A $2.34-billion fund with only three investment professionals should be run with a strict focus on maximising where you can make a difference and keeping it simple and standard where you cannot. This means deriving most returns from smart asset allocation rather than stock or manager selection, and it means placing a large slug of assets in a low-fee, sit-and-hold passive equity allocation with Vanguard. It also means accepting that you are not going to be first on the block with new investment classes, according to Paul Kessell.
He describes his fund in modest and measured tones – “We run a fairly vanilla investment palette” – but tell him that his fund is not a pioneer and he is heated in its defence.
“One thing we are clear about is that complexity does not mean sophistication. Just because you go out there and explore, and you look at smart beta and low volatility and whatever is the current fad does not mean you are going to have a better outcome.
“We might have a traditional vanilla portfolio, but it is clearly designed to achieve the objectives we have set. We do not need to have complexity. We do not need to have black box-like strategies that maybe no one else has got, because that might seem more sophisticated.”
He cites the fund’s international research on sovereign wealth funds and defined benefit fund best practice as proof of these lofty aims. This taps into his previous experience of four years in London working as an investment manager for the pension fund of supermarket Sainsbury’s and for the London Pensions Fund Authority.
The fund has also notched up a first in adopting the UBS Global Risk System, which provides a monthly report measuring the various risk exposures of the portfolio. This informs Kessell and his team of the implications of any active positions it holds and if their intuitive understanding of the portfolio is correct.
“If we have a certain macroeconomic outlook, we feed that back through our risk profile to see how it plays out and which managers should do better in that environment,” he says. “Excess cash flows are allocated to each asset class depending on what our view of the world is. If a manager has a high allocation to resources or to banks, depending on our view we will allocate to the manager to get the best out of that decision.”
He believes this process is just as important, if not more important than individual investment opportunities.
“It is one area we have taken a lead in. It is not looking at one investment opportunity one after another, but at how we allocate our resources.”
The approach makes sense given how investors’ confidence in market norms has been torn up since 2008 and it tunes into Kessell’s idea of how much a small investment team can control its portfolio.
“We cannot control how investment markets play themselves out, but we can control our strategic allocation and our long-term strategy. A lot of funds will take a lot of time looking at managers, multiple meetings, but we take the view that ultimately whether you pick manager A or B it is not going to be a huge driver of performance, it is going to be the allocation to the asset class that is key.
“So we try to find a better idea of what are the areas that we can compete well in, both against our peer group, but also against increasing the likelihood of achieving the investment objective we have set for ourselves.”
The structure of the investment team is built to make this successful. All three members focus on the overall portfolio and in understanding the full implications of any decisions on it. Furthermore, the team members have some delegated power to act as they see fit. “The board has delegated me to select managers and deselect them, so we can make our decisions quite quickly and that is very important. It is not just identifying the opportunities but getting into the market and getting into the portfolio to get the advantage of it.”
Kessell’s theories are testament to 14 years spent in institutional investment, the last five at Kinetic, with four years in London and five years at ESS-Super.
“I intrinsically enjoy the work of managing the portfolio and getting the best outcomes we can,” he says. “I am very conscious that we are managing other people’s money. Being responsible for the investments and the outcomes allows me the opportunity to create the strategy and the vision, and the opportunity to deliver on that, which appeals to me.”
One of Kinetic Super’s key objectives is to manage the down side, placing the fund among the more conservative of its peer group. “The profile is consistent with the risk profile of the organisation,” says Kessell. “We have to trust the managers that they will run the money in the way they said they would.” There is no hedge fund exposure – “We are conscious of ensuring we understand what we invest” – but there is a 10-to-15 per cent allocation to unitised alternatives funds. This includes dynamic asset allocation funds, which occasionally take long-short positions, high yield bonds and a money market fund. Liquidity is favoured to help keep assets manoeuvrable while a low-fee focus counts against infrastructure and private equity investments.
A low-fee approach to choosing assets is also important to Kinetic’s approach to returns, which has seen it achieve topquartile performance for industry funds. Kessell says his fees are at the “bottom end” of the industry superannuation group, much helped by its high allocation to Vanguard. The fund manager’s fees are famously competitive, but he will not be drawn on their generosity, stating only that “we are comfortable with the arrangement we have with them”.
With this focus on asset allocation at a low price, one might form the impression that Kessell is not terrifically interested in his fund managers, especially when he says: “We understand what our investment objective is, then we find a manager who can deliver the objective for that part of the portfolio, rather than choosing managers because they seem good.”
Indeed, this decision not to agonise over manager performance has led to only one change in domestic equity manager and one international equity manager in five years. And when asked what he is planning to change in the portfolio, Kessell picks currency overlay, which has until now worked well for the fund.
“Up until recently (the interview took place in June), we had a higher than average hedging level for our international equities and that worked in our favour. But as the Australian dollar went up, it worked against us, so we have been considering lowering that.”
Kessell’s theme of not stepping outside one’s capabilities by over-engineering the investment process very much applies to Kinetic’s MySuper offering. The fund is to continue with its core default offering of 50 per cent equities, plus property, alternatives and fixed income. He says lifestyling was not appropriate for its member profile, not least because the average balances for its 350,000 members are below $10,000 and it is unlikely to take in the full mix of assets a member holds. Kessell is a believer in the importance of holistic financial advice before changing investment options.
“My personal view of the role of a superannuation fund is to get the best outcome it can from each account with us. It is not the super fund’s role to be the sole provider of adequacy in retirement for each and every member. That is the member’s responsibility and one way of doing this is to pool their superannuation. They have to understand what adequacy means to them and how they go about trying to achieve that.”