The next investment exodus

AMP’s share price took a serious hit after its life insurance business sale hit a roadblock.

This is much more profound than a simple deal falling over. 

The exodus of funds under management from AMP to industry funds has been quite significant. One might have thought that by July 2019, it would have settled down but that share price fall will almost certainly stop the outflow and if it continues will seriously damage the iconic Australian brand. 

At the same time, we are starting to see an exodus of superannuation funds from Perpetual. This might be unfair, but I have received many complaints about poor performance by investments managed by Perpetual trustees. Money was all too often funnelled into in-house products, which performed badly after fees.

Perpetual’s trustee money is different to superannuation money, but the story gets mixed. Perpetual needs to have a very hard look at itself.  

Whether it be from Perpetual, AMP or other retail funds, we are watching an incredibly significant change in the investment landscape. Industry funds are being flooded with money and taking their investment management in-house. They are planning a very different investment approach to that adopted in previous years. 

The plan is to take a longer-term strategic view of major Australian companies and encourage companies wanting to raise money to talk directly to the funds rather than go through an investment house. At the same time, the amount of money directed to non-listed private equity capital is set to increase. 

SMSFs and the ASX

The industry funds are not at all happy with the rampant shorting that is taking place in parts of the ASX. This can have a devastating effect on short-term superannuation fund values. Just how significant this change in investment direction is to the market is yet to be determined but it is certain to be important. Strangely, the industry funds are moving closer to the sort of strategies that a great many self-managed funds adopt. With self-managed funds, the trustees are the beneficiaries, and they invest using strategies that are designed to directly benefit them. 

The great concern in the self-managed fund space is the fact that many retirees are getting older and feel less confident in managing their own affairs. However, the benefits of self-managed funds are so great that for those families fortunate enough to be cohesive, it can make sense for the children to join the parents’ funds.

At the moment, the number of people in a self-managed fund is limited to four. The government a couple of years ago promised to lift that limit to six, but the legislation was blocked by the ALP. I think it will return to the legislative books in the next twelve months. I hope we actually go for eight to allow for even more flexibility.

Bringing children into self-managed funds will not suit every family, but I do suggest that my readers look closely at that option, in anticipation of a legislative change.  

Hong Kong 

One of the areas of international activity that I am watching closely is Hong Kong. I don’t think it is likely that China will permanently retreat. President Xi Jinping is a very strong leader and he wants part of his legacy to include having Hong Kong and Taiwan much closer to the Chinese orbit. 

Since the protests began, we have seen an increase in Hong Kong Chinese buying of Australian property. Much of that money is directed through Singapore. All the indications are that a great many Chinese are looking closely at shifting money out to Australia while they still can. Most fear that it is only a matter of time before the money export restriction applied to the mainland Chinese will be extended to Hong Kong. Accordingly, they are looking to shift their money first to Singapore, and then to either Australia or Canada. The plan would be to continue to live in Hong Kong but have a way of leaving should the situation deteriorate. This development could have enormous implications for Australia and its population levels. We tend to think of Sydney as synonymous with Chinese development, but in fact, in the three months to March, Chinese buying of property in Melbourne was almost twice that of Sydney. They seem to like the southern capital. 

Checking out Coles and Woolworths

During the week, Coles announced they were linking with Microsoft to use Microsoft technology and completely revamp the Coles distribution system. This would encompass much greater use of artificial intelligence to develop new services and products to satisfy customer needs. Similarly, the artificial intelligence will be used to make the distribution system even more efficient. Woolworths has a very similar plan but is doing much of the development itself.

This is a major break in Australian retailing patterns and opens the possibility that one of the two companies will do much better than the other in this new environment. This would change the current supermarket paradigm. 

And, of course, what is happening on the Woolworths/Coles supermarket front will be duplicated across many other areas of the retail space. Customer data will become an incredibly valuable tool, but only to those who discover how to harness its power, which will be with assistance of artificial intelligence.  

Meanwhile, I am fascinated that retirees and those dependent on bank deposits for income are starting to get angry in the media. That’s a first step in getting those who are pulling the strings to understand what is happening. 

We are going to see a big rise in non-bank deposit products in the coming few years. This will restore income to a great many savers, but it will carry higher risk. Nevertheless, the opportunity for non-banks is going to be increased by the squeeze being put on bank lending policies and the high capital charges that are now imposed. 

We are now starting on a serious hunt for non-bank deposit securities. In due course, this will affect banks, particularly if those who create these products are diligent in the safety precautions that go with them. 

A special mention to the US

Finally, two important features of the US market warrant our attention.

First, technology stocks are soaring, and investors are becoming excited about the possibility of lower interest rates from the US Federal Reserve. These forces dominate the market.

The Nasdaq has surged almost 25 per cent this year thanks to the so-called FAANG stocks – Facebook, Amazon, Apple, Netflix, and to a lesser extent, Google owner Alphabet. Microsoft has also skyrocketed.

Value stocks are being left off the shelf – of course, therein lies the opportunity.