Big calls and manager selection combined for value add

John Coombe
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John Coombe: you need clarity around the consultant’s role

John Coombe is the last of the originals at JANA Investment Advisers.  He and his former colleagues, John Nolan and Ken Marshman, worked together at Victoria’s State Electricity Commission finance department in the 1980s.  While the others have moved on to other things – Nolan selling the business to NAB some years ago to concentrate on funds management and Marshman retiring last month – Coombe maintains the guiding principles which built the consulting firm to the largest in the country.  He speaks to Greg Bright.

John Coombe, who recently celebrated 25 years at JANA, believes that asset consulting requires a different psyche to active investment management.

“We have the luxury of not having to do the latest deal,” he says of his fellow consultants. “When you’re a fund manager, you might have only a couple of hours to make a decision on a big deal. Consultants can reflect on it and do proper research. I think I’m more suited to taking a long-term view.”

But another major difference between the psyche of an asset consultant and that of a fund manager is the relationship with the client fund.  Coombe says the consultant has to try to get to know the trustees in order to get a clear understanding of what his or her role is.  These days, for instance, some funds will have two or more consulting relationships, so clarity around their roles is important.

“The relationship may range between (the client fund) saying ‘just tell us everything you know and we will make up our own minds’ to ‘tell us exactly what to do and we’ll do it’… The trustees are the ones who have to stand up before members and explain their performance. And they’re the ones who need to have a feel for what their members want.”

JANA has traditionally differentiated itself from the other major consulting firms in two main ways: it has made some significant and brave asset allocation calls and it can demonstrate that it has added consistent value through manager selection. For many years the firm has presented its own attribution analysis at its annual conference for clients and others to see. At this year’s conference the chief executive, Ian Patrick, showed that manager performance contributed most – nearly 1.3 percentage points – of the 1.4 per cent value add for the average JANA-advised balanced fund. In a relative sense, this was actually the best year for manager selection since 2000. In 2011-2012, manager selection contributed nothing, and in the previous year about 50 per cent of the value add.

But Coombe, who heads up Australian equities research, points out that the themes recommended by the consultants and JANA’s house view on markets will often influence manager selection. It is sometimes difficult, therefore, to differentiate between manager selection and asset allocation in their contributions to added value.

He says big calls and manager selection combined for value add over the past 25 years.  The tech boom created the best conditions for adding value in the past 20 years. More recently, he says: “We stuck with our managers through the tough period of 2011-2012. Our Australian equities strategies delivered about 3.5 per cent alpha after fees, with a tracking error of less than two, in the case of REST. Our only poor call was that we were a bit overweight emerging markets.”

REST, the $25 billion fund for about two million retail industry workers and staff, is one of JANA’s clients with which Coombe works closely. He says that it tends to be a fairly conservative fund. On the other hand, AustSafe, a fund he also works closely with, tends to be more aggressive in chasing growth, befitting the trustees’ assessment of the profile of its membership, which includes a lot of itinerant workers.

“The trustees’ belief systems are really important as to how they invest the money,” Coombe says.

JANA-advised funds balanced options have returned five-year earnings rates after fees and estimated taxes ranging between 6.1 per cent and just under 3 per cent. The median JANA ‘balanced’ fund over the period was 4.1 per cent, against the SuperRatings ‘all funds’ balanced universe of 3.9 per cent. JANA funds have beaten the Superratings average in every year back to 1990.

JANA produces a house view for each asset class and comes up with strategies to implement that view. At the moment, it believes Australian equities are relatively unattractive, but not as unattractive as bonds. It tends to be up to the client as to how far it wants to move away from the benchmark.

“We look at each asset class and ask whether we have the right managers to reflect our view. For instance, until recently at least, quality-orientated global mangers may have saved you in a world of consolidation and deleveraging. That’s been a very good call.”

Coombe says that over the past three years, the consultants’ biggest dilemma has been finding defensive assets. It currently likes bank loans but is not in favour of high yield within the broader credit category.

“We’ve been negative on bonds since 2007,” he says. “Clearly we were wrong then. We loaded up on credit, including high yield, collateralised debt and bank loans, after the GFC. We’ve since taken out the high yield allocations. We also went overweight infrastructure and unlisted property.”

With Australia’s higher interest rates, super funds have had to compete with overseas investors who have also sought out real assets to hold.

JANA was late to the trend to implemented consulting, which Mercer, Russell and the former InTech pursued during the 1990s. This market has largely dried up for new business, with the massive contraction of the small corporate super market. Nevertheless, JANA currently has 54 implemented clients with a total of $30.5 billion under management. This compares with total funds under advice of $271.5 billion for 103 clients.

There is a little double counting in these figures, as with aggregates presented by the other consulting firms. Some funds have both traditional consulting and implemented services. Some also take advice from two or more consultants.

A fund, such as Australia’s two largest – AustralianSuper and First State Super – having two or more consultants raises other issues such as information sharing between the advisers. Coombe says that JANA and other consultants have developed protocols which seem to be working.

Looking back over the past 25 years, Coombe says, the most enjoyable period was probably when the firm was very small: “I liked it when there were only three of us required to make decisions”. However, it would be impossible to do the required research with what super funds are looking for today with just a handful of staff. When JANA was purchased by NAB in 2000, it had 20 staff, of whom 10 were shareholders. It now has more than 80 staff.

“When I started researching global equities in 1992,” Coombe says, “I think there were only six firms offering a truly global strategy. There were some others which bolted on US to EAFE strategies too, but they weren’t integrated products. Now there are more than 100 global managers and nearly 150 Australian equities managers.”

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