Business as usual for BT – under Principal’s wing

Now that it is firmly in the Principal fold, BT Funds Management is back in action and spreading that message on a roadshow to financial planners this week. Zilla Efrat investigates just how it looks after the $20 billion retail investors have placed under its management.

It has been a nail biting six months for BT Funds Management, Australia's largest retail money manager.

Much has been said about its ownership jitters and the hold notices slapped on it by about half of Australia's financial planning and research groups.

Now, with its new parent firmly in place, BT is back on the road spreading the news that all is well at the group's Chifley Square Sydney headquarters.

Firstly, the group has not faced the exodus of staff forecast in some quarters.

"We have 120 people involved in managing money. Inevitably there will be some turnover, but there hasn't been anything out of the ordinary," says chief investment officer Andre Morony.

"The payments from the Deutsche deal have come through, so there is nothing forcing people to stay if they don't want to."

Secondly, BT's investment coffers have not been sapped by all the uncertainty.

"Sure there have been outflows of funds", Morony says, "but nothing outside the norm".

"Over the past six years, there have been five times when the redemptions were higher than we have just seen," he says.

Thirdly, despite all the high drama, BT's investment team did not take its eye off the ball and although it has been a while, it now has something to gloat about.

Indeed, according to Morony, 98 per cent of BT's retail funds turned in first or second quartile performances in the period between October and April. And, 66 per cent of them were in the top quartile.

Fourthly, several positive spinoffs should flow from the Principal tie-up.

Australian customers can expect BT to introduce some new products after it piggybacks on Principal's strengths in US in areas like property and fixed interest corporate credit.

The deal also provides BT with new outlets, including the chance to offer some of its products in the US, where Principal is the largest manager of 401(k) pension plans.

"Principal is looking to expand into the UK, Japan and Brazil and we expect to be part of this," Morony says.

The message from rating houses like Morningstar is also positive.

"Principal has a strong investment management competency and focus, and a commitment to becoming a truly global managed investment company. BT figures strongly in its current and future plans," Morningstar notes.

"The sale brings both Principal and BT closer to the critical mass (net assets under management) required as a serious contender in the global funds management industry," it adds.

But, perhaps, what has made BT's staff sigh the most with relief is the news that so little will change - neither its name in Australia nor its long held investment style.

"Principal's philosophy is exactly the same as ours. It has a small team of eight international equity analysts. We are looking at how we will get the best thinking from them, but otherwise there will be no changes at all," Morony says.

Now as the dust settles, BT will no doubt capitalise on what it considers to be its strengths. One of these is the fact that unlike any of its competitors, it manages all assets, both domestic and international, from Australia.

Over the past year, BT has sought to build on this by integrating its domestic and international equity teams into sector teams. And, it has formalised the way these interact to ensure "cross pollination of ideas which our competitors with international teams in Boston or London cannot have".

According to head of international investments Chris Selth, this helps BT "get the best thinking of the firm for all clients".

Instead of using just a local analyst to research Tesltra (which has no comparative rival in Australia), BT will bring in its international analysts to comment on what has happened to similar companies in other parts of the world.

It will also ask its analysts researching related sectors, like media or information technology, for their input.

This approach is based on sector versus region matrix which the fund manager believes naturally builds up its team's focus and ensures that all the bases are covered.

Morony avoids labels like "value manager" to describe BT, but he says: "We buy stocks that are undervalued, but we use sophisticated valuation techniques that go beyond just price to earnings ratios.

"Some of the stocks we buy would be seen as growth stocks - like Westfield and Harvey Norman - but we still see them as undervalued in this market."

Vital to BT is management quality and its scoring process to assess this.

"Everyone says they talk to management, but not everyone has the same scoring system and not everyone has the same access as our analysts do. Frequently we are one of only a few companies to get access to management," Selth says.

Indeed, two recent surveys - CorpScan '98 and the 1998 Reuters Asia Pacific Rim survey of investment banking, research, sales and trading - found that BT's analysts are seen as the most insightful by Australian management.

While companies are screened both quantitatively and qualitatively, Selth says the real spark for good investment ideas normally comes from meetings with management.

He says each analyst makes about three to four two-week overseas trips each year. "The people covering the US and Europe have to work in those hours and our dealers monitor the market around the clock. We work much longer hours than other managers. That's just part of our culture."

The driver of remuneration at BT is portfolio performance which means that everyone has to sell their ideas into the portfolio. Critical review is the order of the day.

"Our meetings usually turn into pretty heated debates, but everyone walks out as friends, a sign of a healthy culture," Selth says.

The process leaves BT with 100 stocks, on average, in each of its portfolios.

Among it international holdings at present are MCI Worldcom, Exxon, Pfizer, Walmart, British Petroleum and Wells Fargo. Its most favoured local stocks include National Australia Bank, Telstra, News Corp, Qantas, Pacific Dunlop and C&W Optus.

BT's bottom up approach is countered by top down risk controls, introduced after the Asian crisis, which ensure that the size of investments in terms of stocks, sectors and countries reflect the strength of its view.

"We have several controls in place to make sure that the only risk that we take is investment risk," Morony says.

While BT's investment style varies across asset classes, it is all research driven.

Its bond team, for example, visits central banks across the globe while research into listed property securities mirrors that of equities.

The group also believes that being based in Australia gives it a unique focus. For example, while many of its rivals don't, BT believes in actively managing its currency exposure to enhance returns from its investments.

The integration of the equity team is also extended to other asset classes and to asset allocation. For example, BT's economists may provide a macro view, but company anecdotes from its analysts will help it paint a bigger picture and may guide, say, the bond team.