by David Chaplin*
After more than a quarter of a century leading the NZ$45 billion (A$42.3 billion) Accident Compensation Corporation (ACC) investment fund, Nicholas Bagnall is starting again, leaving the job he successfully toiled away at for 26 years, to launch his own shop under the Te Ahumairangi Investment Management banner.
The name references the hill – Wellington’s highest peak at 301 metres above sea level – that shadows the city’s inner northern suburbs including the enclave of Thorndon, home to both the Beehive (the executive wing of the NZ parliament) and the ACC headquarters.
Te Ahumairangi, according to one version of the story, translates to ‘the way down from heaven’.
And for Bagnall it’s a path that comes paved with a NZ$1.5 billion-plus global equities mandate courtesy of his, almost, former employer. Under the heavenly deal, he will take charge of the close-to NZ$1.6 billion pool of international shares the ACC has, to date, managed in-house.
In one sense the shift to an external mandate won’t be too much of a stretch: Bagnall has managed the portfolio since the ACC began dabbling with in-house global equities about seven years ago.
Subsequently, the allocation to the internally managed offshore shares portfolio has ramped up to reach more than 20 per cent of the ACC’s total global equities exposure (excluding Australia) of roughly NZ$7.5 billion. A panel of eight other third-party firms manage the remaining ACC global shares exposure.
Bagnall, who began at the-then nascent ACC fund in 1993 running NZ shares, said the international equities component has been his main hands-on portfolio management job for the last few years. However, as chief investment officer he also had broader asset allocation and other duties across the fund.
According to Bagnall, the imminent move into self-employment was partly prompted by a mooted internal restructure at the ACC that would have left him with either more administrative duties or a narrower investment management role.
“I thought this might be the right time for me to step away and start my own investment firm,” he said. It is understood that consulting firm PwC has tabled a report on potential changes to the ACC fund structure.
In a statement, the ACC said: “As part of good governance, ACC regularly externally reviews its processes. It is appropriate to do so with a fund that is NZ$45 billion, employing 60 staff and a significant player in New Zealand’s capital markets. The latest review… has yet to approved by the ACC Board.
“It is a co-incidence of timing that Nicholas is leaving ACC to set up his own funds management company. He had been considering the opportunity to set up his own funds management company for some time.”
But Bagnall has a few things to finalise before taking over full independent management of the ACC mandate – such as the choice of operational systems, staff and office space.
Te Ahumairangi does have at least one other employee lined up, with Ian Graham confirmed as a senior analyst. Graham, who worked alongside Bagnall over a five-year stint at the ACC from 2007, has more recently worked in senior research roles for Woodward Partners and Scott Technology. He also operated his own venture capital consulting firm, Think Capital.
Bagnall said his new boutique might need to employ one or two other analysts as well as an administration assistant, although he won’t be able to poach staff from his soon-to-be ex employer.
The ACC said in the statement that Bagnall has “a long-term non-solicitation clause” preventing offers to the government fund’s employees. His exit, however, may have consequences for other ACC global equities analysts. “Consultation is underway with two affected staff members,” the ACC statement says.
The Te Ahumairangi arrangement will probably remain a one-off for the government-owned fund with the ACC committed to retaining its other substantial in-house investment functions – covering Australasian equities and local fixed income. “We believe the current model creates a significant competitive advantage, as such we have no intention to consider an outsourcing model,” the ACC statement says.
Until Te Ahumairangi beds down its operating resources there will be a transition period where Bagnall plugs into ACC systems.
“For operational reasons – to continuously operate the portfolio – we need a transition period,” the ACC says. “The intention is to keep this as short as possible before we transition to Te Ahumairangi Investment Management.” Bagnall estimated Te Ahumairangi should be operationally ready by March next year.
The spin-off deal has sparked a minor kerfuffle including a ‘Stuff’ (NZ’s Fairfax daily newsletter) article alleging a conflict of interest. And while the ACC move is a first for a government-run fund, there is a least one precedent in the NZ private sector: in 2013 the Westpac/BT internal investment team exited the institution to launch Salt Funds Management with a billion-dollar mandate from the bank in hand. Salt retains the Westpac/BT business today and has diversified its client base further.
For at least 12 months, though, Te Ahumairangi will remain a one-client firm. Bagnall said the ACC arrangement included a one-year exclusivity clause. “After that we will focus on taking on other wholesale clients,” he said.
In the interim, a number of high-net worth investors have tapped Bagnall to run money but he said the business was not ready to take on quasi-retail clients. Regardless, the ACC mandate – which is rumoured to be worth almost $7 million in annual fees (or about 40bps of funds under management) – offers an enviable launching pad for a boutique NZ fund manager.
The ACC said in its statement that after 26 years of solid service and an undeniable reputation as a “world-class investment manager”, Bagnall “offered a unique value proposition”.
“Under Nicholas’ leadership, the global equities portfolio has returned 186.26 per cent – a return of 13.00 per cent per annum. This is net of offshore withholding taxes (which have been slightly over 0.2 per cent per annum),” the ACC statement says. “By comparison, the portfolio’s benchmark would have produced a gross return of 172.25 per cent (12.35 per cent per annum) (not allowing for any taxes), and the more common-followed MSCI World index returned 156.06 per cent (11.55 per cent per annum) (not allowing for any taxes).”
Bagnall said his investment style leans to “low-risk” large-cap stocks that is benchmarked to the MSCI world and low-volatility indices. “Because I target lower risk stocks than the average manager, the portfolio has a lower beta to global equities,” he said.
His 250-stock portfolio can also deviate a little from the mainstream with some exposure in off-index jurisdictions like Korea and Taiwan.
“I will probably always, on average, have a value bias but my value orientation now is stronger than it has been in the past because I think investors are over-paying for quality,” Bagnall said. “In general, I believe that markets are inefficient in different ways at different points in time.”
Te Ahumairangi has an alternate meaning in Māori of ‘whirlwind’, which seems appropriate for a Wellington-based global equities business. The hilly area is more colloquially known as Tinakori, which loosely translates as ‘no lunch’.
Either way, Te Ahumairangi enters the fray in an era of historically unusual global financial conditions featuring ultra-low interest rates and record high share markets: it’s a long way down from heaven; Bagnall will need some lunch.
*David Chaplin is editor of Investment News NZ