Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Founders bow out in style at SuperRatings and Lonsec
by Greg Bright
Jeff Bresnahan and Jason Clarke, the two founders of SuperRatings in 2002, have sold their combined stake of 37 per cent in the holding company Lonsec Holdings, of which Bresnahan is still chairman and Clarke still a director. Bresnahan, who holds the largest individual stake in the group, plans to semi-retire. Clarke had already given up executive responsibilities to pursue other interests, predominately as chief executive at Methodic, a fintech for global share trading.
Bresnahan and Clarke launched SuperRatings, now the institutional side of Lonsec Holdings, with $200,000 in loan capital provided by Bresnahan and Brian Delaney, an industry identity, who is himself retiring from a senior role at QIC in December. They launched Australia’s first benchmarking service for super funds, first ratings and first super fund performance charts. Warren Chant, who started his consulting and tender business in 1997, and Rainmaker Information, known mainly for its industry database, followed soon after. Chant West and SuperRatings went head-to-head but the three companies learned how to co-exist by emphasising different market segments and with slightly different business models.
Bresnahan said: “At the time, the commercial and non-super part of the industry had a lot of competition among research firms providing performance numbers and ratings. There was Lonsec, S&P, Assirt, Morningstar and others. That sector had about $600 billion. The super sector had about $500 billion and yet had no-one doing ratings or performance charts. It was a time when super was never questioned, just accepted. SuperRatings changed that landscape. We put the industry into mainstream media and we made funds uncomfortable by publicly questioning their efficiency. I think that’s what we’re most proud of.”
While Bresnahan was always the public face of SuperRatings and chair of the holding company, Clarke was a key driver in the takeover of retail ratings agency Lonsec in 2011. Clarke also became chief executive of Lonsec, while overseeing the increasingly important technological developments required by the two entities. The share registry expanded with the Lonsec deal, including attracting the interest of private investor Mark Carnegie and, ultimately, other investors such as director Ian Knox, the founder of Paragem, which he and partner Charlie Haynes sold to Hub 24. Haynes is the current chief executive of Lonsec Holdings.
If all that sounds a bit complicated, the chairman of the new substantial shareholder in the company, Generation Development Group (GDG), has his own long history in the industry, as a former head of BT Funds Management and then Westpac’s general manager in charge of the big retail banking business – Rob Coombe. GDG is entitled to one board seat on completion of the transaction, aimed for mid-October.
According to an ASX filing last week (September 17) GDG will pay $20.1 million in cash for Bresnahan’s and Clarke’s 37 per cent stake, plus an additional amount of up to $6.6 million worth of GDG shares, depending on an earn-out agreement. The deal values the whole of Lonsec Holdings at around $80 million. GDG said it was aiming to raise $35 million immediately after the notice, with up to $10 million to be used for product development in annuities and the rest for working capital. The Lonsec share deal, though, is contingent on the success of the raising, of which about two-thirds is fully underwritten. The raising result is expected today (September 21).
Coombe said in the ASX release: “Lonsec is well known and respected in the financial services sector, with its clients comprising a significant proportion of Australia’s leading fund managers, superannuation funds, advisory groups and wealth platforms… We believe that Lonsec is well positioned for future growth, supported by strong industry and regulatory tailwinds and will provide access to resilient recurring revenue streams from its core research offering. The Lonsec investment is expected to be immediately accretive to our earnings.”
GDG is a provider of insurance or investment bonds, which were popular in the 1980s and have in recent years made something of a comeback because of the cap on super contributions. The bonds represent the second-most tax effective investment which is generally available, after super, and have a few quirks such as confidentiality in the distribution of the proceeds from an estate. Its expansion in the annuities field could provide some further synergies with both the Lonsec and SuperRatings businesses.
Bresnahan had made no secret of wanting to reduce his workload, gradually achieving the goal since Haynes was appointed chief executive in late 2018. But the first many staff heard of any sale was through an incorrect report in the Australian Financial Review, coinciding with a voluntary trading halt by GDG on the day of the formal announcement. The newspaper misinterpreted the news as a full takeover, causing some initial anxiety among staff. The report was corrected online.
The negotiations over the deal commenced well before COVID struck in March, following an indirect introduction from Coombe to Bresnahan and Clarke, organised by Ian Knox. Knox and Coombes are old friends. One of their more memorable times together was in the morning of September 11, 2001 when they shared a taxi in Manhattan and headed for their first meeting of the day, at the World Trade Centre, moments before it was hit by the hijacked planes. A large group of Australians from the industry was in New York for a series of organised meetings.
After Westpac, Coombe’s career took a major turn. He accepted the role of chief executive, in 2011, and then chairman, from 2017-2019, of Craveable Brands, which operates in the fast-food sector with the Red Rooster, Oporto and Chicken Treat chains. This earned him, for a time, the nickname of “Chook Coombe” among friends back in the finance world. Coombe is the chair of several organisations apart from GDG, including MLC, to which he was appointed independent chair in June.
On the early years, Bresnahan said: “About three years in we were still treading water so we decided to double down in 2005, by doubling our staff, from five to 10, within a couple of months, without any extra revenue. Some of the staff even had to share a desk before we found new premises. Their gamble worked. Revenue subsequently doubling in the same year. Jason and I spent a lot of time on the road talking to funds.”
In their first year, though, the pair knew that they needed a prominent fund to take up the offering, which was the benchmarking service, thinking there would likely be a domino effect. They had had a lot of polite knockbacks until they met with the late Paul Costello in November of 2002, then the chief executive of STA, later to merger with ARF to become AustralianSuper. “He said ‘yes’ to the concept straightaway,” Bresnahan says. MTAA, Aon,, ARF (now part of AustralianSuper), Colonial First State, HostPlus HESTA and CARE were just some of the funds that quickly followed.” Costello went on to become the first chief executive of NZ Super and then the Future Fund, both organisations which are strong on governance and accountability which benchmarking helps.
The Fund of the Year awards, first held in 2003, also represented an industry first. “There were lots of awards for fund managers, but no-one had ever done one in super land,” Bresnahan says. The first few annual awards dinners were held to coincide with an ASFA conference, to make it easier for delegates to attend. The very first one was held at Mount Cootha near Brisbane where the ASFA conference was to be held the following day. “We bussed people out there. We had no idea how many people would attend, but we got about 90 and it was a great success,” he says.
The Day of Confrontation one-day conference had an interesting genesis. Pauline Vamos, then chief executive of ASFA, told Bresnahan that her board wanted to ask him to stop piggy-backing their conference with his dinner, which they thought was unfair. But he and Clarke were concerned that potential attendees would not travel to another city just for a dinner, especially a black-tie event. They needed a further attraction, such as a conference of their own. But there were already several big industry conferences – CMSF and ASFA being the main ones – so, SuperRatings decided to put on a different show, getting speakers from outside the industry to talk about a broad range of topics. The Day of Confrontation ran for 10 years, until 2018. In a business sense it had become more a labour of love, organised by Jason’s wife Melinda, who tragically passed away this year after a long illness. The awards night, now regularly attracting 400-500 people, combined with Lonsec awards, was able to stand on its own two feet.
Bresnahan, in particular, was outspoken on all aspects of the super industry. He worked hard at getting press coverage for SuperRatings and in the early days was pretty much the first port of call for TV, radio and print journalists. He even had regular spots on Sky Business News. Sky was well-known as a thrifty organisation, to put it kindly, and did not provide a hair and makeup service for their interviewees. Jeff carried his own around in his brief case in case he got a call from Sky wanting a comment on a super event.
One subject which got under his skin was the way big super funds screwed down on the prices charged by their administrators, even the industry fund-owned SuperPartners. He told the industry it needed to invest more in technology and if funds wanted to cut costs they should be wary about doing so with administration because that was the most important contact point for members. Lack of funding, followed by a disastrous attempt to catch-up with the market technologically, led to SuperPartners being sold to competitor Link Group.
Bresnahan also questions some mergers. His preferred model of the industry is a bar-bell structure, with a handful of very large funds at one end and a lot of smaller funds – “say, $10 billion today” – at the other. The smaller funds must have a demographic or geographic advantage. “The belief that mergers necessarily create scale advantages is false,” Bresnahan says. “It has never been proven.”
It should be noted that Clarke will retain a tiny piece of SuperRatings history in his own portfolio of interests. It is a company he and Bresnahan set up in Hong Kong, MPF Ratings Ltd, to provide ratings for the Hong Kong MPF schemes, of which there are 38, accounting for 457 funds in Hong Kong’s compulsory savings system. The company is now fully owned by Clarke and a friend, but does not occupy much of his time.
In the same way that it was difficult to imagine Chant West without Warren Chant and Andrea West, who retired from full-time work in 2018, so it is difficult to imagine SuperRatings without Jeff Bresnahan and Jason Clarke. But, as with Chant West, SuperRatings will go on. Bresnahan believes Lonsec is in great shape and has a lot of confidence in the leadership and its 130-or-so employees. “It’s simply time to stand aside and let the next wave of staff step up and make their own mark on the business,” he said.
