After bedding down the acquisitions of ANZ Pensions & Investments business (ANZ P&I) and MLC, Insignia Financial CIO Dan Farmer is now looking to benefit from its larger size by participating in more co-investments, especially in the private market space.
After a spate of acquisitions, Insignia Financial has grown to be one of the larger asset owners in Australia, with assets under management of $84 billion as of 31 December 2022.
With scale comes certain benefits, not only in terms of cost savings, but also in the types of transactions Insignia Financial is able to engage in. And co-investments is a key area the company is planning to do more in.
“What we are looking to do more of internally is co-invest, leveraging our relationships with managers and the skills we have in the team to look for more co-investment opportunities across unlisted infrastructure, private equity and potentially global unlisted property going forward,” Dan Farmer, Chief Investment Officer with Insignia Financial says in an interview with [i3] Insights.
“So that is an area we are continuing to look to grow,” Farmer says.
What we are looking to do more of internally is co-invest, leveraging our relationships with managers and the skills we have in the team to look for more co-investment opportunities across unlisted infrastructure, private equity and potentially global unlisted property going forward
Although Farmer is also eyeing co-investments in the alternative asset space more broadly, future co-investments are likely to take place mainly in private markets.
“We were looking at unlisted assets and alternative assets on the IOOF side, and MLC had been going through a similar process of beefing up exposure to unlisted assets, being unlisted infrastructure and unlisted property,” he says.
“We’ve both been on that journey and so when we came together it was refreshing to see it was quite similar,” he says.
The acquisition of MLC also gave the investment team new capabilities in private equity, since MLC employed an internal fund-of-funds investment team in this area. Farmer says IOOF, before the acquisition, was a client of the private equity team.
“With the acquisition of MLC, we’ve got a really strong fund-of-funds and co-invest private equity team that MLC had been cultivating and nurturing for 20 years. IOOF was actually an institutional investor with the MLC private equity capability well before the acquisition was ever contemplated,” he says.
“So now the private equity team, which we really respected as an external investor, is part of my investment team, and so we’ve really been getting some strong people [in the team].”
Streamlining the Portfolios
As is inevitable with the coming together of investment teams, Farmer has been streamlining the portfolios to reduce overlap and create efficiencies. And although he is keen to reduce the number of external managers the company uses, he emphasises Insignia Financial is still likely to use smaller and mid-size managers if the team believes there is an alpha opportunity.
“Part of decluttering [the portfolio] is fewer but larger relationships with managers,” Farmer says. “So a focus on a smaller list of underlying investment managers is an important part of driving returns in the long term, but we still look for niche opportunities,” he says.
“Where we can find alpha pockets, we will pursue those pockets. If we can pursue that with a multi offering investment manager we will, but sometimes it’s more effective to go to a specialist to tap into some of those opportunities,” he says.
Both IOOF and MLC had been running some smaller scale strategies in-house, for example in Australian equities, while IOOF also had an in-house property capability. But Farmer is reluctant to embark on a broad scale insourcing program other than co-investments, he says.
“Both sides have a history of running some internal management, but really at our heart we’re a multi-manager. That is really our core skill set,” Farmer says.
We will look at in-house [management] where we believe there is a niche opportunity in the market and where that opportunity is not being well-captured by external managers and we believe we have the skills to run it at a lower cost than external managers. But that is certainly a very clear gate that we have to pass through before bringing anything in-house
“We will look at in-house [management] where we believe there is a niche opportunity in the market and where that opportunity is not being well-captured by external managers and we believe we have the skills to run it at a lower cost than external managers.
“But that is certainly a very clear gate that we have to pass through before bringing anything in-house,” he says.
He says the investment team has been amalgamated into one team with clear responsibilities and it is currently at a good size to carry out the investment strategy.
“We are in good shape at the moment,” he says. “We did a lot of heavy lifting last year. There are now 47 people in the investment team, which given our FUM (funds under management) is about the right size. There are no immediate plans to up- or downsize the team.”
But he is quick to add that if Insignia Financial is presented with more co-investment opportunities, that might change. “If that really accelerates, then we’ll add resources as required,” he says.
Aligning Investment Philosophies
Although the name Insignia Financial is new – the product of the 2021 acquisition of MLC – the organisation traces its roots back to 1846, when it started as a friendly society under the name of the Independent Order of Odd Fellows, better known as IOOF, in Melbourne.
It was based on a model of friendly societies that sprung up in England during the 18th century, where Odd Fellows lodges were first documented in the early 1700s and were set up with the aim to help members in times of need, but also help the broader community through charitable programs.
After the development of the welfare system in Australia, including Medicare in the 1970s (and to a lesser degree compulsory superannuation in 1992), the need for friendly societies diminished and IOOF morphed into a wealth management and financial advice organisation.
MLC, derived from the name: Mutual Life & Citizens Assurance Company Limited, also has a long history, being established in 1886.
But from the outset, it was much more of a for-profit life insurer, having the aim to “popularise Industrial Life Assurance, and to carry it to the homes of the working classes by issuing policies for small amounts and receiving the premiums thereon each week”.
The acquisition of MLC was the most recent one in a string of many acquisitions for Insignia Financial, which also include the notable acquisition of ANZ P&I in 2019 and several dealer groups over the years, including Australian Wealth Management in 2008 and Shadforth Financial Group in 2014.
Despite the different backgrounds of the two organisations, Farmer says he found the investment philosophies of both MLC and IOOF to be quite strongly aligned.
When you think about it, both are multi-manager teams that have been active in the market for a long time, and so when we got together the investment philosophy was very similar
“When you think about it, both are multi-manager teams that have been active in the market for a long time, and so when we got together the investment philosophy was very similar,” he says.
“There is a belief in active management, both in active investment manager selection and active asset allocation, so both teams had a form of dynamic asset allocation tilting,” he says.
MLC is well known in the market for its scenario approach to managing risk, which was developed under the guidance of Susan Gosling, former Head of Investments at MLC. This approach started with the premise that the future is unknown and unpredictable and to get any grip on potential risks is to envisage a range of potential ways the future might unfold.
Gosling developed as many as 40 different scenarios, which informed asset allocation decisions across the various portfolios.
Farmer’s approach to dynamic asset allocation followed a different path, but he has been fascinated by the additional insights the MLC framework has provided on risk.
“It does force you to think wider than the base case,” he says. “It forces you to think about a wider set of possible scenarios, and I think in the current environment where we’ve been through a period of regime change in inflation, a lot of the traditional models have struggled with that.”
The models developed by MLC included a number of inflationary scenarios under different sets of circumstances. Farmer says these predetermined sets of scenarios provided an extra dimension to the conversation around positioning.
“It has been a good complement to the traditional valuation and market cycle-type models that many funds have been using. It provides a different risk dimension,” he says.
But despite the benefits of scenario modelling, the framework does not provide a silver bullet for tackling the challenges of investing in the current environment, he says.
“I haven’t found a model yet which provides a complete roadmap of the future and if I do I probably won’t tell you,” he quips. “But what it does is makes us think about the different types of inflation environments without trying to be predictive.
“It doesn’t give you the answer, but it shows you the potential risks and gives you insight into what outcomes could play out,” he says.
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.