The Exchanges

Q So what year was that when you first started consulting?

A 1999. It was actually a bit daunting because the independent director that they had for CBUS was the ex-Reserve Bank governor. And in Australia, It's a bit like Canada. Our currency moves around quite a bit with the global economy, and I'm there expecting to give currency advice to the guy that actually used to run the Reserve Bank of Australia. The fund itself didn't have at that time internal investment people, and so I was effectively like an outsourced CIO. They had the very early iteration of a direct property company in those days, and they spent a lot of time talking about that. It wasn't in its initial iteration. It wasn't working as well as it should have. So the director spent a lot of time on that, which meant that when it came to all the other issues, effectively, if I could get agreement with Bernie Fraser, then most of the stuff got through.

AI assessment note: “1999. It was actually a bit daunting”

Q So as you look at the forty five billion today, how much of it is being managed internally?

A So at the moment, it's only just, I think, around 10 to 12% now. There's a number of strategies to be funded. So we have a debt lending strategy, which will, depending on the attractiveness of opportunity is in the pipeline, will take a look. A few years to, to ramp up. We have a small caps team that's come on board that will be allocated money. This is in Aussie equities. There'll be another Aussie equity strategy where we take longer term positions in companies, sort of hold and try to build broader relationships with them, which we think is an interesting one. And then we've got a few other strategies around alternative beta that we're doing some work with. So we've got a quant team, but we're looking at working with an external manager where we can.

AI assessment note: “at the moment, it's only just, I think, around 10 to 12% now.”

Q Yeah, we'll get to that in a bit. Why don't we get started with your background and how you came to be in the seat that you occupy today?

A I started my Life as an actuary. And for those that don't know what actuaries do, they sort of combine probability, statistics, mathematics with finance modeling. They use those skills to try and solve financial problems where there's a bit of uncertainty. So typically you'll see them in the defined pensions space, but also in insurance and so forth. So when I was growing up, I, um, had a strong interest in maths and And economics, and my father was an engineer, and I decided I actually didn't want to do what my father did, so I was lucky enough to have a scholarship with a local insurance company, National Mutual, which ended up being bought out by AXA, and then I think subsequently bought out again. So it was a mutual life office at that time, so the owners were the policy holders at that time, and it was in the early nineties, I spent a little bit of time in their head office, which is sort of about strategy and the total business, and I spent some time in the corporate superannuation area, and I'd never heard of superannuation. At that stage, that was the very early iteration of, it wasn't quite compulsory super at that stage, but in the late eighties, there was this accord, so it was an agreement between workers and government. And effectively through the industrial system employers. So rather than having high wages inflation, there was an agreement to offset some of the c…

AI assessment note: “I started my Life as an actuary.”

Q Yeah. Those scenarios have to come off of like a neutral portfolio. So before you start running it, How do you figure out what you want that neutral portfolio to be before you start tweaking it because of different scenarios?

A We used to have a long-term portfolio, but it was sort of like so long that it didn't capture medium-term trends. So now we have a reference portfolio, and it's designed to take into account particular sort of aspect of the cycle. So for instance, that we're in a very low interest rate, part of the cycle is likely to be Some interest rate rises at some point in time. So it doesn't form a view about in, but it is sort of in the five year type horizon. So that is discussed and agreed by the investment committee. And then we've got delegations around that to deviate across. And then the way we think about deviating is based on asset class considerations, but also we're informed by some of these scenarios as well.

AI assessment note: “So now we have a reference portfolio, and it's designed to take into account”

Q How easy or difficult is it for you to bring in those types of private equity professionals internally when there's so much pride in keeping costs low?

A So for us, I think that the whole concept of internalization has been sort of interesting because we've had to think about how we pay people differently. We've had the introduction of variable pay to a small Number of staff. We keep it fairly modest compared to the industry standards, so the amount of at risk or opportunity is not what you would sort of see in the typical asset management business, but it's there, so I think that's an important thing. I think people are coming because they get a sense they can really build something unique, so in the early stages it hasn't been too bad, particularly as we have hired credible People. So when they see people, people coming along, it makes it easier. They go, okay, well, clearly they've got all the things around that allow those people to come and do their job. My feeling is that over time, we're going to have to keep looking at remuneration and adjusting for that. That's the reality. But I think most people coming in along those lines as well, they come in, establish something, prove themselves.

AI assessment note: “in the early stages it hasn't been too bad, particularly as we have hired credible”

Q When you have conversations with external money managers, many of whom are devoid of Of these types of long-term patient personnel development practices. How do you judge those managers when they don't have the same disciplines that you do in place to improve the team?

A A lot of them do. So part of what we've done is actually talk about how do you manage a pipeline of people and bring people through and create opportunity because they have risks, right? They have key person star risks that happen. So I wouldn't suggest that that is necessarily the case with everyone. Certainly fund managers that are very short term in terms of the way they think about people, we just don't think that their business model will sustain, right, because the people are not aligned to us, they're aligned to themselves, and it's likely that those people will be just attracted to move to another place anyway. When we evaluate managers, we do Particularly smaller teams , we should spend a fair bit of time analyzing the team and the dynamics, and that forms some of our judgment around whether we feel comfortable allocating money. I think that's fair, it's a fair point if we think, truly believe that the way we think about people and how we align them and how they work together adds value, which we do. We apply the same sort of principles when we evaluate external fund managers.

AI assessment note: “We apply the same sort of principles when we evaluate external fund managers.”

Q Great analogy. What teaching from your parents has most stayed with you?

A My dad was an engineer, as I mentioned before. It's quite funny. He'd come back and he'd talk about these hospital projects and code you Generation. And even, you know, the early days of mobile phones and things like that. And set up his own business, because he wanted to make a name there. And I think for me, that example of really, you know, not just doing the same old stuff, but being inquisitive about what some of these newer things are, has been quite impactful. So for me, do what you do well, but actually look for the next one. Opportunity is there. For my mum, she got married early, hadn't finished high school, but went back and did her high school certificate. She set up her own small business when we were young. What I've realised since then is that these things are very challenging for her, like getting out there, talking to people and so forth. It's actually quite challenging. When I reflect on what she did, I thought that's amazing. So from that, I think, um, If you've got something, a good idea, don't be afraid to put yourself in a bit of an uncomfortable position to actually pursue it, is what I got from her.

AI assessment note: “don't be afraid to put yourself in a bit of an uncomfortable position”

Q How do you think about the competitive environment with either other superannuation funds or globally?

A Yeah, it's interesting because we just had a productivity commission on the whole superannuation industry, so it's a report that was conducted on behalf of the government to look at it, and I think it's fair to sort of take a step back, and they did some analysis around the different parts of industry, so the main parts are industry funds, which is like us, so they're set up as mutuals, pretty much, so we don't have to make a profit for our shareholders, It's cost recovery or profits, returns go to the members. And there's the retail funds, which are owned by banks. They do need to make a profit on the way, but they're very big too, or some of them are quite big. They've got, you know, strong distributions through the banking network. And then there's what we call small self-managed super funds, which people with larger balances, you know, the accountants will say, well, you can set up your own fund and do it yourself. The report pretty much said that the larger funds were the ones that were delivering, and they did custom benchmarks for their strategies, so it wasn't distorted too much by the risk of return positioning, but the broad conclusion was the bigger funds generally, and the industry funds generally outperformed. The smaller funds didn't, generally, and for the self-managed funds, unless you had more than A quarter of a million than you seriously underperformed. Fortu…

AI assessment note: “the broad conclusion was the bigger funds generally, and the industry funds generally outperformed.”

Q And what's the environment like? For hiring that talent internally, when, as you mentioned, the competitive environment would indicate they'd get paid a lot more if they were managing it externally.

A So in Australia, there are a small number of funds that have decided, actually, they do need to think about taking more control on the investment side. So we weren't the first to talk about internalization, but we were sort of a close follower. For us, I think a lot of the people, when they come to us, I think they're driven by the funds, their sole focus on generating strong risk adjusted returns to members, so they don't have to worry about marketing and multiple investors and so forth. I think the other thing that really attracts people Is that I've been quite deliberate in trying to build a team with capabilities across multiple types of investment strategies so that we can sort of think about in totality, uh, like a total portfolio aspect. So if we have something that doesn't quite fit in one portfolio, there's enough people that whether you got credit skills or direct investing skills or listed equity skills that you can sort of pull them together and say, well, actually, can we do something with that? And I think that's got some attraction for people, so they're very capable and in their own sphere, but if they see an opportunity that doesn't quite fit into their capabilities, there's still a way to take advantage of that. And I think the other thing that we've been very focused on is sort of cultural fit.

AI assessment note: “I think they're driven by the funds, their sole focus on generating strong risk adjusted returns”

Q Yeah. How have you tackled private equity in the sort of traditional corporate businesses?

A Yes. So, we have a fund to funds program that was entered into a long time ago, and And frankly, that just doesn't work for us. So we've got a legacy portfolio there that we're just sort of working through. In Australia, it's a small market for high quality private equity managers, so you sort of know who's around there, but also the advisor sources transactions. So that's been the model to date, but we've been sort of thinking about as you become more involved in the market, new things start to come to you. So we're starting to see Direct opportunities coming to us that are not really infrastructure, they're more private equity, but we'd like to hold it longer than a private equity time horizon. So we're, we're putting our minds a bit towards that. The other thing that we're sort of thinking about is, um, in relation to finding opportunities to invest in the decarbonization of the, um, efficiency sort of space, so playing the thematic, we think there's a big opportunity to look at, uh, the construction industry. You know, there's a huge role that can be played around new innovative construction design We also are aware that there's a, I suppose, a disruption to the industry that's happening through technological change and so forth. So we think we're just playing around with the idea of, well, maybe in the same way that we could use our networks to build a very successful prop…

AI assessment note: “we have a fund to funds program that was entered into a long time ago”

Q What's the time horizon or duration that you think about for this investment pool?

A Well, it depends on what it is. So, property could be more than the life of a property. It could be you hold it, then you redevelop it. Infrastructure, it's often between 20 and 40 years. So, you don't know what's going to happen in 20 years, but you start to think about what could disrupt an asset. When we think about a toll road or something like that, we think about, well, what's the impact of automation? Is there likely to be rail, otherwise? Other sort of alternative means of transportation. When we think about property, it's interesting. It's what I like about these real assets. It actually gives you a bit of a window on some of the secular changes that are going on in society. So we look at our property developments in the residential space. We're now thinking about making sure we have three phase power in the car parts because the lead time between the design and when people come in, it's like four years And then they expect to be there for more than a decade. Well, at that time horizon, I think cars and that will change quite materially. But other interesting things is that, uh, you know, we have to think about the pumping systems for our property because higher incidence of flood and things like that, making sure that they're robust enough in the perception type areas. We have to think about storage now because there's this huge trend where people are Purchasing more …

AI assessment note: “Infrastructure, it's often between 20 and 40 years.”

Q And are there certain pockets, either asset classes or geographies where that's more prevalent?

A So within infrastructure, for instance, we already have a number of managers that are high quality of global reach, but they're very big. So, they can give us access to the really large deals, and in some cases, I'll source them, and we might actually invest alongside with them, but because they're so big, there's a whole space of infrastructure that doesn't get addressed, which is sort of the mid-size and also greenfields, so we felt that we could complement that, plus also sometimes in consortia, certain partners actually have a higher chance of winning than others, so you sort of want to have a little bit of optionality there. So that's an example, but equities is the same. The way we sort of thought about how we add value. So one is focusing on being a long-term investor because we have strong cash flows and a fairly young membership. So we think that thinking about your activities, thinking about the investment over longer time horizons, it's a natural approach for a fund like us, and we think that it lends itself to drive value. So as an example, With CBUS property, if you thought about investments in the short term, you'd never do development, because there's a long lead time to buy a piece of land, get approvals, get tenants, and you don't really make much return. But if you think about it as a pipeline of opportunity, right, and then you actually can make that model wo…

AI assessment note: “within infrastructure, for instance... that's an example, but equities is the same.”

Q Yeah. So what does it look like at that highest level before you start trying to fill in the cracks?

A So we have the asset classes, but we also think about defensive and return seeking type of portfolios. We even think about from a defensive point of view about what's the effectiveness of the defensiveness. So for instance, cash, it's cost is, it's not really a cost, but it's a low return, but it's defensive and this is probably not that strong. Uh, we think about currency in the same way. Uh, we think about options, uh, And fixed income also. Same thing around credit. So we sort of look at that, and it's based on different scenarios. So we might say, well, what's the sort of scenario that might lead to a downturn? So is it related to the global economic thematic? So for instance, the US being in the late growth cycle, at some point in time, they're being sort of, we get back eventually to some kind of Normal economic cycle reduction. What does that mean? How does it sort of flow across all the asset classes? Or in Australia, it might be a housing market, for instance. So, you know, we've had a very strong property and housing market, and what's the impact of different moves that would slow that or create a correction there? Then you've sort of got to go and work out, is it based on interest rates rising in response to inflation or Do they rise too early? Then you look at, well, which assets are going to be positively in one circumstance. If they're inflation protected, they're…

AI assessment note: “we have the asset classes, but we also think about defensive and return seeking”

Q That's a hundred that you have relationships with? You're seeing a hundred that exists?

A I know. In the Australian market, there's like a hundred people trying to sell Aussie equities. But I mean, for instance, our global team actually came from a, um, family office investing in the same strategy, so the time horizon was very similar, but the feedback I got was, well, they sort of got a bit tired making billionaires richer. I actually like the idea of making ordinary Australians richer, so, so people sort of moved for those reasons as well, and we've got a lot of money and that they can have the opportunity to invest, and it's growing. And we do try to make sure that we, if they need anything, whether it's information, travel to succeed, that we make sure that we don't deny that. So we find that that's all really important.

AI assessment note: “In the Australian market, there's like a hundred people... But I mean, for instance, our global team”