IDEIAS

 

How are asset owners reallocating towards sustainability? Listen to Jason Mitchell discuss with Dan Mikulskis, People’s Partnership CIO, about how the People’s Partnership is doing to evolve its investment strategy; what that means functionally for in a responsible investment context; and why asset owners like People’s Partnership are taking on a bigger leadership role in sustainable finance.

Recording date: 26 February 2025

Dan Mikulskis

Dan Mikulskis leads the investment team at People’s Partnership, driving forward the investment strategy of The People’s Pension master trust, which has more than 6 million members and is one of the largest asset owners in the UK. Dan is a big fan of cutting through the noise when it comes to investing and using clear principles to guide investment. He has been operating in the investments sector since 2003. His previous career experience included investment consulting roles at consultancy firms Lane, Clark and Peacock (LCP), Redington, and Mercer.

 

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

 

Jason Mitchell:

I’m Jason Mitchell, Head of Responsible Investment Research at Man Group. You’re listening to A Sustainable Future, a podcast about what we’re doing today to build a more sustainable world tomorrow.

Hi everyone, welcome back to the podcast and I hope everyone is staying well. So this episode starts with a question, how do you begin to reallocate a more than 40 billion portfolio to focus more on responsible investing principles? I’m talking about the recent announcement, where the People’s Partnership, one of the UK’s leading pension funds pulled almost 90% of its investments from one provider over sustainability concerns.

Look, to be honest, it’s not the why that makes this move so interesting to me, it’s the how. From the reallocation process all the way to designing an RI approach that doesn’t compromise portfolio returns. This episode also speaks to the consolidation cycle that UK pensions are going through. The move to larger, more impactful pools of capital creates a big opening for UK asset owners who are willing to step up as leaders in responsible investment. Importantly, at a time when there are more headwinds for policy makers and asset managers are increasingly constrained.

And last, this episode’s about self-development and the power of platforms, whether it’s blogs or podcasts that hone critical thinking as an investor. Which is why it’s great to have Dan Mikulskis, CIO of the People’s Partnership on the podcast. We talk about what the People’s Partnership is doing to evolve its investment strategy, what that means functionally for responsible investment in terms of asset allocation, and why it’s really great to see asset owners like People’s Partnership take on a bigger leadership role in the sustainable finance ecosystem.

Dan leads the investment team at People’s Partnership, driving forward the investment strategy of the People’s Pension Master Trust, which has more than 6 million members and is one of the largest asset owners in the UK. He’s a big fan of cutting through the noise when it comes to investing and using clear principles to guide investment. Dan’s been operating in the investment sector since 2003. His previous career experience includes investment consulting roles at Lane, Clark and Peacock, Redington and Mercer. Welcome to the podcast Dan Mikulskis. It’s great to have you here and thank you for taking the time.

Dan Mikulskis:

Jason. Thanks so much for having me. I’ve been really looking forward to this, big listener of the podcast. Delighted to be joining you today. Thanks so much.

Jason Mitchell:

That’s fantastic. And a fellow podcaster in the past too. So I’m super excited about this episode, especially in light of the big announcement today. But before we get there, let’s start with a little bit of scene setting. People’s Pension is now the UK’s biggest commercial defined contribution pension master trust. So for background, can you give a sense of your size, the growth opportunity, the drivers for that, and what all that represents over the next five years?

Dan Mikulskis:

Certainly, yes. And look, I think we’re at such an exciting moment in the UK pension space and it’s wonderful to be playing a big part in that. I’ve been with the organisation for a year and a half, I should say. So obviously a lot of this I’m working on the history prior to my involvement. But People’s Pension has been a huge beneficiary of auto enrolment of course in the UK, 2012 all employers had to offer a pension scheme to their employees and pay in at certain contribution rates.

People’s Pension was able to offer to the whole spectrum of employers, so not just those largest employers that had sort of 5,000 or 10,000 members, but also down to the small kind of family businesses, two-person firms, across the whole economy. So we took on a huge number of employers. About 100 000 employers basically use us as their auto-enrolment vehicle to provide a pension to their employees.

And so over time, that’s grown into us having 6 million individuals that have a pension with us. About 2 million of those are paying in actively sort of as of today. So every month they pay in their contributions, and over time, that’s obviously compounded into the 33 billion that we have today. But also with those people paying in every month, a really solid projection of where that’s going to go in the future.

And just a quick comment maybe on the sort of genesis of People’s Partnership, which is the organisation that provides People’s Pension, its roots are in the construction industry and the federated employer, kind of trade union type movement. Was set up in the 1940s, providing financial products to the construction industry on a profit-for-member basis. So all our profits are effectively reinvested to generate better products for members. A bit like a mutual for example.

And the key point there is that’s different to most other UK pension funds, but it is quite similar to how the Aussie super funds are set up. A lot of those are industry-based and are kind of profit-for-member. So I think that’s quite a special model, it’s quite important. Perhaps a little bit underappreciated, but that’s the quick story.

Jason Mitchell:

Absolutely. So you joined the People’s Pension in September 2023 with I think what effectively sounds like a blank piece of paper. What were the big considerations you faced? First off, what trade-offs did you find yourself constantly rebalancing? And maybe talk through how that has all led into today’s pretty significant asset reallocation that carries pretty big responsible investment focus.

Dan Mikulskis:

Yeah, absolutely. We’ve been working towards this announcement for what feels like a long time, probably a year. But yeah, first of all, just to say, I think I did have a blank sheet of paper when I started the role. And look, what a wonderful privilege and opportunity it was to have that. I feel incredibly grateful that the CEO and the board have backed my vision of building an asset owner that I’ve sort of talked about from the start.

And yeah, I just feel so fortunate. Basically, I don’t think one gets that chance many times in your career to do that. So yeah, I’ve really been tackling that with all the energy that I have ever since really. But it’s a great question in terms of trade-offs being faced. Because so many, right? And I think the first one is one that every asset owner kind of faces, and that’s really my first challenge was, designing a team, designing an org structure. What kind of team did I want to build?

The team that I took on was quite small. It was focused on kind of over-citing the arrangements we had, which was fine, but we needed to get on the front foot and build out a much larger investment team. And the trade-off I think that a lot of asset owners get into is one of specialisation versus being future-proof, in terms of that team.

What I mean by that is, it’s very tempting to build a team around how you’re investing the portfolio today, which may or may not still be relevant in say five years time. So the classic example of asset owners that you see is big teams focused on, for example, UK equities, when maybe UK equities doesn’t become a big part of the portfolio going forward. You’ve seen that happen with UK asset owners. And there’s all sorts of other examples of that.

We could be in-sourcing parts of the arrangements over time, you never know. So today I might be wanting manager researchers who can research passive managers, which is how we do a lot of our management currently. In the future we might want actual fund managers sort of thing. So that’s a real trade-off in terms of how on earth do you start building a team that can be future-proof in such a growing organisation, but still get things going today?

And broad solutions to that was try and hire kind of really skilled generalist who I thought could play a role, whether we’re selecting managers or whether we’re managing assets more directly. Kind of across that.

Jason Mitchell:

I want to dig into this asset allocation area a little bit more. As I’m sure there’s academic work demonstrating that strategic asset allocation could account for as much as 90% of the variability in investment returns over time. Now People’s Pension has a pretty extensive responsible investment policy that obviously focuses on climate. So I’m wondering how does climate influence your strategic and maybe even dynamic asset allocation process? How do you think about the time horizons of returns when, let’s face it, most investors look at quarters, years against climate impacts, which are decadal in nature?

Dan Mikulskis:

Good question. A lot in there to unpack. And I suppose I would come back to our responsible investment policy, which is probably going to be referring to that a lot over the next little while. Because we put that together about a year ago now and we put a lot of thought into writing down exactly what we sort of believed and how we wanted to go about things.

And that has set the foundations for a lot of the work we’ve done since really, and that talks a little bit about this. And the reason I think it’s important is when making some of these investment decisions, you’ve got to be clear what your objectives are with regard to each decision. Are you trying to manage risk? Is it trying to add value? Are you aiming for impact? Are you aligning with values? Are you expecting it to be neutral to returns or additive or what have you?

So I think setting that out was important. What we set out there is we do look at climate risks in the overall portfolio kind of construction piece. Where that comes through at the moment is the climate indices that we use for our index tracking equity portfolio, in terms of these expected returns and that kind of piece. We do work things in there, but I think to me it’s less obvious there, that that introduces clear choices, and you’ve got to balance that against the general overarching financial objectives that you have.

So I think overall the principles we take is you’re setting your strategic asset allocation to deliver the financial objectives that we’re trying to do and then within that you’re trying to find the best way of managing risk, including climate risk.

Jason Mitchell:

Yeah. It’s really interesting to me. I ask because there are obviously some asset owners out there working to triangulate risk-return and sustainability/impact. In other words adding kind of a third dimension to the traditional mean-variance portfolio optimization kind of efforts. But I guess pulling back from that a little bit, philosophically speaking, do you think of sustainability primarily as a constraint across the People’s Pension portfolio? Or do you see it more as a means to drive portfolio returns?

This is interesting. Because as I was doing research for this episode… I ask, because you make a point in an article from back in 2021 titled The Good the Bad and the False. Addressing 9 arguments against ESG. Where you wrote that “diehard efficient market types may try to argue that environmental and social factors are already priced in, but I would say how could they possibly be? These are long horizon systemic issues that break almost every single model that people investing use.”

Dan Mikulskis:

Yes, thanks for bringing up that article. That got a little bit of reprise recently, didn’t it, somehow?

Jason Mitchell:

It did.

Dan Mikulskis:

I reread it. It still stands up okay.

Jason Mitchell:

It does.

Dan Mikulskis:

Four or five years old now. It’s all right. Yeah, I’d love to get onto this question of pricing of climate risk. Because I do think that’s something that’s actually understudied, bizarrely and sort of underthought about. But to get back to the key question, how do we think about it?

We try to get really clear on this in the responsible investment policy, in terms of what we’re trying to achieve. And Leanne, who’s our head of responsible investment, and I sat down with some of our lawyers actually who advised the trustee on legal aspects to really try and get to the nub of the issue of what can we legitimately aim for, what can we actually set out as our objective in this kind of area?

And then the trade-off that we’re getting at here, really I suppose is between the extent to which you’re recognising financial versus non-financial considerations in terms of your investing. And the reason we wanted to get into that was I think a lot of asset owners go down a slightly convenient route of kind of saying that well all non-financial stuff could be financial stuff in the future. And a lot of non-financial stuff is financial to some stakeholders. So by invoking some sort of co-universal owner theory or whatever, you can basically say, well all non-financial stuff is actually financial stuff so we can address financial and non-financial stuff as much as we like, and yet it’s all kind of financial kind of thing.

And we wanted to move on a little bit from that way of thinking about it, because I just don’t think that quite stands up to scrutiny. And I think it is true that there are some non-financial things, not necessarily in terms of allocations, but in terms of stewardship. There are some non-financial things that we believe in because we just think that they’re the right way of doing things, the right standards to adopt.

And so we’ve really tried to actually lean into that separation of those two things a little bit as far as we could, whereas I think a lot of asset owners kind of deliberately just sort of blur them, because a little more convenient. So where we land on that, so I’ll answer the question directly, is that the overriding objective of our responsible investment policy is to add value and manage risk.

And then as the secondary objective, we believe it’s legitimate to have a stewardship objective, which as long as it’s neutral to returns, can seek to make improvements to practises to benefit wider stakeholders and wider society, independent of that being an impact on financial returns.

So that might sound like a whole load of waffle and splitting hairs if you haven’t dived into this area yourself. But I know you probably would have wrestled with some of these things. But that’s kind of how we saw it. And on the… So we come back on the point on whether climate risks are priced. Yeah, I guess I found back then when I was thinking about it, I felt I would frequently run into what I would describe as a sort of efficient market maximalist positioning, which basically, which I think is a bit lazy by the way as well, which basically people would say, oh, everything’s fully priced at all times in all markets and all sectors at all times. And so therefore you can’t do anything to manage risk beyond investing passively up to your risk appetite.

And that is quite a powerful argument obviously in some ways, but it’s pretty hard to argue against in certain ways. But I do think we can do a little bit better than that. I am broadly a believer in efficient markets, but I think that sort of maximalist view pushes it a little too far. I don’t think you have to work very hard to pick out examples of where climate risk was maybe fully priced, more than priced, less than priced at different times in different places in the past. And so if you believe that, I do think it’s worth pursuing efforts basically to invest in ways that might manage risk, and there’s reason to think those might be rewarded.

Jason Mitchell:

It’s a super interesting conversation. I guess I’d add that as you call them, die hard efficient market types tend to use historic crisp data to support their theories. But obviously the future impacts of climate change are going to manifest very, very differently from what the 1925 to 2024 data that they tend to use, that crisp data tends to suggest.

But I guess kind of staying a little bit on this point, how do you distinguish between portfolio paper decarbonization and actual real world decarbonization, the stuff that signatories are signing up for under net zero, et cetera. It’s been a pretty active discussion among institutional investors, but are there frameworks you use or expectations you set?

Dan Mikulskis:

Yeah. That is a really important point, and obviously I listened to the podcast you did with Professor Tom Gosling a little while ago. I agree with a lot of what Professor Gosling said there quite honestly. And I think… Yeah, I think he’s probably right in sort of saying there has been maybe a little too much focus on the kind of portfolio paper decarbonization and that it doesn’t really… Questioning whether that really means very much. I think that is definitely the right question.

I saw someone the other day saying something at a conference that’s something like, UK DC funds have made fantastic progress on climate change. And I was like, ew, that just seemed like an odd thing to say. Do you know what I mean? In a world where emissions are still rising, I’m pretty sure. Climate change doesn’t really know much about what we’ve done to be honest with you.

So it just seemed like a slightly odd way of looking at it. And I think you focus too much on the portfolio paper decarbonization and you can end up kidding yourselves that there’s been more impact than what we have. So I’m not going to sit here and make a sort of full-throated defence of portfolio paper decarbonization, but let me make a couple of points in sort of a semi-defence of it. Which I think, when this issue first started to be focused on more, probably around about, I don’t know, 2017 2018, so in the years post-Paris Agreement, investors started to ask more questions about this. And I was obviously an investment consultant at the time and a lot of managers simply couldn’t tell you what the overall carbon footprint of a portfolio was. They certainly couldn’t tell you which were the highest emitters in the portfolio. They couldn’t come close to telling you what percentage of emissions were being subjected to engagement activities. They couldn’t tell you any idea about how much the portfolio was aligned to the Paris Agreement or not.

And so I think a focus on that, the portfolio emissions has driven a really important alignment across the industry, such that obviously it’s now completely standard that all managers will be able to pretty much give you that data. And so I think as a starting point, it wasn’t totally wrong and has been helpful to a large degree in getting more focus on it. You can come to a point where you sort of run out of road in terms of that being useful. I’ve always felt that a slightly better framework was looking at the proportion of the portfolio that was aligned in terms of having a target to get to net zero. That felt a little more real world impact-ish to me.

But yeah, again, to come back to something that Professor Gosling said, I think as the owners need to recognise that our impact is pretty marginal in general and that’s fine because it’s not nothing, it’s small, it’s not nothing. And if you recognise that for what it is, you can actually make most of it. Whereas, the error if you like, would be to overestimate our efficacy, and then you’ll end up doing things that might actually have almost no impact at all.

Jason Mitchell:

Does the recent asset reallocation announcement, to some degree, does it answer this question? Does it try to obviously maximise returns but also drive real world CO2 reductions as well?

Dan Mikulskis:

Yeah, I think it’s definitely a part of it. And I suppose just to recap for listeners who might not have caught that, we appointed two new fund managers to manage large parts of our portfolio. We appointed Amundi to manage 20 billion pounds in developed market equities, and Invesco to manage 8 billion pounds in global fixed income.

And particularly on the developed market equity side there, stewardship and responsible investment was a big part of it. And what that really boiled down to, again coming back to that RI policy document, was an exercise in saying this document captures how we would carry out stewardship were we doing it directly. But obviously we aren’t, we do rely on asset managers to do that for us.

And so the exercise is then saying, well, which managers are doing it in a way that is most aligned to how we would do it? And our RI policy is quite specific. So it talks about particular situations, it talks about escalation to voting against directors, voting against management resolutions in certain situations, in certain sectors sort of thing. So it gives you quite a good basis for assessing which manager can most deliver that in the most aligned way.

And that was sort of the basis we used for scoring that. And I think that is a reasonably robust framework for doing it, rather than thinking in terms of better or worse or right or wrong and this and that, it’s simply a question of which potential provider here is most aligned with what we’ve written down. And that was a big part of the work we did in arriving at the choice of Amundi to manage those developed market equities.

Jason Mitchell:

You mentioned Tom Gosling and I wanted to stick on that, because in the last podcast he said an interesting quote that seemed to have resonated with people, he said that climate change is a risk management problem, not an optimization problem. He’s obviously talking here more about risk management on a long, long-term basis. But it sort of made me think, how do you think about managing it tactically on a short-term, medium-term basis?

Optimization is obviously one way to manage climate risks and part of that process is kind of understanding the interrelationships and interdependencies among different kinds of risks, which tend to be overlooked or often overlooked. So how do you think about managing risk while simultaneously trying to, as we just talked about, optimise for real world climate objectives like decarbonization?

Dan Mikulskis:

Yeah. It’s a pretty complicated kind of area. I guess I would probably come back on this question of market efficiency and whether to what extent things are priced, and if you don’t think they’re priced, then what can you do about it to try and make your portfolio a little bit more efficient in the presence of those risks?

We use the climate indices, we actually use the CTB indices that are provided by MSDI, and they do a little bit of tilting in terms of the positions as a way to think about it. And they use a little bit of other sources of data such as emissions data, but also some information about the sectors that companies are operating in.

And I suppose that is at the core of our current approach to risk management in that sense. And I suppose what’s standing behind that method, the actual logic, is saying, well, if we accept that climate risk is not fully priced across all sectors, if we add a little bit more data into the mix, could we potentially get a little bit closer to… Could we actually improve the efficiency effectively by adding in a little bit of that emissions data or sectoral data, making a few tilts along those lines, do we end up with something that’s actually a little bit more optimal in the presence of that risk that isn’t fully priced?

That’s sort of the theory behind it. There is obviously a but, and I think Professor Gosling is sort of right to challenge that approach a little bit. Because you can certainly go overboard with that and the further and further you push that sort of methodology, the more it does look like an active management kind of exercise where you ought to have a much higher bar in terms of your conviction in it. But I think there is a grey area there in terms of the tracking area.

One example I always like to use is, if you’re thinking about global equities, people talk about the index as if it’s a sort of innate inherent property of the universe sort of thing. But of course an investor can switch from being a FTSE client to an MSCI client, and I don’t think anyone would force you to come up with a very clear investment rationale for doing that. I think most people would say, well, they’re both broadly decent interpretations of the global market cap portfolio. But there’s what? A 40 basis point tracking error between those two indices, something like that.

And there are tonnes of kind of subjective judgmental things that index providers make in putting that together. I see famously S&P insist on trading four quarters of profits, which is why Tesla wasn’t considered part of that index for a long time, but it was in FTSE. And so I think there’s enough wiggle room there around the edges to say, well, if you’re doing something that’s basically market cap with a few tweaks, you’re still in that broad realm of it’s basically kind of a version of market cap.

Yeah, again, it comes back to how sort of maximalist you are on the efficient markets points. Some people will say, well as soon as you deviate by a basis point away from the MSCI World, then you’ve got to justify that as an active decision. Whereas I would say, well come on, there’s just so much of a grey area there. When you actually look at how those indices are constructed, there is a little bit of wiggle room around those.

Jason Mitchell:

Those are really good points. What do you think all of this means for asset managers who are increasingly pulled in different directions, particularly jurisdictionally? There’s this perception that asset managers talk out of both sides of their mouth or increasingly they do so. I’m thinking of the old Groucho Marx quote, which you may know, “these are my principles and if you don’t like them, well I have others.” Right?

But the reality is that US expectations now differ pretty dramatically, and legally from those in the UK and the EU. So at the end of the day, can you really distinguish managers at a firm level versus a product level?

Dan Mikulskis:

Yes, I think you can now actually. And that’s a great quote by the way, isn’t it? It’s probably quite apt as well. And yes, there has been over the last few years and increasingly today, there is quite a big difference between US and European managers on these issues. You can look at, for example, ShareAction produced their voting masses report in there a couple of weeks ago. That shows you a difference in the voting activity of those two groups of managers pretty objectively.

And again… Sorry, yes, again, I’m going to bore you by going back to something that Professor Gosling said, which I completely agree with, which is that what’s happened recently is actually a little more helpful I think for asset owners because there’s more of a sorting exercise going on now. It’s clearer where managers actually stand on these issues and what their house views are.

And so it makes it, I think, slightly easier for us to select who we’re most aligned with. Whereas you sort of had this period before where all managers were trying to be all things to all people and trying to say they would do all of it and believed in everything. And it was just a little hard to get beyond that. Whereas I think now some managers, and I do certainly have empathy for managers that are being pulled in two directions and choose to take the view of saying, well, we want to offer products to groups of individuals with wildly differing views, and this is how we’ve tried to reconcile it.

And that’s fine, it’s got more variety now, I think in the landscape. And so as an asset owner, you can more accurately say, okay, this organisation we feel we’re more aligned with. And you made a really important distinction there. There is a distinction I think between gaining alignment at a firm-wide level versus a product level. I think that they both potentially matter, they can both be good and bad in different circumstances.

And so that’s another choice that an asset owner can make. For a certain asset class we might say we want firm-wide alignment, by which we mean that at a firm level we want to see that firm recognising things like, I don’t know, double materiality for example, or other kind of core tenets of our responsible investment philosophy. We would like to see them recognised at firm level.

Whereas, there are some asset classes where we might say, well actually no, if we’re building into the products, let’s say we’re building into our IMA terms all of the components that we want, then we’re fine with that, and at a firm level we’re happy that the firm is a little bit more neutral. So I think both of those stances can be perfectly fine. They aren’t the same though, and I think that maybe gets a little glossed over. So obviously a lot of managers would like to think that there’s no difference between product level and firm level alignment. I don’t think that’s quite the case. But they are different. In some cases, I think asset owners will want a firm level alignment and some cases they will want product level alignment. And then obviously the challenge is that if European asset owners are wanting firm level alignment, they’re increasingly struggling to get that with some of the US managers.

Jason Mitchell:

I want to come back to the alignment question in a little bit, particularly referencing an article you wrote. But one of the areas that is really interesting and really refreshing to see for me is The People’s Pension willingness to assume a much bigger, more visible role. With regulators and policymakers less willing to lead, and asset managers certainly now more limited in their scope of what they can do. It seems to me there’s a big opening for asset owners to have greater agency in driving the agenda and establishing expectations.

And I say that very strongly as chair of UKSIF. And by the way, thank you very much for your support as a UKSIF member. But one recent example is the asset owner statement on climate stewardship, which I’d say The People’s Pension led among with other UK asset owners. Talk more about this. How do you think of your role as an asset owner evolving in the sustainable finance ecosystem vis-a-vis the political pressures out there?

Dan Mikulskis:

Yeah. That’s a critical question and I do think the role of asset owners is really vital actually. And it’s partly why we’re at such an exciting moment here in the UK, because the UK hasn’t had a strong tradition of asset owners to be honest with you. If you look at global surveys, we’d only really had one asset owner in the UK of a global scale in the past, and that’s been USS. When in the future we’re going to probably have a dozen, including ourselves.

And I think that is great, because it is asset owners that have the agency in this situation. And so I think it always made sense that it should have been asset owners who were driving things a little bit and in that kind of euphoric period, let’s call it around pre-COP 26 or whatever, around 2018 to 2022, it got a bit muddled up in terms of who was leading it, who was driving it and who was setting expectations.

And I think it’s right that asset owners assess expectations, and I think asset owners are important institutions that need to exist. And that is one of the reasons they need to exist, to set expectations in a financial system that is quite powerful in terms of the capital it controls. And they are one of the groups that actually has agency as opposed to being just sort of acting on behalf of others. But to do that, you obviously do need a considered thoughtful position. You need to be on sort of solid ground yourself, in terms of what you’re doing.

So yeah, I think certainly my view since taking on the role is we wanted to get ourselves into a position to do a little bit more of that. And part of that is certainly collaboration with other asset owners, because we are a collaborative group, but by nature it makes sense that we could be sharing resources there a little bit. So the asset owner statement I think was a really nice example of that, both in the fact that it happened, that it was collaborative, but also the structure of it, in terms of setting out sort of principles, in terms of how that group wanted to work and wanted to engage. I just thought was really very refreshing and kind of a nice reset in terms of a more mature approach to the whole area in the industry, with asset owners working from that basis and then managers able to figure out how they interacted with that.

So I see it as quite a positive step. As I say, I think it is an exciting time in the UK, because we are going to have this stronger asset owner voice going into the future. And so I would like to think we’ll see more of that, not less. One of the quotes I like by the way is I think it’s a Spider-Man quote, isn’t it? “With great power comes great responsibility,” or something.

Jason Mitchell:

Yes.

Dan Mikulskis:

And I’ve got a four-year-old massive Spider-Man fan at home, so I just wanted to get that quote in there, just for him, because he’ll be very, very proud of that. But yes, Spider-Man has some good lessons for us on that one.

Jason Mitchell:

That’s great. I’ve got a six-year-old who’s a Spider-Man fanatic as well.

Dan Mikulskis:

Just actually… Sorry, just on that, just on Spider-Man, there’s another good Spider-Man lesson if you bear with me on this. There’s a great Spider-Man meme where there’s… I’m sure you can picture it, I think there’s like three Spider-Men, and they’re all pointing at each other, and all looking at each other, and it’s kind of in a circle, pointing around at each other. And I do think that’s a great meme, because it’s a good representation of parts of the finance investing industry where you’ve got this long investment chain of not end-asset owner fiduciaries, but kind of agents working on behalf of fiduciaries. And those people could be managers, index providers, consultants, what have you.

And there’s situations where they’re kind of all pointing at each other, particularly in responsible investments, how you’re doing it. The manager might save the index provider well. We just tracked the index, so it’s your issue. The unit’s provider might say to the consultant, well you selected that index kind of thing. And it just sort of goes round and round and no one’s taking responsibility. Whereas, I think the role of the asset owner is to cut through that kind of chain and actually be able to set out what the key principles should be and whose job it should be. So again, Spider-Man pointing the way there.

Jason Mitchell:

Interesting. It sort of makes me think back to the question around the blank sheet of paper. I guess I’m wondering when you think about the cultural change that has happened at The People’s Pension, what’s that been like? When most people think of boards, they think of boards sort of establishing or setting strategies. But the reality is boards are also incredibly responsible for cultural changes. And sort of what you’re describing, this willingness to play a much bigger, much more visible role, at least in the UK sustainable finance ecosystem, is sort of a big cultural switch I imagine for the firm. What’s that been like?

Dan Mikulskis:

Yeah, it is. It’s a really good question. Our firm has been on such an interesting journey on that, even over the time I’ve been there, which is actually sort of a year and a half. So I can’t talk from any sort of long, long experience, but just the sheer benefits of growth I think have really meant that firms had to go on quite a big journey as part of that.

Just one small example of it, we opened an office in central London just over a year ago now. Our headquarters is down in Crawley near Gatwick Airport, and that has been where we’ve been based for our whole existence. But as part of that growth we have the office in London now, and of course that means that folks can come and work for us who sort of live all around London and greater London much more easily than was the case before.

And it’s just been that mindset I think about getting confident about that future growth and getting confident in terms of our position as an asset owner on our way to being one of the larger asset owners. And I think it was just getting to a certain point where we had that confidence and that trajectory, and were able to start looking out towards that and focusing less on… Spend a decade trying to onboard 6 million clients, which is a huge heavy lift for any organisation. And clearly it’s something that took a huge amount of time and effort and still does. But it’s just being able to get the confidence in the position we were in, that we were large, we were established, and we had that trajectory. And then be able to gradually kind of work through that and build out the teams that could support that kind of forward-looking view and positioning, which is partly what I’ve been doing, built out my team a lot, brought a lot more thinking and expertise in the teams as we’ve grown out.

Jason Mitchell:

I want to go back to the asset allocation process kind of discussion. As I understand it, People’s Pension takes a panel approach using asset managers to build out kind of a model of returns assumptions across region asset classes, factor exposures and strategy types. Where in all of that does ESG fit in the process? Do you take a similar panel approach across ESG scores or risks or Paris Alignment trajectories? What is the end game? Do you ultimately want to try to put a value on clean water, air, civil societies with rule of law and quality of life with access to nature, those kinds of elements?

Dan Mikulskis:

Yeah, it’s a good question. This goes back to the question you asked earlier about something, the trade-offs involved in building an asset owner. There’s always one obvious trade-off is you encounter each of these kinds of elements that you need for an investment process like capital market assumptions. And with each of them you have the choice, you can build it internally or you can sort of get it from a single partner or you can get a consensus from the street if you like. Those are kind of your options basically with each of these things.

And I take a sort of a horses for courses approach on those. I think there are some things where getting a consensus from the street is quite a nice way of doing it because it gives you a nice range. There are some cases where you want to work with a single partner that you’re really super aligned with. And there are some cases where you want to own that internally entirely, and you want to build out the team and the ability to wrestle with that internally. But you can’t do that for everything obviously, otherwise we’d be having a headcount of 500 people in the investment team quite quickly, wouldn’t you?

So I think on each of those points you want to make a choice. The capital market assumptions is an interesting one to pick on, because we are in the process of actually bringing that internally, partly because you realise very quickly that the practicalities of wrestling with lots of different assumptions is a bit challenging. And specifically the question actually of, to what extent climate is being built into them, is a little bit unclear if you’re getting them from different providers.

So that’s a good example where bringing it internally allows you to put that element into it. But yeah, extending it to the adjacent area of kind of ESG and responsible investing data, that is probably one where we’re solving through these kinds of deep partnerships with external managers. And an obvious case, there being Mindy and Invesco being two partners who we think can provide us quite a lot on that front.

And again, that goes back a little bit to the philosophy of how we’re trying to build up the asset owner here, which is not looking for putting in place dozens of different managers where we’re looking for best in breed across every single regional sleeve or something, but working with really deep partners over a broad range of areas, and really trying to get a lot of value-add basically from those partners. And I think data and insights are a really important area where you can get a lot of leverage from external partners, that would be quite prohibitive to actually build up that capability internally.

So the thing I’m constantly wrestling with is, am I building capability to oversight an external partner? Or am I building capability to actually do the thing? You see what I mean? And I think that the question is not completely settled and might change over time of course as well. But I think, my sort of hunch, our current hunch, is in that area you probably want to leverage off an external partner. Because yeah, there’s great resource out there in the industry within asset managers, as you well know. Lots of managers are really deeply invested in the data and systems to analyse some of that stuff.

And I kind of feel why wouldn’t we want to just basically piggyback off that with a partner that we feel aligned with, rather than thinking we want to own it all ourselves. Now we’re growing really fast. So in five years time we could be on our way to a $100 billion in AUM. Could we be insourcing some of that ourselves? Should we? Yeah, maybe. It’s certainly possible. There’s a lot of things we could be insourcing on that journey. But I think for now it seems to be one of those things that kind of makes sense to, if we can get these partnerships working in the way we want, tap into what’s already been done out there.

Jason Mitchell:

To what extent do you as an actuary by training borrow from actuarial discipline when it comes to areas like net zero, especially in a world where let’s face it, many investors, governments and corporates appear increasingly less committed? In other words, how do you work backwards from a 2050 point target when many macro and micro variables are so volatile?

Dan Mikulskis:

Yeah, thanks for outing me as an actuary. I’m proud of that. I’m proud of being an actuary. I do think a good discipline it’s an important discipline. But I suppose I would think of myself in some ways as kind a reformed actuary or a reformed quant. I’ve always been a mathematician, come from a, in many ways, a sort of family of mathematicians. But I consider myself a sort of reformed quant, in the sense that quantitative models, actuarial models get you pretty far and are really helpful in understanding the world.

But you get to a point where you realise they leave out a lot of things that matter and then you get to a point where you realise maybe they leave out the things that actually really matter most and sometimes you run out of road in terms of the usefulness of those models and those ways of thinking. Which is how I would review it from this point in my career.

So yeah, I think a lot of actuarial methods and models are really useful in making sense of uncertainty and making sense of the future, but I’m not convinced that all of the approaches that they might take to looking at climate change and responsible investment for example, are the right responses.

Coming back to specifically your question, how do you work backwards from the 2050 point target? I feel like that’s an example of where maybe that’s not the right way of thinking about it. I always thought that it’s a more market-led. I think it makes more sense to take a more sort of market-led approach. In other words, you can run a little bit ahead of where the market is in these areas or any area, right? Same thing if you’re an active manager looking at picking stocks or whatever, you might want to run a little bit ahead of where the market is in terms of your allocations or your conviction or whatever. But you don’t want to get too far ahead, otherwise you go down weird roads and do strange things to your portfolio.

So I kind of think more in that kind of pragmatist lens rather than working back from far off targets or whatever, more working forward from where we are today and saying, well, as an asset owner, yeah, we can run a little bit ahead of where the market’s doing in terms of say, I don’t know, decarbonization for example, or the proportion of the companies that have targets in place for net zero. So we can run a little bit ahead of where the market is and maybe that provides a useful signal, maybe it has a little bit of impact on the margins, maybe it manages our risk a little bit on the margins.

But if you find yourself suddenly getting way ahead of where the market is, and say you were imposing a huge decarbonization constraint on the portfolio and the market wasn’t doing that at all, then you’ve got to say, wait a second, we’ve gone too far off track here from the market and that’s no longer helpful. So yeah, I suppose it’s maybe more bringing a market-driven pragmatist stance to it rather than letting the long-run models run everything there, if that makes sense?

Jason Mitchell:

Yeah, it does. It does. I want to go back to this kind of point around alignment. I remember reading your article why asset owners matter, which really resonated with me. And I fully appreciate your point that asset owner preferences kind of get lost in pooled funds, but what does that mean for People’s Pension? As I understand it, most of the assets were originally invested in off-the-shelf index tracking funds. One of the first moves you did was move into climate indices, and you’re obviously now looking to go beyond index tracking into the active side, which is reflected in that announcement. When you think about structuring more custom solutions, what does that look like from a sustainability perspective?

Dan Mikulskis:

Yeah, at this point on pools versus segregated accounts I think it’s a really subtle one. And I think it’s probably… If I look back over 23 years of my career, I think it’s one of the biggest changes I’ve seen, is the move away from segregated accounts and towards pooled funds. When I started my career, it was far more common for UK pension funds to own stocks in segregated accounts than it is now.

And I understand why, asset strategies have gotten more complicated in some ways that favours pooled funds. But I feel something important gets lost when asset owners get commingled into a pooled fund, and that is some of the agency, the asset owner gets diluted and actually the pooled fund more becomes the principle in that arrangement. And you’re just kind of along for the ride. As the asset owner, that might be fine, but in some cases it’s kind of not fine.

And so I think pooled funds are important when you’re small as an asset owner, let’s stipulate that. Because they’re great. They let you get up and running really quickly, really efficiently. Exposure to all the stocks in the world really quickly. Inflows and outflows just dealt with. The asset manager handles a whole load of admin in the background that you don’t want to bother with when you’re small.

So pooled funds are great when you’re small and you’re getting going. I think you do come to a point where the gold standard is segregated mandates. And as part of our announcement that we announced today, we have moved all those assets to segregated mandates as well, across 28 billion pounds of equities and fixed income. We’re now in segregated mandates in our own name.

And I do think that is the gold standard for asset owners in a few ways. There are tangible financial benefits of it, I think, in terms of, you can be more nimble, move things around more easily, you need to hold less cash in structures, you can equitize cash more efficiently, basically work the balance sheet a bit more efficiently to get more financial returns. Per scale you get lower costs as well, because you can bear down on lots of different elements of the costs. But also in responsible investment, you have much more say obviously then in terms of how those mandates run. In fact, you have complete say in terms of how you structure those investment management agreements, kind of what you put into them.

So I do think it’s a natural maturing that sort of ought to take place. And that true asset owners should be basically in segregated mandates, because of the amount control it gives you. I think it’s something that’s kind gone underappreciated in the UK, because of the huge push towards pooled funds that’s happened because of the general kind of push towards more complex and sophisticated strategies, that gets lost in that kind of flow. And that, I would love to see a little bit more focus on why segregated mandates are actually important and why they matter. And hopefully we can try and make the case, albeit it’ll sound like a self-serving one of course because of what we’ve done.

But just in terms of the announcement we just made, we built those investment management agreements from scratch, from the ground up, around our specific requirements. And so we built a tonne of responsible investment criteria and engagement targets and goals into both of those mandates, which are the legal contract we have with our managers in beds. A whole load of those things. Which you would never ever get in pooled funds.

Now you can say, well, the manager might still be doing it in pooled funds. There’s a difference between having something in a legal contract and whether it’s done or not, is you can have it either way, but having it baked into the mandates we do think is important basically.

Jason Mitchell:

That makes a lot of sense. Now that you’ve reallocated, how do you measure the success of all this responsible investment activity, apart from things like AUM, signatory support for the statement on climate stewardship? Are there RI related performance attribution metrics or stewardship metrics you now watch?

Dan Mikulskis:

Yeah, that’s a bit of a work on, I think to be honest, it’s something we want to look at a little more. I think it is a difficult one, because we’ve got to admit how marginal our sort of impact is. So I think, you don’t want to go hunting too hard for outcomes basically, otherwise people will end up manufacturing slightly fake outcomes. Or they will end up pushing for asks that are just too easy. They say, yes, we managed to get else to sign up to this disclosure thing, so therefore it’s a win.

So I think that’s quite a subtle question. I think I’ll probably come back to saying, that the starting point is alignment in terms of how engagements are taking place and being able to track the escalation of engagement and then the voting activity off the back of it. If we can track some of that and that’s sort of lining up with how our policy and how we would like it to be done, then that probably is a good starting point.

But yeah, I would probably on that one try and steer folks away from this temptation of making it a data exercise and really diving in. Because you’ll get back to the thing where managers are reporting 10,576 stewardship engagements over the course of a year as if it’s a meaningful number sort of thing. Whereas the most impact might be getting your asset manager to get behind one single vote over the course of five years. That could be the most impactful thing that you might do, if that single vote tips the voting share over the threshold and something gets enacted because of that. That could be more impactful than the other 10,432 activities that the manager did.

So I think there’s another bit of maturing that needs to happen, but I think working with the right partners is a good first step, and I would love to see, I suppose the industry come together a bit to get some decent measures, some grown up measures of how we can actually talk about that without kind of needing to kid ourselves a little bit that we’re having more impact than we really are. [inaudible 00:45:55].

Jason Mitchell:

I do, I do. So I want to finish on a few last questions about your own development. Because there’s a real… To use some Gen Z slang, there’s real glow-up professional speaking in your story, in your kind of arc, that I find, and I think a lot of people would find really inspiring. You’ve gone from senior roles at big consultant firms right into the CIO role of one of the UK’s biggest pension funds. You’ve clearly had broad exposure to asset allocation. But how did you manage to translate that from the consulting side to the investment side? What lessons would you pass on to others thinking about transitions in the investing space?

Dan Mikulskis:

Yeah, thanks for that. Yeah. Yeah, glow-up. I love that. Good, good. I thought about this question last night. And I’m always a bit reticent honestly to try and draw too many generalised lessons from my own experience, because I want to recognise that like all of us, there’s a tonne fortune and luck and let’s be honest, privilege as well in my story. Of course there is, and that is a lot of it.

And so you always wonder how much there were sort of generalised lessons. But anyway, having sort of stipulated that there may be a few things that I’d draw out. I feel incredibly fortunate to have started my career in consulting. I think it’s a really wonderful field because it gives you such broad exposure to a whole load of things that are going on. And also it teaches you how to interact with stakeholders, how to get your point across how to present, which is just such important kind of meta skills wherever you want to go.

So I think consulting can be great for that. One of the weaknesses of consulting is you can get a little far away from actual day-to-day investing and markets kind of thing. So that’s one of the question marks there. In terms of my progression, I do want to say, because I think it’s important to say this sort of thing, I saw myself as a stretch candidate for my role. Let’s be honest, I didn’t have a CIO position on my CV or even a deputy CIO position, so I felt like a stretch candidate for that role.

And so perhaps one of the lessons is put yourself forward as a stretch candidate in situations, you never know what’s going to happen sort of thing. I think that is perhaps part of it. And as a stretch candidate, you can offer different angles to your sort of appeal. There’s potentially a hunger and appetite there that other people who have been in that role for a while might not have.

And there’s another aspect I thought about, which is where I do feel like advice I often give to folks earlier in their career is, I think your 20s, for example, as a sort of a decade, generally even your early 30s, it’s a time where accumulating different experiences is more valuable or important than having a clear sight of where you want to get to. That’s been my experience and that’s would be my sort of advice. Try and appreciate each role you’re in for what it is. And take the time to learn your craft in each role. I do sometimes see folks that are kind of… As soon as they get a role then straight away onto how can they progress, how can they get to the next thing, how can they go up?

And it’s great to be ambitious, but I do think there’s real value in simply learning your craft, doing the basics of your day-to-day role. And even if you realise it’s not quite the right thing for you longer term, there’s always lessons to take out of something. Whether it might be that you are in a small team in a big firm, maybe it’s a small team in a small firm. Maybe you’re a small team, US firm, or a European firm in the UK, whatever. Or maybe you’re working for a founder, maybe you’re working for an ex-Co or board, or a CEO, whatever. There’s always little important insights you can take away, I think from almost any role.

So I think just kind of knuckling down for the basics and viewing each role as an opportunity, at least spend three or four years understanding and taking the most you can from that thing would be another sort of lesson. And then I suppose a final point, I suppose I feel to serve me well, just is that kind of keeping curious and just really asking questions, and just trying to keep learning.

And I suppose that was one thing in consulting that was always pushing me back to interacting with markets more and more and staying close to that side of things, which I think in consulting is potentially a risk that you get too focused on presenting advice to your clients and maybe perhaps not enough on the actual minutiae of markets, whereas a good dose of curiosity kind of help you out on that one. So yeah, those are my best I could come up with in terms of career lessons.

Jason Mitchell:

Last question. Platforms like this podcast are really important to me. And when I look back at you over the years, you’ve been a podcaster on LCP’s Investment Uncut. You kept a regular blog called Real Returns, which is fantastic. I remember reading it. And you’ve now managed to publish, despite all the stuff you’re doing, a weekly investment commentary called Your Thursday Investment Fix, which I highly recommend.

So I’m really kind of curious about this, but talk about why building and maintaining a platform as an investor, as a thinker, is important to you. Is it as much about process? For instance, I’ve heard you mention this notion that good writers are good thinkers or is it a need to be an active part of the wider discourse?

Dan Mikulskis:

Those are the two key points. It is both of those. Yeah. Look, it’s a lovely question. I don’t get asked this much, but I do feel quite strongly about it, I think. And first of all, I do think it is a good part of the day-to-day process. It’s almost like going to the gym every day, but for your brain and for your thinking process sort of thing. I do think I’m a much better thinker than I would be if I hadn’t written all those blogs and newsletters. Just because I know that so many times I sat down to write something and, first of all made me realise I didn’t really understand it. And then when I did understand it and then realised that the opposite of what I thought was true was actually true.

And so it teaches you a bit of humility in terms of going through that process and also helps you articulate your ideas so much better. So I think it’s a day-to-day part of good process. The same with going to the gym, or going for a run, to be quite honest. In terms of your brain and time and commitment, it gets a little easier over time, because you put it in your process a bit more naturally.

But there’s a bigger point as well. I do think platform is valuable in and of itself, and it’s quite a special thing actually. I often found my career that people will reflect with regret on how little influence they think they have. They might think, oh, when I become a team leader, when I get promoted I’ll have some influence. And then you get promoted, you get to that role, you think, oh, it’s my head of department really that has all the influence in the [inaudible 00:52:10]. Maybe you become head of department. Oh no, really it’s the CEO that has the influence.

And I’ve sat with CEOs who’ve told me, I don’t think they have much influence actually. It’s really the board or really it’s actually the ground level people that have the influence. And I even saw a talk that Tony Blair did, where he said that he didn’t think he had that much influence when he was Prime Minister. And so I kind of feel like the temptation is to always think that the person above us in the chain has all the influence. And in doing that, I think we’re vastly underappreciated how much influence we each can have, if we just make the most of what we do have without kind of wishing what we had more.

And I think you can build stuff out carefully over time, and you start with just a small number of listeners or readers or whatever, and maybe it gets a bit bigger, maybe it gets huge, maybe it doesn’t. But I do think that sort of matters. And it’s something I have always thought about. And it sort of cuts both ways because as soon as you have, and I’m sure you would’ve wrestled with this as well, as soon as you have a number of people that listen to you or read, you do feel a sense of responsibility in terms of what you’re saying and what you’re putting out. And I feel responsibility to sort of fact check everything I’m saying. And it’s not like I’m talking to millions of people. Obviously I’m talking to 100s or maybe 1000s at the most.

But I think that having a bit of a platform, a bit of responsibility comes with it to use it responsibly. So in line with your principles, and to try and ensure that you are putting out things that are consistent with your own principles and values and that you’re sort living that out. But I do think it’s worthwhile because of how rare this concept of influence actually is generally, that you can make the most of it. I’ve seen people who just a couple of years into their career can probably have almost as much influence as a CEO just by building that platform.

And actually, especially today, it was often used to reflect in a previous role when senior individuals in the firm got together, they would’ve inevitably come back to talking about Gen Z and what do the grads think? What do the grads think about this? What’s their view? And I was just thought, goodness me, if they knew the amount of time that is spent debating the senior people in this firm, what they think of the world? They would maybe value their influence a little more than they actually do.

So yeah, maybe a bit of a meditation there on the role of influence in platform and hopefully a positive message that we can all have a little more influence than you might think, and it’s worth thinking carefully about how you want to use it.

Jason Mitchell:

That’s a great way to end. I think I heard you say power and responsibility, and I was waiting for you to invoke Spider-Man again, but…

Dan Mikulskis:

Yeah, he was nearly coming back there. We’ve done the Spider-Man references I think for today. So leave that one.

Jason Mitchell:

Perfect. Look, so it’s been fascinating to talk about what The People’s Pension is doing to evolve its investment strategy, what that means functionally for responsible investment in terms of asset allocation and why it’s really great to see asset owners like People’s Pension take on a much bigger leadership role in the sustainable finance ecosystem.

So I’d like to really thank you for your time and insights. I’m Jason Mitchell, head of Responsible Investment Research at Man Group, here today with Dan Mikulski, CIO of The People’s Pension. Many thanks for joining us on a sustainable future, and I hope you’ll join us on our next podcast episode. Dan, thanks so much for this. This has been great.

Dan Mikulskis:

Thanks, Jason. It’s been wonderful talking to you.

Jason Mitchell:

I’m Jason Mitchell, thanks for joining us. Special thanks to our guests and of course everyone that helped produce this show. To check out more episodes of this podcast, please visit us at man.com/ri-podcast.

---

This information herein is being provided by GAMA Investimentos (“Distributor”), as the distributor of the website. The content of this document contains proprietary information about Man Investments AG (“Man”) . Neither part of this document nor the proprietary information of Man here may be (i) copied, photocopied or duplicated in any way by any means or (ii) distributed without Man’s prior written consent. Important disclosures are included throughout this documenand should be used for analysis. This document is not intended to be comprehensive or to contain all the information that the recipient may wish when analyzing Man and / or their respective managed or future managed products This material cannot be used as the basis for any investment decision. The recipient must rely exclusively on the constitutive documents of the any product and its own independent analysis. Although Gama and their affiliates believe that all information contained herein is accurate, neither makes any representations or guarantees as to the conclusion or needs of this information.

This information may contain forecasts statements that involve risks and uncertainties; actual results may differ materially from any expectations, projections or forecasts made or inferred in such forecasts statements. Therefore, recipients are cautioned not to place undue reliance on these forecasts statements. Projections and / or future values ​​of unrealized investments will depend, among other factors, on future operating results, the value of assets and market conditions at the time of disposal, legal and contractual restrictions on transfer that may limit liquidity, any transaction costs and timing and form of sale, which may differ from the assumptions and circumstances on which current perspectives are based, and many of which are difficult to predict. Past performance is not indicative of future results. (if not okay to remove, please just remove reference to Man Fund).