Podcast Transcript - Rob Gardner

06/12/2021

Juan Torres Rodriguez

Juan Torres Rodriguez

Fund Manager, Equity Value

Kevin Murphy

Kevin Murphy

Co-head Global Value Team

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JTR: Rob Gardner, thank you very much for coming onto  The Value Perspective podcast – it is a pleasure to have you here. For those who might not know who you are, could you please provide a little bit of an introduction on yourself and your background?

RG: Juan, thank you for having me on your podcast. I have really enjoyed getting to know it these past few weeks. I am Rob Gardner. I am the director of investments at St. James’s Place (SJP), which means I am responsible for running the team that plans, grows and protects the wealth of 850,000 clients in the UK, and a little bit in Asia. Collectively, we invest about £150bn on their behalf. So that is my day job – I am also married with two lovely girls and, before SJP, I founded a company called Redington, whose mission was to help make 100 million people financially secure. I also founded a company called Mallow Street as well as a charity called RedStart Educate, which I am sure we will talk about later.

KM: Thanks, Rob. I am interested in delving back in time to talk about Redington a bit before we come onto St James’s Place. The process of starting and founding a business is an extremely difficult one and the uncertainty surrounding those decisions is extreme. You started in the financial business at a similar time to myself, back in 2000, you did six years in banking before deciding you had enough and you set up a consultancy in your bedroom. Could you please talk about how difficult a decision it was to leave that well-established career path and to start your own firm.

RG: Thanks, Kevin. To set the scene, I was at Merrill Lynch and actually life was going pretty well for me. I had just been promoted – I think I was the youngest director at Merrill Lynch at the time – and so it was a bit of a shock to Merrill Lynch and to everyone who knew me when, a few months later, I said I was going to retire, which was what I needed to do in order to keep my shares.

But in terms of the decision-making process, you are right – it is a tough one. And just the stats on starting a new business are pretty scary – I think 20% of businesses fail in the first year, 50% of businesses fail after five years and 96% of businesses fail after 10 years. So being an entrepreneur and starting your own business is not the risk-free path. So that is point one – point two, I was already in a good, secure job, doing pretty well. So you go, well, why would you do that? And that is certainly a question my mum and dad asked me. They thought I was nuts leaving a great job at Merrill Lynch.

I have to say, my decision-making process was really led by a strong belief that I had and my co-founder Dawid [Konotey-Ahulu] had that there was a better way of addressing a particular problem. So Dawid and I had pioneered a technique called liability-driven investing, which is a way to hedge the interest rate and inflation risk of pension funds. We had convinced Friends Provident pension funds to hedge out that risk and really pioneered an entire new industry.

We would then spend a lot of time speaking to pension fund trustees and to companies about their pension fund and say, look, there is a better way you can manage your risk and still invest, to grow. And then the perception was, yes, but you would say that – you are investment bankers and you are just trying to sell these long-dated derivatives to us. And we were like, no, we are not – this is honestly the best thing for you and your pension fund.

And it became increasingly obvious to us that, in order to solve that problem and find a better way, we had to leave the industry and take on the consultants – so, at the time, Watson Wyatt, Mercer and Hewitt, Bacon & Woodrow – and actually say, look, we think we can show a better way to do this. And so the genesis of Redington was this simple idea – which we actually wrote in our then-FSA application form at the time – that we wanted to do to pensions what Jamie Oliver did to school food. So we were really driven by this deep sense of finding a better way of solving a problem.

In terms of the risk management of my decision, I took the view I was six years into my career, I was doing pretty well and what was my downside? So I was kind of mapping out my downside. I was not married, I did not have kids and I figured, I am not leaving the industry to travel the world or set up a sushi restaurant, I am still in the same domain. So my domain was the same – it was pension funds.

By the way, I never predicted the global financial crisis but my backstop was, if I leave Merrill Lynch, do a year and a half of trying to do a pension consultant, speak to lots of trustees, speak to lots of CFOs and it is a complete failure, I am pretty confident Merrill Lynch or RBS or Morgan Stanley or Goldman Sachs would hire me back. So I was driven by this clear sense of purpose and a desire to solve a financial problem. Also I was not doing it alone – I was doing it with Dawid, my co-founder and someone I trusted intimately. And so, not from a financial risk-and-reward perspective, but I actually thought my downside was pretty well-covered.

KM: And when you started knocking on doors and calling people up, how difficult was it as a relatively young and inexperienced consultant to go into the consultancy waters? Were people willing and able to take your calls? Or was it very difficult?

RG: Actually, as I was resigning or retiring from Merrill Lynch, a very senior MD grabbed me to try and convince me to stay. He took out his business card and pointed to the Merrill Lynch logo, which is a bull, and he went on to say, look, Rob, you have got to understand – the only reason people talk to you is because you work for Merrill Lynch and, when you leave to set up your own business, no-one will talk to you.

That clearly did not work as a recruitment-retention technique but I think it did make a valuable point about credibility. Obviously, people need to trust you and trust is your integrity – do you do what you say you will do? – but it is also are you credible at what you do? Dawid and I were very credible – I think we had established a lot of credibility in what we did at Merrill Lynch. We had deep domain expertise around derivatives, around pensions and around liability-driven investing.

So we had that bit covered but we needed to establish ourselves as a brand. So a couple of things really – right from the get-go, Dawid and I have always tried to lead the industry through thought leadership, share ideas, put our ideas out there and build that sense that these people really know what they are talking about and are clear domain experts. So that is point one – and use that to build a brand and a reputation around Redington.

The second thing was a really simple one, which is I used to wear glasses. Lots of people now at SJP say, I did not know you used to wear glasses – and the reason why I wore glasses is it makes you look older, it makes you look more credible. Now I am older, I want to look younger and I wear contact lenses. But when I was younger, I used to wear a suit and a tie and wear glasses and make myself look older for exactly that reason.

KM: My co-manager grew a beard and wears glasses for exactly that reason! He does all our client meetings and he comes across as the mature, erudite one, whereas I sit in the background and try and do the thought leadership piece. So I am interested, Rob – how different was the reality from the original business plan when you set it up? Redington, from my perspective, has been outrageously successful in what it does but presumably, on your business plan, it did not say, ‘Goal 1: Be outrageously successful’. So how different was the reality from what you expected? Did you just say, if we build it, they will come? Or did you say, we need this number of clients by this day to validate what we do?

RG: Directionally, we were 90% right – it just took us a lot longer than we thought it would. And I think probably any entrepreneur would say ...  if you knew it would take as long as it did take, you would never leave. But as I say, when we set up – it was not the FCA at the time, it was the FSA – and we wrote that we wanted to do to pensions what Jamie Oliver had done to school food. And by that, we mwant we wanted to change the way people thought about pensions.

And I remember writing how we wanted to be thought-leaders, that our way would become a gold standard and, actually, success would be that other consultants adopted our approach, which I think has proved to be the case. So it was not just financial objectives around number of clients and revenues. Of course, we tweaked our business model and all the rest but I would say the main thing is we were broadly directionally correct. We just completely underestimated how long it would take. And then, two years after we started, the global financial crisis hit as well so that made things a little bit spicy.

KM: By luck or judgement or, presumably, a bit of both, Redington has been very successful but then you came to the decision to leave your own firm, to leave your baby, to leave your co-founder and to go back into a more established business. Can you talk about how your decision-making framework managed to strip out the emotion from anything else as part of that decision and what brought you to SJP?

RG: It was partly some push factors and some pull factors. The background was, in 2017, Redington actually tried to go and do a small private equity fund-raise as we needed some capital to grow. Up until that point, we had been completely self-funded. We had run what is called a customer-funded business model – so, as you get new clients, you get new revenues and you reinvest that – but that limits your rate of growth. And we wanted to invest in technology and we wanted to expand into new territories.

There is nothing like taking your business to investors. If you have children, no-one ever tells you your children are ugly but, when you take your business to investors, they do not hold back. And so, look – the positives were, we love the purpose of your business; we love the culture; we love the clients; you have an amazing client list and you have really long-term relationships with them. But what we do not know is how reliant Redington is on you two, the co-founders – can you win new business and can you grow without the co-founders?

And so they offered us some money but they hair-cut the valuation – they were very clear about that because they were like, we think there is a lot of key-person dependency on Dawid and you. And I guess this is always the entrepreneur’s dilemma. which is actually to create real value is to be able to make sure that your business can succeed and grow without you in it. That was a real ‘Aha’ moment that, actually, the business would be more valuable if we could demonstrate it could succeed and grow without us in it.

So that was the sort of push factor, which I had not really thought about. Interestingly, we had both stepped down on our 10th birthday, which was 2016 – so we had already put a new CEO in place. And then the second factor was, unlike me, a bit sliding doors. I was having breakfast with David Lamb, who was my predecessor at SJP and he basically said, look, Rob, confidentially, I am going to be retiring soon, we are running a process for my replacement and we would like to include you in that.

So in terms of my decision-making, once I had realised that, actually, I needed to find a way out of Redington, I then needed something that was aligned with what I cared about. And so I use a framework called ‘Ikigai’, which is the Japanese reason or purpose for being. If you imagine a Venn diagram with overlapping petals – what you are good at; what you can get paid for; the intersection of those two is your profession; what the world needs; and what you love – if you can find all of those things, at the heart of that is your Ikigai, your sweet spot.

And so I have always been very purpose-driven – Redington has always been about transforming people’s financial future and the purpose of Redington is to help make 100 million people financially secure. I spent the bulk of my time really advising pension fund trustees – Redington is very much a business-to-business relationship – rather than talking to an end-client. I had always wanted to get closer to actually helping individual’s personal financial circumstances and SJP was when I joined and, even more so now, is one of the biggest in the business today. We have, as I said earlier, 850,000 clients so, for me, it was very much in that Ikigai circle.

The second thing is I knew the business very well. I am a big believer in not changing too many variables at once and it was still in my domain. So although I was changing domains from pensions to wealth, the investment part of my domain was staying strong. So I thought, OK, I am changing a domain – pensions to wealth – and I also know SJP as well as I could know any company from the outside. They were a client of Redington so I knew the people and the organisation very well. So, actually, the variables I was changing were relatively small. And again, I always take the view that my downside risk is low – if I go in and do a good job, I am reasonably confident I will find other opportunities elsewhere. And so, in a way, it was a similar mindset of decision-making to leaving Merrill Lynch.

JTR: Changing gears, we have twice had Annie Duke as a guest on this podcast and she is a passionate believer in equipping people at a younger age with the tools they will need to make better decisions in life. That includes some statistical tools that she believes should be part of the curriculum at primary and high school. I believe you share some of that passion, having written a book to educate children very early in their lives about financial matters. Can you tell us what the book is about and maybe this is the time to talk about the RedStart Educate charity as well.

RG: Five years ago, I wrote Save Your Acorns, which is a book written for four to six year olds. Really the idea is to start the conversation with children – and actually, secretly, with their parents – about money and how it works. And the backstory to that – and also to Redstart, the charity I founded – was, when I was working at Redington, it was very clear to me that financial responsibility had shifted from the people we work for – our employers and governments – to us as individuals, but no-one had really told individuals.

So you could find yourself at Schroders sat next to someone who is five years older than you and they have a defined benefit pension fund, which is worth many, many times more than you and your defined contribution pension. To the average person, you both have a pension – except one is called defined benefit and one is called defined contribution – and how can they be that different? But, I promise you, they are very, very different outcomes and promises.

One of the things – going back to that Ikigai – that I feel passionate about is ... the sad truth is the average man in the UK will run out of money 10 years before he dies and the average woman will run out of money 12 and a half years before she dies; people do not feel confident about making decisions about money; and, in the short term, it turns out that 50% of all mental health issues are caused by, typically, indebtedness and poor financial decision making.

And it is not a surprise, really, because financial education is not on the school syllabus – it was only put on the secondary school syllabus in 2014. Parents would rather talk to their children about sex than about money. Money is a very taboo subject – we do not really talk about it. And, actually, decision-making about money has become infinitely more complex than it was 50 years ago. 50 years ago, it was pretty simple – you worked, you got paid a pay-packet, typically in a brown envelope, you got a pension, you maybe put your money in the post office and you probably went to the cinema or the working men’s club on the weekend and life was simple.

Today, we have ISAs, JISAs, LISAs, pensions, DB, DC ... we have more fund managers than underlying equities and we have more equity indices than underlying equities. We have credit cards, we have store cards, we have pay-as-you-go ... our lives are bombarded with financial decision-making and yet the average person is just ill-equipped to make those.

So I am deeply committed, through financial education, to try and teach the next generation about how money works and how to make it work for them. And the big insight for me was in 2013, when some research was done by Cambridge University and the Money Advice Service, which showed that our money-saving habits – that is the key word, ‘habits’ – are formed by the age of seven.

I had only just become a dad, I was reading a lot of children’s books – mostly Peppa Pig – to my daughter and I thought, actually, books are a great way to deliver parables, right? Think Aesop’s fables and all the rest. I thought, I know what – I will write a children’s book called Save Your Acorns, to teach children about saving, about sharing and about how to grow your money – this concept of compound interest – all in 850 words and 32 pages.

JTR: Based on everything you have researched and your experience, what would you say is the most difficult financial concept to get across – not only to children, but to people in general?

Probably compound interest – it is the one that, I think, changes the game. You and your listeners work in fund management and have figured out that, actually, managing capital gives you massive leverage, massive compound returns on your efforts and your careers. I think compounding is everywhere. It is not just financial compounding, knowledge also compounds, social networks compound – who you know and how you use your social network can make a big difference.

So this idea that you can earn money on your money and you can earn money while you sleep, or you can just change your wealth by some very simple steps but done over decades, is enormous. I mean, the reality is, 90% of Warren Buffett’s $90bn in wealth was made after he turned 65. If he had stopped at 65, no-one would have ever heard of him. He would just be a guy with a few million dollars.

KM: He has done pretty well, hasn’t he?

RG: What he has nailed is what Joe talks about in his podcast – he understands that the most valuable asset is time. And yes, he has had very impressive returns but, actually, he has been compounding for 75 years.

KM: That is right. Through some extraordinarily good environments but also managing, in the drawdown environments, to make sure you do not get hit too much as well.

RG: Yes.

KM: So I totally agree with you. I have two young kids as well and I have a savings app set up for them. I do not know if we are allowed to plug other apps but it is called Bankaroo – so I have plugged it anyway! But you can put money into separate pots. So we have a savings pot for them, a spending pot for them and a sharing pot for them. And every week we put a pound into those three different pots and, on the savings pot, we have put an outrageous amount of interest so they can see the impact of that compound interest on a weekly basis. And they like nothing better than to see how much interest they have made over the last week on their savings. The higher rate was put on it so they can see it on a weekly basis and so to try and really hammer home that importance of saving and the benefit of compound interest on that. Now, switching gears ...

RG: Kevin, I was just going to plug another app – RoosterMoney, which is the same thing – and we have also done the same. We have set our rate of interest at 20% a month to do exactly that – so you can see the benefit over a month and see the benefit of not having it in the giving or spending account, for example.

KM: They might not be too happy when they grow up and realise interest rates are not 20% a month but that is the world we live in today, right? Conversely, one of the hardest lessons for people to understand or learn are decisions where the feedback does not come immediately – so when you do not have that 20% monthly interest. And in fact, drawn out over a much longer time period, it is much harder to learn. So if you are taking penalties in football, you immediately know whether you have scored, or if you are serving in tennis, your feedback is immediate – but, when making investment decisions, the feedback is often noisy and occurs sometimes years later. And that means people make poor investment decisions and often learn the wrong lessons – they often do not save enough because they do not know how long they are going to live for; they do not think about the environmental impact of some of the decisions they make. So how do we create structures or processes that better give feedback or teach those lessons to adults?

RG: It is a great question and I know, based on previous podcasts, you are later going to ask me what one of my favourite books is. But one of them is How Will You Measure Your Life by Clay Christensen and it is not about finance. Basically they track these graduates from Harvard University and check in every five years and it is about their decisions about relationships and about their health and, 20 or 30 years later, who is still healthy, who is still in a healthy relationship with their partner, who has healthy relationships with their kids.

And I guess parenting is a great example of something where the feedback [is very delayed] ... Kevin, you will not know whether you have been a good dad or not until 20 years’ time, right? Someone once said to me, you have 1,000 weekends with your children – spend them wisely. And it does not matter what mistakes you make along the way – we will only know we have been good parents once they have flown the nest and they are adults standing on their own two feet. And that is really tough, right? That is every decision you make every night – you know, do you help them? Do you not help them? How do you prepare them to make decisions?

Obviously, the parallel there is it is something that takes decades for you to realise the outcome. I think getting married is the same – people’s approach to relationships – who we get married to is probably one of the most important decisions we make. And this sounds terrible and completely unromantic but how many of us apply a proper process to identifying who is going to be our life partner. I have been married for 13 years, I have been with my wife for 17 years and, in some senses, we are quite different people from who we were. So how do you know that you are going to build a life together?

And the amazing thing is that, actually, successful relationships – people who can hold a successful relationship – compound their wealth 77% faster than people who live on their own. And one of the best ways to destroy your wealth is to get divorced. All of this does not answer the question you asked me because we never really think about these things, right? I mean, who gets married and has a conversation about, if we have kids, what kind of education are we going to give them? What kind of parenting style are we going to have? And yet, when you do get married and you do have kids, these are absolutely the conversations you need to have. So somehow we need to understand and experience these concepts at a faster pace – which is exactly what you have done and I have done with the compound interest – so you can understand it even though it does not play out.

So I read books like How Will You Measure Your Life? and like Steve Peters’ The Chimp Paradox, and I ‘write my tombstone’ to think about what I want people to write about me when I die, in order to frame the decisions and choices I might make today.

And the second thing is, it is all about habits and staying the course. So then you need to read James Clear’s book Atomic Habits, because once you do all that, then you need a habit that says, how do I keep on track? How do I not get divorced because I spend my entire time at work and not enough time at home? Or how do I make sure I benefit from compound interest by putting money into my pension or my ISA every month.

So I suppose it is a combination of education – to help understand these long-term processes that play out – and then, at the same time, using sort of behavioural ‘hacks’. In the case of investing, automated saving is the best behavioural hack you can do to keep you on track to achieve the outcome you want to achieve.

KM: That is really interesting.

JTR: Yes. I want to go back to your book because – and this goes in line with what you were just saying – one of most difficult ideas just to get across to people in general, and important for children as well, is the fact that there is only one future that will play out but there might be many different scenarios, and you just do not know which one will actually happen. In your book, you have the example of bad behaviour and good behaviour and one tool we have talked about a lot in this podcast is how to adopt probabilistic thinking, which should help you assess the fact there is not only one outcome, but many different outcomes that can play out in the future. And how best to adopt probabilistic thinking because, once you mention the word ‘probability’ to people, they tend to black out and it is very difficult to embrace. So we are interested in whether or not you have given any thought on how to educate people at a very young age to adopt probabilistic thinking – and what would be the best way to do this? Is it through more books, like the one you have already written, for example, or table games, where you incorporate chance?

RG: The follow-up to my book was I created a card game called ‘Silly Monkeys’ – and I think games is a very powerful way. Obviously Annie Duke is a former world champion poker player, which is probably one of the best games to understand probability and a whole host of negotiation skills – a wonderful, wonderful game.

But at RedStart, the charity we created, the way we teach is through what is called experiential learning. Earlier, I said it was about habits, and we use Montessori techniques to teach concepts like compound interest – for example, we use wooden blocks and building towers to understand how you can compound. In this game, ‘RedStart’, everyone is given £1,000 and there are a series of games you can choose.

So you have ‘Fighting Fit’, where you exercise for money – and the point there is there is no leverage to that. So it is like being a hairdresser or an Uber driver – there is only so much hair you can cut a day, so you are capped out on how much money you can earn. We have someone who scams you – we have ‘Rich Ricky’, who offers to double your money with this amazing investment opportunity and he scams people.

We have a game called ‘Built to Last’, where you build blocks and the taller the towers, the more money you do, but the more towers you build, the more you compound – and so we can teach risk and return and diversification. And then we have a game called ‘Eye on the Prize’, which is darts. And if you are skilful at darts, you can make a lot of money. And if you are not skilful at darts, you do not – so it is about skill and do you understand your skill and can you leverage your skill?

Then we have another game called ‘Playing with the Big Kids’, which is basically Twenty-One, which is all about luck. We have played this with thousands and thousands of kids and the point is, the winner is normally the one who figures out ‘Built to Last’ – the compounding game – gets good at it, practices and gets better and better. But we do have people who win from ‘Playing with the Big Kids’, which is just gambling or speculating – because in life you can get lucky. You can win the lottery. Luck is a big part of life.

And then, sometimes, the kids who win are the ones who are really good at darts because – guess what? – if you are really good at darts, if you are really good at football, if you are really good at tennis, you are going to nail it. So the game is laden with probability and outcome and every time it is 25 or 30 different kids so no game is the same.

So I love games as a way of teaching. As a kid I used to play Pass the Pigs, which is a bit like Yahtzee or a dice game because you have got to trade off what you are going to throw – but if you throw a certain combination, you lose your go. If you throw another combination, you lose everything. And it is about getting to 100. So at no point do we talk about probabilities. But in those games, probability is everywhere. Uncertainty is everywhere. And it is all about teaching people to navigate uncertainty – though maybe not being as explicit about base rates and probabilities as Annie is.

JTR: That is really interesting. We had a guest on the podcast, [Global Parametrics CEO] Hector Ibarra, who was saying he has seen the Red Cross use games to help people in very underdeveloped areas of the world understand the concept of risk and uncertainty in general. One of the things I have seen as a pushback that Annie Duke has had to deal with, is using card games for children to understand probabilities and uncertainty is it might drive them to the concept of gambling, which is not the what you are aiming for. Do you have any thoughts on that?

RG: Look, we call the game ‘Playing with the Big Kids’ and it is one game within games. That is why we have the darts game, we have the ‘Fighting Fit’ game, the ‘Built to Last’ game ... the point is, the ‘Built to Last’ game is one you can actually practise and get good at. And the more you practise that, the better you get. And more blocks you build, you have more diversification, you have less risk. You can also teach about compounding. You can also talk about building taller towers and risk and return. We do not have that game as a standalone game – it is a game embedded in that game.

And I think it is more about the lottery. It is not gambling – it is just trying to say, look, you could take part in something and it is kind of luck, whether you win or lose. What we are trying to get across is – are you in control of the outcome? In the darts game, you control the outcome; in ‘Built to Last’, you control the outcome. In ‘Fighting Fit’, you can control the outcome by how much shuttle runs you do or how many star jumps you do. But in the game that we have set up – which is ‘Twenty-One’ but we do not call it that – it is really that you do not control the outcome. It is purely luck. So there is a framing point that I think is important.

JTR: One other thing you mentioned before was you will only know many years later whether or not you have done a good job on the process that you build over time. You were referring to the quality of the decisions your children will make in life based on the education and tools you give them to deal with whatever uncertainties come in life. That also happens a lot in the investment world – we design processes and, despite whatever happens short term, we will only know whether or not the process was good many years after the fact. How do you communicate to people the importance of process over outcome?

RG: In the work context, that is extremely important and Redington is built on processes and our pension risk management framework and ‘Begin with the end in mind’. I have never really thought about it in terms of how I would explain it to someone outside of our industry.

I suppose, just stepping back, one of the things I would say is that ‘no decision’ is a decision [in itself] and often people think that not making a decision is avoiding it. Just getting people to realise that kicking the can down the road is a decision – so own it. I think the second point, where I slightly challenge the thinking, is ... sometimes you have to make decisions in uncertainty and then manage the outcome.

So when I was talking about leaving Merrill Lynch to set up Redington, there were some outcomes I was not in control of – but I had at least thought about those and I had a plan, which was – I could go back with my tail between my legs and try and get a job at a JP Morgan or a Morgan Stanley. I at least had a kind of ‘If this, then that’ outcome [in mind] – if that makes sense.

And I think people often get paralysed by decision because people are always looking for black and white decisions. And I always think ... certainly, in a leadership context, it is different from investing ... you are paid to make decisions where it is grey, where it is unclear, where the probability is 40% or 60%. When the probability is 10% or 90%, it is easy. What is the value? The value is when you make the decisions in the murky bit right in the middle – in that 40% to 60% zone.

And therefore I think it is about what could happen – and how am I going to execute? If this happens, what can I execute and how can I better control the outcome? And I think it does go back to talking about these things. If I am together with my school friends, you try and analyse and go, what are the good decisions that we have made? And what are the poor decisions we have made? People have changed jobs, people have been in relationships that have and have not worked out. And at least having the discipline of looking back and analysing the decisions and going, what was the signature? Was there a pattern I could have identified? And then avoid making the same mistake in the future.

KM: And learning from other people’s decisions and other people’s mistakes is clearly the cheapest way we can do it. But taking the time to reflect is something many people do not spend enough time doing. We are all so busy, we are on the treadmill, there is another decision coming and another decision coming. And, actually, you are far better off trying to carve out a set portion of your day – whether it be 5%, 10% or 15% of your day – to review historic decisions and how they have played out, to ensure you make better decisions going forward. And that is something I personally feel, as individuals and as an industry, we do not do well. We try on our team to build processes and structures around it to ensure we do but it is not straightforward, simply because time management is very difficult.

RG: Yes. I have a concept called ‘Red, Blue, Black’. I have three pens here – red, blue, black – and, every week, I map out my diary. Black is kind of ‘important but not urgent’ – it is the strategic stuff, going to the gym, spending quality time with your wife, spending quality time with your kids, and it is too easily lost. Red is the admin – paying the bills, doing your emails. And then blue is the stuff you need to do in your job –investing, managing your team and so on.

And I work with my PA every month to analyse my diary and look at the split between red, blue and black and try and deconstruct or go, what happened here? Or I was out three nights in a row here and then, guess what, that caused an argument on the weekend with my wife go. And I can go, OK, how do we avoid not having three nights out in a row? And you do not always get it right – I certainly get it more right now than I did five years ago, for sure.

KM: And that is all we can all strive for – getting better gradually over time, compounding those lessons so we ultimately become better people and better investors.

RG: Yes.

KM: Rob, thank you very much for your time. We usually end with two questions – a nice one and a nasty one. You have already given us the answer to the nice one, I think. Usually, we ask for a book recommendation and How Will You Measure Your Life by Clay Christensen sounds like extremely interesting book and I am going to be straight on Amazon afterwards. Other book publishers and shops do exist! But I am going to go and order it online straight afterwards. So unless you have another book recommendation ...

RG: I have one I have just bought. I have followed this guy for years on Twitter. On Twitter, he is called @Naval but his name is Naval Ravikant. And Eric Jorgensen has basically written up all of his talks and all of his tweets as The Almanack of Naval Ravikant: A Guide to Wealth and Happiness. I love his tweets and his Twitter threads and this is all of his wisdom condensed into one book. So that is my most recent book and it has gone pretty much to the top of my chart list.

KM: Brilliant – thank you very much. That leaves us with our last, somewhat less nice question, which is – can you give us an example of a time where you have made a bad decision, driven by a bad process rather than simply bad luck?

RG: Yes. There have been lots of them but they were either to do with fund managers or hiring decisions and I do not think it is appropriate for me to say which fund managers and which names. But I think they come down to those two things – or actually three things: hiring, promoting and either selecting or deselecting fund managers.

One of the things we learned at Redington is, unless you have a written-down process, deselecting or firing a fund manager is very difficult. One of the behavioural hacks I used, when I was a consultant, is I always asked myself – imagine I am in the Treasury Select Committee two years from now, and I am trying to explain the advice I gave to a client. Why did they hedge? Why did they use that much collateral? Why did they move out of equities into high yield? Why did they deselect that fund manager and appoint that one? That is a very good behavioural hack – the Treasury Select Committee one – and my team will know I go, imagine it is the Treasury Select Committee, how will you explain it?

In order to explain it, you need a process. And so one of the things we did at Redington was create this kind of process for how we select fund managers – a 10x10x10 matrix and it was kind of 10 factors. But embedded in it was this idea of red flags – what red flags would cause us to end this fund manager? Sometimes it is obvious –  you know, the key portfolio manager [leaves] or a merger between the company.

The mistake that then creeps in with that process is the frog or the toad in boiling water, which is – what happens if you do not have any red flags but, over a long period of time, you have a yellow flag and another yellow flag and another yellow flag and another yellow flag? The question is, how many yellow flags make a red flag? And quite often, when they are dissipated over time, we cannot see it and sometimes we need to zoom out and see all the information. And then when you look at it with hindsight – and that is always the problem with hindsight, it is so obvious – but in the midst of it, you cannot make those decisions.

I would say the same is true with hiring. I remember, in the early days of Redington – it was after the global financial crisis and obviously there were a lot of ex-investment bankers who had lost their jobs and were looking for jobs – and we hired some extremely competent people. I suppose our hiring was really very one-dimensional – it was based on competence, years of experience, knowledge around derivatives and all the rest. And we did not do enough on values – and crucially, we did not set a threshold on values.

And therefore, if you imagine it is a 2x2 grid of competence and values, we ended up with some highly competent people whose values were not right and you would describe them as ‘toxic talent’ – and I am sure you have come across those people in your career. And, again, that is why you need the reflection time – to ask, how did we end up in this situation? How did we end up either promoting this person or hiring this person, who on paper looked brilliant, or through our quite narrow selection process looked like a great hire, and actually has been a disaster?

And again, the way to address that is two people interviewing at the same time; much more values-based; being clear up front; and a much more robust review process. But, in both cases, bad hiring and bad decisions about fund manager selection have been a lack of process we can then look back to objectively.

KM: Thank you, Rob. That is very honest and very candid. Bill Belichick, the most award-winning NFL coach of all time, says ‘Talent sets the floor; it is character that sets the ceiling.’ And I think that is a great way to think about individuals – in that you need a certain amount of talent to get through the door but, actually, what we should all be striving for is that character to really push to the top echelons. It is not easy to set in place a process to ensure you get that because it is always the softer side – the talent bit is much easier to measure. But that is something that we, in our team, try to do as part of our own decisions as well. But easier said than done.

RG: And you get behavioural biases because you like that person. You think this person is brilliant and you want to bring them in and you kind of self-justify why they are going to be great. And that is why you need other people, who can maybe see the non-values-aligned piece and are able to call it out.

KM: That’s right.

JTR: Rob Gardner, that was fascinating. Thank you very much for your time on The Value Perspective podcast.

RG: Kevin, Juan, thanks for having me.

KM: You are very welcome. Thank you very much.

Author

Juan Torres Rodriguez

Juan Torres Rodriguez

Fund Manager, Equity Value

I joined Schroders in January 2017 as a member of the Global Value Investment team and manage Emerging Market Value. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet, I was a member of the Customs Solution Group at HOLT Credit Suisse.  

Kevin Murphy

Kevin Murphy

Co-head Global Value Team

I joined Schroders in 2000 as an  Pan European equity analyst with a focus on construction and building materials.  In 2010, Nick and I took over management of the team's flagship UK value fund seeking to offer income and capital growth. I manage UK Income and UK Recovery funds.

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