The Exchanges

Q Where did your career take you until the point where you joined Host Plus?

A So the initial entry was out of the university system. I taught at an institute of technology, which later became a university of technology, teaching maths to business students. So there was that pathway. And I decided at that point that I would specialize in forecasting in finance. And I attended a conference, I gave a paper at a conference, and someone in the audience heard it or heard about it, I never quite got to the bottom line, but called me at home and basically asked whether I would like a real job. And my immediate reaction was, I have a job, in fact I have tenure, which means I was shackled to the university, I didn't want to leave, but when I met with that person, his name is Andrew Goddard, he convinced me that His consulting firm, Towers Perrin, was something that I should consider, if for no other reason that he was a theoretical physicist himself, and that he would be prepared to mentor me and hold my hand, which he subsequently did for a period of time, and so I entered that organisation as an investment consultant, and that led to Eventually, working for another investment consulting firm, Frontier Investment Consulting, which had a client called Host Plus, and I was the consultant to Host Plus, and again, as I say, the rest is history.

AI assessment note: “Frontier Investment Consulting, which had a client called Host Plus”

Q So let's turn to Host Plus Assets, and how do you structure the portfolio?

A We decided that the way to invest our pile of money was With that time horizon and that demographic, Is to capture the equity risk premium and to capture the illiquidity premium. And so, 53% of our strategic asset allocation is public equities, listed equities. It's a combination of domestic equities and international equities developed markets and international equities emerging markets. 53% in total. The other 47% is unlisted infrastructure, unlisted real estate, credit, hedge funds, and private equity. Importantly, we have no strategic asset allocation to cash or to fixed interest. Zero. It's not to say we don't have any cash. We have huge cash flows. Just the SAA to those asset classes is zero. Our downside protection comes from unlisted assets. The volatility of the equity markets is dampened By the existence of unlisted assets in varying degrees, and that's not just a valuation lag. It's also to do with the quality of the cash flows that you get from those assets, right? Ask yourself this. If the asset is an electricity generator or a water supply, how bad does the economic environment have to get Before society decides to switch those assets off. Those cash flows are guaranteed. The returns may differ in a low returning world. Everything goes south. Bad luck. Everybody gets that, right? But your cash flows are pretty much guaranteed under those circumstances, and you nee…

AI assessment note: “53% of our strategic asset allocation is public equities, listed equities. The other 47% is unlisted”

Q All right, let's hit some closing questions, and we'll get you on your way. What's your favorite hobby or activity outside of work and family? The question that you ask all your future employees.

A I mentioned earlier that I had a childhood dream of wanting to be an astronomer, But like most serious hobbies, it's expensive to do that properly. Fortunately, I now have the time and the money to give it a good shot, and so I've started constructing an observatory at my home. It's four metres by four metres in size. It's 13 foot by 13 foot, and I live about 20 miles, 30 kilometres out of the City lights. So it can get quite dark out there, so coupled with the fact that technology's come a long way since my childhood, and that black and white television, and watching the lunar landing, I'm particularly excited by getting this up and running, so I think I've rekindled that hobby.

AI assessment note: “I've started constructing an observatory at my home.”

Q That private portfolio after 11 years, you probably have a core of managers that you like, and those are the ones that you lean on to find the new relationships. How did it evolve from when you first arrived and were building out the portfolio and no doubt made some great investments and some mistakes along the way?

A Well, we inherited, obviously, upon arrival, there's an existing portfolio, some of which I was the advisor to back then, so it's, I'm not distancing myself from it, it's there, and it needs to be dealt with. Wherever it was possible to work with other investors to get out of opportunities, we tried to do that, wasn't always successful, Other investors have a right to keep those managers if they wish. That's fine. We will live with that, right? But I think the single biggest move we made was to hire an individual, Neil Stanford, who is head of private equity at Host Plus, and he bought a discipline to the analysis of the Private equity portfolio. Again, back to relationships. I hired Neil Stanford when I was working at Russell Investments. He then went to work for JANA, our current asset consultant, and I hired him again from JANA. So that working relationship, that familiarity with the individual, meant he hits the ground running and bought in a discipline, an expertise, if you like, that allowed Us to re-examine that private equity portfolio through a different lens, and today it's in a much, much better shape than it has ever been, including Hostplus putting 1.2 billion dollars into venture capital, which makes Hostplus the biggest Australian institutional investor super fund In venture capital by a long shot, and there are reasons for that. Again, the demographics, the time…

AI assessment note: “we inherited, obviously, upon arrival, there's an existing portfolio... the single biggest move we made”

Q How do you guys go about making decisions?

A So we have a, a fiduciary operating model. The board makes all investment decisions. Our job is to work with Jana, our asset consultant. And prepare the case, if you like. Think of the board like a jury. Think of them as nine men and women of the jury. And we need to lead them to make an investment decision on this case. And if they make a decision other than that, that we wish, it's not their fault. It's my fault. We didn't do a good enough job in prosecuting the case. It's quite simple, and we learn lessons from that. We learn what to bring to the board and what not to bring to the board, and more often than not, decisions go through, and the board has demonstrated that they're quite happy to say, no, you need to go away and come back and fix this and fix that, And we learn from that, and very rarely they say, go away and never bring this opportunity back. This is not something we want to do. So it's good to know that we can read the landscape, and we have other decision-making structures, such as we have strategy days, so that we formally put things on strategy. So if something is off strategy, we ensure that we don't spend time Looking at it with an expectation that it goes to the board. It's not going to the board if it's off strategy. You need to get it on strategy first, and then build the investment case, educate the board, and then we're off. And that fiduciary model h…

AI assessment note: “The board makes all investment decisions. Our job is to work with Jana”

Q How do you frame out return objectives in comparison to short or even medium term risks?

A So we're fortunate the fiduciary system that we have has a board in place, and a board That gets those characteristics, understands those characteristics, will understand the need to put a time horizon attached to the return objectives that's commensurate with your characteristics. So for Host Plus, our return objectives are inflation plus four percent per annum over 20 year periods. So why am I focused on short term? Well, it's still a competitive environment, and we still need to protect members from short-term advertising that might attract them to some other fund, right? And so there is a need to consider the short-term, but not be driven by it. And so the answer to that is invest in equities and ensure you have downside protection, right? There's the risk control.

AI assessment note: “our return objectives are inflation plus four percent per annum over 20 year periods.”

Q Usually when you think about those, to some extent, property and real estate, certainly that's how people view infrastructure. In those two areas, you mentioned you're using external managers. What's the split geographically?

A Just under two thirds is offshore, and about 40% of it is domestic. There's a limit to how much we can do in a small country like Australia, and over time, that proportion will be increasingly forced offshore. We're looking to this country, to the US, for infrastructure opportunities. You, you have a, an infrastructure need. I'm not telling you anything you don't already know. And, you know, pension funds in this country, your pension funds, Pension funds in Australia, pension funds in Canada, pension funds in, in the Netherlands are good owners of assets, and together we could help build US infrastructure, and importantly, the infrastructure assets stay here. It's not like we're taking them away, right? So there's a whole conversation to be had about that, but you can see how over time the proportion of our investments offshore It's inevitable that that will increase.

AI assessment note: “Just under two thirds is offshore, and about 40% of it is domestic.”

Q Yeah. Are there benefits to Host Plus or CBUS or the others of effectively competitive growth? Capturing market share or other clients from some of the other super funds.

A Let's look at the landscape. Christian did a good job discussing the difference between retail funds and industry funds. He referred to retail funds as bank-owned funds, for-profit funds, so you can see why the answer there would be, yes, there is a benefit to them, that they are a for-profit entity, so the more market share they can capture, theoretically, the more fees they can generate, and that story is not an uncommon one Anywhere in the world, right? Now let's talk about whether there's any benefit within the industry fund sector to compete with each other. Well, first of all, you can't help but compete simply by being in the marketplace together. So there's competition at that level. There's also competition for staff and resources. There's also competition for a bigger slice of choice assets, right? But there's a communal investment spirit amongst industry funds that doesn't exist amongst retail funds. Let me give you an example, a hypothetical example. Let's say an airport is available for sale. If we could get together a group of industry funds that are interested in taking different slices of capital of the equity slice of that airport, then we can take the whole airport. And if we take the whole airport, we can afford to get one tax advisor amongst all of us. Share the cab fee. One legal advisor amongst all of us. Each fund would still reserve the right to get their…

AI assessment note: “Now let's talk about whether there's any benefit within the industry fund sector”

Q Let's turn a little bit to private equity. Your portfolio is public, and as I looked at your private equity portfolio, it's quite different from large brand name private equity managers, which you might expect for a large and growing plan. How have you thought about manager selection?

A So I like to look at our private equity portfolio in two phases. The legacy phase, where we were still in In diapers being the, the US phrase, in nappies being the Australian phrase, where we were relatively unsophisticated as investors, and we were taking fund to fund private equity investments on their terms, and some of those legacy portfolios are still there. And you can't get out of them, and you just need to do the time until they come to a natural end of their lives. We put cash in and we expect cash out, but that's about it, and they're just on care and maintenance. The more recent portfolio construction, if you like, in private equity, I'd like to think has been a well thought out strategy. It's one of looking at different segments of the private equity marketplace, working out where we want to play with an eye again to our time horizon and our demographics and our cash flow, realizing what the issues have been in the past in terms of follow on funding, For venture capital not being there, et cetera, and the mistakes that were made in the past, ensuring that we don't repeat them, and seeing where the gaps are in our portfolio, and trying to find managers with the skills to close those gaps for us. So today, there's more exposure at the GP level, where there is exposure at fund-to-fund levels, In more recent times, the terms and conditions and fee structures and the veh…

AI assessment note: “you don't see brand names there intentionally... we don't invest in brands We invest in individuals”

Q So venture in the US, there's this belief that there's a subset of great venture capitalists. You hear about benchmark and there's incredible funds, but the capacity and access to those is effectively non-existent, except for a very small number of investors. What does that look like in Australia?

A So the venture capital industry in our country all but disappeared in the dot com bust of 2000, ah, and so mistakes were made at the time and capital went away. And today, it is a growing industry, and it's growing for a number of reasons. One, the pension fund industry is big, and so it can start to put money there as we have, and a number of other pension funds are starting to put money in that direction. The future fund, I think you interviewed Raf Arndt, who I know reasonably well. He mentioned venture capital in his Session with you. So that industry there is starting to pick up. The second reason why it's starting to pick up is that if you are a venture capitalist in Silicon Valley or in other select number of other parts of the world, you know, real estate is expensive and talent is expensive and Melbourne and Sydney and Adelaide and Brisbane aren't the worst places in the world to live. And so you could think about Wanting to relocate your family there, and it's not such a bad lifestyle, and we're getting flows that way, and it's evidenced by US investors putting money into Australian venture capital managers, and that signals a difference this time round, and so that is the, the winds of change, if you like, that I think means that the industry, provided it doesn't It doesn't suffer any adverse events that the industry is here to stay now, so it's a pleasing outcome.

AI assessment note: “So the venture capital industry in our country all but disappeared in the dot com bust”

Q you invest in any particular manager in the portfolio they put together. So on the one hand, what you're describing is a very qualitative assessment or one person's assessment of their self and their advantage. On the other hand, you come from a maths background. How do you put those two things together when you're thinking about your public equity portfolio as a whole and what really is value added?

A You know, the biggest change I've had in my life has been the conversion from believing quant is more important than qual to today believing qual is more important than quant, right? It's just one of these things that evolves over time. You can do the numerical analysis on a portfolio. And come up with conclusions. And you can make decisions based on that portfolio. In fact, you could make higher decisions based on that analysis without even meeting the manager. Good luck with that. That's my view. Good luck with that strategy. It's not that sophisticated. And there isn't that level of precision, and we fool ourselves in finance, in economics, in believing that these systems are like physics. They're not deterministic. You repeat the experiment in finance and economics, you get different outcomes. In the hard sciences, you expect the same outcome every time, right? And so, We believe that we've modeled it right. We have risk factors. We have factor analysis all over the place, and it's the assumptions we make in those models that end up killing us, and one of the things that physics teaches you really well is that assumptions matter.

AI assessment note: “conversion from believing quant is more important than qual to today believing qual is more”

Q And as you look at those offshore, particularly on the infrastructure side, how much do you think about the political or the political economic aspects of, yes, if you owned a bunch of US infrastructure, and that grew and grew and grew, does that have long-term political implications?

A It might in different jurisdictions. And that could be good or bad, but we have to be responsible owners of assets. Remember, Just because the copper in electricity wires is worth more than the electricity that's generated doesn't give you a right to shut down the electricity network and strip out the copper. If you did that once, what makes you think any government will ever deal with you again? Anywhere on the planet. So you can't misbehave not even once. With someone else's asset, right? And that check and balance, you know, just a thought experiment again, going back to that other notion, How can you expect to get away with misbehavior? And we need to generate returns that are like tens and 12, not eighties and seventies. So the concept of super normal extraction of wealth and abhorrent returns just isn't going to happen if you have pension fund owners. It's unnecessary.

AI assessment note: “It might in different jurisdictions. And that could be good or bad, but we have to be responsible owners”

Q reporting to reconciliation, trading, compliance, and more. In the AI era, asset and wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now back to the show. How do you go about articulating those non-performance purposes when you go into the investments?

A Let's start with the investment manager. Again, you can lead by example. We have quite a number of relationships that are 15 and 20 years old, and we say to each of our fund managers, if we invest with you, then expect us to be there for the long haul. Look at our cash flows. Look at our time horizon. If you want us to be An investor in your fund, then let's talk about having a relationship, not a transaction, right from the start. And in some asset classes, like private equity in general, or private markets, but private equity in particular, without a relationship, we won't do the investment. Relationships are 95% of the driving force. People underestimate how important relationships are in private markets. I'm convinced of that. Completely underestimate the importance of good relationships. The internal team at Host Plus understands that we are a relationship based organization, and we have relationship sourced managers. Managers that we have been introduced to because of other relationships, that the alignment is huge, and the incentive for them to misbehave, which is always low for the reasons that I outlined earlier, Is even lower right from the outset because of those introductions and those, those other hooks and attachments. We like doing business with those types of entities. Preferential fees, preferential terms, preferential deal flow. There's any number of benefits …

AI assessment note: “let's talk about having a relationship, not a transaction, right from the start.”

Q How did the mathematical study launch you into where you started your career?

A Well, maths is the bridge between science and finance, and so there was a time In the late 19 eighties and early 19 nineties, the initial foray of the quants into finance. As misguided as that was by those hiring the quants, they seem to believe, unbeknown to any of us at the time, on either side of that equation, that The advent of the personal computer and availability of computing time and the complexity of analysis of mathematics and the hard sciences like physics would result in an ability to get an edge in finance. And some of us discovered sooner rather than later that was never going to happen. The tools were just that. But the human element in finance and that the assumptions that you need to make swamp any of the other benefits that the data provided at the time. Interestingly, we're back again with artificial intelligence and machine learning and better data and more powerful computers. Let's see what happens this time.

AI assessment note: “In the late 19 eighties and early 19 nineties, the initial foray of the quants”