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. 129: From The Archives – Fiona Trafford-Walker

    1D AGO

    129: From The Archives – Fiona Trafford-Walker

    In this episode, we go into our archive to October 2019, when we interviewed Fiona Trafford-Walker. Fiona was one of the key consultants behind the success of Frontier Advisors and spent 25 years with the asset consultant, advising many of the largest funds in Australia. She has been named several times among the most influential consultants in the world and was a driving force behind the fight for equitable fees in the industry. In this interview, we delved into the changing role of asset consultants, questioned whether too much time is spent on manager selection and examined the struggles of value-style strategies. Fiona has since retired, but is still active in the industry through various director roles, including for Victorian Funds Management Corporation, Perpetual and as a member of the IFM Real Estate investment committee. __________ 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 Episode Overview Fiona Trafford-Walker podcast: 2:30 I'm an accidental asset consultant 4:30 You're named as one of the most influential asset consultants in the industry. What makes a good asset consultant? 5:35 You have to be willing to collaborate 7:00 Technical skills are very important, but equally important is time in the markets 7:30 The changing role of asset consultants over the years 9:30 As asset consultants have increased their senior staff, have conversations become more focused on strategy? 10:30 There is still the need to have a blend of specialist and generalist skills 11:50 Are we already heading to having a panel of asset consultants? 13:00 Is there a good balance between the time spend on manager research and that on asset allocation? 14:30 What type of data should inform changes in asset allocation? 16:00 There is not much you can do about geopolitical risk; predicting what politicians are going to do next is pretty hard. 16:30 But trade wars are a real thing that have an effect on markets 18:00 Are the struggles of active managers, particularly value managers, structural or cyclical? 19:00 There seems to be a need to tweak the value process to allow for the new capital-light business models. But at what stage do you get style drift? 21:30 Frontier Advisors took the decision to build a platform with all their research on it, quite a brave step in an era where softcopies get distributed easily. 26:00 You spent some time arguing for lower fees in the industry. Are we at the right level? 27:30 The real change has been the internalisation of asset management by some funds. 29:00 Can internalisation refocus asset management on the long term? 30:00 Bottom draw mandates 31:00 To what extent should asset owners engage with the companies they invest in? You are on a number of boards and see both sides? 33:00 Governance certainly has changed as asset owners realise they are the beneficial owners 35:00 To what degree can you divest from companies as a fiduciary? 38:00 The challenge of developing retirement products 41:00 At the moment, the willingness to do things together [as funds] isn't there. 42:00 What is next in store for you? 44:00 What issues come up in mentoring new asset consultants? Full Transcript of Episode Wouter Klijn  01:12 I'm here today with Fiona Trafford-Walker, who is a director with Frontier Advisors. Fiona, welcome to the podcast. Fiona Trafford-Walker  Thank you. Walter, happy to be here. Wouter Klijn So 25 years of Frontier advices, has it gone quickly, or do you think it's a long time ago since you started out? Fiona Trafford-Walker  01:28 I think the answer today is both, when I think back that it's been 25 years, I feel like, wow, that's such a long time. It's about half my life. And if I think about it like that, it feels like it's a very long time. But also, I think it's gone very, very quickly when I think of what it was like to start the organisation with Ray King, obviously he was very integral to starting the asset consulting business inside industry fund services, which became frontier. And I remember very clearly the first day walking to the office in Carleton. There were two of us in this room working out of there. And then I think of how, you know, we grew over the years. Some terrific people came on board, and then all of a sudden, it's 25 years later. So in some ways, it feels like it's a long time. Otherwise, it feels like it's gone very, very fast. Wouter Klijn  02:13 Yeah, if I can take you back a little bit to the start of your career, I read this funny quote one time that you did an interview with The Sydney Morning Herald, where they asked you how you became an asset consultant, and you sort of made this comment where you said, yeah, it's not really something that you aspire to in university. It sort of happened. Can you tell us a bit about that? Fiona Trafford-Walker  02:33 Yes, that's definitely true. I'm a great accidental asset consultant, I think, for a few reasons. One, it's not something back, you know, 25 years ago that people really knew that much about it was a relatively new career. Back then, the asset owners were much smaller. The system was very different. And I was interested in financial markets research, and I grew up in North Queensland, where the career prospects for that sort of thing are obviously relatively narrow. So I knew I had to move, and I knew it would have to be Sydney or Melbourne, and so just applied for a number of different jobs. I remember going for my interview again with Ray King, because he has employed me twice now, and sitting in the office at Towers Perrin in Sydney. And you know, Ray was asking me all these questions, and I couldn't answer most of them, and I thought I'd completely mucked up the interview. And next thing you know, they're offering me a role. It was a research role, and it was in the investment consulting business in towers parent, but sitting alongside that function, and my job was to do specific research that might help the consultants provide advice to their clients. And there were two of us in what we called the Global Research Unit, which I used to think was kind of ironic, given there were two people in Melbourne in a global unit. And after six months, the person I reported to Ron Bird, decided that he would move into funds management. And so I think they looked at me and said, Oh, well, we'll just move you into the asset consulting business. So I moved in, and I was there at Towers Perrin for a couple of years, and I just really, really enjoyed that work. I think what resonated with me was the chance to do research and practical research that could then be used to influence client portfolios and then outcomes for members. And I think I just not made that connection well enough before in those first six months. So I moved into the asset consulting division, and then in the middle of 1994 when Ray left to start industry fund services, I moved over with him, and the rest, as they say, is history. Wouter Klijn  04:32 So you've been called one of the most influential asset consultants in business. What makes a good asset consultant? Fiona Trafford-Walker  04:40 I get asked that question a lot now, and I think, I think what happens as you get older, people ask you all these questions, and so I've had to actually think quite a lot about it, because it was not something I ever thought about a lot beforehand. For me, I just did what I thought was the right thing, and it sort of happened to work out. But as I look back, I think. There's a few key characteristics. One, I think, is you have to be able to listen to people, and not only listen, but you have to hear. So listen to what they say. Sometimes their words aren't exactly what they mean. So you have to be able to read the room and understand what a question really means, and then you have to answer it and be clear in your answer, depending on the audience, use the right kind of terminology. So for example, in a trustee meeting, where you might have a lot of people who don't have an investment background, speak in very plain English so that people can understand what you're recommending that they do equally. If you're speaking to a much more technical audience, for example, internal team, then you tailor the way you speak to answer the questions and have the discussions. So listening and hearing and communicating, fundamentally, I think, is really, really important. The next thing I think you need to be really good at is collaboration, because as an investment consultant, asset consultant, you're giving advice, and a client may or may not take that advice, so you have to be willing to work with them to get a good solution that works for them. And sometimes you might go in with the best of intentions, the best advice you can possibly develop, but a client might say that doesn't work for me for these reasons, and so you have to always collaborate and move and shift and evolve your advice to make sure that you can continue to influence the clients. I think also, there are some fundamental skills around you know, the technical skills you really need to have, and they have changed over the years. So, for example, when I first started, I think we still use lotus, 123, but I'm not actually sure, because we didn't use it very much. And then we graduated to excel, and when we were interviewing people, when, for example, about 15 or so years ago, we'd interview people, and we used to do these tests in Excel, and they would have to do a VLOOKUP and those sorts of things. Whereas the technical skills nowadays, not only in the use of various pieces of software, but also the financial technical skills, are much, much stronger, and we see the young people coming through. They've clearly exceptionally skilled. And for people like me who don't necessarily have all of thos

    48 min
  2. 128: MLC Asset Management's Dan Farmer – Active Management, Private Equity, AI and the Early Days at Telstra Super

    FEB 2

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

    In this episode, I'm speaking with Dan farmer, who is the Chief Investment Officer of MLC Asset Management. We talk about Dan's early days managing an internal Australian equity portfolio and getting involved with derivatives at Telstra Super, almost straight out of university. We talk about some of his mentors, including Steve Merlicek, and the influence they've had on Dan's investment philosophy. We also touch on the merger between IOOF and MLC and the new capabilities this has brought to his team. __________ 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 Dan Farmer, CIO of MLC Asset Management 02:00 Getting a job at Telstra Super, while still at university. "Imagine a graduate helping out dealing in a small Aussie equity portfolio, probably one of the first internally managed [portfolios] going around" 06:30 How did those first company meetings go, when you were still a 20-something year old? "I thought I was being taken seriously at the time, but in retrospect I probably wasn't" 08:00 The investment philosophy I build up over the years is being active in all areas, whether it is active in asset allocation, using active managers or being active in currencies 12:00 Dealing with market concentration in the US and the Magnificent Seven, while being cognisant of the Your Future, Your Super regulations 17:00 Looking at Private Equity, you really need to take a longer term perspective. Under YFYS, private equity is benchmarked against listed global equities, that has been a particularly hard benchmark to beat over the last few years 25:00 Steve Merlicek told me that if you have high conviction in a position, make sure you follow through on it 29:00 It is pretty hard for a CIO today to be purely an investor; you have to manage your team and there is also the regulatory aspects to it 33:00 Too stringent an implementation of TPA can create its own problems 36:00 We are doing some work around looking whether AI changes active management, where active becomes data scraping with some AI tools applied to it. We haven't reached a conclusion yet 43:00 MLC is the fund with the highest number of retirees. What special insight does this give you? Full Transcript of Episode 128 Wouter Klijn Dan, welcome to the show. Dan Farmer 01:51 Thanks for having me. Pleased to be here. Wouter Klijn 01:53 So tell me a little bit about how you got started in investing. I had a look, of course, at your CV, and you spent 17 years with Telstra before going over to IOOF. Tell me a little bit about how you got started and what some of your key moments were at your time with Telstra. Dan Farmer 02:12 Yeah, look how I got started. So I was doing my masters of finance at Melbourne Uni, so I was in my fifth year of study, and thought I better grow up and get a job and actually start earning some money. So I started looking around, and I got a tip off from one of my college supervisors about a role going at Telstra super, which, at the time the CIO was a guy called John Simkiss. So went over there, got a job at Telstra super, and it was fantastic, great, great time to enter the industry. The Super industry in Australia was really in its infancy. Imagine a graduate out of uni, and I was straight helping out, dealing on a small Aussie equity portfolio that the group was running, probably one of the first internal managements going around in the Aussie super industry. So great learning curve. You know, really cut my teeth on that, that Aussie equity portfolio. So it taught me a fair bit of humility. It's not easy running a direct Aussie share portfolio, so I think that set me in a good stead about how the industry actually operates. Wouter Klijn 03:12 So you said it taught you some humility. What do you mean? What are , Dan Farmer 03:17 It is tough to outperform the market. If you're sitting on the outside, it's very easy to throw rocks and say, well, you should be outperforming in this market and be quite critical of managers. But I think it gave me an insight on the nuances of running a portfolio. It gave me a good insight into risk and look, I think I was very lucky starting off with that role. Also part of that portfolio was using option strategies around individual stocks to provide some protection. So that also gave me probably my first taste of asymmetric risk and using options to control risk. Wouter Klijn 03:54 So thrown straight away into the deep with options and derivatives and Dan Farmer 03:58 Yeah, it wouldn't happen today. Wouldn't happen today. This is back in the early 90s, but had a really good, really good boss in John Simkiss, who used to be Head of Research at UBS Australia. So it was great start. And look milestones at Telstra Super, as I said, the industry was in its infancy, so I think when I got there, the portfolio was two balanced managers. That was it. You know, might have been BT and Schroders. So really went through the whole evolution of moving from balanced managers to specialist Australian equity managers, specialist global managers, specialist fixed interest managers. So, you know, that whole exercise, you know, working with consultants, it was a great time to be entering the industry. And then Telstra Super also went from purely a defined benefit fund to an accumulation scheme. You know, as Telstra was reshaping its workforce, you could just see members leaving the DB fund, and we set up an accumulation Fund, which was a little bit novel at the time for a corporate super fund, but was very successful. And that's obviously, you know, huge part of the Telstra super fund as it is today. Wouter Klijn 05:02 And I think your main role was looking after equities. Why equities? Why did you start there? Dan Farmer 05:07 To be perfectly frank, that was the job offer. That was my toe into the door. And look, I did love the space. And it was Australian equities, which was very relatable. I think it's a great spot for new people to enter the industry, because you can relate to the businesses. It's tangible. The management of those companies are very proximate. So, you know, I was a young, early 20s guy meeting CEOs of, you know, big Australian businesses. It was a fantastic learning curve. And I think I learned a lot more in the direct Aussie shares to start with, and then really put me in good stead with the managers. And it was a terrific spot. I mean, active management was certainly dominant back then. And there was some great, you know, Great Aussie equity managers going around. I think one of the first appointments I made was Perpetual when it was just coming out of the trusteeship. So did that search with JANA and, you know, really had good access to those managers?. Wouter Klijn 06:06 Yeah, so how did those first company meetings go? I mean, did you, did you feel that you were taken seriously, or did you have to build up? You know, some slick... Dan Farmer 06:15 I felt like I was being taken seriously at the time, but in retrospect, I probably wasn't. That's, that's all right. So no, look, those, those meetings were great. And really, I think the industry back then was, it was probably a bit smaller. There was a bit of an acceptance of new people coming into the industry. So I'm sure I asked a lot of pretty naive questions at the time. But, you know, good, good, good respect. But it was, it was interesting because we also, when we're running direct portfolios, going into a lot of smaller companies as well, and they're very hungry for capital. So it was a really good dialogue with a lot of those, a lot of those CEOs and management teams. Wouter Klijn 06:56 Yeah. So do you feel that gives you a different perspective on you know, now, as a CIO of a large company to had that experience of like boots on the ground and and talking to management themselves. Dan Farmer 07:07 I think it does like at the end of the day when we're investing. Obviously, as you climb the ranks of an investment team, you probably become less and less proximate to the actual investments. So a reminder, at the end of the day, when we're investing in an index, you know, whatever global equity index that is, ultimately, that's a series of underlying management teams under a series of underlying business strategies. And hence, one of the , I guess, philosophical beliefs that I've built over the year and we run in the team, is a belief in active investment management in all its forms. Be it being active with asset allocation, using active managers where it makes sense in that particular asset class, you know, being active with currency, active with style selection. So I think that grounding in direct shares, and the fact that it is a very differentiated asset base, and there's a lot of idiosyncratic risk in there, really filtered up, you know, throughout my career, and just how we think about managing money today. Wouter Klijn 08:08 Yeah, do you see a change in the role of active management today as back when you started? Because we obviously seen a lot of changes in markets, in the Super system, new regulations coming in with Your Future, Your Super What is your current view on active management? Dan Farmer 08:27 Yeah, look, still see a role, very much a role for active I mean, the industry has changed, and it's, it's a big topic, particularly at the moment where there's obviously, at the moment, high concentration in in equity markets, and the concentration is correlating with some high valuations, so it is putting some challenges on on active managers at the moment. Now, I've been around long enough to see a few cycles of different forms of this, and I remember the 2000s, where, you know, we had a similar concentration wasn't quite as high, but, you know, very similar in the sense of valuations high. Think a little bit differen

    47 min
  3. 127: Frontier Advisors' Kim Bowater – Consultants in a Changing Industry, AI and Gender Diversity

    JAN 19

    127: Frontier Advisors' Kim Bowater – Consultants in a Changing Industry, AI and Gender Diversity

    In this podcast, I'm speaking with Kim Bowater, who is the Director of Consulting at Frontier Advisors. Kim has spent 23 years at the firm and saw the asset consultant grow from a small advisory firm with just 13 people when she started in 2002 to the leading asset consultant it is today. She is one of the driving forces behind a number of key initiatives that have supported Frontier's growth, including the establishment of a technology platform that allows clients to access research online and the initial set up of the retirement business. In this episode, we discuss how the continuously changing industry affects the role asset consultants play, the impact of AI and gender diversity within the investment 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 Kim Bowater, Frontier Advisors 03:00 I come from a science family; I'm the only one that went into finance 06:00 When I joined Frontier there were 13 people 07:00 Frontier's new independent CIO service 10:00 You led the first phase of Frontier's technological overhaul that saw the implementation of a digital platform for clients. How did that come about? "I put my hand up." 14:00 We are a reasonably open book in terms of our research and ratings 16:00 Does this platform allow you to address knowledge management of the organisation 15:30 We've developed an AI agent, called Frank, that allows us to access all of our data in a streamlined manner 20:30 Ashby Monk said asset consultants might be in trouble with the rise of AI. Do you agree? "No!" 23:00 You've started Frontier's retirement business. What are your thoughts towards product development and investments? 25:00 Retirement is a meaty problem 26:30 Annuities haven't been helped by the low-yield environment that we've had for so long, but in principle, we do think they have a role to play 32:00 The industry has changed quite a bit, how do you look at the future growth of Frontier? Where is it going to come from? 38:00 How do you look at the gender balance in the investment industry today?   Full Transcript of Episode 127   Wouter Klijn  00:00 Kim, welcome to the show. Thanks. How are you pretty good, pretty good. Thank you very much. Thanks for having me. So why asset consulting? I think you started originally out as a actuarial consultant. How did you become involved with the asset consultancy side?   Kim Bowater  00:18 Yes, well, I am, yes, I did maths at university and took up an actuarial consulting role, which was coming from a scientific kind of family, a bit of a leap into the unknown. It worked with defined benefit funds, so in the superannuation space. But after a few years, I felt like I was more attracted to the asset side rather than the the liability side. So started the CFA course, and then kind of naturally moved into to asset consulting. It was, it was relatively kind of organic, one step at a time, then then in an intentional path. But here, but here I am still.   Wouter Klijn  00:59 So what sort of science is your family into?   Kim Bowater  01:02 My father was a a senior lecturer of Applied Chemistry, and my mother was a Pharmacist, and she had a science degree as well. Yes. So there was no one in finance in my family. I thought, let's give something we've got. We don't know what it is, but we'll give it a go.   Wouter Klijn  01:20 Is that your form of rebellion?   Kim Bowater  01:22  Yes, they were intrigued too,   Wouter Klijn  01:25 Fair enough. And now you've been with Frontier for 23 years, so you don't see that too much anymore in the finance industry, where everybody has like to be your gigs. So 23 years, that's, that's quite a long time. And you've, you've, now, you know, climbed all the way up to part of the leadership team, part of the Investment Committee, but when you sort of look back on that period, was there anything that stood out for you? Is like, these are some of my standout moments?   Kim Bowater  01:55 Yeah, I mean, it's, it's been a good journey. I think Frontier also changed a lot, and our clients, particularly in the Super space, have changed a lot over 23 years. So it feels like a role that's had a lot of change in it, rather than kind of just one firm. I think when I when I started, we were under the leadership of Fiona Trafford-Walker, who, you know, many people will still remember as a leader in the industry and frontier, had a had a really nice culture. I thought client focus, kind of team oriented, but forward looking, kind of challenging ourselves and and I think kind of one, it's not necessarily a serious tan at moment, but I'm quite proud of of the fact that we've managed to have a culture that's endured with those characteristics. That's something I'm quite proud of. Frontier has always been a good place to be part of, and we still hear that today.   Wouter Klijn  02:58 Yeah, I think Fiona was one of the first people that I interviewed, I think, for this podcast series A while ago. But yes, it's still one of my favourites.   Kim Bowater  03:08 I think also, you know, just thinking about the evolution of advice, the different environments we've been through, you know, COVID, GFC, all the evolution in the superannuation space that's impacted on investment processes and governance and portfolios is something that, you know, we've really focused on working with clients to help them succeed. And I think, you know, I feel that's been a really rewarding journey, I think, for funds themselves, as well as for ourselves, who are, who are also here to kind of create good outcomes for members. We've we've done very well, you know, in our in the external survey of asset consultants, which has been the Peter Lee survey for a long period of time, and that's always been a kind of standout moment for me and the team, you know, to receive really positive feedback from our clients that we're actually, you know, adding value, because you're always a step remote. Step removed as an advisor, in a way, I think, as well from, from looking at Frontier as it's grown, you know, when I joined, there was maybe 13 people. Oh, wow. It was a pretty small, you know, we all did something, you know, we did a range of things. It was mostly super now, you know, two thirds of our clients are outside of super across a whole range of areas. We're working with clients in New Zealand and Japan the Pacific. We have an office in Japan and now recently announced a new independent CIO service. You know, all of those are really significant kind of standouts.   Wouter Klijn  04:38 That was quite an exciting announcement. Because, I think to a degree, it does change the business of Frontier a little bit. Because I think so far, Frontier has been able to provide advice, but not necessarily implemented advice. And now with this team up, where you bring in the investment team of state Super 14 people come. Coming over, you actually will be able to implement that as well. It's quite a bit of an evolutionary step for the business. But what do you see, sort of the future? How, how do you think that this might add to growth?   Kim Bowater  05:12 Yeah, I mean, it's exciting. We've always, you know, we've been an independent, kind of institutional advisor, so not not having implemented product business, and we're going to continue to be an independent advice led consulting business. And this really, you know, in our mind, extends the reach of that it's not implemented product solution, but we have found that there are asset owners. It's less, less kind of common in superannuations that have grown and have internal teams, but outside of super and some at the smaller end, perhaps, you know, want external advice, want an institutional advisor, but don't really have all of the tools to implement it or execute a bit reporting or custody or execution. So this just provides some extra service levers that we can work with organisations that need those components. It's still, it's still advice LED. It's recommending portfolios that really align to their needs and objectives. And previously, the only other solution they've had is to go into an implemented, like a Balanced Fund, kind of wholesale, kind of group product. And this is, this was providing, I think, a really, potentially, really attractive solution. So from a from a growth standpoint, I think it extends the reach of our our institutional advice, to the border, to broader markets where they need some additional service capability as well.   Wouter Klijn  06:38 Yeah, yeah. And from what I understand, this mainly is targeted, sort of the smaller end of the spectrum, like the charities, maybe some family offices. Is that right? Yes, yeah. And does that also allow you to then tap more into sort of the private wealth space?   Kim Bowater  06:53 Yeah, potentially, we've been working in the private wealth space for a while now. That's obviously a growing area, and they're also, you know, a group's interested in in working with an organisation like us as they've got bigger so and they they also can have other additional needs, like reporting and various things that that this can assist with. So it just provides a greater flexibility of us to to help our clients with all of the different aspects that they need.   Wouter Klijn  07:25 Yeah, and it's very aligned structure as well, because State Super has now become a co-owner of Frontier, yes, and it's been a long-term client as well.   Kim Bowater  07:35 So it's yes, it's exciting and and to have you know a team with Charles and 14 people join us is really exciting, too.   Wouter Klijn  07:44 Yeah, yeah, for sure. So if I may take you back a little bit about your journey at Frontier and changing essence consultant environment

    43 min
  4. 126: Professor Scott Donald – Should Trustees Use AI?

    JAN 5

    126: Professor Scott Donald – Should Trustees Use AI?

    In episode 126, Scott Donald, Professor at the Faculty of Law and Justice of the University of New South Wales, breaks down how artificial intelligence is reshaping the work of superannuation trustees. Efficiency is the big draw, but legal and ethical risks mean trustees are moving carefully. AI is already embedded in parts of the finance sector, from document summarisation to risk management, yet its tendency to hallucinate and behave inconsistently remain serious hurdles. Scott explores where AI can genuinely add value and discusses its application to investment strategy, compliance and even private-market valuations, while stressing the need for strong human oversight. 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 Scott Donald, Professor at UNSW 02:00 Using AI as a trustee is a little bit different because you are managing money of somebody else 04:00 AI can be applied where a trustee knows what information to look for, but just asking it to go and look for something can be quite dangerous. 07:30 Trustees have an obligation under the SIS Act to form an investment strategy. I think it would be very dangerous to use AI here. 10:00 Risk is where you don't think to look; AI can help with that 12:30 AI models don't really hallucinate. They don't seem things that are not really there, because they don't care about the truth. 14:30 In contrast to a fund manager, a trustee often has to answer to the Australian Financial Complaints Authority (AFCA) and they will ask you to justify your decision. 'The machine said it', is not an answer that is going to work. 18:00 How human interaction with an AI model occurs is actually quite crucial and we haven't really grappled that to the ground yet 24:00 Should trustees use AI at all? "I think they should consider it, because it can drive down costs" 30:00 Most of the AI systems out there are trained on datasets that are massive, compared the data in a super fund 37:00 As investment and legal professionals, we have to be aware that some of the skills that got us to where we are now are no longer worth the cost to us to acquire Research paper: Donald S, 2025, 'Artificial Intelligence and Super Fund Trusteeship', Company and Securities Law Journal, 41, pp. 137 - 157 Full Transcription of Episode 126 Wouter Klijn  00:00 Welcome to the [i3] Podcast. I'm here today with a return guest, Scott Donald, who is a Professor at the Faculty of Law and Justice at the University of New South Wales. How did you come to research this topic?  Scott Donald  00:24 Look, it's very difficult to avoid the issue of AI. It comes up everywhere in the news, talking to trustees about what they're doing, the plans they have for next year, and so on. So for a lot of Trustees, it's a really important issue. Trustees typically don't have enormous resources to spend on things, and they've got an enormous list of things they've got to get through. Yeah, so it's, it's a natural place for them to look for efficiencies and ways to get things done quicker, more rigorously, perhaps cheaper. So just hearing it on the on the grapevine, that they were really interested in this, but, but also a little bit nervous. Yeah, you know, what were the risks? How, what, what, from a legal perspective, might be some of the issues. And so that was really how I started to get engaged in this is to think, Well, we know trusteeship is a little different. Yeah, it's not just about managing your own money. You're managing money for someone else, and that that does change things a bit. So that's how it came about. Wouter Klijn  01:22 So did you find that they were already dabbling in AI, or were they more curious?   Scott Donald  01:27 I think most of the big financial institutions are well down the track of thinking about how they can employ AI in different areas. And so the trustees that are part of those big institutions were hearing things or being told that they should consider different ways of organising their operations. But just generally, even at conferences, you'd see people talking in groups, or maybe the presentations from people who are spruiking the advantages of AI. So they were coming across it in lots of different ways, and there'd be very few boards, super fund, boards, managed investment scheme, boards that aren't think, haven't thought about, haven't discussed, how might we use this? Could we do that? Could we do this? Or could we do that? But it's hard to get independent advice on it, because the expertise in the area is so much in the hands of those who are selling the various products that you know you're sitting there as a trustee with lots of other concerns to do with the administration of the trust, to invest and so on. And now you've got, well, hang on, what do I do with AI? It's, it's, it's not an easy area to get into, yeah.  Wouter Klijn  02:32 So what are some of the obvious applications of AI for a trustee? I could imagine that, you know, they get large amounts of documents to read. A core of AI, at least with large language models, is sort of the summarisation capabilities. Can they just chuck it in AI and tell them what they should know?  Scott Donald  02:52 Well, sometimes that's always very tempting, and sometimes it's a better idea, and sometimes not so much. I mean, AI is very good at collating information. You can send out to search things, find things. It's helpful if you know kind of what the lay of the land is beforehand, because it's not quite so good at disclosing that it hasn't actually found something, or it hasn't known. And we'll maybe talk a little bit later about sort of hallucination and the way it can create apparently information. So I think certain types of summaries, it's very useful for, I think some of the trustees that we've been speaking to who are using it to in very controlled environments, so places where or circumstances where they know what type of information is likely to be relevant, they know what type of information they need to bring to bear on a decision, then I think it's much safer. I think just asking it to go and look for something could be kind of dangerous. I don't know if you've ever tried to plan a trip somewhere using it, or tried to find the date for something, it quite happily will come back and tell you the wrong answer, and not really. You've got no way of second-guessing whether that's right or not. Yeah. So, so I think that that kind of summarisation is useful, but you need to be really sensitive and thoughtful about is this an area where we know what sort of information we're likely to find. So, you know, the insurance companies have used AI very effectively to understand better the nature of the risks and the sorts of information they need to work out what the underwriting risks are around around their book, but they're looking for specific things. They're interested to find patterns that they might not have seen otherwise. That I think works quite well. I think if you were just trying to do it in an area where you know, perhaps you didn't know what sorts of answers you wanted to find. You might be a little bit more. Might be a bit riskier for you. Wouter Klijn  04:49 Yeah, so I think in your paper you list a few areas where it could potentially be applied, and I picked out a few that I thought were interesting for. Sort of the investment environment, and one of them is investment strategy, mandate, compliance and private market valuations. Now those sound kind of complex topics. Is that sort of an obvious area to apply? Scott Donald  05:16 Ai, let's start with the investment area. I think, for instance, if you're a superannuation trustee, you actually have a responsibility under the under the SIS Act to formulate an investment strategy. That particular act is one. I think AI, you'd be very nervous about using AI for, because the actors said you as trustee, and therefore, you know your directors have a response, a legislative responsibility to do something, which means that if it's ever comes into question as to how that was done, you need to be able to demonstrate how you might have gone about it. So the highest level investment strategy story that that, I think you need to be careful about how you might use it. But beneath that, you could fund funds and investment managers, investment managers and investment firms have been using AI for some time to go looking for trading strategies, to go looking for risks, to go looking for other sorts of things that maybe wouldn't be apparent using normal kinds of analytical techniques. And I think it can be tremendously powerful there, because at that point that's really kind of a flow down from the overall strategy. And I think you can, you can certainly use it there. And hedge funds and investment managers and others have been using it there quite productively for some time. Yeah, and that makes perfect sense.  Wouter Klijn  06:33 I think the area of private market valuations, there's this a lot of focus on that by the regulator. They want to see more of it, potentially more look through. How can AI be applied there? Scott Donald  06:47 Look, one of the nice things about listed markets is you've got lots of people looking at the data from lots of different angles, asking lots of questions. And so any finance theorist will tell you that an efficient market hypothesis, you know that all that information is going to come to bear in private markets, you don't have that quite so much. And if you're trying to work out what the value of a property is, and all your all the leases and all the rest of it, and drawing all that information together can be incredibly time-consuming. People make mistakes, not just machines, and so, you know, it's error-prone as well. So I think some of that data colle

    40 min
  5. 125: The Devolution of Neoliberalism – UTS Finance Department Roundtable

    12/03/2025

    125: The Devolution of Neoliberalism – UTS Finance Department Roundtable

    In this special edition of the [i3] Podcast, in collaboration with the UTS Finance Department, we explore how the neoliberal model of economics, which largely ignored politics and focused on financial metrics, has eroded over time and made way for the rise of populism, which has exerted its influence on economies around the world. Why did the guardrails that neoliberalism provided slowly disappear and what are the consequences of this? Is there any model that will replace it? Political Economist Elizabeth Humphrys, Geopolitical Specialist Philipp Ivanov and UTS Industry Lecturer Rob Prugue delve deep into this fascinating topic as part of the Circle the Square roundtable series. __________ 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 00:00 – Introduction Wouter introduces the special i3 Podcast edition, produced with UTS Finance. He outlines the episode's theme: how the post-war neoliberal guardrails that long supported economic certainty have eroded, creating persistent uncertainty in markets. He introduces guests Elizabeth Humphrys, Philipp Ivanov and Rob Prugue. 03:04 – Origins of Neoliberal Guardrails (Rob) Rob explains the emergence of post-WWII guardrails: Bretton Woods institutions, NATO, the World Bank, IMF and other frameworks enabling stability and collective economic growth. They created a predictable environment but gradually weakened. 06:05 – Australian Context & Rise of Neoliberalism (Elizabeth) Elizabeth describes the long boom after WWII, its collapse in the 1970s, and neoliberalism's emergence. She explains how the Hawke Government in 1983 implemented major reforms—floating the dollar, tariff cuts, privatisation—enabled by strong political capital and union involvement. 10:09 – Global Perspective (Philipp) Philipp explains the Cold War dynamic: US-led order versus the Soviet bloc, with non-aligned states largely weak. Post-1970s Soviet stagnation and 1990s globalisation cemented US dominance, setting the stage for the "golden age" of the neoliberal order. 14:21 – Pax Americana and the Peace Dividend Rob discusses how guardrails encouraged discipline: countries deviating too far politically were penalised by markets. But global shifts, manufacturing loss and deindustrialisation gradually hollowed out these systems. 16:02 – Contestation of Neoliberalism & Social Impacts (Elizabeth) Elizabeth stresses that neoliberalism was contested from the start. She highlights social movements in the Global South, rising inequality, and sharp pain in Eastern Europe during rapid liberalisation. Domestic consequences—job losses, wage stagnation—fuelled political distrust. 22:03 – Globalisation, Inequality & a Multipolar World Wouter links globalisation to economic displacement. Philipp outlines four major geopolitical mistakes after the Cold War: Assuming China would remain benign Dismissing Russia Taking the developing world for granted Ignoring the power of nationalism and inequality 27:26 – Where Are We Now? Have the Guardrails Fully Collapsed? Rob argues that the guardrails can't simply be rebuilt—political divisiveness and grievance-driven politics are now embedded. Trust in US institutions and commitments (e.g., AUKUS) is eroding. 30:45 – Are We Heading Toward Chaos? (Elizabeth) Elizabeth argues capitalism is resilient but political legitimacy is collapsing. The promise of neoliberalism—trickle-down prosperity, stable institutions—failed large groups of people, fuelling anti-politics, housing unaffordability and climate-related tensions. 37:17 – Beyond Traditional Politics Elizabeth notes the breakdown of mass-membership parties and unions. Declining voter turnout and low trust create fertile ground for populism and fragmented political identities. 40:13 – Global Fractures & Major Trends (Philipp) Philipp highlights five converging forces shaping today's uncertainty: Economic fragmentation Great-power competition Societal divisions Climate change Technological revolution (especially AI) 45:28 – Technology as an Amplifier Rob and Philipp discuss how technology intensifies divisions but is ultimately a human-driven tool. AI raises the stakes of geopolitical competition, especially between the US and China. 53:14 – What Could Future Guardrails Look Like? Rob foresees three emerging forces: Rise of nationalistic policymaking Oligarchic influence filling the institutional vacuum A tri-polar world (US, Europe, BRICS) 55:24 – Can Australia Rebuild Guardrails? (Elizabeth) Elizabeth doubts that politicians currently have the vision for a new national project. She emphasises conflicts between economic growth, climate needs and powerful resource sectors. 59:24 – The Populist Base Rob asks whether a new base of disillusioned voters is forming. Elizabeth agrees: anti-politics creates a vacuum easily filled by opportunistic populists, on either left or right. 1:02:03 – Role of Media Rob highlights how politically aligned media ecosystems widen the vacuum and intensify division. 1:03:10 – Conclusion Wouter closes by noting the episode doesn't provide solutions, but maps the journey from stable post-war neoliberalism to today's entrenched uncertainty. Full Transcription of Episode 125 Wouter Klijn  00:00 Welcome to a special edition of the [i3] Podcast, produced in partnership with the University of Technology of Sydney's Finance Department, which includes the Anchor Fund, an educational investment fund managing real money, which is run by students and overseen by Associate Professor of Finance, Lorenzo Casavecchia of UTS. So this episode aligns with the second instalment of the UTS Circle The Square sessions, which are a thought-provoking series of roundtables on economic, financial and political ideas. You can find them on YouTube, and of course, [i3] is very happy to support them. So today we will delve into the neoliberal model, which, post-war, has provided guardrails for economics to operate in and allow investors to focus on the usual numbers, earnings, inflation and growth. But these guardrails have been eroding under the influence of various forces, including the rise of populism, and this has led to an almost permanent state of uncertainty. And of course, we all know markets don't like uncertainty. So how did we get here? What has changed, and why did a neoliberal model held together for such a long time in the first place? So this episode sits a little bit outside of our usual investment talk. It's more about the system underneath the data, applied political economics, and we're asking why the guardrails that once held in place neoliberalism have been thinned out and what is left behind. So I'm joined here today with three panellists. So first off, we have Elizabeth Humphrys, who is the Head of Discipline for Social and Political Sciences at the University of Technology Sydney. Elizabeth is a political economist who focuses on the impact of financial crisis and climate change on labour relations. She is the author of the 2019 book 'How Labour Built Neoliberalism'. We're also joined by geopolitical strategist Philipp Ivanov. Philipp has been globally recognised as an expert on international relations, particularly China and China-Russia relations, and he has worked in Russia, in China and the United States. So he will provide us with a global view on this issue. He's also an Industry Fellow at UTS. And finally, we've got Rob Prugue, who is an Honorary Industry Lecturer at UTS, but who most of you probably know as the former CEO of Lazard Asset Management for the Asia-Pacific region. He's one of the driving forces behind the Circle The Square roundtable series. So welcome everyone. Okay, so we're looking at uncertainty in markets, which, to a large extent, has been caused by the dismantling of the guardrails in which the political debate have moved. Now let's start at the beginning. What were those guardrails and what kept politics out of the market for such a long time?   Rob Prugue  03:04 I think the best way to explain this is it's it's nascent, and where I least I see it began, and it probably began post-WW2, when the West in particular, needed to rebuild itself after near a decade long World War and the destruction that obviously it needed to be addressed, and having learned the lessons of previous mistakes such as League of Nations or working in a bilateral World, the West appreciated early on. In order to counter the Soviet force, it needed to unify, and as part of that, it needed to build a system that would rebuild an economy by lifting the ship rather than individually handing out life preservers and life jackets to sectors, or worse, certain people. As a result, guardrails were built to make sure that this was a system that benefited the totality, rather than specific groups, and over time, that worked well. This is not to suggest that neoliberalism didn't have its challenges. Of course, we had wars. Of course, we had economic cycles. Of course, we had large unemployment. But when you compare it to pre-1946, and the fact that you know now, the world had access to nuclear destruction, all things considered, neoliberalism certainly post-WW2 had its benefits, and that peace brought a national prosperity. The guardrails were there, not necessarily as instruments of curtailing growth, but think of it as. Golf rules. I'm not a golfer, but when you go out in the golf there are certain etiquette and rules that are applied. The guardrails have that. But then they built systems and infrastructure to again, manage that. It's as simple as the World Bank, Bretton Woods, World Bank and IMF, the United Nations, the international scope, the World Health Organisation, to name but a few. But then progressively, even do

    1h 6m
  6. 124: Fidelity's James Richards – Investing in Energy Transition Materials

    12/01/2025

    124: Fidelity's James Richards – Investing in Energy Transition Materials

    In this episode, I'm speaking with James Richards, Co-portfolio Manager of Fidelity International's Transition Materials Strategy. James runs a strategy that invests in stocks of companies that are exposed to materials that will play a crucial role in the energy transition. And it's not all about copper or lithium. James keeps his investment universe wide and includes commodities, such as animal fats and wood chips. We discussed the spike in rare earth materials earlier this year. We also look at why this is a super-cycle, but unlike the previous, China-led one. And finally, we explore whether this strategy correlates with the Australian economy and its emphasis on materials and style factors, including value. 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 James Richards, Fidelity   01:00 What are transition materials? 04:00 This was an analyst-driven idea, based on common themes emerging in different materials, rather than a product team idea 06:00 This is a different supercycle from the China-driven supercycle 07:00 There is a school of thought that says iron ore is benefiting from the transition. I don't really believe that 9:00 The energy transition will have an element of decommoditisation to it. There will be pockets of price premiums 11:00 Rare earth prices spiked earlier this year as generalist investors came into this market 14:00 In the first six months of this year, China has installed as much wind and solar as 90 per cent of all wind and solar ever built in the US. 17:00 Are we experiencing a uranium/nuclear renaissance? 21:00 This is not a commodity strategy; you invest in equities. Why? 24:00 We are looking to expand the universe rather than contract it, because we think the opportunity set is wider than even we envisaged. Chemicals is an interesting area. 25:30 Correlations with the commodity-heavy Australian industry. 29:00 You can see the way the world is heading, but when we get there is often unclear. You can lose a lot of money investing in a great demand stories that are just uninvestable at this time 31:00 Is this a value play?   Disclaimer: The content in this podcast is for institutional and wholesale investors and is not for distribution to retail investors.  This podcast has been prepared without taking into account any person's objectives, financial situation or needs. It is provided for general information purposes only and is not intended to constitute advice of any kind. References to specific stocks is for illustrative purposes and is not a recommendation to buy, sell or hold those stocks. You should consider the relevant PDS and TMD for any Fidelity Australia product mentioned before making any investment decisions, available at www.fidelity.com.au. Full Episode Transcript Wouter Klijn  01:16 James, welcome to the show.    James Richards Hi. Wouter, thanks very much for having me.   Wouter Klijn So let's start at the beginning. What are transition materials and why should institutional investors care?   James Richards  02:15 You know, I think that the transition is one of the big structural thematics of the next couple of decades, and transition materials are what I call a wide range of commodities and materials that benefit from the process of the transition, and in many cases, the demand driven from the transition, coupled with the fact that it is never been so difficult to bring on new supply of a number of commodities, will create the conditions where, you know what I think could be the next super cycle for a wide range of commodities. And this is a very, very investable thematic, in my view,   Wouter Klijn  02:49 Before we get to the super cycle, can you tell me a little bit about where this idea came from? Because I understand this was more of an analyst driven idea to set up the strategy. Is that right? Yeah.   James Richards  03:00 I mean, you know, I think normally ideas are born in this, in the product team, and, you know, then they go and find a portfolio manager, you know, this one is something that came out through, you know, hours and meetings and the sort of the work that we were doing around, around the commodity space, and the same themes, you know, started to come up again and again, first of all, in copper. But then, you know, we began to get increasingly excited when we saw the same themes coming up across a wide range of commodities, and, you know, as far afield as vegetable oil and animal fats. And it was then that we saw that there was a sort of wide ranging, quite diversified, investable thematic here.   Wouter Klijn  03:41 So what's the story with animal fats?   James Richards  03:45 Well, animal fats is so the renewable diesel chain, you know, particularly in the US, but also also wide. What are more widely, you know, is sealed by animal fats and vegetable oil. And you know, there is a, there is a fine, a finite supply of these things, and so you have to incentivize it. And the only way to incentivize new suppliers through price and, you know, the demand that is in there's been created by stricter regulatory standards and and stepping up of requirements, you know, really places a challenge on those supply chains.   Wouter Klijn  04:22 Yeah. So is that in your portfolio animal fats and oils?   James Richards  04:26 We certainly think that the vegetables animal fats is a very interesting long term thematic,   Wouter Klijn  04:30 yeah. Okay, interesting. So coming from themes that you saw in copper and copper is, of course, a key material in electrification. So is this transition the story to renewable energy? Is it just about electrification, or are there themes involved in this as well?   James Richards  04:51 So I mean electric, if you look at the sort of the current opportunity set, electrification is an obvious one. You know, it has various aspects. You know. Renewables is one obvious aspect. Electric vehicles is another. And if you think about sort of the grid requirements of the increased demand for electricity, you know that that that that also has some pretty found profound implications. But it's not just electrification. If you think about sort of hard to abate areas like like steel production, maritime fuels, aviation fuels, you know, the circular economy is a very is a very interesting area. You know, it's a much, much wider area than just electrification.   Wouter Klijn  05:38 And I think you've mentioned digitization and urbanisation, as to key thematics that are related to the transition materials. In particular,   James Richards  05:47 I think one of the one of the interesting aspects that you get here is that you get demand that is driven by the transition but then you have a lot of other structural demand drivers that are also facing in the same direction and pulling on the same commodity demand chains. And so, for instance, AI and data centres will drive demand for copper and other and other commodities, but also the industrialization of India and Southeast Asia as they start to hit levels where commodity intensity picks up quite dramatically. You know, they're essentially being competition with the transition and data centres for scarce supply of commodities and, you know, and that is quite exciting, I think, in terms of compromises will have to be made. I mean, if you look at the sheer population size in India, and you put a sort of average peak commodity intensity on it, like the numbers are mind boggling. And so, you know, compromises are going to have to be made. And the only way that you get those compromises made, and the signal that you get to to get substitution, and all the ways to get the numbers to work. You know, the only way you can get there is through price.   Wouter Klijn  07:03 So there's a couple of big trends involved. You just mentioned one around the super cycle in commodities. So when you sort of look back over time, have we had some of these super cycles before?   James Richards  07:16 I mean, I do have a history degree, but not much of a history student, so I'm kind of more focused on, on the most recent, which is, you know, the early, the early years of my career were with the China driven super cycle. And, you know, that was one of the reasons, where I saw, you know, clear echoes of what I was seeing, you know, today, you know, versus what I was seeing there are seeing above trend demand for commodities driven by China hoovering up, you know, pretty much every commodity in sight. And you know, decades worth of under investment in commodities at the time. So you had a relatively curtailed supply side. And that's really important is, you know, in order to make money in commodities, the supply side has to struggle to keep up with demand. And so, you know, commodity with 20% demand, keiger, you're not necessarily going to make money if the supply side is a lot, is it elastic? And so, you know that supply side is really, really important, but it is a different super cycle, I think, from from the China driven super cycle. In the the China driven super cycle, I think mainly had winners, whereas in this super cycle, I think, you know, there are clear winners and losers in terms of in terms of demand, you know, and you know, the transition kind of gives the clue to that in thermal coal, demand should decline over time. All demand should decline over time. You know, we're talking, we're talking longer term here. And you know, there are areas like, I think, although there are some demand benefits for steel, you know, the process of decarbonizing steel is quite, is quite difficult and expensive. And so I think there is, there's some difficulties around that. And you know, I'm in Australia, and you know, there's a sc

    40 min
  7. 123: Cbus' Linda Cunningham – Pricing Risk in Debt Investments, Private Credit and the Impact of Retail Investors

    11/17/2025

    123: Cbus' Linda Cunningham – Pricing Risk in Debt Investments, Private Credit and the Impact of Retail Investors

    Note: This episode was recorded before the release of ASIC's Private Credit Surveillance Report 820. The ASIC report mentioned in the podcast relates to the Private Credit in Australia Report 814, released in September 2025. In this episode of The [i3] podcast, I'm speaking with Linda Cunningham, who is the Head of Debt and Alternatives for Cbus Super. We talk about some of Linda's core beliefs when it comes to debt investing, including the banking 101, to be very careful when borrowing short and lending long at the same time. We discuss the importance of cash flows and ensuring the ability of a borrower to pay their interest. We discuss liquidity mortgage funds and private credit funds aimed at retail investors, as well as the occasional funky fee structure. We even talk about how Linda once provided a loan to finance a catamaran called the soggy moggy. 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 Linda Cunningham, Head of Debt and Alternatives, Cbus   03:00 My father was a bank manager and I wanted to get into banking at an early age 04:00 In year nine, I had a discussion with a teacher about the difference between a bank and a building society 05:30 Late 80s, the property market was booming, but interest rates were high. One of my jobs was to drive to Geelong and go through the credit files. One of the lessons out of that was how important cash flow is for a loan. Where is the interest coming from to pay you? 11:30 Matching liquidity profiles, the case of AXA products marketed to retail clients. "Having daily liquidity is great, until it is not" 17:30 You can finance anything, I've financed a catamaran, but it is about where it sits in the portfolio 18:30 Setting up the internal credit capability for Cbus. "You are coming from a bank and so you don't think about who is going to communicate with the borrower what the interest rate is" 19:30 "I started in 2016, but we didn't write our first loan until 2019" 20:30 Financing a catamaran, the 'Soggy Moggy'. 22:30 Debt is not like equities; you can't just go out and buy a ready-made portfolio 32:00 There is no pressure for us to allocate money [to loans], we can give that money to managers 34:00 On occasion, we are seeing some 'funky [fee] structures'. 36:00 Private credit is not new; there have been mortgage funds operating in Australia for at least 30 years 38:00 What is getting more focus is: where is the private credit sector getting its money from? 40:00 I do worry about the flow-on effect from what is happening in retail products 41:30 The market is very competitive on loan transactions at the moment, are people pricing risk appropriately? 45:00 It takes someone really strong, who gets paid on funds under management, to say no to the funds, whereas at Cbus we don't have that tension. I can look at other credit managers 49:00 On the internal front, we would like to do a little more construction deals. We think there is going to be a little more residential over the next year or so 50:00 We are not sure if in affordable housing equity is the way to go. But we do think that with debt you get an appropriate return for your risk Full Transcript of Episode 123 Wouter Klijn  01:16 In this episode of The [i3] podcast, I'm speaking with Linda Cunningham, who is the head of debt and alternatives for Cbus Super. We talk about some of Linda's core beliefs when it comes to debt investing, including the banking 101, to be very careful when borrowing short and lending long at the same time. We discuss the importance of cash flows and ensuring the ability of a borrower to pay their interest. We discuss liquidity mortgage funds and private credit funds aimed at retail investors, as well as the occasional funky fee structure. And of course, we delve into the state of the private credit market and ASIC's recent comments on the sector. We even talk about how Linda once provided a loan to finance a catamaran called the soggy moggy. Enjoy the show!   Linda Cunningham  02:06 Linda. Welcome to the podcast. Thanks for having me, Wouter.   Wouter Klijn  02:09 So your journey started a bit unusually compared to maybe some of your peers. I believe you started in the industry when you were just 15 years old. How did that happen?   Linda Cunningham  02:20 That's correct look, and I'm going to age myself here, but we are talking, you know, the early 1980s I had grown up. My father was a bank manager, so I had, from a very early age been exposed to banking, and by the time I was finishing year 10, I had a decision to make, which was, you know, Did I did I want to go on to year 12? Did I want to go on to university? I knew I wanted to end up in banking. Superannuation funds didn't really exist at that time, but I knew I wanted to get into the lending side of things, and I had the opportunity to actually start working in the local branch at the bank, a different bank to where my father was, and I enrolled to do a TAFE course. So I did a Gosford Teik, an accounting course three nights a week for four years. So once I finished that, I enrolled in doing my degree by we'll call it remote learning. In those days it was called by a correspondence. Yeah. So by the time I was 23 I had been working for eight years, three years in a branch and five years in the corporate banking area, yeah. And I had my degree.   Wouter Klijn  03:40 Excellent. And I think there was an anecdote where you even on the school playground would discuss monetary policy or something.   Linda Cunningham  03:49 Look, I do remember, in a commerce class in year nine, having a debate with my teacher about the difference between a bank and a building society. And apparently I was, I was quoting the Banking Act of 1959 in those discussions to tell him there was a difference, right?   Wouter Klijn  04:09 Right. Not your average conversation, I think, for a teenager.   Linda Cunningham  04:12 No. But look, it had been something that had always interested me. And look, I still now people have various dreams. One of my dreams is always rolling coins. So yeah, rolling up the 20 cent pieces and 50 Cent pieces into the pieces of paper. I can still do that in my head,   Wouter Klijn  04:31 Very good. There's probably muscle memory comes into play with that one. So having started relatively young, you've seen probably a few financial crisises. I think the 1990 collapse of the Geelong based pyramid building society was one of them. Can you share some of your learnings from some of these downturns with us in terms of how it shaped your outlook on investing?   Linda Cunningham  04:56 And look, that was absolutely a very interesting time to be in the lending space. I had moved from New South Wales to Victoria with my work. And, you know, late 80s, everything was booming in property, everything was booming everywhere. But you also had interest rates pretty high. And, you know, the market was, was, was very hot, and the bank I was working for had exposure to all of the pyramid associated companies. So there were actually four building societies there. And we were actually doing what these days would be called a warehouse loan. So we're effectively providing them, you know, with the loan, 80 cents in the dollar, based on a, on a on a pool of mortgages, and those loans, the underlying loans, would be some commercial property. They'd be residential. It'd be a whole mix of things. And one of my jobs I got to do was to get on the freeway and head to Geelong every few months and actually sit there and look through the credit files. There was you couldn't get them on Excel. You couldn't log into a data room. You'd actually go in and sit there in the premises and look through those credit files. And I think for me, one of those, the sort of lessons out of that was, was really how important cash flow is for a loan. You know, if you are, you know, in our case, we're expecting, you know, the borrower being, say, pyramid building society, to still pay our interest. But you know, if you've got a pool of loans that are in there, that are just secured against a vacant block of land or a non income producing property, where is the where's the income coming from, where's the interest coming from, to actually be able to pay you? And I think that was, that was probably one of the strongest sort of lessons that I actually had, was really how critical income is. And I would say that was even important. If you looked across, you know, the banks books at that time, and a couple of other names you've got to mention from that era. You can't not mention the state mortgages tri Continental, all of the state banks, like I work for State Bank of New South Wales, which actually was in a pretty good state, but we're probably still in that time whereby we actually had a large proportion of our property based loans, which were from an LVR perspective, we had breaches, right? And it was one of those situations where you we actually did okay, like those loans were were pretty good, because the income was still solid on them. The borrowers were still earning enough income from these assets to actually be able to pay the interest. But, you know, they suddenly went from having a loan to valuation of, you know, 60% to 80 or 90% breaching covenants, etc, just really because of the rapid change in interest rates in the market and the impact on on property values,   Wouter Klijn  08:02 yeah, and I think that importance of knowing where the income come from and the underlying assets that sort of carries through through time. Because I think we recently spoken about a loan, and we won't name any names, but it basically looked like a term deposit. But when you looked under t

    52 min
  8. 122: Fidelity's Maroun Younes and James Abela – SMIDs in a World of Large Cap Dominance, Are Things About to Change?

    11/03/2025

    122: Fidelity's Maroun Younes and James Abela – SMIDs in a World of Large Cap Dominance, Are Things About to Change?

    In Episode 122 of the [i3] Podcast, Conversations with Institutional Investors, we speak with Maroun Younes and James Abela, co-portfolio managers of the Fidelity Global Future Leaders strategy, about the attractiveness of small and mid-cap investments, a $12 trillion market with significant growth potential.  They acknowledge the recent underperformance of small caps due to market concentration in large caps, particularly in US tech, but point out that people are starting to wake up to the risks associated with those concentrations. Are we in an AI bubble, driven by these large caps? The conversation starts at a high level, discussing the importance of quality, value, transition, and momentum, and then we do a deep dive into specific investments, such as Arista and FICO-score provider Fair Isaac Corporation.  We also come back to AI and see how it can be used by asset managers. ________ Follow the Investment Innovation Institute [i3] on Linkedin Subscribe to our Newsletter Explore our library of insights from leading institutional investors at [i3] Insights ________ Disclaimer: The content in this podcast is for institutional and wholesale investors and is not for distribution to retail investors.  This podcast has been prepared without taking into account any person's objectives, financial situation or needs. It is provided for general information purposes only and is not intended to constitute advice of any kind. References to specific stocks is for illustrative purposes and is not a recommendation to buy, sell or hold those stocks. You should consider the relevant PDS and TMD for any Fidelity Australia product mentioned before making any investment decisions, available at www.fidelity.com.au. Podcast Overview 04:00 Large caps outperforming small caps in the US is unusual; historically small caps have outperformed over time. But people are waking up to the risk of concentration, both at a stock level and sector level 07:00 We are not too concerned about US exceptionalism, because we don't see a huge break point going forward 07:30 It is always hard to tell whether we are in a bubble, but there are early signs of a formation (of an AI bubble). There is a lot of spending in this area and at this stage we don't see that return on capex coming through 09:00 Fidelity webinar on AI 10:30 We have four focus areas: quality, which is the love quadrant, value is a neglected quadrant, transition is the quadrant of hope and momentum is the hot quadrant 13:30 We have guardrails for allocating to the different areas: 40 per cent quality, plus or minus 10, value 30 per cent, transition 20 per cent and momentum 10 per cent, 17:00 The case of Arista, looking for a catalyst to unlock value 20:00 Another case study, Fico credit scores 23:00 On selling discipline 28:00 We are not looking to make a big market call, but are looking to participate in the continued rally 31:30 We mainly have exposure to China in the healthcare sector. Most Chinese tech companies are too large for us 32:30 Getting compared to the QSML exchange traded fund 37:00 Looking but not buying; the case of Deckers and the Hoka shoe 44:00 White paper on Lessons Learned over the years 45:00 Using AI in our work; you can get to a working knowledge of a company in a matter of minutes For the Fidelity webinar, 'Navigating the AI boom: A framework for investing', please see here. For the Fidelity white paper, 'Discovering tomorrow's global future leaders, today', please see here. Full Transcript of Episode Wouter Klijn  00:00 Welcome to the show.  James and Maroun Thank you, Hi.  Wouter Klijn  So why small and mid caps? What got you started in this particular space of investing. James  00:21 Well, for me, I started in the Australian market, in Aussie mins and smalls, but we were asked by clients to move into the global space. That's where Marouns joined me to attack this global market, which is huge. The tractions are significant. There is a very, very big market. The size of the market is 9 trillion US, which is huge. So 12 trillion Australian so it's 5x the size of the Australian market. So the opportunity set is significant. The breadth and depth of stocks is very significant. So the number of stocks you can own in the universe, in each sector or in each theme, is quite broad and diverse. Valuations are very attractive, and one of the other key things is that they are still under researched, and in many cases, under appreciated for what they actually have in terms of quality. So that allows moon and I to find ideas that are often 15 to 20% EPS growth on 15 to 20% roes trading on very reasonable multiples, compared to things that are more discovered in large caps and the size we can now go up to is about 60 billion US, which is our universe scope, which gives us quite a long runway in terms of years of holding stocks before they are large caps. They're all the key attractions. So it is a very attractive space. Wouter Klijn  01:32 So we've seen a lot of concentration, in particular US equity markets. And we did see that earlier this year's small and mid caps have underperformed a bit. Are the two linked? Is the concentration in the market affecting the smaller mid cap space? Maroun  01:47 Yeah, absolutely. So they're two sides of the same coin. So you've basically had in the US market a concentration of maybe half a dozen stocks, predominantly in the technology sector, and they've been doing incredibly well. So they've propelled the market a lot higher, and they've they've allowed large caps to outperform small caps. That's quite unusual. Small caps historically, if you look back 25 - 30, years, small caps historically, have outperformed large caps. They're smaller. They're growing off a smaller revenue base. It's much easier for them to double and triple in size over time, but certainly over the last maybe five or six years, that's not been the case. So it has tempered some enthusiasm, I guess, in the past, for smaller mid caps. But I think you're also starting to see people now waking up to the risks associated with the concentration levels, both at a stock level as well as a sector level, and people actively now looking to diversify away from that. Wouter Klijn  02:44 Yeah. So you don't see it as a structural change. This, the small cap premium is still out there. It might be just a temporary dislocation. Maroun  02:51 I think so. If you look back in history, there has been periods in time where, where large caps have done quite well. If you look back to the nifty 50, back in the early 70s, there was that there was a handful of stocks that did incredibly well, predominantly at the top end. So we do go through periods every so often. I think this is another one of those episodes. Wouter Klijn  03:09 Yeah. So might be a nice buying opportunity then?  Maroun Absolutely, yeah, we definitely think so, yeah.  Wouter So we've looked a lot at US exceptionalism, a lot of talk around that, especially the Magnificent Seven. But you know, is it the broader market, or is it just the Magnificent Seven that are exceptional? Or do you see that also extended to the to the smaller mid cap space? James  03:35 Yeah, with US exceptionalism, it's a very big topic area. So what we focus on, I guess, in our world is returns, and the return profile of the mega caps is quite high. Still, during that 20% level, in terms of roa's or Reich's return on investor capitals, our index is still around a 15 to 16% level, which is quite high, and also the US in aggregate compared to the rest of the world, is very high. So 15 to 20% returns on capital, compared to the world average of around nines to 10s, whatever you want to call it like, the US, is 50% better on average, in terms of returns on capital to the rest of the world. So we are still, you know, half of our fund, at least, is in the US. There's a lot of talk about the US builds great businesses. The Chinese build great manufacturing, and European builds great regulation. It's a well known kind of cliche, but the fact is that the US does have great businesses, whether they're whether whatever you is you want to say, the cause of that is, and that's expected to continue, especially for the next few years. Yeah, so we don't think it is a one off, and it's not just the mag seven either. Mag seven are symptomatic of the US being a leadership marketplace, and we find that's why we find it very attractive, because in global mids and smalls, we've built a portfolio which has returns on capital of in the 20% range as well, and still a very reason. Or valuations. So, you know, we aren't too concerned about that concept of us exceptionalism, because we don't think it's there's a huge break point that's obvious coming forward.  Wouter Klijn  05:10 So there has been a lot of talk around whether we are in an AI bubble or not, and whether the Mag Seven isn't a symptom of that. What's your take on it? Do you have any views on whether we're in a bubble, just in an expensive period. Maroun  05:22 Yeah, it's always hard to know whether you're actually in a bubble or not, but certainly there, there are signs, early signs of formation. There's a lot of spending going into this area, and at this stage, we're not seeing the return on that, that increased capex come through now it may still Come, come come further down the track, and in which case, all this spending is justified. And you know, things continue as they are, but when you're seeing an increasing level of CapEx, I mean, some of these companies in the mag seven are spending 10x the amount of CapEx they were 10 years ago. So they were capital like businesses, and now they're quite capital intensive. Businesses spending a lot more money, that money needs to earn an attractive rate of return, because one of the things these businesses have done historically is deliver very high rates of return. So when you're investing a wh

    48 min
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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/

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