But there are some notable exceptions. MLC, the fourth biggest multi-manager in the world according to Cerulli Associates, recently effected the biggest movement of funds by a single manager in Australian history, reshuffling 15 per cent of its A$62bn (€40bn) of funds under management.
MLC manages around 14 per cent of the country’s retail pension and unit trust business, so when it announced in early July that it had withdrawn billions from some of the best-known managers in the industry, there was more than just a smidgen of interest from global asset managers.
Departures
Four managers departed the A$22bn global equities portfolio, including heavyweights Fidelity International and Vanguard Investments. Fidelity managed 17.5 per cent, or almost A$2bn, along with Lazard Asset Management (12 per cent) and Vanguard (10 per cent). Platinum Asset Management (7.5 per cent), one of Australia’s top global equities managers, also left the MLC fold, while Capital International’s allocation dropped from 32 per cent to 21 per cent.
The big winners have been Walter Scott & Partners, Alliance Capital, Dimensional and Wellington, all of whom have come from nowhere to take major stakes. Bernstein Investment has nearly doubled its share of the pie to 17 per cent. Walter Scott, based in Edinburgh, took 16 per cent; Alliance Capital took 15 per cent and Boston-based Wellington Management weighed in with 10 per cent. Dimensional prised a 9 per cent share of the portfolio.
In all, A$9bn was reshuffled. Why was so much money changing hands so quickly? MLC chief investment officer Chris Condon says that it was removing benchmark-hugging managers in favour of “high conviction” investment styles which focus on a smaller number of individual stocks. But that doesn’t explain the speed of change.
He says it is normal MLC protocol to make changes incrementally – this was a one-off case, he says, where “various stars aligned” prompting a wholesale revamp.
“While it looks like we made a quick decision, we are always undertaking a continuous review of our managers and talking to prospective ones. We also do a complete strategy review every couple of years, but we are not like pension fund trustees which put mandates up for tender and conduct beauty parades at a set date. It’s ongoing,”says Condon.
“As for the new managers, we’ve been meeting with Wellington and Walter Scott for years. But when we hire a manager – the first they know is when we ask them to sharpen their pencils on fee arrangements – there’s never a beauty parade, never an overt tender process.”
Mr Condon keeps on coming back to one idea – whether incoming managers can prove “competitive edge” through their high conviction stock selection and whether incumbent managers can maintain it. The same philosophy applies across all asset classes which range from global equities (the largest asset class) through to Australian equities, global and Australian fixed interest and global and Australian property.
He admits “edge” is relative and ever-changing: “We can only assess a manager’s competitive edge in the context of the set of available managers. A good manager’s competitive edge may deteriorate if better managers become available.
“This is an extremely subjective assessment, and one in which it is very dangerous to make strong statements. This is one of the reasons why we are disinclined to comment on managers we have terminated.”
Vanguard, an index manager, clearly did not fit into the new, evolved strategy, while Fidelity and Lazard were managing “traditional” active portfolios, Mr Condon says. Perhaps they were too benchmark-conscious.
“When we considered the opportunity set for high conviction portfolios, we took the view that other managers had an edge,” says Condon.
“As for Platinum, it is a fine manager, but had evolved its business strategy away from multi-manager investing.”
There was, he adds, also risk in giving one manager too high a percentage of the asset class. Capital International’s 32 per cent holding had obviously created too much manager-specific risk. Hence the change.
Mr Condon is always stressing “high conviction” strategies, so it worth asking exactly what that means.
He believes that investment managers need to discard their own business risk, the most common being managers’ obsession to produce ‘alpha’ - the returns above predetermined indices. They simply need to express their best, unfettered thinking for MLC.
Instead of a manager picking their 10 best stocks and then weighting them within portfolios according to size, they should be weighed according to how the manager truly believes each stock will perform.
“We would argue that tracking error is not the right metric for risk for investors that take a more holistic view of investment,” says Mr Condon. “ A better measure of risk is a manager’s contribution to the risk of the total diversified solution, ie the portfolio that includes all relevant assets, and indeed liabilities.”
Benchmark agnostic
“Thus, a ‘benchmark-agnostic’ manager may well have a very large tracking error measured against the relevant equity index, but could invest in such a way that they have a small, or even negative, impact on total risk.
“This assessment cannot be made in isolation - it requires knowledge of the total portfolio. Excellent equity managers understand this, and are keen to manage in a benchmark agnostic fashion provided that they have an extreme level of trust in our strategy and discipline.”
Mr Condon therefore accepts the implication that any blame for poor performance may not then lie with the underlying manager but with MLC. Risk must be considered at the multi-manager portfolio level, not manager by manager inside the portfolio: “At any one time we expect that one or two of our managers may have experienced several years of poor performance – this is what multi-manager investing is all about.”
“But they can be assured, as long as we think their competitive edge is sound, they’re going to be a long-term client.”
He expects his team of benchmark-agnostic equities managers to be less impacted by an overall bear market. They must also continue to find the best investment opportunities and be less affected by the fall in price by the stocks in the index that have the larger weights. “But they will probably underperform the broad index in a raging bull market,” he adds.
Another requirement is tax awareness. Capital gains tax (CGT) in Australia is paid at the same rate as income tax when stocks are sold within a year, but concessions are available after that period. Thus, overseas managers need to be aware that CGT is discounted by 50 per cent on stocks sold for individuals, and 33 per cent for a superannuation fund.
“A manager may say to us: ‘I’ve had this stock for 11 months and I have other stocks I want to buy’,” says Mr Condon. “We’ll be saying: ‘Hold on to it for a few more weeks and that capital gain that can be discounted on a concessional basis’. It will have a distinct effect on returns.”
While multi-managers - and pensions schemes for that matter - rarely discuss in detail why a manager was dropped, they are happy to explain their new choices. In Bernstein’s case it was their excellence as a value-oriented, bottom-up investment manager driven by quantitative fundamental research, says Mr Condon. “In the past, Bernstein would overlay its best thinking by introducing neutral stocks to provide more diversification. We asked them basically just to give us the best thinking,” he says.
Dimensional, he says, are able to construct extremely well-diversified portfolios that implement their belief that stocks with apparently low prices return a premium, on average. They also demonstrate extraordinary execution skills. “They have a strong heritage for managing money for high-net-worth individuals that give them a natural sense of tax awareness.” he says.
Absolute wealth
Walter Scott is a manager that tries to find companies that consistently grow earnings. This approach results in a very low turnover for growth-type portfolios. “They don’t care about indices and how other investors think,” says Condon. “Instead, they focus on building real absolute wealth for their clients”.
Wellington, he says have a very experienced research team. “We have been a catalyst client for their new product, and they also have an extremely well-founded research base.”
Finally, Alliance Capital developed a new product for MLC that focused its global research growth approach into a high conviction portfolio with attention to Australia’s tax regime.
Mr Condon says Alliance’s products have been built around a philosophy focusing on companies which are expected to grow either faster or for longer than the market is anticipating.
“The emphasis on stocks whose growth potential is not yet factored into its share price necessitates a price discipline that has served the process well in good times and bad. It is this price consideration which distinguishes Alliance Capital from many other growth-orientated managers,” he says.
The product, is a cutting edge version of their normal diversified global research growth process and will own no more than 40 to 60 of their ‘highest-conviction’ stocks, he says.
