Towards the end of each week we seek inspiration (that's probably a slight exaggeration - maybe "ponder" describes it better) for the subject matter of the weekly Hedge Clippings email. It is a sad reflection on the current state of financial markets that for the past couple of months we have become somewhat predictable, as the antics of bankers and other sectors of the financial services industry have dominated the commentary.

The list has been extensive, headlined by AMP, plus NAB, CBA in multiple guises, and the overall vertical integration structure of product distribution and sales masquerading as independent advice. The boardroom ranks of AMP in particular have been thinned out significantly as reputations have fallen by the wayside, and the damage has either been reputational, or borne by shareholders.

This week has seen the significant extra bite of criminal charges being laid against senior banking executives, including one chairman, at the top end of town amongst Citi, Deutsche, and ANZ over an underwriting shortfall. The problem with financial penalties, even those as large as the $700 million levied on CBA by AUSTRAC's for breaching AML regulations, is that generally speaking it is the shareholders who pay the price. Even then, unless the dividend is cut as a result, there is little pain in investors' hip pockets at the end of the day. That's all changed and the message will have been sent loud and clear not only in this case but to all boardrooms.

Some readers may have noticed that Hedge Clippings has joined none other than the Treasurer, Scott Morrison, in previously suggesting that the potential for an enforced "holiday" would be the ultimate deterrent for serious corporate wrongdoing in the banking sector. Without wishing to prejudice the outcome of this particular case, it will be a serious wake-up call to all executives and directors who elect to sail close to the wind based on "normal practice".

Passing on a hefty fine to shareholders is one thing. Taking the risk of getting one's reputation pinged by the regulator even - but the thought of packing one's toothbrush and being introduced to a new diet (and room-mate) will undoubtedly sharpen some directors' sense of priority - and self-perseveration.

In 1756 at the start of the seven years' war the British executed Admiral Byng for "failure to do his utmost" to avoid defeat at the hands of the French fleet in the Mediterranean. When a French Admiral was asked why, and if this was not a little harsh, he responded it was "pour encourager les autres" - to encourage the others.

Whatever the outcome of the upcoming court case over ANZ Bank's underwriting shortfall, there's no doubt the message has been sent to "discourager les autres".

INSYNC GLOBAL TITANS FUND

Attached is our most recently updated Fund Review on the Insync Global Titans Fund.

We would like to highlight the following:

• The Global Titans Fund invests in a concentrated portfolio of 15-30 stocks, targeting exceptional, large cap global companies with a strong focus on dividend growth and downside protection.

• Portfolio selection is driven by a core strategy of investing in companies with sustainable growth in dividends, high returns on capital, positive free cash flows and strong balance sheets.

• Emphasis on limiting downside risk is through extensive company research, the ability to hold cash and long protective index put options.

For further details on the Fund, please do not hesitate to contact us.

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - April 2018 (pdf format)

This week the Australian Government's Productivity Commission released its draft report assessing the "efficiency and competitiveness of Australia's superannuation system". Predictably the report found that the system was actually "not so super", and reading through the 571 pages of the full report, Hedge Clippings decided that (purely for expediency as you would understand) the overview, just 65 pages long, was likely to be more our speed.

Taking expediency even further, it was judged that the best way to look at even the draft report was to skip to page 56 under the heading "OVERALL ASSESSMENT". Expediency aside, we would have to say both versions were excellent, and it was almost impossible to fault either the logic, findings or recommendations contained therein.

First and foremost in the recommendations was the removal of "unintended multiple accounts (and the duplicate insurance that goes with them), which the commission estimated would save members collectively about $2.6 billion a year. In addition, if members in underperforming MySuper accounts had instead been moved to the median of the top 10 performing MySuper products, they would collectively have gained an additional $1.3 billion a year".

That's nearly $4 billion a year, probably on behalf of the lowest value accounts, and therefore on behalf of the neediest in the community, which could collectively be added to their retirement benefits. Multiplying that by a 40-year working life makes a mouth-watering $160 billion.

Not surprisingly the Productivity Commission came to the conclusion that "the superannuation system has not kept pace with the needs of members".

What was an outstanding and forward thinking concept introduced by Paul Keating way back in 1983, (allegedly with much input from Garry Weaven, the founding executive chair of industry fund services in the early nineties, and who still wields significant influence in the industry superannuation sector) not only has the system not kept pace with the needs of members, successive governments haven't been able to help themselves and have complicated it disastrously.

Without running through all the findings and recommendations, (again in the interest of expediency), the Productivity Commission's draft report also covered fees (higher than those in other OECD countries), transparency (poor), disclosure (sub-par), performance (mixed, with underperformers particularly prevalent in the retail sector), competition (inadequate),  policy (changes required), default fund selections (unhealthy), erosion of member balances (no comment required), and governance (stronger rules needed).  

We could go on, but that would prevent readers having the enjoyment of thumbing through either report themselves. However, one recommendation, which copped some flak from the industry fund sector, (unreasonably, but given self-interest, not surprisingly), was the call for 30% of each industry fund's board to be made up of independent directors.

The industry funds' position would seem undefendable, apart from the difficulty of finding sufficient appropriately qualified independent candidates. After all, if it is appropriate for the board of an ASX listed company, the majority of which are smaller and have fewer shareholders than industry funds have members, to have 30% independent directors, why not industry super funds?

What's good for the goose, should be good for the gander.