’s excellent results this year and over the recent past. Shareholders were obviously happy
which is not surprising given that BOQ enjoyed the highest total shareholder returns for 1, 3 and 5
years of any Australian listed bank. The 2017 year’s total return to shareholders was a robust 26.5%.
Speaking to his re-election, Davis delivered a confident and factual but humble litany of the bank’s 1 year chart
impressive accomplishments under his stewardship.
MONITORS: Kelly Buchanan,
All items on the agenda passed with no significant protest votes on anything. The ASA was the only Sally Mellick and Mike Stalley
questioner on any agenda item. Date 30th November
2017
ASA asked about directors’ skin in the game and received confirmation of the BOQ ‘understanding’
that directors should own one year’s worth of fees after three years on the board. Some directors were Venue Hilton Hotel,
Brisbane
a bit short on ownership, and one claimed the problem lies in ‘blackout dates’, times in which directors
have inside information that precludes them from acquiring more shares. We pointed out that certainly Attendees 231
there must have been dates over the past six years (that particular director’s tenure) when she could ASA 1.45m shares
have made a purchase. After the meeting, we were immediately approached by two directors with proxies (equivalent to 10th
largest holder) from
promises to ‘do better’ and acquire more shares. We had heard that story before and hope they would
317 proxies
follow through on their promises during the 2018 year.
Value of $19m
Matters post the 2017 AGM proxies
One week following the AGM we received confirmation from BOQ’s Investor Relations representative Proxies Yes
that three directors had added to their holdings in BOQ. We are pleased and amazed that they were so voted
quickly able to find a purchase date which didn’t conflict with their possession of inside information. Market cap $5.2 billion
Director Tredenick, who has been on the board for six years and who promised to ‘do better’ did not Pre-AGM Yes with chairman
take the opportunity to increase her holdings this time. meeting Roger Davis
Effective business improvement and a new INCITEC PIVOT
CEO in place AGM
It was the first meeting for new CEO Ms Jeanne Johns, a successful executive of major industrial and
commodity-based businesses with experience in both the US and Asia, who commenced with the
company in November 2017. Paul Brasher, the chairman, and CEO delivered presentations that did
not add significantly to information provided in the annual report. While higher fertilizer volumes and
improvement in the explosives market in the US have resulted in an increased profit and consequently
some recovery in dividends and share price, both presentations reiterated the difficult conditions (price
and cost pressures, exchange rates) under which the company operated, which confirms the importance
of savings from Incitec’s business improvement programme ($176m in 2017). The recently announced
loss of BHP explosive business was related to “increased capacity” in WA. 1 year chart
ASA asked questions about the timing of decisions and costs of the Gibson Island plant (more clarity MONITORS: Ian Curry
in 3-6 months, costs will be balanced by the sale of land), impairment risk to Southern Cross (fully & Peter Aird
assessed) and the logic behind the share buy-back and its impact on LTI hurdles (best method of
Date 21st December
effective return of capital and impact not significant). 2017
Other shareholders commented on the use of Western Sahara Phosphate rock (no purchases in 2017 Venue Melbourne
and none so far this year) and the company’s increased output of greenhouse gases since 2011 (reflects Exhibition Centre
the company’s growth, output per tonne of product has often decreased). Attendees 71 shareholders
plus 54 visitors
ASA also noted that directors had little “skin in the game”, asking whether the company had a policy
(no was the answer). Only the chairman has a substantial holding (60,000), with other NED holding less ASA 920,334 shares
proxies from 121
than 20,000 shares as at 30 September 2017. On 24 November, after financial year end, we note Ms shareholders
McGrath increased her shareholding to 25,008 shares.
Value of $3.5m
On Ms McGrath’s re-election, ASA expressed concern about her workload. The chairman noted that proxies
Ms McGrath was very hard working and discussed with him any change in her other responsibilities Proxies Yes
such as her recent appointment as chair of Oz Minerals. voted
Ms McGrath was re-elected with 93.92% votes cast for the resolution. The other directors were elected Market cap $6.6 billion
and CEO performance rights passed with a vote over 99% and the remuneration report passed with a Pre-AGM Yes with NED
vote over 95%. All directors spoke briefly as to why shareholders should elect or re-elect them. meeting Kathryn Fagg
ASA spoke briefly with the chairman, CEO and non-executive director Kathryn Fagg after the meeting.
EQUITY FEBRUARY | MARCH 2018 13RESOLUTE Increasing profit, great future, low share price
MINING AGM The CEO John Welborn gave an upbeat presentation outlining the great future prospects of their current
African mines and future mines in Africa. With a long history on operating in the country, he stated
that the company has a good understanding of the operating and social conditions that will lead to
successful operations.
Gross profit increased to $177m from $155m, however NPAT decreased to $166m from $200m. While
the dividend is only 2 cents per share, the company has a quirky arrangement with the Perth Mint to
pay the dividend in gold bullion, or in cash, as selected by the shareholder. The Resolute share was
$1.04 at the time of the meeting, compared with ten analysts’ forecasts ranging from $1.40 to $2.30
displayed by the CEO.
1 year chart
ASA questioned the board setup with director Peter Sullivan having five other directorships, and the
MONITOR: Bob Kelliher CEO/Managing Director John Wellborn heavily involved in rugby in WA (Western Force). The chair
Date 28th November replied that the board has successfully managed these outside interests and there is no deterioration
2017 in performance for the company.
Venue Central Park ASA voted against the remuneration report due to the short-term incentive being entirely paid in cash
Theatrette, 152-158 and undisclosed internal targets. The FY17 result was 96% achieved, resulting in a short term incentive
St Georges Tce
Perth that looked like part of standard annual remuneration.
Attendees 11 shareholders The long-term incentive uses a relative total shareholder target from a selected group of generally poor,
plus 46 visitors low share price, performers, and pays 100% at the 75th percentile. For 100% award, they should beat
ASA 120,800 all their peers. A second target, for reserve growth, pays 50% when growth is zero (production replaced
proxies shares from 14 with discoveries). This award should start at 0% for maintaining reserves as this is a day‑to‑day strategy
shareholders to stay in business.
Value of $125,600
ASA voted in favour of the director elections. While Bill Price is no longer considered independent after
proxies
14 years on the board, three of the six person board are considered to be independent. ASA voted
Proxies Yes
against the renewal of the performance rights plan, as this was just to preserve the 15% capital raising
voted
limit. To protect shareholders interests, vesting of performance rights should be included in the 15%
Market cap $748m capacity, and extra shares bought on market if required.
Pre-AGM Yes with chairman
meeting Martin Botha and There were no other questioners on the resolutions.
director Yasmin All ten resolutions were passed with 99% support of shares voted, except for the re-election of director
Broughton
Henry Price where 89% of votes were cast in support.
SEEK prepares for board renewal
SEEK AGM The AGM started with the usual chairman’s address followed by CEO Andrew Bassat’s fast paced
address which gave a broad overview of SEEK’s business performance and operations. During his
address, Mr Chatfield announced that he would be stepping down as chairman of SEEK by around
December 2018 and that a suitable replacement will be announced in due course. He also stated
that long standing board member Colin Carter would also be stepping down in the early part of 2018.
During his address, Mr Bassat spent a good portion of the AGM question time answering a variety of
questions on performance as well as specifics of the business such as products and services. ASA had
asked questions on international performance of the business and why it hadn’t seen improvements
similar to those exhibited by the Australian arm, given both segments have been faced with depressed
economic conditions. Andrew believes that the reinvestment is critical and that giving timelines and
1 year chart predicting outlooks is difficult.
MONITOR: Claudio Esposito We had asked about moving toward the inclusion of a remuneration table that includes an ‘actuals’
figure. ASA urged that a table is part of our efforts to educate our shareholders and to demonstrate
Date 29th November
2017 that remuneration is a dynamic concept. Statutory reporting, while appears consistent does not explain
the picture of the ups and downs of CEO pay. Chairman Neil Chatfield argued that all information that
Venue Sofitel on Collins,
Melbourne a shareholder needs to calculate actual figures can be ascertained in the annual report. Whilst this is
true, a simple table will help eliminate the need to tease out figures from the annual report.
Attendees 30 shareholders
plus 60 visitors We also had a question from a shareholder with regard to the benefit of the Zhaopin privatisation and
ASA 305,320 specifically how SEEK would make money from such a transaction. The chairman had explained that
proxies shares from 98 SEEK alongside private equity partners Hillhouse and FountainVest had bought back the public portion
shareholders of shares outstanding. A question of defining new products and services was also asked to which
Value of $5.8m Mr Bassat gave a detailed and elaborate response.
proxies
All items up for voting were approved. The remuneration report received 93% support and director
Proxies Yes
election/re-election all receiving in excess of 97% votes in favour. Andrew Bassat’s equity rights
voted
and long term incentive resolutions did not fare as well, both receiving FOR votes of 89% and
Market cap $6.4 billion
72% respectively. ASA was later informed by SEEK company secretary that votes were negatively
Pre-AGM Yes with chairman impacted by recommendations by proxy advisory Institutional Shareholder Services (ISS) and the
meeting Neil Chatfield
Australian Council of Superannuation Investors (ACSI).
14 FEBRUARY | MARCH 2018 EQUITYYou can also read
