Tackling the issues of investment management

By Jayson Forrest

Daniel Micallef (Aoris), Kieran Canavan (Centric), Robert Talevski (Activam), and Dale Pereira (Pendal) take a close look at the investment side of a managed accounts program.

As the Chief Investment Officer of Centric — a platform operator and fund manager that is part of the Findex Group (an integrated advice and accounting business) — Kieran Canavan is aware of the importance of having a solid framework in place for the investment side of a managed accounts program.

As the Chief Investment Officer of Centric — a platform operator and fund manager that is part of the Findex Group (an integrated advice and accounting business) — Kieran Canavan is aware of the importance of having a solid framework in place for the investment side of a managed accounts program.

In a webinar presentation on ‘The investment management issues’, which was part of a broader IMAP Specialist Series focused on ‘Putting a managed account program in place’, Kieran says there are three key areas that make up the main components of Findex’s MDA investment ecosystem. These are:

1. Governance and compliance overlay

This is where Centric’s investment committee sits, comprising of highly skilled independent experts, adviser members, the CIO, risk and compliance members, as well as an independent Chair. The independent members of the investment committee have the ability to veto any decisions going through the committee, including asset allocation, portfolio construction, investment selection, and approved investments.

2. Asset consultants

According to Kieran, Centric aims to access the best asset consultants worldwide. These consultants have deep experience, resources and information that the business can tap into. BCA Research is Centric’s primary consultant, while secondary and more specialised consultants, like J.P. Morgan and Goldman Sachs, are used for specific areas of investment. In addition, State Street Global Advisors is used for Centric’s strategic asset allocation (SAA). 

3. Investment team

Not only is Centric’s investment team responsible for modelling and investment decision-making, it also proactively works with advisers and advice practices, including in areas of governance and oversight, which also covers policies and procedures. The investment team is also responsible for the approved product list (APL) and funds management support.

When deconstructing how Findex’s MDA operates, Kieran says the investment team is responsible for translating the investment objectives into an SAA framework. The team does this by looking at capital market assumptions, establishing objectives and liquidity constraints, and finally coming up with the SAA framework.

The next step is portfolio construction, which requires accessing exposures through a combination of quality external fund managers and bespoke institutional quality strategies. This includes tactical asset allocation (TAA), manager research and insights, and blending the portfolio to get the very best outcome across managers and strategies.

The final part of putting an MDA in operation is ongoing management and reporting. This includes the need to dynamically adjust to changing circumstances and markets, as well as managing additional capital inflows.

“When looking at forward market assumptions, we work vigorously with asset consultants. We also look at portfolio analytics to better understand what’s happening in the portfolios, as well as the actual investments being held by managers and the risks being taken,” Kieran says. “In addition, implementation and rebalancing are also critical parts of the ongoing management of a portfolio.”

Even though Aoris manages a single investment strategy focused on one asset class (global equities), Daniel Micallef — Co-Head of Distribution at Aoris — shares a similar approach to capital market assumptions when building portfolios.

“We have essentially built a fund management business that is independent and fully staff owned, which offers a fund — the Aoris International Fund — that we invest in ourselves. So, we have real skin in the game,” says Daniel. “We acknowledge that different parts of the market have different needs. For some managed account providers, unit trusts are easy and simple for them to use, while for others, an SMA structure is more suitable, particularly for high-net-wealth clients who prefer greater transparency with the underlying holdings.

“We have a consistent approach when working with consultants. In the global equities space, there might be 300 global managers available, and while 30 might be good, we can only pick three or four. That’s where the benefit of working with a consultant comes into play. They assist us with the research that underpins manager selection.”

As a manager providing advisers and institutional investors with managed accounts, as well as asset management and investment consulting services, Robert Talevski — Founder and Managing Director of Activam — says while Activam shares many similarities to Centric’s approach to portfolio construction, it does have some differences. These include conducting its research, asset allocation, and manager selection internally.

As a multi-asset manager, Dale Pereira — Head of Client Solutions at Pendal — believes the key to working with advice businesses when building portfolios is to “know your client”. This includes understanding the client’s views on capital market assumptions, and how a business, like Pendal, can help them in terms of the overall implementation of a managed accounts structure.

As an integrated business with a well developed advice philosophy, Kieran confirms that Centric has had no problems aligning its investment management capability with its advice service offering. He says Centric uses a well trodden path that relies on key structural processes, as well as day-to-day integration between the advice and investment teams, to ensure alignment.

“The process starts at the very top, where the CIO reports through to the board. From the top down, our investment services are aligned with the business’s goals and objectives,” says Kieran.

“Our own investment governance overlay is the investment committee (IC). The IC is a committee of the board, where members are critical in deciding how advice is provided and what our service value proposition is. These members of the IC are all brought into the decision-making process when building models and making decisions.

“Generally, on a day-to-day basis, the investment team is integrated with the advice process. This means all our teams — advice, investment, compliance — are integrated, so if there is ever an issue, we can deal with it quickly and seamlessly.”

Kieran believes the move by the business to MDAs about 15 years ago has actually strengthened the overall value proposition of Centric’s advisers.  

“Managed accounts don’t take anything away from advisers. By removing the investment decision-making process, this structure actually strengthens the position of advisers by enabling them to spend extra time with clients and engage in more strategic advice.”

This has enabled Centric to split its advice fee into a strategic advice fee, and a portfolio construction and management fee. 

“Advisers have been trained how to deconstruct the portfolio construction and management fee with the client. They do this by looking at the part that the adviser does, which is considering the client’s goals and objectives, and then deciding what portfolio to use and how to structure the investments, including looking at tax and CGT issues. The other part of this fee — investment decision-making and implementation — is done by the investment team,” says Kieran.

“By offering this type of service, we’ve found that clients are willing to pay more for the service. That’s because they perceive value in the offering. By being able to explain all parts of the value chain — strategic advice and investment decision-making — you actually have a better value proposition. That has helped our advisers to better articulate what it is they do, and strengthen their relationship with clients.”

When selecting investment managers, Activam considers a range of criteria, with the overarching consideration being manager outperformance relative to their benchmark. Other key considerations include an established track record, and an investment process that is clear and robust.

“We also look for managers with a stable team that has been through different market cycles,” says Robert. “We’re also looking for cost-effective solutions — which means not overpaying for a particular strategy — as well as transparency and governance from managers. In addition, we want to work with managers that are ‘true to label’.”

It’s a view shared by Kieran. Centric’s framework for manager selection follows a long-standing process based on qualitative and quantitative insights. This is the process the business has been using for the Findex MDA — a set of multi-asset models that have been running for over 10 years. 

According to Kieran, Centric’s framework is based on four ‘Ps’ — people, process, performance, and price. For Centric, the sweet spot for manager selection is a manager with a proven track record of about three years, with good performance, and assets that are growing but still well below capacity. “Some of the best managers we’ve had have been within that sweet spot,” he says.

“When looking at fund manager selection, we look at both quantitative and qualitative factors. On the quantitative side, we analyse performance through different market regimes. We seek skilled managers, as well as look at managers that have added alpha consistently through different markets.

“On the qualitative side, we don’t like high staff turnover, particularly at the key decision-maker level. We don’t like high key person risk, as well as business sustainability risks around large losses in funds. And we don’t like non-transparent strategies, which we avoid.”

Undoubtedly, managing investment portfolios for ultra high-net-wealth (UHNW) and family office clients is quite different to typical mum and dad investors. Robert says UHNW clients are typically thinking longer term, meaning they are less sensitive to quarterly results. “For investors who invest in a portfolio such as ours, their time horizon should be five years plus.”

However, Robert acknowledges that these UHNW clients tend to be more demanding in their investment expectations. He says they require greater frequency of updates, and considerable detail about their investments, which is often granular, going down to the individual stock level.

According to Dale, UHNW clients do tend to have higher requirements around intergenerational wealth transfer, and a heightened expectation around tailoring of their investments, such as screening for companies and/or industries.

“These clients do have a significant appetite for reporting. They want to gain a better understanding of what companies are actually doing and not just rely on the Australian Financial Review for that information,” says Dale. “We do get more requests by UHNW clients in relation to the philosophies and policies of companies. Clients want to understand the impact their capital is having by investing in these companies, which could be from an environmental, social, governance, and sustainability perspective.”

Ask Robert for his opinion of where the managed accounts market is heading and he is bullish in his expectations for greater tailoring of managed accounts. He believes that both tailored and off-the-shelf solutions will provide advisers with increased opportunities to adopt a managed account solution that fits in with their respective advice offering.

“Practices with funds of $300 million and over are probably more likely to want a tailored solution, while practices below this amount are more likely to want a mixture of tailored and off-the-shelf solutions,” says Robert.

However, he concedes that as the managed accounts market continues to grow in size, it will attract greater focus by the regulators. He believes the performance of managed accounts will come under greater scrutiny, which will put managed account providers under the regulatory spotlight, similar to that experienced by superannuation funds. 

“We are seeing greater professionalism around advice and with investment teams in the managed accounts space, as well as more compliance, which is a good thing. It’s an exciting time for managed accounts, and we expect to continue to see a lot of growth going forward.”

Daniel adds that while there will always be a sensitivity towards cost within the managed accounts space, he believes that with scale, this sector will become increasingly attractive for more advice practices. He believes managed accounts will help advisers to streamline their businesses, and allow them to focus more on their client value propositions.

Dale is also of the belief there will be a lot more tailoring of managed accounts in the years ahead. He believes managed accounts is moving towards the institutional space, where the next evolution of managed accounts will be a ‘total portfolio’ approach, compared to individual asset classes and strategies.

“Investments that are difficult to do now within a managed accounts structure — like derivatives, over-the-counter swaps, and currency hedging — will progressively become easier to do in the managed accounts space and in a way that will still work for providers,” says Dale

Daniel Micallef is Co-Head of Distribution at Aoris;

Kieran Canavan is Chief Investment Officer at Centric;

Robert Talevski is Founder and Managing Director of Activam; and

Dale Pereira is Head of Client Solutions at Pendal.

They were part of an IMAP webinar panel discussion on ‘The investment management issues’, which was part of an IMAP Specialist Series on ‘Making a success of a managed account program’.

The session was moderated by Toby Potter — Chair of IMAP.