What is the secret behind the NRMA’s 14-year streak of positive annual returns? Dynamic asset allocation has a lot to do with it, Ainsley Lee says.
Ainsley Lee likes to keep a low profile and has somewhat reluctantly agreed to this interview.
But look at his track record and you’d think there is plenty of reason to boast.
In his 14 years with the NRMA – initially as Investment Manager, but now Head of Investments – he has delivered a return higher than equities without a single negative financial or calendar year in performance. “A priority is really focusing on generating attractive long-term returns with a lower level of risk than comparative risk profiles,” Lee says in an interview with [i3] Insights.
This is quite an achievement considering this period included significant downturns, including the global pandemic.
Asked how he achieved this with a portfolio that currently has an asset allocation of 60/40 in growth/defensive assets and Lee answers that the asset allocation can shift quite significantly in periods of stress, but importantly all positions are paired to provide a specific return profile.
“During [the COVID] period the portfolio was not at 60/40. We were probably around 50 per cent [in growth assets],” he says.
“Our quant [process] was showing that markets were looking super frothy [pre-COVID] and some of the global macro indicators were starting to look a little less supportive. When COVID-19 first started spreading globally out of China, markets did not react and even continued to rise.
“When it became obvious to us that whole economies may have to be shut down, we were able to move very quickly to become defensive and built up a large allocation to cash. This protected the portfolio and we were able to redeploy back into risk assets at attractive valuations when the enormous level of fiscal and monetary support became evident.
“I had a pretty high cash balance, probably up to 25 per cent cash during COVID, and so we were able to deploy capital pretty quickly as well.”
People internally think we're investment people, but the reality is I'm just a risk manager. It is just trying to get a grasp of where the market risks are, what the probability is of those risks eventuating and then how to protect the portfolio against them if they are to eventuate
Yet Lee doesn’t see himself as a star investment manager. He argues he simply tries to preserve capital while focusing on positioning the portfolio for the most attractive risk-adjusted returns, in light of the current or emerging investment regime.
“People internally think we’re investment people, but the reality is I’m just a risk manager,” he says. “It is just trying to get a grasp of where the market risks are, what the probability is of those risks eventuating and then how to protect the portfolio against them if they are to eventuate.
“As macro fundamental risks increase through the data, then we seek to be a little bit more protective and vice versa.
“Outside of the investment process, I am fortunate that I have a highly supportive Investment Committee Chair, CEO and Manager, Rachel Wiseman, who provide the right line of questioning and governance to test the robustness of any proposals or asset allocation movements being put forward. The returns are only as good as the people that support the direction of the positioning.”
Dynamic Asset Allocation
When assessing whether to adjust the asset allocation of the portfolio, there are a number of elements Lee considers. First of all are the business needs of the NRMA Group and how the portfolio may be leveraged to enable the best outcomes. What opportunity and challenges does the business face and how can it best service its members?
A good illustration of how the group’s objectives can change was during the global coronavirus pandemic in 2020 as tourism faced significant headwinds during a period of repeated lockdowns and travel restrictions.
“During COVID, we moved to being quite defensive because some of the operating businesses being exposed to tourism were under some margin pressure. We tilted the portfolio to an income bias and a more defensive stance,” Lee says.
But it is not all about crises; the portfolio also plays an important role in securing assets that deliver benefits to members, whether it be in returns or direct discounts on services.
“The purpose of the investment portfolio is to support the long-term financial sustainability of NRMA, as well as supporting the wider business strategy. And depending on the environment, the best way of supporting the business could be to focus on capital growth, generating income and/or providing liquidity, and that liquidity is generally for growing our underlying member value proposition,” Lee says.
“That might be buying more holiday parks or buying strategic assets and so it becomes almost like a funding tool, but in its own right. We also help smooth out some of the earnings of the business when there’s been tough periods, such as COVID. It becomes rather like insurance, which is liability matching, but more about cash-flow matching.”
The NRMA owns assets such as the Manly Fast Ferry, it has about 60 holiday parks and also SIXT car rentals. These assets are not just good investments, but they also allow the organisation to offer discounts to members for using these services.
The purpose of the investment portfolio is to support the long-term financial sustainability of NRMA, as well as supporting the wider business strategy. And depending on the environment, the best way of supporting the business could be to focus on capital growth, generating income and/or providing liquidity, and that liquidity is generally for growing our underlying member value proposition
“We have a cruise expeditions business, which are smaller cruise liners that can go into these amazing experiential locations around Australia, where a lot of the bigger cruise lines can’t access. These are all benefits that NRMA members have access to,” Lee says.
A second pillar to the asset allocation process is an assessment of the macro environment. Lee needs to assess whether markets are in a risk-on or risk-off environment, whether there are significant dislocations in the underlying fundamentals of assets and what the best way to mitigate or exploit the risks are.
Lee uses a probability-based quantitative model to formulate its capital market assumptions and compares these with the assumptions of its asset consultant, Frontier Advisors.
“From there, it is about portfolio optimisation. How do we find an ideal risk-adjusted return position for the portfolio? Again, we’re probably more on the conservative side; we won’t take unnecessary risk and if we do, there needs to be appropriate compensation for taking risks,” he says.
The risks he currently is concerned about revolve around geopolitics and the pressures from the increasing cost of living. Both drivers have the ability to significantly undermine the global economy.
“A key risk for me right now is geopolitics. This is probably the obvious one because it’s just happening everywhere around the world,” Lee says.
“The other one that really concerns me is probably the consumer and the financial strength of the household because I think everything starts at the household and the consumer level, a driver for corporate earnings. And the cost-of-living pressure is really starting to show.
“We’re starting to see it in the US credit card and auto loan defaults. We’re starting to see a rise in voluntary administration of small and medium enterprise businesses. Even here at home, like paying for groceries, you notice the difference.”
Starting with Demutualisation
The genesis of the portfolio Lee runs is found in the demutualisation of NRMA Insurance in 2000. That year, NRMA Insurance Limited was split out into the National Roads and Motorists’ Association Limited and NRMA Insurance Limited, which later changed its name to Insurance Australia Group.
The demutualisation came on the back of NRMA Insurance’s financial success, which had seen it accumulate a large amount of surplus funds. These funds formed the basis for the portfolio Lee is currently managing.
According to the 2023 annual report, the NRMA Group Investment Portfolio had $610 million in assets under management plus $176 million in cash.
In terms of risk appetite, NRMA is a mutual organisation, so Lee manages the endowment with a philosophy of ensuring the long-term financial sustainability of the organisation is protected to sustain the business for another 100 years.
“I do focus on capital preservation. I am always mindful of: ‘How do I protect against the downside and grow long-term through compound growth?’” he says.
“It’s really that Ray Dalio [Founder of US asset management firm Bridgewater] philosophy: If I gave you $100 and the market was down 50 per cent, then you’ve only got $50. You then need 100 per cent to get back to $100.
“Whereas if I don’t lose any of your $100 and I grow by 10 per cent every year, then over the long term of seven to eight years, you should get a doubling of your money. It’s about targeting a smoother, more consistent return profile.”
Dynamic asset allocation is the key instrument in ensuring the NRMA doesn’t lose any capital.
“The important thing about the portfolio is that it is dynamic, and it has to be very dynamic, so it can move between having an income focus to a bit more of a growth bias. But ultimately the underlying managers of the portfolio don’t change much; it’s just the weightings between them do,” Lee says.
The important thing about the portfolio is that it is dynamic, and it has to be very dynamic, so it can move between having an income focus to a bit more of a growth bias. But ultimately the underlying managers of the portfolio don't change much; it's just the weightings between them do
At the moment, Lee has his portfolio at 60/40, but he is contemplating moving it a bit more defensively. But even at 60/40, his portfolio is relatively defensive since certain assets that officially fall under the growth moniker are rather defensive in nature.
“There are disclaimers and nuances around how you classify certain holdings. For example, we’ve got an investment in a core infrastructure asset and the majority of the underlying cash flow is all contracted revenue to investment-grade counterparties,” he says.
“So while it is highly defensive, we’ve actually got it in a growth alternative [bucket], which automatically qualifies it to be a little bit more growthy than probably where the underlying position is.”
Lee has been quite active in the venture capital space in recent years after teaming up with a venture capital group called Slingshot. The performance has been great, but after exiting a number of investments following their initial public offering, Lee is ready to take a step back.
“We have exited a lot [of investments]. We did extraordinarily well on those ones, but that was more on an opportunistic basis. Would we do it again? Probably not. We might go back to managers. Being a two-man team it’s too much work, especially if you’re taking board positions,” he says.
He is currently considering increasing the allocation to sovereign bonds, but also still sees cash as a good way to mitigate risk in the current environment. Yet cash is often a misunderstood asset, he says.
“You’ve got no volatility, it is liquid, and it aligns with my purpose of capital preservation. And it is still throwing off 5.0 to 5.3 per cent, so on a risk-adjusted basis, it’s actually not bad,” he says.
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[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.