Paul Kessell is the first of five finalist in the chief investment officer of the year category that Investment Magazine will be profiling in the lead up to the Conexus Financial Superannuation Awards 2015. The winner is due to be announced on the awards evening at the Ivy Ballroom, Sydney, May 20.
Kessell has 20 years of experience in the Australian and UK institutional investment markets and has been the chief investment officer of Kinetic Super for seven years, during which time the fund has grown from $1.1 billion to $3 billion, and recorded some of the best returns for MySuper (Growth) option in the superannuation industry over one and five year periods.
The investment strategy has been described as ‘smart vanilla’ – setting very clear objectives, investing in a universe of opportunities his team extensively understands, having limited exposure to illiquid assets and avoiding complexity.
“It’s not about trying to be different or innovative for the sake of it. It’s about doing what we do really well. We are very conscious of ensuring the portfolio is only invested across the spectrum of investments that we are comfortable investing in,” Kessell said.
He is the first chief investment officer that Kinetic Super has employed and started in June 2008 after he moved back from London, where he spent four years working with UK pension funds.
“My role initially was to go back to basics, asking: what’s the long-term investment objective the board wants to achieve for its members and what’s the level of risk it’s prepared to take?” Kessell explained. “And then, we had to determine what universe of investments we were comfortable investing in or not to deliver on that outcome, and restructure the portfolio accordingly.”
Prior to Kessell joining the fund, Kinetic Super had successfully completed two industry fund mergers, one in 2006 and the other in 2007, resulting in it being responsible for the management of three different divisions, each with different investment strategies, fee structures and member options.
“We decided that the best approach to delivering improved outcomes for all of our members was to pool all the assets from the three divisions into one set of investment strategies across a focused range of investment options. The investment strategies were to be predominately liquid, straightforward and low-cost, so we didn’t have – and still don’t have – much exposure to illiquid assets, or in fact, any kind of complex strategy, nor anything that’s high cost.”
“One of the important things is that we have achieved our success with limited internal resources. If we have a clear objective of what we are trying to do, and a clear understanding of where we are looking to invest, we can structure a portfolio that is robust and consistent, that has low fees and delivers on the returns that we are looking for, whilst also being able to compete very well against our peer group.”
Kessell says he limits the number of investment decisions made over a year, including not changing the portfolio or the managers very often, and that he only makes dynamic allocation decisions occasionally.
“We are making a limited number of decisions so we can focus and get them right, and ensure they have had sufficient time to play out to fully achieve the benefits sought,” he said.
He adds that this investment approach has given the fund strength to say “no, we’re not going to do that” to certain strategies that may be “fads”. For example, he remains unconvinced that active management has proved itself over the long-term, leading Kinetic Super to have a high allocation to index funds across both domestic and international equities and bonds.
Looking forward
Kessell has reached an inflexion point with the fund’s investment strategy where he is comfortable with how it is currently structured and affording him the opportunity to take a step back and re-examine where he wants to take it next, mindful of only making incremental steps that will enhance the ability of the fund to deliver on its ‘promise’ to members.
Kessell said: “We are asking what do we want to do with the portfolio moving forward. Are we happy where it is and how it’s structured and how it’s operating? Are there changes or tweaks we want to make to it without compromising its integrity and the successful formula we’ve developed?”
“The investment markets are dynamic and things do change over time. There are new products out there, and we need to ensure that we are not then taking our foot off the pedal, and making sure the portfolio continues to reflect our view of the macroeconomic environment.”
To answer his own questions, Kessell is taking a top-down perspective and prioritising those decisions that have the largest impact because he believes that the key to Kinetic Super’s future success does not lie with having too many levers in the portfolio that influence the investment outcome. It is preferable to have a finite number where the factors that drive those levers are well understood.
“We know that no matter what we do, and the decisions we make, ultimately there will be one or two major moves that will drive success or failure, for example, the falling Aussie dollar over the course of this financial year.”
“If you got that one right, every other decision you’ve made essentially becomes immaterial because it has been such a significant move. So if you managed to be successful in picking that then you’re at the top, and if you didn’t do that you are somewhere further down in the ruck.”
Learnings from the UK
Kessell worked for two defined benefit (DB) pension funds in the UK from 2004 to 2008. One was with a corporate fund, Sainsbury’s (the second largest supermarket chain in the UK), and one was a local council fund, the London Pensions Fund Authority.
Despite both being very different in terms of their structure Kessell has taken lessons from them that he still applies today. One of the key takeaways comes from the fact DB funds have a very clear focus on their liabilities.
“When I ran the investments at Sainsbury’s pension fund we had a single sponsor, Sainsbury’s, and the chief financial officer was actively involved in how the pension fund’s liabilities were managed as it affected the balance sheet.”
“It was about the business strategy of how you try to manage the liabilities, whereas in Australia it’s really just the investment strategy without any sense of a liabilities perspective. However, that is now changing with members being educated around having a retirement goal, effectively their own liability to be matched by their superannuation balance.”
“I now look at the investment strategy in terms of what outcome we are trying to achieve for our members in the longer term to help them achieve their retirement goal”.
Kessell added that domestic chief investment officers tend to look at things from the Australian dollar perspective focusing on Asia quite closely, while in the UK it is Europe that is the primary focus with a sterling perspective, making the starting point very different from what it is here.
“You learn that Australia isn’t the centre of the world, that not everything revolves around what we do here – what we do here is important to the extent that we are working in it – but when you are working in the UK, in London, it’s a global city, a global financial centre and there’s a lot happening there. You get a broader palette to operate from and you do see things from a different perspective of how the world operates.”
Experience:
Chief investment officer at Kinetic Super – 7 years
Pensions investment controller at Sainsbury’s (UK) – 1 year
Investment manager at the London Pensions Fund Authority (UK) – 3 years
Investment manager at ESSSuper – 5 years
Education:
Chartered financial analyst charterholder from the CFA Institute
Master of applied finance from the University of Melbourne
Bachelor of economics from Monash University
Awards:
Super investment professional award for excellence at the AIST Awards 2014
Award Nominations:
Chief investment officer of the year finalist, Conexus Financial Superannuation Awards 2015
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