In this episode, Alan Dunne speaks with Dan Mikulskis, CIO of People’s Partnership, about the evolution of large pension funds and what it means to think like an asset owner. Managing over £40 billion for millions of members, Dan explains how scale changes the way portfolios are constructed, managers are selected, and partnerships are built. The conversation explores the balance between passive and active strategies, diversification beyond equities, and the growing role of private markets. Dan also shares insights on governance, investment philosophy, and why humility is essential when making asset allocation decisions in complex global markets.

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Episode TimeStamps:

01:33 - Introduction to the global macro series

02:18 - Introducing Dan Mikulskis and his background

03:38 - From actuarial science to investment consulting

05:45 - The history and growth of People’s Partnership

08:18 - Auto-enrolment and the rise of large UK pension schemes

11:12 - What it means to operate as an asset owner

13:24 - Building the investment team and ownership model

18:34 - Scale advantages in manager relationships and partnerships

23:24 - How large asset owners select external managers

28:58 - Balancing core partnerships and specialist managers

34:25 - Macro insights and quarterly investment forums

37:34 - Portfolio construction and diversified growth strategies

43:19 - Concentration risk and global equity allocations

50:44 - Factor investing and style diversification

53:30 - The role of hedge funds and alternative strategies

56:08 - Total portfolio approach in pension investing

58:56 - Measuring performance and evaluating investment teams

01:03:18 - Career advice for future CIOs

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It is quite a powerful thing to do. So, I do think it's worth deeply getting into it. And a quarterly basis is kind of about right, but it's quite helpful to frame it with a little bit of humility to kind of say, well look, we better understand what the consensus is and better acknowledge that's probably priced in and has quite a good chance of actually being right.

So, you know, where do we actually have conviction in something that's differentiated from consensus is the question that everyone's got to answer really, isn't it?

Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.

Before we begin today's conversation, remember to keep two things in mind. All the discussion with have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions.

Here's your host, veteran hedge fund manager Niels Kaastrup-Larsen.

Welcome and welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical cycle. We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macro-driven world may look like. We want to explore their perspectives on a host of game changing issues and hopefully dig out nuances in their work through meaningful conversations.

Please enjoy today's episode hosted by Alan Dunne.

Thanks for that introduction, Niels. Today I'm joined by Dan Mikulskis. Dan is Chief Investment Officer at People's Partnership in the UK. It's one of the largest UK pension providers managing £40 billion in assets under management.

Dan has been in the markets a number of years previously an extensive career as a consultant with Lane, Clark; and Peacock, Reddington and Mercer, and also experience in the sell side in trading.

Dan, great to have you with us. How are you doing?

Oh, great, Alan, thank you so much for having me. I'm really looking forward to the conversation. Thank you.

Not at all. Great to have you, and I didn't mention, I am a reader of your LinkedIn blog. How often is that?

Oh, it slips a little bit more recently. I used to do it every couple of weeks. Now it's more like once a month. I try and make it worth reading, so, when I've got enough good stuff to go into it, I try to publish one.

Absolutely. We all start off very ambitiously thinking in terms of weekly or bi-weekly, and it does slip, but it's always an enjoyable read that covers a lot of topics, so I enjoy that. I mentioned your career trajectory a little bit in terms of background, in consulting, and we always like to start off by getting a sense on how people got interested in investing in markets in the first place. So, what got you interested in investing to start?

Well, yeah, I suppose my career sort of started off on an actuarial route, really. I mean, yeah, most of my career, as you say, has been in consulting. I did have that little diversion when I moved to Australia and worked more in investment banking, and we can talk more about that if you like.

But I mean, most of my career has been in consulting and I studied actuarial qualification as a graduate. I was doing my master's degree at university, and did an actuarial science module there, and for my sins was quite drawn to it in terms of, I think, the sort of practical applications of some of the mathematics. And I was also quite drawn to the idea of doing a professional qualification.

I mean, if I'd known how many sort of weekends in my early 20s I'd end up spending studying rather than going out, then I might have reconsidered that. But anyway, I considered it a bonus that you could study for a professional qualification. Sounds a bit mad to say that now.

Interesting. And then over time, obviously, you've transitioned more from consulting into being a CIO. And that People's Partnership, it's obviously a business that has grown quite rapidly. I mentioned £40 billion in assets under management. I think when we chatted previously it was only £20 billion a year or two ago.

But it definitely would be helpful, I think, for our listeners just to give us a sense of what People's Partnership does and kind of the history behind, you know, its origin and evolution.

Yeah, absolutely. I’d love to. I mean, I've been at People's Partnership for about two and a half years now and it's been fascinating learning some of the history of the organization, which, obviously, I've not been part of for most of its history. But it is a really interesting organization and, you know, I think it's a sort of a model that has a lot wider applicability.

And because of the profit for member ethos, rather than a profit for shareholder type thing, the organization was able to offer that pension to organizations of all different sizes, from big employers down to the much smaller kind of SMEs - two three person organizations. And that, really, was key, I think, to our success in that we were able to bring on-board 100,000 employers that use us as their vehicle for auto enrollment.

And that's led to a huge amount of members, a huge amount of people around the country paying into People's Pension every month, really, which has sort of compounded. These things compound over time, don't they?

What that has meant, over the last few years, is quite an astronomical growth, in terms of the AUM. As I say, I joined the business two and a half years ago. We'd just gone through £20 billion AUM and recently we just crossed £40. So that's just the last couple of years, really, in terms of the growth. And that sort of trajectory is what's going out into the future as well.

Great. So about 100,000 employers, and how many ultimate members would you say?

Seven million.

Seven million, yeah.

So, it's a huge proportion, and about 2 million of those are actively contributing every month. We have a lot of deferred members as well. That's partly because a lot of the employers that we service are in the sort of sectors of the economy like retail, hospitality, construction, where people might do contract work. So, three to six months contract, they pick up a pension with us and then they'll leave and go to another job.

So, by the nature of the kind of segments of the economy, you end up with a lot of deferred members who have relatively small pots, and then you've got that core of the active members. So, 2 million kind of contributing every month.

Well, that's a very good question. I mean, it's very similar to how the Australian super funds are set up. So, there is Cbus, which is the construction industry super fund in Australia. You could view that as a pretty close cousin of us, really. And yeah, in Australia you've got a much bigger grouping of these industry super funds that came up around particular industries. Obviously, you've got Hostplus in the hospitality space, Rest in the retail space, and so forth. And they're operating the same kind of profit for member model. So, I think it's a little bit more common in Australia.

You also see it a little bit in the Netherlands. So, some of the funds there are sort of on an industry basis. I forget the exact names now, but one of the larger ones there is a sort of healthcare industry fund, which, again, is set up on that kind of basis.

So, yeah, it is models that you see elsewhere. Actually, it's maybe been a little bit underappreciated in the UK. I suppose you can view that auto enrollment was sort of grafted on top of the existing pensions landscape in the UK, which was mainly a commercial sort of retail sort of landscape, without necessarily a lot of thought being put into the nature of the institutions that were going to grow up out of that.

Very good. So, I mean, in practical terms, you are a large, basically DC pension serving 7 million clients effectively. I guess that puts you in the category of asset owner. Is that fair to say? I know that's a term that we increasingly hear these days is the kind of the power of the asset owners and how they think about managing funds. I mean, does that shape your thinking in terms of how you organize the business and set your investment strategy?

Yeah, absolutely. And that was my big kind of thing, I suppose, when I joined the business two and a half years ago was that we should consider ourselves to be an asset owner and should set ourselves up very deliberately with our asset ownership model at the forefront of our thinking. Now, that might sound like the most obvious sort of statement ever, but it is kind of not. Because where UK DC Trust came from, they came from, you know, they were sort of a startup in some ways. They're starting from ground zero in terms of assets. And obviously, when you do that, you have to set yourself up with the most efficient, cost effective, cheapest, simplest model you can, for very understandable reasons. So, UK DC grew, from necessity, out of a very basic approach to asset ownership, which was basically, you know, passive pooled funds, single provider. And, to be honest, that worked really well. I mean, passive has done pretty damn well for the last 10, 15 years.

So, you know, good investment outcomes, good value for money, you know, cheap to oversight - what's not to like sort of thing. And so, certainly, that has got us pretty far. But my view was, at £20 billion, it was time to sort of move on and grow up that model. And, certainly, at £40 billion, I think you can and should have a bit of a different approach to asset ownership.

And there are a variety of approaches to asset ownership model actually. And, I guess, part of my point was your decisions around your asset ownership model are kind of upstream from all your other investment decisions. You can talk about, do you want to be in US equities, private equities, emerging markets, private debt, infrastructure, what have you. Upstream from all of that is your ownership model and how you want to set yourself up.

So, I suppose my thing is that you ought to spend some time thinking about that and kind of getting that right first before you start trying to grab all the nice shiny things and talk about your latest ideas, whether you want to be long, this, that or the other.

Yeah, and I mean, so, what are some of the kind of considerations that you have to think about when you're in that setup phase or, you know, what are the different routes you could go down that you've considered?

I think the first one was team. That was the first sort of key plank of it. I mean, we sort of took it down to about four or five different pillars there, but the team was one, partnerships was another, segregated mandate, sort of direct ownership was another, systems was another one, and governance being another one. So those are the kind of main areas that you have got to consider and you have got to decide where you sort of land on it.

But yeah, team has to come before everything. And I, sort of, my viewers, we wanted a pretty specialized kind of senior, seasoned investing team that could have specialists across all areas, but we wanted that team to stay pretty kind of lean and focused.

So, we're at about 30 individuals at the moment, 30 people full-time on the investment team, which is a lovely number because we can get all of us in a large conference room, which we do that twice a week and just get all on the same page. It's really, really nice. So, we'll probably grow a little bit from that. But that kind of 30 to 50 number I just think is a real sweet spot for a team.

And obviously the asset management is an outsourced model, and we're deliberately, as part of our philosophy, relying really heavily on those managers to get a lot of resource out of them and do a lot of the work that, in a different world, we might have a large team of analysts set up to do, but we're trying to run it sort of very efficiently, if you like, with that relatively focused team of kind of senior investors. So that was the starting point, getting the team right.

And, I mean, obviously, as you say, a key element to it. I mean, what's the kind of attraction or the pros and cons of working in a kind of a large asset owner in this space? You know, in terms of, is that an attractive place to go, are you finding, for investors? Or does it attract a certain type of person or what would you say about that?

Yeah, absolutely, it is an attractive place to work. He says, extremely self servingly. Obviously, you know, I've seen, our profile has changed massively over the last two, two and a half years and we've, yeah, I think we've really put ourselves on the map. We had a fantastic advertising campaign back end of last year, that I think I can't take any credit for. I wasn't involved in that.

But that's really put ourselves on the map as well as just the growth and some of the headlines. So, a lot of things have come together to make it just, I think, a far more well-known proposition now, and therefore far more attractive.

When I joined the business there was a bit of a sense of gosh, wow, these people seem really big, but I've never really heard of them. Is it actually real? What are they actually doing, kind of thing? And we're well past that now. Certainly, when we talk to asset managers, everyone knows who we are, and gets it, and gets the growth. And when you're talking to people who might want to come onto the team, it's the same now. They've really kind of seen that. So, that's changed a lot over the last two years.

Yeah, and obviously what comes with size and scale is more clout and, I guess, more flexibility as you say, more recognition in the market. I mean, obviously, you can see the ability to negotiate on things like fees, I guess. I mean outside of that, what else is that kind of size and scale bring?

I think, yeah, the ability to negotiate with managers is a big unlock for quite a lot of things. It's not just, ‘give me cheaper fees’, although that is obviously a part of it. It's a lot of other things as well. It's about how bespoke you can get the structuring on the fees. It's not just, ‘give me the fund for slightly cheaper’, it’s, ‘can we talk about some kind of SMA where the whole structuring of the fees is completely bespoke to what we want’. And that takes a lot of time, and effort, and focus from a manager to deliver that. So, you need the bigger size to kind of get them interested there.

But yeah, you also get a lot of access to other sorts of areas that the managers can deliver. So, doing research projects, getting insights in strategy and macro, even collaborating with managers on policy work, We have a huge number of touch points with the managers that we work with and people, throughout their business, give us a lot of their time and effort.

I think that's partly because we have big mandates with them that are growing fast and they see the value in kind of investing in that relationship as well. So, I think, yes, you can get a lot of value out of it.

Another point to make is on systems. So, with the managers we've worked with, we have kind of developed and delivered systems and portals. So, we have various views into the portfolios that they run for us, which is just really helpful from our perspective. It makes it so much more efficient and easier to stay on top of those portfolios given a larger proportion of our assets is with the manager. And then we have a system that can give us a direct view into it.

It's a really nice setup. Much easier than if we had 10 dozen managers, and trafficking Excel spreadsheets back and forth, sort of thing, to get a sense of it.

Yeah, and obviously, I guess, as well, what comes with size is the possibility of running strategies in house. So, I guess if you have sufficient assets it can become commercially feasible or plausible to run in house as opposed to going out to market. How do you think about that? Is that something that could become even more of a consideration if assets grow again more or not? Or are you very much in the outsource model?

I mean, it's a road that some large global asset owners have gone down. You know, I spent a bit time in Australia talking to the Aussie super funds, and a lot of them have decided to go down that model where they look to insource a proportion of the asset management. I think there are typically, sort of, three reasons why people do that. One is cost. But that's not the only one. I think it's cost, probably control, and then alignment. And I think it's sort of, yeah, I think some combination of those, really, are coming into play.

I think people don't want to give the impression it's just a cost thing because that can sound a little bit, I don't know, a little bit kind of excessively kind of capitalistic about it, I suppose. But the cost thing, that depends a lot on what your current baseline is, in terms of the fees you're paying. And that baseline varies a lot.

So, yeah, if you're paying decent fees, active management, then I can see why there'd be a big saving. But equally, if you've got your fees baselined in an already pretty low level, the cost one might not actually be as big as you think, in listed markets, certainly. So that's an interesting one to explore. That varies a lot whether that's a good trade-off or not. And the other ones are equally as interesting.

So, alignment is a key one because, you know, these principal agent issues, they're really real in investing. And, you know, I've often talked before about, you get this sort of traditional view of investing where an investor owns stocks in companies, and it's as simple as that. And then the investor makes all the decisions, you know, about asset classes, sectors, buy, sell, all that.

Whereas in practice, there is quite an elongated chain of providers and so forth, in the mix. In some cases you might have something like, you know, a trustee, a consultant, a provider, a platform, a manager, an index provider, all sitting between an investor and what they're investing in. You could easily have seven or eight layers between. And when you’ve got a chain like that, the principal agent problems at each link in the chain can really mount up and can really end up meaning that some things aren't actually being done in the interests of the end saver, at the end of the day. So, getting alignment in that chain is really important and collapsing down that chain.

So, I thought about that. I think asset owners can collapse the chain down a little bit by having direct control in segregated mandates and bringing some of that decision making in house. There is the thinking that in-housing asset management is kind of the ultimate alignment because you're doing it internally, and I would say yes, probably.

But I think it is also possible to really work hard on the alignment with external managers as well. And that has, up to now, been our focus, to be honest with you, is trying to say, can we really rethink the way we're allocating these assets, how we're choosing our managers, really, really get max alignment? We can with an external manager. And I think you could go quite far there actually. You really can, if you do that right.

You know, it's a very different situation than allocating to a pooled fund and a manager versus sort of crafting an SMA with a manager that's just deeply, deeply aligned with you in so many different kinds of ways. So yeah, I think the insource versus outsource is an interesting discussion.

Yeah, we're more focused on an outsourced model over the current planning horizon. And I think, when you chisel away at them, some of the benefits of insourcing are not always as big as might be perceived because you can bear down a lot on the costs and you can actually do more on alignment than you think. So, you shouldn't sort of knee-jerk think that it's all about bringing it internal.

Yeah, interesting. I mean, you touched a lot on the kind of external managers, it being very much a partnership. Obviously, when you have such a large amount of assets, all asset managers are presumably queuing up outside to do business. So, there's a lot of choice. How do you think about, you know, going from that global universe of managers down to a more manageable, you know, shortlist to consider?

Yeah, that’s a fantastic question. We've been through that process now about four times and yeah, obviously, the big ones there, that got announced last year, where we appointed Amundi to manage, develop market equities; Invesco on fixed income; and Rubico on emerging market equities. All of those were quite lengthy processes.

Part of that process (probably familiar to anyone who's done a manager selection piece), there's some common elements to it. You want to have some kind of starting point in terms of a universe tool. You know, we use the likes of investment on the liquid side, global fund search.

You need somewhere to start with the universe. You need some basic kind of screening to get you down to a sort of fairly large but manageable number. So, 20 odd, something like that. And then we would typically do a kind of model portfolio sort of exercise with the 20 odd, and then look to cut that down to a sort of shorter list, ultimately getting down to a short list of about 6 to 10 managers. Then you're going really deep with the multiple meetings over the course of a long period of time. And yeah, we come up with a balanced scorecard and score them, and all sorts of things there.

But end to end, that process, for us, has taken us about nine months. And yeah, you learn a lot about the managers over that period of time. It's really interesting. That's where the kind of partnership bit really comes through because that's not so much about ticking boxes, but you do just learn a lot by how they show up in every single interaction. You know, are the people briefed? Do the people understand what you want the whole time? Is there consistency in terms of who you're speaking to, what's being talked about? And that doesn't come through on a one-off meeting, obviously, but over a nine month period of time it sort of comes through.

And obviously the managers, I just sort of mentioned, generate the larger end of the spectrum. Obviously, Amundi and Invesco, probably both are in the largest 20 managers in the world kind of thing. So, we're talking big organizations here. All the managers we were talking to there were big organizations.

And that, that comes with its pros and cons, doesn't it? Big organization means you've got loads of cool stuff, but big organization means it's big and it just can be tricky to navigate. So, seeing how our key relationship point person navigated that for us, over the period of time we were assessing them, was also quite important. And then the role of that relationship point person became really key over that period of time. And so, understanding how they operated, seeing how effective they were at getting the resources of the organization and bringing it to bear, was quite interesting and quite a big differentiator, actually.

Yeah, I just think some managers that have done that well, some have sort of underappreciated maybe that side of it. And I get why. I guess, as I've been a consultant for a while, I think there was a time there when it was very much a product-led sort of marketplace where consultants were very focused on, give us your best product, give us your best product in this category, your best global active bond fund, your best multifactor equity fund. And this wasn't particularly a focus on the relationship and extracting the value from that.

But I think things are shifting there with more bigger asset owners and the partnerships being able to deliver those relationships, I think, is a real, real skill. And it's brilliant when it's done well, it really is. And there's quite a lot of dispersion across the industry in terms of how effectively that can be delivered. And yeah, as I say, you don't discover that in a one-off meeting because everyone looks great in a one-off. It's the nine months of interaction and the back and forth that sort of reveals that, to some extent.

Yeah, interesting. I mean, I guess most or all large asset managers would talk about their solutions capability and, internally, we talk in terms of kind of consultative sales, but it sounds like there are quite notable differences in how good but they are delivering that. Is that it?

Yeah, that's been our experience for sure. And yeah, it certainly depends on the individuals that you've got and how that sort of process works. It also reflected a little bit of the culture of the managers, I think, a little bit. Again, when you go through a long process, you do sort of get a sense of the culture, how flat is the culture, is it hierarchical, how sort of clunky and bureaucratic is it internally to get things done? These are things where I think it's very tempting, as a manager, to feel like your internal kind of inefficiencies are somehow invisible, but they absolutely do, over a period of time they come through.

And as a client you can sort of sense if it's really clunky going from one side of the business to the other, or in trying to go from one office to another, or from one function to another. Whereas, other ones who are flatter, or have a more open culture, or whatever, can make that a little bit easier. So yeah, I think there's a whole load of considerations there that are worth focusing on and perhaps have been a bit underappreciated.

Yeah, I mean, there is that kind of trade-off between building deeper relationships with a smaller number of managers, and keeping the kind of the perspective broader, and considering lots of managers all the time. How do you think about that trade-off for what is the kind of correct number of relationships you want to maintain? I mean, could you use one asset manager across multiple asset classes or not? Or how do you think about that?

Yeah, we've been constantly debating that, honestly, where the right thing is there. I sort of had this quite strong view that the right number of manager relationships is less than most asset owners have, basically. And yeah, it was pretty common, like in the UK, even a modestly sized asset owner could easily have two dozen managers on the roster. That happens very frequently. I do think that's too many.

But we started to have those conversations around that there is a limit to that. There are some areas we're looking at where I've become convinced that you do lose something if you're trying to get a manager to stretch over too many different areas. And also, yeah, what about boutique managers? Smaller managers have something to offer and you sort of struggle to fit them into the sort of thing I've described.

So yeah, we're starting to develop approaches to saying, well, okay, this is our core number of really core partnerships. And that number, I think, might be quite small. I can see that maybe never being above maybe half a dozen kind of really, really core… because we have to invest in those as well. We absolutely need to spend a lot of time. People on my team will be talking on a daily basis to some of these managers. We have these structures set up for all the meetings that we're holding with them over an entire year. We kind of set that all up. So, we absolutely need to invest outside, and you can't do that with a big number.

But then there's a second question of, can we find ways of slotting in smaller, more specialist allocations into that without breaking the model, which is something we're looking into at the moment, some really sort of exciting kind of operational, potentially ideas, some ways of delivering slightly more specialist managers in a way that still preserves some of those efficiencies and doesn't kind of break that model.

Because, yeah, you're right, even big managers can't do everything. There's some really good stuff that you can go to if you can access the specialists.

Yeah, and I mean, you're talking about partnerships. So, presumably they're providing more than just, obviously, running a portfolio in the segregated mandate. It's, I suppose, research assistance or bespoke projects, things like that, is that part of the value added?

Yeah, absolutely. And one example we used a lot early on, when we were talking to them to try and bring it to life was that this question of macro insights, if you like, as a general thing. And the sense that… Obviously I can say to any manager, can I get a call with your chief macro strategist? Everyone will say yes, and then there'll be a bunch of emails backwards and forwards trying to find a time, that will go in the diary, in, like, four weeks time. We'll both dial into the meeting. I'll be a bit of a, well, why are we here again? And then they'll slot into their usual kind of patter, which they've done a load of times, and they’ll be very good. But, you know, probably on average, 50% of it will be relevant to me and 50% won’t, and that’s it. And then it'll be a lovely meeting. We'll say, thanks very much, close the meeting, and that'll be it. That's one version of it.

Whereas I was saying, what the partnership is more like is, if we have someone on their macro team who's kind of, you know, going into the office in the morning, kind of thinking, ah, we've just changed our view on European equities, I must get on the phone to Dan and his team and let him know because I know they care about that and that's something they can do. It's having that ongoing thing in the diary where every single month we're keeping up to say, okay, you've changed your view there.

Okay, what do you think about Japan? Are you still neutral on the US? What are you thinking about this? What about the dollar?

And just keeping tabs on it, all the time, so that we can sort of synthesize that information and make it far more relevant to us. Because it's very easy for someone to pop up and say, yeah, short the dollar kind of thing. But it's different to say, well, okay, but what did you say three months ago, and six months ago, and when did you change, and what's your conviction level and what's your time horizon? And you only learn all that stuff by having an ongoing conversation with them over a period of time, really understanding how they think about it.

Even to the point where, you know, with the managers we work with, for example, we get input from their sort of central strategist teams and then also some of their multi-asset risk takers. Now, those are different viewpoints and they might not always agree and that's fine. But it's really interesting to know, is that a strategist call or is that the multi asset risk takers call? And so, you're starting to tune into the different ways those different teams work, the different way their incentives operate. So, it's really interesting and that's been great.

And I think all that comes down to us kind of synthesizing all that in an effective way and bringing that information together, you know, into the meetings that we have, every quarter, where we're looking at our allocations. And it's just far more useful when my team has been in almost constant contact with a small number of these kind of strategists, and then my team can kind of come into the room and represent all that rather than us just having a one-off call with a strategist who says, buy this, sell that, buy the other kind of thing. But we never spoke to them before, so we don't know if that's new views or something they've been talking about for 10 years.

Yeah, interesting. I mean, obviously you’re long-term investors, you have to be cognizant of the news flow, but I guess you're not overly reactive. So, to what extent are you using those macro insights, day to day, week to week, in kind of asset allocation or even within asset classes at all?

Yeah, it's a really good question. I mean I spend a lot of time trying to make the point that it is important to step away from the noise. And when it comes to most headlines in markets, most headlines you see coming across Bloomberg, I do think a decent starting point is it's pretty much all noise, actually, and you've got to remind yourself of that. And I also try and remind my team that most of the time consensus is probably about right and it's probably already priced in.

So, I think markets do a decent job of pricing stuff in, and you better know what is priced in. There's no point sitting there saying, oh, you know, I love US equities, or whatever, without recognizing that that is already pretty well priced.

So, in that sense, I'm quite far across the sort of efficient markets side of the world. There is a ‘but’, which is, I do think you can do a little bit better than that. Emphasis on ‘a little bit’. And it is worth doing that because we're a £40 billion fund, so, if we can just add a little bit through that dynamic allocations or whatever, it's worth doing. But you’ve got to have a bit of humility about it. I think you’ve got to set yourself some clear guardrails and some kind of expectations for how much you're going to really achieve. I think we can definitely add a little bit more by leaning into and out of some of those regional allocations here and there. But you don't want to get carried away that you can be some kind of active macro trader swinging around all over the place because, I just think that would be going too far.

So, yeah, we do have a quarterly process. We have quarterly investment forum where all the key investors on the team kind of sit down for half a day. We try and run through all the positioning that we have in the portfolio. And the idea is to sort of re-underwrite that on a quarterly basis.

Now it doesn't mean we change it every quarter and quite often we don't. But I think it's a really helpful practice because, when you do come up and want to make a change, it's so much easier, having had that conversation three, four times, sort of flagging the indicators you're looking for, then it sort of happens, then you have so much more conviction in that change. So, we're probably only making changes like once a year, maybe less than that in these areas.

But I think to inform that, a quarterly conversation, that starts with kind of macroeconomics and then works its way all the way through to kind of regional allocations, duration, maturity allocations, and credit and fixed income sort of thing, is quite a powerful thing to do. So, I do think it's worth deeply getting into it. And a quarterly basis is kind of about right, but it's quite helpful to frame it with a little bit of humility to kind of say, well look, we better understand what the consensus is and better acknowledge that's probably priced in and has quite a good chance of actually being right.

So, you know, where do we actually have conviction in something that's differentiated from consensus is the question that everyone's got to answer really, isn't it?

So, from an asset allocation perspective, I mean, obviously I guess you're looking at the traditional assets, bonds and equities. But beyond that, is it real assets, is it all liquid, any privates, any alternatives or where do you draw the line?

Yeah, so at the moment we're just sort of embarking on moving into private markets and illiquids, and hopefully, the next year or so, we'll have established a program probably across infrastructure and real estate to sort of move into real assets. But as things stand today, generally a liquid markets portfolio.

If I could just take a quick step back, I suppose, maybe talk about how we think about asset allocation. You know, in general, we sort of run this process to try to start with beliefs, then map it through to objectives, put a bit of a framework around that and then research, and then have a strategy that comes on the back. So, it's beliefs, objectives, research, strategy.

And so, we try to spend time on all parts of that, but particularly getting the beliefs right can get you quite a long way. And so, there, what we're trying to do, obviously, is returns in excess of UK inflation. I think that's what drives good outcomes for member’s pensions over time. That's what gives them the ability to accumulate a pension and then sort of spend it down.

Various beliefs around needing short and long-term measures of risk and volatility is not really a great measure of risk. Often we're looking more at the chance of a member falling short of that long-term return outcome. So, it's kind of long-term probabilities.

In some areas we do care about drawdowns because members approaching retirement do care about falls in the value of their pension. So yeah, your beliefs can set out some principles around how you're going to do it and then you can kind of translate that into clearer objectives.

So, in the growth phase, inflation plus 3%, inflation plus 3%, 4%, you can generally show that at the current contribution levels… That is a decent kind of accumulation rate that gets people to a decent place. And then, when people are approaching retirement or at retirement, it's inflation plus a little bit, maybe inflation plus 1%, 1.5%. Something like that is more what you're sort of going for there.

So, that gives you a bit of a return hurdle to go at. And then that sort of mirrors the two asset allocations that we run, really. We've got one main default and that has two main components to it, a sort of growth component and the pre-retirement component. So, it's a pretty clean structure. And those kinds of growth returns, say inflation plus 3% to 4%, that's a sort of an equity-ish return. And a lot of our peers are 100% equities at that point.

But we sort of hold a belief that there is some value in a slightly smoother return stream than that. And our kind of philosophy there is that we would like to see different return drivers driving that growth, not just equities. So, trying to put together a growth portfolio, ideally, that leans on equities, fixed income, and real assets, as kind of three growth drivers that are kind of working together to deliver sort of equit-ish like return in the growth phase, which is basically what we're here for.

And then the pre-retirement phase, as I say, that's quite different. That's much more focused on getting the drawdowns as low as possible, but still doing a little bit better than inflation. Not surprisingly, that's more of a fixed income, short, dated type allocation that you sort of get to there.

But we also work in terms of trying to map those targets to kind of a reference portfolio which we can then map down as a bit of a clearer benchmark for the asset classes because those inflation targets are a great starting point. But they're obviously not investable directly. So, they don't give you as good a day-to-day benchmark as you might need.

Yeah, interesting. I mean, obviously, you're not all-in on equities. You're saying you're kind of diversified growth in the sense of real assets and, presumably, in fixed income you're looking at credit as well. Then, obviously, it's been a tremendous run, the last 15, 16 years of bull market, since ’09, which begs the question, are there tougher times ahead at some point and what that might look like?

Yeah, I mean, look, we're still pretty equity heavy, right? So, we're, by no means, bearish or pessimists on the equity front. But yeah, you're right. Equities have had a great 10, 15 years. Strategies that were 100% equities have done really well. So, well done to the people who embraced equities to that extent.

So, I think that's probably where we're coming from. It's not so much saying, oh my gosh, terrible things could happen to equities. We're bearish and we're going to get all defensive. It's more just saying, well, equities are great but maybe there is a bit of value in just trying to take a slightly more balanced perspective on it than being 100% kind of equities.

I mean, there's a whole raft of issues, even for a long only equity investor, in terms of you’re UK based, and a lot of talk about the UK market has been abandoned by UK investors, etc. Equally, you know, you take a global index, you end up with a lot of US exposure, a lot of concentrated exposure in high growth technology stocks. So, what's your starting point about what's the sensible way to think about your equity allocation?

Yeah, so the starting point is the right question, and ours is global market cap starting point. That's a clear sort of belief that we have there. And I'm pretty, yeah, I'm definitely on the side of, as I've sort of said, market efficiency, in that sense, that the starting point in global listed equities should be global. I think in other asset classes, by the way, you can justify more of a home bias for different reasons. But in global listed equities I think they do a pretty good job of pricing in the future if a particular region is going to have better revenue growth, or EPS growth, that will be reflected in the prices and therefore reflected in the allocations.

The starting point is global but, like in so many areas, we do set ourselves up so that we can control those allocations ourselves if we want, and make changes to them. So, we have a regional approach to our equity benchmarks for example. So, we have a North American portfolio, European, Japanese, UK, Asia Pacific, emerging markets sort of thing, and we allow ourselves a bit of a tracking error budget to lean into those allocations a little bit.

But we try and keep ourselves honest by not trying to deviate too much from the sort of global portfolio. Because obviously we've seen, over the last 10 years, it was very fashionable for a large part of the last decade to be underweight in the US, overweight emerging markets, and, until recently, that had been a very, very painful trade. So, I think you’ve got to be really cautious in the sort of way you're doing it.

But the concentration point is a really good one. So, I will take that, although I'm sort of quite far on the efficient market side. I think that is a sort of a legit knock on the global index approach to the world that there isn't a great answer to. It would appear that those global indices are somewhat lacking in diversification, you might say, which is a bit of an odd thing to say.

So yeah, there are a few levers you've got, to kind of lean against that, but one of them is yeah, to sort of cap your… If you've got that regional approach that we've got, you can sort of put a cap on your US exposure, let's say, half the portfolio, let's say, which then kind of waters down the effect of that concentration a little bit.

So, I think concentration is something to think about. It's difficult to come up with a good sort of theoretical market efficiency type argument around it. And so, I think people will have their own approaches to it. But that's certainly one of the things that's in our mind when we're looking at those regional allocations and the concentration there, trying to get, you know, proper diversification in.

I think, the way things have gone, your US versus rest of world allocation is one of your top level strategic decisions as an asset own owner these days. It's going to make a big difference. It has made a massive difference over the last 10 years. Obviously, last 10 years, more US, the better. You know, going forward, that's going to be a big kind of decision. And our stance has been lean slightly away from the US and more towards rest of the world, which I've sort of done okay I suppose the last year or so, but we'll see.

And another one is obviously what you do with the dollar, and your currency hedging there in terms of that the global indices as well as being concentrated in technology and, in certain companies, obviously gives you a lot of dollar exposure. And yeah, written multiple very long papers on what that means and what you should do with it. I think there's quite a good argument that, from a UK investor perspective, it's actually a pretty decent hedging asset to hold dollars. And so, you should think hard about how much of that you want to sort of hedge away.

It might be quite nice to hold dollars. There have been certain regimes, post ’08, where holding dollars is kind of almost like a free tail-risk hedge. So, that's another thing we do, we do think a lot about what we're doing with those dollars.

And is that something that you would review, as part of your kind of quarterly process? Obviously, there's a lot of, now, debate about the dollar. As you say, it has had that role risk-off characteristic in stress periods which has been beneficial, say, for non-US investors. But obviously, we've seen the shift in sentiment in the last year, people questioning will that always be the case? You can get carried away by the news and the short-term sentiment but there is a structural argument there that might play out over many years. What's your thinking on that?

Yeah, I mean it's something we review. We've been doing quite a lot of work around it recently. It's always such a hard topic to pin down because there are so many ways of approaching it, so many angles to it. We can't take the view that you've got to try and step away a little bit from just a view on the levels of the currencies because, you know, who knows on that really? They really can go in any direction.

I think the analysis we've seen that, you know, managers have done for us and so forth, unless sterling is at very extreme valuation level, it is quite hard to forecast the trend. What you can get a bit more confident on are the risk properties. So, what happens to the dollar in sell-offs?

And obviously, the other point is you don't have to choose all or nothing, in terms of the hedging, you can have a percentage level. And then it's just kind of, well, what sort of range do we think is decent? Where do we want to be in that range? How much flexibility do we want to sort of give ourselves? So, those are sort of the things we're trying to nail down.

But whether the pound goes up or down against the dollar is something we try not to stake too much of a view on, unless it was at really extreme levels. Which, to be fair, it was a couple of years ago, obviously. But more recently, I think it's not really been extremes in the last little while.

I mean, the other area… You talk a bit on efficient markets hypothesis, I suppose the other areas where it might have been breached is with kind of factors, and style, premia, quality, or size and momentum, and things like that. What are your thoughts about integrating those kind of factors into the long equity portfolio?

So, I think any sensible strategy there has to learn the lessons of that period of time and has to have a sensible answer for what went wrong there, and why, and what have you done differently. My take on it is that yeah, it was particularly value in the US that got very badly hammered over that period of time and some of the multi factor approaches, in hindsight, were a little bit too overweighted to US value.

And so, it's something that really ensures it's not suddenly getting over its skis to any one factor, and also feel that momentum was the thing that has sort of saved some of those multi-factor things recently. And sometimes momentum gets underplayed because there's a bit of a sense, like, is it a real factor sort of thing.

But the data would show you, over the last few years, that you definitely need that there. You want that to be there and have a strong presence in the signal, as well, to be able to sort of work. So, you know, I'm not sitting here saying I've got the best factor models myself. Obviously, we're an allocator, so, we're looking to managers to say, well, have you learned something from that period of time? What have you learned? How can you sort of be sure that your factors are more sort of evenly spread today?

But looking around the world, I mean, actually, factors work pretty decently in EM for most of that time. So, when you look back at the data it was the US experience that just really clouded a lot of European values that worked pretty well for the last few years.

So, it's about trying to make sure that you're genuinely balanced, and if one factor fails in one region that doesn't somehow drag down the performance of the whole product.

Yeah, and what about alternative investment strategies, liquid alts, hedge funds? I mean in theory, we can access strategies that have a low correlation to equities and boost the Sharpe ratio, more stable risk adjusted returns if you believe all the literature, and the marketing, etc. Is it that they are not appropriate for an asset owner, for a structure like yourselves, or is it costs, or would you consider them?

I think we certainly are considering it and starting to look at it. I think it comes down, a little bit, to the asset ownership model. Again, because DC has evolved from a basic asset ownership model, those strategies are basically just off the table because the ownership model and the cost constraints just ruled it out from the get go.

That isn't the case anymore, I don't think, because we've got a more sophisticated model. I'm pretty sure, at our scale, we could access versions of it that would work in the cost constrained way as well. But I do think, again, you've got to face into some of the issues that those strategies have experienced.

And again, a few of my reflections would be that some of those strategies that did badly were where allocators imposed quite a lot of constraints or implemented a more kind of watered-down version of it to satisfy cost constraints. Those were some of the versions that didn't do well. So, I think you’ve got to be quite wary of watered-down versions of it just to satisfy your approach.

The right approach is to get your model sophisticated enough to do the proper versions of it rather than do the kind of dumbed down ones would be one point. And then there just has to be enough recognition that, generally, equities do go up and do well. So, they shouldn't be about totally trying to hedge and shouldn't focus too much on spending a lot of premium on reducing risk because, over the long term, that is just a drag.

I still think there's some good there, and I would love to look more at how we could bring some of those kinds of hedges into play, a little bit, in a sensible way, in a construct that doesn't bleed away too much premium, doesn't pay excessive fees, and works against that longer-term, that kind of equity stream. But that's definitely a sort of next couple of years type project, I'd say, for us.

Okay. I mean, the big buzzword in pensions and public pensions has been TPA, total portfolio approach. Is there something relevant in your model? You know, being a DC provider, but obviously you do have the kind of flight path offerings. How do you think about TPA?

It's definitely relevant. It's a helpful framing to think about some of it because, again, it just goes back to the asset ownership model point. You know, one of my sort of views (maybe slightly pushy views), is, I think the concept of TPA almost originated with some of these much larger asset owners where the internal team became very large and things became awfully siloed between the different asset classes. And so, they needed a way of kind of reinventing a more centralized process that could be a little bit more nimble.

Now if you set yourselves up with a smaller, more focused internal team, like I said at the start, then I think you're naturally thinking in that way a lot more. Just the way we've kind of set the team up naturally sort of engenders that kind of cross asset collaboration and the kind of single centralized group that's taking decisions across the portfolio. Yeah, it's not far away from what we're trying to do.

But, on the other hand, DC members, I think, broadly, do want an SAA type thing. I don't think you can take it to the extremes. DC members, I think that they have a right to expect a certain sort of asset allocation and to be able to have a sense of this is what the equity bond real asset split is. I think intrinsically that the members do want that.

So, I don't think you can take it to the nth degree of saying, oh no, we'll deliver CPI plus 3%, but it could be anything in that portfolio, from one day to the next, is probably not the way to see it. But yeah, as soon as you're working in an internal team, you become quite tuned in to this balance of governance between it being team centric and board centric approaches. With the board centric approach being very much here's the SEA, we sign it off with some ranges, you go and implement it.

The team centric approach being where you have a lot more freedom. And yeah, when you're operating in that environment like we are, you get quite tuned in to the differences there. And we're definitely debating where we want to sit on that, where is the comfort that we have with our trustee and with our governance as to how far we could move on it, where do our regulatory permissions allow us to sit?

So, I think it's a very useful spectrum as you're considering your ownership model and your governance. But I think, in some ways, I has been sort of invented as a solution to a problem that we don't have at the moment as a relatively smaller, more flatter asset owner.

Fair enough. I mean, you talked about balance scorecard in terms of evaluation of external managers, the manager selection process. In terms of how you think, you know, People's Partnership, that the investment team themselves should be evaluated, how do you think about that and is it balanced scorecard? Presumably it's not just returns. Performance, over what kind of time period, and what other factors are relevant?

Yeah, I mean in terms of the performance, it's a three lenses approach and, even just looking at performance, is quite complicated and nuanced because you’ve got three different benchmarks, effectively, and then you've probably got at least two different time periods that you care about. So, you've got at least a six-factor scorecard just on performance.

But the three lenses on performance are peers, reference portfolio, and the inflation targets of the funds. So, those are three different comparators. They all give you different but useful information. They can all tell you slightly different things at different times. So, I think you need to synthesize all those together. And then, in terms of time scales, yeah, I am a fan of looking at long-term returns, which I think generally means at least trailing five years. So, I love to focus on a trailing five-year number. But the issue is, that doesn't change very fast.

So, you also need to have a pulse on what's going into the front end of that five-year. So, I'd often like to look at the one-year, five-year. So, you look at the last one-year and the trailing five-years against each of those kind of measures, and you can sort of put that into like a red, amber, green type scorecard to get a pulse of where you are. And then, again, we have to do that across the two different products.

So, you start to see how the returns monitoring thing becomes quite complicated. But I'm a big fan of having a clear, repeatable framework on that stuff. Because the worry in investing is you can just show your stakeholders a slightly different picture of returns every quarter. You can always find the number that looks good and show it.

And you really shouldn't do that because what's, what's better is to say, let's agree that this is the framework. Every quarter will show you the same thing, and we'll stare at the same 12 numbers, and over time we'll sort of get some really useful information out of that. So yeah, it took us a little while to settle on that perspective.

But that's similar to I think how the Aussie superfunds would do it in terms of that peer view, the reference portfolio and the inflation targets view. And obviously, yeah, as I say, out of those the reference portfolio is obviously completely investable. So, that very clearly drills down to the exact benefit that the team has sort of delivered versus something else that could have been pursued. It's a very, very clear counterfactual.

You know, the peer group is also more or less a counterfactual. So, I think it's quite helpful to know what would our portfolio have done had we sort of outsourced it to the peer group? Yeah, albeit not quite as directly invested. It's harder to stick that into a barer model and get a tracking error out of it.

But you've got a rough idea. Then you've got the inflation targets which are sort of, they're obviously more of a longer-term kind of guide and they're absolutely not investable. I would love to be able to invest in something that could do CPI plus 3% but of course that doesn't exist.

That was tricky during that period of time as well, which is why you need to have the other views on it because if you're offside on that measure you might not be doing anything wrong because the peers and the reference portfolio might have the same issue inherent in them and you might have even done slightly better than peers but worse than the reference portfolio kind of thing. So, those three perspectives have been quite helpful in looking at returns. But it means that it's a slightly more nuanced conversation than just are you up on the down?

Very good. Well, we're just conscious of time. We do like to wrap up just getting some perspective. Obviously, you've been in the markets a while on the consulting, the investing side, I mean for people earlier in their career are looking to develop a career as a CIO either as an asset owner or elsewhere. I mean what would you suggest or what are the things that were helpful for you through your career, would you say?

Yeah, a few things. I mean, I get asked that question a little bit. I mean, one thing that was really helpful for me, you know, starting my career at a consulting firm and a global firm was really, really beneficial, especially in that period of time. I got all sorts of insight into how loads of different pension schemes operated. As a consultant you get exposure to loads of managers. So, that breadth of exposure, for me, was super helpful.

But you know, not everyone's going to be in that position. So, a sort of more general piece of career advice that always served me well is I think really making the most of every kind of opportunity you're in and really, really learning your craft in every single role. Because I think sometimes people can be very focused on, right, I've got a role, what's the next thing, what's the next thing?

And people, you know, might do a year, 18 months in a role and be very keen to move on. Whereas, I think there's real value in, as I say, taking out at least three, four years in a role, I think is what it takes to learn the craft of that role. Really deeply learn it, and understand it, and appreciate the situation you're in. Because every situation is going to be a bit unique.

For example, you might be in a global firm, in an overseas office. You might be in a UK firm, in a UK office. It could be a founder led growth company with very particular kind of company. It could be an employee owned partnership. It could be a profit for member organization. I've worked for all those kind of organizations. They're all brilliant in their own ways, they all have their own issues.

And unless you spend real time in it and really kind of absorb it, I think you can risk not really taking that lesson on properly in your career as to what it's like to work in the overseas office of a European company, or the UK office of a US company, or work for a cyclical or countercyclical part of the business. So, I think learning your craft in each area is really important and then sort of developing that a little bit more.

I think, when I interview people, what is often deeply impressive to me is when someone is sort of able to say, right, here's my philosophy of how you should do XYZ thing. And in some ways the more simple that XYZ thing is, the better. Because it shows they've really thought about something quite simple, and it shows a lot of agency, and curiosity, and loads of good things.

So, it's one thing debating your philosophy of investing, but let's say something as simple as what makes a good end of day email to go out to an asset owner? Yeah, it really impressive if someone says, hey, here's my philosophy, what should that be on that email? Because I've spent time thinking about that.

I didn't just do what my boss told me to do. I thought to myself, what are the people reading? What helps? What decisions are they going to make? What is the information that they need to make those decisions? How can I make it quicker? How can I make it more accurate?

So, a lot of people will just sit there, do what their boss told them to do, and then pass it on. Whereas if you spend that time learning your craft and really think, you know, what is my philosophy of how to do this very specific thing? I actually think that's very impressive to people, as you go through your career and you build up a series of those sort of philosophies. And obviously, you can sort of go up the ladder.

When you're early in your career it might be, what's the philosophy of how to send out this email or do this very specific process? As you get further along in your career, it could be a philosophy of how you run a team, how you run a portfolio, how you build an organization. You know, you can't jump straight to that. I think you've got to learn how to build it up by thinking that. But it is a different way of thinking that sort of, yeah, as I say, shows a bit of curiosity but also a bit of agency that you can actually go and own something and change something. And that to me, I think, is always differentiated and is always impressive.

Very good. Well, I think that's definitely good advice and we should all reflect on our end-of-day emails now and develop our philosophy. But thanks very much for coming on, Dan. It's great to get that perspective on the DC Pension landscape and the tremendous growth in that side as well.

And for anybody who wants to keep abreast of your work, obviously your LinkedIn newsletter, I think it's called, Your Thursday Investment Fix, is probably the place to find you, but thanks a lot, and from all of us here at Top Traders Unplugged, thanks for tuning in. We'll be back again soon with more content.

Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you, and to ensure our show continues to grow, please leave us an honest rating and review in iTunes. It only takes a minute, and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.