AustralianSuper is likely to have 20 people on its in-house global equities and Aussie large and small caps teams by next year as the fund grows towards $150 billion, with a further 10 looking after external manager portfolios and strategy. Innes McKeand, head of equities, believes the implementation of this strategy will save $150 million in costs a year by 2018. Investment Magazine reports on how a man from Scotland is laying the foundations of this vision at AustralianSuper.
AustralianSuper’s in-house domestic large cap equities team is already up, running and making significant gross and net returns, as well as lowering the fund’s costs, says Innes McKeand, head of equities at AustralianSuper.
The seven man large cap team has already been managing money for the best part of two years and is built around portfolio manager Shaun Manuell. Keen to build on this success, McKeand recently appointed three people to run a domestic small-caps portfolio – George Batsakis and Jackie Thai, both ex-Goldman Sachs, and Luke Smith from Canaccord Genuity – and is in the process of starting a global equities team.
“We’ve demonstrated that we can successfully execute scaled portfolios and we’ve set ourselves some pretty ambitious targets to bring money in-house,” McKeand says. “They are ambitious because the whole fund is growing rapidly and we’ve been able to execute successfully, not just in equities but also elsewhere. There’s a big program of change going on across the whole of the investment team and we will hopefully get global equities up and running soon.”
Three years ago the fund didn’t run any equities in-house. This blank canvas provided McKeand with a unique opportunity to build it right and not just drive ahead. Even though many at the fund’s senior level had experience with equities from other organisations, it was the first time the institution had operated in this territory.
In line with the investment committee’s objective to have a ‘one portfolio strategy’, McKeand is building a single integrated team across equities. To this end he is making sure peoples’ incentives are aligned around the performance of the balanced plan as well as their own portfolios, so they keep an eye to the overall fund outcomes, rather than just their small part.
“We’ve got some advantages of thinking of ourselves as one fund,” McKeand says. “We don’t want to build silos, we want to build processes that are team-based upon real fundamental insight. It’s not about micro-managing one particular portfolio; it’s looking at the overall outcome for members.”
An advantage of the one fund approach is if a stock outgrows the small cap portfolio it can be passed straight into large cap portfolio and doesn’t have to be sold. If an external manager ran the stock, AustralianSuper would probably end up selling it and crystallising capital gains tax.
McKeand says there will be a standard global equities mandate, like there is for the Aussie equities large-cap team, with the investment philosophy being to buy good quality companies at a discount to intrinsic value, based upon proper fundamental analysis.
“That’s a way of saying do the basics right, but there will be other opportunities across different parts of the equities team and across asset classes which we might look at.”
According to McKeand, hiring the Aussie equities team was relatively easy; however, when he went to hire to the global equities team it was a challenge as there were few institutions in the country with global equities experience. As a result, he has been leveraging his links with the UK and other offshore locations to provide a decent cohort of candidates, which will inevitably lead to the team being a combination of domestic and international hires.
“As we are bringing people in from the other side of the world we can’t be specific on exactly when they will be able to arrive, but we will have the core of a pretty strong team that we will be able to start deploying by the end of the year,” he says.
One thing he knew at the outset was that an internal equities mandate would give valuable insight into the market. This has already been put to use in a couple of large direct transactions, following the one fund strategy.
One such instance was a joint venture with the fund’s infrastructure team to buy a stake in a Queensland motorway last year. McKeand’s team helped consortium partner Transurban in the equity fund raising, showing the fund offers sophisticated capability across the different asset classes.
“We can write big cheques and invest for the long term and we are engaging with corporates regularly on this agenda. We think we’ve got a lot to offer as a long-term investing institution, across the asset classes. It’s not just equities, it could be infrastructure, it could be credit; the infrastructure team have been busy doing deals and the property team have been busy doing deals internationally.”
For McKeand, another advantage of an inhouse team is scalability, as the same team can run multiples of what they currently manage, so large portfolios can be run internally at low cost.
“Global equities will be the same as we don’t have to hire a gazillion people,” he says.
But McKeand was keen to reassure the fund’s external equity managers they were not stealing IP, as information barriers were in place stopping the internal teams from seeing what the external managers hold.
That was a conscious decision for two reasons: to reassure the external managers, and to get the internal team to figure it out for themselves.
“We want them to build up the best quality process that they can and it means I don’t want them to be looking over their shoulder to see what Perpetual are doing or what Fidelity are doing. You want to build your own insight, and that is absolutely critical,” McKeand said.