1 00:00:05,760 --> 00:00:08,010 Sean Aylmer: Welcome to the Fear and Greed business interview, I'm Sean 2 00:00:08,010 --> 00:00:11,580 Sean Aylmer: Aylmer. Fiscal year 2024 was a good year for the 3 00:00:11,580 --> 00:00:13,678 Sean Aylmer: share market, and a good year for super funds, the 4 00:00:13,679 --> 00:00:16,919 Sean Aylmer: second year in a row of very strong returns. Can 5 00:00:16,920 --> 00:00:19,349 Sean Aylmer: they make it three? My guest today is Dan Farmer, 6 00:00:19,350 --> 00:00:23,880 Sean Aylmer: chief Investment Officer at MLC Asset Management, overseeing MLC's broader 7 00:00:23,880 --> 00:00:27,509 Sean Aylmer: investment strategy and the bulk of Insignia's financial funds as 8 00:00:27,510 --> 00:00:31,679 Sean Aylmer: well. MLC's My Super Growth Portfolio delivered a near 10% 9 00:00:31,679 --> 00:00:34,348 Sean Aylmer: return for the last financial year. Remember, this is general 10 00:00:34,350 --> 00:00:37,619 Sean Aylmer: information only, and you should always seek professional advice before 11 00:00:37,619 --> 00:00:40,260 Sean Aylmer: making investment decisions. Dan, welcome to Fear and Greed. 12 00:00:40,470 --> 00:00:41,370 Dan Farmer: Thanks for having me, Sean. 13 00:00:42,180 --> 00:00:45,719 Sean Aylmer: Let's look past first. What was last year all about? 14 00:00:45,719 --> 00:00:47,550 Sean Aylmer: A near 10% return, that's pretty good. 15 00:00:48,030 --> 00:00:50,790 Dan Farmer: Yeah, good return, Sean. Look, we're really happy for our 16 00:00:50,790 --> 00:00:54,389 Dan Farmer: members, because 10% return is a strong absolute return, and I 17 00:00:54,389 --> 00:00:58,920 Dan Farmer: think a period where inflation's been high, super funds now 18 00:00:58,920 --> 00:01:01,350 Dan Farmer: found in particular delivered a return well above the rate 19 00:01:01,350 --> 00:01:04,410 Dan Farmer: of inflation. So that's helping our members drive those real 20 00:01:04,410 --> 00:01:07,259 Dan Farmer: returns. I think the year itself, a really interesting return. 21 00:01:07,259 --> 00:01:09,899 Dan Farmer: I think if you wound the clock back 12 months, 22 00:01:10,289 --> 00:01:12,509 Dan Farmer: I'm not sure that many funds would've been expecting such a 23 00:01:12,569 --> 00:01:14,910 Dan Farmer: strong return. So it was been a really, really good 24 00:01:14,910 --> 00:01:17,490 Dan Farmer: year. Quite a few things have driven the return. I 25 00:01:17,490 --> 00:01:20,160 Dan Farmer: think the way we've built our portfolio has been quite 26 00:01:20,160 --> 00:01:25,048 Dan Farmer: unique. We really focus on diversification and really robust portfolios. 27 00:01:25,049 --> 00:01:27,750 Dan Farmer: So I've been running these sort of portfolios for 30 28 00:01:27,750 --> 00:01:31,289 Dan Farmer: years and one thing I've found is diversification is really 29 00:01:31,290 --> 00:01:33,900 Dan Farmer: key. So when we look at what actually drove performance 30 00:01:33,900 --> 00:01:35,760 Dan Farmer: over the year, it's been a whole range of factors. 31 00:01:35,760 --> 00:01:38,789 Dan Farmer: Not one single position has been the key driver. So 32 00:01:38,790 --> 00:01:42,149 Dan Farmer: in our portfolios we've had some really interesting drivers of 33 00:01:42,150 --> 00:01:45,000 Dan Farmer: return over the year. We really try to run a 34 00:01:45,000 --> 00:01:50,250 Dan Farmer: quite differentiated alternatives program, so alternatives to those assets, which 35 00:01:50,250 --> 00:01:53,280 Dan Farmer: we're looking for a really strong return from, but behave 36 00:01:53,520 --> 00:01:56,460 Dan Farmer: very differently from other asset classes. So their return's not 37 00:01:56,460 --> 00:01:58,709 Dan Farmer: driven by what happens in the equity market or what 38 00:01:58,710 --> 00:02:01,710 Dan Farmer: happens in the fixed interest market. So we've had some 39 00:02:01,710 --> 00:02:05,340 Dan Farmer: strong returns out of what we call our insurance- related 40 00:02:05,340 --> 00:02:09,239 Dan Farmer: investments. So these are investments where we actually take some sub- 41 00:02:09,240 --> 00:02:12,389 Dan Farmer: underwriting or some reinsurance risk off the big insurers and 42 00:02:12,389 --> 00:02:14,340 Dan Farmer: we get paid for that and our members receive that 43 00:02:14,340 --> 00:02:18,419 Dan Farmer: return. So that insurance- related investments last year in our 44 00:02:18,419 --> 00:02:22,619 Dan Farmer: portfolios returned 16%, got really strong return, and uncorrelated to 45 00:02:22,619 --> 00:02:25,620 Dan Farmer: other asset classes. And it's interesting to look at what's 46 00:02:25,620 --> 00:02:29,639 Dan Farmer: driving that. Those insurance- related investments are really taking weather 47 00:02:29,639 --> 00:02:33,660 Dan Farmer: risk. So Florida hurricane risk and taking some very remote 48 00:02:33,660 --> 00:02:37,319 Dan Farmer: risk of large hurricane events in Florida, we've been getting 49 00:02:37,320 --> 00:02:40,290 Dan Farmer: paid 16% returns for that risk over the last year. 50 00:02:40,799 --> 00:02:44,220 Dan Farmer: Really interesting space. It's been starved of capital. A lot of capital's 51 00:02:44,250 --> 00:02:47,130 Dan Farmer: exited that space for a whole range of reasons, and 52 00:02:47,130 --> 00:02:51,000 Dan Farmer: that's resulted in really good returns in that space. Probably 53 00:02:51,000 --> 00:02:53,339 Dan Farmer: Sean, the other couple of key things here, private credit 54 00:02:53,340 --> 00:02:56,639 Dan Farmer: markets, which have been very topical in recent periods. We've 55 00:02:56,639 --> 00:02:59,279 Dan Farmer: been really quite nimble with our private credit exposures and 56 00:02:59,279 --> 00:03:02,370 Dan Farmer: we're finding parts of the market starved of capital. So 57 00:03:02,370 --> 00:03:05,790 Dan Farmer: we've got a really experienced team that's really scouring the market, 58 00:03:05,790 --> 00:03:08,160 Dan Farmer: looking for those opportunities in the area where capital has 59 00:03:08,160 --> 00:03:11,910 Dan Farmer: been removed. And we're getting very attractive returns there as 60 00:03:11,910 --> 00:03:14,849 Dan Farmer: well. So again, alternatives, 11% return out of some of 61 00:03:14,849 --> 00:03:18,418 Dan Farmer: these opportunistic private credits. And to give you an example 62 00:03:18,419 --> 00:03:21,179 Dan Farmer: of the sort of areas there that we're finding. Commercial 63 00:03:21,180 --> 00:03:24,810 Dan Farmer: property, so office space has had a pretty challenging year, 64 00:03:25,230 --> 00:03:28,559 Dan Farmer: but we're starting to find some niche opportunities where there's some really 65 00:03:28,559 --> 00:03:32,758 Dan Farmer: attractive, slightly distressed assets in the commercial property space. So 66 00:03:32,758 --> 00:03:37,290 Dan Farmer: finding some private credit opportunities in northern European commercial property. 67 00:03:37,530 --> 00:03:40,350 Dan Farmer: So some really interesting niche things, driven returns. I guess 68 00:03:40,350 --> 00:03:43,380 Dan Farmer: probably one of the big ones has been equities. Again, 69 00:03:43,380 --> 00:03:47,370 Dan Farmer: if you wind the clock back 12 months, listed equities, we 70 00:03:47,370 --> 00:03:50,189 Dan Farmer: were facing into a pretty challenging environment, recession risk looked 71 00:03:50,190 --> 00:03:53,130 Dan Farmer: pretty high. It was kind of tempting to be underway 72 00:03:53,279 --> 00:03:58,050 Dan Farmer: listed equities, both international equities and Australian equities. We avoided 73 00:03:58,050 --> 00:04:00,990 Dan Farmer: that and stayed neutral equities, and we actually got a really 74 00:04:00,990 --> 00:04:03,599 Dan Farmer: good active return through active managers. It's been a tough 75 00:04:03,599 --> 00:04:06,270 Dan Farmer: year for active managers. So when we invest into listed 76 00:04:06,270 --> 00:04:09,509 Dan Farmer: equity markets, we look for the best external managers out 77 00:04:09,509 --> 00:04:12,839 Dan Farmer: in the marketplace and really ask those managers to outperform 78 00:04:12,870 --> 00:04:15,809 Dan Farmer: the index. So through really being active in what stocks 79 00:04:15,810 --> 00:04:18,960 Dan Farmer: they select, looking for them to beat the index after 80 00:04:18,960 --> 00:04:21,690 Dan Farmer: fees. And we've had a really good year there. So 81 00:04:21,690 --> 00:04:26,490 Dan Farmer: our international equity managers outperform the index by around about 82 00:04:26,490 --> 00:04:29,399 Dan Farmer: 2%, which was a really strong result in the year. 83 00:04:29,400 --> 00:04:33,930 Dan Farmer: So even though international equity markets dominated by tech, Nvidia, 84 00:04:33,990 --> 00:04:36,330 Dan Farmer: the big tech shares really driving a lot of that 85 00:04:36,330 --> 00:04:40,470 Dan Farmer: return. Our active managers had some exposure to tech but 86 00:04:40,889 --> 00:04:43,320 Dan Farmer: found a lot of other opportunities to drive the return 87 00:04:43,320 --> 00:04:45,509 Dan Farmer: over and above tech over the years. So Sean, a 88 00:04:45,509 --> 00:04:47,729 Dan Farmer: whole range of factors driving those good returns. 89 00:04:48,689 --> 00:04:50,339 Sean Aylmer: Just a few things I want to delve into that. 90 00:04:50,339 --> 00:04:52,740 Sean Aylmer: The fact that you're talking about taking on reinsurance risk. 91 00:04:53,190 --> 00:04:55,590 Sean Aylmer: I suppose one of the reasons you invest with MLC... 92 00:04:55,680 --> 00:04:59,520 Sean Aylmer: Me as an individual puts money with an institutional investor 93 00:04:59,520 --> 00:05:02,488 Sean Aylmer: like MLC or many of your competitors as opposed to 94 00:05:02,490 --> 00:05:06,630 Sean Aylmer: a DIY, is that you can actually get exposure to 95 00:05:06,750 --> 00:05:10,680 Sean Aylmer: asset classes that you probably never would do otherwise. I 96 00:05:10,680 --> 00:05:12,480 Sean Aylmer: mean reinsurance risk is a good example. 97 00:05:13,260 --> 00:05:17,279 Dan Farmer: And it's a really specialist space. So again, it's something 98 00:05:17,279 --> 00:05:18,570 Dan Farmer: you need to go in with a really good knowledge 99 00:05:18,570 --> 00:05:22,200 Dan Farmer: base, really good transparency on what you're actually investing in 100 00:05:22,709 --> 00:05:25,140 Dan Farmer: and it takes a massive amount of work. So in 101 00:05:25,140 --> 00:05:29,520 Dan Farmer: our case, and we have a team that's been in that alternatives 102 00:05:29,520 --> 00:05:34,678 Dan Farmer: reinsurance space for coming onto 18 years. So success doesn't 103 00:05:34,678 --> 00:05:36,719 Dan Farmer: come overnight. It takes a long time to build up that 104 00:05:36,719 --> 00:05:40,049 Dan Farmer: skill. And of course we, like most institutional investors, really 105 00:05:40,049 --> 00:05:43,289 Dan Farmer: demand a high level of transparency, really deep dive onto 106 00:05:43,290 --> 00:05:47,279 Dan Farmer: those assets and climate change comes up as a discussion 107 00:05:47,279 --> 00:05:51,510 Dan Farmer: point around those weather- related risks and a lot of 108 00:05:51,510 --> 00:05:53,880 Dan Farmer: work being done on that. And when we analyze those 109 00:05:53,880 --> 00:05:57,839 Dan Farmer: risks, we see that we're being overcompensated, we think for 110 00:05:57,839 --> 00:06:00,299 Dan Farmer: the weather- related risks that we're being paid to take on. 111 00:06:00,870 --> 00:06:02,640 Sean Aylmer: Stay with me Dan, we'll be back in a minute. 112 00:06:08,849 --> 00:06:12,480 Sean Aylmer: I'm speaking to Dan Farmer, Chief Investment Officer at MLC 113 00:06:12,480 --> 00:06:16,440 Sean Aylmer: Asset Management. Okay, so it is all about risk- reward 114 00:06:16,440 --> 00:06:18,630 Sean Aylmer: here. It's not one or the other. They come together. 115 00:06:18,990 --> 00:06:21,000 Sean Aylmer: What about going forward? You mentioned you think there are 116 00:06:21,000 --> 00:06:24,359 Sean Aylmer: opportunities in commercial office space in terms of how your 117 00:06:24,360 --> 00:06:30,750 Sean Aylmer: funds are positioned today, mid- July. Where is your bias towards? 118 00:06:31,290 --> 00:06:33,238 Dan Farmer: Yeah, sure Sean and I think look just on the 119 00:06:33,240 --> 00:06:35,699 Dan Farmer: commercial office space, we probably think it's still a little 120 00:06:35,699 --> 00:06:39,150 Dan Farmer: bit early to go back into office investment wholesale if 121 00:06:39,150 --> 00:06:43,080 Dan Farmer: you like, where really rifle- shotting specific opportunities. But there 122 00:06:43,080 --> 00:06:45,059 Dan Farmer: will be a time where that's the case. I think 123 00:06:45,059 --> 00:06:48,479 Dan Farmer: going forward there's some really interesting returns. So as you said, 124 00:06:48,480 --> 00:06:51,058 Dan Farmer: it's been two good years in a row, we'd love to 125 00:06:51,059 --> 00:06:53,159 Dan Farmer: make it three. A lot of that will depend on 126 00:06:53,219 --> 00:06:55,950 Dan Farmer: what equity markets do and trying to pick an equity 127 00:06:55,950 --> 00:06:58,410 Dan Farmer: market from year to year is, I've been doing it 128 00:06:58,410 --> 00:07:00,660 Dan Farmer: a long time, that's a very tough call. But we 129 00:07:00,660 --> 00:07:04,020 Dan Farmer: know through the long run those equity markets deliver strong 130 00:07:04,020 --> 00:07:07,170 Dan Farmer: returns and super funds in general have delivered strong returns 131 00:07:07,170 --> 00:07:10,260 Dan Farmer: over ten- year periods. So the year ahead, we're staying 132 00:07:10,260 --> 00:07:14,700 Dan Farmer: relatively neutral on our equity positions. So we're not overly 133 00:07:14,700 --> 00:07:16,620 Dan Farmer: positive, but we're not overly negative. We can see a 134 00:07:16,620 --> 00:07:21,180 Dan Farmer: range of scenarios going forward. So equities were relatively neutral. 135 00:07:21,690 --> 00:07:23,969 Dan Farmer: One area that we have been building is our global 136 00:07:23,969 --> 00:07:27,809 Dan Farmer: private credit exposures or investments in global private credit. A 137 00:07:28,650 --> 00:07:31,200 Dan Farmer: really interesting space. There's been a lot of talk about private 138 00:07:31,200 --> 00:07:34,590 Dan Farmer: credit. We've actually been an investor in Australian private credit 139 00:07:34,590 --> 00:07:38,280 Dan Farmer: for many years, and that's been a really successful investment 140 00:07:38,280 --> 00:07:43,410 Dan Farmer: for our funds and our investors. Large institutional investor like 141 00:07:43,410 --> 00:07:46,139 Dan Farmer: us, we really demand a lot of transparency looking through 142 00:07:46,139 --> 00:07:49,199 Dan Farmer: the underlying assets to make sure we're very comfortable with 143 00:07:49,199 --> 00:07:52,890 Dan Farmer: the high- quality assets we're taking on. Global private credit 144 00:07:52,890 --> 00:07:56,759 Dan Farmer: scenario, we're growing, so we are looking to invest about 3% plus 145 00:07:57,030 --> 00:08:00,209 Dan Farmer: in the global private credit. Really attractive returns we can 146 00:08:00,210 --> 00:08:04,559 Dan Farmer: see going forward, around about 12% returns we're seeing. There 147 00:08:04,559 --> 00:08:07,860 Dan Farmer: has been a lot of capital go into the private 148 00:08:07,860 --> 00:08:10,650 Dan Farmer: credit space and when I say global, I'm really focusing 149 00:08:10,650 --> 00:08:14,849 Dan Farmer: on US and some European private credit. But we see a really 150 00:08:14,849 --> 00:08:17,550 Dan Farmer: good opportunity. The banks have been exiting that space. There's 151 00:08:17,550 --> 00:08:20,520 Dan Farmer: still really high demand for capital there and we're seeing 152 00:08:20,520 --> 00:08:25,440 Dan Farmer: returns of around 12% for really high- quality underlying credits. 153 00:08:25,650 --> 00:08:28,170 Dan Farmer: So we think for us going forward, build out that 154 00:08:28,170 --> 00:08:31,410 Dan Farmer: space, really good opportunity for 12 months, focus on high- 155 00:08:31,410 --> 00:08:34,319 Dan Farmer: quality investment managers, really managers that have been around a 156 00:08:34,320 --> 00:08:37,170 Dan Farmer: long time. We've seen a lot of new private credit 157 00:08:37,170 --> 00:08:39,149 Dan Farmer: managers emerge over the last couple of years that have 158 00:08:39,150 --> 00:08:42,419 Dan Farmer: sort of set up relatively recently. We're really looking for well- 159 00:08:42,450 --> 00:08:46,020 Dan Farmer: established managers who have really got the wherewithal to do a 160 00:08:46,020 --> 00:08:47,819 Dan Farmer: lot of deep- dive research on the quality of the 161 00:08:47,820 --> 00:08:53,370 Dan Farmer: credit. So private credit is an interesting space for us 162 00:08:53,790 --> 00:08:56,520 Dan Farmer: and traditional, some areas that are, may be more boring 163 00:08:56,520 --> 00:08:59,699 Dan Farmer: but are coming back into vogue. Just government bonds and 164 00:09:00,720 --> 00:09:02,010 Dan Farmer: what we call duration. 165 00:09:02,940 --> 00:09:04,980 Sean Aylmer: Who would've thought a government bond could be sexy, but 166 00:09:04,980 --> 00:09:05,280 Sean Aylmer: there you go. 167 00:09:05,280 --> 00:09:09,990 Dan Farmer: They're coming back. They're coming back. So they're starting, they're playing 168 00:09:09,990 --> 00:09:11,968 Dan Farmer: the role that they've sort of historically played in the 169 00:09:11,969 --> 00:09:16,108 Dan Farmer: portfolio. They're offering 10- year yields, sort of 4. 3% 170 00:09:16,379 --> 00:09:21,238 Dan Farmer: as we record today. Relatively attractive, but also offering that 171 00:09:21,240 --> 00:09:24,540 Dan Farmer: sort of diversification and defensive qualities. We do see a 172 00:09:24,540 --> 00:09:28,230 Dan Farmer: crack in equity markets or growth, really economic growth really 173 00:09:28,230 --> 00:09:31,770 Dan Farmer: slow down. We typically see money rush towards those government 174 00:09:31,770 --> 00:09:34,080 Dan Farmer: bonds and you get strong returns. So they're both giving us 175 00:09:34,080 --> 00:09:37,529 Dan Farmer: a return and also that defensive quality in our portfolio. 176 00:09:37,529 --> 00:09:41,250 Dan Farmer: So good old- fashioned bonds and durations starting to play 177 00:09:41,250 --> 00:09:42,930 Dan Farmer: a bit more of a role in the portfolio again. 178 00:09:43,290 --> 00:09:44,639 Sean Aylmer: We're almost out of time, but I just want to 179 00:09:44,639 --> 00:09:48,839 Sean Aylmer: quickly go to your point about active management. I think 180 00:09:48,840 --> 00:09:50,759 Sean Aylmer: in the flow of ETFs, although there are a lot 181 00:09:50,759 --> 00:09:52,468 Sean Aylmer: of active ETFs now, but certainly there's a lot of 182 00:09:52,469 --> 00:09:55,860 Sean Aylmer: money going into passive investing, no doubt about it. There is 183 00:09:55,860 --> 00:09:58,500 Sean Aylmer: a real argument though that now is the exact time 184 00:09:58,500 --> 00:10:01,800 Sean Aylmer: to go active simply because the world has changed so 185 00:10:01,800 --> 00:10:03,750 Sean Aylmer: much and the interest rate environment has changed so much. 186 00:10:04,800 --> 00:10:06,838 Dan Farmer: Agree. And look, we see a role for passive. So 187 00:10:06,839 --> 00:10:11,429 Dan Farmer: we're certainly not in the case that there's no role for passive. Passive can play an important 188 00:10:11,429 --> 00:10:14,580 Dan Farmer: role in portfolios, but we really strongly see, as you 189 00:10:14,580 --> 00:10:17,340 Dan Farmer: say, a particularly good case for active management at the 190 00:10:17,340 --> 00:10:21,660 Dan Farmer: moment. There's a lot of concentration in equity markets. We've 191 00:10:21,660 --> 00:10:23,940 Dan Farmer: seen tech stocks really dominate a lot of the return 192 00:10:23,940 --> 00:10:26,639 Dan Farmer: in the US. Our active managers and I think active 193 00:10:26,639 --> 00:10:29,519 Dan Farmer: managers broadly should find a pretty rich hunting ground for 194 00:10:29,520 --> 00:10:33,210 Dan Farmer: opportunities where you do see interest rates pivoting from tightening 195 00:10:33,210 --> 00:10:38,040 Dan Farmer: to easing. We're seeing new industries arise and we think 196 00:10:38,580 --> 00:10:42,090 Dan Farmer: a greater dispersion in returns going forward. So it should 197 00:10:42,090 --> 00:10:46,439 Dan Farmer: be a relatively happy hunting ground for active managers going 198 00:10:46,440 --> 00:10:49,920 Dan Farmer: forward. And look, our funds have benefited from active management 199 00:10:49,920 --> 00:10:53,190 Dan Farmer: after fees, which is really important, for a number of 200 00:10:53,190 --> 00:10:56,310 Dan Farmer: years. So we're remaining committed to active management in large 201 00:10:56,429 --> 00:10:57,540 Dan Farmer: parts of our portfolio. 202 00:10:58,080 --> 00:10:59,789 Sean Aylmer: Dan, thank you for talking to Fear and Greed. 203 00:11:00,150 --> 00:11:01,348 Dan Farmer: Thanks Sean. Thanks for having us on. 204 00:11:01,860 --> 00:11:05,218 Sean Aylmer: That was Daniel Farmer, Chief Investment Officer at MLC Asset 205 00:11:05,219 --> 00:11:07,679 Sean Aylmer: Management. This is the Fear and Greed business interview. Remember, 206 00:11:07,679 --> 00:11:10,170 Sean Aylmer: this is general information only and you should always seek 207 00:11:10,170 --> 00:11:13,710 Sean Aylmer: professional advice before making investment decisions. Join us every morning 208 00:11:13,710 --> 00:11:15,990 Sean Aylmer: for the full episode of Fear and Greed, Australia's Best 209 00:11:16,080 --> 00:11:18,839 Sean Aylmer: business podcast. I'm Sean Aylmer. Enjoy your day.