The Value Perspective Podcast episode – Meet the Manager, with Kevin Murphy
Hi everyone and welcome to the TVP Pod. This year is our 10th birthday – not as a podcast but as a value franchise, here at Schroders. We wanted to celebrate this by throwing a ‘party’ with some of our longest-standing clients and past podcast guests – inviting them onto the pod and turning the tables. Usually, we interview people from all walks of life about their fields of expertise but, in this ‘Meet the Manager’ miniseries, some clients and guests will introduce us instead and get to ask any burning questions they may have been harbouring over the last 10 years. We will continue to publish our regular podcasts as normal but hope you also enjoy this miniseries where we place the value franchise in the hot seat as a birthday treat. In this latest episode in our Meet the Manager series, John Husselbee interviews Value Team co-head Kevin Murphy. John is head of the Multi-Asset Team at Liontrust and has 38 years of experience managing multi-asset and multi-manager funds and portfolios. Before Liontrust, he was co-founder and CIO of specialist boutique North Investment Partners, and before that he was head of multi-asset solutions at Henderson. For his part, Kevin has been managing portfolios since 2006, having joined Schroders in 2000 as a UK equity analyst focused on the construction and building materials sector. Here, John and Kevin discuss Kevin’s background from childhood to co-founding the Value Team; the decisions and issues involved in building a value investing franchise 10 years ago; the challenges of value investing through a hard 2019 straight into Covid in 2020 and the worst decline in the value style in 100 years; how the Value Team has avoided style drift even in the very worst days of the pandemic; and, finally, how to keep an investment framework loyal to its underlying philosophy while evolving as markets change. Enjoy!
Milestones on the road to a career in value
JH: Hello, Kevin. How are you?
KM: Good, thanks, John. How are you?
JH: Not too bad. Thank you so much for joining me today. I have to say it is a privilege to guest-host this conversation – of which we have had many over the year. The conversation we have not yet had, however – you being a fund manager, me being a fund selector – but one I have always been keen to have is on the investment mind, the personality and, in particular, the motivation of successful fund managers and fund management teams. So I am interested today to explore that a little. Now, in preparation for this meeting, I did the usual thing in googling you and looking for past interviews to get some clues on angles to approach. Yet I only found out three things – so let’s start with a bit of a fact-check. First of all, you studied economics at Manchester University. Second, I believe you are married – or at least your LinkedIn picture looks like it was taken on your wedding day. Spooky, this, isn’t it? And, finally, you play and have a passion for basketball. Beyond those three things, it feels like you have tended to shy away from any sort of personal revelations – and I appreciate that. Still, could you just share a little bit today about yourself – perhaps from your childhood through to now, in terms of growing up, your ambitions and that development of the investment mind. Heading back to the 1980s and 1990s, where did you grow up and what was it like?
KM: So you are right – I have totally shied away from all these kind of personal questions in the past. I figure I am not that important, I am not that interesting, so let’s stick to the funds and the process – that is the main thing. As you are such a good friend, though, I am happy to go through this.
JH: Well, no-one else is going to know are they? This is just between us so it is fine!
KM: Exactly! So I was born and raised in the UK – in Oxford. My parents are originally from Northern Ireland and we are very firmly, strongly Irish. So we hung out with other Irish families, in Irish communities, went to Irish pubs, listened to Irish music, all our holidays were back to Ireland and it was always, We are here temporarily before going back – but they left it a little bit too long for me in that I clearly have a strong English accent. I was 18 when they moved back but my siblings and my parents all have strong Irish accents so I am very firmly the black sheep of the family in that regard. And it can be very confusing for people who meet my brother, who is also in the industry – and maybe we will talk about that a later – but he has a strong Irish accent and people just can’t understand how this has happened, when two siblings look similar but sound so different. But it was basically because I was left behind when my parents went back home.
JH: Was there any connection to Oxford? What professions were you parents in?
KM: Absolutely no connection at all. My parents are both very working class. My mum had to leave school at 14 to get a job and help raise the family and then, while she was working, she went to night school, gradually did her qualifications – GCSE and A-level equivalents. She got into nursing, carried on learning, got her Master’s and then started teaching about nursing. She went on to become the head of the department of nursing and then moved back to Ireland to be head of nursing for the whole of the country. So nothing to do with the city, but an impressively useful emphasis on the benefit of education.
My dad, meanwhile, when he was at university, got into programming computers a bit as part of his degree –and so, in the 1970s and 1980s, he had a front row seat in computing, which was about to be the biggest boom in the whole world. He was an IT consultant – in fact, he was probably the only IT consultant in the world who absolutely despised computers in every single way! He didn’t know anything about actual computers but he could programme them – and so that was his career for most of his working life.
JH: As a child, what sort of hobbies did you have? Are you into collecting stamps, bottle tops or anything bizarre you can share with us?
KM: Nothing too bizarre. When I was younger, I was a massive geek and was into Lego and reading. I would go to the library on a Saturday morning, take out my full allocation of five books or whatever and then I’d have read them all by Saturday afternoon. I can be quite focused in what I am doing and I would get a book, sit there and just plough through it – and onto the next one. Then, as I got older, I got more into sports. As you correctly say, basketball was my one true sporting love but, alongside that, there was mountain biking as well. So, from my teenage years onwards, it was mainly the sporting side – basketball and mountain biking.
JH: And school? Probably more secondary school than before that – what did you enjoy there? And what did you excel at academically?
KM: Well, my school wasn’t a very good one – in that, shortly after I left, it closed for good for failing to meet its academic-standards requirement. So the things you mainly remember from it are the bad behaviour, the fighting, the poor teaching standards – but it was extraordinarily useful for a couple of things. First, the friends I made then are still some of best friends now. At my wedding – and you are correct to say there is a photo of it on my LinkedIn page – the best man was my best friend from school.
JH: That is quite a challenge, isn’t it? Obviously, I’m a bit ahead of you in terms of age but I assume, growing up, there was no social media or WhatsApp groups and so you know those friends really are friends as you have had to work hard to keep in contact with them all over the years.
KM: Well, it helps that both of us are entirely useless at keeping in contact and so we do not feel the need to phone every day or month. We will phone up occasionally and say, Do you want to meet up? And then we will go to the pub. And that suits both of us. There is a group of 10 or so of us and, when I go back to Oxford, we all go out still and it’s great. As for academic subjects, because it wasn’t a great school, you didn’t have to work very hard to be towards the top of the class – and that was extraordinarily helpful, longer term, because being a big fish in a small pond teaches you a degree of self-confidence and self-belief that has been extremely useful in my profession and working in the City. And, ultimately, I think it probably was a good school for me to go through because it taught me lots and lots about life I wouldn’t have learned otherwise.
JH: Can you think of an example of that in the context of your working life today?
KM: It is just that independent of thought. That ability to sit down and work through a problem yourself – because, frankly, the teachers aren’t going to teach it to you – so you have to work out how to learn. You take the first steps of doing that when you’re in secondary school and, ultimately, what I learned at university was how to learn, rather than anything else. That journey and that transition has been extremely beneficial.
JH: I often ask people I interview if they went to school with any famous people or celebrities. From the way you talk about it, I assume you were at school with a few boxers!
KM: My school is more infamous than famous for its ex-pupils, I’m afraid! So no celebrities.
JH: When it came to selecting A-levels, your choices would have been fairly limited – unlike the endless options my kids have today – so what was your thinking? And were you thinking, The City is the place for me? Or, I want to be an investment manager? Or where you looking in entirely different spaces?
KM: When I was selecting A-levels, I chose computer studies, because of my dad, I guess; maths, because numbers and logic were everything I liked up to that point; and also economics. I didn’t do economics GCSE as the teacher said, You can just come in and do it for A-level and it will be fine, so I didn’t bother. But then when I got to A-level, I was like, Let’s try economics – and it was that combination of maths and logic, but also real world application. At the time – and I have learned better now – I used to think economics knew how the world worked. And it touched so many different categories – whether it be politics, markets, all the news you would see on TV, how businesses work – economics underlay all of them. And I liked that insight into the functioning of the world – how the world works – and to do that alongside a logical mathematical framework, I found extraordinarily interesting.
JH: Like art and science working together. You mentioned you loved reading so I would have thought that would have taken you straight to English Literature – but that never crossed your mind?
KM: No! The linguistic style of writing and the creativity required are things that are well beyond my capabilities. I stick to logic and reasoning and I definitely get that from my dad’s side of the family. That is what I found was my skill-set and my wheelhouse and where I am most comfortable.
JH: So off to university and economics at Manchester. I can guess why economics but why Manchester?
KM: Well, I have made a succession of decisions over the years that, with hindsight, you go, Ooh, that is not a very good framework for making a decision. I picked my school based on who had the best basketball facilities – and I wouldn’t recommend that to anybody – and I picked my university based on where the best nightclubs were and, at the time The Hacienda in Manchester was the best nightclub in the country. Unfortunately, it closed in the summer before I arrived so, by the time I got there, it wasn’t even open! That was the thinking behind it – although it also happened to be the largest economics programme in the country. And Manchester is an amazing city. We went to visit a bunch of different universities – the one thing my school did do was organise trips to go and see some – and Manchester was a proper place. Rather than being a campus in the countryside, there was a real city – and that is what I wanted to be involved with.
JH: And did you gain a further network of friends there as well?
KM: Absolutely. I made friends I am still in touch with to this day – and I’m going out with a bunch of my friends from uni next Thursday night – but none that are professionally network-related, right. A couple of people from my course went into the City – but very few, given it is such a large programme.
JH: Do you have a stronger connections with your school mates or the friends you graduated with?
KM: That is a hard question to answer. They are different groups of people. What I would say is, with the friends you have in your formative years – when you’re going through your teenage years, where you first start going out, meeting girls and whatever else – that shared experience is extraordinarily valuable. You have stories and shared connections from those years you can never replace or replicate. But it is not dissimilar to going to university where you are living away from home for the first time and you are going through other new experiences – so they are just different. I wouldn’t say the connection was stronger or weaker in any individual groups – it is they are both different. There are similar personalities and senses of humour and styles of people so, when they all meet up, which they have done over the years, they all get on. While they are two separate groups of friends, they effectively have a similar kind of focus on humility and humour and just basically messing around and taking the mick out of each other.
Graduating towards a sense of a purpose
JH: OK. Let’s get on to thinking about what you wanted to do as a career. Did that firm up through university? I speak to a lot of young people these days and I now reckon I was quite lucky that, from a very young age, I knew I wanted to be involved in some way with ‘the stockmarket’ – whatever that meant. I was very purposeful and I really set my path towards that but I think I was lucky I was able to do that and I am very lucky to continue to do that today – that is not true for everybody. There is that great book Range: Why Generalists Triumph in a Specialised World by David Epstein, which is a must-read for anyone, whether you are graduating or at school or a grandparent or a parent – it is a great book to read. So when did you decide that, actually, this was a career you wanted to pursue.
KM: At university, I had a good friend called Romil, who was from – what’s the polite way of saying this? Rom, if you’re listening, I’m sorry! – a wealthier family and he knew about the stockmarket and investing. I started university in 1997 and so, throughout my time there, the tech boom was going on – it was getting towards the tail-end – and it was all super-exciting. He was on what were called ‘bulletin boards’ at the time – so internet chat rooms – getting stock tips and buying this stuff. And it was going up and he was making loads of money – and I was like, Wow.
Now I didn’t have any money to spend so I couldn’t buy any shares. But it was always very exciting, alluring, just outside of my range. I didn’t know quite what it was or how you did it but I knew it was interesting, I knew it was exciting and I knew it was related to economics. So I was interested and, at the end of my second year at university, I was lucky enough to get an internship at Barings. I applied everywhere and everyone ignored me entirely – except someone took pity on me at Barings and said, Well, you can come and open the post for a week or two. And so I did exactly that – I literally opened the post and I built them some spreadsheets because I knew a little bit about computers.
And just that simple fact of being able to be there ... it’s little things – it’s getting off the tube at Liverpool Street and seeing thousands of people in suits squirrelling around in different directions, like little ants going every which way. And you felt like you were at the centre of something – I don’t know if ‘important’ is the right word – but everyone was so purposeful. They were all striding and busy and I thought, Well, this is exciting. And the stockmarket was clearly on fire and it was quite intoxicating in some ways – like, Yeah, this is something I want to be involved with. Being able to sit there on the sidelines for a couple of weeks over the summer and see what was involved, it was like, Yeah, that is what I want to do.
And then, during my third year, all of the big asset management companies and investment banks would come and do their roadshows around the universities – and Manchester was one of those. So I went to the Schroders graduate fair – among other companies. But the people I spoke to at Schroders were the people I thought were the nicest – they seemed to have the best work-life balance and to be the most down-to-earth and that appealed to me. So I applied here, along with a bunch of other places, and was lucky enough to get on the Schroders’ graduate scheme and, by the end of that, I got the role I wanted on the team I wanted. That was on the UK equity team, which at the time was probably the biggest and most successful department at Schroders.
JH: And with a fantastic history and pedigree as well. Who were some of the individual fund manager names you were working with in those days?
KM: Absolutely right. Ben Whitmore and Nick Purves were the people who I would shout out in particular and who were my kind of intellectual teachers. I was more like a voyeur as there was no formal learning programme – you just sit there and you watch and that is extraordinarily beneficial. For three years, I effectively had a front-row ticket to watch how to run money through the very end of a bull market and then watch it through a bear market. Without having any skin in the game at all, because I wasn’t running any money, I was able to see how the pressures can bear onto people, onto a team, onto a style. And just being able to watch that was, again, extremely fortunate.
JH: We will come back to that because, in the post-Covid world of remote working and working from home, something is missing there in that respect, isn’t it? Like you, that is how I learned, just by looking – and through the 1990s in particular, with one crisis after another, there was plenty of learning to be done. But you mentioned your brother was in the industry too – what does he do?
KM: My brother Dermot works for Jupiter and he does pretty much the exact same job as I do – he is a UK value manager. After he graduated, he became a professional rugby player but he always knew that was not a lifetime job – that is a job you do until you are not able to do it anymore. So he was doing his CFA in the evenings and weekends alongside that to have a plan B. And then, when injuries and whatnot got in the way of his rugby career, he decided to pivot into the City and managed to get a job – at Fidelity initially and then alongside Ben Whitmore running the value strategies at Jupiter – if I’m allowed to say any of those things!
JH: When I was at Henderson, I worked with Job Curtis, among other value managers, while his brother Charlie was a growth manager and I always thought ‘Curtis & Curtis’ would probably be a good investment management team of funds for all seasons! Let’s move on to the characteristics that successful fund managers have in common – and, from my experience of doing this job for almost 40 years, I think I can roll them up into perhaps four or five things: intuition, humility, patience – or persistence, if you want to call it that – and attention to detail. From that, I put together an acronym of ‘Spurs’ – well, I say I did but I should probably acknowledge my colleague Simon Hildrey, who is chief marketing officer at Liontrust! Knowing I am a Tottenham fan, he put together this ‘Spurs’ acronym for what I saw as successful fund-manager characteristics: ‘Stamina’, ‘Process’, ‘Understanding’, ‘Resoluteness’ and ‘Stimulus’ – and I thought we would run through them together.
Patience and persistence through value’s worst year
Let’s start with ‘S for Stamina’, which is all about patience and persistence – very much attributes I know you share. If you remember, though – it was shortly before the pandemic in February 2020 – at Liontrust’s own Meet the Manager event at Simpson’s in the Strand, we shared a stage along with Chris St John, a UK equity growth manager. We tried to bill it as a bit of a boxing match – you know, in the red corner, here’s Kevin representing value and here’s Chris in the blue corner representing growth. It was an interesting event, with a lot of commonality and indeed you had two or three stocks in common – albeit your reasons and rationale for getting there were different. Anyway, I want to remind you of an answer you gave to one of my questions, which was, Value has underperformed for a period of time now so do you see any catalysts that might kickstart a recovery for the strategy?
I am going to read your answer out because the memory is fading a bit but you replied: “People will claim there is a catalyst – it may be interest rates or GDP going up – but I fundamentally don’t believe that will be the case. All we can say is that value-versus-growth is one of the most extreme readings ever and that means, I believe, there is some latent performance built up within the value-based strategy for those willing to be patient.” And what happened next? It was pretty brutal – lockdown came along and, yes, there was certainly some value there because, basically, value sold off by a further 25%! So if it was cheap then, it subsequently got very, very cheap. Can you remember your reaction to that event? What goes through your mind and what does it mean for your process and your thinking?
KM: I do remember – I think the entire team will remember till their dying day! It was an extraordinarily tough environment. 2019 had been a hard year in particular to be a value manager – and value has been under pressure for a while. There are charts showing that, from 2009 onwards, it had been under pressure – and we had managed to offset the vast majority of that through stock selection and we have done a reasonable job as a team navigating those markets. But 2019 was brutal and there was no place to hide. So, as we come into 2020, as you correctly say, the readings on value-versus-growth made us confident that, yes, 2019 has been bad but there is an opportunity here – absolutely, there is an opportunity here.
And then we could see the pandemic coming because it was just a question of maths. Quite simply – as soon as you knew it was in Europe, as soon as the ski resorts had it and as soon as the average person was giving it to six other people, you didn’t have to be a genius at maths to understand compounding and realise there was no escape. If they weren’t going to shut the borders then, I’m afraid, it was going to happen. So we could see it coming and we knew it was likely to lead to an economic downturn of some kind. Now, previously, what has happened in economic downturns is people panic initially and sell out of value stocks but then, before the peak of the actual economic impact, they find a bottom and value stocks start to improve because they tend to have reasonable balance sheets, they are short-duration assets with high income yields and whatever it might be – and it is the expensive stuff that really comes under pressure as you go through those environments.
So you have a shakeout – a change in leadership in the market. And that is exactly what we thought would happen in 2020. And, as we went through March, it didn’t happen. April – didn’t happen. May – didn’t happen. And the growth stocks just kept on going. I think performance started to turn around in June or July for our strategies – but it was a brutal period, where things we owned that were cheap just got cheaper; and people left, right and centre were just giving up on the premise that valuation as a strategy would ever work again. To withstand that pressure, then, was extraordinarily difficult.
JH: So what did you rely on? What rock, as it were, could you cling to?
KM: Well, we are fortunate in that we have a team built for a reason. One of the premises of the team – and the original Value Team was founded in 2013 – was exactly to give emotional and psychological support when times were tough. You can be value managers scattered around a business but, if you are surrounded by growth managers and they are all making out like bandits and performing extraordinarily well – and you are not – it is a really tough spot to be in.
JH: How difficult was it to get that idea for a team off the ground, though? Because, as far as I can see, it is the only franchise, if we can call it that, within Schroders today. I mean, it has turned out to be a great decision because, as you said, it has provided you with that protection at the end of the day. And it has one of those things I very much look for, which is real clarity of process. You know, there is the label, that is what it says on the tin, open it up, there it is – there is nothing different about it.
KM: That’s right – but setting up the team was quite difficult. It required a bit of luck – as these things always do – and a bit of good fortune in terms of timing. Peter Harrison, who is now Schroders’ CEO, had just become head of equities and Nick Kirrage and I went to him with the idea to bring us all together. There were three UK equity managers, one European and one global and we said, We should be a team and these are the benefits. We said, Here is the value-versus-growth chart – which was already looking quite extreme back in 2013! – it is about to turn so why don’t we get involved? And of course, that didn’t happen – 2013 wasn’t the bottom and it all carried on until 2020. But the premise for the team wasn’t just to benefit if things turned, it was to protect us if things were bad. It wasn’t straightforward but we were able to do it with Peter’s help.
JH: And over the ensuing 10 years, has the team’s existence ever been questioned or doubted?
KM: No – no questions, no doubts. One of the features of the team, and a common thread between each of the members of the team, is a focus on continual learning and getting better – a desire to have the intellectual humility to say, We are not perfect, we do make mistakes, but let’s learn from them. You can make them once and that is fine – just don’t make them again. And we have built a process that is designed to do exactly that. That means the process iterates consistently over time – but it also means that in the summer of 2020, when things were very harsh, we had a full ‘drains-up’ review. This was every member of the team looking at every stage of the process and asking, What are the intellectual gaps? What are the issues here? Where could we be wrong? What mistakes could we be making? What do we need to do, or should we do, to be able to protect our clients – it was always a client focus – from the market and whatever else might be going on?
JH: We are using words like ‘stamina’, ‘patience’ and ‘persistence’ but the reality is, those who were invested with you three years and a half years ago and stuck with it would have a positive return today.
KM: An extremely important point for us to make, John, is the only reason we could do it was because of the clients. We have never sold short-term performance. We have never said, Look at these numbers – aren’t they amazing? We always sat in front of people and said, Here’s the process. Here’s what it has delivered. It won’t always deliver that but, if you like the process, let’s form a partnership. That has meant we have an extremely good long-term client base and, during that period of 2019/20, we weren’t hit with mass redemptions; we didn’t have to churn the portfolios; we didn’t have to fundamentally change things to try and shore anything up. Because, ultimately, the clients got what they thought they were going to get. They might not have liked it but they got what they thought they were going to get. And that’s extremely important.
Consistent philosophy, evolving process
JH: We have drifted into ‘P for Process’ – and I am a firm belief believer that short-term performance is simply not repeatable, but sticking to what you know and sticking to process over the long term produces the results for you. And in terms of that sticking to process, the foundation, as we have already discussed is value, which people to some extent see as just buying cheap stocks. I remember exploring this with you that time at Simpsons but, over that 10-year, post-financial crisis period, there have been plenty of value managers who have folded. Or plenty of value managers who have said, I can’t take this anymore, I’m going to start buying some growthy stuff, which, in my book, is even worse – that style drift. What have you been able to do differently from them and so ‘stay in the game’?
KM: Well, obviously it is difficult for me to comment on what other people have done. Recently, at this year’s London Value conference, an individual I have the utmost respect for said all value managers during 2019/20 either tweaked their process to enable them to buy the tech stuff – or they got fired. Well, we didn’t tweak the process – and we didn’t get fired. So we definitely did something in a way that others in the industry don’t, or didn’t, because a lot of our competitors either got fired or retired during that period. And there are very few true value managers left, either in the UK or in the other jurisdictions we look at – with the exception of the US, which is more value-focused.
All I can say is we have a process and a team set up to try and deliver that consistency of approach – and we were able to maintain that throughout the period. As for what was different about that compared to others – maybe it was that being together with like-minded individuals that just gave us ‘cloud cover’. But I guess there are also two other factors: first, the environment we work in – we are not the majority of Schroders’ assets by any stretch of the imagination and so there was less corporate pressure on us to have to do XYZ because we were more insulated. And also that client piece – because the clients didn’t panic, we were OK.
JH: We are talking about sticking to a consistent process but markets and economies are changing all the time – and I assume the stocks and sectors you had in your portfolio 10 years ago are going to be different to today. So how does the process evolve in that way yet, at the same time, remain consistent with your core philosophy, your core belief? How does it evolve – because surely it doesn’t just sit still?
KM: Quite right. We were actually looking at this, for another reason, the other day and Roberta Barr, one of the team members, counted up all the different iterations there have been of our model. I built the model for the team in 2014 and, since then, she counted 47 different iterations, with little tweaks. To be clear, this is not our value ‘screen’, it is the financial model we unified in 2014, taking the best bits of each individual’s models – because, up to that point, we all just built our own, bashed them all together, took the best of the best and created what we, somewhat tongue-in-cheek, called our ‘One True Model’. And, since then, we have just gradually iterated it – taking stuff out we didn’t need, bringing stuff in, fixing mistakes, focusing on other areas people felt were important.
In particular, though, our strategy isn’t the same as many other investors’. Lots of investors are looking to find the best companies in the world, or even the best value stocks, and our process is not around doing that – it is around getting rid of the worst ones, the ‘value traps’ at the bottom. And, because of that, we can learn all the time by stripping out and learning from the data and going, There was another value trap. There is another mistake. What can we learn from that? And we store every decision we make – not just what we buy, which is the data series most people have, but also what we didn’t buy – which allows us to go back and, with hindsight, analyse, Why didn’t we buy that? What was our share-price target? What did we think was going to happen? What did happen? And we learn from that. And when we get that data out, we can then go, Well, actually, to try and protect ourselves from that mistake again, or to try and ensure we don’t get rid of that cohort of stocks we got rid of in 2015/16 that went on to be very good, let’s change the focus of the model. Let’s update line 312 or whatever it is and make sure it better reflects our current thinking. And we do that on an incremental, iterative, procedural basis all the time – just trying to get better and better over the years.
The continual focus on becoming better investors
JH: That is the third letter for me – which is good, because hopefully there is some logic to what we are doing here! But that ‘U for Understanding’ – obviously, the knowledge and experience but also how you collaborate with colleagues. Let’s back to 2013 – you and Nick ask, Please can we have this team? Peter says, Yes. And you go, Oh God – now we have to put something together! You have the process but how do you go about creating the right culture and environment and selecting the right people?
KM: Well, value is quite a self-selecting group anyway.
JH: Sure – but you have to create a culture for that group. Is it rock music in the background or walls being painted a particular colour? I’m being facetious, of course, but there has to be some environment and culture you want to create because I’m not sure all value managers are equal, are they?
KM: From day one, we just wanted to be the best we can be. Everyone on the team has more of a science or a logic background, so we believe in the data – and back then it was quite difficult to get good data. It is much easier nowadays – we have better access to data and better computer systems that can query it and learn from it. But if we were to talk about a culture of the team, it is that ... I want to say ‘pursuit of excellence’ – but excellence is something you can never achieve. It’s always just, Let’s get a bit better today, tomorrow, this month, this year – just that continual focus on what can we do differently that will make us better investors?
JH: Is there a leadership model within the team, where people lead with their strengths? Do you allow other people to lead with their strengths? How do you collaborate together?
KM: We try and operate totally as equals in that, while Nick and I are nominally co-heads of the team, if you came to any team meeting, you wouldn’t know that – at least, I hope you wouldn’t. Every voice is equal. Everyone’s opinions are as valid as anybody else’s. We don’t have any hierarchy at all. Everyone on the team is an analyst and a fund manager. Everyone is totally responsible for their own portfolios – and to their own clients. It doesn’t matter who it is or what jurisdiction they are operating in – all funds are co-managed. So they and their co-manager are responsible, they make their decisions, they are accountable and they learn their own lessons. But everyone operates within the framework of the process we have built as well. So you have autonomy within certain tramlines – but you have a process because, ultimately, the team needs to have an ethos or an underlying consistency. So if a client is buying one of our UK funds and then says, I’m interested in a European fund, they can invest knowing they are going to get a similar strategy and style, even if the individuals running it might be different.
JH: Does that mean ‘groupthink’ is almost encouraged?
KM: Ha! There is only one answer to that because ‘groupthink’ has such negative connotations!
JH: Yes – but you do want to stick to a process and your universe of stocks is pretty easily constrained, isn’t it? You are fishing in a pond that is very easy to see.
KM: We are very cognisant that, certainly until the middle of the last decade, 2015 or so, the majority of the people on the team were Schroder graduates, male and had similar-ish backgrounds – not exactly the same, but certainly we all went to university and so on. And we very firmly wanted to ensure we had diversity of thought – but within, as you say, a set core belief in value. You have to believe in value – and once you believe in value, you are welcome to the team and you can think about other things in any way you want.
But if you don’t believe in value and you’re going to come to the team and say, Why don’t we do this growth thing? I’m afraid that just isn’t going to work. So we have recruited people from all around the world. Juan, for example, who normally hosts these podcasts and is an emerging markets manager, is from Colombia; Vera, who is also an emerging markets manager, is from Russia – and we now have a variety of people with different backgrounds, different experiences, to try and increase that diversity of thought, but clearly with that one ‘North Star’ of I believe in value first – and then you can believe in whatever else you want after that.
JH: Let’s return to that point about remote working or working from home. I wholly agree with you – you and I both learned from watching others and watching other people make mistakes is certainly better than making them yourself. How difficult has that been over the last two or three years?
KM: It has definitely been a challenge.
JH: Sorry – I should have said ‘challenge’ and not ‘difficult’ because we should be positive!
KM: It is not straightforward – and I think the issues won’t fully reveal themselves until we are further down the line. That is because the gap in particular is for the younger people coming through and the lessons they have not been able to learn – and you don’t appreciate that until you get to the stage where you needed to have had that lesson. So there are definitely some pent-up issues. But as I say, all portfolios are co-managed and the co-managers stayed in daily contact with each other. As a wider team, that has been harder because you can’t be on the phone with 10 other investors all the time – and we have all been on those Zoom calls where people are talking over each other and it is quite awkward. I don’t particularly enjoy those for a variety of reasons.
But we have encouraged people to come back into the office on a Monday and a Wednesday – rather than saying ‘two days a week’, you pick them. So we say, All the team meetings are on Mondays and Wednesdays, you can choose to access them remotely if you want to but it is encouraged, if you would like to come in to be part of those, to do them face-to-face and to have that central contact at least once a week to try and bring the sub-teams together. But it is not straightforward because we want autonomy in the team – we don’t want to tell people, You have to do this. Our team is a team of contrarians so, when you tell people they have to do something, everyone rebels against that immediately – including myself.
And so we just try to lead by example and encourage people to work together. In the case of Charlotte, who is the newest member of the team – the new graduate – we have just put together a programme of learning for her, where she will spend a month shadowing each individual person on the team and there is a set learning profile and a set stock to look at, with specific learning objectives, so that she understands exactly how to go through and analyse a company. She doesn’t have to be in the office five days a week when she is shadowing someone – but at least those objectives are there to learn from and to follow and hopefully to close some of those gaps that might be missed.
Scientifically minded and extraordinarily stubborn
JH: We can make that link back to what you have said about learning at school and university as well and being self-motivated in that respect. Let’s turn to ‘R for Resoluteness’, which is all about courage, conviction, determination – that decisiveness, plenty of which I think we have already discussed. There is plenty of academic evidence highlighting the outperformance of value – and that it does come with a cost. It happens over the long term so there are shorter and medium-term periods of underperformance and, as we have already discussed, it can come with some extreme periods of volatility. Indeed, as you said, from the global financial crisis until quite recently, large-cap growth has taken all the prizes so, at times, it must have been a lonely place for value managers. To meet the challenges of maintaining that resoluteness, then, what have you been doing? We talked about how the franchise has helped but is there anything else – your own personality or the team or is it just the fact you are all in it together?
KM: I think it is a couple of things. The first is, the team tends to be more scientifically minded – more logical – and the data is very clear. Yet value is not just something you can back-test and say it works – it is the logic behind why it works. Why valuation is the best predictor of future returns just simply, logically, is persuasive to me. So if back-tested data came in tomorrow that said, All you have to do is buy stocks beginning with an ‘A’, I would really struggle with that because there is no logic behind it. Whereas, for value, it has the track record and it has the logic and so, for me, I find that very persuasive – and that is replicated across the team.
But we are also extraordinarily stubborn people on our team – to a degree that is perhaps slightly unhealthy at times! – but it means it is very difficult, once our mind is made up, to persuade us to the contrary, particularly when there is a large body of evidence behind us. And as a consequence, during those dark days, there was no swaying our belief in that one North Star – it will come again but it is going to be a little bit painful until it does. In fact, that is why it will come – because other people won’t be able to stay the course. They will be blown off-course but we have no choice. It is our job to do this for our clients so we get up and we go again.
JH: That stubbornness must lead to some disagreements within the team so how do you handle that?
KM: Yes – so the first thing to say is everyone is allowed to disagree. There is no issue with disagreeing. You are in charge of your own portfolio so, if someone likes a stock and someone doesn’t, as long as it’s in your portfolio, not theirs, there is no problem. There is no mandated stock list you have to buy or anything like that – people are responsible and accountable for their own performance. The more difficult issues are suggestions around process and what can or should be done to change that? But the answer is, because we are all logically minded, data will win the day and, if we can’t prove something sufficiently strongly to persuade people of the merits of whatever the case is, then we don’t do it.
And once there is sufficient data or evidence, one way or the other, then we will make a change. And the fact is, ultimately, today we have got a good process and what we don’t want to do is to throw the baby out with the bathwater. We need to make sure any changes we make are iterative and positive and moving in the right direction – so, rather than large jumps and wholesale changes, it is just constant iteration. As a consequence, we tend not to have large disagreements – because, ultimately, we can make a small change and, if it doesn’t work, we can roll it back.
A fundamental and inherent competitiveness
JH: I want to move on to the last factor, which is ‘S for Stimulus’. Incentives is one element here but I really want to talk about motivation – motivation to perform, motivation to succeed. In my experience, with the more successful fund managers, it goes way beyond economic incentives. So have you got some point to prove or some score to settle, I wonder? Where does your motivation to succeed come from?
KM: I think it is just a fundamental and inherent competitiveness that I have – for example, I am one of a very few people I know who loves exams. I have always loved exams. I love the challenge. I love the revision. I love the focus. I love the deadline. I love the working up to it. I love the pressure. And I have been very lucky in that every exam I have sat I have done reasonably well in and, as a consequence, maybe there has not been that negative lesson I ultimately need to learn.
JH: Did you pass your driving test first time?
JH: So there is nothing you have failed at? Give us something to prove you are human!
KM: There are plenty of things I have failed at – they just didn’t happen to be tests! So that competitive streak in me means I just want to walk away at the end of my career and say, I did a good job for my clients. And we are fortunate, in some regards – although this might seem like a strange thing to say – in that, at the end of every single day, there is a league table that tells me how I did against my competitors. Every single day. And some people can’t live with that pressure – it is very difficult. I don’t look at it every single day, of course – one of the ironies of the stockmarket is, to do well over the long term, you have to ignore the short term.
And so I don’t look at it every day and I don’t look at every week but, when it gets sent around on a monthly or quarterly basis, you check and you see how you are getting on. And, ultimately, it is that since-inception number – how have we done for our clients? – that I am focused on. I don’t really care what the scale of the assets is – I am not interested in saying, I ran the most money. Or, We were the most important people at Schroders or wherever else. Or, My job title was XYZ. I don’t care about any of those things in any way, shape or form. I just want to do a good job – to be the best I can be.
JH: Now, I read on the internet – so it must be true! – that either you, or more likely Nick, said you want to build a track record of 25 years on a fund? Is that an ambition of yours in terms of that ‘long term’? Because that really is proof, isn’t it?
KM: So they say more than 10 years is required – and we were fortunate to be given our first product back in 2006. So we are well through the 10 years now and we have a good track record. I mean, every incremental year is data but I don’t think anyone’s going to go, Well, after 24 years, I’m afraid you haven’t built up enough data yet ... but now you have reached 25 years, I am persuaded!
JH: It is that idea of luck versus skill, isn’t it?
KM: That’s right – and you need to think about ‘survivorship bias’ too. We look at data all the time – for example, there are currently 230-odd funds in the UK All Companies sector. But if I look at how many funds have been in there over the last decade, it is 542 different portfolios within the sector over that time. And how many of those have had a consistent manager for that 10-year period? A handful – hardly any. So just getting to that decade is great – and we are now well through that for all the portfolios we look at in the UK.
JH: Now you can see some of the challenges of being a fund selector – because that is what you are looking for. I just want to ask one more question on this – something that is a challenge, particularly for listed businesses is the eternal conflict between asset gathering and asset management? I suppose again, with the franchise around you, that gives you some protection but how is that handled here?
KM: The reality is, it is not ‘handled’ at all – in that we are not focused on the assets at all, really. We are fortunate in that we have a good book of business already so we don’t need to win assets to be profitable. With the UK products, one of them is at capacity and one of them has a bit to go but we don’t need to raise any more money. And my focus has always been on just doing the best job we can for our existing clients – and if other people want to come along for the journey, great; and if they don’t, then that is totally up to them.
We have always been very honest about what we can deliver for our clients and, when we sit in front of new clients, we don’t say, Look at this chart with performance from the bottom left up to the top right – aren’t we amazing? We simply say, Here is our process – either it is something you’re interested in or you’re not. And if they’re not, then no harm, no foul. Everyone is entitled to go and find a different way to run money or find a different fund manager – that is absolutely fine. Our job is not to find all the clients – it is to find the clients who are willing to give us 10, 20, 30 or whatever the right percentage of their money is and for us then to run it in an explicit valuation-based style. Then they can blend us with other people and that is great and we are very happy for them. Ultimately, though, the asset-gathering side can be done by other people in the business.
JH: Well, as ever, I have thoroughly enjoyed chatting to you, Kevin, and I am very grateful for your openness today. I am going to ask you one more question that will again take you back to something a bit more personal – but, just for a bit of fun, in terms of having a day off work, either with friends or family, what would be your perfect day out?
KM: It would start with some sunshine and the kids behaving themselves – and both of those things are pretty rare in the UK! If we had both of those, it really doesn’t matter what you are doing. Still, there are times and there are moments when you are on a ski slope – you’re high up in the mountains, the sky is blue and the snow is perfect – when you are with the family and skiing together and it is genuinely magical. Surrounded by the beauty of the Alps or the Pyrenees or wherever you might be and it is absolutely amazing. Those are good moments – or it might be floating in the sea, jumping in off a boat or a dock, with a barbecue in the background and a beer in your hand. So the extremes of snow or a barbecue by the sea just as long as the kids are behaving and the sun shining – those are the key features.
JH: Sounds great to me. Thank you very much, Kevin.
KM: Thank you, John. It has been a pleasure.
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