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Join ETF Securities as we partner with Australian and international investment professionals to discuss the latest market and economic issues and what this means for investments. You’ll find the latest videos and articles on this page, or subscribe using the purple subscribe button on the top right hand side of the page to receive the weekly updates.

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ETF Securities Partner Series: Is robo-advice the future of financial planning in Australia?
ETF Securities Partner Series: The changing face of leveraged investing in Australia
ETF Securities Partner Series: What investors, like you, are buying
ETF Securities Partner Series: Investment strategies in uncertain times

Why gold should always be a portfolio staple

Sep 09, 2020

Why gold should always be a portfolio staple Gold prices have surged to record highs and investors have flocked to hold it as an asset in the uncertainty of the COVID-19 pandemic. But gold is more than a temporary hedge and its characteristics can make it a valuable long-term component of a diversified portfolio. Kanish Chugh, co-Head of Sales for ETF Securities, spoke to Chris Brycki, CEO and Founder of Stockspot, to discuss how gold has been used in Stockspot’s portfolios and why it should be considered a portfolio staple. Gold - more than just an alternative Gold has traditionally been viewed as an investment safe haven due to its defensive and growth qualities. It has historically performed differently to other asset classes and offered positive performance in a range of market conditions. The performance of gold over the year-to-date, covering the COVID-19 pandemic and associated periods of volatility is shown below. Gold prices January-August 2020 Source: Bloomberg, ETF Securities Read more about using gold in a portfolio here. Increasingly, investors are becoming aware of the value of including gold in their portfolios. While some are only beginning to invest in gold now, Stockspot’s portfolios have included an allocation for many years. Mr Brycki says, “we've constructed our portfolios based on Markowitz portfolio theory, which basically says that you actually want to include different assets in a portfolio that move in different directions i.e, they don't all move in tandem. They often move in the opposite direction… Unlike a lot of other assets that are sometimes seen as being defensive like property or infrastructure, gold actually has a much better standing at actually providing negative correlation to equities at the time when you need it most.” The correlations between gold and other major asset classes is shown below. Table 1: Australian Equity Global Equity Australian Fixed Income Global Fixed Income Correlation -0.3 -0.12 0.36 0.07 Source: Bloomberg data as at 31 July 2020. Correlations are calculated monthly over 20 years in Australian dollars. Australian equity is represented by the S&P/ASX200 Total Return Index. Global equity is represented by the MSCI World Total Return Index. Australian fixed income is represented by the Bloomberg AusBond Composite 0+ Yr Index. Global fixed income is represented by the Bloomberg Global Aggregate Total Return Index. Mr Brycki found gold’s negative correlation to equities has assisted in offering protection to his clients’ portfolios during this year’s market uncertainty. “When markets collapsed around March and April, it actually protected our client's portfolios compared to the equities market by between 50 to 80%. And that was just with a 12% allocation to gold,” he says. A long-term approach Investors can use gold in a variety of ways in a portfolio but Stockspot sees gold as a long-term holding, a portfolio staple. While some clients may have questioned the inclusion in early years, particularly in 2014-15 when gold was falling after highs in 2011, those same clients appreciate the vision now. Mr Brycki says, “We really had to explain to clients that it was that a form of insurance… that actually you want gold to not go well in your portfolio, because that means everything else is doing really well. And you're probably getting great returns… On years like this year, we get the opposite…So we end up having to explain the long and short of not having too much gold, but having enough to provide a cushion in your portfolio, which is why we feel that current allocation of 12% is the right amount.” Some commentators may wonder what the future holds for gold. While Mr Brycki personally believes momentum is set to continue, his view is to not make any predictions in portfolios and to manage for any scenario. “Our philosophy at Stockspot is really that you shouldn't be trying to predict where things are going. You should just prepare for all the potential outcomes. Our portfolios really take that perspective of we never try to predict. We always just try to prepare because we think that puts our clients in the best position,” he says. From that perspective, gold is a permanent and necessary allocation for Stockspot’s portfolios. How much gold is enough? Stockspot view a 12% allocation to gold as the right amount for their portfolios. This amount was set a few years ago and was an increase on their previous amount. Mr Brycki says, “we saw that the correlation between bonds and shares was moving from being more negative to being more positive, which meant that, in theory, bonds weren't going to provide the same level of protection in a share market fall. And that indeed happened earlier this year when the share markets fell. Actually, for a period of that fall, bonds fell as well until central banks got up and decided to stand behind the fixed income markets. And as a result, gold really did protect portfolios in a way that was advantageous and something that bonds weren't able to do.” To hedge or not to hedge Stockspot use ETFS Physical Gold (ASX: GOLD) for the exposure to gold in their portfolios. GOLD is not currency-hedged and for Mr Brycki, using an unhedged ETF was a deliberate approach. “It’s not taking a view on the Australian dollar as much as it’s thinking about why you have gold in a portfolio. One of the key reasons is to protect your purchasing power in your own currency. So if you hedge your gold exposure, what you’re doing is protecting your purchasing power in someone else’s currency that really has very little relevance to your day-to-day income expenses, assets and liabilities. If for some reason there was a huge devaluation in the Australian currency, you wouldn't enjoy the benefit of that if you hedge,” he says. Taking the simple approach The simplicity of gold is part of its appeal in a long-term portfolio for Stockspot. Mr Brycki says, “most investors think that by making their portfolios more complex, including more assets, they're going to give themselves better returns. Our view is actually the opposite and a lot of the evidence suggests otherwise and actually keeping things simple is better because simple is lower cost, simple as less risky and simple performs better.” Stockspot’s view on gold as a portfolio staple extends to its recently launched kids’ portfolios. “We take them on a bit of a journey where they can learn a bit about some of the companies that they're investing in. The great thing about investing is, as well as investing in things like gold, where there's a physical, tangible thing you can hold, you can also invest in great companies that you use every day,” Mr Brycki says. Is gold one of your portfolio staples? Contact us to find out more about ETFS Physical Gold (ASX code: GOLD) and using gold in your portfolio. To learn more about Stockspot and its offering, please click here. Client Services Trading Phone +61 2 8311 3488 Email: sales@etfsecurities.com.au Phone +61 2 8311 3483 Email: capitalmarkets@etfsecurities.com.au

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Is robo-advice the future of financial planning in Australia?

Aug 19, 2020

Is robo-advice the future of financial planning? The future of financial planning may feel uncertain at the moment, off the back of a raft of significant reforms and large numbers of financial advisers leaving the industry. Some speculate the future is digital, in the form of robo-advice. With even large international corporations, such as Goldman Sachs or Vanguard, incorporating such offers, robo-advice could have an attractive future. Kanish Chugh, co-Head of Sales for ETF Securities, spoke to Pat Garrett, co-CEO and co-founder of Six Park Asset Management, an Australian online investment management services firm founded in 2014. Six Park Asset Management aims to offer investors low-cost access to investment management. What is robo-advice? In basic terms, robo-advice is automated online investment management. Mr Garrett says, “it is taking a number of these activities and interactions that a person might normally have face to face with an advisor on the investment management side and takes the components that can be automated, which include things like a risk assessment, and a fact find.” He views robo-advice as changing the traditional landscape of financial advice, which typically catered more to high-net worth individuals, by making access to advice more affordable. “You can streamline the efficiency of delivering an investment management service and therefore, construct a well-diversified portfolio primarily using index funds, at a very affordable price point relative to what people might normally buy, or simply not have access to,” he says. Robo-advice typically uses passive investments, particularly ETFs, to construct portfolios. The reason for this comes down to their simplicity to use and ease of access to different markets, along with the low costs involved in many ETFs. ETFs and index funds can also be easily implemented within modern portfolio theory and core-satellite portfolio investing. {Read more about enhanced core-satellite portfolio investing} Mr Garrett says, “picking individual stocks at any time in the market is very hard. And most experts get it wrong, let alone retail investors. So, our investment philosophy is that the two most important decisions that any investor can make is to be well-diversified and to keep your costs low. And what index funds do is basically help you accomplish both of those very efficiently because they are listed on the ASX. They track an index that typically has hundreds, if not thousands, of components either across a region, an industry, or an asset class, which can be defensive or growth. And because they are tracking an index, as opposed to actively trying to get in and out of the market, the fees are quite low. So, they are incredibly efficient investment vehicles to build diversified portfolios.” Wide appeal for investors Robo-advice appeals to a range of investors for a variety of reasons, though Mr Garrett says it tends to attract investors between 30-50 years old. “It is sort of a midlife saver accumulating, they have a fairly medium to long-term investment horizon, and they don't need sophisticated financial advice that comes with a commensurate price tag,” he says. Some investors even use robo-advice as a form of risk management. “We have a number of clients who will use our service and then do some stock picking or buying a racehorse or whatever it is, bitcoin, around a service like ours. And so, it's a form of risk management, using a robo-like service, and then maybe doing active, more speculative investing around it,” says Mr Garrett. He notes that Six Park Asset Management has seen an influx of smaller value accounts recently, as a result of market activity. Mr Garrett has also seen significant interest from investors wanting to set up accounts for children and grandchildren, without the need for complex financial advice. Complementary rather than competition to traditional financial advice That’s not to say that robo-advice will replace traditional forms of face-to-face financial advice. Mr Garrett sees them as complementary and filling existing gaps in the market for low-cost, low touch investment needs. “Wealth managers and planners really need to modify their service delivery model a little bit to incorporate digital offerings, like robo-advice, so that they can address these types of needs in the market,” he says. He points to the US as a model for how robo-advice has become an integrated financial service tool. “You're seeing the biggest banks, wealth managers, fund managers introduce digital, low cost, low touch offerings into their suite of services, either directly or through partnering with the likes of a robo-service. I think that that will happen in Australia… I think you'll see robo-advice services working with incumbents who already have the relationships with the mass market. And so, I just think you'll find it as an extension of the service spectrum, to be integrated within the wealth management industry. Like it has in America,” he says. Just as technology is playing a massive role in the emergence of robo-advice, it can also be said that the ETF landscape has been crucial to its growth and future success. As the ETF landscape continues to evolve and tailor, it is likely that robo-advice will also evolve with it. For more information about investing with ETFs or enhanced core-satellite portfolio construction, contact us.

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The changing face of leveraged investing in Australia

Jul 15, 2020

Products like margin loans and contract for difference (CFDs) may have been the traditional face of leveraged and inverse investing, but the emergence of leveraged and inverse exchange traded products (ETPs) has changed the landscape. Kanish Chugh, co-Head of Sales for ETF Securities spoke to David Tuckwell, Editor for ETF Stream, Zac Zacharia, Founder and Managing Director for Centra Wealth Group and Adrian Rowley, Head of Equity Strategies for Watershed Funds Management about this growing space and how they are using these products. Leveraged and inverse ETPs While leveraged and inverse ETPs bear some similarity to exchange traded funds (ETFs) in that they are listed on a stock exchange and traded this way, they are managed and operate differently. “A leveraged ETF is a bit like a magnifying glass. So it starts off with your regular old index, like the ASX 200 or the S&P 500, then it essentially magnifies the return on that index. If it's an Australian-style ETF, then it will magnify the exposure within a certain band. If it's an American-style one, it'll do it slightly differently and give you exposure, but a magnified exposure, but only for the day. Just to give a little bit of information on the inverse ones, the way they work is like a mirror when the market goes up, they go down and vice-versa,” says Mr Tuckwell. Leveraged and inverse ETPs is a growing market in Australia – there are currently only 8 products listed on the ASX, compared to approximately 257 listed in the US [1]. Australia may follow the path of the US to some extent, though Mr Tuckwell notes there are differences between the markets. “Australia is not the United States. We're a very different country with different laws, with different regulations… In the United States, the way those leveraged inverse ETPs work is they give you the exposure just for one day… over the long-term, they go to zero, essentially, because of the way they compound. That's not allowed in Australia, those kinds of funds aren't allowed here… The way they work here is they're actively managed, they work like hedge funds and they try and give you a magnified or inverse exposure within a certain parameter. So, very different countries, very different laws, very different context,” he says. Increasingly popular Investors have shown increasing interest in and use of leveraged and inverse ETPs in recent months, with the most popular Australian listed inverse ETP tripling its assets since January. Market volatility related to the COVID-19 pandemic has been a key driver for this activity. Mr Tuckwell says, “investors are looking for a way to either hedge against it or in some cases, trade into the volatility…They're trying to do it without necessarily resorting to short selling, or they're trying to do it without being able to access derivatives.” Different ways of using leveraged and inverse ETPs Mr Zacharia and Mr Rowley both use leveraged and inverse products for their clients, though in slightly different ways. For Mr Rowley, it is about managing risk in the portfolio. He says, “So, late last year and certainly early this year with the maturity of our market, with the valuation that was clearly stretched in some of those macro risk building, we built up a fairly substantial index short position within our Large Cap Aussie Equity SMA. So what that means is, we could keep a larger percentage of the portfolio intact. So reducing turnover, keeping more of the portfolio in top 100 stocks, getting that 4 or 5% dividend, but by buying a leveraged and increasing a position for exposure to a leveraged short ETF, we could really dial back the overall market exposure at a point where we thought that the market was clearly stretched. So for us, it's a way to manage risk, but we have actually bought geared ETFs as well.” He views leveraged and inverse products as valuable tools in market volatility. Mr Zacharia uses such products slightly differently and focuses more on using leveraged ETPs, rather than inverse. “Where the client is moderate or high growth, that's where we bring in the geared Australian shares or international share ETPs as part of the core index exposure to those classes. Now, depending on the client, this can represent anything from 10 to 50% of the allocation. And where it works really well is if it's done in conjunction with a dividend reinvestment strategy. And that's where we really see the effects of compounding that works well in their portfolios,” says Mr Zacharia. He uses inverse ETPs occasionally as a hedge against market volatility but feels the leveraging is not enough in these products and market timing also holds concern. “You get the timing wrong and you really don't benefit as much as perhaps you should from those,” he says. What to consider when using leveraged and inverse ETPs Leveraged and inverse ETPs are sophisticated trading tools, and while listing on the stock exchange may make them accessible, this doesn’t mean they are suitable for all investors. Mr Tuckwell says, “it's fair to characterise index funds and ETFs as more defensive kinds of products for the most part. These types of funds aren't necessarily like that. So I think the first and most critical thing for investors considering using these, is know the risks and know what you're buying.” Similarly, Mr Zacharia says, “I think it's really understanding the risk versus reward story where it fits in the portfolio. Leverage is always going to be a double-edged sword and investors need to understand that you’ve got to take the good with the bad, I guess. Understanding the drawdown risk, if you are a passive investor in a traditional buy and hold sense. And remembering of course, that short ETFs are for the short term, dare I say it. Often people don't get the timing right, and they don't benefit from them.” Mr Rowley shares this concern but also highlights the importance of their role within the broader portfolio. “I think, for us, it's about really understanding how it fits within the client's broader portfolio. So, for us they're portfolio construction tools. So, it's about thinking how it fits within the broader portfolio and how that will change or alter the risk and return profile going forward,” he says. ETF Securities launched two new Ultra Short and Ultra Long Nasdaq 100 Hedge Funds in July, find out more or contact us. References [1] https://www.schwab.com/resource-center/insights/content/leveraged-and-inverse-etps-going-going-gone

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What investors, like you, are buying.

Jun 30, 2020

The COVID-19 pandemic may have proved volatile for investment markets, but it also appears to have opened the door for new and existing investors seeking opportunities. What makes recent months particularly interesting is that investor behaviour in the latest market volatility has been unlike past panic activity. Kanish Chugh, Co-Head of Sales at ETF Securities, explored recent investor behaviours and interests with Gemma Dale, Director SMSF and Investor Behaviour at Nabtrade. Increasing investor activity ASX reports show a substantial increase in retail trading over the course of the COVID-19 pandemic, with average retail trading increasing to $3.3bn at the end of April 2020 compared to $1.6bn pre-COVID and many dormant accounts recommencing trading activity[1]. Nabtrade, one of the largest trading platforms in Australia, experienced much of this increased interest and activity. “We’ve seen just an unbelievable uplift in people who are suddenly really enthusiastic about buying shares…We saw a 500% uplift in new applicants in March. We saw another 300% increase in April – that’s off usual levels, not off March. And we saw that continue through May, but it’s starting to fall away,” says Ms Dale. Ms Dale found that investors have been focused more on quality rather than speculative purchases in the past few months. “They were buying largely blue-chip stuff that they were already very familiar with. We saw people buying stuff they wanted to own for a long time before but thought were too expensive,” she says. She points to CSL as being popular with investors along with banks. “Most of them saw that times are going to be tough for banks. When you give everyone a loan repayment holiday for six months and when you have high levels of unemployment, and so on, it's going to be tough, but these are still high-quality businesses. They're going to be around after all of this is ending,” Ms Dale says. She also found aggressive buying behaviour around buy-now, pay-later companies such as Afterpay, Zip and Splitit and, perhaps more surprisingly, the travel sector, with Qantas and FlightCentre a particular focus. She suggests the activity on travel relates to expectations that Australia will still need a national carrier and people will want to travel again once borders open. Investing for the long term in international International investments have also been popular with Nabtrade investors, with the US representing about 90% of those trades. “It’s where you see the huge tech stocks, which is what they’re most enthusiastic about buying. So when you talk about FAANG and the broader universe that you guys cover, that is absolutely where investors love to go when they go off-shore, they have been looking for those for a really long time,” says Ms Dale. Interested in FAANG companies? Find out more about ETFS FANG+ ETF (ASX code: FANG). International trades for Nabtrade have typically been buy and hold investments, with investors wanting to avoid trades where they need to move quickly (and would therefore be required to monitor activity overnight to be ready to act). Of the buy and hold activity, Ms Dale says, “a lot of it is of high conviction, very high-quality companies. The number one is Tesla. It's very, very popular among our base. It's been an absolutely wild ride. The 52 week low's around the $200 mark and it rocketed back up to well over a $1000. So a lot of our investors were buying it on the lows and have done really well out of it.” Tesla is included in the portfolio of ETFS FANG+ ETF (ASX code: FANG) and ETFS Battery Tech & Lithium ETF (ASX code: ACDC). While generally activity has focused on long-term quality purchases, Nabtrade still have investors who are closely tracking markets and responding to it. “The one that shocked all of us, that was fascinating, and you asked about sectors that we haven't seen before, was oil stocks. So when the oil futures went negative, there was one night that the oil futures went negative, $30 negative as well… There was this massive panic selling. We had investors buying so enthusiastically that night, it was extraordinary. They were mostly buying ETFs based in the U.S. that gave them exposure, which was really interesting to see,” she says. Unusual investor behaviour Retail investors have traditionally been expected to panic in periods of market volatility, selling at the wrong time. Ms Dale has found current behaviour to be the opposite, with many investors taking the opportunity to buy companies at cheaper prices and focusing on quality. She says, “we saw existing investors putting cash to work that they'd had sitting there for quite some time and we saw a lot of new investors coming to the platform and to the market in general… We saw people buying stuff they wanted to own for a long time before but thought they were too expensive”. ETFs were also popular as a quick entry point for many investors. “What we saw in these really, really volatile days, was a lot of our investors wanted to get a piece of the action. They move extremely quickly. If they didn't feel they had time to do the research, or they didn't want to take a position on what was going to move, they just wanted to be in it… We saw a lot of active investing using ETFs to get access to particular positions that they might otherwise have found quite difficult, or just from a timing perspective,” Ms Dale says. Tips for new investors The COVID-19 pandemic has been an unusual event, and many investors capitalised off the opportunity to buy stocks at lower prices. While experienced investors may be accustomed and hardened to experiencing volatility in their portfolios, newer investors may still be yet to understand what this will mean financially and mentally for them. On this note, Ms Dale cautions newer investors to manage their expectations on market activity accordingly. “The windows in which this happened are very, very rare. You get this kind of event once every 10 years and the next time the market falls, you'll be on the wrong side of it because you now hold shares. You didn’t hold them before. So, you've never felt that way, watching them drop away. Now you have to learn how to hold your nerve when they do fall away because it happens sometimes, and events occur. If we get a second wave, whatever it might be. So it's brilliant that investors have come to market and done so well so quickly, right? It's fantastic. Just don't convince yourself that this is a normal experience. There are only a few windows in your lifetime of investing that you will be able to do this well this quickly, particularly if you're new to market,” she says. ETF Securities offer a range of ETFs across asset classes, regions, sectors and themes for your investment portfolio. Find out more or contact us. References: [1] https://download.asic.gov.au/media/5584799/retail-investor-trading-during-covid-19-volatility-published-6-may-2020.pdf

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Investment strategies in uncertain times

Jun 17, 2020

Uncertainty and periods of volatility are an expected part of life as well as financial markets and investors should be considering how to factor these into their investment strategies. While there’s no easy fix strategy that can be used for all investors, effective strategies tend to share a few aspects in common. Kanish Chugh, co-Head of Sales at ETF Securities, discussed investment strategies for uncertain times with Andrew Connors, Founder and Director of Quilla, one of Australia’s leading independent investment consultants serving financial advisers and institutional investors. The characteristics of a good investment strategy A good strategy will be tailored to the individual investor’s needs, goals and circumstances but there are a few aspects that should hold true regardless. “You can’t avoid diversification. It’s still the only free lunch you get with investing, and what I mean by that is you can invest in two securities that, in combination, mitigate some of the risks of each of those securities individually, without necessarily impacting the return,” says Mr Connors. He notes that diversification is more than just holding a variety of shares, it’s avoiding a concentration in one sector, region or asset class. Australian investors tend to have a home country bias where they mainly hold assets listed on the Australian stock exchange rather than spreading investments internationally and across assets. Mr Connors says, “another characteristic of a good strategy would be to manage excessive turnover in your portfolio. Turnover is one of those things that chips away at your returns in the background. So being aware of the impact of transacting and the transaction costs is important for a good investment strategy.” Understanding the products you are invested in, the risks involved and any correlation between your investments is also valuable to setting an investment strategy, for example, knowing that the performance of two particular assets is positively related may reduce the diversification benefits of both. Or alternatively, only investing in high risk investments may mean you are more exposed to volatility than you would like to be. Mr Connors also believes that investors should be aware of liquidity in their portfolios. “Liquidity was certainly impacted during the period of March when we saw the majority of the market falls… Being able to get your money out when you want it is an important characteristic of a portfolio, but also understanding those assets that don't necessarily have that liquidity. It's not necessarily a bad thing, but you need to be aware of it so that you are not surprised when we go through periods like that,” he says. Adjusting in periods of uncertainty Mr Connors has sought to incorporate investments that might perform differently to financial markets or offer stability to hedge riskier assets in the portfolios he recommends. “Cash is an asset you shouldn't be afraid to hold in your portfolio to protect wealth, and that's especially important in this current market environment given the swings we've seen in shares. Related to cash, but with slightly more risk, is bonds or bond funds. These still have a place in your portfolio, even when yields are so low, but you've got to understand they're not risk-free assets,” he says. In the current environment, Mr Connors has also seen value in foreign currencies and precious metals to support investment portfolios. “Foreign currency exposure… can insulate some of that volatility that we see from holding shares in your portfolio,” he says. Investors can incorporate such exposure by using unhedged international investments or by taking a direct currency exposure. This could be by transferring cash into other currencies or using ETFs like ETFS Enhanced USD Cash ETF (ASX code: ZUSD) for exposure. In terms of precious metals, gold has been a focus for Mr Connors. He says, “gold's been something we've used in portfolios over the last six to seven months as a tactical hedge against certain risk events… Gold has been up 9% this year to the early part of June, although it did experience some volatility throughout the pullback we saw in March.” Interested in investing in gold? Find out more about ETFS Physical Gold (ASX code: GOLD) Mr Connors uses a blend of actively managed and passively managed investments in his portfolio, with active credit managers gaining in recent times. The liquidity and ease of use of ETFs has been valuable during the past few months. “The specific benefits of ETFs, for us, include being able to use the ASX clearing house. So that means that we can implement complex transactions with multiple buys and sells, and that they all can be executed at exactly the same time. And that's a really important point, that speedier execution, especially in times of heightened volatility when the markets are going up or down by 7% in a day. So you don't want to be out of the market in that type of environment. So that's certainly an advantage compared to the slower process utilized when you're buying or selling managed funds,” he says. On the horizon for markets: time to invest or time to exit? Mr Connors considers the strong recovery in prices since March concerning and not reflected by the fundamentals in companies globally. He says, “we're still seeing the Coronavirus as not being under control, even though investors seem to have already priced in a recovery. We're also concerned about the impact of the geopolitical conflict between China and the US, and its allies, for that matter, like Australia. So that has the added potential to disrupt the fragile recovery that's underway in the US. And that would certainly add further pressure to the rally in equities that we've seen over recent months as well.” Mr Connors suggests investors go back to the basics of portfolio construction and focus on the long term, considering measures like dollar-cost averaging (i.e. consistent investing over time) as part of their strategy. “Don't expect to get the results you want in too short a time frame. You've got to let these things play out, and… complement that good investment philosophy and that good investment strategy, with an approach that perhaps sees you gradually entering back into the market,” he says. Learn more about building an investment portfolio through the core-satellite investing approach here or contact us.

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Beyond healthcare: the future of biotechnology

Jun 04, 2020

The search for cures and vaccines during the COVID-19 pandemic has brought the biotechnology industry into sharp focus. Beyond the COVID-19 pandemic though, what does the future hold for this industry and the broader healthcare sector? Kanish Chugh, co-Head of Sales at ETF Securities, discussed the future of biotechnology and healthcare with Scott Power, Senior Analyst covering Healthcare, Life Science and Technology for Morgans Financial Limited. Defining healthcare and biotechnology The healthcare sector represents all businesses providing medical goods and services to treat patients. “The way we look at healthcare in Australia is we put it into four buckets…Pharmaceuticals, so that’s like CSL. Medical devices, so Cochlear, ResMed. The services, so the hospital operators like Ramsay Healthcare, and the fourth bucket is diagnostics. So that’s Sonic Healthcare and some of the telehealth offerings that are out there,” says Mr Power. He notes healthcare represents about 8% of the ASX300 index within Australia, with 23 companies listed, ranging from CSL with a market capitalisation of $130 billion down to Monash IVF with a market capitalisation of $230 million. Biotechnology falls within the healthcare sector, often within the pharmaceuticals space. Specifically, though, biotechnology refers to technologies using biological processes. Biotechnology companies focus on research, development, manufacturing and/or marketing of products based on biological and genetic information to treat human diseases. This is the sub-industry covering COVID-19 vaccine development and testing. Mr Power says, “I think it’s 12 products in human testing at the moment and with over 100 in pre-clinical development…It’s big household name companies like Merck, Pfizer, Gilead, Eli Lilly are all working towards trying to find some sort of vaccine and/or therapeutic (cure).” The US and FDA approvals In terms of healthcare and biotechnology, the US is the largest market with the US Food & Drug Administration (FDA) approval process considered the gold standard. “The US FDA is one body, once you've got it, it goes right across the whole country. Their healthcare system is much more complex than ours, but again, once you have the approval and the appropriate reimbursement encoding, the ability for you to get across a larger patient population is much easier,” says Mr Power. From that perspective, many healthcare companies such as Moderna or Gilead have based their companies within the US to improve ease of access to both FDA approvals and the large US population. The COVID-19 pandemic has resulted in fast-tracked processes for testing vaccines and therapeutics for the virus but this may be a negative for non-COVID vaccines and cures. Mr Power says, “a lot of clinical trials have been put on hold. So, if you can’t recruit, because of isolation type issues, then you can’t actually conduct the trial. So a lot of companies, not only in Australia but around the world have actually put their clinical trials on hold.” While the fast-tracking during COVID-19 has given some hope for more efficient FDA processes in the future, Mr Power believes change is unlikely. “The drug approval process is well entrenched, well established, you’ve got to go through certain hoops, safety… and tested against larger population groups, that’s not going to change. Will the timing of those trials change? I think we are always finding better ways to get through these clinical trials,” he says. Ongoing evolution of the sector The COVID-19 pandemic has accelerated some change within healthcare. Mr Power says, “we are seeing some clear structural shifts, we've talked about telemedicine or remote monitoring. It's really gone from a nice to have to a must have… In terms of government policy… one of the issues previously is the reimbursement for teleconsult has been quite low. They have increased it during the COVID crisis to encourage more teleconsults but it needs to be maintained. So, I think we can definitely see a change in government policy from that perspective. In terms of other structural shifts we're seeing, we spoke about the diagnostic side, there's real trend towards rapid diagnostic, whether it's home testing, particularly with the current pandemic, but putting that to one side, that whole concept of early quick detection of conditions and diseases is certainly very much to the forefront. And that will continue.” Healthcare and biotechnology as a sub-industry have been tipped to benefit from a globally ageing population and the ongoing need for disease treatment. Biotechnology in particular is forecast to reach more than $729 billion in 2025[1]. “What we’ve seen over the last 10 years is healthcare as a sector tends to outperform most other sectors… We expect that to continue… I think it’s important for investors to make sure they have exposure to global healthcare companies,” says Mr Power. He notes that company selection from the global front can be difficult but it complements and diversifies the more concentrated Australian exposure to the sector. “Do you want to back Gilead… or Moderna, they’re working on a vaccine, they’ve got a market cap of $30 billion, but they actually don’t have a product. So that’s a highly speculative play,” he says. From that perspective, he suggests using ETFs such as ETFS S&P Biotech ETF (ASX code: CURE) or actively managed funds which capture the top companies, to assist investors to manage the risks and volatility inherent in the sector. Learn more about using global biotechnology in your investment portfolio by clicking here or contact us.

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