US President Donald Trump’s first term in office taught MLC Asset Management chief investment officer Dan Farmer a valuable lesson: it is usually better to respond to what Trump does, not to what he says he’s going to do.
Farmer says that in April this year, when Trump announced a slew of trade tariffs on so-called “Liberation Day”, the MLCAM investment team “wound the tape back” to Trump’s previous term.
“Our process goes back to what are the fundamentals of the economy doing? What are the fundamentals of the assets we’re investing looking like? How do we see the prospects from here?” Farmer says.
“We also layered over that some of our learnings from the previous Trump administration, where it became much more of a case of respond to what Trump does, not to what Trump says.
“We basically took the view when we looked at those fundamentals – the economy and the equities that we were holding – we were, I’d call it, aggressively rebalancing. So [with] markets falling, let’s rebalance back to our neutral benchmark.”
That approach saw MLCAM – owned by Insignia Financial – yesterday post an 11.4 per cent return for the MLC High Growth Super fund, exactly in-line with the fund’s 11.4 per cent a year five-year return. It posted a 12-month return of 10.1 per cent for the MLC MySuper Growth Fund, almost a full percentage point above the fund’s 9.2 per cent a year five-year return.
Farmer says it appears that markets are generally reacting less violently to Trump’s many and varied pronouncements. Back in 2016 the concept of reacting to every social media post was a shock to the established way of doing things – but “we got used to that”, Farmer says.
“He sprays out a lot of stuff. He wants attention. His style is probably the ‘break and repair’ model, we call it,” Farmer says.
“My gut feel is the market reacts less and less, and we’re probably seeing a bit of this more recently: let’s see where we actually land.
“We got the sticker shock of the tariffs. We’ve learned that he’s going to adjust, and that really, that’s part of his negotiation tactic. He negotiates by punching you in the face and then shaking your hand afterwards.”
But responding to these issues as an investor is one thing; helping the super fund members whose money MLCAM manages is an another.
“It is really difficult, because the markets do react,” he says.
“Part of what we’re trying to do across the broader Insignia [group], is communicate with clients, because what I worry about sometimes more is that our clients get unsettled by it, particularly our super members. They [worry] quite rightly, what does this mean for my potentially second-largest asset, [which is] my super, if I’ve got a home.”
Farmer says the key message to members is “you need to look through, take a long term view”, and to remind them that investment processes are not designed to “react overnight to whatever Trump’s tweeted”.
“It’s trying to make sure we communicate with our members so they feel they have a degree of confidence or comfort that they don’t need to jump in and start switching unless… they’ve got a particular issue,” he says.
“They don’t need to go and switch asset classes and react to what they’re seeing in the media.”
Listed equities did most of the heavy lifting in the past financial year, both domestic and international, and that the key to capturing returns was to remain disciplined.
“We kept our equity weights very close to benchmark throughout the year,” he says.
“That sounds boring, but I think that’s actually quite a strong decision. [That is] the importance of a steady, resilient asset allocation process, because there’s been a lot of noise. It’s probably been one of the noisiest years in a while in terms of geopolitical [and] policy instability, [and] concentrated asset markets.”
Farmer says this meant MLCAM was well positioned to benefit when markets bounced after the tariff announcement.
“We’re not claiming perfect foresight – if we had that, we would have gone overweight. But being in position for the rebound mattered,” he says.
In the financial year just past, diversification also paid off, and “across the suite of our major asset classes, really, it was a year where most were firing on all cylinders in terms of return”.
An allocation to private credit along with MLCAM’s longstanding positions in alternatives, in particular what it calls insurance-related investments, also paid off
“We’ve been building [private credit] out, particularly in the MLC funds, diversifying from Australia into the US and Europe. That private credit program delivered about 9 per cent, mostly income,” he says.
“Our insurance-related investments generated about 9 to 10 per cent with zero correlation to equity markets. And for me, coming in as CIO a few years ago, that was one of the gems: geez, okay, I’ve got this.”
Another bright spot: “Our esoteric private credit – asset-backed, litigation financing, special situations – delivered about eight and a half per cent.”
Farmer says these kind of broad-based investment returns are relatively rare.
“We’ve had very strong equity markets before, but usually your defensive components are poor. This year, both defensive and growth delivered,” he says.
Still, not everything fired. Unlisted property, of example, was “flat to slightly negative” over the year.
Even so, Farmer sees opportunity emerging.
“We’re committed to an opportunistic global property fund [with managers that] are looking for good quality properties having trouble with funding. They can go in on either the equity or debt side, reposition the assets. We’re expecting net IRRs of about 15 per cent in that space,” he says.
Even retail, which has been “beaten up over decades” is showing signs of life, Farmer says.
“We went through the whole digital revolution, what does retail look like going forward? But now we’re identifying a pretty specific niche in convenience retail we think is pretty attractive – that’s your ‘convenience retail’. I define it as ‘you can park your car in front of it’.
“It might have a Coles, your local fish and chips. That’s actually been performing well, and very similar to large-scale retail. So we’ve been upping our allocation [and] we’ll be moving to slightly overweight retail in our unlisted property [allocation].”
To fund the shift, Farmer is reallocating within the property bucket by trimming “a little bit off listed, trimming office, and also trimming some high-yielding, mid-risk credit”.
Looking ahead, Farmer says MLCAM is maintaining neutral equity weights.
“When we look at fundamentals, we still see a case for growth risk assets. We expect the economy to slow, but not a recession, a manageable slowdown. Yes, earnings will probably tail off a little bit in that, but the dynamics around particularly the equity market and growth assets more generally, has been quite strong. We think the market has got a good chance of kind of looking through that to the other side.”
