Many a fund manager would like to know what goes on inside Innes McKeand’s head. After all, the $60 billion equities portfolio he oversees is the largest allocation in the country.
With $120 billion in assets, AustralianSuper is the nation’s largest industry fund, and the fastest growing, and the fund’s default option, in which 80 per cent of members’ assets are invested, has an exposure to listed equities of about 55 per cent.
As head of equities McKeand is responsible for the equity portfolio, of which 26 per cent is invested in Australian shares and 29 per cent in international shares. He runs the portfolio with an unwavering belief in active management and employs around 30 external managers including an in-house team of 40 – all focused on concentrated portfolios.
“An overweight position, compared to other funds in Australia, reflects our positive view on equities,” McKeand says from the fund’s headquarters in Melbourne. “The macro economic environment is supportive and the global economy is growing well.”
AustralianSuper’s foray into building an in-house team began four years ago and today around 40 per cent of Australian equity holdings and 10 per cent of international equities are managed internally. The aim is to have 50 per cent of total assets run in-house by 2022 and the fund is about half way there.
Despite the hype around the internalisation of investments, McKeand concedes the inhouse team will not do everything and external managers still play an important role in managing the fund’s assets.
“There are limits to our ability to do everything and there will always be managers with greater insight who can do it better,” McKeand says.
The in-house teams run Australian large caps and small caps, and two new international strategies launched in 2016: a fundamental strategy – run by Christine Montgomery, whose previous experience includes managing money at Fidelity, Franklin Templeton and Martin Currie – and an internal quantitative strategy, headed by Jonathan Tay, that uses machine learning techniques.
“This is a natural area for us to focus on because of the scaleability,” McKeand says, adding that more time and money will be spent on technology to support the data-driven strategy.
The in-house team, he says, has a collaborative culture and the local and international teams lean on each other.
“They’re all looking for good quality companies with intrinsic value and scaleable mandates,” he says.
Local clout, global reach
Across the entire domestic equities portfolio, AustralianSuper holds around 370 local stocks. Commonwealth Bank is the biggest position, followed by the rest of the big four banks, BHP Billiton, Telstra and Wesfarmers.
The fund engages directly with every local company it invests in across environmental, social, governance (ESG) and other issues.
“We can influence the share price so they listen,” McKeand says. “We say, ‘We’ll engage with you in a thoughtful way’, and now we’re among early phone calls if there’s a capital raising going on.”
Being known as a “shareholder of choice” is a big advantage in the local market, but capacity constraints mean it is inevitable that the relative allocation to global equities will continue to rise.
At the time of writing, a $15 million stake in internet retailer Amazon is the largest holding in the global equities portfolio. Other large holdings are Tencent, Visa, Microsoft, Baidu, Accenture, Facebook, Time Warner and Oracle.
Due to the need to ensure outperforming managers have a chance to move the dial on the total portfolio, the average international equities mandate is $3 billion.
“We do recognise these are large amounts of money and our operational due diligence on managers is a lot more than it used to be,” McKeand says. “We’re paying hundreds of millions of dollars in fees, so we want an active result.”
He looks for managers with concentrated portfolios and differentiated approaches underpinned by strong research.
“We also tend to prefer managers with skin in the game who own or control their own business and tend not to like managers that are, for example, owned by a large bank or insurance company.”
He argues that one of the key advantages his in-house teams have is that they face less agency risk and feel empowered to take a longer-term view which is aligned with members’ best interests.
But to a large extent, the move to in-source investment management is being driven by a desire to lower costs.
The internal team has outperformed the external managers over the past three years, and also delivered lower costs to members.
“If we could get an equivalent strategy at the equivalent cost externally then we would consider it. In the long run we’ll run internal at a quarter of the cost of external,” he says.
The whole AustralianSuper portfolio, including internal and external mandates, costs 57 basis points to run. Asset class heads have budgets in outperformance, costs and illiquidity buckets.
China the biggest risk
On the day of our interview, McKeand had just arrived back from an Asian advisory committee meeting, which the fund holds four times a year in a revolving list of major Asian cities.
“We spend a lot of time talking about China,” he says. “We think China is the biggest risk in the global economy, not the US. The risks are building there; we’re more cautious than we once were.”
The recent inclusion of China A-shares in the MSCI indexes is interesting, he says, but is not having much impact on the portfolio strategy.
“The quality you can get access to is variable among Chinese companies – we don’t want to invest in low quality companies just because they’re in an index,” he says.
AustralianSuper also has a small office in London, where its London property manager is based. McKeand expects the fund to have offices in most major financial centres within 10 years.
McKeand has been in charge of equities at AustralianSuper since 2011. Before that he was based in the UK in such roles as chief investment officer at AIB Investment Managers and head of investments at the Nestle UK Pension Trust.
He says there is still much to keep him interested and challenged. “We’re still growing and there’s so much more to do,” he says. “We’ll be building the internal framework for a long time.”
This includes building out the quantitative investment strategy and implementing factor-based analysis as a tool for better understanding the portfolio.
“We’re at a significant stage of evolution,” he says. “This is still effectively a greenfield. We can do a lot of things you wouldn’t get to do in other funds.”
Innes McKeand will participate in a panel discussion at the upcoming Investment Magazine Equities Conference, to be held in Melbourne September 12. For more information about the conference please visit the event website or contact Emma Brodie via emma.brodie@conexusfinancial.com.au or +61 2 9227 5708.
