Given elevated levels of global equity markets, the panel expects returns from the equity asset class to be muted compared to recently, and especially in the US where stocks look most expensive. Should one readjust one’s investment style for this? Good growth managers should still look for good growth companies, and value investing will still work where good stock picking avoids the companies that will not recover. Based purely on headline valuations, emerging markets look to be the cheapest, but the panel was sceptical that these would necessarily provide the best returns. There are a preponderance of state owned or directed firms, and without confidence in either property rights or the rule of law, promising returns can evaporate quickly. In addition, higher quality companies in emerging markets are often commanding a significant premium to the market as a whole.
The panel felt that the more focus the industry gives to ESG investing, the less meaningful it is becoming as a tag. It is perhaps more useful to reclassify funds into impact funds (which only buy companies that are focused primarily on having a positive impact), sustainability funds (whose fund managers believe in active engagement), and others (many of which will effectively incorporate ESG into the research in any case). There was an interesting discussion as to whether there was a potential sacrifice of returns for investors in these funds, or whether they might in fact outperform. An increasing demand for ESG funds has driven a differential in valuations of firms that are considered to be ESG positive or ESG negative, and this effect on its own has impacted short term performance. Whether this will have a meaningful positive effect in the longer term, or whether tighter investment restrictions will inhibit returns will only be known with the benefit of hindsight.
The panel also discussed a variety of points around building a culture at an investment company. Should employees be able to deal personally, even if they do so within the usual compliance guidelines (no front running, for instance)? Some view it as a dangerous distraction, or even as a conflict of interest if employees start to change their behaviour around stocks they own. Others see it as a vital pragmatic learning opportunity, in that you only really get experience when your money is on the line. Another question is how to get diversity in the investment team? An interesting observation from Rory Sutherland in his book Alchemy was that teams will be more diverse if the company hires in batches – if you hire one a year, you end up with the same mould. If you hire five at once, you can take some risks and might therefore hire some more differentiated candidates. On decision making, there will always be lots of conflicting voices, internally and externally, so part of the investment process is to absorb all the points of view, but still be able to act, even in the face of some opposition.
Peter Hollis, Russell Napier, Angus Tulloch, Ally McKinnon and the Kennox investment team.