6 September 2020

DAMON KITNEY

Paul Heath, the chief executive of the $8bn boutique wealth manager Koda Capital, says the over-exposure of Australian investors to the local sharemarket through their superannuation funds is undermining the nation’s retirement system and unnecessarily amplifying risk for retirees.

The former JBWere executive claimed the dual themes of banks and resources stocks that have dominated the local market for decades “were over” and said the dangers of the concentrated market were highlighted in the March equities slump.

“Many Australians with investment portfolios are over-exposed to large cap domestic equities, which creates distortions in capital markets in this country,’’ Mr Heath told The Australian.

“It is amplifying risk. So, if you do get significant market dislocation, amplification of risk creates second and third order consequences. The foundations of Australians saving for their retirement, this issue undermines that system.”

Almost six years ago Mr Heath teamed up with former MLC boss Steve Tucker to launch Koda, which now advises on $8bn of client assets and counts some of the nation’s ultra-rich among its top clients.

In June nine Koda Adviser Partners, or over 30 per cent of its team, were named in the list of Australia’s Top 100 Financial Advisers published by The Australian’s The Deal magazine in partnership with US financial investment publication Barron’s.

Unlike many of the nation’s boutique wealth management firms that are based in Melbourne, Koda is based in Sydney.

“Rightly or wrongly, in Sydney you seem to be less bounded by tradition,’’ Mr Heath said.

“It has allowed us to be more courageous about doing things differently.” While financials, materials and healthcare stocks comprise 62 per cent of the S&P/ASX 200 Index and 37 per cent of the MSCI World Index, those sectors only represent 18 per cent of Koda’s portfolios.

IT and biotechs comprise 3.7 per cent of the ASX but represent 12.5 per cent of the Koda portfolios. Of Koda’s investment in equities, 39 per cent is domestic and 61 per cent is international. Forty-eight per cent of the portfolios are in strategies domiciled outside of Australia.

While 55 per cent of the portfolios have allocations to equity, the spread is highly idiosyncratic: 8 per cent is devoted to long/short strategies; 12 per cent to small-cap/micro-cap stocks; 5 per cent frontier stocks and 4 per cent Is­raeli technology stocks.

“All the growth that clients needed 20-30 years ago was achievable domestically. The reality is the sources of growth that are so critical for investors to maintain purchasing power are not as reliable as what they were,’’ Mr Heath said.

“By looking globally you can find those sources of growth and diminish risk at the same time.”

Greeks and gifts

Koda works with a very large high net worth adviser in the America, the New York-based Papamarkou Wellner Asset Management.

The firm was founded more than three decades ago by a former E.F. Hutton broker named Alexander Papamarkou, who had strong links to Greek shipping magnates and was famous for showering his super-rich clients with luxury gifts.

Today more than half of Papamarkou’s clients are from outside the US.

For the 12 months to the end of August Koda’s portfolio return was 4.5 per cent, versus its median growth manager benchmark of -0.9 per cent. Over five years it has returned 8.4 per cent versus the benchmark return of 5.2 per cent, a performance better than the Future Fund.

Mr Heath said Koda had learnt plenty from how sovereign wealth funds or an Ivy League endowment fund invests to grow and protect wealth over multiple generations.

“The money we advise on has 30-40-50 year time horizons. So, you can afford to lock portions of the portfolio away for a long time,’’ he said.

Koda also allocates a portion of its client portfolios to strategies whose returns are derived in an uncorrelated fashion. This includes 5 per cent to life science therapeutic product development, 5 per cent to merger arbitrage and 5 per cent to what it calls domestic equity special situations.

Some of its more eclectic investments include US-domiciled catastrophe reinsurance, US-based secondary trading in hedge fund stubs, European litigation funding and Australian water rights trading in the Murray-Darling Basin.

In the technology space, 17.5 per cent of the MSCI Index is now made up of technology stocks but it is very heavy on Silicon Valley tech (the so-called FAANG stocks).

Koda’s approach uses an Is­raeli tech specialist where the solutions and valuations are very different.

What about Afterpay?

Asked about its attitude to the most talked-about stock in the Australian market, buy now, pay later superstar Afterpay, Mr Heath said: “There is no question that the thematic of these buy now, pay laters is going to be prevalent. One of the things for clients to look for is to find avenues towards exposure to the thematics that aren’t going to get caught up in a valuation issue.

“For the Australian stocks, there is a lack of choice and a wave of passive money driving it.

“We don’t chase highly sought-after names but we are in thematics.”

Koda’s largest asset allocation is 23 per cent to domestic private debt strategies.

Mr Heath claimed the withdrawal of the Australian banks from sectors of the corporate lending market had created a unique structural opportunity to generate equity-like returns from senior and secured credit to high-quality companies.

But he was wary of situations such as the Virgin Australia bond issue last year, where investors are now getting less than 20c in every dollar after the company went into administration.

“If you are going to be involved in debt strategies, employing a professional manager is fundamental. Ensure those managers are operating in niche areas where they have expertise,’’ he said.

“You also need to find the right structures. I am not convinced LICs that have portfolios of private debt are the right way to get access to this space.”

While Koda has no significant exposure to infrastructure because of record low interest rates and valuation issues, it is starting to look at direct property investment, especially with the return to office space around the world following the COVID-19 pandemic.

“Twelve to 18 months from now there is likely be distress in the commercial property market. We are starting to explore that area as one where we expect we will see opportunity,’’ he said.

Koda also looks after $2bn of assets for the not-for-profit sector and earlier this year was the first external manager to be awarded a mandate to manage money for part of the Ramsay Foundation’s $6bn investment portfolio.

Read more at theaustralian.com.au