MLC Super is keeping a close eye on equity valuations as the AI boom continues to run but is also working on implementing new techniques to make up for the performance gap that results from its active managers running underweights to the big tech stocks.  
 
“As we go into [2026], we’re looking more at how we utilise our derivatives capability even more deeply to manage aggregate portfolio risks,” chief investment officer Dan Farmer tells Investment Magazine. 
 
“Our fundamental bottom-up active global equity managers are finding it hard to buy tech stocks because of their valuations, so we’re working with the derivatives team to find some solutions for reducing the risk of being underweight tech without necessarily undoing the active underweight positions those managers have. Things like dispersion trades, which allow you to gain exposure to the AI companies if they continue running, but if they fall you’re not wearing the downside. 
 
That means that MLC Super might be able to take a more thoughtful approach to managers that have underperformed a red hot market rather than – as many funds have – terminating them and taking everything back to the benchmark. 
 
“[It’s a question of] if the tech stocks keep running, how do we ameliorate some of the underperformance risk that the active managers have in aggregate?” 
 
In less concentrated markets – and Farmer says these are the most concentrated he’s seen in his career – much of that risk is naturally negated by having managers running different styles. But in the US, price momentum is “dominant”.  
 
“One of the things we’re watching closely is managers that have a clearly defined style, that those managers that are looking at the AI stocks in a dispassionate way, but through the lens of their process.  
 
“So what would probably worry me more is if a manager that we wouldn’t expect to buy an AI stock is suddenly buying AI stocks to ameliorate their business risk. That’s not what we’ve got them there for. The derivatives make it easier to be patient with those managers that are just sticking to their investment style.”  
 
And while valuations are “obviously pretty full”, they don’t, by themselves, worry Farmer. The fact that something is richly priced doesn’t mean it will be any less richly priced tomorrow, though a “bump in the road” might give investors more reasons to fret.  
 
“The amount of AI capital spend is huge, but our modelling shows that it isn’t peaking; there’s more to come. That’s been an incredibly important driver of equity markets but also very important for general growth, particularly GDP growth in the US… We’re watching that, and how that capital expenditure is being funded – the amount of credit and debt funding that’s going into it.”  
 
But the AI thematic is also making its way into more parts of the portfolio than just equities. While MLC Super has had “reasonable exposure” to data centres, Farmer says that there are more speculative assets coming to market that the fund is more cautious on. 
 
“No long-term contracts, loose power supply arrangements, and often in a poor location – not close to population centres, or in an area that might be hurricane prone or bushfire prone. These things can’t go down… It’s an area that’s running hot, and as always with all our investments we’re very selective about what we go into and who we partner with to find those opportunities.”  
 
Farmer expects that 2026 will be the year that significant productivity gains from AI – which have so far eluded many businesses using it – will begin to appear.  
 
“I think 2026 will be the year where we start to see the second-order effects of AI coming through… We’re watching that very closely to see if solid earnings growth starts to emerge as AI gets more deeply embedded into underlying businesses. 
 
“We are starting to see, in some of the financial services plays we’re invested in, early signs of AI driving margin improvements; we’re starting to see that appear pretty clearly in our private equity program.”  
 
MLC Super is also building out its unlisted infrastructure portfolio into more core-plus assets, including in the renewables space.  
 
“In the past we might have been looking for low double digit returns for new allocations to unlisted infrastructure. Today we’re looking for more mid-teen returns… We think the opportunities are there, and we’ve got a very mature capability. We feel more confident that we have the abilities and capability to go into core plus. 
 
“We feel that, given the benchmarks we’re trying to beat, it’s almost a safer bet to go to core plus to try and get excess return. We have excess return in most of our products against Your Future Your Super, and this is an opportunity to extend that performance buffer.”