Ebb tide paddler rows hard for charity

When the former chief executive of Colonial First State, Chris Cuffe, set out to design a new managed fund, he no longer had the backing of a major financial institution to help him along - but he did have a great idea and a bucketful of goodwill.

The Third Link Growth Fund marks Cuffe's re-entry to the managed funds business after six years away, during which time he channelled his energies into his role as an executive director of Social Ventures Australia.

SVA is a non-profit organisation designed to bring together the community's philanthropists with "social entrepreneurs" - people who SVA's website says "bring innovative solutions to some of our most pressing social problems".

But like all non-profit organisations of its kind, SVA's revenue is uncertain because it relies on donations and gifts from philanthropically minded individuals.

Cuffe's idea was to harness his knowledge of the funds management world to provide SVA with a source of relatively predictable income. Investors in the Third Link fund will pay a fee, as investors in all managed funds do, but because Cuffe has sourced many of the fund's services for free, it can channel its "profit" back to SVA.

The story of how Cuffe pulled together this managed fund is the story of how a highly regarded and entrepreneurially minded individual conceived of a novel investment product and then enlisted the support of some of the funds management industry's leading players, all committed to supporting SVA's non-profit work.

The Third Link fund has a "fund-of-funds" or "manage-the-managers" structure. An investment in the fund is spread among a range of underlying fund managers who do the actual job of investing the money in specific securities and assets.

It is a common approach in the Australian industry. It can provide diversification at an asset level (if the fund invests in a range of different assets) and at a fund manager level. Different managers have different styles of managing money, and combining them effectively in a portfolio can help reduce the likelihood of the fund suffering too much if the market stops suiting a particular style of managing money for a period of time.

But for Cuffe there was a more practical reason for adopting this structure. From the outset he was adamant the fund would invest in a number of different asset classes - shares, fixed interest, property and "alternatives" - and there are few, if any, fund managers who can manage each asset class well. He needed to tap into the best managers in each class.

Although the managers employed by the Third Link Growth Fund are managing the fund's money for no or very low cost, Cuffe says they are not there for this alone.

"That was certainly a danger, so to speak, of the project," Cuffe says. "One of my fears in putting this together was if I put together my 'preferred [managers]' list and I go to see them and they don't all agree, I could be forced into a 'B' team.

"But it didn't work out that way. I narrowed it down to who I thought were the better money managers. I started with my theoretical list, and then I did some testing to make sure it was going to be OK. I went to see a couple to start with . to say: 'I am putting this together, will you be part of it?' and they said, 'Yes.' "

So the line-up, as it has emerged, is not "a list of only the people who said yes", but pretty much Cuffe's wish-list. "And I have had many more say they would be part of this if I wanted them to," Cuffe says.

"I then went and bounced that list off a number of parties - primarily those advisers who are helping me."

They included Stephen van Eyk, the founder and managing director of the van Eyk retail managed funds research firm, and Fiona Trafford-Walker, the managing director of Frontier Investment Consulting, which provides manager selection advice to major super funds and institutional investors.

"One of the advantages I have over the established research houses is that they will open up to me, because they know I am completely independent," Cuffe says.

"That was a great value-add, in my view.

"I also spoke to a couple of people on the advice side, like Rob Keavney [chief investment strategist for Centric Wealth] - Rob has been around forever - and also Kieran Kelly [managing director of Sirius Fund Management] and Frank Macindoe [director of private wealth management] at Goldman Sachs.

"So it's been pretty well considered.

"What I found was a really interesting thing: some of the managers I had, van Eyk had not heard of, and some of the managers I had, Frontier had not heard of. I think that was really interesting. These guys do it for a living, so how could they not have heard of them?"

When it came to putting the managers together in the Third Link portfolio, Cuffe's approach deviated slightly from the usual path of assessing risk and return.

"An opportunity was offered to me, through help over at Goldman Sachs and van Eyk, but I didn't take it up," he says.

"This is going to sound strange, but I am not a big believer in it, in many ways. Most fund-of-funds struggle to outperform their index - and that's right back to the early days of MLC. My observation is that after 10 years . their performance was only just equal to the index. I think that's true of most funds-of-funds.

"I think they possibly use too many managers, and all different styles, so they actually neutralise the active [management] component. We have three to four managers in an asset class, all things being equal, but it's OK to have more if they bring something different.

"But this growth versus value [argument] - why does it matter? And does the Australian market really have the depth that you can classify these things? If you look through the good boutique managers these days, most of them are 'style-neutral'. They will say in their blurbs that they do not like to be boxed in."

When working out how to put managers together, Cuffe could safely "ignore fees, because I could assume they would be refunded". "If you are fee-agnostic, it takes out one of the big blindsiders," he says.

"I have a view that people do get blindsided by fees - I would happily pay a 20 per cent [performance] fee on my personal money because, guess what? I get 80 per cent. If it's a reasonable [performance] hurdle, then I am delighted for them to get their fees."

The fund's asset allocation - how investors' money will be spread among different types of investments - was determined after consultation with advisers to the fund.

"We sat there for three hours, talked about the world economy and where investment markets are," Cuffe says. "Each of them nominated an asset allocation. We debated that, and then we went from there.

"Ultimately, it rests as my decision, with Frank [Macindoe] being very closely involved, but we at least got the input of the others - and [their nominated allocations] weren't miles away from each other, either, which was interesting.

"The reason for Frank's very close involvement - and he has more involvement than others - was that when I set up the management company and got it registered, ASIC required two people to be nominated. So I asked Frank if he'd help, and he was happy to."

Now that Third Link has settled on its asset allocation and manager line-up, it remains to be seen how the fund performs in practice. But again, Cuffe is reluctant to do too much modelling or forecasting, or to make off-the-cuff predictions.

"I prefer not to make big comments on that," he says. Long-term "growth" assets are expected to return between 4 and 6 per cent above the so-called "risk-free" rate of return.

"I am not trying to reinvent the wheel to come up with a new number," he says.

"As for volatility, I cannot see the point in doing it. The managers are what the managers are; we have said to everyone this should be seen as a five-year thing.

"Someone said to me the other day: 'Is it cheaper to go through [Third Link] or should I invest with each of the managers directly?'

"But a number of these managers are waiving their performance fees, as well as their flat fees; a lot of managers have a half-a-million-dollar investment minimum; and a number of these funds are closed [to new investment].

"Those are the value adds. So if I want to do it myself, that's great. Then, how are you going to work out your asset allocation?"

Cuffe says it is a tough environment to be raising money for a new fund. To date, Third Link has attracted about $21 million, with another $5 million in the pipeline. Applications will be closed once it reaches about $150 million. At that size, and assuming a 1.4 per cent a year fee, the fund will provide about $2 million of recurring income to underpin SVA's activities - which has been Cuffe's aim right through the process of developing the new fund.

"We're closer to the bottom [of the equity market downturn] than we were six months ago," he says. "Anyone investing at this point in the cycle is probably going to do quite well.

"From a fundraising perspective it's been tough. I'd have liked to have had $50 million by now. But I'm told that around town no one is raising money. In relative terms I'm probably doing OK; in absolute terms it's a bit tough."

Third Link managers

BlackRock Investment Management

Colonial First State Global Asset Management

Contango Asset Management

Cooper Investors

Eley Griffiths Group

Goldman Sachs JBWere

Magellan Financial Group

Orion Asset Management

Paradice Investment Management

Pengana Capital

Perennial Investment Partners

Platypus Asset Management

Select Asset Management

Solaris Investment Management

Taube Hodson Stonex Partners

Treasury Asia Asset Management

Third Link advisers

Frank Macindoe - director, private wealth management, Goldman Sachs JB Were

Robert Keavney - chief investment strategist, Centric Wealth

Kieran Kelly - managing director, Sirius Fund Management

Doug McTaggart - chief executive, Queensland Investment Corporation

Mark Nelson - chief executive officer, Caledonia Investments

Don Stammer - former chief economist and director of investment strategy, Deutsche Bank

Fiona Trafford-Walker - managing director, Frontier Investment Consulting

Michael Traill - chief executive, Social Ventures Australia

Geoff Wilson - director, Wilson Asset Management

Stephen van Eyk - managing director, van Eyk Research