Investor Dialogue

Investor Dialogue: David Kiddie

The head of AMP Capital’s multi-asset group and specialist investment teams discusses dynamic asset allocation, managing volatility and the firm’s Asia strategy.

What is the current size of your assets under management and how has this changed in recent years?
In our latest first-half results we announced that AMP Capital’s total assets had increased to A$123.2 billion ($127 billion), which is up slightly from December 2011.

Good investment performance has helped offset the trend we have seen across the industry of net outflows.

In June 2007, our assets stood at A$111.6 billion so current assets are higher than they were prior to the financial crisis. A growing amount of client money is sourced from overseas. We manage A$7 billion in assets for Japanese clients, for example, out of A$9.02 billion in total foreign-sourced assets.

How would you describe your current investment style?
When I joined AMP Capital nearly three years ago, the company had a strong research ethic and bottom up approach to investing, which is still a key element of our style today. On top of that, and as a reaction to the financial crisis, we have implemented a few new portfolio construction strategies. We are mindful that markets will remain volatile and that it will be harder to eke out returns, so we are aware of the importance of asset allocation from a top-down perspective.

We have reinforced the role played by our head of investment strategy Shane Oliver and his team of dynamic asset allocators who make direction calls with the idea of giving our investors a smoother ride. We recently launched a multi-asset fund that has both institutional and retail appeal and has the ability to move in and out of assets that aren’t normally held in a traditional balanced fund. Its performance isn’t benchmarked against peers or other funds, but against its own target. To do this you need a team that understands dynamic asset allocation, can use ETFs, futures and derivatives to reduce volatility. We are now implementing 130/30 and concentrated funds that take advantage of our managers’ stock picking expertise and have both long positions and short positions in the portfolio. And we’re looking at income strategies as well — funds that invest in high dividend-paying stocks.

These are significant changes. How are you staying on top of the risk?
In September 2010 we hired Aaron Durkin from Aberdeen as our head of investment risk with the view to understanding the true sensitivities within our portfolio. His role, along with his team, is to look at our performance relative to the risks we are running and give us a real understanding of what is creating that performance. We then run stress tests on the impact of market shocks such as an oil price hike or a sharp jump in inflation.

In December last year AMP sold 15% of its funds management arm to Mitsubishi UFJ Trust and Banking (MUTB).

How is this union bedding down and what does it say about your current Asia strategy?
AMP Capital has been working with Japanese asset managers for many years on retail distribution opportunities, and now the alliance with MUTB gives us access to the Japanese pensions market. We’re particularly keen to share our knowledge of direct infrastructure and direct property investment with Japanese pension funds, and this is underway. For MUTB, the deal is representative of the growing interest that Japanese institutions have in improving returns by investing offshore. It gives them a window into the Australian superannuation market which is one of the largest pension pools in the world. To date we haven’t entered any other partnerships involving equity as a consideration, but we have a number of important distribution relationships with Asian entities. We have a long-standing MoU [memorandum of understanding] with China Life, for example, that covers strategic cooperation on investment opportunities and is a source of infrastructure investments.

Do you also have teams on the ground?
Yes, we have teams in Tokyo, Beijing and Hong Kong. In Hong Kong we recently took new office space in Pacific Place and moved our Asian equities team from Sydney to that office. In early August we hired former Fidelity executive Kerry Ching as managing director for Asia ex-Japan, who reports to our director of global clients Anthony Fasso.

And this month [September], we will be joined by three new hires from BNP Paribas Investment Partners, including Patrick Ho who becomes head of Greater China equities and will be responsible for the portfolio management of the AMP Capital China Growth Fund. Ultimately we see ourselves as expert manufacturers and providers of top performing Asian equities and fixed income products that we are able to distribute around the world.

You were recently awarded a mandate by China’s National Council for Social Security Fund. Was that a competitive process?
We are not at liberty to reveal the size of that mandate, but it is a global Reit mandate and yes it was won through a competitive tender process.

Our team in Beijing has strong relationships within the Chinese pensions industry, a strong investment process and the performance of our core Reit fund — which has returned 24.11% over three years — caught the attention of the NCSSF.

What role should Asian investments play in an Australian institutional portfolio?
For the foreseeable future we expect to see strong cashflows directed towards Asia as the region carries a more prominent position in client portfolios. Investing in Asia is an attractive proposition for Australian institutions because of the relative strength of the region’s fiscal position, its population demographics, and the maturation of its investment culture. For the moment, institutions hold roughly 50% of global equities in US stocks, but I see this shifting over time towards Asia.

What is your outlook for the Asia region? Which markets do you favour?
Compared to the US, Asia will offer better profit growth in the near to long term. Productivity and living standards are catching up quickly, and in the bond space, Asian governments are in a strong fiscal position.

Valuations are at attractive levels in several Southeast Asian countries. We also expect to see a rebound in China and Korea where growth will resume after a period of slowness. China has proven its ability to use policy levers to keep the country on track. We are attracted by certain valuations in Europe but have significantly reduced our European positions, which is understandable given the political uncertainty in the region. That said, with companies trading at 40% discounts to fair value in the listed infrastructure sectors as an example, we believe there are long-term opportunities there, if stock selection is managed carefully.

Why has the Australian market underperformed other global stock markets?
The investing backdrop has been very different in Australia. We haven’t suffered a recession since the early1990s, and interest rates have remained at high levels compared with the rest of the world in recent years. This has encouraged investors to put their money into high-yielding term deposits and leave it there. As a result, equities have performed poorly and the Australian stock market has lagged. We expect this situation to normalise as the economy starts to slow and as yields on term deposits drop.

Investors will be encouraged to seek alternative sources of return and money will start to flow back into equities again.

Yielding stocks will likely be targeted as we have seen overseas.

What is the biggest challenge facing your portfolio managers during the next 12 months?
To continue to outperform in the face of volatility. Eighty percent of our funds are beating targets and benchmarks over three years, and our fixed income team is ranked number one in the country. We have tremendous stability in our investment teams. So one challenge is to avoid becoming complacent.

This is a volatile period in the world’s financial history and it’s not unusual to see intraday swings of 10% to 15% in certain holdings. We need to manage our portfolios through this volatility and, importantly, remain confident when setbacks occur.

Investors pay us to maintain conviction, and this is what we must continue to do.

 

This story first appeared in the October issue of FinanceAsia magazine

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