Ben Samild
5/10/2023
Australia's Sovereign Wealth Fund - With Ben Samild, Deputy CIO of Future Fund

In the second episode of our Super Allocator Miniseries, Ben Samild shares the history, strategy and mission of Future Fund (Australia's SWF).

transcript

Simon Brewer

In 2002, the Australian Federal Treasurer, Peter Costello, commissioned the Australian treasury to look at the long-term issues facing the nation and how adequately current generations were preparing for future ones. It was eye-opening. I'll quote from the report. The message was stark and shocking. However well the government was managing the issues of the day, Australia's ageing population would put immense stress on public finances, especially on health and aged care spending over the next four decades. Total government spending would exceed revenue within 15 years, and by 2041, those demands would strip the equivalent of 5% from annual GDP. As always, if you spend more than you're earning, you have a difficult road ahead. There were no easy solutions. Immigration levels were increasing. In fact, Peter Costello famously encouraged Australians to have more children with his slogan, "Come on, Australians! One for mum, one for dad, and one for the country." So here we are. You are sitting in Melbourne. I'm here in London 10,000 miles away. I think you're the furthest guest to have appeared on the Money Maze Podcast. Delighted to talk to a very different sovereign wealth fund today. Ben Samild, the deputy CIO at the Australian Future Fund, welcome to the Money Maze Podcast.

Ben Samild

Thank you, Simon. Pleasure to be here.

Simon Brewer

We have much to talk about. It's the end of your day, it's the beginning of mine. You just told me you've actually already had supper. I've had breakfast. We are always worried about the communications but absolutely beautiful broadband for the moment that seems to be helping us. I talked about the problem that was identified, but starting high level, what was the solution?

Ben Samild  

They tossed around a couple of solutions. I would say that it's kind of quaint given the state of global government finances now that they were desperately worried about perhaps overspending in 20, 30 years’ time. They tossed around a few solutions. There was no government debt at all and they had no need to borrow, and so one was to shut down the Commonwealth government bond market. That received some support, although the people at the AOFM and in Treasury obviously had a reaction to that. Losing a sovereign curve wasn't thought as the best idea perhaps. So fortunately, that one was yelled down. And then the second and most obvious one was to use the funds for say election largesse, and that would have, I think, been the most tempting one and I'm sure that our chairman now and the treasurer then, Mr. Costello, had to push back fairly hard against the temptation for the use of those funds to improve electoral chances. They decided not to and instead, they decided to invest the surplus, which was our last surplus, of course, in a sovereign wealth fund, essentially a savings fund, which was a consideration of intergenerational equity.

Simon Brewer  

Yes, of course. Those of us who go back a long way, what amazed me was that Australia was running into these surpluses, where forever, Australia was like Britain, which was a weak currency, deficit running the country. And yet, Australia got itself into this remarkably fortunate position. So before we talk about the AFF, how do your own journey lead you into Australia Future Fund?

Ben Samild

I grew up solidly, I don't know, lower middle class and was obsessed with local sport. I knew that I was very much not good at the things that people around me were good at. They were very strong and they tended to fix things and I had no idea how to do any of that. I thought, "My goodness, I'm never going to be able to be useful in any tiny way." So I ended up getting very interested in history and psychology and going to university and studying that. I thought for sure that that's what I would do with my life. I had planned on becoming something called a cognitive neuropsychologist and my journey was relatively well set. And then I got waylaid by- my mum got very unwell, and I had to look after her. And essentially, by the time I got back to study to do my post-grad, I was sort of out of options. I was out of supervisors, and the only two supervisors I could access at the University of Melbourne Psychology Department at the time was someone who was very interested in the psychology of music and I was not very interested in the psychology of music, and another person who was this incredibly intimidating polymath who had gone to Caltech at the age of 15 and had the highest measured IQ in Australia at that time. He had lots of interests, but one of those happened to be behavioral finance. And so I took the behavioral finance piece and I cobbled together over the next year sort of a mud map of how markets work based on some sort of agent-based modeling. He asked me to stay on and become a research fellow at the university, which I did. And then I paid my way through in various ways, one of which by being a recruiter for a local professional sporting team. That work eventually got recognized by a significant investor in the US and that became a hedge fund, which I led the research on for about nine years and then decided that whilst that was absolutely fascinating, it was kind of an upside-down life to go straight into a hedge fund without the broader experience of investment bank consulting, asset management, whatever most people do. I did my Master's in Applied Finance and went to a local asset owner, a super fund, thinking that was exactly the same as working at a hedge fund, which of course, it was a very different skill. I learnt that and eventually became the head of investment strategy there, and then came over to join the hedge fund program at the Australian Future Fund was that 2014, so I'm in my 10th year now.

Simon Brewer

Great. Well, that's a very, very interesting journey and unexpectable. We have not had anybody, as far as I know, who has attempted cognitive neuroscience, although as we said in our earlier chat, Nicolai Tangen from the Norwegian sovereign wealth fund has experimented with all sorts of things and I think he actually talked about aspects related to that. If I can ask you to summarize the AFF as it is today, I think you're a $250 billion institution, but just give us a sense of scale, size, numbers, locations.

Ben Samild

$250 billion give or take on the day. We have a series of mandates. The biggest pot of money is the future fund itself, which is approximately $200 billion of the $250 billion, and then we run a series of other funds, client funds. So some of those for medical research, indigenous land, and various other things. It's $250 billion. It's Melbourne and Sydney, but primarily Melbourne, and there's roughly call it 350 permanent employees, around 75 of those in the investment team. There's a few unusual things about it. Unlike most of our peers these days, including say the Canadian model, it's a purely outsourced model. There is no internal asset management as it were, although if you're interested, there are some things which get close to that, but we don't run our own internal hedge fund program or anything like that. And we've from day one really been very focused on this thing that we call being joined up, joined up investing, one portfolio, one purpose, we call it now. It's different. It's always been different. It was very new at the time. Lots of people now call that total portfolio investing. I think it's becoming more popular although we would say that's actually a different thing to what we do.

Simon Brewer  

We are going to come back to that. But I want to start at this high point, which is the investment aim, because it's quite striking. Every institution has a different approach but yours is to achieve long term investment returns of 4.5% to 5% per annum above inflation, if I'm right, which is, I think, particularly in a country like Australia, quite a demanding return. I think it was, again, Peter Costello, who said we're not here to fund road construction in Tari, we're here to get a financial return. So how do you collectively think about that investment objective?

Ben Samild  

I should say that right now, the way we think about it is it looks incredibly hard, because obviously, our benchmark is screaming away from us. We make money by investing in financial assets and they have obviously done quite so well over the last year, but we have achieved that from inception since 2007. So our long-term returns are more or less met. Our objective, we think that's going to be harder going forward, much harder for all the obvious reasons that we're living in the here and now and that we saw through last year, but also because we think we've moved into a different paradigm, a different world. The tailwinds that allowed us to generate these CPI plus 4.5% to 5% returns over the last decade, we feel they're becoming, at least, not tailwind and in many cases, headwinds, which should just make our job quite significantly harder. It'll definitely create opportunities, really interesting opportunities. I think it creates an opportunity for a more interesting life, frankly, and a more interesting investment experience and a more interesting job and to create more value, which is really purposeful. So I know I'm quite excited about it. Maybe I'm masochistic because we all get paid on meeting that objective, but I think for a long time over the previous paradigm, one could have closed their eyes and just as long as you were invested, it almost didn't matter what you were invested in. You had this giant beta tailwind which took you to a reasonable return outcome while your benchmark actually kept on getting lower. We're in a different place now so we feel like we have to work a lot harder.

Simon Brewer  

I think that's candid, and of course, I'm going to agree with you because that's my view as well about a tougher landscape ahead. Now, as we get down into the portfolio approach, one of the things that an earlier CEO of yours, David Neal, had said is that many institutional investors arbitrarily fill predetermined asset class buckets with too many average quality assets in the name of diversification, risk management at its worst. I thought it was quite interesting because I've seen lots of different investment approaches and there is a lot of that that goes on. We've got our strategic asset allocation, we have our silos, how do we populate them? You've mentioned this total portfolio approach. Just talk me through how you guys have gone about it.

Ben Samild  

Dave was at the genesis of this very much. He also famously- maybe it's not famous, it’s famous to me. I was in the audience so I remember it well, but he also said we don't need to curl up in bed sucking on the corner of a benchmark, we should be better than that. That resonated strongly with me and I thought I want to work there. What that means, my current CEO, CIO, Raph, he has a way of describing this joined up approach of ours, which is essentially, he shows a slide which has the top-down view, the bottom-up view, and then this sort of cartoon cloud in the middle with arms and legs all coming out of it demonstrating collaboration or a giant fight in the middle. Essentially, that was the genesis. So it was a very small investment team. They didn't think they'd ever need to have more than 30 people. All the senior people were essentially in the same room making the decisions together. The idea was that you would have a competition for capital. It was a competition for ideas. So there was a blank sheet, but there was always a blank sheet, or the concept of a blank sheet with look at this as if it were a blank sheet. And very importantly, what that meant, which is hard because finance doesn't tend to work like this anywhere else, is that you had to understand the total portfolio, everything that's in it, how it interacted, all the different dynamics of risk, be it return volatility, yes, currency, absolutely, which is actually hard for a lot of people, duration, liquidity, very importantly as well, and everything else in between. You had to understand all of that and then you had to build this total portfolio. You had to build the whole thing, which is very different from saying, you're a property manager, you're a hedge fund manager, you're an equity manager, go and build the best portfolio that you can build. So I ran the hedge fund program for some time, for example, and I populated that in a way that was a long, long, long, long way away from how I would have run it if I was asked to just run a hedge fund portfolio and get CPI plus 4. I would have had a lot more risk-taking themes, I would have had a lot less long vol themes. I would have sized things completely different frankly, I would have taken on a lot less liquidity. I would have taken on more illiquidity because that would have suited me. But when there's a whole bunch of assets that I can invest in that are illiquid, quite possibly, the best use of that illiquidity budget is not in my portfolio. I should perhaps be providing liquidity in an emergency so that we can invest in assets somewhere else. So one has to understand that and really embrace it and really trust everyone in that room that they're going to be supported if they go for years and years generating very low returns in the environment that's very strong in the knowledge that at some point, that will turn upside down and that's good for the total portfolio. And there's examples of that in every asset class. So that's a much harder model than you've got $4 billion or you've got this much VaR or you've got this much risk, go and do the best you can. And often then, a total portfolio approach or what people call total portfolio approach will be go and do that and we'll fix it in the middle with overlays and whatnot. So we have an overlays program, but it's also integrated into that. That was the genesis and that's absolutely how it worked and how it still works. But of course, it worked much easier like that with 20 people and $50 billion. It's much hard to do that with $250 billion and 350 people. But we work very hard at maintaining that culture because we believe that's a really important part of our edge and the way we add value. It's also why we're predominantly in Melbourne and Sydney and we haven't taken on global offices because we believe that information dissemination, collaboration, is actually the secret sauce to our relative success.

Simon Brewer  

That's interesting. Also, you are outsourcing so the boots on the ground in foreign countries, I guess, has a different dynamic to those that are trying to do it in those countries. But the thing that stood out as I went through the portfolio and the transactions of the past was concentration. I noted, now, this was back after the GFC, that you bought over £200 million worth of commercial real estate in the UK, the Bullring, when British Land was being forced to divest. So again, concentration risk, they merge in people's minds. How do you as a group and as a deputy CIO think about that concentration?

Ben Samild  

We think about in all the traditional ways. Everyone looks at the potential downside, maximum loss, volatility, all those things. Obviously, just the same as everyone does. But ultimately, the role of the investment committee is to also say I propose this sort of joined up culture. Essentially, if this is such a good idea, why are we only doing this much of it? So if my property head comes and says, look, I think this is an amazing idea, I think they're throwing this out, my expected return here is whatever, pick a number, and it's really low risk for all of these reasons and they can convince the investment committee of that, what they will then frequently do is say, so within my portfolio, I think this makes sense that, pick a number, 3% of my portfolio, 6% of my portfolio, whatever it is, but it's not their portfolio. They're not running a portfolio. They have a series of assets which go into the total portfolio. And so 3% or 6% or 10% of my property portfolio is not going to move the needle at the total portfolio level. And if this is an incredibly compelling investment, then we should do as much of it as we can because we can bear that at the total portfolio. The conversations look more like that than just make sense in an isolated sub portfolio way. We really try to steer ourselves miles away from that conversation and we incentivise away from that as well.

Simon Brewer

Do you think that unlike the CalSTRS and the Ontario Teachers' that have this fixed liability and the challenge with that every year, it's giving you more room to take that longer term view?

Ben Samild  

I think so. To your point, we've been in the semi luxurious situation of not having outflows since we started and so we were able to look over the horizon. We also don't have inflows, and we're an Australian Dollar investor so we do have to be extremely cautious about the recent UK experience being a wonderful example. We do have to be careful about our liquidity management and not just pinning our ears back and assuming that we’ll always be okay. We are a very procyclical currency. We have a mismatch on margining our FX versus our long-term assets. And so this is one of the joys of being an asset owner in Australia is that you have this other giant risk that no one ever writes about. It's never in the journal of finance that you have to always pay a really great deal of attention to.

Simon Brewer  

Well, I wanted to talk about FX only because it's something that always interests me and I've grown up doing a fair amount of it. In Australia, again like the UK, it has historically been a weak currency because of its deficits in inflation. Actually, the Aussie dollar looks quite cheap on a purchasing power parity versus the US, for example. It sits at the epicenter of the resource, which we're going to come onto in a minute, which may be where this shift in winds is going to prove to be quite helpful to the Canadas and Australias given that. So how active do you have to be with your currency overlays and how does it actually affect or stop a decision to invest somewhere in something else?

Ben Samild  

This consumes an awful lot of my headspace and an awful lot of meeting hours amongst various team members who think about little else. So the secular environment you're laying out is one that we more or less agree with, or at least agree that you should discount the probability of that at a higher level than the previous paradigm. The real issue with that, of course, which I think you're picking up on very quickly is that has profound effects potentially on your return depending on your choice of how much foreign currency exposure you want. But also, if the correlation is shifting, if the risk correlation of the Australian dollar is shifting, you essentially own a very almost completely different portfolio. So a world where you have a very procyclical, pro-risk currency where equities fall, the Australian dollar falls, you get this free put option, not exactly free, but close to free put option on your returns, it does create some interesting portfolio management issues, but it's a real buffer. Now, you have to come up with liquidity and so you have to manage that. Now, if we're going into a world where say the Australian dollar is more, let's call it, I don't know, an atom's over bits will people like things, a commodity supercycle map to or something like that, and you could paint a picture that you could easily get to that assumption. And you think the Australian dollar is much more correlated with things like base metals, which is reasonable and empirical, those base metals are going to stay strong almost regardless of the risk environment, then you don't now get that buffer, you don't have provision for the liquidity. But it's very hard to bet on that with certainty because that solvency issue is so acute. So essentially, it's a much harder portfolio construction challenge.

Simon Brewer

I can see that the logical conclusion is it becomes a higher domestic component given that if you want to access everything from timber to silver, a lot of it's on your doorstep.

Ben Samild  

That's right. we have been taking on more domestic exposure over the last few years with this recognition that that might be better rewarded and a better risk management practice.

Simon Brewer

I also note that recently, you've gone through a review of the environment, which you've been hinting at, and that you published a paper called 'A New Investment Order'. So what came out of that as investors?

Ben Samild  

It was a really fascinating process. Towards the end of 2019, we were starting to think about a couple of things. We were starting to think about our own age, all of these things I just spoke about, about our formation and our history. Our CEO would describe us as a teenager and we hadn't really done a very serious rethink on the way we do this and whether it's still fit for purpose. So we wanted to completely look at the way we invested and make sure we still believed in it, we were still doing it, it was still fit for purpose, did it need adaptation, did it need development. We sort of do that iteratively, but we wanted to do a proper deep dive. And we also started to look at the state of the world and started getting a little bit concerned that things were shifting at the margin. And so we were running exercises in 2019 which were things like imagine say the world just came to a grinding halt and the Australian dollar fell to 50, 40, 30 and risk assets are here and you can't communicate very easily with each other all of a sudden, you can't be in the same room. How are we going to act? The intention was to make you feel what that would feel like now. Little did we know that a year later, that's exactly what would happen and we would absolutely be feeling that although it turns out, you can actually feel it. We had also invested in that technology as a just in case. So thank God, we could actually talk to each other, we could work from home, we didn't have to scramble too hard with daily investment committees and all of that. Now Melbourne, of course, were locked down for longer than any other city in the world. We had a fair bit of time on our hands and so we thought to hell with it, we'll do this complete review of the way we invest and also the state of the world. So one of the streams of work was this thing we called paradigm shifts, which was just a deep dive investigation into essentially the scaffolding of the world, the rules of the game. Were they changing? And if so, why and where might they head? We essentially concluded that it was reasonable to assume that they are and that COVID was a catalyst for this. And what we thought would happen coming out of it was higher inflation, some form of deglobalisation, more conflict, a very profound impact of the decarbonisation movement, much more free fiscal empowerment, rising interest rates but probably monetary being secondary to the fiscal for the first time in forever, that correlations would struggle. All of these things which now seems their prescient is very much in the narrative, the everyday narrative, we started talking about and writing down in 2019 and 2020 and then pushing the portfolio in that direction.

Simon Brewer  

One of the interesting observations you made is that you don't manage the money actively in-house, you allocate to external managers. So let's just talk a little bit about how you identify and access what you term high-caliber managers. Everybody wants to find the good managers but tell me a little bit about how you build your process around identification.

Ben Samild  

The formal way, which is that we talk to everyone all the time. We sit at the center of this giant expert network essentially. We have quite specific needs often in terms of what kind of active management and in what structure and what vehicles or whatever is attractive to us. And they can be quite different to other investors because of our position in the world, literally, our position, our currency, our size, and our constraints. We have consultants and whatnot, but essentially, we do most of it ourselves. We travel extensively, we talk to people every day, we try to understand what we need, and then either we go out and identify the kind of groups that might fit the bill or they come to us. Often, they come to us. And increasingly, as we build our reputation over time, what you realise as an asset owner, is I think that for a long time, you think that you're the powerful person in the room and you're the gatekeeper to all this money and all these potential fees. And of course, you're soon humbled by realising that the people you really want to give money to don't need that at all. It's like a nightclub with a giant queue and that queue is populated with every proverbial rich guy on Earth and they're all desperate to get into that door. So actually, the most important thing is that you understand that, you stay humble. And to me, it's like, okay, well, what on earth can I give these potential partners? I use that word in a very deliberate way because I think a lot of asset owners use the term partner and what they really mean is we give you fees and you do whatever the hell we ask you. What I mean is not that. What I mean is, what are comparative advantages? What view of the world do I have that I can potentially help you with? And for some, that's not much. For some, that might be just I say nice things about you and that's fine. But for others, that can be quite a lot. It can be introductions, it can be, have you thought about this bit of research, have you spoken to this person, others are doing this kind of thing on risk management, I think you're behind, you really need to scrub up. So a two-way information flow which builds your reputation as someone sensible, helpful and pragmatic. Ideally, what that means is then whatever, they raise the velvet rope for you and you're able to engage in a mature two-way partnership and not a transactional relationship.

Simon Brewer  

They raise the velvet rope. I like that expression. I'm not sure the velvet rope has been lifted for me. But your other interesting factor is your geography. You sit there with the biggest economic bloc, China, nearest to you, and not having lots of global offices so easy to feel isolated but potentially quite difficult to also feel integrated into those other big capital market centers, the US and Europe. How do you think about it?

Ben Samild  

Anyone who's been here will know that it's a good 15 hours to the closest financial capital. So we've made the decision that at the margin, our comparative advantage is better served by being together and being able to share information, collaborate. The credit team are close to the private equity team who are close to the infrastructure team who are close to the strategy team and the economics team. Because we outsource, we essentially have a giant global investment team, but it's an outsourced one. So we're one step removed. There are clear potential benefits of being closer to the lifeblood of markets, I guess. I would argue that there are real disadvantages in terms of you are so close that having lived in Connecticut and worked at a hedge fund, you can tend to become fairly reactive to all the parties, all the information, all the hot takes, all the inside grabs. It's a little bit harder to just sit back and be thoughtful about being a long-term investor, which is what we're meant to be doing. And secondly, we used to at least travel a lot. It was imperative that we get on planes more than most and so we would spend somewhere between 6 and depending on what asset class and what kind of person you are and what kind of work you're doing, somewhere between 6 and 16 weeks overseas. I do less of that now when there's more of this and that makes life a bit easier. But we still end up being on planes quite a lot.

Simon Brewer  

Yeah, well, as I said before, I ran into Carolyn Kay, who's one of your senior advisors, who happens to be also connected as a senior advisor at Rothschild where I do some work as well and it was very interesting just sitting in Switzerland having this meeting. I didn't feel alien or far away at all. But I guess the onus is on you folks to travel more because that's just the way it goes. Now, we've talked about how you build a portfolio, what we really wanted also to get a sense of in all these interviews with the sovereign wealth funds is agility, flexibility, i.e. huge pools of capital. My goodness me, these are all vast. That can be an enemy of mobility and flexibility, but it need not be. How do you as a group think about times when you want to make bigger moves?

Ben Samild  

I think we are all passionate and always have been passionate that we would never lose an investment opportunity due to the stickiness of our governance. We have managed to display really efficient and effective and professional decision-making governance really since inception. It really started with, we got a large check in 2007 and we started investing and we had a consultant, and that consultant was telling us to get invested and start putting it in passive equities or whatever. We started down that process and then abruptly stopped on the advice of the investment committee and the Head of Strategy at the time who thought that we weren't getting well rewarded for taking that risk. The consultant pushed against us, and ultimately, we went up to the Board of Guardians where Carolyn is now a member and they supported the management team and allowed us to stop investing, and we sat in cash for a little while and then the world changed, obviously. That became an amazing decision and that saved us a lot of money and really embedded this idea that we would never be beholden to benchmarks as you were investing. It's been quite a seminal part of our culture. So that flows through today. We have a very, very professional and extraordinarily commercial and good legal team and tax team and operations team and all the implementation teams that are extraordinarily diligent and professional and reactive and commercial. Essentially, we are able to make decisions in a really flexible way, in a really responsive way, in really significant size. I'll give you a semi-specific example. During the COVID experience, we started having daily investment committee meetings over Skype at the time. We have better stuff now. We had several opportunities, obviously, like what's our function as an asset owner. Really, it's we're going to make the most money when we are providing stopgap liquidity into an environment where price discovery is really, really difficult. That's ultimately our function in the capital markets system and so that's what we should be very clear-headed about. But to your point, you have to be able to do it, you have to be able to react to it. You have to have buy in. And so in the midst of those daily IC meetings when we're defending the portfolio and obviously losing billions of dollars every day and it's very stressful, we were actually also able to invest in very large size into vehicles that were raised over the weekend. We had IC on Friday, we were invested on Monday, we're able to diligence the whole thing. And this is one of the other ways that you can be helpful to your partners, by being able to provide capital, by being able to understand the opportunity, by being able to diligence, by working the extra hours, by getting up at three o'clock in the morning if you have to, to be on the calls to understand the opportunity set, and then relaying it to your own IC at six o'clock in the morning, and then setting the wheels in motion to get invested. So we're very passionate about that. I think we've done that extremely well.

Simon Brewer  

One of the challenges that I think you've answered but I again wanted to talk to all of these organizations about which is talent and retention of talent. Now, it does seem that you're all incentivized. Just within what you can talk about, you're still there, you've been there a long time. How have smart people been persuaded to stay working for a government entity?

Ben Samild  

That's a good question, one we ask ourselves a lot. And the truth is that we don't hold on to everyone, obviously. We actually have a pretty low turnover. Personally, I can answer for myself and then more broadly, I think for the organisation, there's a really terrific purpose. Every 1% in extra returns I can make is give or take $2 billion. And actually, that buys a lot of stuff. That's 30,000 teacher's salaries if I do my job well. That's incredibly meaningful. That's most of a research hospital, it's a train station. So there's a tangible impact in what we do that's very clear and purposeful and meaningful, and it's not muddied. So that's very important. We also have one client, well, we have 30 million, but we don't see them. We only invest for investment returns. We don't raise money, we don't run around trying to convince people that we’re slightly better than the next guy because we did half a percent better with a half a percent lower vol or whatever. That's not our job. That's really not our job. It's incredibly pure. We get to think about investing. That's what we do. Like I said, we sit in the middle of this wonderful expert network, we talk to all the most interesting people in the world, we have all the access, and we try to do our best to put all that information to do a little bit better for every one of our neighbors. That is actually really powerful and really cool. And if you can't get up in the morning for that, then don't work here!

Simon Brewer

The last investment question comes back to ESG. There is a backlash, which isn't entirely surprising given how euphoric and how commercial much of the investment industry has been. There's a chap we do know well, happens to be ex-Goldman who founded Valor Investments. They have long argued that allocating capital based on ESG scores and exclusions is a flawed investment concept and he asks, ‘As stewards of long term capital, how do you or your third-party managers engage portfolio firms on ESG sustainability with a view to unlock financial value?

Ben Samild  

Obviously, it's important. It's a quality factor. Basic diligence should allow you to overweigh things that are governed well. The sustainability environment, this is the biggest capital event of our lifetime. It's the first time we've retired an enormous amount of operating capital stock that works incredibly well for the sake of the externalities and we're going to replace it with stuff that possibly doesn't work as well. That's an enormous event. It's the world's biggest challenge. It's the world's biggest capital movement. It's going to impact our portfolios and the way we invest for the rest of my life. We also believe that the biggest impact we can have is via our influence, is via our ownership, is via our active ownership, is via speaking to the appropriate stakeholders, and that's been our approach.

Simon Brewer  

Sitting there with China on your doorstep albeit a long way away, there have been more tensions because of the philosophical perspective of the Chinese versus the West. How would you describe the investing lens that you use with China.?

Ben Samild  

This is central to this sort of disentangling, deglobalising world. It's variously described. It's a great power competition. I think the US themselves describe it as some form of intense competition. Jake Sullivan said that just the other day. So that's the crucial change. I think that the world has gone from mutually assured destruction to we'll wrap ourselves in diamond encrusted golden handcuffs and so we'll never be able to punch each other in the face, and now to something else and we don't exactly know what that something else is. At times, I'm sure it will look fine, and at times, it will look less fine. This adds a risk premia, essentially, to all our investing. So we work hard to try to understand that risk premia and if we are better rewarded for taking on that risk, if that's unpriced somewhere versus the stock of global things that we can invest into, then we'll take that into account.

Simon Brewer  

We know that this can be at times a really tough business and when investment performance is not your friend, tell me a little bit about how you deal with it emotionally and how, as a team, you respond to it, particularly when you might have parts of the team that are feeling slightly more pleased with themselves.

Ben Samild  

There's two ways. There's the how do I get up in the morning way, and that's like I was implying earlier, it's more interesting and we can add more value if we get things more right. So that is an enormously motivating force for me. So without the risk of annoying people, I proverbially jump up out of my bed in the morning and think, 'Okay, how can I do this a bit better today?' So personal motivation is not a problem at all. Some version of it's okay to fail, but make sure you fail thoughtfully, and we will embrace thoughtful failure, which I think is reasonably profound because it means A, take some risks, we'll support you, we own them together. Make sure they're well-reasoned risks and then learn from them if they don't work. More volatility means more things won't work and there's a very close relationship between those two. But if we stop taking risks, then for sure, we're not going to get anywhere near meeting our mandate or anywhere near adding the kind of value that we want to add, and adding that value is really important and it's substantial and it does important things for the country. So I don't find motivation hard.

Simon Brewer  

When you leap out of bed in the morning enthusiastically embracing this new world order, what's the one or two skills that you would like to add to your war chest personally?

Ben Samild  

I'm getting older. So I once upon a time would have loved to have been able to run three-minute kilometers and swim properly and all of that. My dreams of any of that are long gone unfortunately. Really possibly a very boring answer but we live at the other end of a firehose of information. So I do jump up every morning, and every morning, my inbox is populated with hundreds and hundreds of messages, and many of them more than not are interesting and they contain some nugget of information. But I only have 24 hours and I have 45 odd people directly and 350 odd indirectly who I feel very responsible for, and then my own family and then 30 million other people. So deciding how to use my time is obviously extremely important. And I think earlier on in my career in life, I would have spent more of it doing the interesting things without really making the connection between I enjoy this, but is there really a point in this? Is that the best use of my time? Whereas this guy, I definitely have had to develop more discipline around that, and I think that's a lifelong thing that I hope to continue to get better at.

Simon Brewer  

Absolutely, you're right. It's a huge challenge for us all. I watched two nights ago on Netflix, this new documentary called ‘The Race of the Century’. I don't know whether you've seen it but it is the America’s Cup 1983. It's Australia's great challenge on that bastion of invincibility of the US yachting club. It’s an absolutely fantastic race of the century. So there you go. I'm not an agent for Netflix, but I was captivated by that. Well, look, you have got another 150 emails that you probably still need to go through. It's the end of your day. I've taken up nearly an hour of your time and we really, really appreciate it. This has been, again, a very different interview because you've given us lots of things to think about. If I was summarising maybe two things that struck me in this conversation is that, again, unlike many, the corporate ethos is that being together is a corporate advantage, and I think that runs against the tide of global footprint firms with local expertise. I like it because Australia is the place you'd least expect to find that as a core belief. And you elaborate on the fact that this could be a new investment order, the world's disentangling, but the things that won in the previous 15 years with super cheap money are unlikely to be the winners, which does mean that your portfolio is going to have different components, whether that is higher commodity components or even a different thinking around currencies. I'm not sure that that's being embraced in lots of quarters where I travel and observe. So, Ben, it's fantastic to be speaking to you on the other side of the world. Hopefully, the communications will have worked and this will be a flawless production on YouTube and on the audio channels. I very much look forward to meeting you in person on one of your trips. So thank you so much for being with us today.

Ben Samild  

Absolute pleasure, Simon. Well done on the success of this podcast. It's quite the array of luminaries you have on your website there. It's very intimidating.

Simon Brewer  

Well, fantastic. Thank you very much.

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In the second episode of our Super Allocator Miniseries, Ben Samild shares the history, strategy and mission of Future Fund (Australia's SWF).

In 2002, the Australian Federal Treasurer, Peter Costello, commissioned the Australian Treasury to look at the long-term issues facing the nation and how adequately current generations were preparing for future ones. The message was bleak; “Australia’s ageing population would put immense stress on public finances, especially on health and aged care spending, over the next four decades”.

To help address this, the Future Fund was created, and it now looks after six public asset funds (totalling AUD $243.5bn of AUM, as of 31/12/22).

So in the second episode of our Super Allocator Miniseries, Ben Samild, Deputy CIO of Future Fund, explains its mission and strategy, including Future Fund’s mandate to achieve CPI + 4-5% returns per annum.

He explains the “total portfolio approach”, why they locate portfolio managers close to another, their approach to external manager selection, and why in the words of their former CEO that “too many institutional investors arbitrarily filled pre-determined asset class buckets with too many average quality assets in the name of diversification…risk management at its worst!“

From commodities to FX, from concentration to ESG issues, this is a compelling conversation that crosses borders and asset classes, and challenges some conventional thinking.

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