BT management takes stock and plans for 2002

MARCUS Fanning took the job as chief investment officer at BT Funds Management nine weeks ago. Up to that time he had been at AMP Hendersons.

At AMP Hendersons he had been inordinately successful, delivering returns to the equity funds of around 5 percentage points above the index performance. So why would someone with that pedigree want to go to a funds management team that had underperformed the market in the past 12 months and was also the subject of some criticism from the advisory industry and the market generally?

I took the opportunity with Mr Fanning recently to cover some of the issues related to BT Funds Management’s performance and the mandate that he had been given there.

Marcus, you were successful at AMP/Hendersons. Why did you decide to join BT in May this year?

A) Over time, BT has shown itself to have a very strong performance culture, and so I have always been attracted to BT as an organisation. And, like many people, I was disappointed to see BT’s Australian share fund was having a tough run over the past 18 months.

The opportunity to be involved in a turnaround presented itself, and the idea of being at BT during this time is something that appealed to me tremendously. When I joined AMP it was in a similar situation to where BT is today, so I am motivated to be involved in the reinvigoration of Australian Equities at BT.

We have seen some researchers put the BT Australian Share funds on hold. Is this still the case?

A) Some research houses are quite complimentary recently, while other research houses say we still have some work to do. I think you will find that research houses often have varying opinions on asset managers – whether it is BT or one of our competitors. Some place a greater weight on past performance. So for some, it will only be through the passage of time, as we drop off some past poor performance, that they can reconsider their views.

One of the most prominent research houses, van Eyk, has just lifted its hold from the BT Australian Share Fund, and that is a pleasing result. Van Eyk is quite willing to be predictive in coming to its conclusions.

In short, they said we are doing the right things in terms of risk management and think our global resources gives us an advantage to some other Australian equity managers.

We have done a lot to ensure the process is now in place to deliver investors a strong return. My challenge is to now translate this process into good returns for our investors.

My aim is to deliver competitive returns consistently, year-in, year out, and that over the longer term, say three years plus, we will be a top quartile manager.

The major issue causing the poor Australian share performance seemed to relate to the call that BT made in regard to technology. What has happened since your arrival to change the philosophy of the Australian share fund?

A) For the Australian share funds, the technology exposure is a misnomer. The portfolio did, however, have a large weighting to small telecommunication stocks, which have since been eradicated from a peak weighting of 7 per cent.

The other major drag on performance in the past 12 months was the -20 per cent underweight position in the banks. We have reduced this significantly with purchases in the major banks as well as Macquarie and Suncorp. This has proved timely given the recent rally we have seen in the financial stocks.

Our underlying research philosophy is similar to what I had at AMP Hendersons, and so I don’t see a need for substantive change.

What we have done, however, is change our portfolio construction rules to better deliver returns in a more measured risk environment. We will take a larger number of active stock calls rather than a select handful of really large positions. Our job is about getting more stock calls right than wrong. But when you do get them wrong we are not likely to deliver the large under performance of the past 12 months – our construction rules are designed to provide a safety net to investors.

Has the performance of the fund stabilised since your arrival?

A) I have been here just nine weeks. The portfolio has been transformed and investors should look forward to more stable returns. Consider where returns would be had we not made the changes in terms of buying the banks and selling the small telcos.

A couple of months is a very short timeframe from which to make an assessment after the portfolio transformation we have made. I am confident that investors will see a much-improved performance over the next 12 months.

If we are ahead of our major competitors in a year’s time, and our investors are happy, then we will have reason to feel like the team has achieved something.

What are the main portfolio changes that you have undertaken? What sectors are you now underweight in or overweight in?

A) Well, as I mentioned before, we have increased our holdings in banks and financials through such purchases as Macquarie Bank and Suncorp Metway. We remain, however, a little underweight to the financial stocks in comparison to the broader market. We have also beefed up our exposure to healthcare, via the addition of CSL to our other holdings in this space, which include Resmed and Cochlear. We also hold an underweight to Telecoms and Resources.

Aside from that, we have been looking for quality business franchises to add to the portfolio. Companies who fit this description include Wesfarmers, QBE, Computer-share, CSL and Fosters.

Have the stocks that caused the problems been eradicated from the portfolios?

A) Most of the stocks have, yes. But really, I think when you are assessing a fund manager you have to look beyond one or two stocks, because while last year a few select holdings dominated performance, there were a few stocks, like Westfield and Resmed, which delivered terrific performance. Similarly, some stocks we didn’t have much exposure to last year, like Coles Myer and Lend Lease, also proved to be smart decisions.

Last year’s poor relative performance was probably mostly the result of the fund’s construction.

It is one area we have worked on and, on arriving to BT in May, I am pleased to see the commitment for improvement in this area.

What processes have you put in place to ensure that this does not repeat itself in the future?

A) Without getting too technical, we have set some firm limits on the size of any one stock, and the size of broader industry sectors.

In short, this reduces our limit on risk, while still allowing for strong returns. We want to achieve more consistent returns with less volatility.

It is important to note though that we are still what is called an active manager, we will always be looking to give investors better returns than our competitors through strong bottom-up stock picking, now aided by an improved portfolio construction process.

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