Quantum leap from DJ to fund manager

Leo Krippner says his science background has prepared him well for finance. Marty Melville / Getty Images

Paying his way through a Master of Science degree in quantum physics at Waikato University, the young Leo Krippner spun vinyl at parties, 21st birthdays, and weddings.

By day he'd traverse the complexities of stochastic laser equation modelling. At night he'd select a combination of dance music, top 20, rock'n'roll, and even old-time foxtrots and waltzes, calculated to keep the party lively as the 1980s drew to a close.

Since August this year, Krippner, 38, has headed AMP Capital Investors' investment strategy team.

The amiable and level-headed son of Karapiro horticulturalists is still doing the maths and making selections intended to keep the good times rolling, only now he's doing it for investors. About 305,000 New Zealanders, in fact. And his decisions involve what mix of domestic and international shares, bonds, cash and property will produce the best returns for an "acceptable" degree of risk.

While AMP has about $11 billion in funds under management, Krippner is responsible for allocating $4 billion, comprising the company's balanced fund division. It's a task he doesn't take lightly, not least because some of that money belongs to his parents and eight brothers and sisters.

Because he knows that people might worry about a quantum physics masters graduate managing their money, he's keen to point out he has formal training in economics and finance from Victoria University and the London School of Economics.

Nevertheless, while quantum physics might sound abstract, "you'd be surprised how much a lot of mathematics within physics actually translates across to financial markets", he says.

"The skills that you get from doing mathematics and physics actually give quite a good grounding for quantitive work like valuation models or any sort of analysis of financial market data. It's basically the same maths but applying it to a different problem."

While Krippner's primary job is to formulate benchmarks - the right mixes of different assets to deliver good returns over the long term - he also actively manages funds.

"The active management is saying that in the short term there's various influences that might mean that particular assets like, say New Zealand shares, might not perform particularly well, in which case you want to limit people's exposure to them," he says.

"You'll take some money out of there and put it into something else like New Zealand cash, which gives a pretty good performance at the moment, or overseas shares, which we also expect will give pretty good returns."

That means keeping an eye on global and local economies, inflation and monetary policy - "how all those things might come together to influence the likely returns on different asset classes".

When not shuffling millions of dollars of New Zealanders' savings between various assets classes, Krippner likes to shoot a bit of pool or snooker and maybe listen to some of the 300 albums and 400 singles he amassed when working as DJ.

Dinner table conversation with longtime partner Iris, an Inland Revenue economist, can turn to economics and tax "sometimes".

In fact Iris helped stoke Krippner's "born-again bent for yield-curve analysis" - the yield curve being the graph showing the relationship between the annual return on assets, usually bonds, and the number of years before they mature.

Having begun his career in tax and macroeconomic forecasting at Treasury in the early 90s, he then moved to the Reserve Bank before taking up a job with Axa.

At Axa he'd been doing yield-curve modelling as part of his work on fixed-interest management. When Iris completed her PhD in economics, Krippner was inspired by her example to take his interest further.

The RBNZ was a better place to pursue his studies, with four days at work and one day on his studies. He planned to crank out the PhD in two or three years. Five-and-a-half years later, he's at AMP and will be submitting his thesis "within a few weeks".

While it might sound only fractionally less impenetrable than stochastic laser equation modelling, Krippner says people perform yield-curve analysis whenever they refix their mortgage.

"You can get a different rate depending on the maturity that you want to have it locked in for. You can choose a floating rate or you can go for a two, three or even five-year maturity, which would have a different interest rate, which at the moment would be lower.

"There's a lot of information in the shape of the yield curve, it should reflect people's expectations about where interest rates are going and therefore can reflect the future path of the economy.

"If the economy is growing really strongly you'd expect interest rates are going to be high to slow the economy down, otherwise inflation is going to pick up. If you think the economy is going to slow you'd expect interest rates are going to be low to stimulate the economy back up to a level that means that inflation won't go negative or go too low.

"At the moment New Zealand's yield curve is inverse - short-term rates are higher than long-term rates. The implication is that the market's looking forward to a time where interest rates are going to be lower and therefore that's going to be consistent with an economy that's growing slower."

However, he points out that the yield curve is a reflection of people's expectations rather than a reliable economic roadmap.

"When it comes to any outlook for the economy, inflation or returns on shares or interest rates or cash you always use all the information on the economy, inflation, interest rates and so on you've got available right up until the present, but there's always going to be new information that surprises the market."

But of course, markets are not all about numbers, "they're people and why they do what they do".

"Economists have always got this idea about rational expectations, that people have all the information available to them and they do what makes the most sense. But in reality people don't have all the information available to them and they do dumb things."

Krippner has read general and social psychology and the more specialist topic of behavioural finance.

"In psychology they call it the 'availability heuristic', which essentially means that what people easily remember is what they think is really common." To illustrate that, he points out that investors tend to be the most pessimistic about equities when they are near the bottom of a bear market.

"If we had poor performance over the last couple of years, the availability heuristic says 'all I can think of is that returns are going to be negative and I'm going to bail out of these equities and go back into something safe like cash', which is what some people did in 2003.

"On the other hand if they've had a couple of good years of performance they think this can never end - like the housing market now.

"Basically humans are humans whether they're involved in financial markets or social situations. They very much always have a short-term memory. That's one of the reasons I like coming back to some of the longer-term quantitative analysis ... and make sure I'm not getting caught up in the current hype and that portfolios are constructed in a way that's looking towards long-term returns.

"Sure we'll dabble around the edges and try and pick up good short-term returns or avoid things that we think might give us a poor return, but really, the main thing is trying to construct those portfolios for the long-term perspective, to save people from themselves."


Leo Krippner

AMP Capital Investors head of investment strategy.
Age:38.
Originally from Karapiro, south of Cambridge.

Education:
Cambridge High School.
Waikato University: BSc in maths, physics, chemistry, MSc in quantum physics.
Victoria University: Honours year econometrics, macroeconomics and microeconomics.
London School of Economics: Summer school, macroeconomics and finance.

Career:
1992-96: Treasury.
1996-99: Reserve Bank
1999-2001: Axa New Zealand.
2001-04: Reserve Bank.
2004-present: AMP Capital investors.

Interests: Music, pool and snooker, mountain biking, advanced yield curve analysis.