The Value Perspective Podcast episode – Meet the Manager, with Andy Evans

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SH: Hello, Andy. The plan for this episode is me talking ‘to you about you’ – so why don’t we start with you giving us a few details about your background? Where do you come from?

AE: Hi, Simon – and thank you for agreeing to do this podcast with us to mark the value team’s 10-year anniversary. And I should probably discuss my background in the context of that team, given these podcasts are celebrating 10 years together. I actually joined the team in 2015, however – so a couple of years after it was formed. In fact, I was the first external hire so I guess I was ‘employee number one’ with the five ‘founding fathers’ who set up the team. I do have a bit of a different investment background from some of my colleagues. Most people on the team actually started on the Schroders graduate scheme – only a few people are external hires – whereas I spent some time on the ‘sell’ side as well. So I was on the ‘dark side’ of the investing industry before I made the move into the light! I was a sell-side analyst for about 13 years and have now been on the ‘buy’ side for about eight years.

SH: I share that background though I am careful not to talk about it too much! Welcome to the light! As I understand it, the value team is the only style-based team at Schroders. How did that come about?

AE: Obviously there are people with different styles of investing inside Schroders but, really, the value team is the one that congregates around an individual style. The origins of the team actually involve Peter Harrison, who is now the company’s CEO. At that time, he was the head of equities and he decided there were a few people across the investment floor, who shared a common philosophy in terms of value investing – and that congregating them all under one roof in a quasi-boutique form would be a pretty sensible move. So that was done in 2013 – although the history of value investing at Schroders actually dates back much longer than that.

Some basic beliefs underpinning a value approach

SH: And is the team’s approach to value investing based upon contrarian beliefs about markets?

AE: Yes, it largely is. There is an apocryphal story about the origins of value at Schroders that, back in the early 1970s, any stocks other investment managers no longer wanted to hold were put into a separate fund. I don’t think it was quite a ‘dustbin’ fund, as such, but it was made up of stocks that were deemed to be either unwanted or too risky. I say ‘apocryphal’ because there is some debate as to whether that is its true origin or not but what is true is the fund has always invested in companies that were pretty unloved – and that definitely remains the case today. We want to invest in companies where the valuations are attractive but, by and large, there is a contrarian angle. We are investing in companies lots of people don’t want to go near whereas we think that’s the opportunity – we can make money because people are running away.

SH: So we can take it that is one of your basic beliefs about how markets function – that where there is consensus about stock prices, the consensus is usually wrong. Are there any other basic beliefs about markets that underlie your investment philosophy?

AE: I have quite a few basic beliefs – in fact, I was thinking about this the other day because I had a sit-down with a group of 14 and 15-year-olds at a careers day. I was notionally there to talk them through finance and how the finance industry works but, towards the end, I asked them, If you were to invest in a stock, what would it be? And after they had woken up – because I’d been speaking far too long about finance! – they said, Oh, I would invest in Apple or Amazon and all the typical companies you might imagine.

And it got me thinking about beliefs. These were people who had never invested in the stockmarket or even looked at the stockmarket and their immediate instinct was to do two things. One was to ask, What is a company I know well and I think is a good company. And the second is to ask, What do I think about the future and does that future look good for those companies? And if the answer to those questions is ‘Yes’, then I can say the name of that company.

So those were quite simple rules they had in place yet, when I sat there and thought about them, I realised I had probably reached the polar opposite of them after working in the industry for some time. On the first one, I do not believe it is about the best company you can possibly find – it is about finding where the expectations of the future are mispriced. So you could have something like Nvidia, where everyone is now getting very excited about AI, and it could be a fantastic company – it could be the best company out there. But if it is trading on an outrageous multiple and an outrageous expectation of the future, it is going to be very hard for you to make money from that.

SH: Doesn’t that depend partly on the growth rate and also on the particular timeframe of the investor? So if you have a higher growth rate – a high rate of return on reinvested earnings – you can actually grow yourself out of what appear to be excessive valuations. Would you agree with that?

AE: I certainly agree with that but it is not the style of investing we do. And I think that is exactly the same issue as I discussed before – what is happening here is that future expectations are being discounted at the incorrect rate. And therefore, wherever that happens, you can make money. I am definitely a value investor at heart but I also recognise there is more than one way to make money.

Returning to that second belief – that is, thinking about a future possible outcome and saying, That’s what I think the future looks like and that’s the outcome where I’m going to make money – again, that is something I simply do not believe these days. You have to think about the world in a probabilistic fashion – that there are lots and lots of future paths – and, as an investor, what is more important is working out situations where you’re going to make more money when things go down a favourable path than you lose when things go down a bad path. You are trying to skew the upside/downside in your favour.

So I hold two very different beliefs to the ones those 14 and 15-year-olds reached for with no experience. That then feeds into other beliefs and one of the big ones is that while, as I said before, there are lots of ways you can make money in stockmarkets, the academic evidence suggests there are only a few really endurable ones. Momentum is one. That is not the way we invest but momentum has lots of evidence suggesting it works over a long period of time. Investing in small caps is another – and there are other ways out there. But the one I am most passionate about – the one that really resonates for me – is investing in value, investing in cheap companies. That has a logic to it and also evidential support as to why we would want to follow that style.

Human beings overcoming human bias

SH: You mentioned the need to think probabilistically and I know you have a great interest in what I would call ‘decision science’. So is it fair to say some of the inefficiencies you are setting out to capture are the result of cognitive biases other investors suffer from?

AE: That has to be the case. Coming back to those very basic beliefs about the market, if it is because of misaligned future expectations, there has to be a reason why those are happening. And I think, at a very basic level, when there is human interaction in any system, there is that opportunity that humans are making poor decisions. Again, at a very basic level, the inefficiency we are looking to exploit really comes down to the fact that people get scared and they get greedy – at different points in time. And, of course, there is the great Warren Buffett quote about the need to be fearful when others are greedy and greedy when others are fearful.

So it is that cycle of fear and greed – and, if you think about the sort of stocks we have to look at, they are companies that are very out-of-favour. In certain cases, they are companies everyone has given up on or they find too scary to invest in. And it is by picking through the bones of those areas of the market that we think presents the opportunity set for us to make money – and, you know, there are a number of cognitive biases that are really feeding into that. It’s not just an individual one.

As an example, a love of narratives is a big thing – when things are going well, people get incredibly carried away and so can extrapolate fantastically fast growth rates far into the future. These are the sort of things we want to stay away from. Likewise, when things are going very badly, the narrative can move towards a far too negative place, which leaves opportunities for investors like us. Herd mentality is another important example – and we try and move in the opposite direction to it. As you touched on before, we are contrarians – we are trying to avoid areas where there is far too much of a herd mentality.

SH: So the core belief is that the market is driven by human decision-making and human decision-making suffers from cognitive flaws, which leads to inefficiencies that you can exploit. Yet your team – I presume – is made up entirely of humans! Could you just confirm that for me?

AE: Yes, we’re all humans!

SH: OK – so how do you overcome the biases you are presumably as prone to as every other market participant?

AE: It is an interesting question because, whenever people talk about psychological biases, there’s almost an implicit suggestion that, because you’re aware of them, you’re not subject to them. But we are very aware we have all those biases and we can be subject to them as well – so the best thing we think we can do is to have a process that tries to overcome them as much as possible. So, even if that was starting from a really basic point in time, we have a screen that focuses on the cheapest part of the market.

And even that, in some ways, is trying to overcome our psychological biases. If we have identified this as an area that is going to be interesting, we don’t want to be deviating away from that – we know that is where the probabilities are in our favour. We accept there are lots of exciting things outside the cheapest part of the market but we are effectively saying we don’t want to go there. Having that screen really keeps us true to that – it’s a bit like being tied to the mast to stop the Sirens getting to you. It is incredibly important.

SH: The trouble is, though, people don’t like being tied to the mast – by requiring people to adopt the kind of discipline you are talking about to overcome their biases, you are restricting their freedom. Do you find it difficult to impose these ‘handcuffs’ on people? Do they resist at all?

AE: I think we’ve all signed up for this – for the nine of us investors who sit around the table, this is what we wanted to do. So by signing up for the team, we have effectively said this is the style that suits our personality – and we’re also willing to accept we are going to be fishing in this pool. As exciting as it may be to fish elsewhere, one of the penalties we pay to try and get better performance is to have a bit less excitement in our lives – and we’re OK with that. Also, when you dig deeper and look into the analytical side of things, we do have a checklist of questions we go through but we also have a lot of freedom to go away and explore an investment in any way we want to. We are not so dogmatic we can’t move away from a set amount of rules. It is definitely not boring for the investment team, that’s for sure.

SH: I wasn’t suggesting it was boring but I was suggesting people do not like having their freedom restricted – particularly in an industry that has tended over the years to revere personalities. That kind of tendency towards hero worship I find quite alarming. What do you think about that?

AE: We did talk about psychological biases and I picked out a couple of examples but one that is particularly huge in the investment industry itself is overconfidence. This can come out in many different ways – and, in some ways, the industry absolutely loves overconfidence. Asset managers love a very confident person standing up at the front of a room and telling them exactly what’s what and here’s the future direction of travel of the economy and this is the way this stock is going to go.

But that doesn’t sit right with actually being a good investor. That is a slightly different skill-set because, to be a good investor, you want to think probabilistically – you don’t want to say, This is definitely the path where the future is going to go to, because that’s not how the world works, in my view. So overconfidence can get you into quite a lot of trouble. It can do you a lot of favours, if you want to raise a lot of assets by telling people great stories – but that may not always be the greatest thing for your investors either.

A supportive environment for decision-making

SH: I completely agree. You have described the investment process you are all committed to and which allows you a little bit of flexibility but, on a broader basis – and particularly in value investing, where excess return payoffs tend to be concentrated into fairly abrupt periods – how do you deal with those long periods of underperformance? And by ‘deal with’, I mean both in terms of your external communications and the emotional support you may need to give your colleagues?

AE: That is a great question because it gets to the heart of what you need to be a good value investor. If you had a checklist for that, being able to deal with the associated adversity would definitely be on it – and there are probably a couple of ways I would tackle that. The first I would say is that, while value does tend to come in fits and starts, the number of five-year rolling periods that are negative for value is actually quite low. Unfortunately, we have had one in the more recent past – but we can still take some comfort from knowing that, if we stay through those trickier, shorter-term periods, the longer-term periods will show through in a positive fashion. So I think that backdrop – and the belief in that longer-term evidence – is really helpful.

My second point comes down to something slightly different and concerns mental health and resilience and how you can overcome adversity. I don’t think we have chatted about this before but one of the things I do on the side here at Schroders is I am the co-chair of Minds, which is the company’s mental health initiative. There are two important reasons I’m involved with that – the first being I have had people close to me who have had some impact from adverse mental health. I have seen some real damage done in that regard and so I want to be involved in in trying to help other people.

But there is an important element of mental health as well – and particularly investors – which is that, if you’re not in the right frame of mind or you’re overstressed or you’re not thinking clearly enough, you’re going to make bad decisions. And we are in the game of making good decisions so we need to make sure we are in the right frame of mind mentally to make the best possible decisions we can. Techniques you can use to calm yourself down, in terms of your limbic system and not allowing your more primal instincts make decisions for you, I think are incredibly important – so meditation or exercise are things which I and other people in the team will do to try and help here.

And then you have to have a supportive environment, where other people are not going to be pointing fingers at you when things are going in the wrong direction. We definitely have an environment on the value team where people will normally admit their mistakes before anyone else points them out – and I think that sort of supportive environment is incredibly important because it means you are allowed to say, Well, that one didn’t go my way but I’m open to talking about it. You feel free to talk about these things rather than having someone pointing fingers and saying, You got that one wrong, what are you going to do about it?

Confidence in the process – but not overconfidence

SH: So a supportive environment and a commitment to the long-term existence of a return premium to value investing is obviously associated with a calm mental attitude, where you want to make sure you make the same decisions independent of emotional state, effectively. But there must have been times when you have been tempted to say, No, this time it is different and we need to change our investment process. Is that the case or have you never been tempted to make big changes?

AE: I guess probably half the time the team has been together has been a pretty tough time for value investors. And we have definitely sat down and had conversations about the best way to look at the process. I don’t think we have ever had that conversation of, Do we still believe? I mean, if we are given up on value, then it really is all over – or maybe it’s the very best time to be buying it. But, over this period, we have always looked at those situations and said, Do we believe in what we are doing? Yes. Do we think, if we follow the process, the outcome should eventually come? Yes. And I think we were helped by the fact that, if you looked at the valuations, they were getting more and more stretched. So, if anything, we felt that was pent-up demand or pent-up future performance that was being built up. It wasn’t the case of us owning a set of companies that were remaining at the same valuation and the rest of the market were staying at the same valuations but the fundamentals were just going against us. That is the point where we would be very concerned about things.

SH: I want to pick up on this idea that, as a team, you are always learning. I know one of the things you do is go back and look at mistakes and I’m curious about how you define such a thing. Like us, you are long-term investors, so over what time period do you look to see if buying or selling a stock was the right decision? When you look at outcomes, is it based upon time or something else?

AE: The way we approach our after-action reviews, as we call them, is by way of an archive that is effectively a database of all the work we have ever done. That has been going basically for all the time the team has been around and it now contain thousands of entries. Some three to five years after we have made a decision, we will dig it out of the archive and carry out an after-action review, which effectively boils down to looking at what we forecast at the time of the decision and assessing the outcome relative to that forecast three to five years later. Importantly, we do this for every single company in the archive – not just for the ones that went very right and the ones that went very wrong as we think we would be learning the wrong lessons that way. We use the biggest data set possible – and we do it that way because we feel we are more likely to tease out any systematic errors we may be making in our process. So, coming back to your question about whether we change our process, any change we do make would be very, very gradual. We believe we have a very solid process at the heart of it but there could be small, incremental improvements we can make over time.

Let me give you an example, which relates to a subset of companies rather than any companies we necessarily bought or sold or decided to pass on. Through this after-action review process, one thing we found was that we were making accurate forecasts on normalised profits – so profits three to five years after the date we made the forecast. However, we also identified that the cost of getting there – so the balance sheet at that point in time – was worse than we expected. And that was because of, say, M&A being the reason they got their normalised profits or additional capex or restructuring costs – there were a whole series of costs that got you there. Of course, we are very aware of return on capital employed and the importance of that but what that led us to do was say, OK, in our shared models, we are going to place a bit more importance on the incremental return on capital employed, make sure we are very aware of it and probably prioritise the IRR [internal rate of return] over the holding period, to elevate its status, relative to just pure upside. So that was a very, very small change but it was one we identified during those after-action reviews.

Experience, gut instinct and ‘too much information’

SH: Let’s talk a bit about your research. You are stockpickers with access to large amounts of data and I am curious about how you use data to make the forecasts you were just talking about. How do you take all those inputs and turn them into a fairly accurate output of earnings and cashflow forecasts?

AE: The first thing to say on data is we are believers in the ‘80/20’ rule in that we think we can get a long way to the answer by focusing on a relatively small amount of information. That is where our seven ‘Red’ questions and the work we do through our modelling come in – we think they are the essentials and, if we get those right, we will be in the ballpark of being right overall and stand a good chance of having a good outcome. So we are very focused on the data we look at and the way we focus in. More broadly on data and investing, if you go back in time, there was a real advantage to having different data from other people. Famously, the Rothschilds made a lot of money when they got ahead of the game after learning Waterloo had been won by the British. They made successful investments, because they had information a day ahead of everyone else. Similarly, Rockefeller used to gather as much data as possible about his competitors, which gave him an informational advantage when he came to buy their businesses.

I think investors face a very different problem these days as the information advantage is not the same. A bit like a person who likes talking about their bowel problems in public, the big issue these days is ‘too much information’! So what we need to do when we look at data is make sure we are taking the right amount and focusing in on what really matters. It doesn’t have to be particularly fancy either – the satellite imagery above a shopping mall or whatever – it could be something very basic.

Picking up on your point on forecasting, one of the biases investors are exposed to is the issue of ‘inside’ and ‘outside’ views. Narratives can be incredibly compelling and, when you are looking at an individual company, you can get really carried away. You may get overexcited because it seems so exciting – the CEO is very charismatic, the growth prospects look fantastic and so on. That leads you to a set of assumptions where you say, This company is going to do a 20% margin five years out and there is going to be 10% growth every single year between now and then. That will be your ‘inside’ view – and it will probably be informed by all the things you have seen around the business.

The question not many people ask – despite it being a very simple one – is how likely is all that to happen? Of all the companies we see in the world, how often do we actually see 20% margins with 10% growth over five years? So we have what we call our ‘base rate tool’, which effectively helps us judge, for all the companies out there in the world, how many have achieved those sorts of growth rates and margins? It allows us to adopt the ‘outside’ view, not just the ‘inside’ view, when we’re making decisions around a company. So every time we forecast a margin, we will go and look at all the other similar companies out there in the world and ask, Is it really likely this business is going to achieve that margin in three to five years’ time?

SH: Yes, we think very similarly about data – that your edge is how you use it and how you filter it. I like to quote Lou Gerstner, who was head of IBM back in the 1990s, who said the role of analysts is to be “intelligent filters”. When I started in this business, the role of the analyst was actually to get the data, which could be very hard to do. So I do agree the nature of an investing edge has changed dramatically over the last 40 years or so. So here you are. You are all highly paid – I hope! – experienced, intelligent, thoughtful people with a well- structured process but what is the role of judgement? When are you allowed to go with your gut?

AE: I very much like your description, first of all – so thank you for that! And I would say we are allowed to go with our gut pretty much every time we look at a company – in the sense that, if it was purely left to the machines or if we were quant investors, we would be very different investors. Every time we look at a company, we are looking at the upside and, in some ways, there is some subjectivity there in that we are having to make a forecast about the future and a judgement about how likely that is to happen.

And, when we think about the things that could go wrong and we put a risk score on every single company we look at, again, we are making a judgement about the risk of that company – how likely is it to achieve the forecast we have made? So we are not robots – we don’t go, Let’s leave this purely to the computer. If anything, I would argue every single one of our investment judgments is down to us. It is down to our personal judgement about how an individual company looks in terms of risk and reward.

SH: But do you think investing is a domain in which experience and the development of judgement is even possible?

AE: Investment experience is a pretty interesting topic because it is so complex. You might think the simple answer would be, Experience is a good thing because all these experienced investors have great track records – but that may just be pure survivorship bias. It could just be down to the fact that those people who are quite good at investing also happen to be the ones who stuck around. So experience and investing is actually quite difficult – and arguably the most difficult element is the fact it is not a linear job we are doing here.

Markets aren’t linear. They are very complex and they are adaptive – they change a lot. That means the experiences you might have had, say, up to the dotcom bubble might not serve you very well in the five years after that. So, because the world and the environment is changing a lot, experience could be overplayed. It may just work for the environments you are in. Countering that, I would say there are definitely things that repeat over time – cycles, for example, seem to follow the same sort of patterns and that is where experience probably does help you. So I would say it matters in terms of the nature of the investing you are doing.

Placing investing on the ‘skill-luck continuum’

SH: I’d agree with that – which brings us on to the roles of luck and skill. There are some aspects of investing where experience does not help you. There are some aspects where forecasting does not always help you. You have talked a lot about the importance of structured process and the discipline to stick with it but what about the roles of luck and skill in all this? How many of your forecasts do you get right and, when you do get them right, how do you know whether you have been lucky or skilful?

AE: That is another really tricky concept in the context of investment. Thinking about our after-action review process, one of the most difficult things is how to unpick skill and luck. I think it comes back to something Michael Mauboussin has covered very well – the idea of the ‘skill-luck continuum’. If you think about different activities, something like chess is a very skilful enterprise and, all things being equal, the more skilful of the two people playing will tend to win the game. If you look at sports, basketball tends to be a high-skill enterprise while, going down the spectrum, something like ice hockey actually involves a bit more randomness and is thus a bit more about luck. Then, at the other extreme, you can go to a casino and that is all about luck. Investing sits somewhere between ice hockey and going to a casino. There is a lot of luck involved in the near term and it takes a long time for skill to actually materialise.

As such, for any one decision, it is quite difficult to unpick to what degree skill or luck helped you reach where you are at that point in time. When we are doing our structural reviews, then, we are very wary of saying, This decision is definitely down to skill while that one is definitely down to luck. The easiest instances are where we have made a misappraisal in our analysis – where there is a very clear mistake – and that has happened once or twice and we can pick those up very clearly. With the decisions that are more difficult to unpick, we try and look at clusters to try and understand if something is happening more systematically. So if the sample size starts to get bigger, that may be something we can learn from. Looking at an individual decision that went very badly is normally a quick way to learn the wrong lesson.

SH: When I think about the roles of skill and luck in investment results, it reminds me of the old saying that there are two kinds of portfolio managers – the skilful and the unlucky! So when things are going badly – but you would say it is the result of bad luck, not poor decision-making – how do you communicate to clients that you have just been unlucky and it is not a mistake but the environment?

AE: Again, that is probably one of the harder elements of investing. By and large, I think most people in this industry do understand probabilistic thinking and that there will always be some skill and luck involved in investment. That can be forgotten, however, when they see some shorter-term outcome numbers. It is a difficult thing to communicate but the way we approach it is to say, We are following a process and this process, we believe, will deliver good performance over longer periods of time.

The work we have done suggests we are able to weed out more value traps than we buy so there is something successful we identify in the pure research we do. So that is helpful for demonstrating there are elements of skill involved in what we are doing. As for explaining away short-term performance, all we can do is say, This is the way we are approaching skill and luck and this is what might happen in certain time periods – but we believe you will be compensated over longer time periods. Out of interest, Simon, how would you approach this issue with your own investors?

SH: By trying to be as transparent as possible. In everything we do, we try to be as transparent as possible. With every short-term period where the environment has been against you, I think you have to reaffirm your commitment – as you said – to your investment philosophy and to your belief in the process. And obviously, if you have survived that difficult period of time, it has put you in good stead. Still, I do think it is very easy to descend into excuse-making so, as you are, you do need to be very open internally about making errors. And, actually, being unafraid to confess to errors is really important with clients and incredibly important internally. You alluded to it briefly when you talked about having an environment where you can analyse errors safely rather than things degenerating into a culture of blame – you know, I have worked over the last 40 years in three investment firms and, at two of them, people were very quick to blame others, which I think leads to very rapid erosion of the culture.

How best to incentivise investment decision-makers?

SH: But, if I can turn it back, given short-term results involve a balance of luck and skill and given you, like us, are long-term investors, we do not have many data points to analyse to be certain an individual has been lucky or skilful – so how do you think investment decision-makers should be incentivised?

AE: Probably the clearest way of doing that is being tied to outcomes over a longer time period – and that is generally the way it is done here. At Schroders, you are tied into your fund performance and I think that is the way it should be. On the team, by and large, we also take the active decision of going that step further and investing in our own funds – I personally have a lot of my family’s wealth invested in the funds we run. Now, someone might look at that and say it is completely irresponsible because of the lack of diversification – and I do understand that – but I also think that is important because we are actually in a privileged position where people have entrusted their money to us. And I don’t think it is that much of an ask that we be invested side by side and believing in ourselves in the same way they have believed in us. I would argue that being tied as much as possible to the performance of your fund is a very sensible way of incentivising fund managers.

SH: My concern there would be that that lack of diversification could make you risk-averse. You really do want to be able to take risks – particularly as a value investor, you have to buy when it feels uncomfortable, to buy when everybody else is selling. If you are worried about your family’s financial security, you may not be as prepared as you should be to take those risks for the benefit of your clients.

AE: I guess this ties in with a slightly different point – and it is actually something we have discussed in the past, for example in the context of the cars that footballers drive. If you are working in finance, you should be able to find a way to live within your means and still be able to make the right decisions for both you and your investors. I think it probably comes down to how you decide to live your life and the decisions you are going to make in that regard. I used to work at the same firm as James Montier and he wrote my favourite-ever piece of sell-side research, ‘If it makes you happy’.

That is where I came across ‘hedonic adaption’ – the idea that people quickly become very accustomed to something new they buy. So if you buy a new house or a new car, for example, it will only take you two or three months before you view that as just your ‘new normal’ – there is no additional happiness apart from that very early stage when it is quite nice to drive around in a new car. And once you recognise these material things are not going to bring you that much benefit, then it is probably not worth your while spending lots of time and money and effort thinking about them. There are other important things in life – and, when you understand that, it means you can set yourself up very differently, I think.

SH: I wish you would tell my footballers at Plymouth Argyle! It drives me crazy when I go into our carpark in my dirty old Skoda and I see young players who just signed a two-year contract driving around in expensive Audis. But the decision-making in sport is by humans – as in investing and as in all domains of life – and the narratives surrounding sport are such that people suffer, in many ways, even worse than in investing from some of the biases we have alluded to. You mentioned overconfidence earlier and you see it in football too – you know, the ‘great man’ notion that leads 23-year-olds to think they are immortal and their careers will be as long as Cristiano Ronaldo’s. They very rarely are, of course, but they fail to look at the base case. More education, I think, is going to be required.

AE: I hope you are helping them out with that?

SH: I am working on it at the moment, actually, yes.

The difference between growth and value? It’s personal

SH: We are running out of time, I think, but I do have just one final question. There is a reason I am the one asking you these questions and it is because you know we share, at Harding Loevner, a lot of your beliefs about the importance of decision science, implementing processes to overcome human biases, the difficulties of going against consensus, the difficulties of group decision-making – you know, almost everything you said, we would agree with. Yet a big difference between Schroders and Harding Loevner is we call ourselves growth investors and you call yourself value investors. Now, we are absolutely explicit that there are three ‘legs to our stool’, which is growth, quality and price, but at root we are looking for companies that can generate cashflow growth over very long holding periods. We would appear very similar, then, so what in your mind is the difference between growth and value? I think it was Warren Buffett – or maybe Charlie Munger – who said there is no difference between growth and value, there is just investing. How do you see the difference?

AE: I guess it comes back to what I said before about there being lots of different ways you can make money in markets. It comes down to the fact you are still trying to do the same thing – in the sense that you are trying to find where expectations are misappraised and identify future scenarios where you’re going to make more money when things go down a favourable path than you lose when things go down a bad path. You probably have similar aims – it is just that your method of getting from A to B is different.

We sometimes talk about this in terms of ‘objective value’ and ‘subjective value’. The way we think about the world is from an objective perspective, where we can see the numbers these companies have made in the past, we can see the returns on assets these companies have made in the past and we can see the valuations staring us in the face. And so we would like to believe that, on that basis, we can work out whether it is cheap or expensive, on something quite moderate in terms of future expectations. The growth investor’s perspective, I think, will focus more on the subjective value – the future possible outcomes. Can the growth continue at the same rate it has before? Can the returns remain that high?

So, when it comes down to the difference between growth and value investors, I think it comes down to the person. It comes down to where you feel most comfortable and, for me personally, I have always felt more comfortable with things I can see and touch. I can see and touch the past performance of a company and I can see and touch that valuation. Now, we have some very good growth investors here at Schroders and we spend time with them so we know they are doing something very similar to us. But they like to see and feel in terms of thinking the future growth will be greater than the market is currently anticipating. I think that is where the difference lies – it comes down to the person and how you are most comfortable investing.

SH: I like the distinction between subjective and objective reality – particularly as the owner of a football club. There is no objective value at a football club whatsoever!

AE: There is glory, with your promotion to the Championship.

SH: There is a degree of psychic pleasure associated with owning a football club but there is no financial model that justifies the price that people, including me, pay to be those owners. There are very few cashflows you can discount at the appropriate rate from the future – it’s just the subjective.

AE: You could ask all the Argyle fans what price they would put on that final win that got them into the Championship. I imagine they would put a very, very high price on that.

SH: Well, there are agency issues there – they put a very high price on that because it’s not their money! On that happy note, we should stop. Thank you very much, Andy. That was fun.

AE. Thank you very much, Simon.