MLC: Managing the managers

As a manager of managers,MLCdraws on the experiences of managers from around the world. It is this investment approach, according to Chris Condon, chief investment officer at MLC Investment Management, that “gives investors access to a combination of the best fund managers across each asset class, providing diversity across and within asset classes and across investment styles”.

“This helps provide greater consistency of performance in variable market conditions compared to a single manager and significantly reduces risk without compromising the overall return. Our skill is in identifying the managers. This takes serious research,” Condon says.

So MLC’s investment philosophy relies on using specialists to make a large number of small, quality bets that offers a diversified portfolio.

“We avoid a small number of large bets as the results are unreliable. Specialists generally outperform the generalists.”

MLC’s investment approach is to select and retain investment specialists, build portfolios comprising different managers, keep asset allocation stable through disciplined rebalancing and minimise “implementation leakage”.

How, then, are managers selected?

“The process is an iterative one,” Condon explains.

“We regularly monitor our existing managers and substitute or ‘reserve list’ managers who might complement our existing mix.

“Our objective is to build our knowledge of a manager and develop a corporate relationship over multiple years, so that when the need to appoint an additional manager arises, the decision can be effected rapidly. Typically it takes three to five years to gain a reasonable understanding of a manager’s team and process.”

MLC’s manager turnover averages seven years.

The key criteria used by MLC in identifying a demonstrable, sustainable competitive edge with an investment manager include: a logical and defensible investment philosophy; the investment approach used to effect the investment philosophy; research; portfolio construction; implementation; investment staff; ownership structure; and assets under management.

While managers manage within guidelines that include performance benchmarks, recent past performance by the manager is notably absent from this list of considerations.

“We are happy to tolerate underperformance when we are convinced the manager continues to have a competitive edge because short-term movements are not that informative about the future,” Condon says.

“Our decisions are based on future expectations rather than past performance.

“The focus is on deep qualitative research of the manager, supported by quantitative analysis of their portfolios over time. The key is to ensure our research team remains focused on this deep research of the best managers by purchasing broad manager research from external sources. We buy in breadth and do the depth ourselves. We do not publish our research and thus do not waste resources meeting with managers who are unlikely to ever manage assets for our funds.”

Condon emphasises that the manager review and evaluation process does not end when the manager is appointed.

“Appointed managers are subject to ongoing review to ensure continued compliance with the appointment criteria. In line with the overall long-term horizon of our investment objectives, what we require from all our managers is superior long-term performance.”

Once managers have been selected, the task is to build portfolios comprising several different investment managers that offer a range of belief systems, research approaches and portfolio constructions.

“Our objective when building portfolios of investment managers is to find managers who are first of all excellent in their own right, and secondly are different from each other. This provides greater consistency of performance, under changing market conditions, than would be expected via a single manager. In this way, we have been able to construct very active portfolios that have very low tracking errors and little exposure to market cycles, styles and fads.”

The underlying belief is that instead of trying to out-guess the market, by trading in and out of asset classes and investment managers on a tactical basis, MLC sets and maintains its weightings to asset classes and investment managers based on long-term expectations.

“We rebalance our diversified funds following a disciplined process, which involves buying into asset classes that have fallen below their allocation range and selling out of asset classes that have risen above their target allocation range.

“This range is tight, currently plus or minus 2 per cent, to ensure that we are neither over nor under exposed to one particular asset class due to short-term fluctuations in the market.”

Looking at MLC’s performance over the past three years, in Australian shares the average annual excess return is in the second quartile of managers, with a tracking error in the fourth quartile.

“We look at these two measures hand-in-hand — it tells us we have generated above average manager excess returns for consistently lower risk.”

Similarly for global shares, MLC’s average annual excess return is in the second quartile with a tracking error in the fourth quartile.

Going forward, Condon talks about diversified funds focusing on the lower risk end and improving the group’s enhanced offer via MasterKey.

MLC History

MLC Investment Management is part of the National Group’s Wealth Management division that operates a broad portfolio of financial services businesses across Australia, Europe, Asia and New Zealand. The division was created through the integration of the National’s financial service and funds management businesses with MLC and its subsidiaries, which the National acquired in June 2000.

It has more than 2.8 million customers across Australia, Great Britain and Ireland, Asia and New Zealand, and manages more than $64 billion on behalf of retail and corporate customers.

MLC itself goes back to 1886 when the Citizen’s Life Assurance Company was incorporated in Sydney.

In Australia, MLC is the largest player in the wealth protection industry (insurance), and ranked second in the country in terms of retail assets under management.

The wealth management operations also include the National’s Private Bank division, which provides tailored financial services to high-net-worth individuals.

Team MLC

* Strategy(headed by Michael Clancy): Responsible for the ongoing analysis and review of investment managers. This includes detailed manager research, quantitative analysis and strategic manager strategy. This team is responsible for researching and maintaining a reserve list of managers for MLC. It includes Capital Markets Research headed by Ian Hagtharp, Equities headed by Paul Duncan and Debt headed by Peter Sumner.

* Implementation(headed by Gerard McCreton): Responsible for implementing and maintaining MLC’s investment strategies. This includes managing cash flow, and the rebalancing process, both integral components of the MLC investment process. This team is also responsible for negotiating and managing the formal investment agreements with the underlying investment managers, and managing the transition process when changes are made.

* Communication(headed by Susan Gosling): Responsible for ensuring investment strategies reflect the needs of investors, and that MLC communicates with investors and advisers in a formal and effective manner on investment issues.