Bank pins sharemarket hopes on a mild Colonial boy

David Murray might be the seemingly immoveable boss of Commonwealth Bank and the man behind its once great share performance, but he's now relying on a former Colonial First State treasurer, John Pearce, to win back investors' hearts after a rough six months.

Pearce has been named chief executive of Colonial, CBA's funds management arm, but he's not in the stockpicking mould for which Colonial is renowned.

His background is in the trading of financial instruments like derivatives to manage the risks of running a bank.

``There's a lot more similarities than differences between a funds management business and a financial markets business," Pearce says.

``In terms of people management skills, they are very similar because we are talking about a similar type of people dealers, fund managers and traders."

The comments are fitting. Colonials First State's loss in the past year of several key fund managers and executives has raised some big questions about the funds manager's future.

The departures have included Pearce's highly paid predecessor, Chris Cuffe, senior executive Peter Polson, legendary stockpicker Greg Perry, and small capital stocks expert Barry Henderson, who leaves at the end of the month.

It remains to be seen whether Colonial First State can continue its outstanding fund returns, particularly in Australian equities. Two years after the risk-averse CBA took over, is it interfering too much, spoiling the ethos that led to 10 years of stellar growth in funds under management from virtually nothing to around $100 billion?

Pearce is running a business that is meant to guarantee CBA a new era of growth into the 21st century, by tying up consumers' superannuation as well as their mortgages and bank deposits.

But with a potential $1 billion write-down against Colonial First State set to be announced next month when CBA reports its interim results, heightened fears about staff losses and the generally poor estimation of the superannuation industry after last year's negative returns, Pearce has his fair share of challenges.

``It's good in the sense there's no point coming in right at the top so there's nowhere to go," Pearce says.

Shortly after CBA bought Colonial First State for $10 billion, there were murmurs that Murray was not happy with the big bets the funds manager was taking on stocks and would be more comfortable with a bank-like approach of avoiding risk altogether.

That would allow Murray to sleep better at night, but will those who have their super with Colonial First State be looking at lower returns and therefore take their money elsewhere?

It's probably too early to tell the collateral damage on fund inflows because Colonial First State's recent performance is muddied by the fact that investment markets have been so bad that fund managers almost everywhere have been seeing funds leave their grasp.

Still, according to Colonial First State, after poor June and September quarters it put together a strong final quarter in 2002, with $351 million in net retail inflows. This includes $1.048 billion of inflows to Colonial First State and $697 million of outflows for older Commonwealth and Colonial. How this compares to the rest of the industry and the quality of the flows won't be clearer until Assirt releases its market share figures in the coming weeks.

Pearce, of course, rejects any assessment that CBA is ``interfering" but admits independent is not the right word to describe its relationship with Colonial First State.

``Firstly, I am not enamoured with the term `independent'," he says. ``It would be crazy to be independent from one of the most powerful distribution models in the country [in CBA]. I much prefer the term `inter-dependent' ... There's an inter-dependence there between CBA and Colonial First State."

Independence is important because of Colonial First State's close relationship with, and reliance on, independent financial advisers. They are traditionally suspicious of big banks but represent the lifeblood of the business by putting clients into Colonial First State products.

To Pearce, his own appointment is confirmation that CBA is not ``interfering" unduly in Colonial First State investment business.

``I am an ex-Colonial boy," he says. ``It's not as if there is a traditional Commonwealth banker running Colonial First State."

But ratings house Morningstar summed up his predicament last week: ``Pearce's major challenge will be to restore CBA's confidence and support of funds management, albeit in slower markets, while maintaining the intensity and passion that delivered such good returns to Colonial First State's investors, but which are starting to ease."

Morningstar's Howard Tweedie says the personnel exits were due to a combination of factors including ``enthusiasm waning" and the individuals questioning ``once you have built your own reputation and build a good track record, where do you go from there?".

Despite much market commentary to the contrary, Pearce believes Colonial First State is not dependent on one or two individuals like the typical small fund manager.

``That's not to say we don't have key individuals," he says. ``We have a lot more of them and more spread out."

He also believes Polson's exit was overplayed. As head of the bank's overall insurance and investment activities (one rung above Cuffe), Polson didn't hire and fire the fund managers, Pearce says.

The most senior Colonial executive initially remaining with CBA after the merger, Polson left late last year and is believed to have been asked to join the new CPH/Challenger board, where Cuffe is managing director.

To make matters worse, Colonial has already gone through a few changes since Polson left. His replacement, John Mulcahy, has gone to Suncorp and the CBA's chief numbers man, Stuart Grimshaw, has taken on the job in the interim.

Pearce insists the group has handled succession management well. Indeed, it has brought in several new fund managers in the past year to top up the reserve of talent, including experienced market hands Martin Duncan, Natalie Coombe and Jim Taylor.

Pearce is far from inexperienced in funds management. His most recent role of general manager of investments at Colonial First State was primarily one of business development.

Even before the loss of Cuffe and Perry, Colonial First State was keen to develop new products beyond its traditional strength in Australian equities investment management.

Colonial First State, like other fund managers such as Perpetual, has been preparing to deal with the potential crippling impact of a period of poor investment markets.

It has sought to introduce products where revenues to the fund manager are not as dependent on the Australian sharemarket.

Colonial First State's main ``GDP-plus" style equity funds are still a very important part of the business, representing around $20 billion of funds under management.

But Colonial First State has veered off into the much hyped ``platform" market through First Choice, and more recently, a joint venture with renowned value fund manager Peter Morgan, formerly of Perpetual. But like Westpac through its purchase of BT and its custodial wrap business, it's unclear when this will generate any sizeable return for the bank.

As much as anything, Pearce will be hoping for kinder investment markets to make his job a little easier.

``The whole funds management industry has been hurt by poor returns, but it's that one year statistically we were going to have ... Australia fundamentally is in pretty good shape. We have low inflation, low interest rates and a stable political system. We did not have a speculative bubble like our international peers. We are confident about the local scene."