New players get the results, but lack history

There are 57 Australian equities managers in the latest InTech Financial Services Sector Performance Survey of Specialist Funds. This number does not include a number of managers in the survey for various reasons such as size, but the upshot is that this is a well-covered sector.

The February 2002 InTech survey reveals that three out of the top four performing managers (based on 12-month performance) — Lazard Asset Management, Perennial Investment Partners and Dimensional Fund Advisers — are all new players in the market that have not yet established a three-year track record. Add to this the emergence of a number of other new Australian equities managers, boutique or otherwise — including Constellation Capital Management, Concord Capital, Jardine Fleming Capital, Alpha and Bell — and there is a sizeable proportion of Australian equities managers that are the new kids on the block.

This means that while the Australian equities market is often split by growth, value and style neutral managers, there is another defining issue facing the sector — track record or past performance, which unfortunately for these new and keen Australian equities managers, only comes with time.

“It is certainly a barrier to entry. People want to be able to make an assessment on performance, and the delivery and consistency of that performance,” Constellation managing director Douglas Little says.

A boutique Australian equities manager, Constellation was founded in 1999 by Little when he saw an opportunity in the market to build a new business. In charge of funds management at Tyndall at the time, Little saw his opportunity to “start fresh” after the group was taken over by Royal & Sun Alliance.

Constellation emerged onto the Australian equities market as a value manager, equally owned by its management and Qantas Superannuation Limited. Constellation brought an additional edge to its approach, integrating the standard value style with a further risk management technique, resulting in a risk controlled value investment approach.

“It’s about putting in place more disciplined portfolio rules,” Little says.

After being incorporated in October 1999, Constellation won its first mandate in July 2000 worth $100 million. The size of the initial mandate has been significant for the group, Little says, in helping overcome the absence of a three-year track record.

“It has been helpful in demonstrating that performance can be delivered on size,” Little says.

“But having a track record does make it easier for advisers and investors to assess a group, we understand that and just have to be patient.”

Another way for a new group to indicate future performance levels to potential investors, and assert its position in the competitive market without a three-year track record, is to leverage off the reputation of the group’s managers, InTech head of manager research Fraser Murray says.

According to Murray, some new ventures will be more successful than others when they are formed by managers whose reputations are already established.

“Starting up a boutique and leveraging off the individual’s reputation in their previous company can provide an unofficial track record,” he says.

“Going in with a good reputation, a group is more likely to have support. If not, you have to pass the test of time and prove yourself in some way.”

This approach has been successfully followed by Lazard, which launched in July 1999 and is number one on the latest InTech table for Australian equities 12-month performance.

Lazard Australian equities head Rob Osborn says he and colleague Philipp Hosslin were approached by Lazard while working as value managers at Tyndall.

“We were Australian guys with experience, Lazard’s style was already globally successful and they saw the Australian market as a growing opportunity,” Osborn says.

The strategy was based on Lazard’s own international reputation, and the company then launching its Australian business with names known in the Australian equities sector and managers who already had client relationships established. It worked.

“They foresaw using our philosophy as a value manager, and at the time there were a limited number of managers with a value focus,” Osborn says.

Not only is Lazard the best performing manager for the 12 months to February 2002, it has $1.5 billion under management and is focusing on growing to $2 billion in the short-term.

Despite this, the absence of a three-year track record remains an issue.

“It poses problems when talking with a potential client base. We make the point that we will outperform, but cannot show that yet,” Osborn says.

Experiencing yet another different launch into the market about two-and-a-half years ago is style neutral manager Concord, a financial services business previously operating under the Lend Lease banner before it was sold to National Australia Bank.

Concord chairman Richard Douglas says the group was able to meet all the requirements of carrying over its track record.

“There was a change in group ownership, but with the same people managing the same money from the same client with the same process,” Douglas says.

While he says having access to a three-year track record has certainly been a positive for Concord, the group is still conscious of the need to prove its performance, just like other new entrants.

“I think most people will say, ‘I want to see how they go for a year before we give them our money,’ and we’ve seen more interest in the past 12 months than the first 12,” Douglas says.