Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 251

Cuffelinks Newsletter Edition 251

  •   4 May 2018

Just when AMP was taking the brunt of the Royal Commission's criticisms and the banks were welcoming a scapegoat, APRA's Prudential Inquiry issued a stinging assessment of the Commonwealth Bank. If the new CEO, Matt Comyn, wanted a catalyst for change, he now has it in spades. The Treasurer, Scott Morrison, jumped on it: 

"The Report, I think, is required reading not only for every institution in the country but, frankly, it should be the next item on the agenda of every single board meeting in this country regardless of whether you're a bank or not."

The Report said CBA's financial success had dulled its senses to a deterioration in the risk profile, especially non-financial risks:

"These risks were neither clearly understood nor owned, the frameworks for managing them were cumbersome and incomplete, and senior leadership was slow to recognise, and address, emerging threats to CBA's reputation." (page 3)

A strange feature of the APRA Report is the repeated identification of executives as 'previous', 'former' and 'new' without naming them. Current staff are generally not blamed for the systemic failures. For example, the Report says:

"There was some evidence at the BRC [Board Risk Committee] that the reputation of the previous Chair of the BRC and CRO as industry experts with a 'scholarly gravitas' stifled the level of challenge at Committee meetings." (page 18)

The previous Chair of the BRC was Harrison Young (who left the Board in November 2017 at the same time as Laura Inman) and previous Chief Risk Officer was Alden Toevs, who left CBA in 2016. Chief Financial Officer David Craig retired in 2017.

APRA's Report is an indictment on the culture created under former CEO, Ian Narev, and former Chair, David Turner. In the Culture and Leadership section, it says:

"Executive Committee members commonly described the 'socratic' questioning style set by the previous CEO leading to some 'decisions being driven by the best debater rather than the person with the most robust position.'" (page 88)

Indeed, how many times have we all seen that? The King is dead, long live the King.
Many more Royal Commission seasons to come

The daily broadcast of the Royal Commission is taking a break, and it feels like the end of the football season or completion of binge-watching a series of Fargo. Bring on Season 3. We've seen the removal of villains (taking their booty with them), fainting and ambulances, gold medal performers and shredding of reputations. It's rare to hear a CEO called out in public for lying, as Mark Costello did to Dover's Terry McMaster:

"That's a lie, isn't it? I put it to you it is Orwellian to describe this as a Client Protection Policy. The entire intention of this document is to minimise Dover's liability for the work of its authorised representatives."

And soon after, Terry McMaster collapsed, topping two weeks of high drama.

There has also been much focus on AMP amending the so-called independent report by Clayton Utz. Consultants or regulators commonly offer an opportunity to comment on a draft report, but this is now likely to change. The main issue here is not so much the amending of the report, but passing it off as an independent third party assessment.

The Royal Commission may also be causing a further tightening of mortgage lending conditions. The latest CoreLogic Home Value Index shows combined capital city values had the first annual decline since 2012, although Hobart continue to shine.

Source: CoreLogic Hedonic Home Value Index, April 2018 

This week focusses on financial advice. Jonathan Hoyle gives 15 questions to ask a financial adviser in the wake of the revelations, while John West and Trevor Schuesler check whether advisers have much success selecting fund managers. Daryl Wilson dissects 15 years of S&P data for investment lessons and Vinay Kolhatkar explores the perverse incentives exposed by the Commission.

Back on investing, Anton Tagliaferro emphasises the value of dividends while Adam Kibble offers tips on currency exposure as markets fall. Robert Miller gives three checks when an investor is faced with company earnings downgrades.

In a change of pace, well-known fundie Rob Prugue takes us on his sabbatical walking the 800 kilometre El Camino in Spain, with plenty of twists along the way, and an unexpected plea about how to think about superannuation.

The White Paper from Challenger argues for greater focus on retirement income and advice targetted at the needs of retirees.

Last week's Special 250th Edition ebook on investing mistakes was extremely popular, and is available on the home page of our website for anyone who missed it.

Graham Hand, Managing Editor


Edition 251 | 4 May 2018 | Editorial | Newsletter



Leave a Comment:


Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

Coles no longer happy with the status quo

It used to be Down, Down for prices but the new status quo is Down Down for emissions. Until now, the realm of ESG has been mainly fund managers as 'responsible investors', but companies are now pushing credentials.

Latest Updates


The 'Contrast Principle' used by super fund test failures

Rather than compare results against APRA's benchmark, large super funds which failed the YFYS performance test are using another measure such as a CPI+ target, with more favourable results to show their members.


RBA switched rate priority on house prices versus jobs

RBA Governor, Philip Lowe, says that surging house prices are not as important as full employment, but a previous Governor, Glenn Stevens, had other priorities, putting the "elevated level of house prices" first.

Investment strategies

Disruptive innovation and the Tesla valuation debate

Two prominent fund managers with strongly opposing views and techniques. Cathie Wood thinks Tesla is going to US$3,000, Rob Arnott says it's already a bubble at US$750. They debate valuing growth and disruption.


4 key materials for batteries and 9 companies that will benefit

Four key materials are required for battery production as we head towards 30X the number of electric cars. It opens exciting opportunities for Australian companies as the country aims to become a regional hub.


Why valuation multiples fail in an exponential world

Estimating the value of a company based on a multiple of earnings is a common investment analysis technique, but it is often useless. Multiples do a poor job of valuing the best growth businesses, like Microsoft.


Five value chains driving the ‘transition winners’

The ability to adapt to change makes a company more likely to sustain today’s profitability. There are five value chains plus a focus on cashflow and asset growth that the 'transition winners' are adopting.


Halving super drawdowns helps wealthy retirees most

At the start of COVID, the Government allowed early access to super, but in a strange twist, others were permitted to leave money in tax-advantaged super for another year. It helped the wealthy and should not be repeated.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.