Conversations with Institutional Investors

Investment Innovation Institute [i3]
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Conversations with Institutional Investors is your gateway to in-depth discussions with the masterminds behind leading global investment firms, including key figures from pension funds, insurance companies, and sovereign wealth funds. Our podcast explores the evolving landscape of asset allocation, portfolio construction, and investment strategy, offering you firsthand insights from industry experts to inspire smarter, more innovative investment approaches. For further insights go to i3-invest.com. You can also subscribe to our complimentary newsletter at: i3-invest.com/subscribe/

  1. 137: Aware Super's Simon Warner – Investment Strategy as a Perspex Box, TPA and the Changing Role of CIO

    23h ago

    137: Aware Super's Simon Warner – Investment Strategy as a Perspex Box, TPA and the Changing Role of CIO

    In this episode of the I3 Podcast, Aware Super CIO Simon Warner joins us to discuss how his unusually broad background across fixed income, equities, public and private markets shapes his approach to investing. Simon explains the realities of implementing a total portfolio approach within Australia's DC superannuation system, balancing risk, liquidity and cost while empowering specialist teams rather than imposing top‑down macro calls. He also talks about Aware Super's evolving organisational structure, its global expansion via London, and the changing role of CIO in today's superannuation industry.   Follow the Investment Innovation Institute [i3] on Linkedin Subscribe to our Newsletter Explore our library of insights from leading institutional investors at [i3] Insights Overview of podcast with Simon Warner, CIO of Aware Super [02:00] Simon's career path: Simon outlines his journey from JP Morgan balance sheet risk management (rates and FX) to AMP Capital and then to Aware Super, spanning fixed income, equities, multi‑asset, and private markets. [04:36] From trader to investor: He reflects on moving from being a trader in highly liquid markets to a broader investor, stressing how this built a rigorous risk‑management ethos that underpins his work today. [05:50] Total Portfolio Approach (TPA) in super: Discussion of TPA and why implementing it is different for Australian super funds (with member choice and labels) compared to sovereign funds like the Future Fund or NZ Super. [06:55] Constraints of the Australian super system: Simon explains key constraints: DC structure, direct B2C member relationship, liquidity for switching/redemptions, and dual focus on net returns and costs in a competitive market. [09:30] "I sometimes wonder whether commentary on TPA isn't code for top-down decision-making?" [10:33] Practical TPA and risk premia vs idiosyncratic risk: He describes building a common language and philosophy around risk premia vs idiosyncratic risk, using infrastructure as an example to think about embedded factor exposures across the whole portfolio. [15:33] Active vs passive and future of data in private markets: Simon talks about using analytical frameworks to separate what should be cheap beta/factor exposure from what is truly idiosyncratic alpha worth paying for, and how better data in private markets will enable more scientific portfolio construction. [17:14] Restructuring the investment team: He explains recent organisational changes: grouping property and infrastructure under private markets, creating dedicated accountability for liquidity and implementation, defensive assets, and having public equities report directly to the CIO. [23:31] Internal vs external management: With ~30% of assets managed internally, Simon discusses when Aware chooses internal management versus external managers, stressing competitive edge, proximity to assets, and reserving higher fees for true idiosyncratic opportunities. [28:48] Global expansion and the London office: He outlines the rationale for the London office—access to deeper global markets, managing domestic capacity constraints, building trusted co‑investor relationships, and carefully embedding Aware's purpose and culture offshore. [31:00] "We are at our SAA in terms of illiquid asset classes, so there is no urgency [to increase]"   [35:29] Role of super funds and member expectations: Simon positions Aware as already vertically integrated, with large non‑investment teams focused on member engagement and advice, and discusses balancing performance, cost, and responsible investing for a diverse 1.4m‑member base.   [40:18] Lessons, mentorship, and the CIO as 'director': He shares lessons from mentors like Mark Beardow and Adam Tindall on process, humanity, and psychological stability, and describes the modern CIO as akin to a movie director: setting vision and culture while empowering specialists rather than micromanaging decisions.   [41:30] Make your investment process a perspex box that you can describe to yourself, to people around you and to the people that will occupy your position in the future   [49:00] The role of an CIO is somewhat akin to a [movie] director: you have to have some level of consistency of vision and consistency of what you are trying to achieve Full Transcript of Episode 137 of the [i3] Podcast Wouter Klijn  00:00 Welcome to the [i3] Podcast. I'm here today with Simon Warner, who is the Chief Investment Officer of Aware Super, which has now become a 235 billion superannuation fund. Simon, welcome to the show.   Simon Warner  00:14 Thanks, greatly appreciate it.   Wouter Klijn  00:17 So, you took on the CIO role at the end of last year, and I was looking at your background. I spent a long time at AMP Capital, long time at JPMorgan Chase, but you have both had very senior roles in the equity side and the fixed income side. That is kind of unusual for a CIO. Can you tell me a little bit about how that came about?   Simon Warner  00:41 Yeah, well, so a lot, a lot of my career is a story of serendipity, and maybe me being active about making loads of opportunities that have come my way, but a lot of it is about a embracing the path that life has put out for me. I started, I started my career at JP Morgan, as you say, or one of the prior banks that now makes up JP Morgan, and my first job there, and the job that I had for 11 years was working on a on the balance sheet, managing the strategic interest rate and currency risk of the bank, which in many ways was sort of an internal hedge fund, so operating in, you know, the world's most liquid, most highly arbitraged markets to try to add value that then parlayed into a move into the buy side where I worked at AAP Capital, first within the fixed income team, and then my last job at AMP Capital was running equities, fixed income, and the multi-asset area, so the part of that business that used to manage the superannuation monies, but the last job I had there included the front office, but it also included all the support staff and all of the distribution product technology, etc. I then took a break and re-entered in this role under Damian Graham, my previous boss, and the old CIO here, where I took a role for him, looking after private equity, public equities, infrastructure, and property, and so over the course of that journey, I've been very lucky to have been either a direct practitioner or very proximate to decision making across pretty much everything that we do here now at Aware, that certainly I would emphasise, has not made me an expert at all of it, arguably an expert at not any of it, but it has given me a level of proximity and a level of understanding and a breadth that I do think is like you say, it's a bit unusual.   Wouter Klijn  02:36 Yeah, so do you see yourself today as more of an equity guy or a fixed income guy?   Simon Warner  02:41 You try not to label yourself, because they tend to be a little bit of rivalry between those two simple camps, and I think one of the things that I would, I would probably frame it differently, I think, I think you know my time at the start of my career operating in those markets that I described, I think that creates a level of rigour around risk management that is a really strong foundation for any individual within investment within the investment industry, and so I made not only have I made this journey from fixed income into equities from the public side into the private side, but I suppose I've had a bit of a journey from being a trader to being an investor, and that training I do think creates a very strong risk management ethos that to my mind is a critical pillar for a great investor as well, and so I would not proclaim myself to be a great investor, let me be clear, but I do think that foundational skill or foundational approach has been one of the things that I do hold on to.   Wouter Klijn  03:50 So that's interesting. So there's the equity side, the fixed income side, and then the trading side as well. And I was sort of thinking of it. You mentioned briefly JP Morgan was sort of like an hedge fund type approach. All of those roles seem to filter quite well into, you know, what is very popular today is the total portfolio approach, where you know you look at the total portfolio and see where the gaps are, and we've looked into this recently a bit. Obviously, within a super fund environment, it's very different to implement that than say the future fund to New Zealand super, where they can get rid of a strategic asset allocation. Super funds can't really do that, they have to be true to a label in their investment options. So, what we've seen is that funds try to do more of sort of an overlay, or completion, as Canadians call it, and that seems to translate sometimes in a little bit of a hedge fund type of techniques, and we see relative value, we see global macro trade, is that something what you're thinking of as well, and what are your thoughts on TPA in general?   Simon Warner  04:55 Yeah, yeah, so as you allude to there, I think. Think understanding our context and understanding our task within our context is sort of foundational for understanding about what the best way of going about our business is, and without wanting to repeat what you said, one of the features of the Australian superannuation industry, or the two features that I think are really salient, is one is that we are a DC system, and secondly, we are B to C entities, and so we operate with a direct relationship with our customer base, or our member base in our case, and they can switch at any time. We have a, we have a really tactile and close relationship with the beneficiaries of our capita

    53 min
  2. 136: Circle the Square – Environmental Risk and the Repricing of Stability

    May 31

    136: Circle the Square – Environmental Risk and the Repricing of Stability

    In this special episode of the  [i3] Podcast, we're partnering with the University of Technology Sydney for the Circle the Square roundtable discussion. Today's topic focuses on environmental risk and the repricing of stability. For most of financial history, the environment was treated pretty much as a given, stable enough to model around, reliable enough to insure against, and predictable enough to build on, but that assumption is now under pressure. Follow the Investment Innovation Institute [i3] on Linkedin Subscribe to our Newsletter Explore our library of insights from leading institutional investors at [i3] Insights Key Takeaways The foundational assumption is breaking. Finance, insurance, and infrastructure planning were all built on 12,000 years of environmental stability. That stability can no longer be taken as a given, which undermines actuarial models, long-duration asset valuations, and infrastructure design. Insurance is the canary in the coal mine. Insurers were among the first to feel climate risk directly through claims. APRA has flagged that one in four Australian households may soon be unable to afford home insurance — effectively making the taxpayer the insurer of last resort. Disclosure isn't the same as resilience. Reporting frameworks like TCFD are a useful starting point, but simply mapping risks doesn't mitigate them. True resilience requires collective, systems-level investment — not just individual firm-level action. Short-termism is a structural problem. Pension funds have long-term liabilities but face peer-comparison pressures that punish near-term deviation, creating a mismatch between the time horizon of the risk and the incentives of the managers. The Monday morning question: Are the assumptions underlying your portfolio — on insurability, asset longevity, and gradual linear change — still valid, or are you already running on outdated models? Speakers Martina Linnenluecke, Director, Centre for Climate Risk and Resilience, University of Technology Sydney Kristy Graham, CEO, Australian Sustainable Finance Institute Rob Prugue, Lecturer, University of Technology Sydney, Anchor Fund Wouter Klijn, Host, [i3] Podcast Overview of Circle the Square podcast 06:00 The world has seen a stable climate for the last 12,000 years. What happens when we move into a new regime? "We've assumed that environmental stability was a freebie, but the last 20 years has shown that is not necessarily the case. And the markets are beginning to take notice." 09:00 "Climate and environmental risks are no longer abstract externalities; they are felt across sectors." 11:30 We are seeing that in some countries, climate change is factored into infrastructure planning. Does that happen in Australia? No, but it should 13:30 "Climate science has become a political debate. As a result, policy is set based on the political climate not the science itselft." 16:00 We are seeing increasing standardisation of tools or frameworks across asset classes and providers and that matters because it enables you to look across your portfolio 17:00 "It often starts in an ESG function, which develops a centre of expertise, but in the organisations we work with now it sits right across the whole organisation." 24:30 There seems to be a disconnect between the way in which the investment industry assesses climate risks compared to how climate scientists assess it. "We do see more sophistication around how scenario modelling is used. But there is certainly a communication issue" 25:30 "It certainly is not just a temperature increase; it is a much broader, systemic issue." 29:00 "For a pension fund, to walk away from your long-term liabilities when it comes to climate risk doesn't really add up." 35:30 "APRA is concerned that one in four households will not be able to afford insurance in the future. In coastal towns, it is 50 per cent." The rise of insurance deserts 37:30 The silver bullet is building models that support resilience, rather than the current model, which is disaster recovery after an event has occurred. 50:30 "We don't have DCF (model) for opportunity cost" Full Transcription of Episode 136 Wouter Klijn 00:00 Welcome to the i3 podcast. In this special episode, we're partnering with the University of Technology Sydney for the Circle the Square roundtable discussion. Today's topic focuses on environmental risk and the repricing of stability. For most of financial history, the environment was treated pretty much as a given, stable enough to model around, reliable enough to insure against, and predictable enough to build on, but that assumption is now under pressure. Environmental risk is moving through the financial system in a way that is becoming harder to ignore. Insurance premiums are rising and cover is narrowing. Infrastructure built to last decades is now decommissioned ahead of time, and capital is being asked to fund a transition whose policy settings keep on changing. So, this is not an ESG conversation. It's a question about the structural foundations that finance has always taken for granted, and what happens when those foundations start to reprice. Today we have three speakers who are well placed to assess where the pressure lands in this discussion, who absorbs it, and what the response could look like. We have Martina Linnenluecke, who leads the Centre for Climate Risk and Resilience at UTS, and has spent a career examining how environmental change reshapes companies, industries, and financial markets. She was also a key contributor to the Intergovernmental Panel on Climate Change's sixth assessment report. We also have Kristy Graham, who is the inaugural CEO of the Australian Sustainable Finance Institute, an independent body that works with Australia's largest financial institutions to realign the finance sector and ensure capital flows to activities that will create a sustainable, resilient and inclusive economy. Kristy, I think you were also involved in the establishment of the first Australian Government Impact Investment Fund. And, of course, we also welcome back Rob Prugue, who is honorary industry lecturer at UTS and one of the driving forces behind the UTS Anchor Fund, an educational investment fund managing real money managed by students. The question we're here to explore today is, what does finance do when the assumption it was built on is no longer holding? Rob, maybe I can ask you to set the scene. Has environmental risk moved from externality into something that investors now have to price, underwrite, and perhaps insure? What do you think? Rob Prugue 02:37 Thanks, Wouter. And thank you for this opportunity. I guess, like the rest of us, I too have been wondering for quite some time now about the impact on the environment, not just in my everyday life, but as an investor thinking about capital markets, pension funds and superannuation, and how they manoeuvre around these highly heated discussions around environmental science. What triggered it for me was some years back when I did the Camino de Santiago, and had the good fortune of meeting many people, one of whom was a professor at Oxford, a palaeontologist and climatologist, which is an interesting mix. Naturally, it raised a few eyebrows, and I asked, "Please explain." He said, "Well, we study the environment through studying Earth's history," and he reminded me that, of Earth's 4.5 billion-year history, roughly the last 12,000 years have been the most environmentally stable, and humanity, as we know it, thrived and flourished under that stability. Of course, we had storms, of course we had volcanoes erupting, of course we had floods, but for the most part the environment and the seasons were predictable. That allowed farming, agricultural growth, town growth, and a level of prosperity that humanity had not necessarily seen before. So that got me thinking. If that's true, what happens if we start moving into a new regime, and how will we adapt? We're so accustomed to that stability and predictability that it flows through everything from actuarial science and the pricing of insurance products through to assumptions on long-duration real assets. The generator is going to be there. The airports are going to be there. The assets are not necessarily going to be damaged in ways we haven't priced. For many decades, if not centuries, we've assumed that environmental stability was a freebie, a free get-out-of-jail card. The last 20 years, or even 15 years, has shown that is not necessarily the case. So, while politicians and others debate the science behind environmental science, there are movements afoot. The markets are beginning to take notice. Wouter Klijn 05:22 Yes, Martina, if I can move to you, do you already see a realisation of this entire strategy and potentially more on the operational side of businesses? Martina Linnenluecke 05:35 Yes, I think we are definitely seeing that climate risks are increasingly factored into decision making, and the science is clear. We are going to see very fundamental changes in environmental conditions. We are going to see massive shifts in temperature. We are going to see changes in extreme events, which are going to be very impactful, and in the conversations that we have with leaders in industry, we can definitely see that these risks are already felt. Certainly not across every sector to the same degree or extent, but we do see that some sectors are starting to be very concerned, especially when we look into changes in extreme events and how that affects everything from supply chain, cash flows, asset values, insurability, financing costs and operations, but also strategic viability. So, there's now a real question around where should we invest, how are we investing, and what can we do to protect these investments in the long run. In many sectors, especially those with long-lived assets, these are very difficult considerations, because some asset

    1h 12m
  3. 135: Funds SA's Con Michalakis – TPA Lite, The Comic Con of Asset Allocation and my Best & Worst Investment

    May 13

    135: Funds SA's Con Michalakis – TPA Lite, The Comic Con of Asset Allocation and my Best & Worst Investment

    In this episode of the [i3] Podcast, Conversations with Institutional Investors, we speak with Con Michalakis, Chief Investment Officer of Funds SA, which is a $50 billion investment manager for South Australian public sector superannuation funds and other approved state authorities. Con is well-known in the Australian investment industry, not in the least, for his outspoken views on a variety of investment topics, including gold, crypto and asset allocation, much of which has historically been disseminated through his notorious Twitter or X feed. We trace back to Con's roots as a quant and value investor, and discuss how this continues to shape his current investment philosophy, despite the fact that he calls himself now an ex-quant. We discuss the changes in governance and the implementation of a TPA lite framework at Funds SA, while we also touch upon the turmoil in private credit. Finally, Con admits that he was wrong about innovation and disruption being the most dangerous words in investing, while he stands firm on his dislike for crypto and dynamic asset allocation. Enjoy the show! Follow the Investment Innovation Institute [i3] on Linkedin Subscribe to our Newsletter Explore our library of insights from leading institutional investors at [i3] Insights Overview of Podcast with Con Michalakis, CIO of Funds SA 03:00 I'm more of an ex-quant these days 05:00 In my heart, I'm still a value person and a contrarian; I like to invest in areas that are unloved or where capital is scarce 09:30 When I joined Statewide, the GFC hit. It was the worst I'd ever seen and Statewide was in trouble 12:00 By the time we merged with Hostplus, we were one of the top performing funds in the country, but that first six to nine month period was hell 13:30 Covid was short in terms of the market bounce back. What was hard was early access to super 14:30 Governance changes at Funds SA; "There were a lot of meetings here at Funds SA" 16:00 Having a risk management lens and no more siloes is a key part (of the new governance structure) 16:30 You used to have a photo of Trump on your desk to remind you of risk. Do you still have that? "No, I see enough of him!" 18:30 Making changes to the investment committee 21:30 We cut our tracking error budgets for Australian and global shares down by half to almost two-thirds. We've introduced passive, we've introduced quant systematic, and we have an active sleeve. You can't be full one or the other. 23:30 The world has changed: there is faster money, there is pod shops (fund managers that distribute capital across numerous semi-autonomous teams (pods) led by individual PMs) and there is instant reaction 24:00 You have to embrace dispersion across styles and managers 27:00 Implementing "TPA Lite". 27:30 "The idea that you are going to do dynamic tilting, or that you are some sort of macro guru, I call that a Comic Con of Asset Allocation. Everyone dresses up in their favourite character." 30:00 There is a slight survivor bias in the group of TPA proponents that the added value is based on 35:00 You said previously that innovation and disruption are the two most dangerous words in the industry? "I was wrong". 39:00 There was a shoe company in the US that was going bankrupt and pivoted to AI and the stock price went up 5x. Clearly, there is some nonsense going on. 43:00 Crypto; if you want to have it as a digital Ponzi scheme, go for it. 45:00 At Funds SA, we have zero Australian private credit 46:00 Some sort of global small/midcap manager, who has never done private credit in their life, is saying it is going to die. What do they know? 52:30 My worst investment? Probably, single strategy hedge funds. 55:00 Con's Twitter/X presence   Full Transcript of Episode 135 Wouter Klijn  02:56 Con. Welcome to the show.  Con Michalakis  02:57 Good to be here. Thank you for inviting me.  Wouter Klijn  03:00 No worries. So I want to take you back all the way to the beginning to get sort of a sense of your thinking on investments. And I believe you studied mathematical science in Adelaide, then went on to do a Master's in financial economics in London, and ended up at the Oxford Said business school. So there's sort of a combination of, you know, purely mathematical thinking, but also strategic thinking. How has that shaped, sort of, your outlook on investments?  Con Michalakis  03:28 Yeah, sure, so I would say I'm more of an ex quant now. I mean, it's a long time ago since I did option pricing and was a quant So, but still, you know, numbers guy in terms of how I think about it, and to be, to be honest, you know, the younger people that I've worked with, whether it was at Statewide, Hostplus, at Funds SA, to say they're brighter, they're more technical, they're more up to speed, so they've way taken over. So I would, I would call myself ex-quant. I still think in terms of numbers, still, you know, pretty Stemmy. And there's a bias across all three firms that I've worked for for sort of STEM type thinking, you know, science, technology, engineering, maths, the but you can't just all have one I have now believe that you can't just be one grade. I still think you can take stem people and teach them finance. It's hard to take finance people and teach them stem but you need, you need all sorts. And some of the best thinkers are not necessarily the way they think and critical thinking. They're not always just stem types. I've learned to embrace more diversity in that and interesting some of the managers that we've invested in, you know they come from interesting historians. So you got a critical thinking is more important. But, yeah, definitely bit of a buy. As the stem.  Wouter Klijn  05:01 Yeah. So how would you describe your investment style now? Then, because, of course, you mentioned three firms you you worked at Pezna for a while, which is a value shop, a deep value shop. Do you still have some of that thinking as part of your DNA, or are you looking more as sort of a contrarian investor.  Con Michalakis  05:22 I think in my heart, in my heart, I'm still a value person and a contrarian like to invest at the margin in areas that are either unloved or where capital is scarce, because highly likely the risk is that hasn't been priced in, and therefore there's a trade off. But definitely call it the maturity cycle, diversification, the ability to invest long term and make sure you have investments across a broad, strange range of strategies and asset classes, and not being sort of, you know, across the cycle, not having one dominating I think, is very important. I've learned that lesson, and it's a lesson that I know, but in my heart of hearts, if it's contrarian in value, it's probably my kryptonite.  Wouter Klijn  06:19 Yeah. So, so you learned those lessons. Can you give an example of some of the things, some of the trades? Maybe that taught you those lessons?  Con Michalakis  06:28 Yeah, probably bond allocation, fixed income, you know, like, if you look at the Japanese bond market, you know, it was the widow maker, you know, you didn't like it at four. Didn't like it at 3,2,1,or 0, it's come back now. So, you know, maybe the mean reversion took 30 years, but it's coming back. You could just got to be a bit you got to be a bit more smarter than naive mean reversion. Value Investing. There's been a value, statistical value, risk premium over 100 years, but you know, arguably, it's been very chopping. Hasn't worked since the GFC or prior to the GFC. If your portfolio, if you're running a diversified, multi strategy, strategy, multi asset portfolio, and you've let one style dominate your over a cycle, you're going to outperform or underperform because you're too biassed to that at the margin, though, you know, at the margins, I remember you're running a world diversified fund. Occasionally you get thrown these strategies and ideas where either the market has unloved it or there's an opportunity to extract return. That's pretty good. So, you know, we were a bit late to that at state. Well, I definitely noticed. Plus, when we did the sort of insurance link strategies with quota shares, we did that last year here too, at funds SA, and that's that's done really well, you know, in the small and mid cap, you know, where managers can probably do a little bit better. Venture capital, when that was unloved 15 years ago, we were late to that at Statewide, but Hostplus was very good. So you want to, you want to be diversified, but you want to go to early areas and adopt that if you can.  Wouter Klijn  08:11 So looking back on that, what does that mean for portfolio? This, is there still a place for value, or are you more style neutral guy?  Con Michalakis  08:20 There's a place for value and be conscious. If you're going to use a combination of passive, quant, systematic and traditional fundamental, you want to be conscious of what your and how your managers managing that. Some are core. Some identify as value. Some are kind of fighters, quality or growth. You want to be conscious of what you're carrying into that portfolio, except particularly in this incredible market movements that we've had, probably since Covid, for lack of a better word, that you're going to have dispersion. And that gets down to beliefs. Can you ride the cycle. Do you have the ability to, if you have good relationships and you trust your managers to reinvest when there's…, their style or, you know, there's always a style that they've had an issue with a couple of stocks, do you have the backbone to just stay in the game with them and reinvest?  Wouter Klijn  09:18 Yeah, you just mentioned that Covid period. Do you have any sort of lessons from that? Did you change anything in the portfolio to deal with sort of that volatility?  Con Michalakis  09:28 You know, when I joined statewide, it was a GFC, so, so I left Pzena,

    59 min
  4. 134: JANA's Jo Leaper – Risk as a Source of Alpha

    May 3

    134: JANA's Jo Leaper – Risk as a Source of Alpha

    In this episode of the [i3] Podcast, I'm speaking with Jo Leaper, who is the Head of Operational Consulting at asset consultant JANA. We talk about the next evolution of risk management, where risk doesn't reside just with a dedicated team, but is addressed by all functions, including the investment team. When implemented well this form of holistic risk management is not simply a cost, but can lead to operational efficiencies and even alpha. Afterall, investors need risk to produce returns, but how you manage that risk is the key. __________ Follow the Investment Innovation Institute [i3] on Linkedin Subscribe to our Newsletter Explore our library of insights from leading institutional investors at [i3] Insights  __________ Overview of Podcast with Jo Leaper, JANA 01:30 Why is operational due diligence important? 06:00 What I'm seeing is investment governance getting more involved and almost acting like a bridge between the investment team and the risk team. 13:30 Hopefully, we will get to a world where risk is not a cost of business, but it is an enabler of outcomes 17:00 New regulation will always cause a little bit of friction and in all honesty it should 19:30 There is already a strong focus on valuations and risk in unlisted assets, but it will get more intense 23:00 We talk about 'risk sensible' a lot; funds still need alpha 23:30 Is there such a thing as operational alpha in risk? Absolutely. 25:30 Managing risk in a $2tn organisation. Employing multiple custodians and services providers Full Transcript of Episode 134 Wouter Klijn Jo, welcome to the podcast. Jo Leaper Thank you for having me. Wouter Klijn So today we're going to talk about operational risk and operational due diligence. Why is that so important?  Jo Leaper  01:36 Operational due diligence, it's always important for investors to know what they're investing in, and if you're not doing operational due diligence, you're not necessarily understanding what that actually understanding what that actually is, because the risk is important to the portfolio. You need the risk to generate alpha. But if you don't know what those risks are, if they're hidden, then that's where you fall into a trap.  Wouter Klijn  01:52 Yeah. So what are some of the main challenges in managing this? Jo Leaper  01:57 Really the complexity and a lot of the investments that clients have, and the market has, are investments that have come up over time, and in those spaces, historically, you had a pretty good idea about what you were investing in. But assets are getting more complex. Structures of operating funds are getting more and more complex, and so none of them can know everything. So really for us, getting them to look at the operational risk is getting them to say, I can work with that, or I can mitigate that, or I can accept it. It's when you don't know what those risks are that the complexities really come into play. And I think particularly if you look at the current world, with geopolitical issues at the moment, even managing some of the structural issues and challenges in the industry, there are unintended consequences to those actions. So understanding what your managers are doing a it's a really good learning place, because they're doing this, and a lot of our clients are starting to invest internally as well. But it's just, it's a good way to say, You know what, that's commensurate with what our members and our beneficiaries are looking for. And we do want risk in the portfolio. We need risk in the portfolio. But if you don't know what it is, that's a problem.  Wouter Klijn  03:02 So yeah, it's right. The world is increasingly becoming more complex. I mean, you mentioned geopolitics, but you know, we also see AI and machine learning and so many different things.   Jo Leaper  03:10 It's a really challenging time from a risk perspective at the moment, because you've got a lot of participants in the market, not just investors, but a lot of market participants with legacy instruments, legacy technology, and the market is moving at a faster pace. The regulator is expecting more. Members are expecting more. And we've got a lot of data, but sometimes, unless you've got the right guardrails around how you're looking at it, how you're using it, are you going to get the right outcomes. It's the right intention. But you know, the end of the day, it's members best financial interests, not ours, not anyone else's, it's the member.  Wouter Klijn  03:44 Yeah. So you took recently a look at CPS 230 operational risk management approach guideline, and you, you sort of indicated that it signified a little bit of a shift in thinking about risk management. Can you? Can you walk us through that  Jo Leaper  04:00 Of course. So APRA has always been Prudential, like that's literally in their name, and they try not to be prescriptive in the way that they do this. When CPS 230 came across the desk, it really was to bring back a larger view of resilience and resiliency. And I think a lot in the industry are still wanting APRA to be a lot more prescriptive. And that's not going to happen. That's not what they do. It's not their nature. And so when you look at it, and you will look at what APRA is trying to achieve, their ultimate goal is really the same as the industry's members, best outcomes. That's what we want. And if you can do that by shoring up the system and the structure, APRA can't enforce particular investment styles, but they can try to make sure that the system has the right controls and the right mechanisms to manage turbulence when it happens.  Wouter Klijn  04:46 So I mean, clarity is always, you know, a key issue around regulations. I was recently at a conference where I think the word clarity and taxonomy were the two most used words, yeah, during the conference. But. But, yeah, in this complex environment, it can, cannot always be, you know, that straightforward. You can't describe it. So, so how sort of do you deal with that? And I think part of the shift in the risk management is also around integrating risk management so that you don't have separate silos with just investment risk or just operational risk. So you're working towards more of a holistic risk. To what degree do you think that investment team should take this on board in terms of the non investment risk? So Not, not, you know, the investments, the business side of things,  Jo Leaper  05:38 I think they have to be part of the conversation. It doesn't matter. And I've always said in public, it doesn't matter what investment strategy you come up with. If you can't implement it, if your operational teams, your custodians, your administrators, can't manage it, there's no alpha there. It's dead money. And so they do have to be part of the conversation. What I'm seeing, and what I'm liking seeing in the market, is this rise of investment governance being more involved and almost being as the bridge between the investment team and, say, the risk team, so that it's a much more holistic conversation members best financial outcomes is always the bottom line. If that's your guiding principle, you're doing well in the industry. But if you had two managers side by side that looked very equal, would you take the one with the lesser risk on I would Yeah. And so I think they really do have to be in there, but it's also about improving the communication and the decision making processes, and that they're part of the broader discussion. So if we go back to your previous question in terms of APRA and what they're looking for, they still want the same goal, same as what the investment teams want, which is members best financial interest. And so I think with CPS 230 and then, as you say, going into the businesses, by looking across the risk spectrum, they're going to end up with an overall better outcome, because the cost to member isn't just the risk in the portfolio or the fees. It's legal, it's admin, it's it, it's audit, all of those costs come in too. And so if you can find a way to structure or manage your investments to ensure that you're looking at those things as well, that's your true cost of investment. So the more you can find, I'm going to say strategic alliances, a synergy, whatever you want to call it, but the more you can get some cohesion there in the decision making and some understanding of each other's process, I think the better it will come together.  Wouter Klijn  07:20 So is it more a degree to a degree about communication, or do you think should it be a new function within the investment team?  Jo Leaper  07:32 A risk function that is one person responsible for line one risk has always been part of it. So I don't think that's any change really. In particular, I think the main change is actually coming through the FAR legislation, the financial accountability regime, because that's designating individuals as being specifically responsible for particular parts. And when you think about it, the board is absolutely responsible at the top, but they have to delegate. The board can't do everything. They can't know everything. The IC can't. The audit and risk committee can't, and each of those C suite executives or others who are designated accountable can't know everything about everyone else's role if they're not communicating, if they're not exchanging knowledge between teams, if they're not talking in advance of an investment, they're letting themselves down. The better ones will have their operational and risk teams separate to investments, but we'll talk to them regularly in terms of we've got this coming up. This is what we're thinking. Is that doable? Is that not doable? What? How long will that take the custodian? What will it cost me? And it becomes part of the process, not an add on at the end.  Wouter Klijn  08:29 Yeah. So do you think that this will change, then structures within organisations? Because I sort of had the

    32 min
  5. 133: From the Archives – Gus Sauter and the Early Days of ETFs

    Apr 13

    133: From the Archives – Gus Sauter and the Early Days of ETFs

    In this episode of the From the Archive series, we look at a 2019 interview with Gus Sauter, the former Chief Investment Officer of Vanguard, who worked for more than 25 years at the company. Sauter is also an adviser to the Australian Retirement Trust, then Sunsuper. Index and passive investing have gained momentum in recent years and it is estimated that about 60 per cent of investments follow passive strategies today. Considering this sheer weight of money and the move of more Australian superannuation funds to passive investing in recent years, it is easy to forget that index tracking and the popular investment vehicle for doing so, Exchange Traded Funds, were once controversial. In fact, Jack Bogle, the founder of Vanguard, was not a fan when Sauter launched the ETF business for the company. In this interview, Gus takes us back to those early days and revisits the active/passive debate, a discussion he never tires of. __________ Follow the Investment Innovation Institute [i3] on Linkedin Subscribe to our Newsletter Explore our library of insights from leading institutional investors at [i3] Insights __________ Podcast overview Gus Sauter 1:00 You started a bank at age 8, is that true? 3:00 Then a goldmine in your 20s? 4:20 Gold is an Armageddon type of investment; if the world collapses, gold is probably going to be fine 5:50 My first stock 6:30 I've had the active vs passive debate literally thousands of times and 'no' I'm not tired of it. 7:00 Passive is a good investment strategy, but it is never going to be top performing in any given year 9:00 I'm not totally on board with the efficient market hypothesis 10:00 Why indexing works 12:00 But does the market capitalisation method work in fixed income, where you skew to the most in debt entity? 14:00 Over time, markets have become more efficient, compared to the 1980s. 15:00 Did Jack Bogle cut his holiday short to find out why you were adopting ETFs? 16:00 Jack disagreed on ETFs 17:00 The crisis of 1987, and the subsequent redemptions from mutual funds, shaped my thinking on ETFs 19:30 Is there more institutional takeup of ETFs in the US, than there is in Australia? 20:00 ETFs are not a product; they are a way to distribute index funds. 21:00 Not a fan of smart beta 27:00 You don't think there is necessarily a correlation between GDP growth and stock market returns? 28:30 You can take a great firm and make it a lousy investment by overpaying for it and visa versa 31:30 Working with Sunsuper 33:00 Do you see a lot of similarities or differences between the issues that investors in the US and Australia grapple with? 35:00 Should pension funds in Australia be more dynamic in their asset allocation? 37:30 What have you learned from past crises? 42:00 Jack said: "One day indexing is going to be really big and we'll have US$ 10bn in assets" We now have US$ 4 trillion. Full Transcript of Episode 133 Wouter Klijn  01:00 Gus. Welcome to the show. Gus Sauter Well, thank you. I'm glad to be here. Wouter Klijn  01:52 Let's start a bit with the start. I'm going to take you right back to age eight. There is a website that is called Buggle heads, and it has your buyer up there, and said that at age eight, you started taking deposits and making loans to neighbours, effectively starting your own bank. Is that true? And what is wrong with playing with Lego? Gus Sauter  02:16 It is true. I'm hesitant to admit I think I probably broke several 100 banking laws. But yes, I didn't think my neighbours were going to turn me in. They would give me $1 or two, and I would turn around and deposit it in the bank and earn interest on it, and then turn around and give them the interest that they would have earned. So yeah, I was a little enterprising at eight and not too much into Legos. Wouter Klijn  02:40 So where did you get the idea from? Gus Sauter  02:43 You know, just from my parents and going to the bank with them. And I guess I was just curious about how money could make money for you and and really, that was the genesis. Wouter Klijn  02:53 And then it also says that around in your 20s, you formed your own gold mine, but what inspired you to make that investment? Gus Sauter  03:04 Probably naivety. I was working as a commercial real estate developer in Denver, and we were building, really about 11 story office buildings, and I was working on the financial side of putting these deals together, and this opportunity came along to develop a gold mine, and I figured, well, I'm the financial side raising capital to build buildings. Why can't I raise some capital to build a gold mine and and so I put a venture capital deal together. Took me about three years to run it under. Turned out to be a little bit of a frustrating point in my life. Wouter Klijn  03:35 I can imagine. So looking back, what is your view on gold today? Because a lot of investors think that gold is a bit speculative. It doesn't have any inherent value. How do you look back on that? Gus Sauter  03:47 Yeah, so I started that in 1982 and that was really kind of the height of the gold mania, the gold rush, and I was looking at a little bit more like a mining company, as opposed to the lustre of gold itself, although I must admit, if we were mining for salt, I probably wouldn't have created the firm. So my view then was to hopefully make money mining gold and selling it immediately, not holding on to it. My view is that gold is kind of a Armageddon type of investment. If you if the world collapses, probably gold is, is fine. My view is the world is not going to collapse. And so I, you know, gold doesn't give you any sort of rate of return. It is, you know, as you indicate speculative. You buy it with the idea you can sell it later to somebody at a higher price. There's no dividend on it, no interest. So I think if people do have it in their portfolio, it should be a small, small part of the portfolio. Wouter Klijn  04:47 Yeah, well, I'm glad the world is not coming to an end. So we had banks, we had a gold mine. You mentioned real estate. How did you get started in the asset management industry when my gold mining venture went on? Gus Sauter  04:59 I had a good friend from business school who had kept in contact with me, and he went to work for Pimco, who is now the famous bond management firm, and he kept after me, and kept telling me that I belonged in the investment management industry. And actually, quite honestly, I felt that as well. I bought my first stock when I was 11 or 12 years old after after the banking experience and and I loved investing, so I followed his advice. And interestingly, I had some opportunities, perhaps, to go with PIMCO out on the West Coast, in California, but I grew up in Ohio, in more the centre of the United States, and I wanted to go back home. Unfortunately, there just aren't many investment management firms in Ohio. So I worked for a bank in Ohio in their trust investment area, and got experience. Wouter Klijn  05:47 And I think that that first stock was that a basketball team. Gus Sauter  05:51 The basketball team was actually my second stock. Yes, my first stock was a snowmobile company, and my second one was the Cleveland Cavaliers. I'm proud to say I was one of the original owners of the Cleveland Cavaliers. I grew up 90 miles south of Cleveland, so, yeah, Wouter Klijn  06:07 So taking it to Vanguard, not looking at individual stocks, but we're looking at indexes, and even to deal this day, we still have this discussion about active, passive. You know, what is better? Do you get tired of this conversation? Gus Sauter  06:27 You know, I've had the debate 1000s of times, literally 1000s of times, as we were trying to build indexing back in the 80s and 90s, it was not well received at all. And it was really a brick by brick business building venture, and I was invited to many, many conferences, and interestingly, they would have me on a panel, and I'd be in a debate with somebody else, and it would always be a top performing, active manager. So you know, you're always kind of with with your back in the corner. Indexing is a very good strategy and appropriate for most investors, but it's never going to be top performing in any given year, it's going to be a good performing investment that really compounds over time into top performance. So I actually, I do love the debate, because I think it shows the advantages of indexing and also allows for the advantages of active management to complement indexing. Wouter Klijn  07:18 And it seems that we have moved on a little bit from one against the other two, where I think we see more especially amongst the larger funds that don't always have a choice to go 100% active, that they say, well, we'll do both. We will have a core allocation to passive, and we'll do some things around it in the active space. Do you feel that the this debate has become more sophisticated around this issue. Gus Sauter  07:42 I do. I think a lot of investors have realised that there are significant advantages to indexing, and it should be a core portion of their portfolio. It's a great foundation, because it's going to provide you with very competitive returns that will outperform a majority of investors in the marketplace. So it's a great place to start, and you have a good deal of confidence that it will provide that rate of return for you in the future, at the same time the satellite portion. So a core satellite approach, you can use the satellite portion to invest in actively managed funds to enhance your returns that you get from an index fund. So if you if the index fund is your your ballast, or your foundation, hopefully you can add some incremental return above and beyond that, without too much risk, by investing in active as well thinking about indexing. What is indexing? Wouter Klijn  08:28 And I think in the past, you have made a strong point around an index is a mar

    45 min
  6. 132: Michael Kollo – New Book, Building an AI Equity Analyst and AI as a Review Agent

    Mar 29

    132: Michael Kollo – New Book, Building an AI Equity Analyst and AI as a Review Agent

    In this episode, I speak with Michael Kollo, a return guest to the [i3] Podcast. Michael has recently published a book on artificial intelligence, called: Future-ready with Generative AI Skills, Mindsets, and Stories in the Age of AI We speak with Michael about how he build an equity analyst AI agent in a weekend, how AI helps review your work and how you can get it to find solutions that are tailored to your style of working. We also delve into deeper philosophical questions around the nature of language, how AI changes people's interaction with language and whether AI changes our perception of what is artificial and what is not. Enjoy the show! __________ Follow the Investment Innovation Institute [i3] on Linkedin Subscribe to our Newsletter Explore our library of insights from leading institutional investors at [i3] Insights __________ Overview of Podcast with Michael Kollo 03:00 We, collectively, still struggle to have the right framing for what this kind of AI is 04:00 I wanted to write a book on AI from a white-collar perspective that was neither hype nor alarmist 10:30 You build an equity analyst in a weekend, using AI agents, which produces broker reports? 14:00 What good looks like is still very much an individual judgment 14:30 AI is a mirror to yourself 18:00 Students are very strong users of AI across many different disciplines. And they are symbiotically learning with the AI and are becoming natural users of it 18:30 One of the more powerful usages of AI is not to do a job, but to review a job 21:00 AI helps you to think on a meta level: what is it that you find interesting, useful and powerful? 23:30 Can you get an AI system to explain to you in plain English why a non-linear system works, test it in 10 different ways and write a research report about it? Yes, you can. 31:00 "I'm expressing myself in my adult language (English), but (AI) is taking it and swirling it into patterns of Hungarian (my childhood language) that are hitting me back at a whole different angle that I'm not sure if I could have done myself". 32:30 "Language was supposed to be this thing that was supremely human. It encapsulates all this weirdness and contradictions that is to be a human being. 34:00 An AI system is not an individual or a single entity that has a will or a desire. It is a field that you can land on and move from one place to another, as you will.  37:30 There is a danger that power users of AI might experience burnout, because they are constantly given things to review. 43:00 AI experts should not be asked about workforce impact, because they don't know enough about it Full Podcast Transcript Wouter Klijn  01:17 Welcome to the [i3] Podcast. I'm here today with a return guest, Michael Kollo. Mike, welcome to the show. Michael Kollo Hi. How's it going? Wouter Klijn Pretty good. Pretty good. So we're here to talk about a book that you wrote on generative AI. It's called Future Ready with Generative AI: Skills, Mindsets and Stories in the Age of AI. Michael Kollo  01:39 Well, thanks very much for that. That's a bit of a mouthful. We kind of continue to expand the title. It feels it's coming out in the middle of March, so I think the 14th, 15th. It's being published by a publisher called Rutledge, which is a UK based publisher. So it'll be available here in the US, in the UK, all around the place. Wouter Klijn  01:58 So what prompted you to write this book? Michael Kollo  02:01 So look over the last three years and for years before that, but certainly the last three years, the topic of AI has obviously become very, very popular. Everybody's been thinking about it and talking about it. But one of the things I found through lots of presentations about 40 keynotes per year from all kinds of different audiences, from boards of directors all the way down to, you know, the average person kind of presentations is that we, we collectively, still struggle to have the right framing for what AI, this kind of AI is, and what it might mean for us. I don't think anybody has answers as to where it's all going, what will happen to the workforce or jobs or personal relationships and so on, but I think we have a pretty good inkling as to its capabilities and how fast it's moving. We have a pretty good inkling as to the different areas it might impact, but we don't have the right framing or the right thinking about it. So I was very keen to write a book that I could capture the imagination of a white collar worker in across any industry, just about to help them just understand what this thing could be and what it means, and get them to form their own view, but to form it in the middle ground, not to be hype and not to be alarmist. I wasn't keen on creating a book about how it could all go wrong and how it could be all terrible. And I wasn't also keen to create a book about, you know, the utopia that it could foreshadow in the future, but I was just interested in informing the average person how the middle ground could look. Wouter Klijn  03:29 Yeah, so not hype, but you do call it a civilisation altering technology. What do you mean by that? Michael Kollo  03:37 Yeah, so that's, um, so okay, there's a story behind that. Okay, so the story is the following. I, I was asked to give a brief testimony to the Senate, Senate hearing in Australia, and it was for the education use of AI within education. And so a lot of the speakers before me had come and talked about the dangers and the problems and so on. So I was really keen to try to counterbalance that with the significance, but in a positive light as well. And what I was trying to say with to that audience is that if we get this right in terms of how we teach the next generation, how we enable the next generation to reason and to think better, then we could bring about a whole golden age, a whole kind of new renaissance, I suppose, of reasoning and thinking, and this could be civilization altering. And so really, the context of it was, how do we use this technology to enable people to be their better selves, or to reason or to think better? It was a bit idealistic, absolutely, because we all know that not every technology, in fact, most technologies, arguably, and not always used for the betterment of people. There's a whole bunch of other negative things that we've had recently, especially with social media and the way that it impacts people. But I was kind of, I suppose, making a case for if we can use this properly, in a good way, that there's enormous an abundance of positivity that we could have for our civilization. So. I really was looking for a term that would say, actually, civilization materially changed with the printing press. It materially changed with a few other critical things we've done in the past, nuclear power, or electricity, or so on. And each one of these changes just brought about change. That's all it is. And this is one of those moments, Wouter Klijn  05:17 And you explore that concept further by actually saying it's not just the technology. I think you describe it as: it's a system that helps you navigate uncertainty. Can you explain a little bit what you mean by that? Michael Kollo  05:31 So this was one of the big challenges I had in the book, is I was trying to get across to people that they should not think about this as just technology, as data, as statistics, because for a lot of people, that alienates them immediately from the topic. They go, Well, I'm not about technology, I'm about people. I'm about conversation. I'm about artistic things. I'm about something else. And so for them, it pushes it away somewhere in the corner for someone else to deal with, and it's more comfortable that way as well. And so I was trying to find the right words or the right framing in this book by positioning it in as a companion, positioning it as a co worker, positioning it as a whole bunch of different kinds of things in the fiction and the non fiction stories. And I think in this particular case, it was somewhat of an abstract way of saying that if you think about this as a reasoning engine, as a thinking intelligence of some kind without will and without desire. So we take those off the table and we say it's just about that. Then it really is about how to help the average working person understand information, distil it, or expand it or manipulate it in different ways, and then ultimately, to deal with the core part of most jobs, which is dealing with uncertainty. Decision making under uncertainty certainly is really prevalent in finance and in financial services, but it's prevalent in many other industries as well. You have to make decisions. Do you write two two paragraphs or one paragraphs to your boss to explain what happened? Do you do you put in a big report or a small report? Do you go with one stock manager versus another stock manager? Whatever the decision might be, there's a constant set of understanding, evaluation, analysis that happens in our world. And this is a capability. I wouldn't even call it a tool. I'd call it almost like a companion to help with that. Wouter Klijn  07:13 I think a lot of people are a bit concerned whether it's going to replace them or not. You say it's more of an analytical tool that helps you make better decisions. And I thought it was an interesting example that you gave in a book where you talk about a friend who is a programmer, and he basically recognised where his own input was when he asked it questions. And some of it was really relevant, but some of it led him down, you know, a deep rabbit hole that absolutely was not worth pursuing, but he recognised which one was, you know, the right path to follow. And that's when he realised, this is where I contribute to it. It will help me. But left on its own, it could easily descend into, you know, just time wasting, resource wasting. Do you think that that translates to other professions, and in particular our indus

    47 min
  7. 131: From the Archives – Greg Cooper

    Mar 15

    131: From the Archives – Greg Cooper

    Greg Cooper is Chair of financial services giants Perpetual and Colonial First State, but is perhaps best known for his role as the Chief Executive Officer for Schroder Investment Management in Australia. In this interview from late 2019, only weeks before COVID-19 broke out, we spoke with Greg about whether public markets are broken, the state of active management and his interest in the venture capital space, topics that are still very much alive today. Enjoy the show!  __________ Follow the Investment Innovation Institute [i3] on Linkedin Subscribe to our Newsletter Explore our library of insights from leading institutional investors at [i3] Insights  __________ Greg Cooper podcast overview: 1:00 Starting out in actuarial studies 3:00 Focussing on Japanese equities 4:00 Compared to 1986, Japanese equities are still at the same level 5:00 What were some of the highlights of your career at Schroders? 6:50 We've moved on from strategic asset allocation 7:55 As a CEO, don't be afraid of what others think and try to draw out ideas 9:35 Are public markets broken? 11:00 Not having a well-developed VC industry means that a lot of good ideas get starved of capital and eventually go offshore 11:30 Will that change when the effect of QE goes away? 15:00 No investor is entirely passive. 16:30 Passive rose, because active had too large a share, but you can't have a 100 per cent passive investment market 17:30 Will value-style investing come back? 21:30 You have an interest in fintech and hold a board position at OpenInvest? 25:00 Joining the TCorp board and chairing the investment committee Full Transcription of Episode 131: Wouter Klijn  01:12 I'm here today with Greg Cooper. Greg, welcome to the podcast.  Greg Cooper Thanks, Wouter. Wouter Klijn So can you tell me a little bit about how you started in the asset management industry. We had some former guests on there that started with, you know, creating banks at eight. What were you doing at eight?  Greg Cooper   01:26 I certainly wasn't creating banks. Probably more surfing and and that kind of stuff up on the beaches and the Central Coast than anything. I mean, my career in investment really started in the latter stages of high school. I was at one stage looking at becoming an accountant. And then my maths teacher at the time had said, Have you thought about actuarial studies? I didn't even know what one was at that point in time, and, you know, and so I looked it up, and things kind of sort of went from there so that, I suppose that was the real genesis of things year 11 and 12 at high school.  Wouter Klijn  01:59 So how do you transition from an actuary training to an investment career?  Greg Cooper  02:04 So I mean, I started out in the more traditional actuarial fields. I was working for Taos Perrin the time as a defined benefit actuary, and it was at the point in time, I was in the early 90s when the SG was just coming into play defined benefit plans, some were being wound down, but there was a lot of work to do in the DB space, but as SG kind of kicked in. Then there was a whole pile of, you know, actuarial work to do around, you know, justifying minimum contribution levels and so forth. And then, you know, one day, one of the investment guys had come over to in the investment asset consulting area, come over and asked me if I was interested in doing some research. And it was on Managed futures at the time. And, and I kind of said, I said yes. And and started doing and I really enjoyed it. And that was kind of the first foray into investment consulting. And so sort of from starting out in the actuarial field, I was lucky enough to get off at a roll up in Hong Kong with with towers. And I sort of took the view that the traditional actuarial work was, was, was a good mainstay, but was not likely to be a growth engine. And moving into the investment space was, was a lot more interesting, and it also worked from a commercial perspective.Wouter Klijn  03:15 Yeah, did you ended up doing anything with those managed futures research? Greg Cooper  03:19 Well, apart from it was kind of the early stages of hedge funds, I guess. And it was at the point where saying, you know, alternatives kind of had a place in a portfolio that was, that was the primary emphasis of the research. So, you know, it's interesting. And obviously, you know, alternatives nowadays have become a much bigger, much bigger part. But back then, it was really just looking at that small hedge fund, like type diversifying characteristics and see whether they fit it in a portfolio. Wouter Klijn  03:44 Yeah. And then from there, you went to Schroeder's and started doing Japanese equities. Why Japanese equities? Greg Cooper  03:51 Yeah, good question. It was really partly as a function of the role that was there at the time and Schroeder's. I come out of asset consulting, I was much more interested in working in the asset management side of things, the role, while it was in Japanese equities, it was much more about the product side of things. So it was more like being in charge of the business, of running an asset management sort of sub strategy, if you like, rather than specifically worrying about, you know, Japanese equities or European equities. But it was very interesting, because at that point in time, Schroeder's was the biggest manager of Japanese equities. You know, you were just coming out of the 90s, which had been a bit of a lost decade, but, but in the latter part of the 90s, you know, Japan had taken off with the likes of SoftBank and so forth. So, you know, there was this real kind of boom happening, and it was just a really interesting time to be involved in, in in the markets, but particularly Wouter Klijn  04:48 in Japan. Yeah, any views on Japanese equities today? Greg Cooper  04:51 Well, it hasn't been a terribly good investment since that time. I remember one day sitting with one of the team, and he said, he said, Oh, you know, he said. I started in Japanese equities in 1986 and the markets pretty much at the same level it is was then. And I think we're always say the same now, so, but it's, you know, it's a very interesting case study in what happens in a deflationary environment. And, you know, when assets get overvalued, you know, you can have everyone thinks that equities kind of go and, you know, 10 years in equities, you'll make your money, but you'll make money. Wouter Klijn  05:21 I was just about to say, Did I just hear you say that equities don't go up always. That's right, Greg Cooper  05:25 so, you know, and it's a fantastic case study, but also one, I mean, sort of investment aside, it's a good one to think about, that, you know, despite, you know, the economic criteria not looking that good. You know, the social cohesion in Japan, everything else is held together very well. And so, you know, life isn't all about just economics. There's more to it than that. Sorry, all the economists. Wouter Klijn  05:49 So you spent almost 20 years at Reuters, climbed up to be the CEO of the Australian business, and also had a global distribution role. What are some of the highlights you look back on your career. And also, do you have any tips for aspiring CEOs, Greg Cooper  06:06 I suppose, in terms of highlights, you know, it was just, it was fantastic, and still is fantastic being involved in, in in sort of the dynamism that is the whole investment marketplace. I mean, in particular, just look at, I mean, not just Australia, look globally, but certainly in Australia, you know, the rate of change that's taken place with funds. And, you know, back in the late 90s, early 2000s you know, there was obviously a much larger number of very, very small funds. And you look at where we've come to now, I'm having conversations about internalising and, you know, financing specific assets, and you know, the size of the asset pools and so forth. So I would say, you know, over that whole span, it's just been a very exciting time, and I think that will continue. It's no less exciting looking forward than it has been in the past. But just the sheer growth of the industry has been fantastic terms of some particular highlights. I mean, I always quite enjoyed standing back and looking at sort of the way the industry was was developing, and coming up with suggestions for maybe how things could be done better, or where, you know, the industry had adopted certain practices that I didn't think were the right sorts of practices, and it was much more fun kind of standing back and trying to point those out and offer suggestions for better ways forward, rather than just joining the chorus of sales people out there. Wouter Klijn  07:21 Can you give an example of that? Greg Cooper  07:23 I mean, the key one that you know, and I write a lot of research papers around this, is the i concept of around, sort of objective Based Investing, and the idea that benchmarks and the whole strategic asset allocation process, which we've grown up with in the 80s, didn't always work. And you had in Japan is a great case in point, you know, a fixed, strategic asset allocation with a large exposure to equities through the 90s in Japan killed you. And so you know that that, to me is, you know, it's resonated very well in the industry, and I think it's a key part of sort of thinking about how to do things differently. And so, you know, sort of, it's not to say that strategic asset allocation is that that style of investing is bad. It's just to say that I think we've moved on from there, and there and there are better ways to think about this, and there's some consequences that come from that, and that's worth bearing Wouter Klijn  08:07 in mind, the consequences. Yeah, so in your answer, it sort of shows that you, you've always been quite keen on fostering a culture where it's open for discussion, and there's pretty much no topic of debate. Why is

    30 min
  8. 130: RQI Investors' David Walsh – Is A Quant Winter Coming?

    Mar 1

    130: RQI Investors' David Walsh – Is A Quant Winter Coming?

    In this episode, I'm speaking with David Walsh, who is the Head of Investments of RQI Investors, a First Sentier fund manager. And we delve into the concept of a Quant Winter.  Some market participants argue a new Quant Winter is in the making, since growth and momentum factors are compounding with limited breadth, driven partly by the promise of AI. This can lead to distortions in the market and the collapse of quantitative models. David has tackled this topic in a recent paper, called 'Lessons from the Quant Winter' and we discussed what it is, how likely it is another one is coming, the impact of monetary policy and innovations in quantitative strategies through machine learing and AI. For the full paper, please see here: https://www.firstsentierinvestors.com.au/au/en/adviser/insights/latest-insights/lessons-from-the-quant-winter.html __________ Follow the Investment Innovation Institute [i3] on Linkedin Subscribe to our Newsletter Explore our library of insights from leading institutional investors at [i3] Insights  __________ Overview of Podcast with David Walsh, RQI Investors 04:00 From engineering to investing 09:00 What is a Quant Winter? 11:00 Is a Quant Winter a form of mean reversion? 15:00 Do I see another Quant Winter emerging? Probably not. What we are seeing is an anti-value period 18:30 On average value should beat growth, because the market is behaviourally tilted towards growth and overpays for it 20:00 In a high volatility environment, a rotation towards quality is sensible 23:00 A good quant portfolio is not just about established factors, it should be much more about finding idiosyncratic sources of alpha 25:00 You don't want a 100 signals in your portfolio; you want them to be able to breath 26:00 Machine learning let's you build models in ways you couldn't in the past 28:30 How to deal with cost in implementing non-linear signals 31:00 Higher dimensional portfolio optimisation through quantum computing 33:00 Quant Winter versus a recovery 38:00 Is AI in a bubble? "My guess is that the air will come out of the balloon, rather than it popping" 41:30 The extent to which passive or passive-enhanced money has affected the market structure is definitely an issue that has been arising in the past five or 10 years. You can broadly read that the market is becoming less efficient Full Transcript of Episode 130 Wouter Klijn  00:00I Welcome to the [i3] Podcast. I'm here today with David Walsh, who is the Head of Investments for RQI Investors. David, welcome to the show.   David Walsh Thank you very much. Great to be here.   Wouter Klijn  So I understand you studied electronic engineering before you got into the investment industry and specialised in reducing circuits and chips, is that correct? And optical communications? So how do you end up in the investment industry after that?   David Walsh  00:28 Yeah, well, that was the topic du jour when I was studying my electronic engineering, way back a long time ago, the idea of what was called, at the time, very large scale integration, which was the idea of taking a circuit board or a chip design, and shrinking it down as small as possible had a lot to do with the way in which the mapping of the transistors on the chip worked, the material science underneath which materials you're going to use. That was very interesting. Also worked and looked at optical communications quite an early part of that industry. A lot of the talk about the fibre technology and loss rates and speed rates and bandwidth and so on, are quite interesting topics that were quite topical at the time. Emerging industries, the material science and the optical technology side, were very interesting, and clearly emerging technologies that have gone a long way since then. I took that and worked in power and mining engineering for a few years after I graduated, not directly in those topics, but used a lot of the ideas and instrumentation design and the like when I when I was in the industry, it doesn't naturally segue into finance, but it's important to think that a lot of the problem solving techniques that you get from being an engineer or training as engineer, the way you approach problems, the technical issues you use, the things you realise you're missing, apply themselves pretty well to a finance study as well. So when I, some sense, moved careers from engineering to finance, a lot of the skills came with me.   Wouter Klijn  01:49 So when you talk about shrinking circuits and chips, is that related to like Moore's law, where, you know, trying to get more and more things on the chip and making them smaller, and then that would increase the computer power. Or is that totally off?   David Walsh  02:05 Yep, no. Same field, pretty much. The idea there is you can only shrink them down to a certain size, beyond a certain size. It's impossible to to get the chip widths, the better the actual tracks you use for transmitting electrons around the circuit. You can't get them any smaller than a certain size. So there's that sort of limit, physical limit. There's been a lot of work since then. That's a long time ago. A lot of work since then, that's evolved that technology. But the idea was, how far could you get it down before we started to impinge on on issues regarding impurities in the material, in terms of the track sizes, in terms of the transition times, in terms of getting things out of sequence. So the design was really important in that sense, that was kind of the the intuition behind it.   Wouter Klijn  02:44 Do you sort of with that background look at today's, you know, development around machine learning and AI and like this need for chips and the dominance of AMSL, with that background, does that surprise you? Sort of where that has gotten to?   David Walsh  03:02 Not at all. No, I think it was a natural evolution. We would see of the of the the technology was growing back in the day when I was again while studying it a long time ago, the evolution of the technology was, was clearly progressing towards faster chips, greater memory, better software and the like. It's pretty early days, but you can see the trajectory it was moving on. A lot of discussions at the discussions at the time not about where the hardware or software would go, but how the usability of those technologies would move. And really, even then, artificial intelligence was a concept. At some point the industry expected to get to the point where it could replicate some kind of human behaviour, not to the scale we see it today. But certainly there was trajectory. I don't think it's been much deviation from that. The only real direction I think has been interesting, and I don't really understand this properly yet, is the idea of quantum computing, which gets away from the original idea of logic gates being zeros and ones to an issue where to a logic gate or a bit can have both zero and one at the same time based on some probabilistic distribution, which I can I've studied Quantum Physics A long time ago. I kind of understand basically the principles. I still don't get quantum computing the way I'd like to.   Wouter Klijn  04:04 Yeah, no, it's a fascinating topic, but very complex indeed. So that engineering background you now work as a quantitative investor. So you know that engineering background was that sort of a natural progression to become a quant, rather than, say, a fundamental approach?   David Walsh  04:21 Yes. So I transitioned across to finance academia first. So I was doing a higher degree in Finance as part of my studies, further studies. And I liked it, and transitioned across at an academic level, mainly because I liked the idea of research and pushing the ideas of knowledge and challenging myself. And I liked teaching. I like communication side. Did those skills necessarily move them across to quantitative investing? The answer is yes, I think fundamental investing has changed quite a bit since I've been in the industry. There are a lot more quantitative skills being used, but it's still not disciplined in a way that a quantitative investment process is. So having those tools and techniques that I'd learned as an engineer were not. Really directly applicable, but the discipline around problem solving, the idea of numerical optimization, the idea of constructing a problem in a certain way, those things lend themselves very naturally to quantitative investing,   Wouter Klijn  05:11 Yeah, but you're not getting to a stage where you built your own computers and systems for backing up the quant strategies?   David Walsh  05:18 No, no. There are many more, many people in the industry, including people that work with us, who are much better at that than me, my skills, are more around I think thinking about how the evolution of information works in markets, what things get priced in, what don't, what drives volatility, what events are happening that will perhaps override those that sort of quantitative discipline applied to the investment market. So it leads us on, naturally to where I've sort of come from in my come from in my industry, rather than going back to the technological side.   Wouter Klijn  05:46 Yeah. So part of the reason to do this podcast is because you wrote a paper that was talking about the quant winter lessons from the quant winter, which is perhaps not the topic you expect from a quant, because, you know, always works, doesn't it? What is a quant winter?   David Walsh  06:02 So quant winter was a term that was coined by a couple of industry people back in about 2020 also 2021 to reflect a certain period when a lot of quant factors didn't work as expected, both not in terms of factors not working, but in terms of the complementary factors that usually work not working either. So I went to almost a drought. So you could call almost a winter or a drought would be sort of either terminology. I don'

    46 min
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