Norman Zhang, Chief Investment Officer, Koda Capital

Norman Zhang, Chief Investment Officer, Koda Capital

Customisation Through Alternatives

In Conversation With Koda Capital CIO Norman Zhang

Norman Zhang joined Koda Capital at the end of last year as CIO. We caught up with Zhang to discuss some of the differences between the private wealth sector and the industry super funds he previously worked at and also delved into Koda’s emphasis on alternative investments

Norman Zhang spent six years as Chief Investment Officer (CIO) at industry superannuation funds Media Super and LegalSuper, before making the jump into the private wealth sector, taking up the CIO role at Koda Capital in December 2023.

His decision to join Koda comes at a time when private wealth companies have reached a level of sophistication that sees them invest in a broad range of complex and alternative asset classes, while allocating increasingly larger investment mandates to external fund managers.

It is a far cry from the old days, when bank-aligned financial planning firms ruled the industry.

This development has made private wealth firms look increasingly more like institutional investors and as a result they have been able to attract investment professionals from the institutional sector.

Zhang is the latest in a growing number of superannuation investment professionals joining private wealth firms.

Kevin Wan Lum joined LGT Crestone in April 2022 as Deputy CIO from LGIA Super. Wan Lum also worked for industry fund Energy Super and Victorian state asset manager VFMC in key roles.

Alexandre Ventelon joined Morgan Stanley Wealth Management in 2017 from AustralianSuper, where he was Investment Manager for Asset Allocation and Portfolio Construction. He is now Head of Research and Investment Strategy for Morgan Stanley’s Australian Wealth Management arm.

Tim Peters left what was then First State Super in 2016 to join Walsh Bay Partners, a private wealth firm set up largely by former ipac staffers. He is now a Senior Investor for the University of Sydney endowment fund.

Zhang acknowledges there are strong similarities between the investment strategies of private wealth firms and superannuation funds, including the focus on asset allocation to drive performance and on sophisticated research capabilities to identify consistently well-performing fund managers.

But he also sees a number of differences.

Whereas in the past super funds were seen as investors that were staunchly long term in their horizon, recent changes in regulations and the growing size of super fund membership means they no longer hold the upper hand in this area.

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Superannuation is also a long term game, but there are other factors that move it to more of a shorter term focus. We all know about Your Future, Your Super and its focus on the shorter term

“One of the good things about moving into private wealth is that you can probably be more of a long-term investor,” Zhang says in an interview with [i3] Insights. “We get to build portfolios that are truly bespoke and long term, in some cases multi-generational portfolios.

“Superannuation is also a long term game, but there are other factors that move it to more of a shorter term focus. We all know about Your Future, Your Super and its focus on the shorter term,” he says.

The annual performance test of the Your Future, Your Super legislation has increased the focus on any year of underperformance, despite the fact the test measures performance over a rolling eight year period.

It has also made funds more aware of tracking error against the benchmarks set out by the Australian Prudential Regulation Authority, which has made some funds reluctant to take any meaningful active risk.

But a shorter-term focus is not the same as a focus on short-term performance, Zhang says.

“I wouldn’t say short-term performance, but shorter-term tracking error against benchmarks,” he says. “But perhaps a bigger factor is the peer awareness that’s being injected into investment decision making. That gets emphasised by some trustees, reiterated by the media, which compares funds on a year-to-year performance, irrespective of the longer-term strategy,” he says.

Investment Philosophies

Apart from the long-term nature of private wealth, there is also a clear difference between the investment philosophy of superannuation funds and private wealth firms. In the private wealth sector, many clients are not simply building wealth to fund their retirement; they are already wealthy. This means there tends to be a much greater emphasis on wealth preservation, rather than accumulation.

“On the private side, a most important element is absolute returns and downside protection,” Zhang says. “Understanding the return profile [of a strategy] is important. What’s your upside? What does your downside look like? Is it symmetrical or asymmetrical? There is a preference in this segment for low downside capture, whilst capturing most of the upside” he says.

The fact private wealth clients already have a substantial asset base also has implications for portfolio construction, especially for the way portfolio managers need to approach diversification.

After all, most clients will already have a portfolio of assets, but also tend to have made their wealth in a specific sector, whether it is real estate or in a certain business sector. A thoughtful portfolio manager will try to avoid or at least minimise any duplicate exposures to these sectors.

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In terms of [portfolio] construction, you need to diversify the portfolio with recognition of the other assets they own, even if they're still operating businesses. For instance, if you've got an operating business in Australia that is highly GDP-linked, then do you really want a lot of consumer exposure in your Australian equities portfolio?

“In terms of [portfolio] construction, you need to diversify the portfolio with recognition of the other assets they own, even if they’re still operating businesses. For instance, if you’ve got an operating business in Australia that is highly GDP-linked, then do you really want a lot of consumer exposure in your Australian equities portfolio?

“Maybe you don’t want any Australian exposure at all and you look offshore to diversify the financial assets,” he says.

Even within investment strategies that look similar to the ones held by super funds, private wealth firms tend to hold strategies that have quite a different flavour to them when looking under the bonnet.

“For instance, when you’re looking at equities in a super fund, it’s typically long only and generally benchmark aware. On the private [wealth] side, you may see more concentrated portfolios, including some really concentrated, sub-10 stock portfolios. And you see a lot more shorting in strategies as well, because of the absolute return focus,” Zhang says.

“In fixed income, you generally see a lot less duration and exposures to government bonds than you see in institutional portfolios,” he says.

Reference, not Model Portfolios

Many private wealth firms develop a series of model portfolios as an easy way for new clients to get set. This involves developing a strategic asset allocation (SAA) for a certain risk profile, which is then implemented by allocating mandates to specialist external fund managers for each asset class.

Investors usually access model portfolios via managed accounts, where the underlying securities are owned by the investor.

But Koda Capital finds this model a bit too prescriptive. Instead, it has developed a series of reference portfolios that form the starting point of a discussion with clients to establish a more bespoke portfolio.

“We use reference portfolios at Koda Capital because we believe fundamentally the best portfolio is the portfolio that meets a client’s requirement. Having a model portfolio implies that that’s the best portfolio for the client, whereas we know each client is different,” Zhang says.

“We then build programs on top of the reference portfolio in conjunction with the advisers. For example, the client can layer a private markets program on top – a closed-ended private equity program that’s curated by vintage and risk. We call this our Opportunistic Program.” he says.

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We use reference portfolios at Koda Capital, because we believe fundamentally the best portfolio is the portfolio that meets a client's requirement. Having a model portfolio implies that that's the best portfolio for the client, whereas we know each client is different

Like model portfolios, each of Koda Capital’s reference portfolios has a different risk profile, starting with a very conservative approach of 10 per cent growth assets and 90 per cent defensive assets to more risky profiles, where the portion of growth assets gradually increases.
The majority of clients start with a 70/30-type portfolio, which is not unlike a balanced option in a superannuation fund. Yet, unlike superannuation options, Koda’s reference portfolios are more heavily skewed to alternatives.

Since its inception, Koda Capital has had a strong focus on alternative and unlisted assets, inspired by the endowment model. As a result it has invested in a broad range of alternative asset classes, including not only private debt and private equity, but also some less common ones, such as water and fishing rights, litigation financing and insurance-linked securities.

Some of these less common alternative investments find their way into Koda Capital’s opportunity program.

“We’ve got an Opportunistic Program that can pretty much go anywhere. It is opportunity-driven and macro-sensitive as well. Right now, we are earning quite a bit with private debt, because rates are high and spreads are reasonably healthy.” Zhang says.

In addition, our Active Allocation program is a relatively dynamic program that doesn’t shy away from taking short term tilts based on macroeconomic research, market conditions and dislocations.

“Some asset classes are relatively more attractive than others at this stage of the cycle. The opportunity program will look to allocate to assets that are relatively more attractive in the cycle and away from assets that are relatively less attractive or where risks are elevated,” he says.

Zhang and his team are currently developing a series of new reference portfolios that put emphasis on responsible investing.

“We’re building more reference portfolios, because we have a variety of clients. Some of them may favour responsible investment. A reference portfolio for a private client that may not be as focused on responsible investment will look different to a portfolio for a private client that has a strong focus on responsible investment and impact,” he says.

Inflation & Gold

One of the most disruptive events in markets in recent years has been the rapid ramping up of interest rates globally after central banks started to raise cash rates in response to inflationary pressures building up after the COVID-19 pandemic.

Inflation can be hedged by allocating more weight to infrastructure and property, asset classes which often have income streams that are indexed to the Consumer Price Index (CPI).

But their ability to hedge inflation is often not perfect, because infrastructure and property companies often have other demands placed on them that are not as easily tied to the CPI, including the payout of dividends.

Inflation-linked bonds, or ‘linkers’, can also provide a solution, but their application is not as straightforward as their name suggests, Zhang says.

“Linkers are priced on inflation expectations. It is not just that when inflation goes up, you make money. It’s actually the expectation that you have to price properly for the asset class itself” he says.

Instead, Koda Capital decided to make an allocation to gold.

“We put on a tactical tilt to gold [ETFs] because there weren’t that many asset classes that had a direct correlation with inflation, relatively easy to access, with low transaction costs.


[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.