135: Funds SA's Con Michalakis – TPA Lite, The Comic Con of Asset Allocation and my Best & Worst Investment

In this episode of the [i3] Podcast, Conversations with Institutional Investors, we speak with Con Michalakis, Chief Investment Officer of Funds SA, which is a $50 billion investment manager for South Australian public sector superannuation funds and other approved state authorities. Con is well-known in the Australian investment industry, not in the least, for his outspoken views on a variety of investment topics, including gold, crypto and asset allocation, much of which has historically been disseminated through his notorious Twitter or X feed. We trace back to Con's roots as a quant and value investor, and discuss how this continues to shape his current investment philosophy, despite the fact that he calls himself now an ex-quant. We discuss the changes in governance and the implementation of a TPA lite framework at Funds SA, while we also touch upon the turmoil in private credit. Finally, Con admits that he was wrong about innovation and disruption being the most dangerous words in investing, while he stands firm on his dislike for crypto and dynamic asset allocation. Enjoy the show! Follow the Investment Innovation Institute [i3] on Linkedin Subscribe to our Newsletter Explore our library of insights from leading institutional investors at [i3] Insights Overview of Podcast with Con Michalakis, CIO of Funds SA 03:00 I'm more of an ex-quant these days 05:00 In my heart, I'm still a value person and a contrarian; I like to invest in areas that are unloved or where capital is scarce 09:30 When I joined Statewide, the GFC hit. It was the worst I'd ever seen and Statewide was in trouble 12:00 By the time we merged with Hostplus, we were one of the top performing funds in the country, but that first six to nine month period was hell 13:30 Covid was short in terms of the market bounce back. What was hard was early access to super 14:30 Governance changes at Funds SA; "There were a lot of meetings here at Funds SA" 16:00 Having a risk management lens and no more siloes is a key part (of the new governance structure) 16:30 You used to have a photo of Trump on your desk to remind you of risk. Do you still have that? "No, I see enough of him!" 18:30 Making changes to the investment committee 21:30 We cut our tracking error budgets for Australian and global shares down by half to almost two-thirds. We've introduced passive, we've introduced quant systematic, and we have an active sleeve. You can't be full one or the other. 23:30 The world has changed: there is faster money, there is pod shops (fund managers that distribute capital across numerous semi-autonomous teams (pods) led by individual PMs) and there is instant reaction 24:00 You have to embrace dispersion across styles and managers 27:00 Implementing "TPA Lite". 27:30 "The idea that you are going to do dynamic tilting, or that you are some sort of macro guru, I call that a Comic Con of Asset Allocation. Everyone dresses up in their favourite character." 30:00 There is a slight survivor bias in the group of TPA proponents that the added value is based on 35:00 You said previously that innovation and disruption are the two most dangerous words in the industry? "I was wrong". 39:00 There was a shoe company in the US that was going bankrupt and pivoted to AI and the stock price went up 5x. Clearly, there is some nonsense going on. 43:00 Crypto; if you want to have it as a digital Ponzi scheme, go for it. 45:00 At Funds SA, we have zero Australian private credit 46:00 Some sort of global small/midcap manager, who has never done private credit in their life, is saying it is going to die. What do they know? 52:30 My worst investment? Probably, single strategy hedge funds. 55:00 Con's Twitter/X presence   Full Transcript of Episode 135 Wouter Klijn  02:56 Con. Welcome to the show.  Con Michalakis  02:57 Good to be here. Thank you for inviting me.  Wouter Klijn  03:00 No worries. So I want to take you back all the way to the beginning to get sort of a sense of your thinking on investments. And I believe you studied mathematical science in Adelaide, then went on to do a Master's in financial economics in London, and ended up at the Oxford Said business school. So there's sort of a combination of, you know, purely mathematical thinking, but also strategic thinking. How has that shaped, sort of, your outlook on investments?  Con Michalakis  03:28 Yeah, sure, so I would say I'm more of an ex quant now. I mean, it's a long time ago since I did option pricing and was a quant So, but still, you know, numbers guy in terms of how I think about it, and to be, to be honest, you know, the younger people that I've worked with, whether it was at Statewide, Hostplus, at Funds SA, to say they're brighter, they're more technical, they're more up to speed, so they've way taken over. So I would, I would call myself ex-quant. I still think in terms of numbers, still, you know, pretty Stemmy. And there's a bias across all three firms that I've worked for for sort of STEM type thinking, you know, science, technology, engineering, maths, the but you can't just all have one I have now believe that you can't just be one grade. I still think you can take stem people and teach them finance. It's hard to take finance people and teach them stem but you need, you need all sorts. And some of the best thinkers are not necessarily the way they think and critical thinking. They're not always just stem types. I've learned to embrace more diversity in that and interesting some of the managers that we've invested in, you know they come from interesting historians. So you got a critical thinking is more important. But, yeah, definitely bit of a buy. As the stem.  Wouter Klijn  05:01 Yeah. So how would you describe your investment style now? Then, because, of course, you mentioned three firms you you worked at Pezna for a while, which is a value shop, a deep value shop. Do you still have some of that thinking as part of your DNA, or are you looking more as sort of a contrarian investor.  Con Michalakis  05:22 I think in my heart, in my heart, I'm still a value person and a contrarian like to invest at the margin in areas that are either unloved or where capital is scarce, because highly likely the risk is that hasn't been priced in, and therefore there's a trade off. But definitely call it the maturity cycle, diversification, the ability to invest long term and make sure you have investments across a broad, strange range of strategies and asset classes, and not being sort of, you know, across the cycle, not having one dominating I think, is very important. I've learned that lesson, and it's a lesson that I know, but in my heart of hearts, if it's contrarian in value, it's probably my kryptonite.  Wouter Klijn  06:19 Yeah. So, so you learned those lessons. Can you give an example of some of the things, some of the trades? Maybe that taught you those lessons?  Con Michalakis  06:28 Yeah, probably bond allocation, fixed income, you know, like, if you look at the Japanese bond market, you know, it was the widow maker, you know, you didn't like it at four. Didn't like it at 3,2,1,or 0, it's come back now. So, you know, maybe the mean reversion took 30 years, but it's coming back. You could just got to be a bit you got to be a bit more smarter than naive mean reversion. Value Investing. There's been a value, statistical value, risk premium over 100 years, but you know, arguably, it's been very chopping. Hasn't worked since the GFC or prior to the GFC. If your portfolio, if you're running a diversified, multi strategy, strategy, multi asset portfolio, and you've let one style dominate your over a cycle, you're going to outperform or underperform because you're too biassed to that at the margin, though, you know, at the margins, I remember you're running a world diversified fund. Occasionally you get thrown these strategies and ideas where either the market has unloved it or there's an opportunity to extract return. That's pretty good. So, you know, we were a bit late to that at state. Well, I definitely noticed. Plus, when we did the sort of insurance link strategies with quota shares, we did that last year here too, at funds SA, and that's that's done really well, you know, in the small and mid cap, you know, where managers can probably do a little bit better. Venture capital, when that was unloved 15 years ago, we were late to that at Statewide, but Hostplus was very good. So you want to, you want to be diversified, but you want to go to early areas and adopt that if you can.  Wouter Klijn  08:11 So looking back on that, what does that mean for portfolio? This, is there still a place for value, or are you more style neutral guy?  Con Michalakis  08:20 There's a place for value and be conscious. If you're going to use a combination of passive, quant, systematic and traditional fundamental, you want to be conscious of what your and how your managers managing that. Some are core. Some identify as value. Some are kind of fighters, quality or growth. You want to be conscious of what you're carrying into that portfolio, except particularly in this incredible market movements that we've had, probably since Covid, for lack of a better word, that you're going to have dispersion. And that gets down to beliefs. Can you ride the cycle. Do you have the ability to, if you have good relationships and you trust your managers to reinvest when there's…, their style or, you know, there's always a style that they've had an issue with a couple of stocks, do you have the backbone to just stay in the game with them and reinvest?  Wouter Klijn  09:18 Yeah, you just mentioned that Covid period. Do you have any sort of lessons from that? Did you change anything in the portfolio to deal with sort of that volatility?  Con Michalakis  09:28 You know, when I joined statewide, it was a GFC, so, so I left Pzena, it was, you know, a couple of weeks off, and joined Statewide the first week, my first week that weekend, Fannie and Freddie was nationalised at the end of the week,  Wouter Klijn  09:44 yeah.  Con Michalakis  09:45 The week later, Lehman went under. Now we're in the GFC,  Wouter Klijn  09:48 yeah.  Con Michalakis  09:48 And that was painful. So really, from September until April, September 2008 April 2009 this was one of the most acute periods of investing I've seen. I. All when, famously, Westpac, had a failed rights issue early on my career, and I think it was Kerry Packer heard to bail it out. We've had Asian crisis, 9/11 but this was, this was up there with one of the worst I've ever seen, and Statewide was in trouble. It really didn't have a diversified portfolio. Didn't have a lot of cash or a lot of bonds. It had to pay hedges by selling equities. Luckily, Chris Williams had joined me, I think October, November that year. Jimmy Vernon Payne is now a consultant at Jana. Bill Watson, I think he's at first super, or is he moving to, you know, I think something like that. And all of that was happening live, and we had to manage that. And that was a really difficult period. We had to write off assets, we had to rebalance the portfolio, but to put in governance structure. We can talk a bit about that later. That was a doozy.  Wouter Klijn  11:02 So that was heavily equity focused portfolio,  Con Michalakis  11:05 that was a heavily illiquid portfolio, but more importantly, didn't have cash or bonds,  Wouter Klijn  11:10 yeah, yeah.  Con Michalakis  11:11 We  didn't have any fixed income. Fixed income was a bit of a saviour. The Aussie dollar collapsed, the international allowed you to international fell by more. So that was a difficult time, and that taught us the importance of the diversification, liquidity, managing portfolio shape, not for currently, but looking out forward, and having a risk management system in that you could understand and also live by. I would say, though, by the time we merged with Hostplus, we were one of the top five or six performing balance funds in the country in terms of peer surveys, your future, your super we're the best Aussie equity numbers over most time periods, the most fixed the best fixed income numbers. Pretty proud that by the time we had merged with Hostplus, we were one of the best performing funds in the country, but that initial six to nine month period was hell  Wouter Klijn  12:06 yeah, I can imagine. I mean, I had in there that, like you must have done something right, because you survived for 14 years after joining state.  Con Michalakis  12:13 Well, ultimately, the central banks and the unbelievable amount of QE and reinvestments and bailing out the financial system. You know, one of the first responders was the Aussie dollar rallying, and we kept the hedge, and we used those hedge gains to rebuild asset allocation. And then, frankly, equity started recovering. I think by May, it bottomed out and it was on the rallying. But yeah, for that period, it felt it was uncomfortable. Now, covid, so, so, so the time we got the covid, we were so well diversified. We had risk management planning, we had liquidity ratios, we had stress testing in in play. And I was only for a week. I remember it was pretty late nights, early mornings, late nights. Chris was then the deputy CI, Chris Williams, who's now Hostplus, was the deputy CI. And I remember was one morning, Chris goes, Okay, now I'm worried this. There's no market. There's no market in bonds. The market was unruly. And I remember being on the couch one night. I was sort of had Bloomberg on, and I saw this big headline, unlimited QE and I remember saying, Okay, this is done. It's over. The markets will respond. So covid was short in terms of the bounce back. What was then hard for most super funds was early access. How would people tap into super How would you manage that? We were moving then to weekly Investment Committee meetings. We had a risk scorecard checklist. We were going through valuation scorecard stress testing. I actually thought we played that well. What surprised us was how quickly the markets bounced,  Wouter Klijn  13:58 yes,  Con Michalakis  13:59 and we had underperformed just, you know, in that immediate period. And then there was a vaccine that was announced. We had quite a few value strategies. They did really well. And then we came through. Yeah, the time we merged, performance was pretty good.  Wouter Klijn  14:14 So it sounds like that in a number of these like tricky situations, liquidity was a central theme in sort of trying to manage the risks in the portfolio, has that sort of changed your ideas on how to manage liquidity, and also in the current environment, where it's quite volatile, very concentrated markets, what is your philosophy towards liquidity?  Con Michalakis  14:38 So front and centre, you know the changes, the big changes we've made at Funds SA, they say was governance. We've set up, we've we've, there was a lot of meetings here. So there was a lot of meetings. There were a lot of people in meetings. We've tightened the meeting schedule. There's less people than meetings. We've broken down silos, and we've introduced concepts like, okay, we've got a proper investment strategy that embraces diversification. We've got liquidity ratio and stress testing. We've got fee budgets. We've got active fee risk budgets that we're implementing. And so we spend, really the first four or five months of every year updating our investment strategy policy, making sure it's fit for purpose, and then basically the rest of the year, reviewing the asset classes that are sympathetic to the overall investment strategy, and in that risk portfolio shape, managing the portfolio, not for today, but over the next 12 months, we have an unlisted forum that goes further and making sure we've got a enough liquidity. What's our effects? Hedging policy, terming out hedges, making sure if markets move, we can take advantage of what's happening. And that's that's that served us really well at statewide. I know it's served Hostplus really well, and we're off to a good start here, ending March. Financial year to date, I would say our balance fund's in the top quartile. Early days, nine months and one year I've been here 14 months. But having a risk management lens and the and shaping the portfolio is and no more silos is a key part.  Wouter Klijn  16:21  Talking about risk management. I've heard that you used to have a photo of Trump on your desk to remind you of risk did you bring that to Funds SA?  Con Michalakis  16:29 No, I see enough of him. I see enough of him everywhere, whether it's news or media. I don't need a photo. It was a joke. I think the team went to some charity and they got a maga hat, and I had a photo of him and Putin, I think, on my desk, which was good, because 2016 election was unusual. If you remember how markets traded, they priced a Clinton win and then a Trump win in the reverse was like, bit like Brexit, actually. And so no, I see enough of him, and I see enough of his policies and and I see enough of the reactions to the markets to tweet, so I, I he's a constant reminder. I don't need him.  Wouter Klijn  17:06 You don't need to be reminded of that. So you mentioned that setting down a proper governance framework was important in sort of reshaping the portfolio Statewide. Can you tell me a little bit about what you think are the essential ingredients of that governance framework?  Con Michalakis  17:22 Yeah, sure, and I starts here with Funds SA so, you know, 14 months in, what did we do? Start with the basics. We actually wrote a plan. I wrote a plan for the board, and what we said was governance strategy, team, structure and within government, Jana coming on as a full of service asset consultant. I've worked for Jana for a number of years, and they've been a great partner, and I consider them not a service provider. They're a partner to us, and we, we, we, we, basically, we rest on their shoulders. We don't have to make things we we can get a lot of their IP and thinking and basically build on that in terms of governance. It was recasting the Investment Committee. There's now a smaller Investment Committee. We have an independent chair, David Holston, who was my asset consultant, then retired, then joined Statewide as the chair of the Investment Committee and board member. He's here as an independent but making sure that's in that's in play, doing things like Investment Beliefs, having detailed asset class reviews, bringing the team together. We have a weekly portfolio construction forum where there's the investment strategy team and the asset class heads. Once a month, we invite Jana as well to that, having papers prepared, going through the shape of the portfolios, what's happening in the markets, trying not to be short term, and managing this for the medium to long term, that's been the, probably the biggest changes here, plus the usual, introducing liquidity ratios, thinking of risk, thinking of how you're going to diversify the portfolio, and being small enough to take advantage of strategies and ideas, should they present themselves? They don't often, and we don't think we can trade our way through it, and we can talk about DAA coming up, but just being aware and being able to execute quickly  Wouter Klijn  19:29 Before we jump into DAA, I want to talk a little bit about Funds SA in sort of the broader investment industry here in Australia, because it's relatively unique. You have worked at a super fund as well. At Hostplus, obviously, they are subject to a whole set of regulations where they need to pass a performance test on the Your Future, Your Super that has influenced how they allocate, especially on the passive, active side of things. At funds, I say you don't. Really have those restrictions. Does that give you an edge or an advantage in finding opportunities that super fund?  Con Michalakis  20:07 Oh, yeah. So we're about 50 billion in assets, and over 90 per cent is the local state pension scheme, Super SA that we run money for it's regulated by the state. So we're like a state, sovereign, if you want to, in that sense, and it has constitutional protection, which is a unique feature. I do think, not being having different being regulated by the state, we have unique and we have some unique tax advantages. Gives us a bit of an edge. We can think about how to invest the portfolio. We still shadow, for lack of a better word, we still shadow Your Future, Your Super we think about the risk we're taking from that lens, but we can free ourselves from the day to day regulatory of an official APRA burden, for lack of a better word, and that gives us, I believe, some unique advantages that we can we can exploit.  Wouter Klijn  21:17 Yeah,  Con Michalakis  21:18 That doesn't necessarily mean that some advantages can be also a balast, because it's active management is difficult. Can't just blindly do it, and hasn't worked for a long time, and it's particularly in recently, it's been a very difficult area. And you know, one of the one of the things we did in the previous review is we had pretty large active tracking error budgets that was purely active in Aussie and global shares. We've basically cut that down by a half to almost two thirds and and one of the reasons is we've introduced passive we've introduced quant systematic, and we have an active sleeve, and we want to let it go, just, just so we, you know, again, diversification, even within Aussie or global equities, it can't be for one or the other.  Wouter Klijn  22:09 Yeah. So is that active component more of a satellite allocation, is it a relatively small?  Con Michalakis  22:15 It's more sort of, yeah, core satellite approach to the active might be a bit more satellite. You can have some style neutral managers. You might have some small to mids value or quality growth. But we, you know, we manage that within a mix, and our tracking error, you know, is moving, you know, maybe in the past it was in the threes. It's now in this of the one, one and a half at both Aussie and global equities,  Wouter Klijn  22:40 that active, passive element is quite interesting in the light of the current environment, because we've seen, you know, equity markets more or less rally for quite a number of years now, concentration in markets, which makes active management quite difficult. But if we would were to see a flip or some sort of recession, that's often where active management shines as well, where they can reduce sort of the downturn. Are we setting ourselves up for failure in that sense, because we're moving away from that active element, and then when a crisis happens, we might not have enough of that.  Con Michalakis  23:16 I mean, we were pretty active at Statewide. We had quite working very well in Aussie and global. And as I said, global, by the time we had finished that net a fee Alpha was pretty good. Aussie was unbelievable. Closer to 2 per cent I would say to you, the world's changed. There's faster money, there's pod shops, there's instant reaction. We've seen it even. I mean, look at between March and April. You basically had equities, you know, fall anywhere between five and 8 per cent and in the first two weeks of April, they basically come back. And in coming into the third week, we're now setting new all time highs,  Wouter Klijn  23:56 yeah,  Con Michalakis  23:56 so the Fast Money response, and what I've I believe, is that you have to embrace dispersion, dispersion across styles, strategies and managers, and in this world of faster money, moving money, you probably want a bit of everything. And the idea that you can be totally active sounds romantic, but I think the path dependency will kill you. The idea of being totally passive, we have some tax advantages that doesn't totally make sense to be totally passive, and the idea of being totally systematic, well, fine, but there was a thing called a quant winter in 2007 and these things will happen. So why not have a bit of everything if you can, but be careful, you know, set your tracking error budget, set your allocations, and try not to one of the things I think that could be happening in industries. If something's not working, they're closing it down, and then they're just going straight to this that's working. Well, okay, that's creating flows and opportunities. When that sort of stops, that's going to create some opportunities on the other side. And I think the other side of that could be an environment where active managers who are targeted and doing well will do better.  Wouter Klijn  25:26 Yeah, yeah. So as part of that, move to towards more passive, basically reducing tracking error, but then we see funds doing a little bit more on the dynamic asset allocation side, where partly is sort of trying to implement some total portfolio thinking, putting trades on top of the portfolio that are almost a little bit hedge fund, like relative value trade, global macro trades. What's your view on that? Is that something  Con Michalakis  25:56 This is going to be fun. So one of the things I one of the things when I came at Funds SA is that there was, there was a lot of siloed behaviour. So there was the asset class, people were doing their own things. Then there was sort of an overlay, doing their own things. What I brought is, everyone's in the room once a week, and we're thinking of what's the long-term strategic asset allocation. Now markets move so you move away from that, what's the commitment to if you've got private capital investments, whether it's equity infrastructure, what's being drawn down, what's being distributed? There's foreign exchange movements, how you should think about the foreign exchange. There's also demographics. There are flows in that. Are flows out they're switching as well. And so I come across from a, I'm going to call it TPA Lite,  Wouter Klijn  26:47 yeah.  Con Michalakis  26:48 So I come across from a total portfolio. What are our exposures? Where, where would you want to be? And if we don't really have strong ideas, run them very close to the strategic assets. After all, it gets reviewed every year, right? We've spent a lot of time spending that as what a research, time looking at that with our asset consultant. The board adopts it early in the year. And if we don't have an idea, stay close to that, then markets drift. And it's all about the rebalance, the idea that you're going to do dynamic tilting, or that you're going to do overlays on top, or you're some sort of macro guru. I call that the Comic Con, right, of asset allocation. Everyone dresses up in their famous in their favourite character. One's a dynamic tilter, one's a post Keynesian, one's a Keynesian. One's a value guy, one's a trend. Great. You can have it. It's all yours. I just think it's noise. And good luck trading that in the last three or four months. In fact, good luck trading that since Liberation Day, and good luck trading that since covid. Because how many people would have told me bonds went from zero to four or 5 per cent and equity market set new time, all time highs? So I think we take a broader portfolio lens, manage that from a portfolio construction level, figure out where the opportunity sets are. Allow a little bit of flex, but you're not going to see us trading frozen concentrated orange juice and pork bellies.  Wouter Klijn  28:22 So do you see DAA as a form of market timing? Yeah,  Con Michalakis  28:25 They can have it. You know, I've heard about other funds. You know, they do SAA, TAA, DAA, macro thematic. Yeah, all yours. It's up to negative. Good luck to them.  Wouter Klijn  28:37 So I had taken you as a little bit of a TPA cynic. But obviously you're  Con Michalakis  28:43 Not totally a TPA cynic. I just, you know, I read the study, and I did start at Watts and Wyatt, and there's Thinking Ahead Group. I think the ideas of TPA are good. The complete adoption, am I going to be the purest TPA, and I know there's been some great funds out there that have done it, that's theirs. I live in a world where we have different clients who have different needs. We have one client who has a sort of an absolute hurdle cash flow for 30 years before it goes negative. I have super clients who, you know, they want us to manage a CPI target. They want to manage against peers. They're switching in between funds. There's demographics. I look at everything, not just through a pure TPA. Call it TPA Lite,  Wouter Klijn  29:30 yeah.  Con Michalakis  29:30 And you know that study that showed all the TPA funds outperforming before I had a good look at it, it felt a little bit like, nothing against my old colleagues, but that looked a little bit like consultant swab.  Wouter Klijn  29:42 Yeah, I looked at that report as well, and I think they came up with 180 basis points or something, but it seemed to be just an aggregate of the funds that were included in that group,  Con Michalakis  29:53 Slight survivor bias, right?  Wouter Klijn  29:54 Survivor bias, but also not necessarily relating it back to TPA. It's just, you know, here's a group of TPA. People. And I think there was even a Swedish fund in AP7. I think it is, which is, to my knowledge, highly geared equity fund. It's not quite comparable  Con Michalakis  30:09 yeah, comparable we, we look at portfolio construction across the thing, we think about what, what, you know, what are we doing to diversify? What are we doing to beat objectives? You know, sometimes your illiquidity mismatches on what's what's a good proxy, where's the actuals? You know, like you maybe want to have some more linkers than nominals in your bonds at the moment, because it's working with better within your overall fixed income allocation. That's how we think about it. We want to term out our hedges. But the idea of being pure TPA Lite, or pure What's your equity equivalent ratio? Yeah, you can have it. Whoever does that. Good luck to them.  Wouter Klijn  30:45 Yeah. Do you think that is to a degree related as well to how large investment team is? Is it easier to do TPA and sit around the table in a relatively small and mid-sized team?  Con Michalakis  30:57 So I've been very lucky that within Statewide, Hostplus and Funds SA, we have relatively small teams, and I think that means there are no silos. That means that we can be far more sort of linked up, to use the term in terms of how we're building portfolios, and have the key people, the discussions in the room. I think that's an advantage that we enjoy wherever you use external managers. We do the implementations internally, of course, but we It allows us to just think a bit and build portfolios, as opposed to trying to manage a lot of people.  Wouter Klijn  31:39 Yeah. I think in a past interview, you sort of stated the importance of stating your opinion and letting the board know what your thinking is. Is that you know possible in every organisation? Or does that need to be created like a culture created around speaking your mind?  Con Michalakis  31:57 Oh, again, maybe luck, all three funds I've worked for boards wanted trust and transparency. There's the Funds SA. It's seven individuals. It's incredible board. And one thing I enjoy, you know, from the chairman, John the CEO, and our board members, is, obviously, I'm not a shrinking violet. So they enjoy the two-way communication, and I think they they want transparency, and with transparency, you can build trust. And so they like the fact that we can have these discussions. Same at the IC. I do think smaller committees allows to have better conversations. That's so the board is, you know myself, the deputy CIO, whoever's presenting, if there's an asset class, the IC, there's there's John, myself and David Holston, the deputy, Kelly, who is sort of like our she makes the trains and run on time in the implementation group, and it just jells at these meetings. It just allows good discussions ample time to have that. And you build trust because they know what you're thinking, you know what they're thinking, and you get, I believe, a better outcome,  Wouter Klijn  33:14 Now Funds SA has gone to quite evolution in recent times, apart from the organisation growing quite rapidly over the last couple of years, you also had a new chair in. Guy DeBell, had a new CEO with John Although John Piteo has been there since 1995 I believe.  Con Michalakis  33:35 Yeah. So I think it's two years so relatively new, yeah. So John, Guy, there's a couple of new board members. Been a few new executives, obviously, new CIO, new deputy CIO, we've added to our implementation team, where Kelly's almost like she's like our COO within the within the investment team. I do think it's a sense of renewal, but I'm probably not the right person, because I've only it's 14 months, but I gather that over the last two years, the Funds SA has changed. It's in a sense that it's more focused on investment returns. Clients are important, and the people who are responsible for managing this business wrapped around making sure we've got appropriate it's really good data and tech that we have here. So yes, I'm part of that change. I think investments has changed a lot, and the team has done a good job, really. I mean, there was a lot of changes, changing governance, beliefs, strategy, no more silos that they've had to go through a lot of change in that responded world to all of that, plus having me  Wouter Klijn  34:55 Fair enough, there's also a lot of change happening in the industry itself, and one of the things that a lot of people talk about these days is AI, artificial intelligence. And I sort of, when I was preparing for this interview, I found an old interview with the AFR, and you said that innovation and disruption were the two most abused words in the industry. Do they? Does it apply to AI, what's your view there?  Con Michalakis  35:22 Okay, I read that article, and I reckon that's aged like a bucket of prawns in the sun. I reckon I was wrong. Okay, so, so this is, let's this is, this is where, you know, you sort of read that went, Oh, I think we are in the age of innovation and disruption. And I severely underestimated, I think that was 2012 Yeah, maybe not. Yeah. A bit later, I think there's been a lot of disruption and innovation, whether it's the digital whether it's obviously now with AI, I think AI is a, is a, there'll be new versions of energy, there's there's ways of living. There's also some bad disruption in terms of, we're in a multipolar world. You know, the cost of warfare has gone down, so the marginal propensity to war goes up. You know, we grew in a pretty balanced world post the war, that we knew we had one world, and now it's, it's bifurcating into various regions and so, so I think I was wrong, having said that, you know, is it as innovative as we've got the round will and introduce fire? Probably not. But the world is changing, and I think we should embrace that, particularly if I think about Australia. And as an allocator, you know, the world has changed since GFC, in some ways, not for the better. We have to deal with energy resilience and climate. We have to deal with critical minerals. What does ai do to the workforce? What does it do for people who gain from the expected productivity gains? Does it go to capital or labour? If it goes all one way to capital, not labour, there will be riots. There will be a greater disparity in terms of wealth and income. People will be unhappy. There will be volatile elections, social media and the rise of that. So I think there's a lot going on in the world, and we just got to make sure whatever as innovation happens, that the gains are shared.  Wouter Klijn  37:47 Do you think it changes as well the asset management game, especially on sort of the active management side, where access to data is easier, it's harder to gain an edge.  Con Michalakis  37:59 So I think the biggest winners in that have been the quant funds and the systematic funds, who are naturally very data enriched and aren't afraid to embrace large language processing models, systems. Much more sort of, might be a bit of P-hacking to use the stats term, but there's, there's a lot more sort of mining and using of alternative data, they were much better than the fundamental types. Probably the systematic quantum are much better job in risk management, more than anything else, the risk management's kept them in the in the game, more than, say, the fundamental types. They're learning those lessons. But you know, when we see, we look at it here, internally, at Funds SA, and then when we see with our managers, it doesn't matter if it's a credit manager, an equity manager, a passive manager, voting of shares. People are using AI in their business. They're using it initially as a tool. We use it here across there's a lot of people, vibe, coding, building macros, building things. It's it's changing. Do I think there's a bubble in parts of AI sector? Absolutely. Do I understand the valuations of some of these large language models that are burning cash and on record valuations? I do not. There was a shoe company the other day on the New York Stock Exchange that was going fail, going bankrupt, pivoted to AI stock went up 5x right? Clearly, there's some nonsense going on. But whenever there's an innovation cycle, or whenever there's disruption, you do get, you know, the old Manic Panic and crashes Kindleberger, you know, one of the bubble things is there's an innovation cycle, and that's part of the game.  Wouter Klijn  39:51 Yeah, yeah. In some parts of the industry, there's a bit of a reminiscence of the dotcom bubble where, you know, you just had to come to your company name and the share price went up at the same time. You know, you see chips are still TSMC came out today, and I think they still had a record profit on selling the chips to the AI sector. So there is a real story there as well.  Con Michalakis  40:19 It's a real story. So Nvidia, the foundries in Taiwan, like TSMC, these are these companies are printing real profits, right? They and Google's another one. So, you know, it's not bubbles can sometimes be overused. But there's, you know, there's some interesting valuations away from them that, you know, it's hard to get your head across,  Wouter Klijn  40:40 yeah. But do you think that that shifts the structures in the equity market as well? There seems to be, you know, the size factor comes back, but almost in the opposite way, where, you know, large caps are dominating, outperforming,  Con Michalakis  40:53 I think when it gets priced in, and we've had a well priced in, I think there will be again, when you get so much, maybe the value person in me, the valuation dispersion, the opportunity sense, will come in. And lately we've seen that with the EM bounce back pretty hard. We're starting to see a little bit of, we're certainly seeing a lot of good alpha, but also some good returns out of the small to mids. So, you know, we had the rise of the Magnificent Seven. The first version of that look a bit bubbly. It's sort of corrected, and now we're getting the sort of the AI type plays. It's it's part of cycles. You can't pick them. You can't pick them on the way up. Good luck picking them on the way down. You just have to be conscious of what positions you take and make sure that at the margin you can sort of lean against it. And, you know, I have opportunity on the right tail in terms of VC or some of these companies, and then on the left tail be diversified and managing your active exposures. I do think the business that we're in of managing capital, whether you're an asset owner or a fund manager, will be changing over the next five years.  Wouter Klijn  42:09 In what way?  Con Michalakis  42:09 Hard to say how it morphs. But you know, if the agentic AI and the models and the and you can develop personas, and they have memories in those models, you know, do you need as many analysts? Do you need to see? I mean, it starts giving you that. So while that rises, you will need the correspondent rise and people almost acting as human whisperers of AI and that output to boards and individuals explaining what that means. So, you know, there's, there's going to be a coincidental rise of those two,  Wouter Klijn  42:43 yeah.  Con Michalakis  42:43 But you know, the first one has more of an employment impact than the second one,  Wouter Klijn  42:47 Yeah, yeah, for sure. So we're not at a stage yet where you should just hold passively the top 20 or top 50 stocks and just let them get on with it?  Con Michalakis  42:55 I don't think I mean passive is a valid part of of any portfolio. But again, I'm not a person you know full TPA or full passive or full active, you know, like I you can have it all right, don't? You don't have to vote against it, but in a default setting where you don't know what you're doing, you don't know where the world's going. Sure, passive and systematic will give you that that beta exposure, but you know, you probably at the margin, can do with a bit of active.  Wouter Klijn  43:31 Yeah, yeah, sure. Okay, so you said you were wrong on the innovation and disruption. You've also been quite critical on crypto. Were you wrong on that as well?  Con Michalakis  43:41 No, that's a load of nonsense. And the thing look, crypto, if you want to have it as a digital Ponzi scheme, go for it. Shoot your lights out. Congratulations. But it's not money. That's the thing that bugs me. When people turn around and say, crypto, or even the gold bugs, gold is not money, and crypto is not money. And we saw that when we went through and with oil in the crisis. The first thing people wanted was cash. And basically, and I would sell all the other nonsense because they wanted cash. I You don't do gold back that. You don't do crypto back there. I'm not, you know, stable, this whole sort of stable area, interesting, the way, sort of FinTech, and that's processing interesting, but, you know, there's been a lot of nonsense in that you can have it that's that's happy to provide the chips and the shovels and the data that they need. But, you know, sustainable crypto, give me a break. You're burning. Energy is already scarce, and what's that used for?  Wouter Klijn  44:41 I think you called sustainable crypto a vegan tomahawk steak.  Con Michalakis  44:45 And once it was, apologies to vegan Tomahawk steaks, which probably, you know, tastes a lot better than the rubbish that's built out by some of those crypto types.  Wouter Klijn  44:54 Fair enough. Another sort of point of discussion in the industry at the moment is private credit. It, and we've seen some liquidity issues with some of the funds. But what's your view on that? Is that a problem with private credit, or just the wrapper that?  Con Michalakis  45:09 So I should say at Funds SA we have zero Aussie private credit.  Wouter Klijn  45:14 Okay,  Con Michalakis  45:15 I feel pretty good about that, actually. So zero, we have about 60 basis points of global private credit. So we're in an interesting situation, but we've put on some really well established global private credit. We've just put on some clo equity, both secondary and primary. I actually think the opportunity space looks good for us because we're underwriting into that. We don't have any existing ones. I think some of the commentary written about private credit has come from it's interesting. You've had all the big, large players in private credit saying, yeah, there are problems, but it's not systematic. Who's on the other side is some sort of global, small, mid cap manager who's never done credit, and they love saying it's a bubble, it's going to die, right? And so what do they know, right? I mean, I mean, the reason they're upset is probably because private credits up there are higher up the cap structure getting their returns. Don't believe private credit, per se, is the SPV of real non-recourse real estate debt of 2007 that's going to cause some sort of crisis. Banks, private credit managers, long term sort of locked up capital that does this is it will, will look will make sure that the system does what it has to do. Are there problems? Yeah. Then one of the big problems is that there was a lot of these BDCs. And when you have a listed entity with unlisted assets, and you offer a liquidity redemption window, it's always the same thing. In any crisis, in any dislocation, it's either leveraged money or money that's not there for strategic reasons, that wants to depart, that creates the opportunity for others to come in and take advantage if they have to sell out of discount. Now are there private credit loans or issues, whether it's been in SaaS software disrupted by AI, or, frankly, bad lending. Course, there are, are there in 5000 equity stocks in the global capital market? Are there 50 or 60 that are in big trouble, or at 70 or 80 that could be in fraud? Course, they are. So you know, you're always going to have problems right in loans. But is it a big systematic issue other than the retail, you know, illiquidity, BDC type, or occasionally bad loans, sure, but I don't think it's a systematic issue.  Wouter Klijn  47:52 Do you see it potentially as throwing up some opportunities for a fund like you?  Con Michalakis  47:56 Oh, yeah, we're taking it as we speak. You know, we're allocating to special sits managers or people who can provide capital and solving for the opportunity. And we're, you know, again, we've come in underweight, so I should be saying private credit is really bad, but I just don't believe it and we're gonna, we'll take advantage of the opportunity across our manager set. We're pretty excited by it.  Wouter Klijn  48:21 Yeah, yeah. Fair enough. So going forward, what's on your agenda for Funds SA? Is there still a lot to do in the portfolio?  Con Michalakis  48:29 So I'm pleasantly surprised how well the performance has been. We're off to a really good start again. Strategy, governance, team. Jana non silo, I really would love to have the third fund I've worked for to continue to have very lucky at stay white, first quartile. Hostplus is a machine, right? It's, I still speak to some of my old colleagues, that is one of the, one of the great funds, and will continue to do all because it knows what it's doing. Yeah, we've turned it around here at Funds SA and my focus is to keep that turn around really happy where we are. But this is like a cricket game, right? It only takes one bad ball and you think you slug and you're bold and you look like an idiot. So happy where, where we've where we are in the process. Early days, very early days, but we got to maintain that focus. Managing portfolios for our clients and members is a privilege, and we can't take, we just can't stop. We got to be on the game and making sure we're aware of what's happening.  Wouter Klijn  49:37 So you mentioned Hostplus, when you look at Hostplus, it does really well, but it also has a very clear sort of target client base. They're young people. They have a long runway, so they can take a lot of risk, which has led to the asset allocation that they have. I think at Funds SA, it's probably much more of a mixed bag in terms of. The demographic of their member base. Does that make it more difficult to set a strategy?  Con Michalakis  50:06 Yeah, so Statewide also didn't have a lot of cash flow, right? So being a smaller team, the unique tax advantages and obviously they're not being regulated by APRA and the setting up the governance structure, I think gives us, and being 50 billion and not 500 billion, and not trying to manage really large cash flows, it allows us to be a bit more nimble and take advantage of the opportunity. Should we get it? And so, like, last year, I was that all of funds. So whether it was the investment team, the finance and ops team, the legal and odd, you know, we've had a couple of opportunities, and we turned them around, going through the process, you know, Investment Committee negotiating commercials, operational due diligence, commercials, and we can turn around within there's one we turned around in eight weeks,  Wouter Klijn  51:06 yeah,  Con Michalakis  51:07 and the the manager said, We've never seen this before. And they manage some sovereign wealth, money, some large pension. Funny. So having the ability to invest, sticking to your beliefs, I think is a Core Advantage. One of the questions I get asked a lot, and I think you were going to ask me, is, you know, what's the best investment you've made in your career? It's the people.  Wouter Klijn  51:34 Yeah,  Con Michalakis  51:34 It's the people. So having being surrounded by really core bunch of people that you can trust. I had that at Statewide. I had that at Hostplus, and we building this at Funds SA as a core, bunch of people, close to your consultant, close to your investment committee and board, and being on this and being committed and not stopping, like being at it, just focused on doing this. That doesn't worry me, because I think we know what we're doing, and it's starting to show on the results.  Wouter Klijn  52:08 Yeah, yeah, for sure.  Con Michalakis  52:09 And you can be niche, you know, we can do a 20 or 30 million VC and 20 or 30 million co invest at our size, and we can do a couple of these, but if you're 300 billion or 150 to get access, and to do that, it's much harder, and just sizing that and taking advantage of that opportunity set, it's I find it easier to run less money than more money.  Wouter Klijn  52:34 Yeah, yeah, for sure. Now, usually I don't let people get away with just talking about the best investment. Can you tell us what was your worst investment and what did you learn from it?  Con Michalakis  52:43 My worst investment, and what did I learn from it? So throughout all the career, probably single strategy hedge Funds was the worst investment. I'm not going to name names, but at Statewide, we had single strategy and you know these, they're all great, big names, big personalities. They promise you diamonds and they give you rocks, right? And we moved away from that at Hostplus. And this is, again, this taught the importance of working with great people. There's Greg, Sam and myself. It was Chris at when I was at statewide, and Dan who it continued lessons just wasn't working. We moved with John to a sort of an allocator model where they were closer they could implement, they could do overlays that was Blackstone here at Funds SA and say Peter, who runs the alts team, has moved from those single strategies to MAN and Blackstone, they're highly specialists. They know what they're doing, and it's worked very well, as opposed to trying to manage these on your own, which are really difficult,  Wouter Klijn  53:53 yeah, yeah, I can imagine.  Con Michalakis  53:55 So I gave you an investment, and the asset class so far, it's turned around. I feel good about that. The other one was, I remember going down the rabbit hole on tail risk.  Wouter Klijn  54:08 Was this the crisis mitigation stuff?  Con Michalakis  54:13 Yeah, yeah. And, you know, you put it on, it works until it doesn't, and then doesn't work. Your people lose going, and then you take it off and, you know, we never got to invest, thankfully, at statewide and Hostplus, and we had a tail risk here at Funds SA, we took it off and we put, put it to productive capital that can make money. Because, remember, you are diversified. You know, the one thing we spend with members is take that, take a traditional balance fund. Equities are down eight, 9 per cent you're about half in equities. You've got fixed income cash now, when bonds move away in a stagflation that could, that could hurt. You've got a bunch of infrastructure and property real assets tend to do okay, so you don't feel the full effect of that. That's the beauty of diversification. And you know, you have to remind people, so the idea that I'm gonna and I'm. Sorry to tell him, and I hope he doesn't call me, you know, idiot, moron, imbecile, than he does, but it's just too hard,  Wouter Klijn  55:08 yeah,  Con Michalakis  55:09 To be fair, and to be fair to him, he does say you should be invested in equities and have this, yeah? Well, we just do balance funds. We've got high growth funds, balance funds, conservative funds. You have the journey for a member. We've got different tailored solutions for clients, so sticking to your strategy and being diversified works.  Wouter Klijn  55:28 Yeah. Now we might finish up with a bit of a personal note. I think a lot of people, apart from, of course, knowing you as CIO, also know you from your Twitter feed?  Con Michalakis  55:39 I've locked that now, are you probably on there, so you still see it?  Wouter Klijn  55:42 Yeah, I actually do. But you know, you got a lot of opinions on there. What do you see of the role of that? And do you use Twitter as well for, you know, getting some market insights?  Con Michalakis  55:55 Well, you get a lot of information very quickly. You also get unfortunate, a lot of fake information.  Con Michalakis  56:01 But I remember many years ago, I did an interview with the Advertiser on this. It started off for football and music. It just morphed into fin Twitter back in the glory days, which was pretty bare knuckles and fun. I've actually met a lot of people through that. Met them around the world. You've met interesting people. You then go to private sort of messaging. So just gotta it's like anything in life, you can use it for good and use it for bad. Use it for noise. Mine's more selective.  Wouter Klijn  56:34 You say it started with music. And I saw some of your comments are around Joy Division, punk music. And I was looking at that, I'm like, That's not just standard business school playlist,  Con Michalakis  56:47 But you'd be amazed. Our chairman famously was interviewed, and he's a big punk rocker, really, Guy, Guy, you know, he will wax lyric on Husker Du or,  Wouter Klijn  56:58 Really?  Con Michalakis  56:58 Pixies, my old co-deputy, CIO, Greg, at Hostplus, we could lose three years just talking about Nick Cave or Joy Division. So, no, no, you'd be amazed. You'd be amazed. How many people come out of their shell when you start doing the music. You'd be, it's more diverse than you think.  Wouter Klijn  57:21 Oh, good, good.  Con Michalakis  57:23 Including the metal types, you'd be amazed how many metal types. I'm not going to out them, but there's some crazy ones out there.  Wouter Klijn  57:30 Fair enough. Fair enough. Now I looked at it and I'm like, Oh, I can now safely bring up my vinyl record collection at some stage, which features a lot of punk, but we'll leave it for another time. Thank you very much for this conversation.  Con Michalakis Was a lot of fun.