2020 Investment and Finance Review

2020 Investment and Finance Review

The Helen Macpherson Smith Trust is a perpetual charitable trust whose principal activities are 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 objective

The objectives of HMSTrust’s investment mission are twofold: firstly 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 continue to serve Victoria’s communities in perpetuity.

HMSTrust’s overall investment objective is to achieve a total investment return of Consumer Price Index (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. to cover granting and operating expenses.

Responsible investment

HMSTrust aims to support positive social and environmental long-term outcomes in the state of Victoria. To avoid circumstances where HMSTrust’s investment activities are working against the objectives of HMSTrust’s granting activities, HMSTrust has a principles based responsible investment policy that aims to balance responsible investment with the need to maintain its granting capacity.

The corpus currently has two impact investments. The investment in the Murray Darling Basin Balanced Water Fund, in addition to earning financial returns, also undertakes watering events across wetlands and funds the development of infrastructure which enables the sustainability of water delivery to wetlands.  Our investment in the COMPASS Social Impact Bond seeks to improve outcomes for young Victorians transitioning from care to independent living.

In FY20, the corpus’s large capitalisation developed market exposure was switched into a product that screens out further investments that are not aligned with HMSTrust’s vision, purpose and granting strategy.  In addition to screening out companies involved in tobacco production and weapon manufacture, companies involved in fossil fuels, alcohol, gambling, adult entertainment, and conduct-related controversies are now also screened out.

HMSTrust continues to manage internally its Australian equities portfolio on a passive basis enabling HMSTrust to take advantage of its tax-exempt status (particularly franking credits and participation in off-market shares buy-backs) and also giving us the flexibility to screen out stocks not in-line with HMSTrust’s vision, purpose and granting strategy (two stocks are currently screened out: Aristocrat Leisure and Treasury Wine Estates).  The benchmark is the S&P/ASX50 Franking Credit Adjusted Daily Total Return (Tax Exempt) Index modified for those exclusions and for FY20, HMSTrust’s Australian equities portfolio outperformed the benchmark by 0.12%, mainly as result of participating in placements and the Qantas off-market share buy-back.

Asset allocation

HMSTrust operates in perpetuity and this allows the corpus to have a high allocation to growth assets (84% at 30 June 2020).  An allocation to developed markets small companies was included for the first time during FY20.

Investment performance

The value of the corpus has had a roller coaster ride during FY20 due to the impact COVID-19 had on world markets.  From a value of $126m at the end of FY19, the corpus reached an all-time high of $136m on 20 February 2020, before COVID-19 caused world markets to tumble, resulting in HMSTrust’s corpus dropping to a low of $102m on 23 March 2020.  We used the opportunity of depressed prices to invest a further $2.5m in Australian equities.  By the end of FY20, the corpus had recovered in value to $118m.

While the total return on the corpus for FY20 was -3.2% due to impact of COVID-19, over the longer-term, the corpus continues to outpace inflation.  The chart below shows how the value of the corpus (which excludes income earned) has changed since 2000, and compares that with the increase in CPI + 1% (our capital return objective which excludes income earned).  Over that period the corpus has remained ahead of inflation, achieving our capital return investment objective.

Investment management expenses

In addition to managing Australian equities internally, investment operations are also undertaken internally to maximise control and minimise costs. During FY20, the total investment costs amounted to 0.32% of the corpus, including direct investment costs incurred internally, investment consultant fees paid to Frontier and investment management fees paid to external managers of international shares and unlisted infrastructure funds.

Operating results

Revenue (excluding realised and unrealised gains on investments) of $5.5m was earned on the corpus during FY20, down 49% on the $10.9m earned in FY19. Capital Account revenue decreased by $3.7m from $4.6m in FY19 to $0.9m in FY20 as there were fewer off-market share buy-backs offered in FY20. Income Account revenue dropped by $1.7m from $6.3m in FY19 to $4.6m in FY20. While FY19 was a bumper year for special dividends (from the likes of BHP and Wesfarmers), income in FY20 was subdued due to the effect COVID-19 had on the ability of companies to pay distributions.

Operating expenses of $1.3m were incurred during FY20 in administering HMSTrust to achieve its objectives and were in-line with those incurred in FY19.

An operating surplus of $4.2m was generated in FY20, a 56% decrease over the $9.6m generated in FY19. $0.9m of the operating surplus was capital in nature and remains in the Capital Account. The operating surplus on the Income Account of $3.3m allowed for a total of $3.2m net grants to be approved during FY20, resulting in a small $0.1m surplus on the Income Account. The balance on the Income Account of $3.7m at 30 June 2020 will be used to maintain HMSTrust’s granting capacity during this continued period of low income returns.

Glen Thomson
Finance Executive