128: MLC Asset Management's Dan Farmer – Active Management, Private Equity, AI and the Early Days at Telstra Super

In this episode, I'm speaking with Dan farmer, who is the Chief Investment Officer of MLC Asset Management. We talk about Dan's early days managing an internal Australian equity portfolio and getting involved with derivatives at Telstra Super, almost straight out of university. We talk about some of his mentors, including Steve Merlicek, and the influence they've had on Dan's investment philosophy. We also touch on the merger between IOOF and MLC and the new capabilities this has brought to his team.

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Overview of Podcast with Dan Farmer, CIO of MLC Asset Management

02:00 Getting a job at Telstra Super, while still at university. “Imagine a graduate helping out dealing in a small Aussie equity portfolio, probably one of the first internally managed [portfolios] going around”
06:30 How did those first company meetings go, when you were still a 20-something year old? “I thought I was being taken seriously at the time, but in retrospect I probably wasn’t”
08:00 The investment philosophy I build up over the years is being active in all areas, whether it is active in asset allocation, using active managers or being active in currencies
12:00 Dealing with market concentration in the US and the Magnificent Seven, while being cognisant of the Your Future, Your Super regulations
17:00 Looking at Private Equity, you really need to take a longer term perspective. Under YFYS, private equity is benchmarked against listed global equities, that has been a particularly hard benchmark to beat over the last few years
25:00 Steve Merlicek told me that if you have high conviction in a position, make sure you follow through on it
29:00 It is pretty hard for a CIO today to be purely an investor; you have to manage your team and there is also the regulatory aspects to it
33:00 Too stringent an implementation of TPA can create its own problems
36:00 We are doing some work around looking whether AI changes active management, where active becomes data scraping with some AI tools applied to it. We haven’t reached a conclusion yet
43:00 MLC is the fund with the highest number of retirees. What special insight does this give you?

Full Transcript of Episode 128

Wouter Klijn

Dan, welcome to the show.

Dan Farmer 01:51

Thanks for having me. Pleased to be here.

Wouter Klijn 01:53

So tell me a little bit about how you got started in investing. I had a look, of course, at your CV, and you spent 17 years with Telstra before going over to IOOF. Tell me a little bit about how you got started and what some of your key moments were at your time with Telstra.

Dan Farmer 02:12

Yeah, look how I got started. So I was doing my masters of finance at Melbourne Uni, so I was in my fifth year of study, and thought I better grow up and get a job and actually start earning some money. So I started looking around, and I got a tip off from one of my college supervisors about a role going at Telstra super, which, at the time the CIO was a guy called John Simkiss. So went over there, got a job at Telstra super, and it was fantastic, great, great time to enter the industry. The Super industry in Australia was really in its infancy. Imagine a graduate out of uni, and I was straight helping out, dealing on a small Aussie equity portfolio that the group was running, probably one of the first internal managements going around in the Aussie super industry. So great learning curve. You know, really cut my teeth on that, that Aussie equity portfolio. So it taught me a fair bit of humility. It's not easy running a direct Aussie share portfolio, so I think that set me in a good stead about how the industry actually operates.

Wouter Klijn 03:12

So you said it taught you some humility. What do you mean? What are ,

Dan Farmer 03:17

It is tough to outperform the market. If you're sitting on the outside, it's very easy to throw rocks and say, well, you should be outperforming in this market and be quite critical of managers. But I think it gave me an insight on the nuances of running a portfolio. It gave me a good insight into risk and look, I think I was very lucky starting off with that role. Also part of that portfolio was using option strategies around individual stocks to provide some protection. So that also gave me probably my first taste of asymmetric risk and using options to control risk.

Wouter Klijn 03:54

So thrown straight away into the deep with options and derivatives and

Dan Farmer 03:58

Yeah, it wouldn't happen today. Wouldn't happen today. This is back in the early 90s, but had a really good, really good boss in John Simkiss, who used to be Head of Research at UBS Australia. So it was great start. And look milestones at Telstra Super, as I said, the industry was in its infancy, so I think when I got there, the portfolio was two balanced managers. That was it. You know, might have been BT and Schroders. So really went through the whole evolution of moving from balanced managers to specialist Australian equity managers, specialist global managers, specialist fixed interest managers. So, you know, that whole exercise, you know, working with consultants, it was a great time to be entering the industry. And then Telstra Super also went from purely a defined benefit fund to an accumulation scheme. You know, as Telstra was reshaping its workforce, you could just see members leaving the DB fund, and we set up an accumulation Fund, which was a little bit novel at the time for a corporate super fund, but was very successful. And that's obviously, you know, huge part of the Telstra super fund as it is today.

Wouter Klijn 05:02

And I think your main role was looking after equities. Why equities? Why did you start there?

Dan Farmer 05:07

To be perfectly frank, that was the job offer. That was my toe into the door. And look, I did love the space. And it was Australian equities, which was very relatable. I think it's a great spot for new people to enter the industry, because you can relate to the businesses. It's tangible. The management of those companies are very proximate. So, you know, I was a young, early 20s guy meeting CEOs of, you know, big Australian businesses. It was a fantastic learning curve. And I think I learned a lot more in the direct Aussie shares to start with, and then really put me in good stead with the managers. And it was a terrific spot. I mean, active management was certainly dominant back then. And there was some great, you know, Great Aussie equity managers going around. I think one of the first appointments I made was Perpetual when it was just coming out of the trusteeship. So did that search with JANA and, you know, really had good access to those managers?.

Wouter Klijn 06:06

Yeah, so how did those first company meetings go? I mean, did you, did you feel that you were taken seriously, or did you have to build up? You know, some slick...

Dan Farmer 06:15

I felt like I was being taken seriously at the time, but in retrospect, I probably wasn't. That's, that's all right. So no, look, those, those meetings were great. And really, I think the industry back then was, it was probably a bit smaller. There was a bit of an acceptance of new people coming into the industry. So I'm sure I asked a lot of pretty naive questions at the time. But, you know, good, good, good respect. But it was, it was interesting because we also, when we're running direct portfolios, going into a lot of smaller companies as well, and they're very hungry for capital. So it was a really good dialogue with a lot of those, a lot of those CEOs and management teams.

Wouter Klijn 06:56

Yeah. So do you feel that gives you a different perspective on you know, now, as a CIO of a large company to had that experience of like boots on the ground and and talking to management themselves.

Dan Farmer 07:07

I think it does like at the end of the day when we're investing. Obviously, as you climb the ranks of an investment team, you probably become less and less proximate to the actual investments. So a reminder, at the end of the day, when we're investing in an index, you know, whatever global equity index that is, ultimately, that's a series of underlying management teams under a series of underlying business strategies. And hence, one of the , I guess, philosophical beliefs that I've built over the year and we run in the team, is a belief in active investment management in all its forms. Be it being active with asset allocation, using active managers where it makes sense in that particular asset class, you know, being active with currency, active with style selection. So I think that grounding in direct shares, and the fact that it is a very differentiated asset base, and there's a lot of idiosyncratic risk in there, really filtered up, you know, throughout my career, and just how we think about managing money today.

Wouter Klijn 08:08

Yeah, do you see a change in the role of active management today as back when you started? Because we obviously seen a lot of changes in markets, in the Super system, new regulations coming in with Your Future, Your Super What is your current view on active management?

Dan Farmer 08:27

Yeah, look, still see a role, very much a role for active I mean, the industry has changed, and it's, it's a big topic, particularly at the moment where there's obviously, at the moment, high concentration in in equity markets, and the concentration is correlating with some high valuations, so it is putting some challenges on on active managers at the moment. Now, I've been around long enough to see a few cycles of different forms of this, and I remember the 2000s, where, you know, we had a similar concentration wasn't quite as high, but, you know, very similar in the sense of valuations high. Think a little bit different this time around in terms of what's driving it. You know, we are seeing earnings in some of those, you know, tech stocks, which is driving a lot of the concentration and valuation stretch. So it's a bit different. But ultimately, when we look at our active managers, you know, stripping out the concentration effect, we still generally see them as adding value against their benchmarks. So we actually are spending a bit of time thinking about what's the right mix of systematic, more risk control, lower tracking-error managers, your traditional fundamental bottom up managers, active managers, getting that mix right. And going back to probably you know, some of my heritage in options and active management, what is the, let's call it the, ultimate asset owners risk, or us as investment manager, in controlling the risk that those active managers have when you put them together in aggregate? So we have a number of active managers in each equity asset class. You know, start, you know, we're doing some work around controlling the risk where you do have concentrated markets to just cap some of those potential outcomes you can get in these conditions.

Wouter Klijn 10:08

You had an interesting example there where you look at the managers and stripping out those big tech stocks. So do you almost take a separate approach, where you look at the market ex-Mag Seven, and then have a separate strategy for that?

Dan Farmer 10:21

Not per se, we were looking at that, that ex-Mag Seven active management, performance, really, for interest. And coming back to that question about the role of risk control in that when we do have these particularly concentrated equity, equity markets, at the end of the day, as you mentioned before, we are benchmarked against Your Future, Your Super benchmarks. So ultimately, that's what we're aiming to be. So for us, it's what the what is the right mix of systematic, quantitative managers which have actually done quite well in this environment. Yeah, they've been generating outperformance your fundamental, bottom-up active managers, which have found these concentrated markets hard, just finding it difficult to buy those highly valued tech stocks. And then, of course, what's, what's our role as the ultimate owner of that mix in terms of managing that risk? So we've, we've been really fortunate at MLC to have a really strong derivatives team capability within my investment team. So they're putting in place some derivative strategies which are somewhat complicated. I won't go into the full weeds, but we use dispersion trades, where we put a trade on which basically looks at the dispersion of the Magnificent Seven stocks to a basket of almost call them inverse Magnificent Seven stocks. And if that correlation widens, we get paid either way, so it's non-directional. So we're doing things like that. It is our role to try to look to manage some of the risk at the total equity asset class level.

Wouter Klijn 11:51

So I think we spoken about that trade a little bit earlier in a different interview, so you still have that on. Is that how you deal with the potential of, is there an AI bubble?

Dan Farmer 12:02

Yes, we still have that trade on. It's not as big as we would have liked it, because it's been a very successful trade, and we have that on, and we're looking at other outperformance options, different trades, to put that in place. Now, what we what we want to be careful of is that we're paying our active managers active fees, and we don't want to just undo the positions they have on. So we're trying to get non-directional, non-linear positions where we take some of the risk out of those positions. So if the AI stocks continue to run, we benefit where our active managers may be a little underweight some of those and vice versa. If, if the stocks fall, we're not undoing the manager's trade. We get that performance back. So in aggregate, I should say our equity performance in global equities, which is most pronounced with concentration for our largest fund, which is our MLC MySuper fund has actually been adding alpha, because we have a 60% of that equity, international equity exposure in systematic strategies, 40% in in traditional fundamental active and then we have some risk control over that. So in aggregate, we've actually outperformed in that portfolio through this environment.

Wouter Klijn 13:08

And I think that derivative capability that came from the merger between IOOF and MLC, So previously, there wasn't that capability there, did you you know, from your early days, having already managed derivatives, that you thought like, finally, I now got this extra tool in my toolbox.

Dan Farmer 13:27

Yeah, it was, it was terrific coming in as being appointed to CIO of the joint group, because there was a lot of great capability, you know, the really strong private equity capability in MLC, really strong alternatives capability in MLC, and then the derivatives capability was really exciting for me. As I said, it's a space that I used to be in my younger days, and could see the value in client derivatives to manage, to manage risk. And the team, you know, really had a strong capability. They're doing a range of things than more traditional, just FX hedging, that's more your trading. But as I said, some of these risk management positions which really do tie into both our dynamic asset allocation positioning, so the derivatives team are certainly in and around our thinking on how we want to position our active asset allocation and come up with ideas, rather than just doing a straight cash, physical tilt, you know? Can we execute that, either through derivatives or futures in a more efficient way, or give us a different payoff that suits our view? And then also down, as I said, down at the asset class construction level, where we may have industry biases, country biases, for instance, another trade that, another piece of work that team helped with was a, was a banking basket we saw in one of our portfolios, Aussie banks somewhat expensive. So that team was in and around building a bank basket.

Wouter Klijn 14:51

I think CBA was the most expensive bank in the world?

Dan Farmer 14:55

I was probably a bit polite, but yeah, it was very, very, very expensive. So we actually built a basket of foreign banks that kind of proxied Aussie banks, put some risk around it, and use that as well to solve for some of our asset class construction positioning that we wanted to fine-tune.

Wouter Klijn 15:12

Are there any other trades like that that you're currently looking into that haven't been put on yet?

Dan Farmer 15:19

We're looking at, it's about performance options. Looking at that, we are doing a bit of work, as I hinted at around, when we look at our active manager portfolios in aggregate. And we, you know, believe in active management when we do get into these markets where concentration is is pronounced, you know, do we want to control for other things, like country, you know, is a simple way to manage some of that risk. Just country risk. Look across how active managers generally underweight the US, if you just controlled for that risk at an overlay level, you know what improvement that makes. So we're doing a lot of work around that, that piece. And I think that dispersion trade idea that, or dispersion option that I talked about. It's got other applications that we're we're looking at, but it doesn't work all the time. It depends on pricing, depends on the basket you can put on. But it's that , it's really trying to keep the deep diversification that we want in our portfolios, but just adding a bit of extra layer of risk control down into the portfolios.

Wouter Klijn 16:21

Yeah, the other capability that you mentioned was private equity. What is, your view from an asset allocation perspective on private equity as an asset class, because we have seen some problems with being able to exit companies and having to set up continuation vehicles. What is your experience?

Dan Farmer 16:41

The experience has been good, and I should say, winding the clock all the way back to that Telstra super I mean, my boss, Steve Merlicek, was very keen..., we were early investors in private equity way back in the Telstra Super days, IOOF, we started private equity. And then, of course, MLC acquisition comes along and I find myself with a great existing private equity capability. So you can, you can get a sense, I'm quite I'm positive on the asset class. It is a long-term asset class, so you need to bear that in mind. And I look back on the performance of the MLC private equity capability, and that's, we've got four people in New York, six in Australia. So it's a reasonable commitment the business has made to that and that team is basically establishing really strong GP relationships for the fund investments, but then also about 40% of our private equity exposure, our largest MLC, My Super fund, 40% of that private equity exposure is co-investments. So the team does a lot of detailed work on co-investments, and getting a those really good opportunities and B at a more attractive price point. So private equity and look in Your Future, Your Super land private equity is benchmarked against listed global equities, which has been a particularly tough benchmark over the last few years. But I think you really need to take a longer term perspective, if you can, to look through those periods. So I look at our our private equity programme, I think it's outperformed listed, listed equities, including the rally we've had recently by round about, I think it's around about, 3% per annum over the last 15 years, including the run up we've had over the last couple of years in listed markets. And then the private equity programme, look, we're starting to see activity. We've had a patch where exit activity has been quiet. As you noted there in our programme, we're starting to see exits pick up. Some of it is to continuation funds, not our continuation funds, but others. So we're starting to see some, some exits there. And, you know, we're starting to see the return profile pick up again with that, with that activity, which is great, and we expect to see that. And there's, you know, we think, I think there's some real kind of permanent, structural reasons, you know, we're in the more lower, lower mid market space. So, you know, gearing is not such a prominent feature of the value proposition in private equity. The value proposition is really around pairing up with great GPs, usually early in their life cycle as a GP. So we're an important investor in their funds, and really making sure those GPs are very active in the terms of their management interaction with their underlying businesses. So really getting strong management teams in reshaping the businesses, helping those businesses, you know, back with their own strategic plans and their own mergers and acquisitions, to really grow those businesses. So we've seen that value come through in our private equity programme, more through the EPS growth than, let's call it financial engineering.

Wouter Klijn 19:45

Yeah, yeah. And when you look at private equity as an asset class, I mean, you run multi asset portfolios, what is the role, and how do you tie it back to other asset classes? And one of the reasons why I'm asking this is because. Um, recently, I did an interview where they basically said, Okay, if we look at a portfolio at the total level, and not necessarily TPA approach, but if you, if you look at the total portfolio, private equity is very growth orientated. And so what does that mean for your equity holdings? Are you going to have a bit more of a skew towards value style, bit more conservative equity. Or does that not tie together for you?

Dan Farmer 20:28

Look, so obviously when we build the total portfolio, as you say, we run through the typical capital market assumptions, strategic asset allocation process. So and we're solving for when we're thinking about the allocation of private equity at the top level. We're solving for a lot of things, you know, liquidity. How much illiquidity can we bear? The reality is, what's the fee, fee load that we want our portfolios to have? The optimizers, in a purely quantitative sense, the optimizers love private private equity because it's, you know, lower, lower volatility, and it has, you know, our capital market assumptions do have an excess return which it has delivered. So we tend to be, yeah, so we will tend to hold in most of our , call it balance, to balance growth portfolios, kind of 5% allocation of private equity. So it's, it's meaningful, but not, not massive, in terms of what does that mean for the rest of our equity portfolios, we probably don't think about it so much in the value/growth factor sense. Our private equity is mid market, so we probably think about it in a bit of a market cap sense. So how much do we want in our listed equities in that small and mid probably where it does show up is more in the total risk I mean, private equity is always going to be, given Your Future, Your Super benchmark, a very high contributor to overall tracking error, just because there is kind of a mismatch with the benchmark that you're going against over shorter periods. So hence, things like, as I said, we have 60% of our global equities in systematic equity strategies. So they're not passive, but they're taking, call it, 50 to 80 basis points of tracking error and far more risk-controlled. So you can get a much better handle on what benchmark risk you're going to get out of those managers, compared to your, to your, to your active managers. So it it shows up in that mix of the styles we run our active equity portfolios in.

Wouter Klijn 22:24

And recently we spoke about you're doing a bit of a review of the MySuper option, and looking to increase growth assets a little bit there for younger members. Does that also translate in more private equity in those options?

Dan Farmer 22:38

Not necessarily, and we're still working through that, that work, so our corporate super team are doing a broader enhancements across our master trust, MySuper offerings. So working through that, but it wouldn't necessarily lead to a bigger, a bigger allocation to private equity.

Wouter Klijn 22:59

Fair enough. Fair enough. Now, you mentioned earlier, there in your Telstra Super days, you worked with Steve Merlicek, which he became CIO there, and then, I think you followed him to IOOF afterwards, where he became CIO and you joined him. How was it working with him? And do you see him as a mentor? Because, you know, we're still the early days back then.

Dan Farmer 23:24

Steve is, Steve was great. And I keep reminding Steve, he dragged me across to IOOF, he brought me across to IOOF. So Steve was, Steve was, yes, certainly got me into that side of the market. But Steve was a, Steve's a great mentor. I still see Steve regularly, and he's always, he's just invest investments in his veins, so to speak. So he's always talking about individual stocks he's looking at and investments that he's making. So he's super active. And I think Steve probably taught me a lot of important things around team and managing money. So he had a few key sayings: "Keep it simple, stupid", was one of his favourites, which was really around, we're here to we're here to add return. Stay focused on on investment outcomes, which sounds obvious, but there's a lot of distractions in the industry. So Steve would always pull you back to, well, what does this mean for the portfolio? What are the investments looking like? And I've tried to keep that. Another good saying that he had, which I've continued to follow, is: hire people that are smarter than you. And like, I could say that's not hard for me, but it is important to hire really good people and be confident to give them space and empower them to do what to do what they do. Yeah, so Steve is, you know, I think, really integral. And just some of those basics around investments, and I think probably one of the big positions we put on back in those days was a currency, a currency position. So Steve was very much encouraging the camp: If you've got a conviction in an investment thesis, make sure you have the courage to follow that through. Obviously, take the risks into account. No one has perfect foresight. But if there's a, if there's a position you have high conviction in, make sure you reflect that and have the courage to put that in the portfolio. So, you know, eg, when the Aussie dollar was above parity against the US dollar, Steve took position of go zero hedging, which was, you know, worked out really well, but that was pretty bold, pretty bold position at the time. So that those examples of back your conviction. So, yeah, Steve was a mentor, for sure. Yeah.

Wouter Klijn 25:45

How would you define your, your way of running a business and investment business as CIO?

Dan Farmer 26:00

Look, there's a few different aspects to being a CIO today, I think certainly in the investment part. So I try to, and this might sound a bit strange, but I try to make sure I'm actively, heavily involved in the investment side, so going to all the investment meetings and being involved, but not necessarily dictating micro terms. So I see my role as two-fold: so being in and around the investment strategy, making sure the actual investment process strategy, the way we make decisions, is working well. How do we think about making decisions? What are our approaches to making decisions? So that very high level, is our strategy really strong and our process really strong? And that's been probably particularly important in my CIO career. Where we're at the IOOF, Insignia, MLC role, we've had a lot of growth through acquisitions and mergers, so bringing teams together, so just making sure the process is strong, is an important part of my role, and then obviously getting involved in the actual investment decisions. And I see primarily my role is to challenge some of the discussions, come at things from a different perspective. I'm talking to different sets of people than my team are, putting, putting some different ideas in and challenge the process to make sure it's robust, and try and make sure we've got good thinking in the day-to-day decision making. And then ultimately, if there's hard calls to make, they'll fly up to me to make those calls. So that's the investment piece. And then there's obviously managing the team. And as I said, like you need without a really strong, capable, empowered group of talented investors around you, I don't think any CIO is going to succeed unless they have that that that support around them. So making sure the team are free to focus on what they need to focus on. So help to the degree possible, try to shield from a lot of the noise that's in and around businesses, and give them a good, good, empowered environment. So I really try to empower my senior investment people to take ownership of their portfolios, which they do, and really drive a lot of decision-making with me coming along beside them, so making sure I've got the right people and they're in the right environment to make strong decisions.

Wouter Klijn 28:15

Yeah. So my colleague Teik, he recently explore the idea of is the CIO of today, a manager or an investor, but from your answer, I get you're both, or somewhere in between?

Dan Farmer 28:27

Try to be, I like to think it's a bit of both, like I don't think you get, I don't think purely, it's very hard to be a purely investment [CIO], I think these days, because you do have to manage the team, and there's also regulatory environment, everything else that comes with the role, but my passion is, is ultimately the investment part of the job. I love looking after the team. I'm lucky to have a great team around me, but it's a bit of both, and I think they are interrelated. So I think, you know strong, strong investment outcomes is part of having the team, hopefully in the right headspace with the right structure to help support that investment decision-making.

Wouter Klijn 29:05

So how much delegation do you have in terms of, you know, delegation from the IC and the board, because you mentioned earlier, Steve was very much about conviction, and if you have high conviction in a trade, you should explore that. How much room do you have to implement conviction trades?

Dan Farmer 29:25

Yeah, and I think we're lucky with our boards and committees that they give us an appropriate amount of delegation, and they understand a lot of our committee members, both from our super fund trustees and our investment manager trustees, have been in markets in some shape or form themselves. So they're very..., they understand the practicalities of running money effectively. So we have delegations around asset allocation ranges, so myself and the team are able to move within predefined ranges around our strategic asset allocation. It varies, but call it plus or minus 10% so quite, quite reasonable ranges. Now we don't necessarily use those full 10% ranges, but we're able to move around without, without having to..., we report everything back up, obviously, but we don't have to go up for that those asset allocation moves. We can reweight managers within ranges hire and fire, depending exactly where the manager is. But hire and fire would typically go to the go to committees for that manager, hire fire function. But we do have delegations. The committees have given us delegation for many of our funds. If there's a manager where the team's walked out and there's a real problem then I have authority to exit that manager straight away, if it's it's a situation where it doesn't make sense, it's a clear-cut case that we need to get out of that manager. So we get a quite a bit of delegation, and the committees get very interested in how we position, etc. Good, well, I'm very lucky in the good, good committees that understand how these things work. They get involved where they need to be, and they'll often get involved where it's policy, strategic stuff, as opposed to the day-to-day minutiae of how the portfolio is run.

Wouter Klijn 31:08

Because I think delegation is one of the things that people look at when they are starting to implement TPA, the total portfolio approach. It's a bit of a buzzword these days. What's your view on TPA? Are you trying to implement it or?

Dan Farmer 31:21

Well, it's, it's, it's an interesting one, and probably each person you asked about TPA has got a different definition of what it is, without sounding too flippant. But look, I think at the end of the day, everyone's running some form of it, like we we ultimately live or die by how our total portfolio outcome operates. So we don't have a strict form of TPA, but certainly asset class PMs, when they're building their portfolios, interact very closely with the Diversified PMs. So I've very much quite like as flat as possible team structure so we don't get too siloed in that we have an investment team member that's running a particular asset class that doesn't... What I don't want is to have people running parts of the asset class portfolios where they don't necessarily understand the drivers and dynamics of the top level diversified pm so we have quite a flat structure, and really try to make sure that the asset class PMs feel a high degree of ownership on their portfolios. But they understand when we almost call what we do call the Diversified PMs are their clients. They want to understand their their clients' needs of what they're building at that top level. And that dynamic is working well, there's, I think it brought up. You always want a little bit of tension between this is a great idea at the asset class level, at the top level, at the top level, but I've got that risk elsewhere, and having that dynamic. So we've, I think we've got a pretty good operating rhythm there. I think two, two of a stringent implication inputs implementation of that total portfolio can create its own set of problems if it gets too strict and too fragmented and too siloed, because it becomes, I think, a bit of a capital allocation challenge at the at the top, if you're not getting that dialogue across teams. So we, we look at, absolutely, look at the total portfolio level, but we try to do it in a more of a in a flat team structured way.

Wouter Klijn 33:17

Because one of the things with when you look at different approaches to TPA is that it's this effort to get everybody to think about, you know, what, what impact does the investment have at the total portfolio level? And sometimes I think, isn't it the CIOs job?

Dan Farmer 33:32

It's really the communication that you want to have, that communication between where that asset class, PMs portfolio is ultimately landing, and what role is that having at the total portfolio level? And we absolutely measure risk, you know, the contribution to risk from all of those portfolios, the managers in those portfolios. So we have very good, as you'd expect, very good transparency through to where the risk in alpha is coming from. And then my role as CIO is to try and make sure we've got great communication. Great communication channels, and there's constructive and healthy tension between asset class PMs, this is a great idea. We want to do a diversified PM say, hey, that might not fit because of this reason, and just making sure that no one's getting lazy in the process, which they're not,

Wouter Klijn 34:18

Yeah, for sure. Now, we spoke earlier a little bit about the impact of the technology stocks on the equity markets, but if we look broader at AI, do you see a role for that in your day-to-day job in the asset management industry?

Dan Farmer 34:34

Yeah, the use of and it's a topic actually my leadership team and the whole MLC and Sydney business has been looking at is, which I'm sure most businesses are, is, how do we implement this? So we've been doing a lot of work in the team just on a few things. How do we use, how do we use existing tools that we have in the AI, tools that we have in the organisation, just for, let's call it efficiency. Just speeding things up, which every business, and I think that's probably going to be from an investment point of view, a bit of a theme next year, as we start seeing a bit of that efficiency turning up in in either cost saving or ultimately in margin in businesses next next year. So in our business, we're doing a lot of work just on the efficiency part. We're trying to challenge ourselves to how to think bigger and beyond just the efficiency piece, because I think that's just almost has to be done. So what does it mean for how markets are invested? And you've seen in the past, we were talking before about indexation as passive, as a strategy. I'm not quite old enough to have been there, but old enough to be around it that running passive money was actually probably a technology issue. When you look back long enough to get the data of what's the market cap of each stock, how do you weight the index before you had so as technology grows, how we invest can change. So we're trying to think a bit bigger about well, what does it mean for your traditional active management? It becomes more about how much data can a manager scrape and apply some reasonable AI to it? So don't have any strong, strong outcomes to that thinking yet, but it's something we're alive to, that the way, at the end of the day we're processing information to arrive at a decision. You know, does the dynamics of that change? Is it about how much, how much data, how much information can you get? What AI logic? What else can we apply to that to arrive at investment outcomes? So I think that'll be for us, a really interesting space over the next it's probably next 10 years, really. But you know.

Wouter Klijn 36:40

So are you looking there into: is it harder for active managers to have an information edge, or to, you know, gain insights that other people don't have?

Dan Farmer 36:49

Could could be and that's what we're trying to think about. And it doesn't mean those active managers will evolve as well, many of them will. So it's about, how do they evolve? Does it actually create new and different opportunities for those managers as you get that , let's call it, data richness improve and AI, injecting itself in different ways into the process. It'll just mean, you know, they need to be and need to be alive to that as it evolves.

Wouter Klijn 37:20

Because one of the applications that I found was interesting as well is that fund managers have been using it as a as a learning tool as well, where you know, if they look at a new sector, it might have taken weeks to come up to speed to know exactly how all the supply chains work and what the key elements are, but These days, you can get at a reasonable level in, like, a matter of hours. Do you see your role there?

Dan Farmer 37:47

Yeah, so it's almost not quite a graduate in your pocket thing, but it's, it's a little bit like that. So your basic , you know, provide me a written summary of this particular industry or this issue. Now, we're highly conscious that you have to have someone interpreting that with some degree of knowledge, like, there is it, if you just took that as verbatim truth, that would be a pretty risky approach, approach to take. So we've had a, you know, a few experts come in and just remind us that AI is not always, you know, factually correct. It can sound convincing, but it may not be correct. So be aware of that. So we are using that, but in a very in a knowledgeable way that we have senior people looking clearly, applying judgement over the top of that. And really, the day to day at the moment is probably one of the things that, as we've looked into this become more apparent to me, is distinction between it just AI and automation as well. So we've, we've had a lot of things, let's get AI to do this for us. And as we've looked at it, well, really, this is just an automation project. So, you know, it's, it's interesting, kind of where the slice, where AI will, will, will come in first.

Wouter Klijn 39:02

Yeah, the information that supplies the always have to check it a bit. It's not just hallucinations, but it's often also just plain wrong. I was doing an exercise yesterday where I looked up the bio of another CIO of a different company, and the first result was, of course, an AI summary, and it's plainly told me that this person was the former CIO, and had left in 2021. But he's still there. He's been there since the last 10 years. So I'm not sure where this information comes from.

Dan Farmer 39:32

Well, that's the thing, and it's, and it sounds very convincing, so it's, it's treat it with care

Wouter Klijn 39:36

So what's on your agenda for next year?

Dan Farmer 39:40

Look, always, always a big year. So our CEO has put out a strategic plan, and we've got, you know, the investment team's got elements. It's, it's more heavily involved in around that. So our private equity capability, which was mentioned earlier, we're really keen to grow that into new channels for a few reasons. We think it helps support the programme. You know that programme benefits from fund flow. Being bigger participant with those GPs helps us get greater access to co-investments. So we're looking at, you know, private equity. We've, we've launched a co-investment, more closing a co-investment fund for we've got a private equity retail, always open evergreen Fund, which is, which is growing and performing, performing well. And thinking about our, which is another initiative that we're pursuing, our Managed Accounts business, which is, is growing very well. It's just ticked over. I think, $4 billion in our last update. You know, thinking about ways private equity alternatives can be safely built into that, into that managed account programme, because those asset classes have been really good contributors from both a return and risk perspective for our diversified funds over very long sweeps of time. So we would like to get our managed account members access to that. So we're thinking about ways of pursuing those opportunities in a, in a in a very managing liquidity, managing all the various risks that come with that.

Wouter Klijn 41:15

I hear some echoes in there from current discussions on private credit and liquidity and offering it to more the wealth space, is that the issue you think about?

Dan Farmer 41:25

Yeah, we're thinking about that. And we're thinking about it really. Or the piece I'm thinking about with the team is offering that in a diversified, managed account where we're controlling the asset allocation along with our clients and the construct of those so it's about: how do we do that, in a, methodology which addresses some of those? Making sure liquidity at the total level is managed, you know, at very comfortable levels. You know, making, you know, the valuation policies strong, which it is that the valuations are coming through. So all of those topics, but at the end of the day, we look at it and go, what's what would generate a better outcome for our clients? And we're running with private equity. We're running alternatives in our main MySuper funds and our wholesale funds performing very well important components. So the challenge to us is: Well, how do we make sure all our clients can get access to that in a, you know, you know, in a very thoughtful way?

Wouter Klijn 42:19

Yeah, yeah. So you're not offering daily liquidity on these private equity funds.

Dan Farmer 42:25

No, not the standalone No. So we're around all of that. So that's No. And again, it's just about setting those things up properly in the first instance, that they're robust through time for those, for those types of issues.

Wouter Klijn 42:37

So this strategic plan that you mentioned, I think it's 2026 to 2030 strategic plan. Is there an end goal there, where we want to be this big by 2030 or we want to have achieved these type of metrics?

Dan Farmer 42:54

Well, we certainly want to be one of the biggest players out in the industry, from my perspective, in the investment team perspective, it's really about our clients having a great return experience and feeling very confident in the process, so whereby, we can deliver great outcomes to our clients across all the different products we offer, and be transparent about how we're doing that as much as possible. Help the clients understand what we're doing in portfolios. And we've, we've got a tool called Investment Central, which allows our adviser clients to look into most of our portfolios for the managers' exposure. And we think that really helps build that understanding and trust in the products. You know, our goal would be to have our clients think: hey, this is my obvious place to go for investment solutions.

Wouter Klijn 43:48

And I think one focus of that strategic programme as well is the retirement phase and having that smooth transition between accumulation and retirement. Now I did see at one point, there is a statistic that MLC is the fund with one of the largest number of retired members. Does that give you special insight into, you know, there's the regulator wanting funds to develop retirement products. Do you have a special insight in what the key elements are that have worked over time for the retired members?

Dan Farmer 44:21

You know, I think I had a similar stat where, I think where the group is the largest pension or retirement income payer outside the federal government. Think they're your statistics probably, probably correct look. And I think there's a lot of different elements that go into that. From an investment team perspective, it's probably an extension a lot of things we've talked about. So there's for an investment perspective. It's for our MySuper, default options is the glide path. We've got the correct shape and trajectory on the glide path, you know, our diversification. So as you get into retirement you want low volatility. Some of those strategies I've been talking about, like the alternatives, where we have insurance-related investments and some opportunistic credit, which are really good diversifiers, they generate good income to create that smooth ride for retirees. So we think about those allocations as we go through the glide path, but it's really much more than that, and this quickly gets out of my area, but it's the digital experience that the retirees have around that it's things like: is it the retirement boost when you switch from accumulation of pension, making sure they access that which members can, and then optimising the structure of the portfolio, not so much from an investment perspective, but the product, I should say, to optimise the ability to access Age Pension as as you get older. So there's a whole lot of aspects around that retirement piece. I mean, the business is clearly working on that. The Master trust really going through a good enhancement programme around all of those aspects going forward, you know, large part to create, you know, really do the work now for members in the accumulation phase and those getting close to to really optimise their experience in retirement with with our products.

Wouter Klijn 46:18

Yes. Fair enough. All right. Well, thank you very much, Dan, for coming to our offices. It was great talking to you.

Dan Farmer 46:24

Thank you and thanks for having me. It's a pleasure.