Tim Dunbar: Has that changed? Have clients gotten more sophisticated in looking at longer term returns and having patience with those kinds of managers?

Kristian Fok: Everyone’s sophisticated when it’s working! The trick is to be very clear about how and why a manager gets put into the portfolio. On the international front, you’ve actually had this flipping of value and growth over the last little bit of time and it’s actually been quite good because you can go back to the last year’s report and say, “Well, these were the worst performing managers and this year, they’re the best performing.” So on the international front you’ve been able to sort of manage the risk of a knee-jerk reaction to a period of negative returns, on the Australian front, that’s been a bit different because up until recently there was more of a growth favour.

Russell Clarke: It’s a very difficult thing to go to any sort of fiduciary and say, “Hey they’re our best performing manager and we think they should be fired.” Unless they’ve actually got a clear breach of risk.

Richard Dalidowicz: Depending on your cashflows you might be able to call it ‘aggressive rebalancing’.

Kristian Fok: What seems to work reasonably well for us is you get your trustees to think about the investment environment separately from the manager: what do you think’s going to happen? Where do you think the risks are? And then you get the manager in to state what their view is and why – and then you can really say, “Look , they’re fundamentally different to the way that you think the environment’s going to pan out. Do you want to continue with such a large allocation?”

Steven Carew: You’ve got to be constantly evaluating managers as to the reason why you appointed them in the first place and we’ve recommended, sometimes successfully, termination of outperforming managers because at the end of the day your manager has to be following its stated investment process and style, have the capable people to execute that, have all the organisational factors, remuneration structure, the situation with the parent, all those sort of factors come into account and usually when we advise a termination of a manager it’s because there’s something wrong on the organisation or the qualitative side, it’s not to do with the fact that style has drifted or the fact that we’re taking a big punt that value’s going to out-perform next year. Fortunately, clients like AustralianSuper have hundreds of millions of dollars going in the door every year, which does allow you to rebalance a portfolio with cash flows and so you think, well, value looks expensive, I’m not going to get rid of all my value but I’m going to focus more on growth or emerging markets or just ‘cheap’ or whatever it is and so, to us, whether a manager’s out- or underperforming is not really the question. It is, are they doing the job that you put them in there to do? Do they have the capability to continue to do what you put them there for in the first place.

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