Download IOOF Investments

IOOF Investments
Reproduced with permission from
Investment magazine December 2015
CIO PROFILE
STEVE MERLICEK
chief investment officer, IOOF
With 16 years’ experience Steve Merlicek is the longestserving chief investment officer in Australia; and after
spending six of those years at IOOF he is seeing a fine
run of performance. DAVID ROWLEY reports.
The
turnaround
16 investment magazine Dec 2015 – Jan 2016
www.investmentmagazine.com.au
CIO PROFILE
W
hen Steve Merlicek
arrived at IOOF in
2009 the then United
Capital Growth fund
was bottom or close to
bottom of most performance surveys. He
was brought in from the high-performing
Telstra Super fund to introduce a
performance culture in a retail sector where
it was the common view that the money
was “sticky”, so coming top of performance
tables was not a priority.
He sees the hiring of Jeff Rogers by IPAC
and Sean Henaghan by AMP Capital as part
of the same trend by retail funds to poach
high-performing people from outside their
sector.
After six years of building a new team and
changing the process, over the year to the end
of August 2015 the IOOF MultiMix Balanced
Growth Trust was first in the SuperRatings
SR50 Balanced (60-76) Index, with a return
of 7.47 per cent. The IOOF MultiMix Growth
Trust was first among growth funds in the
year to date (11.7 per cent) and over three
years (16.8 per cent) to the end of August in
the Chant West implemented consulting
survey.
In total, Merlicek runs $17 billion, of which
$9.8 billion is in the MultiMix range which
is mostly superannuation money. There is
$1.5 billion in a MySuper fund, which charges
a highly competitive 50 basis points, and
$6 billion in the adviser-led Mosaic business.
Performance, says Merlicek, is in his DNA.
“We are trying to do what everyone else is
doing and do it better – my competitors are
doing the same thing.”
The performance figures are interesting in
that they have been achieved with a relatively
small use of high-fee alternatives such as
hedge funds or private equity. Instead, there
is a focus on the best mix of passive and
factor-investing approaches to equities
wherever it can be justified over active equities
and, therefore, higher fees.
Merlicek would have liked the turnaround
to have come sooner.
“For the first couple of years you are putting
in changes and not really seeing the benefit.
You end up saying: ‘Am I on the wrong track?
Have I done something wrong?’ If you have
been in the game long enough you know what
to do, and it is a case of being disciplined.
www.investmentmagazine.com.au
Being an ex-military man I like to see us
like a special forces unit and we leverage
off the skills and abilities of the force
multipliers of other organisations
You have to have the courage of your
convictions in this game.”
Indeed, he refers to his task as turning a
super tanker around. He attributes much
of his success to the strength of the team he
has built, singling out experienced portfolio
managers such as Dan Farmer in domestic
equities and Simon Gross in domestic
property.
Merlicek is pleased with the outcome for
international equities run by Stanley Yeo,
whose team is currently beating its passive
benchmark by 0.9 per cent due to a mix of
passive and active, as well as an enhanced
passive approach with State Street Global
Advisors, Goldman Sachs Asset Management
and Macquarie. He is particularly intrigued
as to how such enhanced passive or smart
beta investing will reveal itself over five years
of performance against an ordinary capweighted index.
Other areas of outperformance are in
small caps, where IOOF is adding around
1000 basis points through investments in
OC Funds Management, Legg Mason and
Selector Funds Management.
“Putting a team together and having the
right cultural mix is so important in this
game. That is half the trick. We are hitting
top quartile across a number of asset classes
now,” he says, adding that his role in bringing
together an “incredibly bright team” and
nurturing them is to be a culture manager
and a mentor. Having worked for 31 years
in investments helps, as well as having seen
the 1987 crash, the tech wreck and the global
financial crisis first hand.
His team mantra is to be strongly
IOOF Investment
Management Committee
Christophe Kelaher (chair)
Anthony Hodges (independent)
Les Coleman (independent)
Steven Merlicek
Renato Mota (general manager
distribution)
Stanley Yeo (secretary)
evidence based. This plays into another belief
around risk. “A lot of what I do is about risk
reduction,” he says. “If you can avoid the tripups and the drawdowns, you will gravitate
to the top over time.”
Beyond MySuper, much of the other money
Merlicek runs is in more growth-orientated
funds that access a high number of alternative
assets. He notes with pride that he was one
of the first investors in Australia to invest in
private equity and has attended the AVCAL
(Australian Private Equity and Venture
Capital Association) conference since 2000.
“We do private equity in a very considered
way, because we know we are going to get
the high fees,” he says.
Team size
All this is achieved with a team of 14 staff
– eight in the Melbourne office and six in
Perth.
Merlicek is sceptical of the trend towards
large teams that take a more granular
approach to asset classes, implementation
efficiency and fund-manager partnerships.
“There are a lot of fallacies that are said in this
industry and many who are talking their own
Dec 2015 – Jan 2016 investment magazine 17
CIO PROFILE
Consultant
IOOF MultiMix Balanced Growth Trust
Cash and short-term securities
Diversified fixed interest
Property
5.45%
21.74%
9.50%
Australian shares
27.23%
International shares
28.93%
Alternative defensive
2.26%
Alternative growth
4.88%
IOOF MultiMix Growth Trust
Cash and short-term securities
4.30%
Diversified fixed interest
5.48%
Property
8.47%
Australian shares
36.04%
International shares
37.25%
Alternative defensive
0.59%
Alternative growth
7.87%
book,” adding that there is not necessarily
a correlation between the number of team
members and performance. “Are we getting
higher returns than we did 10 or 20 years
ago?” he asks.
He also views the trend with scepticism,
given the ability of the average self-managed
super fund to outperform institutional
superannuation funds. “How can the
amateurs do better? They have other
advantages. It might be they can move quicker
or in asset classes we cannot access.”
Merlicek also makes the most of other
resources he can tap into, rather than enlarge
his team.
“Being an ex-military man I like to see us
like a special forces unit and we leverage off
the skills and abilities of the force multipliers
of other organisations,” he says.
In this way, IOOF not only uses the
manager research and Monte Carlo
simulations of Russell – much of it carried out
from its head office in Seattle – but also that of
Mercer, and research from investment banks.
“That model works for us. Others might
want to build up to a team of 100 and do it
that way,” he says.
18 investment magazine Dec 2015 – Jan 2016
The IOOF funds are unusual for their
strategic use of Russell Investments as an
asset consultant, given that all the other
major super providers use Frontier, JANA,
Mercer or Towers Watson.
This was Merlicek’s initiative because
IOOF’s funds did not previously use an asset
consultant, and he knew Russell from his time
at Telstra Super.
“A lot of people say we are doing well, we
do not really need them; especially if you have
an older, stable team like I have got, with a lot
of experience; but it is best not to get arrogant
in this game. Always have that check, that
second opinion, as there are things you do
miss.” He notes that the use of Russell has
been given the thumbs up by Chant West
in its profile of IOOF.
“Warren Chant gave us a lot of points for
using Russell and using them in the right
way,” he says. “They are still a powerhouse
offshore and they are a competitor to us,
with their multi-manager funds.”
His operation also comes with a certain
amount of autonomy built in. He praises the
role of the IOOF investment committee, who
he says have empowered the investment team
with “a true alignment of interest”.
thought to, as he can cite the statistic that
the average retail CIO lasts about two-anda-half years.
He also emphasises the role of humility.
“Don’t be arrogant. I have seen a few of those
and they eventually trip up. A few say ‘I am
right and the markets are wrong’. More often
the market wins.”
And he recommends the role of persuasive
communication, particularly when talking
to a board. He recalls how he used to get
frustrated when what he thought were good
investments ideas were knocked back, but
with time he has come to realise it was his
weakness in not marketing or putting across
the idea to someone who is not an investment
professional.
“Part of the role of a CIO is to be a marketer
to your investment committee, your executive
and your own members. When I took more
of that role and I explained, I started to win
a lot more.
“You always say it is their problem, not
mine, but you have to look at it yourself and
say ‘Maybe I can articulate this in a better
way’; but maybe if I cannot do that there is
something wrong with the idea.”
How to have longevity as a CIO
When asked to explain his longevity as a
chief investment officer and what advice
he would give to those newer to the game,
he cites a “healthy paranoia – you are only
as good as your last football game”, so that
his team have a performance culture where
there is continual improvement. His survival
is something he has clearly given a lot of
Part of the role of a CIO is to be a marketer to
your investment committee, your executive and
your own members. When I took more of that
role and I explained, I started to win a lot more
INV-1032
Asset allocation