May 17, 2021
After three decades at the helm of Ninety One, Founder and CEO Hendrik du Toit has amassed vast experience and wisdom. He recently shared his insights with Patrick Cairns, the editor of Citywire South Africa. We’re pleased to bring you some of their conversation highlights, but the full interview can be viewed here.
I don’t believe we do a good job collectively of explaining our purpose. Active managers help to make capital markets rational; in markets where we don’t exist, pricing is all over the place. Once the market starts professionalising, there is a more sensible allocation of capital and, therefore, an economic benefit for that particular society and for the people who save with us. We are not in the industry of purveying clever structured products that fool clients; we sell decent long-term investments to clients who otherwise wouldn’t be able to access those.
We invest money in companies or we lend to governments or companies, and they provide a return, which for the most part – judging by the history of our industry – has beaten inflation and therefore made the original investors wealthier in a very transparent and simple way, with a clear fee structure and limited conflict.
What really worries me is that the mutual fund and ETF industries offer the illusion of immediate liquidity when we invest in essentially long-duration, less liquid assets. We should be honest with people. You don’t save for tomorrow. You save for 20 years from now and, therefore, if you want to treat your investment portfolio like an ATM, rather get a bank account. Let your investment portfolio work for the long run.
All those people who cashed out their money last year because they were panicking didn’t understand that investing is a long-term game. We don’t talk long-termism enough; we don’t explain the benefit to society. What is brilliant about the sustainability revolution and the acceleration of that trend into the mainstream is the fact that we are starting to ask the question: what impact do our investments have? Once you’re on that track, you’re already thinking how to report beyond return and that may be what unlocks our industry’s position in the market at large.
Sustainability, particularly climate, is the key challenge for humanity right now. The big question is whether humanity can sustain itself with 10 billion people on earth. If we ignore this challenge as an industry in the way we price investments, we would be doing our clients, our long-term savers, a massive disservice. Therefore, one of the key things we are doing, is trying to price the risk of the positive and the negative externality that a company may be contributing to the economy and environment. You may have a wonderful consumer goods business, but if it dumps lots of plastic in the ocean there is ultimately a problem. There is a liability. We need to think about that liability.
Similarly, we also need to think about the solutions – mobilising capital to have a positive impact, for example, to finance the energy transition, which could be a very profitable opportunity. We also need to consider society. We can’t behave with the money of society in a way where we ignore their interests. It’s their money. We are just trying to invest it wisely for them for the long term. Now why would we invest it in a way which affects them negatively?
What we want to do in this industry is make sure investment professionals think more broadly about the long-term consequences of what they do rather than simply trying to price securities in the short term. I think our industry has made huge strides in the last 10 or 20 years, but there is more work to be done. We are not the owners of the assets we manage, so we mustn’t confuse ourselves with our clients. They own the money. We execute on their strategies. We inform them of ideas, and they give us permission to do things. But we are not here to resolve all ills in society simply because we sit on a pot of money.
We must also remember that our clients are a very broad church, so we must beware of the expectation that money managers must use the financial power they have for every cause under the sun. It is not our duty. What an asset manager can do is price risk for the long term and mobilise capital for impact and, therefore, contribute to sustainability with substance as opposed to getting involved in all issues all the time, because then our industry is clearly setting itself up for a hiding.
Yes, I believe that’s correct. For all those interested in these issues I would recommend listening to Mark Carney’s Reith Lectures.2 The point he makes is that we have learnt how to price many things, but not value, and we confuse value and price. The Amazon has value which we can never replace if we lose it. What the price of the Amazon is, is another argument, but in the era of unfettered free market capitalism the assumption was that price equated to value. Price doesn’t always equate to value.
Now I haven’t solved it. I don’t know how to solve it, but I think there is a point where society should put parameters onto market pricing, where price shouldn’t dictate everything. To me, natural capital has a value and that value should be protected or underwritten. It is really about political authorities making rules and then letting markets and the market mechanism and the price-setting mechanism we have work within those constraints.
Arthur Okun was an economist who said the market needs a place, and the market needs to be kept in its place. I really think that is how we should work, and we shouldn’t be shy about it. One of the things we should do when we invest capital into businesses is to consider whether those businesses understand the societal constraints within which they should operate, and either penalise or support them accordingly.
We are not interested in M&A. We can’t say it will never happen, but we have been building organically for 30 years. We believe that is our path ahead and, if we continue to build organically, we can have a very special firm in a world which will be consistently disrupted by M&A. We want to participate in the consolidation by growing, not by buying.
M&A is massively disruptive and clients in our industry are generally very sceptical of it. So why would you do something unless you really have to? And, by the way, putting two bad businesses together doesn’t make a good business. I can show you quite a few examples.
If we underperform and an activist comes and pushes us into deal-making, we probably deserve it. Those are the laws of the market. If we had a private equity owner, they would sell us if we underperformed. If we had individuals who owned us and we weren’t performing, they would make a plan. We live by the rules of the market and being public is just a different method of doing it.
It is clearly a tougher industry than 30 years ago, but it is still a very, very good industry for the winners. It is a tough industry for the losers. Before you make these broad statements, you should say: how well are the winners in the industry doing and how well are the losers doing? Well, the losers don’t exist for that long. Clients take their money away and they eventually go into oblivion or they get taken out by M&A and the winners prosper mightily, and that is probably just about right.
So I see an industry where there is modest, but not extreme, fee pressure because we do something that is useful and, if you generate enough alpha over time, a portion of that should be appropriated by the provider, i.e. the manager, and clients will be happy to pay for that, especially if you present that service in the way we spoke about earlier – in a clear way where the end client understands and appreciates the value.
I do not think we are going to go to zero. It is in the index game where they are going to zero because you will have three big competitors slugging it out for total dominance but with limited pricing power. I think this will remain a good industry because it is pretty capital-light, and technology will help us to keep the costs lower in line with price demands.