So, can you really have it all? Or at least, amid all the noise, red tape and other distractions of 21st century asset management, is there any way for investment specialists to enjoy the benefits of a boutique-type environment without having to worry about the bureaucratic and regulatory demands that would normally be part and parcel of working in a smaller business?
Ian Macoun (pictured right) certainly believes so – as you perhaps would expect of the founder and current managing director of Australia-based ‘multi-affiliate’ Pinnacle Investment Management and indeed, the founder of Australia’s first multi-boutique fund management firm, Perennial Investment Partners, back in 1998.
“We may not actually say it to their faces often, but talented investment professionals are scarce, and they are precious,” he says.
“Millions and millions of people rely on good returns at moderate risk so active investment management is a really important function. But active investment management is also hard – really hard – so, if you are going to do it, you had better be very good. That means you need only the most talented people and you want them to be entirely focused on what they do well.
“The thing is, our industry is dominated by big institutions – investment managers owned by banks and life insurance companies. That is where we all got our training at Pinnacle – for example, I was the first chief executive of a big public-sector fund manager, Queensland Investment Corp, and then I ran the funds management business at Westpac, one of Australia’s major banks.
“We did a good job and had a lot of great people there but, at the end of the day, we reported to bankers. And, ultimately, if you report to bankers or to life company executives, they get in the way of excellence.
“Your investment professionals end up spending too much of their time involved in bureaucracy or other distractions. From that experience, I concluded there was a work environment that was superior to the institutional one.”
‘Supported independence’
“So, we have developed a very distinctive business model at Pinnacle – we call it ‘supported independence’ – for the most talented, active investment professionals. It offers a boutique environment where our affiliate investment professionals are in control of the business. Typically, they own equity in the business, so they have real skin in the game and are very focused on their clients and on delivering good investment returns.”
For its part, Pinnacle – which has some A$90bn (£51.3bn) in assets under management across 16 affiliate businesses, in which it also has stakes – provides support in areas such as compliance, technology and distribution.
“It is a tragedy for investment professionals to spend too much of their time, energy and focus on selling but it is also a tragedy to be good at investing and not reach your market properly,” says Macoun.
“We therefore regard distribution as a major specialist function in its own right and make sure our investment professionals are serviced by really high-quality distribution people. We also provide all the necessary infrastructure support, so everything passes due diligence and clients are completely comfortable. So, again, the investment professionals do not have to worry about any of that.
“Our observation has been that you do not necessarily want big scale in investment management. You want a certain environment for investment excellence and, often, you will want to restrict capacity in order to keep performing and keep delivering. At the same time, though, there are benefits to scale in areas such as distribution and infrastructure.
“This is the best of both worlds for our investment professionals – they enjoy a boutique environment for investing alongside industrial-scale distribution and infrastructure. It is not rocket science but, crucially, the most talented and experienced investment professionals love this model and they do not leave – after all, they have high-quality service and equity in their business so there is no reason to look elsewhere for a better deal.”
What clients want
According to Macoun, “one thing that is often not fully appreciated in investment, though, is clients’ desire for long-term stability”.
“They want to back talented investment people and know they will be there for a very long time. When I was at Westpac, on the other hand, everyone was poaching everyone else’s people and the clients got exasperated. That wasn’t what they had bought. Just as importantly, then, our affiliates’ clients love this model.”
‘Best of both worlds’ is always an enticing prospect but Macoun’s evident enthusiasm for the Pinnacle way does beg the question – if this is such a great model, why is the asset management sector not full of multi-affiliate businesses?
“It’s a fair point,” Macoun concedes. “Who are we – a relatively small, relatively unknown Aussie-based company – to say our model should be exported around the world?
“In fact, there are other business – both in Australia and internationally – with models that have similarities to ours. There will often be subtle differences though – for example, they might want to own a majority of the equity in businesses so their teams do not necessarily feel that independent or they will offer revenue share rather than real equity.
“As we have moved overseas, however, a lot of investment professionals have told us they cannot find exactly what we are offering. What we are doing is harder than it looks to execute properly but we still see it as a bit of a market failure that there are not more businesses like us. And by the way, I would not mind if there were others like us – I just hope they are good at what they do.
“I tell our people they shouldn’t focus on the competition because, as long as we do an excellent job, there will be more market than we can cope with. So, I do think the model will grow – in fact, the way I see our industry changing is with big mergers of institutional investors as, by and large, they are not doing the job they are supposed to. At the same time, I expect boutiques and multi-boutiques to grow, which is fine by me.”
Basic principles
With all those different affiliates, how do Macoun and his team seek to ensure each firm’s individual qualities are not lost within one overarching business and yet, at the same time, maintain a degree of consistency across the whole operation?
Here Ben Cossey (pictured left), Pinnacle’s London-based managing director, EMEA distribution, offers a UK viewpoint.
“The basic principles of what we look for in an affiliate do not change,” says Cossey, who joined Pinnacle from hedge fund seeder Stable Asset Management in January 2018.
“At heart, that is a high-pedigree investment team and a capability we do not already have. We do not want affiliates covering the same areas because they would start to cannibalise demand and the whole model would not work so well.
“Obviously, investor demand varies between different regions and is, therefore, much more of a local decision but then so is how you tell your story – what parts of the investment process you focus on.
For instance, when it comes to sustainable investing or ESG, Europe is obviously at the forefront – at least for the environmental aspects.
“A big part of my role, then, has been helping our teams in Australia understand the sophistication and types of themes that are coming out of Europe.
On the other hand, the US probably leads the way when it comes to the social aspects of ESG – especially around diversity and inclusion – and so our US team is very much educating the rest of the organisation around that. The aim is to find the right balance between the global and the local.”
Shared characteristics
Fair enough, but active fund managers are hardly famed for their biddability – how does Pinnacle knit everything into a combined sense of corporate culture?
“All our affiliates are different, so it is not a question of seeking consistency in investment approach,” says Macoun. “What we do insist on, however, is that each affiliate is true to their label and delivers what they indicate to their clients. What we are seeking is consistency in quality.”
Adds Cossey: “I studied psychology at university and my wife is actually a behavioural scientist, so each of our affiliates having their own distinct culture is a part of the business I find particularly fascinating.
“They may all be different, yet they have shared characteristics – for example, as part of our due-diligence process before we partner with a manager, we do look for certain traits, such as a desire to build something for the long term.
“Often that can involve questions around, say, intergenerational equity transfer and, ideally, we want to partner with teams who want to build something that outlives them as individuals.
“So that probably biases itself to a certain type of culture and, if you compared our affiliates with a random selection in the market, I would hope you would identify more of an emphasis on team and process, rather than any inclination to be a star individual.
“That is where it is exciting for us. We can partner with affiliates at inception – seeding managers and building from scratch – but we also purchase stakes in more established managers. And obviously, the earlier we are involved in the business, the more we can help influence and shape that culture ourselves because it is such an important part of the active management equation.”
Investment toolbox
Speaking of that equation, what asset classes should the modern investor be adding to their toolbox?
“I am old enough to have seen our industry built on equities and bonds, but the needs of investors are far more complex now,” Macoun replies.
“We are in a world where bonds are risky – they are not going to do the defensive job they have traditionally done for decades – while equities have their challenges too.
“We are a diversified business across a range of asset classes so, besides local and global equities, we have global emerging markets, listed debt trusts, infrastructure, agriculture, venture capital and so on.
“Increasingly, real and private-markets assets have a role to play in portfolios too, but our business model will work with all of them. All we need is talented investors in areas where there is a major market and then we will take care of the distribution.”
From a domestic perspective, Cossey also sees the trend towards alternative asset classes continuing.
“For the UK wealth space in particular, access and liquidity are going to be the key constraints and the key problems to solve,” he adds. “This also ties into the ‘democratisation of finance’ theme that we are seeing more and more of because portfolios need greater diversification.
“There are increasingly innovative ways for retail investors to gain access to private companies, private equity funds, whatever it may be.
“In the UK, for example, we have seen the creation of the ‘LTAF’ long-term asset fund for the defined contribution market to gain exposure there and that trend will continue – especially given people’s concerns around fixed income and equities behaving very similarly in a future bear market.”
Merger most foul
Looking still further into the future, Macoun builds on his earlier thoughts on the prospects for some of the biggest players in asset management.
“Traditionally, the industry has been dominated by institutional fund managers – the banks and life companies I mentioned – but we are seeing increasing indications that fund management in the western world is ex-growth,” he says.
“And if the growth is no longer there, the only way these large institutional managers can grow their earnings is by big mergers with the aim of achieving even greater scale. The idea that two big shops merge and take out a whole lot of cost so their earnings can grow may appeal to investment bankers but – while the outcome may vary from case to case – by and large I think it is a disaster.
“Clients do not like it because they do not want to see major change and they certainly do not want to see lots of cost cutting. And the most talented investment people do not like it because they too want quality rather than a focus on cost cutting. What is more, mergers can lead to big culture clashes, and you find a lot of the most talented people do leave in the aftermath.
“I appreciate I am talking my own book here, but this does create a lot of opportunities for us to lift out teams, who have had a gutful of the whole institutional game and just want someone to offer an environment where they can focus on investing.
“So, you may well see more and more specialist investment management firms – boutiques, really – and they may form up into our kind of model, where they can get scale benefits as well.
“And, as I said, active investment is hard and will only get harder. We have seen 20 years of tailwinds for investing – interest rates falling, lots of monetary stimulus and so on – but it will be tougher from here.
“Plus, with the democratisation of asset classes, we will see whole new areas for investors to play in, such as private markets. This all requires talent, expertise and the right kind of environment for investment excellence.”
QUICKFIRE Q&A IAN MACOUN
What is the best piece of advice you have ever been given?
Early in my career, I was fortunate to work with some very talented senior executives and learned mentoring is a two-way street. Everyone in Pinnacle is both a mentor and a mentee, continually and always.
What would be your ‘top tip’ to PA readers to help them run a better business?
Truly understand your clients’ needs and challenges and delight them by exceeding their expectations.
What single issue should most concern professional investors at present?
Inflation! After decades of exceptionally low inflation many portfolios are not positioned well enough to deliver resilience and meet investors’ needs in the event inflation in its various possible guises once again takes hold.
Does anything about your job keep you awake at night?
I learnt a long time ago you are best able to address your greatest challenges and concerns if you get a good night’s sleep! So, I do try to focus on problems by day and not carry them to bed.
What most excites you about your job?
That we enable people to enjoy better lives through investment excellence.
If you were in charge of financial regulation, what would be your priority?
Financial regulators help bring about the best outcomes for the investing public when they ascertain which businesses are the most competent, sincere and dedicated – and work with them to achieve the best results.
What advice would you give to someone starting out in investment today?
Make sure you are well prepared from the start, come in with your eyes wide open and be committed to the challenge and responsibility involved – and to life-long learning and collaboration.
QUICKFIRE Q&A BEN COSSEY
What is the best piece of advice you have ever been given?
As a child, my dad telling me the famous Gary Player quote: “The more I practice, the luckier I seem to get”, which has connotations far beyond sport. Work hard, focus on what you can control and the rest falls into place.
What would be your ‘top tip’ to PA readers to help them run a better business?
Know your strengths relative to your competition and focus on them. It is impossible to fight on all fronts – especially when you are a smaller organisation – so don’t try to be all things to all people.
What single issue should most concern professional investors at present?
Hard to pick just one at the moment – but, if pushed, I would probably go for inflation.
Does anything about your job keep you awake at night?
An obvious one – given the time-zone differences, working with Australians!
What most excites you about your job?
The entrepreneurial element of starting new boutique managers from scratch – working with founders who have raw passion and skin in the game is incredibly inspiring and motivational.
If you were head of the FCA, what would be your priority?
Working with the government and department of education to get basic financial and savings concepts taught as part of the mandatory curriculum for schoolchildren. Better financial education would help protect and empower retail investors and also be beneficial for wider society.
What advice would you give to someone starting out in investment today?
Start investing – sensibly! – yourself, even if it’s £20 a month. Experience is the best way to learn.
THE TWO Es IN ‘ESG’
The term ‘environmental, social and governance’ may have served to rally support for sustainable investing better than any of its predecessors but Ben Cossey wonders if it is now reaching the end of the road.
“It has to evolve,” he argues. “For one thing, the ‘E’ could now be split between, say, carbon-focused investing and more holistic environmental aspects, while social and governance are equally worthy but largely unrelated areas.
“Also, people will become better at asking themselves what is important to them – which element they are most concerned by, or they can have the most effect on – as opposed to the current approach, where everything is either ‘ESG good’ or ‘ESG bad’ and it is all a bit binary and simplistic. And, finally, investors need to be moving away from divestment – it can play a role but should really be seen as a last resort.
“Optically, divestment can look very powerful for organisations but in terms of what it actually achieves – well, that is more questionable.
“As an example, last year, one of our affiliates was involved in the Exxon activist fight, where they supported Engine No 1 – as this tiny little activist investor took on a huge petrochemical company, galvanising different shareholder groups and driving investor-led change by installing two rebel directors on the Exxon board who have tried to push the company in a more sustainable direction.
“That type of change would not be possible, of course, if everyone pursued a divestment strategy – you would just end up with companies owned by people with no concerns around ESG or carbon transition and the world would definitely not be a better place.”
MAN AND MACHINE
“People talk about artificial intelligence, but I just see it as technology tools to aid good investment decision-making,” says Ian Macoun.
“Nevertheless, it is an area where tremendous progress is being made and, since it is expensive, scale does help. We see ourselves as the technology experts, here at Pinnacle. We do not expect our investment professionals to be spending time on it, so it is our job to understand what their needs are.
“We provide them with lots of different technology services and we are always looking
ahead. Obviously, we are a global operation, and everything has been in the cloud for a long time and so, when Covid-19 first hit, we were operating virtually, immediately. We did not miss a beat – in distribution or in any of our investment functions – as we are used to doing it that way anyway.
“We do a lot of things people would call ‘AI’ – but I would say, more simply, now that we
have so much data and so much analytical power available, machines do a bigger portion of the professional investor’s job than used to be the case.
“And that is great – let’s say for the sake of simplicity that, back in the day, 70% of an investment professional’s time was spent gathering and analysing data and 30% on ‘insights’.
“Well, now they can spend 70% of their time on insights because they have so much more powerful tools to gather and analyse the data for them.
“That is a great thing, but it does not mean machines are replacing humans – just that humans are spending their time on the most valuable aspects of the role. That is why technology is such a major part of what we do.”
This article first appeared in the June edition of Portfolio Adviser Magazine
