Additional disclosure - eQR Securities

Regulatory reporting of eQR securities Pty Ltd.

eQR securities Pty Ltd (ABN 30 009 119 242, AFSL 240693) (eQR) is a subsidiary of Westpac Banking Corporation (ABN 33 007 457 141, AFSL 233714). eQR’s business is primarily that of providing research (i.e. general financial product advice) on securities, including selected shares in the S&P /ASX200 Index.

Any financial product advice eQR provides will be general in nature and will have been prepared without taking into account the reader’s objectives, financial situation and needs. Readers of eQR research should seek personal advice from a financial adviser that is appropriate to their objectives, financial situation and needs. Readers should obtain and consider the disclosure document (e.g. product disclosure statement or prospectus) (if any) for a product before deciding whether to acquire, continue to hold or dispose of that product. eQR has no knowledge of the reader’s personal circumstances and will only ever provide the reader with general advice.

The following material is published by eQR to provide information on its processes and procedures relating to research services, research methodologies and conflict of interest management to allow users of eQR research to assess the quality and reliability of the investment research provided.

This guide includes:

  • Scope of eQR’s Research and Expertise
  • Purpose of Research
  • Research Coverage
  • Currency and Historical Research
  • Research Methodology
  • Spread of Ratings
  • Testing our Research
  • Managing Conflicts of Interest
  • Interests in securities researched by eQR

Scope of eQR's research and expertise

eQR is part of the business division known as BT Investment Solutions, which is part of the BT Financial Group (BTFG), the wealth management arm of Westpac Banking Corporation (ABN 33 007 457 141, AFSL 233714).

eQR provides research on a range of financial products including listed income securities, exchange traded funds, listed investment companies and selected shares predominantly in the S&P / ASX200 index for the use of advisers who provide personal financial product advice through BT Advice aligned financial planning channels. eQR also provides portfolio solutions to advisers. The relevant BT Advice aligned financial planning channels that utilise eQR research are:

  • Securitor Financial Group Pty Limited;
  • BT Select, operating under Magnitude Group Pty Ltd;
  • Westpac Financial Planning;
  • Bank of Melbourne Financial Planning;
  • St.George Financial Planning; 
  • BankSA Financial Planning; and
  • Licensee Select.

Where deemed appropriate by the relevant financial planner, certain eQR research may also be provided to a client of that financial planner. Refer to the conflicts of interest section below for further information. eQR research is not otherwise available to the public. 

eQR consists of 6 investment professionals with an average of 12 years relevant financial market experience. The head of eQR is Steve Burgess, who has 17 years investment experience and who has been with BTFG for 6 years. Steve has led the eQR team since its establishment in November 2010. eQR’s research is overseen by Piers Bolger. Piers has investment experience spanning 23 years and has been with BTFG for 6 years.

Independent Investment Research (IIR) conducts an annual review of the research and model management capabilities of eQR. In its latest report (2013) IIR assessed eQR’s research as “Recommended” or higher.

Further detail may be obtained by emailing EquitiesResearch@BTFinancialgroup.com

Purpose of research

eQR publishes research reports for use by BT Advice aligned financial planners. Where deemed appropriate by the relevant financial planner, certain eQR research may also be provided to a client of that financial planner.

Reports published by eQR are not intended to be, and do not constitute, personal financial product advice, personal investment advice or personal recommendations of any kind (including a recommendation to buy, sell or hold a financial product). Published reports have been prepared without taking account of any person’s objectives, financial situation or needs, and so the reader should consider its appropriateness having regard to these factors before acting on it. Material contained in these publications is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such.

Terms used in eQR reports including but not limited to “downgrade”, “upgrade”, “fair value”, “undervalued” , “overvalued”, “underweight’ or “overweight”, do not constitute personal recommendations.

Research coverage

eQR provides general financial product advice in the form of research reports and related information on a range of financial products including listed income securities, exchange traded funds, listed investment companies and selected shares predominantly in the S&P / ASX200 index.

Research coverage for shares and listed trusts is initially determined by the constituents of the S&P/ASX200 index. eQR uses quality filters to exclude a number of higher risk securities and includes a number of Mid Cap stocks that eQR considers are high quality. At 20th July the universe comprises 171 securities.

Research coverage for listed income securities excludes corporate perpetual issues and comprises 33 of the more actively traded securities in the market at 20th July 2015.

Research coverage for Listed Investment Companies and Exchange Traded Funds comprises 21 securities at 20th July 2015. The research universe reflects the most commonly held securities in the BT Advice aligned financial planning channels. Additional securities may be researched if required by BT Advice aligned adviser demand.

A listing of securities covered by eQR is available from your financial adviser or for clients of BT Advice aligned financial planners by emailing EquitiesResearch@BTFinancialgroup.com

Currency and historical research

Research provided by eQR on listed securities in the S&P/ASX200 index is updated daily. Listed income securities research is updated weekly and exchange traded funds and listed investment company research is updated monthly.

Research is current as of the date of the report, unless otherwise stated in the report.

Research methodology

Central to eQR’s research philosophy is the view that establishing and maintaining a structured process to identify securities with strong fundamentals, low probability of “failing” and a favourable outlook relative to price will allow market imperfections to be exploited through an investment cycle, and assist with long term wealth creation strategies.

eQR’s approach to financial product research is based on a belief that a robust risk management framework is essential in identifying securities with key fail points, both on a relative and absolute basis. In eQR’s view, investment decisions should focus on the need for capital preservation and sustainable risk adjusted returns through an investment cycle over the medium to longer term.

Deeply embedded into the equities research process is the team’s focus on looking beyond short-term market dynamics to identify long-term macro thematics and their impact on financial asset market risks and returns.

The eQR investment process for shares and listed trusts includes the following steps:

  1. Define the universe and perform an initial qualitative evaluation. eQR covers the S&P/ASX200 along with high quality Mid Cap stocks. The qualitative evaluation process involves looking at a range of factors including: a company’s segment and position, key differentiating factors, its management and board, earnings outlook, financial stability, valuation, likely share catalysts, key risks and market sentiment.
  2. A risk management framework is used to filter out high risk exposures. eQR applies a proprietary risk management framework across the entire universe of eQR researched products to identify and rank stocks from a risk perspective. The  framework takes into account a broad spectrum of risk metrics that are dynamically weighted within the framework in line with changing market conditions.
  3. Valuation and fundamentals. eQR then analyses the company’s operational environment. This includes analysis of the long-term growth and resilience of an industry, a company’s strength within that industry and stock specific risk factors such as regulatory, geographic or currency risks. These fundamental inputs are then used to establish a valuation using a discounted cash flow approach to assess the potential risk adjusted performance.

An investment thesis is determined for each security under review based on an analysis of industry prospects, key company differentiating factors, management capabilities and track record, financial stability, earnings outlook, likely share price catalysts, key risks and relative valuation.

eQR applies relative valuation ratings of undervalued, fair value and overvalued to these securities. A relative risk rating is also applied – moderate, moderate to high and high. Please refer to the section Spread of Ratings for the definition of these ratings.

The eQR investment process for listed income securities includes the following steps:

  1. Macro credit strategy; forming a top down view on macro credit is crucial, and is a key input which drives our sector and credit quality positioning. We use two approaches when forming our credit market expectations, combining a quantitative approach with a qualitative overlay.
  2. Sector allocation and company fundamental credit analysis; given the limited number of issuers within the LIS space, our sector allocation decision is essentially a decision between financials vs corporates, driven by our views on where we are in the credit cycle and of the underlying fundamentals of each of the sectors. We conduct in-house fundamental analysis to complement S&P’s and Moody’s ratings. This analysis examines the business and financial risk profile of the issuer.
  3. Security selection; using both our credit macro approach and our fundamental analysis, we form a shortlist of preferred issuers. We rank securities by valuation and risk measures.

eQR applies relative valuation ratings of undervalued, fair value and overvalued to listed income securities. A relative risk rating is also applied from low, moderate, moderate to high and high. Please refer to the section Spread of Ratings for the definition of these ratings.

Additional information is available from your financial adviser or for clients of BT Advice aligned financial planners by emailing EquitiesResearch@BTFinancialgroup.com.

Spread of ratings

eQR uses the following ratings system:

For shares and listed trusts:

Ratings are based on the expected performance over a 12 month period on a risk adjusted basis. This means that the potential performance from a valuation perspective is assessed relative to the assessed risks in achieving that performance.

Undervalued

Over the next twelve months, eQR expects this security to outperform the average total return of the securities in the eQR researched universe. Undervalued stocks/securities are considered to be trading at a discount to their valuation at the time of rating issuance on a risk adjusted basis.

As at 20th July 2015, 31% of securities in the eQR researched universe are in this category.

Fair Value

Over the next twelve months, eQR expects this security to perform in line with the average total return of the securities in the eQR researched universe. Fair Value stocks/securities are considered to be trading at or around their valuation at the time of rating issuance on a risk adjusted basis.

As at 20th July 2015, 49% of securities in the eQR researched universe are in this category.

Overvalued

Over the next twelve months, eQR expects this security to underperform the average total return of the securities in the eQR researched universe. Overvalued stocks/securities are considered to be trading at a premium to their valuation at the time of rating issuance on a risk adjusted basis.

As at 20th July 2015, 20% of securities in the eQR researched universe are in this category.

eQR uses 3 ratings to assess relative risk – moderate, moderate to high and high.

As at 20th July 2015, 84% of securities in the eQR researched universe are in the moderate to high risk category.

For Listed Income securities:

Valuation ratings are the same as for shares and listed trusts.

At 20th July 2015 the spread of ratings was 76% fair value, 9% overvalued and 15% undervalued.

An additional relative risk rating of low is added to the risk classification used for shares and listed trusts.

At 20th July 2015 the spread of risk ratings was 27% low, 45% moderate, 28% moderate to high and 0% high risk.

For Listed Investment Companies and Exchange Traded Funds:

Recommend 
Over the medium to long term eQR believes with a high degree of confidence that this security will deliver on its stated investment objective relative to its peers.

As at 20th July 2015, 29% of Listed Investment Companies and Exchange Traded Funds in the eQR researched universe are in this category.

Neutral   
Over the medium to long term, eQR believes with a moderate degree of confidence that this security will deliver on its stated investment objective relative to its peers.

As at 20th July 2015, 71% of Listed Investment Companies and Exchange Traded Funds in the eQR researched universe are in this category.

Under review

The security is being reviewed and does not currently have an assigned rating or view.

As at 20th July 2015, 0% of Listed Investment Companies and Exchange Traded Funds in the eQR researched universe are in this category.

Risk ratings are not provided for listed investment companies and exchange traded funds.

Testing out research

eQR research is tested by reviewing the performance of the three rating categories over time.

The below chart shows the cumulative performance of the eQR research universe split into those stocks that have been rated as Overvalued vs those that have been Undervalued and Fair Value since the launch of eQR in November 2010.

Since December 2010, overvalued stocks have returned a cumulative 16.0% to July 2014, while undervalued and fair valued stocks have returned 44.8% cumulatively. In comparison the ASX200 index has returned 39.1% compounded.

This analysis provides an aggregate view of performance within the three rating categories and does not necessarily reflect the performance of individual security ratings.

eQR Securities July 2014
Source: eQR Securities July 2014

It should be noted that this information is provided for information purposes only and that past performance is not necessarily a reliable indicator of future performance.

Managing conflicts of interest

All products researched are assessed solely on their investment or product merit in a consistent manner. From the perspective of eQR, related party investment management teams are considered equally to those who are external to BTFG. In-house investment management teams or product manufacturers have no line of sight to the eQR due diligence and research process, nor are they involved in any aspect of the APL decision making process.

eQR is required to prioritise client interests when performing their role and the team is not incentivised to recommend any particular product or platform over another.

eQR do not charge or receive any remuneration from either internal or external issuers of financial products for undertaking research on the issuer's financial products.

All members of eQR are required to comply with the Westpac Group’s Conflict of Interest Policy and to note and declare any material or perceived conflicts of interest when presenting investment recommendations to the APL approval committees.

Peer Reviews: All research recommendations are reviewed by a peer and a senior manager to ensure the investment process has been correctly adhered to and that the recommendations are clear, balanced and have a reasonable basis.  The author of the research is required to disclose any conflicts of interest on the report. eQR has an established attestation process and compliance plan to support the publication of research and the monitoring of conflicts of interest.

Staff: Our research staff are generally paid a salary, superannuation and may also receive additional benefits should they satisfy certain targets. They may also be entitled to receive bonuses (which may include an allocation of Westpac ordinary shares) that are based on factors such as the quality of their research, as well as the efficiency and timeliness of delivery of their services. Our research staff may also be entitled to a bonus determined by reference to the performance of other business units within the Westpac group.

Related party products:  eQR may, from time to time, produce material on securities of a company in, or product issued by, a Westpac group entity. For example Westpac is itself an ASX listed company, and entities within the Westpac group issue products which may be covered by material issued by eQR.  The same controls, criteria and approval processes are applied as with the preparation of reports on external products, however materials produced on related party products are not research reports as they are not prepared independently.

Westpac, other entities in the Westpac group, and their representatives may have an interest in the securities of, or an association or relationship with, the entity that is the subject of a report. This could, for example, include a financial interest in, position as an officeholder of, or a contract for the provision of services to, the entity that is the subject of a report. If a person subscribes to the financial products referred to in a research report through a financial product or service issued by a Westpac group company, such subscription may result in companies related to Westpac and representatives of Westpac group companies receiving a commission, fee or other benefit or advantage.

The Westpac group includes a number of companies that provide financial products and services, funds management, insurance, superannuation, investment and administrative services. The Westpac group includes St.George Bank – a division of Westpac, Securitor Financial Group Limited, Magnitude Group Pty Limited, Asgard Capital Management Limited, BT Funds Management Limited, Advance Asset Management Limited and also includes companies that bear the ‘Westpac’, ‘St.George’, ‘Bank of Melbourne’, ‘Bank SA’, ‘Asgard’, and ‘BT’ names. BT Financial Group is the wealth management arm of Westpac.

Trading: Staff are subject to trading restrictions during periods where they are preparing research and all staff trading is required to be cleared by the Group Control Room prior to placing a trade.  Staff may also be subject to additional restrictions as and when determined necessary by the Group Control Room.

Non-financial benefits: Benefits exceeding $300 are not permitted under the Westpac Alternative Remuneration Policy. Employees may from time to time receive non-financial benefits valued at less than $300 from external or internal Westpac Group product issuers.  eQR maintain a register of any benefits received by employees that are between $100 and $300 in value. Please let your financial planner know if you would like to see this register and we can provide this to you for a small fee.

Further information regarding how we manage conflicts of interest are available from your financial adviser or for clients of aligned financial planners by emailing BTFGResearch@BTFinancialgroup.com.

Disclosure of interests in products researched by eQR

eQR publishes daily reports.  These reports are produced using an automated process with oversight by the eQR team of analysts. As such, responsibility for these reports is assigned to the eQR “Team” and any financial interest held by one of more members of the eQR team is disclosed using the Declaration of interests for team coverage reports form and by following the instructions shown below.

eQR Securities

Last updated July 2015.

Disclaimer: This information is issued by eQR securities Pty Ltd (ABN 30 009 119 242, AFSL 240693) (eQR). It has been prepared for use by advisers and clients of Westpac Financial Planning, Westpac Private Bank, St.George Financial Planning, St.George Private Clients, Bank of Melbourne, Bank of Melbourne Private, Magnitude Group Pty Ltd and Securitor Financial Group Ltd and other users authorised by eQR from time to time (authorised users) only. It must not be copied, used, reproduced or otherwise distributed or circulated to any person outside Australia or to any third party other than an authorised user. This information is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. Information that has been provided by third parties has not been independently verified and neither eQR nor any company in the Westpac Group is in any way responsible for the accuracy or completeness of, or endorses, that information. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that such information is complete, accurate, up to date, error or fault free or fit for any purpose; and (b) neither eQR nor any other member of the Westpac Group is in any way liable to any person (including for negligence) or otherwise for any loss or damage arising as a result of any reliance upon such information.