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How fundies deal with scale (and ‘rockstar’ managers)

Scale is a double-edged sword but fund managers with the right model can make it work. And while other super funds are internalising as fast as they can, Aware Super will never completely abandon outsourced management.

Key person risk boils down to “a kind of arrogance”, according to Ian Macoun, founder and managing director of Pinnacle, and the multi-boutique house has made an effort to select against it when considering prospective new affiliates.

“We designed this (multi-boutique model) to overcome the flaws we saw in the main players in the industry,” Ian Macoun, founder and managing director of Pinnacle, told Morningstar’s Investment Conference on Wednesday. “This rockstar culture thing has been a problem for a very long time and we said right from the beginning that we weren’t going to have that. We have key people – every funds management business has key people; you need leadership and so on.”

“But we only partner with people who operate in a team-like way; we spend a lot of time with them before we partner with them. We want to know what their character is, how they think, what their ambition is, how they’re going to run their business.”

While size is typically the death of equity strategies, the same isn’t true of the multi-boutique model that supports them, where it’s been a benefit to both distribution capabilities and fund structure. Macoun calls it “the best of both worlds”.

“You can have a boutique environment for investing, focus on alpha and scale can be your enemy,” Macoun said. “We make sure our boutiques don’t ever exceed their capacity – it has to be very clear how much money they can run in this particular strategy and this particular asset class without prejudicing alpha. It’s a huge issue – we can scale our overall company but we keep each individual strategy to the size it ought to be.”

But the propensity to push on price or capacity is higher if managers have fewer options for future growth, Perpetual boss Rob Adams told the same conference, and scale has allowed the manager to regularly reprice its legacy book of business downwards.

“Market forces are pretty powerful, and if we want to retain assets and grow assets then we too need to be competitive,” Adams said. “That’s where having scale helps… I think as a larger manager with greater diversity it puts less pressure on the insatiable appetite from the listed market to grow, grow, grow. As a public company the public markets have an obsession with flows, and flows at any price; but I think increasingly they’re looking at the quality of those flows and the revenue generation sits within it.”

Adams also defended the controversial acquisition of Pendal, which occurred at the same time that Perpetual was a takeover target for the consortium of Regal Funds Management and Swedish private equity firm BPEA-EQT, as being in the best long-term interests of shareholders.
“We can’t be slaves to the market… A quarter is meaningless in a decent timeframe,” Adams said. “Look at the Pendal acquisition; everybody’s got a view on the Pendal acquisition, most of the world wrote about it last year. And we’re already getting judged on that, and that’s what happens in a public market environment. But did we as a board, when we sat down and made that decision, think about the next quarter? No. We thought about 10, 15, 20 years down the track and the value that we’ll generate for our shareholders.”

Aware Super has been able to use its massive size to drive substantial fee discounts in its external managers, with CEO Deanne Stewart saying it doesn’t pay performance fees to its listed equities managers and finds it difficult to articulate to members why one would be paid for negative performance even when it was above the benchmark. But the fund will never entirely abandon external managers.  

“We believe we will never be fully internalised,” Stewart said. “We want to be really disciplined in where we think we can add value within the growth and the size of our organisation to get value for our members and drive costs down, but when external managers in listed markets or private markets are going to provide a lot more alpha net of fees then what we would, we really believe in that hybrid model versus going fully internalised where some of our counterparts are.”

Photograph: Ben Halcomb

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