by Greg Bright
When John Nolan was thinking about starting his own investment research firm he had never heard of the term “asset consultant”. The 30-year journey he subsequently took, including building the firm which bore his name, in many ways reflects the journey of Australia’s superannuation system. But, as they say, the more things change, the more they stay the same.
There have been many twists and turns in the evolution of John A. Nolan & Associates, which changed its name to JANA Investment Advisers when it was purchased by National Australia Bank in 2000. Its latest turn, involving the purchase of 55 per cent of the equity back from NAB by about two dozen senior executives and consultants, is possibly its most important. JANA has become the country’s largest asset consulting business, advising about $370 billion in super fund and other institutional investment assets.
The recent ownership change proposal, to be implemented within the next three months, underscores – in a world of big data, machine learning and plain old-fashioned Googling – the crucial role of fundamental research in the professional management of people’s investments. In both research and investment management it tends to be better for the people working in the business to also own the business.
Historians like to say that you cannot understand who you are unless you understand where you came from. Here is a helicopter view of that evolution through the eyes of John Nolan himself. There are new investment risks and there are new business and industry risks, however, adherence to some common-sense rules remains the only way to mitigate those risks.
It was 1986 when John Nolan, who had been working in the finance/treasury departments of State Electricity Commission of Victoria for 13 years, significantly in charge of the organisation’s two big super funds, first contemplated going out on his own.
The catalyst was that the-then Victorian Premier, Labor’s John Cain, stumbled in renewing his contract. With a young family to raise, this was a concern. He happened to play cards with a former researcher at Potter Partners and Cortis and Carr, Peter Guy, who said he knew firms in the US which focused on “asset consulting”, the provision of detailed research on both investment strategies and the managers which made the various decisions.
“So, I spoke to Bruce Cook,” Nolan says, “and they agreed to take a 10 per cent interest in my new business and give me some space in their offices at 401 Collins Street.” ‘They’ were Mercer Campbell Cook & Knight, a leading actuarial firm which went on to form the Australian leg of the diversified Mercer international group.
In September 1987, just a year after the introduction of 3 per cent Award Super, a year after Russell Investments opened up in Australia and a year after Towers Perrin, another actuarial firm, started an asset consulting unit, John A. Nolan & Associates was off and running. “There was myself and a PA,” he says.
The Mercer deal didn’t last long as it became increasingly clear that superannuation was going to get very big and the management of that money, including the provision of sophisticated advice, was going to be very important in a business sense. Nolan and his PA moved out and Mercer gave back their 10 per cent. That was the first – and little known – trade in JANA shares.
“What I knew from my role at SECV was that research was very important,” Nolan says. “Their two funds totalled about $1.5 billion and covered about 22,000 members, so they were pretty big for the time. With the deregulation which started in 1983 [the Hawke/Keating reforms]Australia started to internationalise. We had made some decisions with the use of offshore managers which turned out to be not very good. I saw the need for good independent research.”
He also saw that by unbundling the components of the balanced funds which dominated the market at the time, he could construct his own diversified portfolios, exploiting the inefficiencies in the system. Over the 16 years he remained at its helm, the funds JANA worked for (one of the quirks of JANA was that it never referred to clients as “clients”) outperformed their peer group by an average of 1.2-1.3 per cent a year.
Many of the decisions the firm made look, in hindsight, to have been completely logical and even simple. At the time, though, they often meant deviating from the norm, backing their fundamental analysis when the whole world seemed to be going in a different direction. This has been a hallmark of all the great investors through time, but it is not an easy thing to do.
For instance, Nolan says, at the peak of the Japanese boom of the late 1980s, after western markets had suffered through the 1987 stock market crash, the Nikkei index reached 39,000 – a point never to be seen again to this day – and made up about 50 per cent of the MSCI World index. Not everyone thought at the time that that could not last and fewer still were prepared to bet against it continuing, either with their own money or through their advice.
Nolan likes to use the analogy of a herd of zebras. The safest place to be, if you are a zebra, is in the middle. But you don’t get much grass there. The best and most plentiful grass will be on the edges, but that is where you are more likely to be attacked by a lion. “We gave fearless advice and we prospered,” he says. “I wasn’t interested in having a business which sold comfort. We tried to add value through asset allocation and manager selection.”
SECV was a good learning experience in another respect. Because its finance and treasury department looked after the organisation’s debt issuance too, the fund managers got a good education in liability management through the price of electricity and the impact of inflation on its customers. With its advice, JANA was an early adopter of the successful use of CPI-linked bonds in certain funds’ portfolios.
In those early days, Nolan was joined by a former SECV colleague, John Coombe, who wanted to leave the organisation and phoned him for a reference. “Why don’t you come and work with me?” Nolan said. Coombe did and remains JANA’s longest serving employee, as executive director in the Sydney office. Another of the SECV alumni followed, Ken Marshman, who became chief executive of JANA in 1996, as Nolan sought to concentrate all of his energies on investments and also looked more closely at getting into the funds management business himself. Marshman remains the non-executive chair of JANA and is also chair of REST Industry Super.
In 1993 Nolan set up a fund specifically to manage money on behalf of charities. While it took a long time for the penny to drop elsewhere, he recognised that the different tax status of charities should mean that their money is managed differently.
He housed this entity in a new business called Warakirri Asset Management, which got its own office space and a separate identity from 1995. Warakirri, which subsequently offered a range of esoteric and mainstream strategies, including an ‘Endeavour Fund’ for new managers and one of the first agribusiness offerings, known as the “cropping trusts”, became a leading proponent of after-tax management and reporting.
The Endeavour Fund gave mandates to a total of 42 managers over subsequent years, including Cooper Investments, Allan Gray, Greencape Capital, Northcape Capital, Renaissance Asset Management and Paradice Investment Management.
“If you have two managers of equal ability, then you want to choose the one managing the less money,” Nolan says. “REST [the long-standing JANA client on whose investment committee Nolan still sits]had the courage to give [David] Paradice his first mandate.”
As is another of his tendencies, Nolan turned, in 1993, to a couple of people he knew well for advice on how to manage tax-exempt money. They were Peter Guy, again, and Andrew Sisson, with whom Nolan had worked briefly at National Mutual prior to the SECV. Sisson, who subsequently started his own successful funds manager, Balanced Equity Management, and Guy came up with the ideas. Sisson has remained a member of the investment committee for the charities’ two trusts to this day.
That year, 1993, by the way, marked the introduction of the Superannuation Guarantee. Move over Award super, the system became super for everyone.
While it doesn’t seem so long ago, for those of us of a certain age anyway, in 1993 the sums of money involved look rather small 24 years later. ARF and STA, the two funds which became AustralianSuper, had combined assets of $688 million. Cbus was bigger, at $743 million, and REST was just $247 million. Speaking of JUST (now the $4.9 billion Media Super), the journalists’ fund was just $17.7 million prior to its merger – one of the industry’s first – with the actors’ fund, JEST, which had only $9.7 million.
When he left JANA in 2003 after a NAB-contracted period, Nolan, who had been the lead consultant to REST, moved onto its investment committee. Coombe and Steven Carew became its lead consultants and Marshman is now the REST chair. Current consultants to the fund are Coombe, Carew, Matthew Griffith and Matthew Gadscen.
John Nolan recently turned 68. He stepped back from the chief executive role at Warakirri and his shares have reverted back to the firm. Andrew Nolan, his son, remains as head of investments while a new managing director, Jim McKay, was recruited from global manager Franklin Templeton.
In the twilight of his career – not his words, of course – Nolan’s prime focus is REST, the $45 billion fund which Nolan proudly says has never had a passive mandate.
“I believe in active management,” he says. “If you don’t do any research I can understand why you’d appoint passive managers, but that’s not necessarily doing the right thing by the members.”
In doing manager research, Nolan had, or has, a distinct style. It takes him a lot longer than others to do because he likes to see each of the key portfolio managers separately, for instance. While he also crunches the numbers, more than most he believes that it’s the people running the money that matter.
“What makes the individual tick, what drives them, what is important to them in their world. In short, the total environment they operate in [is important]as a change in any key plank in that environment can change their ability to impact as either a portfolio manager or analyst,” he says.
“There’s no correct way to pick managers… I’m interested in ownership, methodology and the drivers of the people making the decisions. If a manager can get six or seven out of 10 right, then that’s happiness.”
John Nolan stories abound and many of them come from fund managers who have been quizzed on everything from their investment styles to their marital status. One story goes to ways to look at what’s likely to influence a portfolio manager’s longevity in a certain position. It was a ‘marital status’ question.
A youngish male manager and his minder supposedly came to see JANA to do a common sales pitch. He was going to move from New York to Dublin in a new and important role for which he was looking for JANA’s blessing. Never the one to be overly politically correct, Nolan asked him whether he was married and he responded “no, but my girlfriend and I plan to be so soon and we will be moving to Dublin together”.
The story goes that Nolan thought: “I can understand her moving to London and being okay about that, but Dublin may be a stretch. That is a risk I don’t want to take. Chances are they’ll be back in New York within a couple of years.” He didn’t get JANA’s blessing and, as it turned out, the manager did end up back in New York with his wife within a couple of years.
With the well-documented struggle by asset consulting firms to prosper as their clients get bigger and fewer, Nolan believes the industry has deteriorated “dramatically” over the past two decades.
For those increasingly big funds themselves, he says the challenge is for the trustees and senior management to keep the pressure on for everyone to know “why they are there”. He says: “It’s fascinating that now we have another generation of mutuals. The issue they have is, if you look at the history of the old mutuals, is that they have a tendency over time to be captured by their management.”
Another new risk is “member risk”. This is where, due to investment choice, most individuals will be able to direct their money into the next boom, without a cooling-off period.
“Booms and busts are a part of human nature, but I worry about super members getting dragged into those booms. Booms always end in tears.”