2019 Investment and Finance Review

2019 Investment and Finance Review

The Helen Macpherson Smith Trust is a perpetual charitable trust whose principal activity is to hold Helen’s residuary estate (corpus) in trust, to invest the corpus to grow its real value, to earn income from the corpus and to distribute that income to charitable institutions and purposes situated in Victoria.

Investment Review

The objectives of HMSTrust’s investment mission are twofold: first to achieve long-term appreciation of the value of the corpus, ahead of inflation, and secondly to generate sufficient income to fund the annual grant giving program and operating expenses.  Long-term growth in the value of the corpus is essential if HMSTrust is to serve Victoria’s communities in the future as well as it has done in the past.

During FY19, two major review exercises were performed.  Firstly, a strategy review was undertaken on HMSTrust’s investment strategy and Investment Policy Statement.  The outcome of this strategy review was that the overall investment objective was explicitly stated as aiming to achieve a total investment return of CPI+5.5% over rolling 20-year periods.  Of the total expected annual investment return, long term capital returns are targeted at CPI+1.0% p.a. and income returns are targeted at 4.5% p.a. for granting and operating expenses.

Secondly, HMSTrust’s internal active management of its Australian equities portfolio was reviewed.  Whilst active management had served HMSTrust well over the years, the Board of Trustees decided to change the management of the Australian equities portfolio to an internal passive basis tracking the S&P/ASX50 Franking Credit Adjusted Daily Total Return (Tax Exempt) Index.  The main reason for this change was to retain the management of Australian equities in-house.  This allows HMSTrust to take advantage of its tax-exempt status (e.g. when it comes to franking credits and participation in off-market shares buy-backs) and also gives us the flexibility to screen out stocks not in-line with HMSTrust’s vision, mission and granting strategy.

In addition to managing Australian equities internally, investment operations are also undertaken internally to maximise control and minimise costs.  During FY19, the total investment costs were 0.32% of assets, including management fees paid to external managers of international shares and unlisted infrastructure funds.

The following chart shows how the value of the corpus has changed since 2000, and compares that with the increase in the Consumer Price Index (CPI), a measure of inflation.  Over that period the corpus has consistently remained ahead of inflation, achieving our primary investment objective.  At June 2019 the corpus reached an all-time year-end high of $126m, a margin of $37m (or 42%) above the CPI.

FY19 was the third year in row of strong investment returns, with the corpus generating a total return of 13.6%.  This strong return reflects a high exposure to both Australian and international shares, and a strong performance from our unlisted infrastructure exposure.

The chart below illustrates the asset allocation of the corpus at the end of June 2019:

Finance Review

Revenue (excluding realised and unrealised gains on investments) of $10.9m was earned on the corpus during FY19 and was 71% higher than the $6.4m earned in FY18.  Capital Account revenue increased by $3.7m from $0.9m in FY18 to $4.6m in FY19 as a result of three off-market share buy-backs during FY19 (totalling $3.9m).  Income Account revenue increased by $0.8m due to the increased dividends accrued during FY19 from BHP and other companies.

The chart below shows the composition of total revenue:

Operating expenses of $1.3m were incurred during FY19 in administering HMSTrust to achieve its objectives and were in-line with those incurred in FY18.

An operating surplus of $9.6m was generated in FY19, an 89% increase over the $5.1m generated in FY18. $4.5m of the operating surplus was capital in nature and remains in the Capital Account. The operating surplus on the Income Account of $5.1m allowed for a total of $4.5m net grants to be approved during FY19. This resulted in a $0.6m surplus on the Income Account which was used to transfer $0.7m to the Capital Account through the Trustees’ exercise of the power of accumulation. The balance on the Income Account of $3.7m at 30 June 2019 will be used to maintain HMSTrust’s granting capacity during this continued period of low income returns.

Glen Thomson
Finance Executive