Interview with Chris Inifer by Zilla Efrat

 

With the managed funds landscape constantly shifting, Australian equities manager Allan Gray has been reviewing new ways to deliver its investment strategies to Australian investors.

Chris Inifer, Allan Gray Australia’s Head of Retail, notes that there has been increased interest in ways in which investors can access manager skill in recent years.

Some products can be traded on the Australian Securities Exchange (ASX), such as actively-managed exchange traded funds (ETFs) and listed investment companies (LICs).

Currently, Allan Gray offers its funds directly to clients or through financial planners, as well as on a range of wrap accounts or platforms. They are also available through the mFund Settlement Service, and traded through many ASX stockbrokers in much the same way as listed shares.

Our goal is to protect existing investors

Inifer says Allan Gray has considered separately managed accounts (SMAs), which allow a professionally managed portfolio of stocks to be replicated. He says SMAs are becoming increasingly popular due to their perceived benefits of transparency and because they enable investors to establish their own cost base, which can make them more tax effective.

“But there’s more to SMAs than meets the eye,” he says. “With SMAs, it wasn’t clear to us that clients would be better off or get a better outcome.”

Specifically, Inifer says, Allan Gray was worried that SMA clients would not get the same experience as their managed fund clients.

He explains that under an SMA structure, it would be necessary for Allan Gray to provide holdings to the SMA administrator each morning, but it would be the SMA administrator doing the buying and selling of the stocks to replicate its portfolio.

“That administrator may or may not be able to manage the portfolio as effectively or efficiently as we do, or at the same pricing.

“In addition, parts of our portfolios may be hard to replicate. That’s because we are contrarian investors and don’t usually invest in popular shares. We build and reduce positions patiently so we can trade at a price that we believe is right.

“Our goal is to protect our existing investors. If we provide our holdings to an administrator, it may be prior to us either fully building or reducing our position. In turn this may negatively impact existing investors.

“You may also find that SMA administrators will look to build or reduce a position at any price, just to replicate a portfolio and fulfil their obligations to increase or reduce that position. But if a share is illiquid what does the SMA administrator do? It can either trade at any price, which is a bad outcome for the client. Or, it can decide not to hold the share or keep the share, which means the client portfolio is not a replication of our portfolio, which defeats the objective. Over time, performance could differ significantly.”

It’s performance, not the vehicle, that counts

Inifer says Allan Gray may consider ETFs in the future. These have also become increasingly popular as an effective way to access a range of local or international securities. Previously these have been mostly offered by passive or index managers, but more recently there has been growth in the number of active offerings.

“The costs to access them on the ASX are quite inexpensive and there are low ongoing fees. But ETFs are not cheap for the manager to establish. That means you do need to ensure that you are going to raise sufficient capital. Perhaps it’s easier if you have a strong brand and an already big uptake of your funds by financial planners.

“But,” he notes, “it’s not the structure or pricing you offer that matters, but your performance and whether that’s sustainable. In a low interest rate, low-inflation environment, investors and planners are looking for cost-effective ways to access markets and saving on fees is, on face value, an easy way to boost returns.

“However, we would argue that investors should be looking at total returns, after fees. Low cost isn’t necessarily better. Surely performance is what counts.”

Inifer also points out that buying traditional managed funds doesn’t have to be costly. “For example, at Allan Gray we offer a zero-base fee option in our Equity Fund Class B unit class,” he says. “It perfectly aligns our investors’ interests with our own as there is only a performance fee, which means that we won’t be paid unless the fund performs well.

“Ultimately Allan Gray is not precious about the vehicle used to access our investment skill,” he says. “We will consider any vehicle, as long as our existing clients are not disadvantaged and the vehicle enables us to treat all clients fairly. Managed funds remain a great option for a large number of investors, providing access to a well-diversified, professionally managed investment with relatively easy access.”

 

Chris Inifer holds a Bachelor of Business Economics and Finance (RMIT University) and a Postgraduate Diploma (with Distinction) in Financial Planning.