The Workings Behind the Awards

S&P says: Macquarie Professional Series, which is a part of Macquarie’s Banking and Financial Services Group, is recipient of the Product Distributor of the Year award for the third year in a row. The Macquarie Profes­sional Series is a range of funds designed to focus on a limited number of exclusive relationships with specialist managers with whom Macquarie has formed partnerships, and whose products are then offered to the Australian retail market.

The current Macquarie Professional Series managers rated by S&P include Arrow­street Capital (five-star rated global active, quantitative equities manager), Indepen­dent Franchise Partners (five-star rated global equities, large-cap manager), Walter Scott and Partners (five-star rated global equities, large-cap manager), and Winton Capital (five-star rated alternative strate­gies, futures-based strategy manager). The aim of the Macquarie Professional Series is to develop and distribute a suite of “best of breed” funds, providing these partners with administrative and distribution expertise in the Australian market. Overall, the quality of the managers chosen by Macquarie Profes­sional Series is a reflection of the discern­ing approach it has taken in selecting these managers, rather than just distributing a large number of average products.

Macquarie has assessed the opportuni­ties and relevance of these products for the Australian marketplace and has provided Australian investors with access to managers and capabilities that may not have otherwise been available to them. Macquarie Profes­sional Series continues to provide quality fund and manager information to financial planners, investors, and other industry stakeholders. Macquarie Professional Series is again a worthy recipient of this award.

Adrian Stewart, head of distribution, Macquarie Professional Series: We begin with a team of people who are searching for managers, and who are very well equipped to carry out the search. We do a lot of due diligence at the desktop, before we get on a plane or sit in front of the managers them­selves. We learn as much as we can about the market, and then we set about meeting the managers.

In the last seven years, since we established the Professional Series, we’ve seen more than 450 managers. We are very active. There would not be a week that goes by without a manager coming to Australia and knocking on our door, hearing about the success that we’ve had in terms of distribution and raising funds in this market. So we have access to managers, and if any managers are coming into town, they will come and see us.

We’ve raised $5 billion in seven years across the Australian retail and institutional market.

We have spent the last three-and-a-half or four years focused very much on honouring our partnerships, in terms of raising funds. At the same time we’ve stayed in touch, we’ve seen managers, and in the last six months we’ve been seriously engaged in manager selection.

We’re not looking to partner with multiple managers and just scatter the market. They are very carefully selected and we take a long time to partner with a manager, because everything must line up.

WINNERS: Schroder Investment Management Australia

Winner of S&P’s emerging markets category in 2007, 2008, 2009, 2010 and 2011

PIMCO Australia (Equity Trustees)

Winner of S&P’s fixed interest category in 2008 and 2011, and global fixed interest in 2009, 2010 and 2011

CBRE Clarion Securities

Winner of S&P’s property category in 2007, 2008, 2009, 2010 and 2011

CBRE Clarion Securities: CBRE Clarion Securities (CBRE Clarion) manages ING’s Wholesale Global Property Securities Fund, and has been rated five stars by S&P for the past four years in a row. This capability has won the listed property sector award for five years running (including in 2011), and has therefore been recognised as a winner of S&P’s newly introduced Sustained Excellence Award.

CBRE Clarion boasts one of the largest, most stable, and experienced investment teams in S&P’s rated peer group, with representation in the key regions in which they invest. It is well led by highly regarded CEO and co-CIO Ritson Ferguson. In our opinion, the depth of investment talent has been enhanced through the addition of experienced former CBRE Global Real Estate Securities person­nel.

CBRE Clarion employs a disciplined multiple-step portfolio-construction process, combin­ing top-down portfolio design and bottom-up security selection based on proprietary real estate market and public company research. The investment process is conservatively and consistently applied within an appropriate risk-management framework.

While the past year to June 30, 2011, was one where the fund, along with most other S&P rated peers, struggled to outperform its benchmark (after fees), the fund has met its three-year excess return objective and its benchmark.

PIMCO Australia (Equity Trustees): PIMCO has won fixed interest awards for four years in a row. It won the Australian fixed interest and global fixed interest (including diversified) awards in 2011 and has therefore been recognised as a winner of S&P’s newly introduced Sustained Excellence Award.

PIMCO has been a stable organisation throughout its history, and has a high level of staff retention in key areas. The firm has significant resources at its disposal, includ­ing a team of investment-related personnel numbering more than 500, with Bill Gross and Mohammed El-Erian leading the team in their co-CIO capacity. Locally, the investment team is led by Robert Mead, who we view as one of the more impressive fixed interest managers that we engage with in our reviews of domestic fixed interest capabilities.

The Australian fixed interest team is skil­ful and highly experienced, with access to substantial offshore resources, which are among the largest in S&P’s rated universe. The process engages the views of all invest­ment personnel. Diversification of investment ideas reduces the reliance on single-strategy positions and themes, thereby delivering a more consistent return profile over the me­dium to long term. The firm adds value from a combination of top-down strategies such as duration, country allocation, yield curve, sector rotation, and bottom-up security selection. The process is supported by highly sophisticated and well supported proprietary risk systems. The firm’s investment process is clearly defined, repeatable and has led to class-leading returns over both the short and longer term.

Schroder Investment Management Australia: Schroders has won the global equities – emerging markets sector award for five years in a row, including 2011, and has therefore been recognised as a win­ner of S&P’s newly introduced Sustained Excellence Award. Schroders has consis­tently demonstrated its superior capability in emerging markets over a number of years relative to its peers. Schroders’ investment process is among the most detailed, thought­ful and proven of the capabilities S&P rates in emerging markets.

Allan Conway has developed a very success­ful approach to managing emerging market portfolios. S&P has a very high regard for the calibre of individuals in the team as well as the way in which the team is structured and resourced. The analyst incentive structure strongly encourages analysts to deliver high­er conviction calls to the portfolio managers.

The manager seeks to generate outperfor­mance from both country and stock selection in roughly equal proportions. A standout fea­ture is the focus on the efficient use of capital within the portfolio. The manager seeks to maximise the performance impact of the analyst recommendations that are working well, and minimise the effect of those that are not. All components of the investment process are continually monitored for their ability to add incremental value or prevent loss. Schroders’ risk emphasis on all stages of the investment process distinguishes it from its peers.

Alternative Diversified Strategies

WINNER: Winton (Macquarie Professional Series)
FINALISTS: • AQR Capital Management
• Aurora/ Barclays Capital Fund Solutions
• BlackRock Investment Management (Australia)

Adrian Stewart, head of distribution, Macquarie Professional Series: Winton has always had a focus on absolute returns. They performed very well in GFC I and they continue to perform very well in the continu­ation of that to GFC II and this is really be­cause of the flexibility in their strategy. They can be long, short, across a hundred different markets. So what they’re looking to do is find trends in a climate where there is significant volatility, either way – sideways, upwards or downwards. They will identify trends and in­vest accordingly with the view to deliver real returns and absolute returns.

Their dedication to research, which in our view is significant, puts us in the best position to capitalise on the volatility, so it improves the opportunity set and the chances of success in these markets. It’s very difficult to predict returns but we believe [in] their commitment to research. They have a very, very strong team of over 100 PhD doctoral and post-doctoral researchers committed to this cause.

I think having an outstanding manager like Winton is core; but in terms of our distribu­tion team and the strategy we apply there, to engage with the market, educate the market and help them educate their clients about Winton is just central to what we do.

It’s very difficult to predict the future but I think I would suggest more of the same – the volatility, the sentiment within the investor market.

S&P says: Winton Capital and the Global Alpha Fund represent a global leader within managed futures and CTA style trading. S&P has perennially rated Winton a five-star fund manager. This rating is driven by our conviction in the skill, process and risk management inherent in this global sector leader. Performance has been consistent and superior on a risk-adjusted basis within the peer group.

CTAs and managed futures have historically offered investors a non-correlated alternative return strategy that is liquid and exchange traded.

David Harding is Winton’s founder, chair­man and head of research. He is one of the pioneers of trend-following systematic trading in Europe with an established track record over three decades. In 1987 David co-founded Adam Harding & Lueck (AHL), a quantitative fund manager, which was later acquired by Man Group. Winton Capital has grown to more than $A21 billion in FUM and is one of the 20 largest hedge fund managers in the world.

Winton’s guiding philosophy is one of con­tinuous research, which it pursues at a high level, devoting considerable resources in terms of computing power and personnel, including more than 90 researchers at last count, with numerous PhDs.

The principle is that advanced quantitative research can pay off – quality personnel and vast computing power can be put to work to isolate anomalies and forecast price move­ments with an aim to successfully exploit them for profit. This general philosophy and research approach guides many other large managed-futures operators, and the particu­lar sources of alpha identified and codified in this way come to represent the intellectual property (IP) of each firm.

Market conditions: Commodity and finan­cial markets have experienced numerous and varied themes in recent years, including investor desire for real assets and a potential inflationary hedge. Large inflows have been recorded into the managed futures industry with Winton being a large recipient.

Global macro conditions have varied con­siderably over the past 12 months with high levels of volatility. Trends that had been established faced quick reversals with gov­ernment interventions at various times. Most trend-following strategies will suffer in highly volatile “whipsaw” or sideways markets. Win­ton has shown an ability to avoid the worst of these drawdown periods relative to the peer group and industry benchmarks, highlight­ing a superior risk-adjusted return profile. Winton Global Alpha was able to generate positive performance over this time period, posting an 8.32 per cent return in the year to June 30, 2011. More importantly, Winton has been able to provide strong performance in the subsequent third quarter of 2011 as traditional asset classes experienced sharp sell-offs, returning more than 7 per cent since July. CTAs/managed futures perform strongly in periods of significant market trend or break-outs.

Actively managed commodities and futures managers are able to exit markets that may be trending lower and/or take short positions in declining markets.

CTAs have historically shown an asymmetric positively-skewed return profile, which can be explained by an active risk-management framework commonly found in the peer group that stops losing trades and lets profit­able trades run. The ability to short fall­ing markets is an explanation for Winton’s strong performance during the GFC.

Alternative Equity Strategies

WINNER: K2 Asset Management
FINALISTS: • Ascalon/Regal Funds Management
• Colonial First State Investments
• Platinum Asset Management

Market conditions: Australian share market performance over the 12 months to July 2011 was positive; the S&P/ASX 300 Ac­cumulation Index rose 11.9 per cent over the 2011 financial year despite ongoing global economic concerns. Additionally, domestic natural disasters and political uncertainty have added to local market challenges. More recently, the market sell-off during the third quarter of 2011, on the back of global equity market movements, has outlined the poten­tial benefits of variable beta managers and their ability to lower overall market exposure for the purpose of capital preservation.

As the overall global markets environment remains uncertain, and probable periods of heightened volatility remain, managers with a strong process and an ability to vary their market exposure should outperform “long-only” style investments.

K2, over its long track record, has shown an ability to outperform the benchmark with lower volatility of returns and, more importantly, lower overall market exposure, signifying its skill. Since inception through to August 2011, the fund has outperformed the ASX 300 TR index by more than 5 per cent net per annum, with an average equity market exposure of 63 per cent since the January 2000 launch of the fund.

The capability has consistently outperformed the relevant indices by a substantial margin over all periods, including 2011 market downturns. The combination of an ability to short, hold cash and rotate among various equity investment themes has delivered in­vestors strong equity performance and lower volatility of returns. During the period of the GFC the fund suffered a -23 per cent return in comparison to -47.5 per cent for the ASX 300 TR index.

S&P says: The K2 Asset Management Aus­tralian absolute return capability has been rated five stars by S&P Alternatives research over several review cycles. This signifies our conviction in the team’s ability to outperform peer funds through the strength of team, process, and risk management techniques.

K2 Asset Management (K2) is an absolute return equity manager with a focus on preservation of investor capital. It invests on a long/short equity basis in the Australian market. The multi-style strategy through the multiple-portfolio-manager approach seeks to minimise exposure to any single invest­ment style and deliver attractive returns through a range of market conditions.

K2’s investment team is well resourced in our view and comprises 10 portfolio manag­ers, four of whom are portfolio managers for the Australian fund. The senior members are highly experienced.

David Poppenbeek is head of the Australian strategy. He has 20 years’ finance industry experience, including six years in funds management. As head of Australian strategy, he helps Mark Newman, K2 Asset Manage­ment’s CIO, determine the net equity expo­sure range of the Australian fund based on current market conditions.

In addition to Poppenbeek, portfolio manag­ers Campbell Neal, Joshua Kitchen, and Nick Leitl also contribute to the fund. Neal, a senior portfolio manager, is also a found­ing principal and has 24 years’ experience in the finance industry. S&P views this team’s unique competitive method – of allocat­ing capital to differing styles based upon portfolio manager performance and market outlook – as a positive key differentiator rela­tive to peer funds.

Andrew Hall, head of distribution, K2: It’s great recognition of the alternative to long-only that we represent, and that we do things slightly differently, and perhaps there is a real appetite now for protection in people’s portfolios.

That appetite is increasing, and we’re seeing it definitely – people are looking for someone who can offer some protection in portfolios, and financial planners are aware of the need for somebody to be able to move quickly, be agile and be vigilant on what’s happening, and make changes in clients’ portfolios very quickly.

We’re certainly seeing an aversion to risk again. We’re getting more appetite now from dealer groups and financial planners for someone who can provide something a little bit different from the long-only strategy [by] being able to make some tactical calls to reduce people’s exposure, and simply by taking some chips off the table and moving into cash. We’re not…guaranteeing that we can’t have a negative month; but what we are trying to do is reduce your exposure when things look very ordinary, as they have in the last few months.

I think the next 12 months is still very un­certain. While very short-term, it looks like there may be some improvements in Europe; the long-term debt situation certainly is not being solved, and that’s going to create continuing volatility in markets for the next 12 months.

So you need somebody who’s going to be able to adapt to the changes that come up consistently.

Australian Equities – Small Cap

WINNER: Aviva Investors Australia
FINALISTS: • Celeste Funds Management
• Eley Griffiths Group
• Fairview Equity Partners (nabInvest)
• Invesco Australia

The Aviva small-caps team was relatively neutral at the sector level at the end of Au­gust 2011, while most funds within the peer group tended to be significantly underweight resources.

Australian Fixed Interest

WINNER: PIMCO Australia (Equity Trustees)
FINALISTS: • AMP Capital Investors
• BlackRock Investment Management
(Australia) – (Indexed)
• Colonial First State Global Asset Management
• Tyndall Investment Management

Robert Mead, managing director, PIMCO: On the Australian front it reflects a very sound and consistent team that’s been in place for almost five years now. We’ve carved out a pretty good track record, slowly growing our domestic capabilities and our domestic assets under management. And also I think it’s reflective of a change in the investor mindset, of being much more fo­cused on bonds as part of their overall asset allocation.

At various times over the past year, the “new normal”, as PIMCO coined, has been in and out of fashion. As we speak, it’s very much back in fashion as people realise that volatil­ity is back and there’s all kinds of market upheaval taking place. But at various times there’s been a belief that we’ve gone back to the “old normal”. So being responsive, and sticking to our guns, thinking that we are in a legitimate slow-growth environment globally, has meant that the portfolios have had to be positioned along those lines.

The world continues to be a risky place. All investors have to get used to elevated levels of volatility, and it just becomes an appropri­ate time frame to have true diversification in your portfolio allocation. The only really true defensive asset is a government bond, even more so than a term deposit – much more so in fact: government bond prices go up when risky assets are going down. So keeping those diversified portfolios intact is going to be key for the next 12 months.

S&P says: PIMCO has been a stable or­ganisation throughout its history, and has a high level of staff retention in key areas. The firm has significant resources at its disposal including a team of investment-related per­sonnel numbering more than 500, with Bill Gross and Mohammed El-Erian leading the team in their co-CIO capacities.

Locally, the investment team is led by Rob­ert Mead who we view as one of the more impressive fixed interest managers that we engage with in our reviews of domestic fixed interest products.

The firm’s investment process is global, with open lines of communication, visible interac­tion, and accountability of team members. The process engages the views of all invest­ment personnel through formal quarterly, cyclical and annual secular forums, which generate a strategic three-to-five-year outlook for the fixed income markets. Diversification of investment ideas reduces the reliance on single-strategy positions and themes, thereby delivering a more consistent return profile over the medium to long term. The firm adds value from a combination of top-down strategies such as duration, coun­try allocation, yield curve, sector rotation, and bottom-up security selection. The end result is the creation of a model portfolio that ensures a consistent application of the firm’s views across all client mandates.

PIMCO’s business structure is clearly defined, with business management and account management responsibilities separated from the investment team. This clears the way for the portfolio manage­ment team to focus on investing rather than business growth and marketing. PIMCO has established itself as a significant manager of global fixed income assets in Australia.

Market conditions: Economic conditions have varied considerably over the past 12 months with uncertainty surrounding the stability of a number of peripheral European economies, and the progress of the economic recovery in the US dominating the discus­sion. From an Australian perspective, the discussion continues to be centered on the two-speed economy, with economic releases throughout the period providing a mixed view on the strength of the local economy.

During this “risk-on, risk-off” environment, market volatility has created an opportunity for active fixed interest managers to add value utilising the strategies at their disposal which include duration, curve, sector, and se­curity. These strategies have been deployed to varying degrees of success depending on the time period observed. However, by and large there has been a general acceptance of greater allocation to credit sectors with an increased focus on those sectors offering stronger fundamentals. Additionally, duration strategies have tended to focus on the expec­tation of increases in interest rates, although this has certainly not been the reality in the second half of 2011.

Portfolios continue to reflect the ever chang­ing, ever challenging economic environment with periods of heightened risk aversion met with a focus on the defensive characteristics of the asset class, a greater focus on portfo­lio liquidity, and where possible, a focus on the prevailing opportunities.

Australian Equities – Large Cap

WINNER: FIL Investment Management (Australia)
FINALISTS: • Greencape Capital
(Challenger Managed Investments)
• Perennial Value Management
(Perennial Investment Partners)
• Schroder Investment Management Australia
• Tyndall Investment Management

Market conditions: Australian shares (S&P/ASX 300 Accumulation Index) rose 11.9 per cent over the 2011 financial year, despite ongoing global economic concerns – includ­ing developed market debt, Chinese inflation and a faltering US economic recovery – which remain unresolved. There was also no lack of domestic headwinds such as natural disasters, political and policy uncertainty, and a difficult trading environment for non-resource related sectors.

The two-speed economy is alive and well, with resource stocks outperforming industri­als, underpinned by continued growth in commodity prices. Domestic cyclicals and discretionary retail stocks continue to oper­ate at the other end of the scale, exposed to difficult trading conditions, including cautious consumers and a high Australian dollar that reached post-float highs.

The market performed quite strongly up until May/June, which was a prelude to the August sell-off, with the negative market sentiment persisting. While most managers expect diffi­cult conditions to continue for some time yet, valuations are appearing attractive, at least based on historical averages, if one is pre­pared to take a medium to long-term view.

Fidelity portfolio manager Paul Taylor does not take large macro-driven sector bets, preferring to manage the portfolio around his core strengths as a bottom-up stock picker, with a preference for earnings growth and increasing returns on capital. He remains firmly focused on quality companies that have good industry positions and growth opportunities, which he views as more likely to be bid-up in a lower growth environment. Compressed valuations stemming from the recent sell-off are creating opportunities to purchase stocks viewed as attractive.

S&P says: The Fidelity Australian Equities Fund is one of the standout offerings within the highly competitive large-cap Austra­lian equity space. While the capability has been five-star rated since 2008, this is the second year in a row that the manager has received S&P’s coveted Australian equities large-cap award. Portfolio manager Paul Taylor has been at the helm since the incep­tion of the fund in 2003. He and his team of analysts have demonstrated great skill over an extended period of time. Importantly, we believe the manager’s competitive strengths remain in place for this to continue.

Fidelity’s Australian equity team is structured quite differently from that of most peers, with stock coverage provided by both domestic and offshore-based analysts, who form part of the manager’s extensive global research network. This potentially provides the team with greater global perspective when assess­ing companies, particularly those deriving a significant component of their earnings offshore. The local team has been extremely stable, having never lost an analyst to a com­petitor. As a result, the team has continued to strengthen as the analysts have gained more experience, and additional hires have been made.

Fidelity’s strong research culture and Taylor’s specific investment approach ap­pear well suited to the Australian market. In our view, Taylor demonstrates great clarity around portfolio decision-making and the overall strategy of the fund. Rolling returns have consistently exceeded the fund’s objec­tives since inception, and this has occurred across varying market conditions, not just those more conducive to Taylor’s growth-ori­entated investment style. This is a reflection of Taylor’s stock-picking abilities, as well as the strength of the core team of locally based analysts.

Gerard Doherty, managing director, FIL Investment Management (Australia):

For every investor around the world it’s been a challenging time of late because you’ve had a great deal of volatility in the markets and a great deal of uncertainty. The real thing that has come through within the last six months, but most recently with the volatility of the last couple of months, is that the markets are telling the governments of the world that they’re not handling the debt issues as well as they should – particularly in Europe, but also the US. That’s why I think we’ve seen volatility – it’s markets saying ‘you’ve got to sort this out’ to the governments.

The one underlying factor – I wouldn’t want to depart from the fact that we’ve got a wonder­ful, skilful portfolio manager in Paul Taylor who runs the Australian Equity fund, he’s a quintessential Fidelity stock picker – but the one core ingredient of Fidelity in everything that we do in equities is our research. We have always been committed to a bottom-up view of the world – bottom-up view of compa­nies – so we’ve put a lot of money and effort into research around the world. We have people on the ground, on location around the world visiting companies. Our coverage and connectivity are endless in this sector.

Australian companies are in very good shape, their balance sheets are in very good shape, so we expect a lower growth environment, but we’d anticipate overall returns and mar­kets to be lower. But the fundamental thing is dividend yields of Australian companies at the moment are fantastic.

Property

WINNER: CBRE Clarion Securities
FINALISTS: • AEW Capital Management (BT)
• AMP Capital Brookfield

Market conditions: The global property securities sector performed strongly for the year to June 30, 2011. The UBS Global Investors Index (Hedged to $A) (UBSGIIHA) returned 33.8 per cent and the FTSE EPRA/ NAREIT Developed Index (Hedged to $A) returned 28.3 per cent. The year to June 30, 2011 also saw the UBSGIIHA outperform broader equities – as represented by the MSCI World ($A hedged) Index – by about 13 per cent.  Notwithstanding strong absolute perfor­mance, active managers still found it difficult to exceed their benchmark. Only three of the 12 active managers rated outperformed their relative benchmarks over the year to June 30, 2011 (after fees). While many manag­ers derived positive attribution from stock selection, issues associated with regional allocation, currency, and cash continued to negatively affect fund performance.  Performance of the capability has been influ­enced by a myriad of issues outside of stock-and property-level fundamentals.

The influ­ence of macroeconomic and capital market issues has been significant, and has proven a difficult trading environment for a number of managers. Funds positioned on the wrong side of macro issues – such as sovereign debt problems, the unpredictable consequences of natural disasters and government market intervention – saw performance adversely affected.  CBRE Clarion employs a fundamental, value investment style. While capital is allocated to regions and subsectors where CBRE Clarion perceives real-estate fundamentals to be strongest, the majority of active risk budget is spent at the stock level – specifically on real estate securities displaying above-average cash flow yield and earnings growth, quality management, and conservative capi­tal structures.

S&P says: CBRE Clarion Securities (CBRE Clarion) manages ING’s Wholesale Global Property Securities Fund, which has been rated five stars by S&P for the past four years in a row. In July 2011, Clarion Real Estate Securities (CRES) was sold to CB Richard Ellis Group (CBRE), the world’s larg­est real estate services firm. We believe that CBRE constitutes a suitable home for the CBRE Clarion business, and are pleased that the team, its philosophy, and processes, have remained essentially intact. Furthermore, we believe that direct access to the global resources of CBRE and CBRE-affiliated busi­nesses will enhance the team’s information advantage over time.  CBRE Clarion boasts one of the largest, most stable, and experienced investment teams in S&P’s rated peer group, with representation in the key regions in which it invests. It is well led by highly regarded CEO and co-CIO Ritson Ferguson.

In our opinion, the depth of invest­ment talent has been enhanced through the addition of experienced former CBRE Global Real Estate Securities personnel.  CBRE Clarion employs a disciplined multiple-step portfolio-construction process. This combines top-down portfolio design and bottom-up security selection based on proprietary real estate market and public company research. The investment process is conservatively and consistently applied within an appropriate risk-management framework.  While the past year to June 30, 2011 was one where the fund, along with most other S&P rated peers, struggled to outperform their benchmarks (after fees), the fund has met its three-year excess return objective and its benchmark.

Bryce Doherty, head of wholesale, UBS*:  Clarion has won this award for a number of years now, back to back, and I think it reflects consistency in the way they’ve been running their portfolio over that period of time.  The team has been together for a significant amount of time, and they very much stick to doing just property.  The global property markets over the past couple of years have actually performed not badly, albeit off a relatively low base after having a pretty bad time during the GFC. Global property options for financial advisers here in Australia are rather limited when you contrast it with equities large cap, and we would suggest that to a degree global prop­erty is slightly under-represented in adviser portfolios as a result of their experience in the GFC.

There’s a view that there’s plenty of oppor­tunity in global property, and that valuations around the world – including Europe, for that matter – are not particularly stretched. However, as I said, global property has had a pretty good run off a low base, so we probably expect people to moderate their expectations. However, it definitely would be an important part of any portfolio advisers are putting together for their clients.  Obviously the fund is run within the param­eters of the mandate for the product that we distribute here. But within that mandate we would expect that Clarion would continue to deliver the solid longer-term performance that they’ve been able to achieve here over a number of years.  *Following its takeover of ING Investment Management, UBS distributes the invest­ment capability of CBRE Clarion Securities in Australia.

Global Fixed Interest

WINNER: PIMCO Australia (Equity Trustees)
FINALISTS: • Bentham Asset Management
• BlackRock Investment Management
(Australia) – (Indexed)
• Macquarie Investment Management
• Schroder Investment Management Australia

Market conditions: Economic conditions have varied considerably over the past 12 months with uncertainty surrounding the stability of a number of peripheral European economies, and the progress of the economic recovery in the US dominating the discus­sion. From an Australian perspective, the discussion continues to be centered on the two-speed economy, with economic releases throughout the period providing a mixed view on the strength of the local economy.

During this “risk-on, risk-off” environment, market volatility has created an opportunity for active fixed interest managers to add value utilising the strategies at their disposal which include duration, curve, sector, and se­curity. These strategies have been deployed to varying degrees of success depending on the time period observed. However, by and large there has been a general acceptance of greater allocation to credit sectors with an increased focus on those sectors offering stronger fundamentals. Additionally, duration strategies have tended to focus on the expec­tation of increases in interest rates, although this has certainly not been the reality in the second half of 2011.

Portfolios continue to reflect the ever chang­ing, ever challenging economic environment with periods of heightened risk aversion met with a focus on the defensive characteristics of the asset class, a greater focus on portfo­lio liquidity, and where possible, a focus on the prevailing opportunities.

S&P says: Of the seven PIMCO capabilities that we rate, all have received a five-star rat­ing, highlighting our opinion that across mul­tiple opportunity sets, the firm can produce class-leading returns within an appropriate investment time frame. This is evident in the return profile of these products over the short, medium and long term. Not surpris­ingly, the firm scores highly on a number of metrics used by S&P.

PIMCO has been a stable organisation throughout its history, and has a high level of staff retention in key areas. The firm has significant resources at its disposal includ­ing a team of investment-related personnel numbering more than 500, with Bill Gross and Mohammed El-Erian leading the team in their co-CIO capacities.

Locally, the investment team is led by Rob­ert Mead who we view as one of the more impressive fixed interest managers that we engage with in our reviews of domestic fixed interest products.

The firm’s investment process is global, with open lines of communication, visible interac­tion, and accountability of team members. The process engages the views of all invest­ment personnel through formal quarterly, cyclical and annual secular forums, which generate a strategic three-to-five-year outlook for the fixed income markets. Diversification of investment ideas reduces the reliance on single-strategy positions and themes, thereby delivering a more consistent return profile over the medium to long term. The firm adds value from a combination of top-down strategies such as duration, coun­try allocation, yield curve, sector rotation, and bottom-up security selection. The end result is the creation of a model portfolio that ensures a consistent application of the firm’s views across all client mandates.

Robert Mead, managing director, PIMCO: We resource the investment team in such a way that we feel that we have insight into what’s happening in global economies and markets, and just test and re-test every single assumption that goes into portfolio construction, remaining humble and never getting any form of complacency in terms of how we’ve been achieving success in the past. We’re starting from scratch every day to ensure that we can continue on the right path for our clients.

We still see a highly volatile marketplace and investors must be prepared to weather the volatility. Some of the best ways to do that is to have highly diversified portfolios and also be very cognisant of each individual’s invest­ment time horizon.

There’s a much higher level of awareness in relation to how much risk an individual inves­tor can [tolerate] but that’s a slow moving train. But there’s definitely momentum there, which is very encouraging, but it’s relatively slow.

The big change, very much in recent times, is the morphing of what used to look like interest-rate risk into credit risk. So when the typical investor made an investment in Greek bonds a few years ago, they were making an interest-rate decision. It turns out that they hold a distressed credit posi­tion. So understanding how those dynamics are changing very, very rapidly in the global bonds space is something that all investors [have had to] get ahead of in order to keep the portfolios on track.

Global Equities – Developed Markets

WINNER: Independent Franchise Partners
(Macquarie Professional Series)
FINALISTS: • Arrowstreet Capital (Macquarie Professional
Series)
• Grant Samuel (Epoch Investment Partners)
• Platinum Asset Management
• Walter Scott (Macquarie Professional Series)

Market conditions: The past 12 months have brought a series of challenges to global equity investors, predominantly macroeco­nomic challenges. In particular, concerns about sovereign indebtedness in the periph­ery of Europe mounted throughout the period and escalated dramatically during June. The afflictions of Greece have threatened to affect other parts of the Eurozone and its bank­ing system, resulting in sharp rises in those countries’ government borrowing costs, a series of government bail-outs, as well as heightened volatility in global financial markets. In addition, investors have been unsettled by unrest in North Africa and the Middle East, by the supply-chain-related disruption from the Japanese tsunami, and rising food, commodity, and energy prices.

Against this uncertain backdrop, financial markets are likely to continue to be volatile and prone to sudden changes of fortune. However, the prospects for some companies remain appealing. Corporate earnings con­tinue to grow, balance sheets are robust, and borrowing costs for higher quality business are low. Investors will have to be mindful of a broad range of risks over the next year. This means investors must be vigilant about where they invest, identifying global equity managers that can uncover companies that generate real cash flows from reliable sources.

S&P says: IFP was established in June 2009 by the former Morgan Stanley Investment Management (MSIM) global franchise team. IFP applies a distinctive, benchmark-un­aware investment approach, culminating in a concentrated portfolio of companies consid­ered to be high quality with strong, sustain­able franchise value. The investment team of four, while small, is relatively experienced and sufficiently resourced for the focused nature of the product. All team members are owners in this boutique investment manage­ment business.

IFP invest only in companies whose primary competitive advantage is supported by a dominant and durable intangible asset – be it a powerful brand, exclusive patent, highly defining trademark, licence, distribution network, or copyright. This approach results in persistent portfolio biases, particularly favouring consumer sectors. The manager is focused on identifying high quality business­es that earn high returns on capital without having to significantly leverage their balance sheets.

IFP invests in businesses that have recurring revenue streams, have wide margins and that generate high and stable, free cash flow. Although share prices on these strong brand leaders have fallen recently, their consistent cash flow should keep their dividend yields high, or enable the company to buy back shares. They can also use their cash flow to grow organically, without using a lot of capital.

S&P believes that IFP’s strong absolute value orientation also results in a bias towards capital preservation, which can be seen rela­tive to its peers not only in the recent market downturn, but also over the longer term.

Megan Aubrey, head of third-party funds, Macquarie: We’ve been partner­ing with Independent Franchise Partners for six or seven years now, and for the two of us to be accepting this award means a huge amount to us.

Independent Franchise Partners has always been true to their investment philosophy, and they really do not waver from that. They’ve stuck with that throughout the last 12 months in particular, and it has really served them well. Their return numbers in the last 12 months have been very, very strong – I think 15 per cent in excess of their benchmark, which has been fantastic.

And that’s why we’ve selected the manager and relied on them through this difficult time – and clients have been rewarded for that.

Just like S&P would do, we look at multiple things. The people are very, very important, we think, and we like to get to know a man­ager and work with them. It’s a very close relationship that we have with Independent Franchise Partners, and I think they’ve stuck to their process the whole way through, and their philosophy, and that’s what we really look for.

I think it’s going to be difficult. I think it’s going to be very volatile, and there’s a lot that the global economy has to work through before we see some clear air. The good thing about Independent Franchise Partners is their process really looks at quality; so through any difficult periods, they’re a good manager to have within your portfolio.

Global Equities – Emerging Markets

WINNER: Schroder Investment Management
Australia
FINALISTS: • Aberdeen Asset Management
• BT Investment Management
• Colonial First State Global Asset Management

Market conditions: Against a background of flagging confidence in the rate of recovery in the developed world and the continu­ing and deepening crisis in the Eurozone, governments in emerging countries have continued to battle with inflation, which is their biggest concern. Almost without excep­tion these developing countries have engaged in monetary tightening through a combina­tion of higher interest rates and an increase in bank capital requirements.

Investors bet heavily on continued expansion, particularly in China and South-East Asia, where policy through the 2010-11 financial year maintained a bias toward growth over fighting inflation. Chinese inflation for the 2010-11 financial year was 6.4 per cent, its highest rate in almost two years. Inflation accelerated over the past 12 months in many other emerging economies, most notably Vietnam (21 per cent). The largest drivers in this global inflation trend were food, energy and commodity prices. The IMF food price index rose 33 per cent in the past 12 months, driven by increasing global demand and natural disaster supply shocks such as the mass flooding in Pakistan and Brazil, and wildfires in Russia and Eastern Europe. Over the 2010-11 financial year commodity prices gained 35 per cent, gold gained 21 per cent, while the oil price added 26 per cent.

Given the issues with inflation, equities in emerging markets had a strong 12 months, gaining 16.8 per cent in local currency terms. The performance of global emerging markets in Australian dollars, over the 12 months to June 30, 2011, was 0.8 per cent, as measured by the MSCI Emerging Market Index ($A).

S&P says: Schroder Investment Manage­ment (Schroders) wins this award for the fifth consecutive year. Allan Conway has devel­oped a very successful approach to managing emerging-market portfolios. The investment process employs a quantitative model to drive country allocation, and is combined with stock recommendations from Schrod­ers’ team of 25 emerging-market fundamen­tal analysts worldwide. The strategy aims to generate half of its alpha from country selection and half from stock selection. Most emerging-market fund managers are bot­tom-up stock pickers, making this offering, which incorporates the manager’s top-down macoeconomic views, a unique emerging-market offering for Australian investors.

The team has a good track record of outper­formance over the medium to longer term. It is also very large, very experienced, and stable compared to its peers. The portfolio is managed jointly by five portfolio manag­ers, each of whom has geographic respon­sibilities. Based in London, the portfolio managers are in a time zone that ensures the best communication with the network of analysts, while centralising the portfolio decision-making process. S&P believes the manager’s use of locally based analysts has real benefits, given nuances such as culture, accounting standards, and business acumen from within each of the regions.

Oliver Trusler, investment special­ist for emerging markets, Schroders: Over the past 12 months, emerging markets have given some of their performance back; they’ve underperformed a bit. But consis­tently, through time, emerging markets have done very well, and as an asset class have performed very well relative to the developed space.

When you’re investing in any kind of market like this, part of investing and understanding the investment you’re taking is the volatility that you expect.

The big issue is emerging in Europe. That’s the elephant in the room at the moment that investment managers are grappling with. That’s the million-dollar question. But it’s amazing: emerging markets are obviously very different, but the impact that the US has on emerging markets is also critical. One of the factors is the flow of money that goes in and out of risk assets.

So as much as we work and we manage and we invest in the best companies within the portfolio, if people are pulling money out of them then that can be a challenge.

At the end of the day the growth story is still there. A lot of the key tenets for investing in the asset class are very strong, so the long-term emerging story is certainly a good one. The issue, as I’ve said, is that risk trade at the moment. Having seen the correction that we’ve seen, we’re certainly advocating that now is a good time to be adding to emerging portfolios – but over time, not all in one day, so to speak.

Multi-Sector

WINNER: Schroder Investment Management
Australia
FINALISTS: • Advance Asset Management
• BlackRock Investment Management (Australia) –
(Scientific)
• BT Investment Management (Macro Strategy)
• Perpetual Investments

Market conditions: Over the 12 months to June 2011, this capability has been faced with a deteriorating macroeconomic landscape and challenging market conditions. Asset class returns have become increasingly volatile, influenced by a number of factors including sovereign debt concerns within the Eurozone, a stalling US economic recovery and fears of moderating growth in emerging markets. With an expectation that investment outcomes are likely to remain uncertain amidst these and other headwinds, active as­set management and prudent strategy selec­tion are to become increasingly important.

In light of the manager’s forward views on markets and asset classes, it has sought to implement strategies that are expected to produce investment outcomes consistent with its stated “CPI-plus” return objective, while also seeking to preserve capital, and guard against the erosion of purchasing power. From an asset allocation perspec­tive the fund was heavily weighted toward income-producing asset classes with cash and duration-based strategies being feature positions. These positions were supple­mented with corporate credit and high-yield strategies, which represented compelling investment propositions and were positive contributors to performance.

Investors should note that this capability’s asset mix might vary significantly from one period to another owing to the manager’s largely unconstrained investment mandate and active approach to asset management. This is an important factor in considering how best to use this capability within a port­folio construction context.

S&P says: The Schroder real return capa­bility is highly rated within Standard & Poor’s multi-sector group. Our conviction in this ca­pability is due to our favourable assessment of key investment personnel, the robustness and adaptability of the investment process, and the sophistication of its risk framework. Within a multi-sector context we consider this fund to be a leader in each of these key areas.

This capability represents a relatively unique offering in the Australian market place. Through the existence of a flexible investment mandate, the manager seeks to produce an objective-based investment outcome without the constraints imposed by a strategic asset allocation (SAA) setting. In­stead, the manager uses an active approach to asset allocation and has the flexibility to invest in traditional asset classes and less conventional strategies.

The designated portfolio manager for this capability is the highly regarded Simon Doyle, head of the Australian multi-asset team. He is supported by Simon Stevenson, head of strategy, and together they are members of a well-resourced and global multi-asset team. Doyle is also head of fixed interest and brings with him considerable experience spanning cash, fixed interest, and credit. Together with his macroeconomic insights, we believe his specific expertise is conducive to the effective management of this fund, particularly in set­ting appropriate investment strategies.

This fund’s investment process is consid­ered both disciplined and well structured. Underlying asset-class exposures are subject to constant reassessment to ensure the end portfolio remains optimally positioned. The investment process comprises a mix of quan­titative and qualitative steps and is well sup­ported by a sophisticated and multi-faceted risk framework.

Simon Doyle, head of fixed income and multi-asset, Schroders: It’s really important in these environments to remain objective and to continue to focus on doing what we deem to be sensible things. So if credit, for example, looks attractive, it prob­ably is attractive. If government bonds look expensive, then they probably are expensive.

We don’t make decisions today because of what we think is going to happen tomorrow; we make them because of what we think is going to happen over the next one, two, three years; and so we’re in the position that we are today in a large part because of decisions we made a couple of years ago. And then where we’ll be in a couple of years’ time will be a result of the decisions we’re taking today.

[Another] part of it is to recognise the importance of [the fact that] the key driver of returns is what markets you [invest in]. It’s not what strategies you employ within them; it’s whether you’re in equity markets or debt markets – [they] are going to be the key drivers of return. So we do put a lot of importance in that but as I said, it’s got to be backed up by good stock selection, by strong underlying capabilities. So if you can bring all that together, what we believe we’ve created is a robust investment framework that will endure through different market conditions; and it’s not just dependent on us making a big asset allocation call or getting our equity stock selection right. If we can do most of those things well, then the results will follow. That’s why we’re here today.