Paul Kessell has been at Kinetic Super for close to eight years, and his leadership at the fund has, for the second year running, secured him a spot as a finalist for chief investment officer of the year in the Conexus Financial Superannuation Awards.
The fund has had upper-quartile returns for the past six years by utilising a “smart vanilla” approach – setting very clear objectives, investing in a universe of well-understood opportunities, having limited exposure to illiquid assets and avoiding complexity.
Kessell is modest about the success this strategy has brought, and is acutely aware that not all of his decisions will unfold the way he hopes they will.
“It’s dangerous to believe you can predict the future and set your portfolio for that,” Kessell says. “You always need to be aware whatever decision you make, no matter how certain you are, there’s always the risk it may not play out – it’s part of the cut and thrust of investing.”
He adds there’s no monopoly on knowledge.
“You can never know everything; there are always things you don’t know, and there are always things that surprise you, and that is fine. That’s the challenge we take on every day.”
It is this challenge that both motivates and excites Kessell, with the strategic aspect of the job being a particular highlight.
“Developing and setting strategy risk management and looking for better ways to manage multi-asset class portfolio. Being really clear about what the key levers are and focusing on what we can control and being careful about what we can’t control.
“That’s why I get up in the morning, to come and do that. The belief that there are better ways; that you can always try and build a better mousetrap.”
In constructing the multi-asset portfolios at the fund, one area Kessell has been very clear on is the risk profile, which he describes as being conservative. This is the point from which Kessell works backwards to construct the portfolio, as for him it’s not just about market outlooks, but the risk profile to which the portfolio is managed.
According to the annual report, Kinetic Super’s default option allocation at June 30, 2015 was: shares, 51.7 per cent (the strategic allocation range is 35% to 55%); property, 10.13 per cent (5% to 15%); alternative assets, 13.94 per cent (13% to 28%); private capital, 4.3 per cent (0% to 10%); bonds, 19.88 per cent (15% to 25%); cash and cash-like assets, 0 per cent (0% to 10%).
Within these classes there is a robust governance framework which defines the limits for the range of investments.
“We’ve defined the multi-asset class structure to marry up with that.”
While the fund is normally conservative, it has become more so over the past year.
“We’ve got an allocation to growth assets that is to the lower end of the standard 61 to 75 range. We’ve had that for probably the last four months or so, and we reduced our exposure to equities around 12 months ago.”
While the exposure to equities has decreased, the portfolio remains at strategic allocation for the asset class level, with no material dynamic allocation tilt in play.
At the manager level there has been some variation in how the portfolio is constructed, with a reduction in areas such as international equities.
“We’ve reduced our Australian dollar hedge so we are now more exposed to foreign currency than the Australian dollar. Those have probably been the two major allocation changes we’ve made in the last six months.”
While equities have been brought down, the exposure to alternatives has increased – in particular, liquid, real-return type alternatives – with the intention they will provide some diversification against equity risk in the portfolio.
“Very similar to the GFC, the diversification or the diversifying assets that have been invested in have not necessarily played out as expected. In this volatile environment over the last six months or so the liquid alterative exposure has had fairly high correlation to what is happening in the market, because they have similar characteristics.”
Looking ahead to a range of diverging investment outcomes, Kessell predicts that some asset classes, like unlisted, will trail what is happening in the listed markets because they are only valued infrequently, but ultimately they will move in the same direction as the listed market.
“Sometimes you have to batten down the hatches and expect that returns won’t be what they have been historically,” Kessell says.
Switching metaphors, he adds: “When you are five for not-much you need to keep your head down and play every ball on its merits, get the singles where you can, take the occasional four and if you do that you’ll be there to stumps. You may not have got a high score, but you are still there, which is the important thing”.
Fees
Aside from risk profile, another priority for the fund is fees. Its allocation to passive is “very high”. Domestic equities is 50 per cent, international equities is 50 per cent, there’s also a passive exposure to bonds at about 25 per cent.
Part of the reason for Kessell favouring passive is the complexity involved in picking an active manager. According to Kessell, there is this intuitive belief or expectation that there are active managers out there that are skilled in producing alpha.
“We ascribe skill to those who have outperformed without understanding why they did outperform, and whether it’s consistent, whether it’s repeatable.”
As in most industries there can only be so many people that are highly skilled. And in the case of fund managers only a few will have the innate ability to pick stocks in a way no-one else can, to see things, identify things, and analyse things in a way no-one else can.
“There will always be fund managers that outperform, but whether that is apparent on the 1st of January is another matter entirely. The issue is whether you could identify them at the beginning of the year, and I don’t think you could. That’s part of the issue.”
All Kinetic Super’s assets are invested in core unit trusts, with the fund unsurprisingly seeking the lowest fee, and periodically going back to renegotiate. The fund is also prepared to forgo a mandate if the fees are too high and don’t fit with what it is trying to achieve.
“One argument is it’s not the fees but the return that’s important,” says Kessell.
“However, we take the view the only guarantee is the fee. There is no guarantee around the performance, so we need to focus on what we can control, which is the fee.”
Trends
While Kessell is similar to many in the industry in wanting to see fees fall, he takes a different view to the range of products which have come about since the GFC, including life-cycle and direct investment options.
He has made the conscious decision not to go down that path as he believes the demand for the products probably hasn’t met the expectation of the funds which developed and offered them to the market.
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Another trend which he does not see Kinetic Super taking part in, at least for the medium term, is the insourcing of investment operations.
“Really that is due to governance and compliance cost of doing so. We don’t have enough assets to do that and we can get the outcomes we want by outsourcing.”
On the subject of funds under management growing and adding to chief investment officer tasks, Kessell sees leadership and team-management skills becoming more important to the role of a chief investment officer.
“But ultimately the one thing that hasn’t changed is the skill set you need to manage a multi-asset class portfolio to deliver on specific investment outcomes. The objectives of the role will never change.”
The winners of the Conexus Financial Superannuation Awards 2016 will be unveiled at a special black tie event at Palladium at Crown, Melbourne, on March 3, 2016, which is being sponsored by AIA and Vanguard. You can purchase tables of ten or single tickets by clicking here.
Conexus Financial has drawn on its extensive contacts and resources to involve an esteemed list if VIPs to present the awards and further honour the important contribution the superannuation sector makes to Australian society and the economy.
