A model of diversity

In a year in which the financial services industry shrank 10 per cent, Macquarie Funds Management (MFM) has seen a 10 per cent growth in funds under management — up from $26 billion to $29 billion.

Figures from research group Rainmaker show MFM, which is the primary manufacturer of managed funds in the Macquarie Bank Group and the major supplier of funds management services to Macquarie’s Financial Services Group, is now Australia's fifth largest fund manager, moving up from position 11 two years ago. The broader Macquarie Bank group's entire fund management business is ranked third compared to sixth two years ago.

Over the past year funds in fixed interest have grown 40 per cent and funds in property trusts have grown 80 per cent, although equities are down six per cent. David Deverall, head of MFM, says profitability is also up.

So what is MFM doing right?

Deverall highlights the group's “model of diversity”. This incorporates diversity in its client base, asset classes and geographic spread.

“We pride ourselves on our broad range of capabilities allowing us to find solutions tailored to client needs,” he says.

“Our products are sufficiently flexible to meet the risk profiles of our clients.”

Underlying the group's performance is its obsessive focus on risk management, where the group as a whole has earned a reputation for delivering superior risk-adjusted performance relative to its peers via its trademarked Precision Management investment approach.

“This is the key to consistently delivering and customising investment portfolios across a full spectrum of risk/return outcomes in all major asset classes to meet the needs of a highly diverse range of clients,” Deverall says.

The Precision approach is broadly broken into five areas:

True Index, which provides investors with exact index returns for no fund manager fees.

Pure Index, which is traditional indexing that aims to perform in line with a particular index.

Enhanced Index, which seeks to marginally outperform the index through low risk strategies.

Active, which aims to actively manage high quality investments and take positions away from the index to add value above the benchmark.

Specialist, which provides investment in classes of securities that offer specific opportunities (such as small companies, corporate debt and so forth).

Deverall adds that “across all risk management systems our fundamental approach is to be pre-emptive rather than retrospective, systematic rather than ad-hoc”.

MFM's legal, risk and compliance systems are streamlined within one operating structure.

“This gives us flexibility,” he says.

Macquarie’s funds management operations go back to 1980 when it launched Australia's first cash management trust. Nine years later it started its first wholesale product, a balanced super fund, and it bought Risk Averse Money Managers, a wholesale fund manager specialising in indexed portfolios.

From 1990, MFM began offering a range of pooled funds in cash, fixed interest and equities, later adding more diversified funds and private equity and, according to Deverall, many products which are now integral to the funds management industry were pioneered by MFM.

As well as initiating the cash management trust, MFM also introduced enhanced indexing (1992); true indexing, which delivers exact index returns for no fund management fees (1997), and negative duration in cash management (which gives portfolio managers the opportunity to add value in a cash portfolio when interest rates are rising).

Macquarie's client base varies from $20 billion super funds to small private investors who can invest either wholesale (going direct) or retail (through financial planners, most notably Macquarie's Financial Services Group).

Of its $29 billion under management, the group has $14 billion in cash, $7 billion in equities, $6 billion in fixed interest and $2 billion in currency.

Some 10 per cent of MFM's business is sourced outside Australia. Deverall expects this to reach 20 per cent by the end of the year. “Who knows, it is possible that the offshore business will be as big as the local business in five years time. Our roots and head office, however, will always be in Australia.”

MFM is pursuing a dual strategy in approaching international markets — establishing full service joint ventures in deregulating markets and identifying product gaps in more developed markets.

The joint ventures in Korea (it owns 65 per cent of IMM & Co) and Malaysia (it has a 30 per cent stake with the AmMerchant Bank) each have $2.2 billion in funds under management. The next joint ventures are likely to be in Japan or Taiwan.

“The idea is for us to provide the investment management and product development expertise and take an equity stake,” Deverall says.

Over the last two years, MFM has established new wholly-owned businesses in Hong Kong and London, offering capabilities in enhanced equities. The Hong Kong operation manages $70 million.

“Ultimately, we are aiming at an enhanced global equities product over the next three to five years. This includes a presence in Europe, the US and Asia.”

Looking ahead locally, Deverall rules out acquisitions. “This causes too much disruption — among management, customers and suppliers.”

But he expects MFM's exposure to alternative asset classes to increase.

“Especially given the fall in equities and the increasing correlation among asset classes. We need to be able to offer the market a broad variety of alternative investment options.”

Macquarie already has a significant private equity fund of fund capability and has recently launched a global small caps fund. In the near future, Deverall feels MFM could move into long-short equity funds.

With massive institutional support via the Macquarie group, a large back-office and broad research and dealing capability, MFM outsources only a small portion of its business. Outsourced activities are primarily portfolio management in specialist international sectors such as international equities, high yield debt, emerging market debt and US corporate debt.

“In international investing we use a best-of-breed approach, accessing the world's leading specialist fund managers across the major asset classes.”