Peacock's Parting Shots

Merv Peacock: I guess the main thing is that if you’re going to invest you probably need to be invested in growth assets, because when you look back over all of my 42 years that’s where the returns have come from. They’ve come from property and they’ve come from equities and, you know, despite the fear that we might go through a 1930s recession, where investors did suffer long periods of not getting returns from equities, I haven’t seen that in my 40 years in this business.

Michael Pascoe: Is it harder now? Is it harder now than it used to be?

No, I don’t think it’s harder now. I think there’s still opportunities out there and in fact we go into a very tough disclosure regime these days where you don’t get many hints and there aren’t too many insiders, fortunately; so if you do good research you’ve got a head start on a lot of other investors.

Is it more competitive now though to be able to find the right investments?

I don’t think so. There’s still a lot of opportunities out there. We know we’re more global. There are more asset classes available now to invest in; so, no, I think there’s still opportunities and that’s why investors have been getting pretty good returns over the past few years.

What do you think is the best change from an investor’s point of view?

There’s no doubt that the corporate governance, despite all the angst that it gives boards. I understand their concerns, but there is more protection in place now than what there was in the past. If you go back to the 1970s and the mining booms and the sorts of stocks that we got bought to the market then, they were pretty dodgy. They came just when someone had pegged a block of land out the back of Kalgoorlie and floated it, and a lot of us bought those stocks. There are protections in place now and they increase every time there’s a crisis.

There is an opinion and a section of the market, the odd commentator who thinks this corporate governance stuff is overblown, overstated.

Oh, I probably think it is too, despite the fact I’ve been quite a strong proponent of it. I don’t think it necessarily leads to better investment performance. I do believe, however, it does give the investors some downside protection. Good management will deliver good performance whether they have ticked all the corporate boxes or not.

You are involved in taking the battle to some of the greatest conmen we’ve had in recent history. What’s your biggest regret?

I guess the biggest regret in terms of what cost us the most money was probably sticking with Christopher Skase’s Qintex story for longer than we should have. We avoided a lot of the others, a lot of the other entrepreneurs at that time. I think we saw that there were a lot of people just leveraging up assets when asset growth was faster than the cost of debt. So anyone who did it made money and we opted out a lot of those, but I’ve got to say we stuck with Qintex for a bit long.

What didn’t you see that you should have?

We didn’t see the debt building up in the business and we didn’t see that at times what we were being promised was not what we were getting and should we have done better research. Well, you can always do more research and, you know, we may have spotted that problem, but you’re going to get some wrong and that was probably the worst one.

Is that an example where perhaps better corporate governance at Qintex could have prevented that disaster happening?

I can’t recall exactly what the composition of the board was at that time, but I am sure they didn’t have the sort of board that we would have required these days. And they probably don’t go through the audit committees and the risk work now that boards have to do.

I also remember a Bell Group annual general meeting when AMP was trying to talk Robert Holmes a Court out of selling out to Alan Bond '” that sort of direct investor activity. Greater now, or less?

I think it’s less but I’d suggest that it’s perhaps just starting to get up a little more of a head of steam than before. It might be that Australian investors aren’t terribly organised. The Australian Shareholders Association is far more rational now than it used to be. You’ve got the superannuation organisations are now organised, but they don’t necessarily all vote together and the investors '” the institutional investors '” are the same. We don’t talk all that much about individual situations, so as a result when it comes to voting we don’t all vote together and I think we’re going to have far more power if we did all get together and vote as a group.

Any recent examples of that?

I think News Corporation is a classic of when we should never have lost that company out of this market. The company didn’t want to go out of the Australian market. The stock exchange didn’t want them to go. Institutional investors didn’t want them to go totally and just because some bureaucrat in Standard & Poor's (S&P) in New York thought he knew how to run indexes, the company disappeared out of the Australian index and will disappear out of the list of companies eventually that Australians will invest in. I think that had we, as investors, all got together and said, 'We’re not accepting this', I think we would have had a different outcome.

When you say you should have got together and done something about it do you mean said something to News Corp as in don’t go or to S&P as in we’re going to ignore your index?

No, I think News Corp actually wanted to have some listing and be part of the Australian index, so it wasn’t News Corp. It was S&P and as a group we should have just lobbied S&P as a total group and made it very hard for them to take it out of the Australian index.

The other side of that of course is the behaviour of News Corp since it’s gone. It gave undertakings that it hasn’t honoured. Is that something that investors should have done more about?

Probably, although I think it’s a little bit like the horse is out and a bit late now trying to close the door.

How can you achieve that? How can you get institutions to move more towards acting in investors’ interests?

I think they all believe they’re acting in investors’ interests so I’m not saying they don’t. There just needs to be a more coordinated approach and it is very difficult, particularly over AGM issues, because they’re very short time frame and all the AGMs are at the one time of year, so if you’re trying to look through annual reports '” and you get 40 or 50 of them every week for about four or five weeks '” so it is pretty hard to get on top of the issues and then rally some action. But we need some mechanism by which the Association of Super Funds and the investors and maybe Australian Shareholders Association have some ability to share their views and get together and talk to companies.

Is that something you’d be prepared to take on in semi-retirement?

I’ve got enough things to do in semi-retirement, like improving my golf handicap.

Your funds under investment now as chief investment officer '” $80 billion?

Give or take, yes.

Is that scary?

It does have some drawbacks, but I think if you treat each dollar like you’re investing your own, then managing a $10 million decision is no different than managing your own $3,000 decision.

But investing on that scale, finding places to park the money must be a problem.

Well the Australian market is actually really increasing because there’s money available here; we’re seeing property companies overseas, property brought to this market. We’re seeing overseas infrastructure brought to this market. We’re buying back some of our insurance companies that used to be owned by Europeans so there are more opportunities as well in Australia. It’s funny when there’s money around '” the opportunities somehow keep appearing, and we’re investing more in international, although that hasn’t moved forward all that much in the past few years. The infrastructure opportunities in the unlisted space: more money is going into private capital than went into private capital before. Institutions are moving a little further down the development end of the property range. So we are just increasing the range of opportunities.

The tension over investment performance with the measuring and the publishing and not just annual or quarterly but monthly results, does that make your old job harder?

Yes it does. But I think it’s a pity we’ve got monthly results because you’ve then got a focus on who did well in the past month and that almost doesn’t count. I think the shortest period you should look at to say how well a manager is doing is 12 months, and even that’s too short. You don’t judge his performance over 12 months, but you should at least know how he’s going over 12 months. Monthly, I think, is detrimental to the industry.

How good is the opposition?

Oh it’s pretty good. There’s a lot of smart people in this business. This business attracts smart people and we’ve seen this. There’s been a growth in the number of small boutiques in this market and their reputation and their performance has been pretty good. Eventually one or two of them will topple over and people will have another look at them and they may not be quite flavour of the month, but they are staffed by good people and they’ve had good results.

The problem of being one of the biggest versus the advantage of being one of the biggest. How do you weigh those two?

There are problems because you do need to move '¦ it’s easy to move blocks of stock when you’re small, but we’ve got a bigger team. We can talk to more companies. We can see more opportunities. We can invest for the diversified investor into a broader range of investments. The asset allocation moves between sectors that we’ve done in the past two or three years under Shane Oliver, I would think better than anyone else in the market. That’s because we’ve got the resources and the ability to look at all the opportunities, whereas the boutiques don’t necessarily see all the opportunities.

What about the firms in the middle '” the middle-size funds managers? How do they fit in?

One of their issues is distribution. These days more and more product is distributed through platforms and you need to have product on platforms. I think if they’ve got product on platforms they do well and if you take a middle firm and I guess Maple-Brown Abbott’s one of those examples '” you know, good track record '” it’s on a lot of platforms and so it gets good distribution. I think if you can’t get your distribution right, that’s where you’re going to struggle.

You mention distribution. It’s a subject dear to Eureka Report’s heart, given that much of the investment industry is still financial sales rather than financial advice. Are you happy with that; the way it’s done?

I think that’s probably a bit harsh. I think more and more of the financial advisers out in the market are genuine financial advisers and they are endeavouring to give their clients the best product. It’s a very onerous task these days and I think the sad part is that more and more of those people who are good in the business are just advising those people who are wealthy. So if you haven’t got a quarter of a million dollars, are you going to find the best planner or can he afford to spend the time if you’ve only got $50,000 to invest? I think that’s a bit of an issue that we’ve got, and perhaps regulation has got its pluses but it’s got its downside, and the downside is that the small investor won’t be terribly well catered for.

Another trend in investment is do-it-yourself: self-managed super; do-it-yourself investment. Obviously, the AMP has a vested interest in people leaving it all to them, but what does it say about the performance of funds managers that so many people are going the DIY route?

I think some of that is that people don’t perceive fund managers as doing a good job, but the other factor is people just like being in control of their own destiny and so they’ve grabbed this opportunity that’s been readily provided to them by accountants and lots of other providers to set up a DIY fund. It's pretty easy to do in Australia and I’m sure some people are very good at it, but I’d suggest the majority don’t even know what their performance is, to know whether they’re good at it or not. I think 80% of them, when you survey them, suggest that they’re outperforming the average fund manager, but they’ve got no evidence to prove that. So I think there’s a risk that people are actually going into DIYs because of the passion of doing it themselves but net/net, they’re probably behind.

Does it say something though about your industry in terms of the fees it charges, the way it’s structured, that people have felt uncomfortable with it, and want to try something else?

I think there’s been a lot of discussion about fees: do you want a cheap fund manager? You certainly don’t want a cheap dentist or a cheap surgeon to operate on you and I think it’s the same. If you want professionals to look after your money in this industry you need to pay professionals, and at the moment because this industry pays well it attracts really good people and I believe it delivers good performance. I just don’t believe the industry promotes itself strongly enough to the market as to what it actually does do. There's very little evidence of any corruption in the Australian industry, in the fund management industry. Most providers give their clients a good balanced portfolio and most of them beat the index. So it’s just an issue that I don’t think as an industry we promote ourselves well enough.

By definition though, most of them can’t beat the index.

Yes they can. The index isn’t made up of professional investors. The market’s only made up of 30–40% of professional investors; and a whole chunk of overseas investors who come in to buy specific stocks at certain times and go out again; and a whole lot of retail investors who buy miscellaneous stocks and more often than not hold them longer than they should.

It could be argued that the very structure of the retail level financial planning industry, as long as it’s based on commission rather than fee for service, is structurally corrupt.

The difficulty with '¦ and the industry would argue for fee-for-service and you are certainly prepared to pay your doctor $200 an hour and you probably pay your plumber more than that, so why aren’t you prepared to pay your financial planner $200–300 an hour? People find that a difficult concept to live with so a lot of people would prefer to pay via a fee that comes out of the investment that they make.

What’s been your favourite and most satisfying investment? Of all the things that have come across your desk, what sort of things have given you the most pleasure?

I think you overweight stocks in your portfolio and you just see them go up, that’s always good. It’s always good to see diversified products rank well in the surveys. At the moment you’d have a look at the AMP balanced products and they’re right up there. I think we were number one of all the managers in the September quarter and that’s a really great time to be going when you can say, 'Look at our balanced product and we’re number one in the surveys'.

That’s the best time. You’re getting out at the top. What was the worst time? Post de-mutualisation?

Yeah, as you know I had as a role as investor relations manager there for some of that time and, you know, that was some pretty dark days and tough days there for AMP. They were probably the worst days because you copped it no matter where you went. You just didn’t feel it at work; you felt it on the golf course or at the barbecue or no matter where you went. If you said AMP, people had a negative story to tell.

Your own finances '¦ Having been used to running $80 billion worth, what do you do with your own money in semi-retirement?

I have got my superannuation in a balanced growth mix, basically, and that’s where it’s going to stay. I’ve got other money in shares, which I’ll continue to have. I’m a bit concerned as you get further away from being able to actually read information on markets that you become less and less effective as a personal investor, and so I’ll watch that to see that I’m not better just to go and buy a fund, which at some stage I will be, and a house and a holiday house and that’s where we are.

So I suppose on an asset basis, you’re relatively light on real estate, and nothing really in alternative investments aside from what you get through a balanced fund. Is that a fair description of your portfolio?

I do have a little bit in some alternative investments but nothing terribly serious. I mean I’m an investor in AMP’s Capital Guaranteed China Fund, for example, which is doing quite nicely.

What do you expect to be the trends in investment over the rest of this decade?

I think the equity markets are still going to be the place where we’re going to see most investment money go. Most of the infrastructure-style investments that are coming to the market, ConnectEast for example in Victoria, came straight to the stockmarket, so that’s basically where most of the investment opportunity is going to be. There’ll still be property investments and, increasingly, I think there’ll be private capital-style investments. But you’ve got to know what you’re doing when you’re putting your money into that sort of area, but they’re longer-term investments; they’re going to have a lot of liquidity and they don’t suit everybody.

Infrastructure investment has been under the microscope a lot lately. Maybe its heyday has passed. It’s more competitive and mistakes have been made. Some people are concerned about how geared a lot of the vehicles are. Is that also a concern to you?

Yes it is, and I would be concerned that a lot of people who invest in infrastructure stocks don’t realise the extent of the gearing within them. But they are pretty well engineered and there’s a lot of hedges in place, so short-term movements in interest rates don’t necessarily disrupt the earnings of those businesses, but there is a fair amount of gearing in them. As I say, I don’t think people fully understand the workings of a lot of those vehicles.

And whose fault is that? How should they be understandable?

It comes with an obligation to ensure their investors understand it, and brokers have got an obligation and perhaps even the press has got an obligation to try and ensure that people understand what these vehicles are. But when the market’s going up everyone’s on board and you don’t necessarily ask all the questions; you just look in the paper and hope your shares have gone up every day, which they’ve been doing.

AMP traditionally '¦ well it’s probably the original infrastructure investor, having the ability and the size in a relatively small market to take direct positions. Is that still what it tries to do and is that becoming a more competitive market?

Yes it is, and we’ve had some pretty fierce competitors come into the market since we were one of the early investors. We probably redefined infrastructure a little bit. Originally we probably thought it was '¦ you could encompass most venture capital in telcos, whereas these days we see it as being somewhere where there’s a pretty secure cash flow in a regulated style investment. So we’d like to think that it’s going to return a 9, 10, 11, 12% return for investors, not buy this project and you’ll get 25% if we can get plenty of customers who’ll buy the service. So we’ve probably moved infrastructure down the risk curve and I believe the investors have also moved infrastructure down the risk curve. They see it as a lower risk investment not a high risk.

We’ve got two floats under way for electricity energy infrastructure in Victoria pitched very much at the retail level investor. How do they add up to you?

They give the retail investor what the retail investor wants at the moment, and that is yield. And they’ve probably given up some growth for that. So these are going to be reasonably good yielding assets that are going to underperform really strong equity markets. So if you think the equity market’s going to be strong, company profits are going to be strong, then you need to know why you’re buying these products. If you’re buying them because you want a stable element to your share portfolio with a yield then they’re good investments, but don’t then complain because we’ve got a bull market and they don’t outperform the bull market.

In terms of how you go about your job, what do you look for? What is the process that you’ve overseen AMP’s investments?

I think first of all you need to manage risk in portfolios these days and if there’s really been a change over 30 or 40 years it’s about understanding the risk in your portfolios these days. I think portfolio managers understand that. When they buy a stock they just don’t add the stock because they think it’s a good stock; it’s got to fit in with a risk profile and it might mean you’ve got to sell another risky share somewhere else in your portfolio to do that. Just managing portfolios is almost as important these days as selecting stocks. With stocks it’s just good old research. There’s a lot of people out there looking at every stock in the marketplace and you’ve got to get an advantage somewhere. You’ve got to have a different take on the management. You’ve got to have a different insight as to why that industry is going to grow faster. Perhaps you’ve got to understand what their strategy is and you know what it’s going to deliver if they’re able to successfully execute it.

So these days you have to spend quite a bit of time just analysing the company from all sorts of areas to decide if it’s a good one or not and every now and then you pick one of those stocks that moves. And I think you’ve also got to have courage to buy stocks when sometimes they’re out on their feet. Just thinking of one recently: QBE. September 11, within a couple of days, that stock was down to $3.50. Today it’s over $19 and you know, [it took] two thirds of the price of that stock being written off because of one catastrophe around the world but investors got pretty scared and those who had a good understanding of the management and that company probably piled into that stock somewhere between $4 and $6 and they’re still laughing.

That importance of understanding, knowing the management, their own trustworthiness. Is that it?

There’s some of that but it’s a case of: do you think this person can execute the strategy and what is the strategy? What’s going to make this company different in two or three years' time? And that’s more important than knowing what the profit’s going to be in six months' time.

Which is the usual trap for most investors.

Yes it is. We all focus on next year's, or next half-year’s profit and it may be a good thing for professional investors that companies are becoming less and less forthcoming in forecasting where they’re going to be. They’re becoming a little more conservative and that gives a good investors with good insights and good perceptions an advantage.

Is the advantage of big investors like AMP that company management beat paths to your door to try to convince you of what they’re doing?

Well we do get to see them and we do get to talk to them about their strategy. Like all managing directors and directors these days, they’re pretty careful about where that insider knowledge is and so we have to focus on the strategy and then our perception of whether they can they deliver and whether it will work.

It’s an inexact science isn’t it?

Yes it is. In this business if you get 60% of the decisions right you’ll be a hero in this industry, so one of the other things you learn is not to be too tough on individuals in this business for getting one stock wrong. It’s not about getting one stock wrong; it’s about getting 60% of your portfolio right.

Are you’re leaving this job with AMP overweight in Australian equities?

Yes.

How far can your eyes see on that horizon?

Well you’ve got to think that over the next two or three years Australian equities are going to continue to rise. I mean they’ve had a good run, so don’t expect terrific returns from this market, but there’s money continuing to flow into the market. Three cents of every dollar you earn every week pre-tax flows into the Australian equity market, so that’s going to stop this market from falling back too far unless of course there are problems with earnings. The economy looks pretty good; full employment. I don’t think we’re going to have any significant increases in interest rates. We’ve got China on our doorstep growing, buying our commodities. So I sense this market feels OK and every dollar of dividend you get comes with a franking credit more often than not. So for an Australian investor, it’s a pretty good place to be and it’s a place that we’re happy to be overweight in.

Is there anything that worries you? Is there anything that you '¦ ?

There’s always lots of things to worry you. I think China is still an issue that we need to watch, although my view is that I think China is a great positive for world growth and for Australian growth in particular. But you need to be watching to see that they don’t have a downturn because we’ll all feel it. Inflation is more of an issue than it was a couple of years ago where we asked whether it was dead. But I don’t think it’s a concern, but I do think you need to watch it. The oil price would remain an issue. It’s taken a little bit of growth off the world growth last year. If we do have another oil crisis, that will impact confidence and consumption and the other one is just what comes from left field. I don’t think bird flu is going to be it, but it could have. If we had had a world flu epidemic we would have had major impacts on growth, travel, sharemarkets '¦ the whole lot. As I say, I don’t think it’s going to happen but that’s what you worry about. Something from left field that you didn’t plan on.

And how do you prepare for what you can’t see? How do you prepare for the X factor?

Just by managing the risks in your portfolio. Just ensure that you understand the risk profile that you’re investor or you as an individual want to take and don’t have all the money sitting in the sharemarket. Don’t have it all sitting in half a dozen stocks that your mate from down the road told you about. It’s just about managing the risks in your portfolio. Whatever you’re comfortable with is where you should be.

Is it too hard a question to ask a rough breakdown of your ideal portfolio at the moment, just in terms of asset allocation?

I would think that you can have 35% in Australian equities. I would have 15% in international shares. I think you should have some exposure to property either through the property trust market or direct, and these days you can have some exposure to the non-listed sectors and as long as you’ve got some diversification and you understand a little bit about what they are.

What sort of job do you think the ASX does?

I think they’ve done pretty well. We’ve got a system in Australia that is pretty close to the best in the world. We’ve got three-day settlement and if you go back to the 1960s and 1970s and we had a bull market you never found the script, you didn’t even know if it had been transacted 10 times before anyone ever got to settle on the first transaction. So we have got a system that works in Australia and I think the stock exchange has got to be complimented for that.

You know your question whether at times there are issues between the stock exchange and the regulators should have more publicity, but it’s not terribly easy to find evidence of questionable behaviour of individuals. But I think the stock exchange does a good job in trying to minimise that and bring it to the attention of the regulators when there are issues. I would have liked to have seen them take a different view on Westfield and GPT, but that’s a pretty small criticism of what’s generally a pretty good job.