2021 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.

Asset allocation

HMSTrust operates in perpetuity and is not able to grant out of capital. These two features allow the corpus to have a high allocation to growth assets. During FY21, our allocation to growth assets increased from 84% at 30 June 2020 to 88% at 30 June 2021. Additional investments were made in Australian equities, developed market equities and emerging market equities, all funded from cash. HMSTrust maintains a high allocation to Australian equities due to the attractiveness of refundable franking credits.

Investment performance

Compared to FY20 when the total return on the corpus was -3.2% due to the COVID-induced market correction, FY21 was an outstanding year, with the corpus generating a total return of 23.2%. This return significantly outperformed our objective of 9.3% (CPI+5.5%).

It is pleasing to note that the total return on the corpus has outperformed its objective by 3.2%pa over the past 8 years. This is no mean feat considering that our total return objective of CPI+5.5% can be considered an aggressive objective, albeit appropriate for a fund in perpetuity like HMSTrust.

Excluding income returns, the value of 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). Over that period the corpus has remained ahead of inflation, exceeding our capital return investment objective. The value of the corpus at 30 June 2021 was $140m, an all-time year end high.


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 inconsistent with 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.

HMSTrust internally manages its Australian equities portfolio on a passive basis, enabling us to take advantage of our 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 inline with HMSTrust’s vision, purpose and granting strategy. The benchmark tracked is the S&P/ASX50 Franking Credit Adjusted Daily Total Return (Tax Exempt) Index modified for negatively screened stocks. When Afterpay entered the index during FY21, HMSTrust made the decision to negatively screen Afterpay out of our Australian equities portfolio due to concerns that its business model may have a damaging effect on disadvantaged people and encourage consumerism. As at 30 June 2021, three stocks were screened out: Aristocrat Leisure, Afterpay and Treasury Wine Estates. For FY21, HMSTrust’s Australian equities portfolio outperformed the benchmark, mainly as result of participating in placements and the Ampol off-market share buy-back.

HMSTrust’s developed market equity exposure is invested in the Vanguard Ethically Conscious International Shares Index Fund. This fund tracks the FTSE Developed ex Australia Choice Index which excludes companies with significant business activities involving fossil fuels, nuclear power, alcohol, tobacco, gambling, weapons, adult entertainment and conduct-related controversies.

HMSTrust is invested in two unlisted infrastructure funds: the Utilities Trust of Australian (UTA) and the IFM International Wholesale Infrastructure Fund. Both funds have responsible investment strategies and climate change policies which embed Environmental, Social and Governance (ESG) factors into their respective investment processes. In 2021, the UTA fund was rated 8 out of 106 global infrastructure funds by GRESB (an organization that produces internationally-recognized benchmarks to track ESG performance of commercial real estate and infrastructure).

During the year, HMSTrust invested in two further social impact bonds (SIB), the Side by Side SIB by Berry Street and the Living Learning SIB by Melbourne City Mission. The Side by Side Program aims to help students (prioritising Aboriginal students) in Years 1 to 4 who are chronically absent from school. The Living Learning Program provides support to 15-21 year olds persistently not engaged in education or training and who have a mental health condition to facilitate higher levels of engagement in secondary education. The Living Learning SIB is unique in that it leverages off both HMSTrust’s Capital and Income Portfolios. Existing impact investments comprise our investment in the Murray Darling Basin Balanced Water Fund, which 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 SIB seeks to improve outcomes for young Victorians transitioning from care to independent living.

Investment management expenses

In addition to managing Australian equities internally, investment operations are also undertaken internally to maximise control and minimise costs. During FY21, the total investment costs amounted to 0.31% 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 $5.1m was earned on the corpus during FY21, down 7% on the $5.5m earned in FY20. Capital Account revenue decreased by $0.3m from $0.9m in FY20 to $0.6m in FY21 mainly due to lower capital distributions received from international shares. Income Account revenue remained consistent at a subdued $4.6m due to the continued effect COVID-19 had on the ability of companies to pay distributions.

Operating expenses of $1.3m were incurred during FY21 in administering HMSTrust to achieve its objectives and were in line with those incurred in FY20.

An operating surplus of $3.9m was generated in FY21, an 8% decrease over the $4.2m generated in FY20. $0.5m of the operating surplus was capital in nature and remains in the Capital Account. The operating surplus on the Income Account of $3.4m together with retained surpluses from prior years enabled a total of $4.0m net grants to be approved during FY21. The balance on the Income Account of $2.8m at 30 June 2021 is reserved for emergency granting and also to maintain HMSTrust’s granting capacity should income levels decline.

Glen Thomson
Finance Executive