[i3] Institutional Investment Podcast

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