Lessons in stockmarket endurance
The redundancy note came out of the blue.
Andrew Bascand, a financial high-flier more used to being headhunted than let go, was managing New Zealand share investments for American investment firm AllianceBernstein when it decided to shut up shop in 2009.
"Shock and surprise, really," was his reaction to the news. "What they wanted to do was take out headcount globally. The [global financial crisis] had hit them hard and they thought the best thing to do was wind down a few offices around the world."
The New Zealand operation was profitable at the time - its 2008 net profit was $1.8 million - and Bascand's team had just been named the 2008 domestic fund manager of the year by consultancy Morningstar.
It was easy to decide what to do.
"Within a second of getting that redundancy note we knew we had a business together," says Bascand.
The business was Harbour Asset Management, which kicked off in Wellington in December 2009 with back office support from broking firm First NZ Capital. It opened its Australasian Equity Fund the following April.
Last month Harbour picked up its first fund manager of the year gong from Morningstar.
"It's good after four years to be on the board but I wouldn't take anything for granted," says Bascand.
With about $1.3 billion under management, Harbour rests on its laurels at its peril.
Alongside his peers in the industry Bascand is riding a resurgent stockmarket fuelled by KiwiSaver money, putting fund managers at the heart of an investment revival. The decisions of people like him are part of the big picture that finances government share offers, company investments and initial public offers.
While the sale of government shares in power companies and Air New Zealand have given a welcome boost for the capital markets, says Bascand, the ultimate test will be longer term.
"I suspect when we look back in three years one thing will have happened - the governance arrangements have created better companies. That's the one thing I'm looking for here."
There are benefits in releasing money for the Government to use elsewhere and local authorities should do the same, he says, "but the true success will be adding to productivity, and I can't measure that today."
It's a typically strategic view from the fund manager. After initially studying agriculture at Lincoln, Bascand attracted the attention of the Reserve Bank, which helped pay for his Masters degree in econometrics and maths.
On graduating in 1984 he joined the bank to work on freeing up currency controls and floating the exchange rate, continuing the theme with a two-year stint at the Bank of England before returning to the RBNZ to help with its first monetary policy targets agreement, which emerged in 1990.
The shift to investment began with AMP, which headhunted Bascand to fill a new role as head of strategy, and the die was cast.
There followed jobs setting up asset management units for AMP and Merrill Lynch in London, providing the ideal background for someone who might one day want to start his own fund management firm.
While Bascand regards himself as an economist and strategist more than a stock picker, he clearly relishes the detail in analysing investments.
"Every day you walk in, no matter how much you thought the day before you knew everything, you know very little. The challenge of the amount of information you have to read and digest in working out the prioritisation of that [investment] systematically, that's what I really like.
"You have to become a very broad generalist to manage money, and be prepared to listen to other people an enormous amount."
Fund managers are typically opinionated, forthright and prepared to trust their judgment in the face of contrary opinions. Bascand, while he expresses his views with understated care and precision, is cut from the same cloth, but not too much.
"[Fund managers] can be too opinionated," he says. "I think the successful ones have a core philosophy, a core belief."
As usual, Bascand is not making an idle remark. A keen student of what makes fund managers successful, he makes a point of travelling around the world every two years to interview key figures in the trade.
Ask him who he regards as the most inspiring and without hesitation he picks out James Anderson of Edinburgh-based fund manager Baillie Gifford.
Anderson, who returned to his flagship Scottish Mortgage Investment Trust in January after a six-month sabbatical, has seen his star soar alongside the trust's returns. In the last five years alone, Scottish Mortgage returned 233 per cent as it outperformed its traditional rival Alliance to become the biggest listed investment trust in Britain.
A growth investor, Bascand shares Anderson's affinity with the philosophy of US fund manager Thomas Rowe Price in the 1950s, as well as his interest in quantitative analysis and maths.
"[Anderson] has implemented it on a global market. He really is someone I admire and look up to. He has built a team around him of industry experts, people who really have deep insights into sectors, not just stocks."
"Thinking about my team here - I've got seven people - I like to think my guys don't only know their stocks, they know their sectors. So [research analyst] Kevin [Bennett] . . . he knows as much about Intuit as he would Xero, that's what I would hope."
Xero is one of those companies local fund managers often have mixed feelings about. Its soaring valuation - last week it was valued at about $5.2b - has looked increasingly at odds with the terrestrial reality of its business outlook. The question is, at what point do they let go of the balloon?
"Some people would say the biggest mistake I made last year was not investing in Xero," says Bascand. "The astonishing thing is we sold Xero at the beginning of the year and we'd already made a lot of money.
"We're delighted that we had one of our strongest performance years in 2013 without owning Xero. Were we right or wrong? We were obviously wrong. But my philosophy was that we'd done our work on it and couldn't quite find the value there despite it being a great company."
Sticking to your principles, despite the pressure to change, helps you make money, says Bascand.
There was a bad period in 2011 when Harbour's performance wasn't looking good and the fund manager reached out to clients to reassure them about staying with the programme.
"Within two months we had a really good recovery in many stocks. A classic example would be Seek and CSL, both of which have more than doubled from their lows."
But not all went well.
"The clear lesson from that period was that where governance was questionable or difficult, and where a company was in an industry that was struggling, we should have cut the position earlier. The most obvious example was Rakon."
Harbour had researched the crystal component maker thoroughly and thought it understood the business well, but perhaps it got too close.
In hindsight, "there were just too many red flags through that whole experience. I was shocked and surprised that so long into an investment career you can still make quite a few mistakes".
These days Harbour keeps a league table of listed companies' governance standards that feeds into its investment analysis. Discreetly, Bascand won't say who tops and tails the table.
However, for all the focus on sharemarket investing, Bascand sees fixed interest and high income funds as the growth area because KiwiSaver money will increasingly be released to savers turning 65 and those people will be looking for yield.
"Over the next five years that's where the growth is going to come from. We love our core business of managing growth equities and we really like our client base, but in terms of where Harbour's going it really is in that fixed interest and equity income area."
With business growth comes increasing public attention on fees. It's a touchy subject for many fund managers and Bascand is no different, but he sees market forces as an important restraint.
"I think fees are quite competitive in New Zealand. I may be wrong."
If there is a problem, he says, it is mostly with performance fees - the manager's bonus for delivering returns over a certain level.
Bascand argues equity fund performance should be measured against an appropriate benchmark, not against cash returns, there should be a hurdle so that bonuses are not paid for simply recovering losses, and there should be a cap so that fees do not exceed a certain level.
He won't name funds he regards as offending that code, except to remark on a competing income fund that has a lower base fee but a performance fee that kicks in above cash. "Now the cash rate's 2.5 per cent. I know what fee they're getting, it's huge."
Such fees will renew debate, says Bascand. "I am witnessing this debate globally and I think it's inappropriate how some of these fees are set today. I know the [Financial Markets Authority] are looking at it."
Performance fees, of course, are the flip side of performance. Ask him how much fund managers should be delivering and Bascand has no trouble coming up with a number. Returns of 2.5 to 4 per cent more than the market should be possible in the medium term, he says, "but not every year".
Anyway, four years is not long enough to judge how good a manager is.
"You need about 10 years' history to determine whether someone's got skill or not. If someone's adhered to the same process over 10 years and they're delivering over that length of time that's a pretty good result."
By Bascand's standards, Harbour's got a way to go yet.
James Anderson Head of long-term global growth at Edinburgh-based fund manager Baillie Gifford. Manager of the £2.7b Scottish Mortgage Investment Trust.
Education: BA in Modern History, MA in International Affairs. Joined Baillie Gifford in 1983, becoming a partner in 1987.
Quotable quotes: "The entire industry superstructure is a construct made to defend the ideology of fund managers and investment banks taking their profits."
"I think big oil, and big pharma, are finished and banks still haven't found the right business model. The perception that because they are big parts of an industry these companies are ‘safe' is wrong in the long run."
"Stockmarkets are not a matter of most companies going up a bit. The vast majority of returns are generated by a very small number of companies."
- Sunday Star Times