McKeand keen to turn around ailing AIBIM

Chief investment officer Innes McKeand tells Jane O'Sullivan, Markets Correspondent, he is still keen on growth stocks but he is determined to pay the right price for them

It may seem like a long way from studying physics at Edinburgh University to heading up AIB's €9 billion investment business beside Dublin's Grand Canal.

But that is precisely the route taken by Innes McKeand, who joined AIB Investment Managers (AIBIM) as chief investment officer from Nestlé last autumn.

Mr McKeand, who hails from Dumfries in Scotland, spent 14 years with Scottish Life Assurance Company in Edinburgh and had been with Nestlé for just a year when he was headhunted by AIBIM's managing director, Ms Eileen Fitzpatrick.

"I would still be at Nestlé but Eileen headhunted me for this role and it was too good an opportunity to turn down," he says from his offices in Percy Place, overlooking the canal. "It's an opportunity to put your stamp on somewhere and turn it around."

And AIBIM's investment performance is badly in need of a turn-around. Over the past few years, it has underperformed its rivals with serious knock-on consequences for the bank as a whole.

As well as facing a near €500 million deficit on its own pension fund, profits at AIB's life insurance subsidiary, Ark Life, have been hit by the weak investment performance. Indeed, AIB recently announced that Ark would no longer rely on AIBIM's investment products alone but would offer products managed by rival firms.

The last pension fund league table, published by Mercer at the end of the first quarter, showed AIBIM languishing at the bottom of the table with the worst performance over five years.

Making the news even less palatable in AIB's Ballsbridge headquarters was the fact that Bank of Ireland Asset Management (BIAM) and the Bank of Ireland-owned New Ireland were among the top three on the table.

In his first interview since taking up his new role, Mr McKeand readily admits that AIBIM "hasn't covered itself in glory" over the past few years. But he says AIB is committed to addressing the problem and to providing the resources to do so.

"There is a big commitment from AIB Capital Markets and, ultimately, Michael Buckley to get the thing right," he says.

His appointment last September, along with that of Lance Graham to head AIBIM's UK equity portfolio and Mr JJ Walsh to head the fixed-interest division, were seen as the first steps in tackling the problems. AIBIM is now looking to further strengthen its team, which includes 22 fund managers.

But Mr McKeand believes that the real problem at AIBIM has not been structural or even cultural, as some critics who blame meddling by head office have suggested. He also says AIBIM's fund managers have the space and the tools needed to do the job correctly. The problem, he believes, has been straight-forward stock selection.

"We got our asset allocation broadly right over the years. Where it's gone wrong is on the stock selection side. It's a question of getting the process and template right," he says.

While rival fund managers such as BIAM have pursued a "value" strategy, ferreting out companies whose shares have fallen on hard times or which have hidden assets, AIBIM has been identified as a "growth" investor in the past.

Typically, it looked for companies with strong sales and earnings growth, operating in sectors that were showing a strong growth trend. But as the economic cycle turned, many of its investments, which included Elan, disappointed.

Mr McKeand says AIBIM still likes growth stocks, particularly those that will grow more than the markets expect. But far more emphasis will be placed on judging what is a reasonable price to pay for them.

"It can be easy to confuse a good company with a good investment," he says, noting that a company may be growing quickly but be overpriced. "The question is: what's the right price to pay for that growth?"

With the first-half fund management league tables due out shortly, Mr McKeand says AIBIM's performance is "on an improving trend".

But, noting a tendency in the Irish marketplace to focus more on the short-term than elsewhere, he believes performance should be judged over time.

"It's about having a process which is a repeatable process, where there are repeatable elements to it, about getting the decision consistently right over time," he says.

And how does he feel about having to compete to sell AIBIM's investment products even through the bank's own life assurance subsidiary?

Mr McKeand believes it can be a good thing, helping to increase AIBIM's focus.

"At Scottish Life we had the same kind of issue and we worried about it at the time. We were offering a choice of Fidelity, Phillip & Drew and one other leading industry name as alternative investment options but 85 per cent or more of the business we sold opted for Scottish Life's investments," he says.

Looking at wider issues facing the industry, he says AIBIM is happy to work through the Irish Association of Investment Managers (IAIM) on issues such as improving corporate governance.

"The question is where we can get the greatest influence. We think the IAIM is a good vehicle for getting our message across instead of institutions all over town coming up with their own approach," he says.

He notes recent progress, with the likes of Independent News & Media and Kingspan moving to address fund managers' concerns on this front.

"There are definite signs of progress and that's very encouraging. Constructive engagement can produce the right results."

But he also cautions against "black and white rules", saying there are always individual cases and issues that may have to be taken into account.

He is among those who fear that the Higgs report, if translated into practice, may potentially be too rigid. "You can be too hard and fast about having a rule-based approach. A more sophisticated or subtle approach can sometimes work better."

And, so to the sixty-four million dollar question: what are equity markets going to do in the months ahead?

AIBIM has recently moved to increase its equity weighting, to a "neutral" position. But this has been largely to take advantage of the recent market rally, which Mr McKeand believes has been fuelled in large part by the reflationary efforts of governments around the world, particularly the US.

"There is a lot of cash sloshing around and it's finding its way into financial assets. Can it be sustained? I think it's questionable," he says.

He notes that global economies continue to struggle with no signs of an upturn, while the strength of the euro is likely to hit corporate profitability in Europe.

"In the short-term, there may be another 10 per cent in it if we're lucky."

However, he says he is less concerned about equity valuations at present than about bonds, which he believes are "an accident waiting to happen" and on which AIBIM has adopted an underweight stance.

So what are Mr McKeand's favourite stocks at the moment?

Despite issues over corporate governance and executive pay, Mr McKeand instantly cites GlaxoSmithKline, which he believes has a lot of potential for positive announcements on research.

In an Irish context, he likes Kingspan, a stock with a decent yield and potential for further growth. He also recommends two smaller US stocks, housebuilder Lennar and food distributor Sysco. For balance, he adds a European stock, Dutch information and media group VNU, which he describes as "a good quality company".

And how did that degree in physics lead to a career in the financial services industry?

"The choice when you study physics is to go and make bombs, teach or do further research. None of those seemed to be terribly attractive options at the time," he says of his decision not to pursue a scientific career.

However, he credits his course for logical thinking. "You certainly come out numerate and able to think clearly" - qualities that should come in handy as he attempts to propel AIBIM's performance up the league table.