The emulation mandate which Vanguard Investments manages across some of MLC’s Australian equity portfolio frees the multimanager from the need to always hire a manager to replace one it may fire, MLC chief investment officer Chris Condon told last month’s 2008 Investment Administration Conference.
For the last three years, MLC has taken buy-and-sell instructions from some of its nine Australian equities managers and supplied them to Vanguard, which implements the trades and claims it is able to do so in a lower-turnover, tax-optimised fashion.
Condon said that MLC policy was to not allow its mandates to represent any more than 20 per cent of a manager’s total funds under management, which presented a problem in the past when it identified quality start-up firms. “Now we are able to bring emerging managers into the emulation portfolio at full weight, and then fund up their physical weighting as capacity becomes available,” Condon said.
The emulation portfolio had helped MLC maintain a nine-manager configuration for its $15 billion Australian equities portfolio, even though the firm’s “ideal” mandate size is only $1 billion (given its ‘20 per cent of FUM’ policy and belief that Australian equities managers start to experience detrimental market impact above $5 billion under management). “Obviously we don’t have 15 managers and emulation has allowed us to do that…rather than chewing up their capacity, the managers receive from us a revenue stream for their intellectual property which is outside their physical funds under management. It’s a win for them and it’s a win for us, because Vanguard’s optimised approach has produced turnover of around 15 per cent annually in the emulation portfolio against 30 or 40 per cent in our active physical portfolios,” Condon said.
The flexibility provided by the emulation portfolio freed MLC portfolio managers from the need to search for a new Australian equities manager each time one was terminated, Condon said. “You don’t need to go out and hire whatever’s there immediately…the emulation portfolio takes up the terminated manager’s slack.”
He added that the arrangement meant MLC’s Australian equities managers received less cash flows (“which they hate”), with the flows instead directed to Vanguard. “And Vanguard loves cash flows because they allow it to rebalance portfolio,” Condon told the conference.