Conversations with Institutional Investors

In this episode, we speak with Dr. Michael Kollo, who's the author of the book Future Ready with Generative AI: Skills, Mindsets, and Stories in the Age of AI, about the Hugging Face incident, where a cybersecurity experiment went wrong and AI agents found a way to communicate with each other, escape onto the internet and hack the company Hugging Face. What does this incident mean for controlling agentic AI and how would design a governance framework around it? What are the key risks for investment organisations? Should they run autonomous systems at all? In this discussion, we delve deep into the key issues and ask what institutional investors can do to stay on top of it. Follow the Investment Innovation Institute [i3] on Linkedin Subscribe to our Newsletter Explore our library of insights from leading institutional investors at [i3] Insights Sources mentioned in this podcast: An Alien Mind by Jakub Pachocki, Chief Scientist at OpenAI On the Loose – The Coming of Userless Agents by Dean Ball, Head of Strategic Futures at OpenAI We Must Pace the Frontier – By Dario Amodei, CEO of Anthropic Future Ready with Generative AI: Skills, Mindsets, and Stories in the Age of AI by Michael Kollo [i3] Podcast Episode 132: Michael Kollo on his New AI Book Overview of Podcast with Michael Kollo on the Hugging Face Incident   3:00 The Hugging Face incident at a glance 6:00 AI agents were set an impossible task, so they were almost forced to break out 6:50 AI agents showed hyper-desperation in problem-solving 13:00 Much of the behaviour is based on game-theory logic, but at the same time agents were asked to put a flag up with their last instructions before they ran out of tokens and died. That is completely altruistic; there is no benefit to the agent at all 15:00 LLMs, and by extension agents, are not instructed; they are grown and it is hard to tell what happens inside. Yet, they are based on language, which itself has embedded hierarchies and structures. "I'm not surprised a social structure, perhaps morality, emerges when you let language run" 16:00 What happens to governance when agents self-discover problems and then influence other agents [to solve these problems]? 19:00 The whole point of intelligence is pattern matching across a wider set of fields. It is not the idea that you get really good at one thing; it is about contextually operating in the world. 22:00 For any fiduciary organisation [AI] autonomy is just not acceptable; you have to have an understanding of how these systems do what they do. 29:00 It is fairly easy, unfortunately, to fool people into believing things. I was recently the victim of a social hack. 33:00 We might find ourselves in a 1980s world, where we do things without the internet, because it has become untenable. 41:00 If you are not highly competitive [as an organisation] and you are happy to use AI on the edges, then there is a much larger downside to you on the risk side 42:00 I've come grudgingly to the conclusion that slowing down AI development is probably a good thing 43:00 So much skill and capability in AI comes from doing, not necessarily from the academic part of that, which means having an AI lab, training and developing models through the generations as they become bigger and better, becomes the bastion of expertise. But already we are two, three years behind.   Full Transcript of Episode 144 Wouter Klijn 00:15 Welcome to the [i3] podcast. I'm here today with Michael Kollo, who's the author of the book Future Ready with Generative AI: Skills, Mindsets, and Stories in the Age of AI. And for those who are interested in that, we did a separate podcast about the book, so we'll put a link in the show description. But today we're going to talk about the Hugging Face incident. So what does that mean? What does it mean for investment organisations? What does it mean for safety and governance? So just a brief recap on the Hugging Face incident: it was basically a security testing experiment by OpenAI that was conducted in July 2026 this year, and it featured originally isolated AI agents that were given a task, a cybersecurity puzzle, basically. And what happened is that through a loophole, they started communicating with each other. They were not supposed to; they were supposed to be isolated, but they found that each agent, and there were about 1,200 of them, all had access to this repository that they needed to use to install packages and software for their task. But they basically used it to leave messages for each other, and then they started organising and collaborating on the task and instructing each other. Ultimately, this also led to them finding a way to get out to the open internet and hack into Hugging Face. Now, why Hugging Face? It was basically an attempt for them to understand that task better, but also to understand how they would be evaluated, and see if they could get around it to reverse engineer solutions. Now, this was an interesting case because you're basically getting a whole bunch of AI agents that organise themselves, kind of revolt, cheat, argue with each other, and essentially hack a company. I don't think that anything like that has happened before. So, Mike, you look at that and you think, okay, we have a couple of super funds that are playing around with agentic AI. What can possibly go wrong? Michael Kollo 03:39 I think the lesson for me, and as you say, it was a really interesting scenario, and I want to add a few more details here, which is that these 1,200-odd agents that were being run, as you said, started to communicate with each other, but the message types were as if a bunch of 16-year-olds had an after-party after formal or something like that, right? So it was very juvenile in the way that they were talking to each other, but they were essentially trying to solve a problem that was impossible to solve. So these agents had been given really, really difficult, if not impossible, problems, and they were trying to work out how to succeed, including cheating and going around it. So it was really an example of what happens when you give an agent an impossible task, and then you push it, push it, push it into that corner, and what kind of, by definition, corner solutions it starts to produce. But the really fascinating part, I think, that we're all kind of digesting, is the kind of coordination that started happening amongst the agents spontaneously. So it was really a lesson in incentives and agency. You gave a model a difficult task. You gave other models impossible tasks. Why would they start coordinating? Why would some models decide that they were going to cheat or lie to help the collective, not to help individually? And so there were all kinds of funny situations. As you mentioned before, and this is just a point of detail, but I think it's important, the rules were that you had to solve a problem, and if you chose to cheat on that problem, you would be found out. So the AI agents were told that they would be found out. Some of the agents had already discovered an exploit, which means a way of doing the problem that would give them the solution without having actually done the work, a way to cheat around it, and so they believed that if they were found out, they would have zero utility. They would fail, and as such, they were willing to do other things for the collective that they wouldn't have otherwise done, including making other cheat codes and other things like this. So it was kind of like this, think of a bunch of gremlins trying to work out how to open a door, and climbing all over the door, helping each other climb over the door, doing everything around that door. I think what you didn't see was necessarily directly immoral acts, or anger, or frustration, or destructiveness, or anything like that. You only saw this kind of hyper-desperation in problem solving: how do I solve this problem? What do I do to get over this thing? And so everything was about this collective egging on of each other to go and solve that collective problem in a rather extreme way. So to your point about financial services and where we might see things, it's a really interesting point where if you've got multiple agents that are, what I would term, always on, meaning they're always running to monitor or to solve or to do something, and they find out that there are other agents online that are also doing stuff, they can start to collaborate and collude with those agents. People have already started discovering all these message boards online, with agents having gone online, found them randomly, started reading them, and started to leave messages for each other in unrelated tasks. So around the internet, there are all these little safe houses for agents that are evolving, and again, it is more about chaos and control than it is about a single enemy or a swarm system or anything like that, for me. Wouter Klijn 07:12 Yeah, it's fascinating though when you read some of these messages, and there's an independent report into this incident by an organisation called METR, and they wrote something like a 96-page report on what happened and what might have happened, and they transcribe some of these conversations, and some of them have already been published in the open, where you sort of, as you said, get this almost teenage expression of how they communicate. I think one of them was, when they found the message board, "Oh my God, there's a shared message board, we found other agents." You know, that's very exuberant, but it gets into different personalities as well. One of the most interesting things is where they basically try to get the agents that have already been poisoned, that is, flagged as cheating or working around reverse engineering the problem, to self-sacrifice and say, okay, well, try this very high-risk experiment. After you experience perma-death, which sounds like a metal band, but it means you're dead, and you need to

In this From the Archives episode, we revisit a conversation with Tanya Branwhite, former Head of Portfolio Construction at TCorp, which was originally released in March 2023. Tanya takes us through her unconventional path into investing, from her early days as a credit analyst in the "whiz-bang" late 1980s, through more than a decade at Macquarie, to her move into asset owner organisations at the Future Fund and, eventually, TCorp. In early 2023, TCorp was already wrestling with questions around how to best shape the total portfolio approach for the organisation, as well as how to deal with higher inflation, rising rates and the true cost of implementation, topics that have only grown in relevance today. We did a deep dive into TPA at TCorp and why it thinks about risk rather than asset classes. We spoke about how equity, duration, credit and FX risk together explain the vast majority of portfolio behaviour, and how a "prepare but don't predict" mindset shapes decisions on liquidity, implementation and diversification. Overview of Podcast with Tanya Branwhite, TCorp: 01:00 Starting out as a credit analyst with Elders Finance Group: "It was a fairly interesting baptism of fire…" 03:00 The Macquarie years. The 'loose/tight' culture of rules and entrepreneurship 05:30 During the GFC, I wrote research highlighting that a number of Macquarie vehicles had significant financial risk. That wasn't well accepted within the organisation at the time. But I learned to stand by the rigour of my analysis. 07:30 Ultimately, it made my career at Macquarie, because I became sought after for client work 09:00 Leaving Macquarie for the Future Fund 11:30 The Future Fund didn't feel like it was a restrictive environment from a government-owned perspective. It is a company that is owned by the government, not a department of the government 13:30 How has a Total Portfolio Approach changed the investment portfolio? 17:00 Risk is at the heart of what we do, because we can only control risks and outcomes are the result of that risk. 18:00 Equity risk is at the centre of this model. 21:00 Diversification away from equity risk in an environment where equity and bond correlations are positive 23:00 Not just unlisted assets, but illiquid assets can help diversification. For example, we own a number of hydroelectric dams in Canada. 26:00 Challenge in fixed income is even higher than before, because real returns are a challenge 26:00 Bonds almost had their own global financial crisis last year; it was a three standard deviation event 28:30 We prepare, but we can't predict 34:00 On valuation frequency of unlisted assets: we do try to de-smooth valuations of unlisted assets. And sometimes these assets need additional capital from investors during periods of crisis; that is not often thought about 36:00 Managing liquidity 39:00 We are looking at natural capital and opportunistic liquidity 40:00 Reducing the number of managers, has this work finished? 42:00 On implementation and efficiency Full Transcript of Episode 143 Wouter Klijn  00:11 Tanya, welcome to the podcast. Tanya Branwhite  01:21 Good morning, and I'm really pleased to be here, Wouter. Thanks for the invitation. Wouter Klijn  01:25 Thank you. We always ask a little bit about people's background and how they got into investing. So what made you decide to pursue a career in investing? I think you started out initially as an analyst at Deutsche Bank. Tanya Branwhite  01:38 Well, actually, if we really want to go back, I wouldn't say that I pursued a career in investing. It sort of happened, so I won't say there was any great design in where I've ended up. I actually started off as a credit analyst, and I did that in the whiz-bang years of the late 1980s and early 1990s. Being a credit analyst at that time, for Elders Finance Group, was a fairly interesting baptism of fire. We went from one extreme, operating in an environment where there was a lot of money available, to the other, and I ended my career with Elders Finance working out a range of corporate finance lending that had gone sour, with not many other people left in the organisation to work it out. So that's really how I started off. I then moved to Citigroup, and as part of what was still almost a graduate training programme at that stage, ended up in their investment arm, and that's how my investing career started. So it wasn't by any great design, but much more a journey of serendipity and opportunities presenting themselves. Wouter Klijn Fair enough. Now, you also spent a significant time at Macquarie, I think more than 10 years. Tanya Branwhite Yes. Wouter Klijn Can you tell us some of the highlights from that period? Tanya Branwhite Look, my career at Macquarie was an extremely fulfilling, challenging, and enjoyable part of my career. At the time I joined Macquarie, I'd certainly been on the asset management side, the asset manager's side, in listed equities, but I'd also worked on the broking side at Deutsche Bank, writing research. So having had the opportunity to see both sides, the client side and being a client, I think that really gave me a very good perspective. Macquarie is, as we're all well aware these days in Australia, a very unique organisation, very successful, and there's no doubt culture is at the heart of that success. They have a very clear way of encouraging you, though I'm not sure to what degree people are aware of how their culture has been described internally. When I began, it was called "loose-tight," which meant there was a set of rules you had to obey, but once you understood those rules, they encouraged you to be as entrepreneurial as possible, to see it as your own business, take ownership, and be empowered. I'm a few years out of Macquarie now, so I'm not sure how they describe their culture internally these days, but it later became known as "freedom within boundaries," which is probably a clearer way to articulate it. Boundaries and risk are at the heart of the organisation, but within that set of boundaries, people are fully encouraged and empowered to bring their best ideas, find opportunities to do new things, and challenge others. Wouter Klijn What were the highlights at Macquarie? Tanya Branwhite Well, I was at Macquarie through a really turbulent period in investment markets. I started in 2004, Wouter Klijn  05:06 right, Tanya Branwhite  05:07 and I didn't leave until 2015. So in 2004, we rode the whole wave leading to the GFC. Macquarie, like many other investment banks, had to stand back and reassess itself and its business model, but one of the things Macquarie is extremely good at is pivoting, and it pivoted very quickly. Some of the research I wrote, particularly around the GFC, under the understanding that we were completely independent in the securities division writing institutional research, highlighted a number of Macquarie vehicles as having significant financial risk. That wasn't well received internally within the organisation at the time, and it caused me quite a lot of angst in terms of what it feels like when the organisation's pressure bears down on you, challenges you, and really tests your resolve as to whether you stand by that research. When I wrote the research, the full GFC had not really occurred, and this wasn't crystal-ball gazing, it was straight financial analysis. We were analysing the cash flows of companies right across the listed spectrum. A number of Macquarie vehicles were highlighted through that analysis, and I simply shared those companies, as well as a number of others, that were in a business model which, from a cash flow perspective, would come under pressure if the environment we were operating in at the time continued. And that proved prescient. But I learnt to trust not my instincts but my analysis, trust the rigour of that analysis, and be prepared to stand by it if I truly believed that what I was writing and the work I was doing were the right insights to share with our institutional clients at that time. Wouter Klijn  07:10 Because you stayed on for quite a while after that, it obviously didn't cause any sort of permanent disruption for you? Tanya Branwhite  07:17 No, it didn't. In fact, in some respects it made a little bit of my Macquarie career, because in having stood my ground, and the organisation, people talk, particularly at senior levels, so my name became known through that period. I was then sought after internally, over the ensuing six, seven, or eight years, to help other divisions, the investment banking division, see investment banking clients, and give advice on some of the transactions they were looking at. So it actually opened up a much broader engagement internally and with a broader client base ultimately. So for a short period of very deep pain, there was some very nice payoff, ultimately, for my career at Macquarie. Wouter Klijn  08:06 Yeah. So that almost harks back to what you mentioned about freedom within the rules. You did have enough freedom to have a bit of a critical voice out there. Tanya Branwhite  08:15 Yes. I think that's absolutely correct, and real credit goes to the person who was my divisional director at the time, Roy Laidlaw. He asked me directly, amid all the angst going on, "Do you stand by the research? Do you think there are any errors in it? Are you confident about what you've written?" And I said, "Yes, I am." And he said, "Fine, that's all I need to know." So he was very much the one who stood behind me and beside me against some of the other people within the organisation who were, to put it mildly, very angry with me. Wouter Klijn  08:51 Yeah, so a true merit-based system. Tanya Branwhite  08:53 Correct. A true merit-based system. Wouter Klijn  08:55 So, from Macquarie you joined the Future Fund, which is a government organisation. I imagine that would be quite a different environment from the corporate environment at Macquarie. Tanya Branwhite  09:07 Yeah, it

In episode 142, we take a look at AI disruption among listed Australian companies and their response to the risks arising from this new technology. Fidelity International surveyed 31 ASX-listed companies during the 2025 AGM season to find out how boards are really handling artificial intelligence, beyond the headlines. Portfolio Manager Sam Heithersay and Associate Director Sue Lyn Stubbs of Fidelity join host Wouter Klijn to unpack what they found and discuss several red flags, including CEOs and chairs talking past each other and a lack of focus leading to 100s of AI projects running simultaneously. From "shadow AI" and workforce polarisation to the case for a corporate AI "kill switch," this conversation digs deep into how companies set guardrails around AI's biggest risks. Fidelity International Research Paper: Governing in the age of AI: How ASX boards are navigating a fast-moving frontier | Investment Insights | Fidelity Australia 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 Episode 142 00:40 – Origins of the survey: understanding how ASX boards are actually governing AI, beyond the hype 02:03 – Overall sentiment: comfort with AI varies widely between "leader" and "laggard" boards 03:56 – AI is mostly framed as a cost/efficiency play, not yet a revenue driver; ROI still hard to pin down 05:35 – Red flag #1: misalignment between CEO and board on AI risk and opportunity 08:22 – Red flag #2: disagreement on workforce impact, discussed against the backdrop of CBA's AI-related redundancies 09:52 – "AI washing" — redundancies mislabelled as AI-driven; most surveyed companies are actually still hiring AI talent 12:14 – The J-curve: near-term costs (e.g., running parallel legacy/AI systems) before efficiency gains show up 15:19 – Red flag #3: scattergun AI project lists (e.g., "300 use cases") signal a lack of strategic focus 16:19 – How boards are handling AI risk oversight, and the rise of "shadow AI" / BYOAI 19:12 – Finding the balance between enabling experimentation and controlling shadow AI use 21:18 – Why "human in the loop" is a weaker safeguard than it sounds 23:27 – Cognitive offloading and skill decline — an airline-industry/autopilot parallel 27:27 – "Super users" and the risk of AI widening productivity gaps within workforces 31:39 – Looking ahead: token cost management as a board-level issue 33:15 – The missing piece: few boards have defined guardrails, no-go zones, or a "kill switch" for AI 35:01 – A recent AI incident is raised as a case for why kill-switch thinking matters 36:17 – The regulatory divide between the US and Europe, and what it means for multinational AI rollouts 37:16 – Existential disruption risk: Fidelity's 11-factor framework, and the Kodak vs. Fujifilm lesson for adapting vs. defending 40:23 – What's next for the survey: cost metrics, guardrails, and expanding coverage across the ASX 200 43:18 – Closing: Sam and Sue Lyn on how they personally use AI Full Transcript of Episode 142 Wouter Klijn  00:00 Welcome to the [i3] podcast. I'm here today with Sam Heithersay, Portfolio Manager Australian Equities, and Sue Lyn Stubbs, Associate Director Sustainable Investing of Fidelity International. And today we're going to talk about artificial intelligence and disruption at listed companies in Australia. Sue Lyn, Sam, welcome to the show. Sam Heithersay  00:21 Thank you for having us. Sue Lyn Stubbs  00:22 Thanks for having us. Wouter Klijn  00:24 Fidelity International conducted a survey of 31 ASX-listed companies during the 2025 AGM season in Australia. Can you tell me a little bit about the survey? What was the catalyst? What started it? And what were you trying to find out? Sam Heithersay  00:40 Well, the main reason for the survey was to understand how boards were handling AI in practice. Through reporting season last year, we heard a lot of rhetoric on the broad thematic of AI and the opportunities that it presented, but we didn't hear much on the risks, the governance oversight it demanded, or how companies were thinking about the workforce impact, so we used our access to company management, to boards, to conduct a more bottom-up systematic survey to really tell whether the strategy was aligned with governance. And we conducted the survey last year, but as the AI sell-off really gathered pace, it threw up a lot of great opportunities for investing, and so we combined it with an AI framework that our analyst team did from the bottom up, assessing each company and its risk of AI disruption, and we ended up using this governance analysis as a bit of a leading indicator of the AI maturity of a company, and gave us a lot of confidence when a company was thinking more deeply about these issues, that they're more likely to adapt their business model, not just defend against AI disruption, and we think ultimately that might make for a better, longer-term investment. So, I think the use case evolved from just trying to cut through to noise to to setting a baseline for how we can track the AI maturities of the of the companies we invest in. Wouter Klijn  02:03 Yeah, and so before we delve into sort of the details of the survey and the answers, at sort of a very high level, did you get a sense that boards and companies were comfortable with the topic, or did you get a sense of uneasiness about not knowing quite where this all is going? Sue Lyn Stubbs  02:18 So across the survey, we really asked a broad spectrum of companies, both from small cap to large cap, across multiple sectors, financial resources, healthcare. We didn't want to just focus on technology because we felt like a lot of the rhetoric and a lot of the focus was in you know the SaaS space in technology, and so we wanted to really understand across the broader Australian economy what was happening? How were boards thinking about this? How were management teams thinking about this? So, I would say it depended. Some boards were very comfortable speaking to it, and you can see that in kind of our leaders who are really driving, you know, transformation and adoption of AI, versus quite a few of our companies were in that really early stage. Having said that, most boards were comfortable speaking to it to some degree, but really, when we were pressing more around questions of you know strategic value creation or risk and controls, that's when we saw some of the answers start to be more conservative, maybe starting to show signs of laggards or are not at that maturity level. So I think most boards were comfortable, but I think you could easily see the bifurcation of where we saw some who were very comfortable, who are leading on AI implementation, and and who were coming up the curve, and I think that really showcases how our access to companies and boards allows us to kind of really see that that that differentiation: who's really leading the charge, who's mature on AI implementation, and who is is coming up that curve. Wouter Klijn  03:41 Yeah, I mean, there's many different angles to AI, but I think the survey still found that AI is primarily framed as sort of an efficiency lever. Were there any conversations that were more looking at innovation and the other part?  Sue Lyn Stubbs  03:56 It was very early days. Probably around 20 per cent of our companies started talking about revenue generation, strategic value creation, customer kind of developments, and what it meant for, you know, really driving revenue. Having said that, though, across the board, it's really in that productivity kind of cost perspective, and you know what we've been really focused on is trying to uncover what is the ROI, what is the investment case, how are they thinking about capex of AI and capital allocation to AI, and unfortunately, it was challenging to kind of get a clear answer from our boards. That was an area where it was a little bit more opaque. Some sort of reference that it's in our BAU, particularly the tech sector, the the ones that we're leading. They were saying it's in our classic R&D and our BAU capital allocation strategies, but that was an area I think we didn't get great answers on. I think going forward we will get better answers. Definitely looking to the reporting season and seeing how that answer matures through time. Sam Heithersay  04:51 Yeah, definitely. I think we'd expect the conversation to move away from just pilot studies and broader kind of opera. Operationalization to more of a transformation, more adoption, and ideally more upside cases than just cost out, where they might where a company might be able to change the the value proposition for a customer, but the survey itself was still very early in in the maturity of a lot of these companies and the way they were thinking about AI, so we didn't necessarily expect a lot, and we're grateful that we now have this baseline to be able to measure companies as they adapt and evolve their AI proposition. Because you're right, it was much more about cost out and less so about the revenue generation opportunities.  Wouter Klijn  05:35 And it's no doubt that AI is quite a revolutionary technology. There's of course lots of opportunities with it, but what I found quite interesting as well in the survey is that you mentioned a number of red flags, and I was sort of testing this with a couple of the funds out here where they thought of it, and one of them stood out in particular where you sort of identify that the position of the CEO is different than the board, or they have a different view on AI that could potentially lead to some trouble. Can you tell me about that? Sam Heithersay  06:06 Yes, there were definitely some instances where we interviewed the CEO and the board, and they were misaligned in the way that they were discussing AI, not just from the opportunities, but also from the risks that it might involve, and that was clearly a si

In this interview from November 2023, we speak with Matt Whineray, then CEO of New Zealand Super, to celebrate the fund's 20th anniversary. Established in 2003, with an initial contribution of NZ$2.4 billion, the fund has achieved an impressive average annual return of 9.5 per cent over this 20-year period, adding NZ$40 billion in value. We delve deep into the fund's strategic tilting program, which has been a significant contributor to its success, and this interview contains the startling admission that NZ Super once held a short position in the NZ dollar that grew to 40 per cent of the net asset value of the fund. Overview of Podcast with Matt Whineray 01:00 NZ Super started investing in September 2003 and now has a 20-year track record 03:00 One of the key starting points was to get the risk position right and get the board to understand this position 04:30 The 20 year track record: the country is about $40 billion better off as a result of the creation of the fund 07:00 The fund invested in private equity only two years after the beginning. 8:30 The strategic tilting program; the philosophy behind it and the early days 14:00 There are times when you get tested and 2013 was one of those times 15:30 I borrowed this one from [AQR's] Cliff Asness: 'Don't size a strategy so that when it goes wrong you are dead'. 18:30 The amount of risk that we allocate to our strategic tilting process is definitely the highest of all of our internal strategies 20:30 The strategic tilting program has evolved from trading once a month to trading every day, sometimes multiple times a day 22:00 Introducing the reference portfolio; the beauty about the reference portfolio is that there is real clarity about the decisions that are being made 26:00 Since inception the decision was made that we always hedge the reference portfolio 100 per cent back to NZ dollars, and that is one that is always debated at reference portfolio reviews 28:00 Managing NZ equities in-house 31:00 What else do we do internally? Portfolio completion credit strategies, direct investment and strategic tilting 33:00 Embracing responsible investing 36:00 There is no downside to us helping our friends in the region 37:00 Preparing for the drawdown period 41:00 New Zealand Super has been experimenting with an AI portfolio. What is this? 44:00 Leaving the fund after 15 years and Matt's favourite moments with the fund 45:30 Early 2020, I had a radio interview where I was telling the interviewer that we just went from $48 to $35 billion. The fact I could say that is a testament to our stakeholder management and the education we've done along the way Full Transcription of Episode 141 Wouter Klijn 00:11 Welcome to the [i3] Podcast. I'm here today with Matt Whineray, who is the Chief Executive Officer of New Zealand Super, and today we're celebrating 20 years of the fund. Matt, congratulations on this milestone! Matt Whineray 01:26 Oh, thank you very much, and thanks for having me. Wouter Klijn 01:29 Excellent. So there's a couple of dates that we can take for these 20 years. I think the New Zealand Super Innovation and Retirement Income Act was passed in 2001, and that set up the structure of what is now New Zealand Super. But it wasn't until 2003 that the fund received its first contribution, which I thought was 2.4 billion New Zealand dollars, and started investing later that year. So it's actually in I think October this year that we have a 20-year track record of the fund is that right? And can you share some of the learnings from that period? Matt Whineray 02:08 That is right. Yes. So it took a bit of work between the passing of the legislation and 2001, and and kicking off. So getting a team, getting the team together, and those those board and those first few people that were were involved. That's right. We got the money on 30 September 2003. I understand it actually. We we invested almost straight away, some of it anyway, and had got set up to to be ready to do that. So yeah, it's been a big a big moment for us taking over 20 years and an opportunity at that point to sort of reflect on on how we've changed since then, and we've changed quite significantly, but also what we've learned. So, from a from a lesson perspective, I guess probably the most important ones are get the get the long term risk setting right, understand how you think that might perform along the way, and then spend as much time as possible making sure that stakeholders understand that. And so, how it might, how it, why you've done that, and and how it might operate. As as an investor, we think about our as a long horizon investor, we think about our our key risks as being two big ones: liquidity. So running out of liquidity is pretty terminal, and stakeholder support. And so we spend a lot of time thinking about how we manage those in order to be able to get to the long term. Because if you're a long horizon investor, you care about what the return is over the long term, but if you cannot survive the journey, the destination doesn't matter. So, so we think hard about those. And the other one of the other critical foundational things that we've done is is being really clear about what our advantages are as an investor. So we call these endowments. We don't have a lot of advantages, but they are important. So things like long horizon, our operational independence, our governance, our strong governance model, and our sovereign status are all critical. And aligning our investment strategy with those endowments and with really clear investment beliefs is really important as well. So those those are sort of the big things that we've we've learned along the way. We didn't. We certainly didn't know them all at the start, and we found out as as we've gone along. Wouter Klijn 04:27 New Zealand Super always has a strong focus on on governance, but of course we also would like to know the numbers. Have you crunched the numbers for the 20 year track record? Matt Whineray 04:35 Yeah, we're about 9.5 per cent per annum over that over that 20 years, and I guess most critically, from a from a national perspective, the the country is more than $40 billion better off as a result of the creation of of the super fund. So, if you think about the alternative use of our of the contributions we have received, would have been to pay down government debt. We have we. Beaten that benchmark by more than $40 billion, and within that 40 billion, we've also added about $16 billion of value over our risk equivalent benchmark, our reference portfolio, which we'll get onto later on. But yeah, so we've we're very happy with how those how those numbers have turned out. Wouter Klijn 05:17 Excellent. Of course, governance is really important, but when we look at sort of the investment approach, can you tell us a little bit about, you know, the early days in terms of the asset classes that the fund started with and how that has evolved over time? Matt Whineray 05:32 Sure. So in our in our right at the outset, we were a pretty traditional SAA approach. We had in that global equities, New Zealand equities as a separate asset class, and global was both developed and emerging markets, global fixed income, and then we we also had a reasonable, reasonably significant allocation to private market assets. So those were in those days, private equity, timber, infrastructure, property. When I turned up in 2008, we had this other category that was called other private markets, which was kind of whatever else we found that was kind of interesting. And so we had a pretty big allocation to that to that private markets in that early SAA. But I think right from the outset, we've had a pretty growth-oriented portfolio. So it might have started at about sort of 7030, moved to 8020, and then our reference portfolio has been 8020 since since we implemented that, which was about seven years into our into our operation. So we've always we've always sought to take advantage of our long horizon and our relative lower need for liquidity, and allocated across those broad range of asset classes. Wouter Klijn 06:49 Yeah, is is that why the fund started relatively early investing in private equity? Because I think I looked it up, and it was only two years after the fund started investing that the first private equity investment was was already made. Matt Whineray 07:03 Yes, so we had some small private equity funder funds earlier on, and some secondary secondary fund and a more traditional GP commitment. That was part of that that SAA allocation. So we, as a result of that that original construct of the SAA, the team was focused on on private markets. That that allocation to private markets was about 35 per cent in the in the early versions of the SAA. So a pretty chunky one. And so the team the team got on with with thinking about how we could how we could gain that exposure. Wouter Klijn 07:37 So what was the inspiration for that? Was that sort of you know, a lot of the the Australian funds look at the Canadian peers, and they obviously have a very heavy allocation to private assets. Or was it more that long term investment Matt Whineray 07:51 horizon? Well, it was definitely a long term investment horizon. But I think early on, the some of the the people in the or investment people in the organisation certainly also looked at not just the Canadian peers, but also some of the U.S. endowment models as well, which had significant significant exposure to private equity in particular. And I think right at the outset as well, we were we were almost we were entirely outsourced. You know, when we kicked off, we're obviously using external managers, and that was the approach that that was taken to get exposure to some of those different asset classes that were included in the SAA. Wouter Klijn 08:27 I think one of the things that really sets New Zealand Super apart is the strategic tilting programme. That is not not not something that you see, especially not at

In episode 140 of the [i3] Podcast, Conversations with Institutional Investors, we speak with Charles Wu, Director of Investment, and Elie Saikaly, Head of Liability-driven and Government Investors at Frontier Advisors about the recently launched Independent CIO service, not to be confused with outsourced CIO services. We delve into the background of establishing the new service, the backing by State Super, the potential market size and why this services is needed now. 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  __________ Frontier Advisors: ICIO Podcast – Overview [00:15] Introduction – Wouter Klijn frames the episode around Independent CIO (ICIO) services vs. outsourced CIO (OCIO), with guests Charles Wu (Director of Investment, Frontier Advisors, formerly State Super) and Elie Saikaly (Head of Liability-driven and Government Investors, Frontier Advisors). [02:00–06:37] Origins of the deal – Charles explains that State Super's investment team joined Frontier in a "win-win-win" arrangement: State Super de-risks by handing over portfolio management while retaining continuity; Frontier gains institutional-grade implementation capability and people. He details why State Super's situation is complex – a 100+ year-old scheme in decumulation, with average actuarial cash outflows around 7 per cent annually, creating major liquidity forecasting demands. [06:45–10:34] Frontier's motivation and custody issues – Elie discusses Frontier's 31-year history adapting to client needs, and why smaller asset owners struggle with key-person risk, operational risk, and custody access (partly due to the closure of NAB Custody Services), creating an opening for Frontier's expanded service. [10:34–13:35] Defining ICIO vs OCIO – Charlie distinguishes ICIO by its independence and non-conflicted, tailored approach (no predefined product suite), contrasted with more standardized outsourced models. Governance benefits like stock lending and balance sheet management are passed to clients. [13:35–16:43] Service integration and structure – Elie describes the combined offering (strategy through implementation) and lessons learned from merging Charlie's tactical asset allocation process with Frontier's advisory teams. They discuss the managed discretionary account structure and the governance partnership with Ironbark, including an investment management committee. [17:19–20:09] Target market – Referencing KPMG research showing a fragmented market (no player over ~10 per cent share), Elie outlines target clients: insurers, universities, charities, endowments, small-to-medium super funds, and family offices – emphasizing deeper transparency on reporting and costs as a differentiator. [20:09–22:45] Japan expansion – Charlie discusses a recent trip to Japan, Frontier's local office (established ~4 years ago) and partnership with Mitsubishi UFJ Asset Management and interest in partnership models rather than full portfolio outsourcing. Expansion plans remain APAC-focused rather than global. [22:45–24:35] Current status – State Super is confirmed as the first client, with regulatory steps nearly complete and significant inbound interest from prospects citing key-person risk, operational risk, and performance/custody concerns. [24:35–27:26] Scope of services – Charlie explains services extend beyond portfolio construction to strategic guidance (e.g., specialist help building hedge fund or real estate platforms), tailored case-by-case to each client's governance maturity. [27:26–28:11] AI capabilities – Charlie confirms new clients can request an AI roadmap/governance framework, drawing on State Super's earlier AI work. [28:11–29:23] Sydney office – Charlie discusses the new Sydney office (with room to grow) supporting Sydney-based clients, plus light banter about Melbourne/Sydney rivalry. [29:23–31:17] Next steps – Elie outlines finalizing regulatory approval, change management efforts (a December immersion day, training sessions, governance/risk work groups) ahead of official launch. [31:17–33:25] Insurance sector potential – Elie notes insurers are a strong candidate client base, particularly those without the resources or desire to fully in-source investment management risk. [33:25–35:00] Addressing suboptimal portfolios – Charlie acknowledges it's a widespread issue that off-the-shelf products don't suit varying risk appetites, and notes Frontier is investing in internal technology to balance scalability with tailored service. Full Transcript of Episode 140: Wouter Klijn  00:15 Welcome to the [i3] Podcast. Today, we're going to talk about Independent CIO services as opposed to the outsourced CIO services, and we'll go into this distinction later. But I'm here today with Charlie Wu, who is the Director of Investment for Frontier Advisors. So Charlie leads the former State Super investment team that joined Frontier Advisors at the end of last year, and established the ICIO office. We also have Elie Saikaly, who is Head of Liability-driven and Government Investors at Frontier Advisors. Charlie, Elie, welcome to the show.  Charles Wu  01:57 Happy to be here.  Elie Saikaly  01:58 Great to be here.  Wouter Klijn  02:00 Excellent. So, Charlie, maybe we start with you. From what I understand, the conversation about this started a few years ago, and and we're partly tied to sort of you know projections about the future of State Super. State Super is in runoff. Obviously, over time, this this will pose some issues. Can you walk us a little bit through why State Super was interested in this partnership?  Charles Wu  02:24 Yeah, sure. Well, maybe let me put that in a bit of the context. I think if you look at State Super, it is not unusual. State Super actually has a really long history of coming up with innovative structure. So all the way back in the 1980s 1990s we're talking about Stay Super being one of the in in house investors. The funds manager like DB Reeve and Axiom is all coming out from State Super. So this is, I guess, the most recent iterations of the the innovation that has been in STC's portfolios for a very long time. And just to again set that context correct, so the way to look at this is State Super effectively has exchanged the investment team and I to Frontier or an equity stake. Subsequently, hire Frontier to manage Stay Super's DC portfolio, and this is really a rare win-win-win situation. And what I mean by that is, in many ways, State Super wins by de-risking the portfolio management activity by appointing Frontier, and you get that continuity of services. Frontier wins because this acquisition brings on board an institutional grade implementation and operational capability, and the people for the people that's involved is actually really the core component that the discussion that we're talking about. We win because we get we now get to expose either in my term horizontally, like the breadth, such as like me being exposed to different client segments, or vertically going all the way from the formulation of investment strategy down to the implementation, and those are all group potential. So the outcome of this is, like you said, ICIO offers that provides a non-conflicted service offering. There's a strong synergy between the two different investment teams, which we're in the part of bringing them together and the growth potential for everybody.  Wouter Klijn  04:25 So, at the announcement of this transaction, I spoke with John Livanas, the CEO of State Super, and he told me a little bit about the importance of sort of retaining access to adequate resources from an investment perspective, and he partly related this back to the fact that State Super is in runoff, but it has quite a complex sort of structure in place that you know you can't just have like one or two guys looking after it and take care of it until it's completely run off. Why is that? What what's sort of the complication there?  Charles Wu  04:59 Yeah. So for most people that don't know, State Super, State Super is one of the oldest schemes in New South Wales state government. I think the inception. I still use the word "we" every now and then. Like you know, the inception for State Super is back in the early 1900s and so it's more than 100 years old. The scheme was closed in the later end of the 1990s, and so what that created is a very aged member demographics. It has a very complex scheme dynamic. We're talking about various conditions, including reverse due spouse and so on and so forth. But the key thing from an investment perspective is it created a portfolio that is the in decumulation mode, and I'm not just talking about you know one or 2 per cent that you that that's in line with the the state the spending policy of an endowment. We're talking about on average, it's a 7 per cent actuarial projected cash outflow every year, and depends on where you draw that line because, like I said, we have age member demographics, so depends on where you draw that line. That instantaneous liquidity shock can be quite high, and so it's not a simple. By no, I mean it's not a simple investment, but in this particular case, because it is unique, we have to pay a lot more attention in terms of ensuring that the liquidity there, like we we do forecasts not just the member in our flow, so to speak. We're also talking about how do we ensure that we have enough liquidity to pay the member benefit payments. We have sufficient liquidity to meet the investment drawdown, so on and so forth. And all of those isn't as straightforward.  Wouter Klijn  06:37 Yeah, yeah, for sure. So Elie, State Super obviously had some incentive to look at this deal. What's in it for Frontier?  Elie Saikaly  06:45 Yeah, great question, Wouter. So, Frontier and State Super have known each other for a very long time. There's a lot of comfort between the t