The $45bn Aussie fund manager you’ve probably never heard of

For many retail investors, BHP’s decision last August to collapse its dual-listing structure and repatriate London-listed shares to the ASX may have seemed like a technical piece of financial engineering. But for index fund managers like IFM Investors Aidan Puddy the move was hugely significant.

As a result of the move, BHP’s weighting in the benchmark ASX200 was suddenly going to jump from 5.2 per to 10 per cent. Or 12 per cent of the ASX100 and 14.8 per cent of the ASX50.

Global head of listed equities at IFM Investors, Aidan Puddy, says the reunification of BHP was a difficult, given moving prices and volumes. Credit: Luis Ascui

“That was probably one of the biggest index changes we have ever had,” Puddy explains.

Aidan Puddy is arguably Australia’s least-known mega-fund manager. He manages over $45 billion worth of stocks but has no public profile compared to stock picking superstars, because he focuses on index investing on behalf of institutional clients.

He constructs portfolios to mirror the ASX200, ASX100, or whatever index the client wants to benchmark to. And, as BHP’s move to collapse its dual listing structure shows, this is not as simple a task as it’s often made out to be.

When BHP announced the change, Puddy’s team had to scramble to buy BHP shares so each index portfolio mirrored the sudden change in index weighting. “You just don’t know how much volume is going to be available. We didn’t know volumes, and we didn’t know prices, necessarily,” he says.

His team had to sell other shares to fund the purchases, and made contingency plans in case there was a huge jump in BHP’s share price.“There was a big risk management exercise with that because for an index portfolio, you don’t carry a lot of cash.”

When Mr Puddy started at IFM in 2005, the firm was less than a year old and didn’t even a website.

He had studied a generic bachelor of economics at Monash University in Melbourne, before finding a job in unit pricing at County Investment Management in the depths of the 1990s recession. “I just took what I could get”, he says.

He later moved to the active money team at the Myer Family Office, then realised his skills lay in the index and quantitative side.

Over 18 years IFM Investors has become globally renowned for its environmental, social, and governance (ESG) credentials.

He constructs portfolios to mirror the ASX200, ASX100, or whatever index the client wants to benchmark to.Credit: Louise Kennerley

It competes on the world stage against the biggest investment houses and its infrastructure fund is one of the world’s largest with over 500 clients and $83.8 billion invested in airports, utilities, roads, and ports across Australia, Europe and the US.

But its growing size and influence is challenging the power dynamics of corporate Australia

While IFM was born and is still collectively owned by the union-aligned funds of the 1990s. But Mr Puddy says he has never heard either current chair and former Labor government Minister Greg Combet or former chair Gary Weaven espousing unions or the Labor party.

“What they have done - and it’s made a big impression on me - is they talk about who we are managing money for and that is millions of Australians,” he says in a recent interview at IFM’s offices in Melbourne.

“From my standpoint, we are apolitical.”

While ESG investing is now highly popular, particularly when it comes to climate change, IFM’s long-term horizon means it has been advocating these core beliefs for the past 17 years.

“Sustainability is profit-maximising, but it may not be immediately obvious,” he explains.

“If you don’t respect the social licence you are given, that social licence may cease to exist in the future and I would argue that would have a very big detrimental effect on profit.”

Of the $45 billion Puddy oversees, $32 billion is indexed Australian equities.

He calls his index product “enhanced passive” - holding all the stocks in a benchmark index, but tinkering with the weightings just enough to outperform. . The fund would get in trouble for performing too well, he says, “because that would indicate we are departing too much from the benchmark”.

IFM now has about 580 employees and brought in $530 million in management fees in 2020-21, mostly from the infrastructure fund. The listed equities team took in fees of $10.2 million, according to its latest annual report filed with the corporate regulator.

Puddy believes IFM’s mandates are won on merit by offering lower fees, research, a strong track-record, customisation, and tailored products like low-carbon portfolios.

IFM only reports its performance to the 22 super funds that own it. But Puddy says his products have outperformed over the long-term. “We have done what we consider a great job for our clients and their members.”

As his funds grow, so too does his power.

“The bigger you are, the more impact you can have on companies,” he says. “It’s right that you should be able to be listened to.”

That power gets wielded during annual general meeting season with IFM last year voting against 134 resolutions at 237 AGMs, usually on director fee increases and executive remuneration.

PwC partner and global co-leader in reward and benefits, Andrew Curcio, says boards are engaging more with super funds to secure their support.

“While the average votes against the remuneration report remains under 10 per cent, the number of extreme votes against is trending upwards,” he said. The largest ‘no’ votes in 2021 were against Dexus, Link Administration, and Rio Tinto.

“As part of this we are seeing much more engagement in recent times with superannuation funds directly, recognising the level of interest and influence they now have in these matters,” he said.

Puddy also recognises that IFM owes its growth to its performance but also government policy, which guarantees a constantly growing pool of retirement savings.

“It’s not lost on us that there is a super guarantee in Australia, and therefore we need to respect the social licence that needs to exist as a result of guaranteed inflows,” he says.

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