Tower brings equity management in-house

Chief executive Sam Stubbs said they were adopting a quantative, value style of investment and that the company had recruited a number of new staff who were "familiar with managing money this way, they have done it before and very successfully."

Tower would retain two of the seven external managers and he said the investment style they would be adopting, "is very much something the likes of Benjamin Graham and Warren Buffett would instantly recognise."

Stubbs declined to name the managers in question as they had not all been informed, however he did say one being retained was a particularly strong performer and the other was in emerging markets.

He said the decision to retain the emerging markets manager was due to that sectors increased geographical complexity and need for very high quality data, "so where we can't do that ourselves we'll continue to outsource."

He said the changes had been eight months in the planning and he was happy with the back testing and screening that had taken place, promising Tower was positioning itself to provide strong, long-term value returns.

"We're so confident of this we'll be investing our own money and shareholders funds in these strategies, so we'll be very much eating our own cooking on this," he said.

"This will have completed our review of how we're managing money so we now know we have very comfortable, long term, value orientated strategies on fixed income, property and equities, we're ready to go and I think you'll see this is the way Tower will be managing money for a long time now."

Benn Bathgate is a business reporter for ASSET and Good Returns, email story ideas to benn@goodreturns.co.nz

Comments from our readers

On 12 July 2011 at 11:28 pm The Sage of Taihape said:

Buffett, Graham, Stubbs.........

All the great names of investing are aligned now.

On 13 July 2011 at 9:10 am Fred said:

Wonderful. What took 'em so long?
With Tower just distribution, investors always wondered why deal with the organ-grinder's monkey, when they could go straight to the organ grinder themselves.

On 13 July 2011 at 3:31 pm Interested said:

A interesting aspect of KiwiSaver is that it appears to be driving (some) providers towards trying to cut costs out of their investment offering............. yet not pass any of these benefits on to the end investors.

Insourcing funds global equity management would have to be one of the most aggressive examples of this (other examples include moving to passive and semi-passive investment options within different sectors). Maybe one of the research houses should do a quick comparison of the make-up of different providers diversified funds pre and post KiwiSaver, as I suspect other groups have been quietly doing similar things.

Finally you have you have to ask yourself if you seriously think that a group like Tower can really believe that they can set up global equity capability that rivals the real experts in these areas (such as GMO who are a decent quant value manager)? For my money I am picking the answer is no, which then helps to highlight the long-term limitations of this type of strategy.

And (absolutely finally this time) I guess the biggest question in all of this is: Can KiwiSaver Default Providers make such radical changes to their business/investment model and not face any sort of review or inspection from above? I bet you anything that a business wouldn't have ever got awarded KiwiSaver Default Provider status if they self-managed their global equity assets from NZ (especially with a new, unproved investment team).

It will be interesting test to see if KiwiSaver Default Providers can do what they want without any risk to their privilaged status. I reckon that if they can, you might see a lot more people crowing about the benefits of DIYing global assets, and other low cost options like passive management.

On 14 July 2011 at 7:00 am Collin said:

This announcement shows great ambition but doing better than the likes of proven names such as Marathon, Capital International and Bernstein is going to prove very tough. In-house management is very alluring but I'm not aware of a single NZ manager who has successfully managed international equities in-house.

On 14 July 2011 at 9:48 am Independent Observer said:

My understanding of the approach is:

Domestic (Australasian): Tower will self-drive

International: Tower will outsource

Unique: Tower will outsource where they have no comparative advantage

Seems like a good strategy to me.

On 14 July 2011 at 9:36 pm Interested said:

IO - I think that the articles have confirmed that international shares (or a significant part of it) will be in-sourced. Phil seems to be saying this, and other news agencies said it (with quotes from Sam).

On 15 July 2011 at 10:35 am Independent Observer said:

Thanks Interested... it seems that my original information was incorrect, and that Tower are opting to manage 70% of their foreign exposure in-house.

Good luck with that!

On 16 July 2011 at 8:51 am denis said:

@Interested

I take your overall point, but I would have thought outsourcing the global equities fund management was *cheaper* than providing it in-house.

On 17 July 2011 at 10:42 pm Interested said:

Denis

Lets do a quick bit of math....... all the following figures are just rough, but they demonstrate the point.

Let's assume that Tower uses an "outsourced" active global equity manager.

If they manage roughly $3 billion in total funds, of which 40% is in global shares, it would mean that they have about $1.2 billion in global shares.

Picking up on IO's point, lets call it $1 billion for good measure. Let's then look at 2 fee senarios - being 0.50% to the external manager, or 1.00% to the external manager.

1.00% on $1 billion is $10 million, and 0.50% is $5 million.

So let's say (just for for fun) that they save $5 million in external manager fees. How much do you think that they are going to spend on additional resources to manage global shares from NZ?

My pick is maybe nothing, or maybe 1 half decent analyst to help the guy Stubbs who is in charge of their share portfolios - so lets call it $300,000 for fun. Even double or triple this number and you can see how attractive this is to the shareholders.

However, lets go back to the key point.....how much do you believe that Tower can put together a decent global equity team in NZ? Maybe if they were a boutique they would have a chance (by using equity to attract global super stars)..... but this doesn't look like what they are up to at all.

I would be interested to know how many external wholesale clients they retain as a result of this move. The only people they will be able to convince that this is the way to go will be the people they have been given by "Default" by the Government.

Tower brings equity management in-house

Tower is overhauling the way it manages equities and will bring the management of around $700 million in shareholder and policyholder cash in-house.

Wednesday, July 13th 2011, 5:00AM 10 Comments

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