The best investors buck consensus thinking
During his recent visit to Sydney, Kevin Charleston, Chairman, President and CEO of Loomis Sayles & Company, a Boston-based asset manager with $250 billion under management, sat down with us to discuss his career and Loomis Sayles. During our conversation, Kevin offered his perspective on the key investment themes for the next three years and what it really takes to perform in the market.
He told us: “To be a good investor—to generate returns—you must buck consensus thinking. Nobody invests successfully by following conventional wisdom.” He also shared his thoughts on asset allocation as a driver of long-term outperformance, why investors should have an exposure to China, and the chances of a recession in the next three years. Read on for the full interview.
Q: Imagine someone asked you to describe your role at Loomis Sayles. How would you answer? Can you take us through the key components of your role?
If you think about what sets asset management firms apart, it's portfolio manager talent. My job, in many ways, is making sure our portfolio managers can stay focused on producing the most precious commodity—alpha. Working with my senior staff, including Chief Investment Officer Jae Park, we ensure our investment teams have the resources they need to uncover opportunities across markets.
Another key component of my role is figuring out how to package and deliver our investment strategies in the most efficient way to global investors. There are so many investment vehicles available today. It’s critical that we identify the most appropriate vehicles for our broad investor base.
Client service and experience is also a priority, and I’m very involved in making sure we are meeting client expectations in terms of performance and service. To do this, I work closely with our product managers and relationship management team to evaluate feedback and fine-tune client service on an ongoing basis.
Q: Have you always had an interest in investing and the investment industry?
I studied finance in college and started my career at a bank. I've always been eager to take on new projects and tasks, so when the opportunity to work in the asset management division at the bank came up, I quickly raised my hand. From there, I joined a company that focused on asset manager mergers and acquisitions. In that role, I evaluated different asset managers and constructed incentive structures that would align their interests with client and company interests.
I enjoyed the role but ultimately wanted to get into the asset management business itself. I was interested in business management and finding ways to produce best-of-breed investment strategies that provided solutions for a global client base.
The opportunity to work at Loomis Sayles came in March 2000 when I was working with then Loomis Sayles CEO Robert Blanding on compensation structures. He asked me to join Loomis Sayles as Chief Financial Officer. I jumped at the opportunity.
Q: If you look back on your early career, did you have anyone who served as a mentor?
Robert Blanding helped me identify what clients need and value the most in asset managers. Neal Ryland, the CFO who brought me into asset management, was my first mentor and helped me understand that you win as a team, keeping your ego in check.
Q: How have client needs evolved over your time with Loomis Sayles?
Clients have always wanted consistent, positive performance with an investment process that can be well articulated. This is a constant and has not changed over my career. However, the industry and the investment environment have both changed dramatically. If you look at the asset management industry in the 1990s, it was really a cottage industry made up of mostly small managers, many of which were not well managed from a business perspective. There was a lot of built-in secular growth and a favourable capital market backdrop, which meant a company operating fairly inefficiently could still be profitable.
This all changed by the time you get to the 2000s. If you look at the most successful managers, whether it's PIMCO, Goldman Sachs, BlackRock, etc., you’ll notice they all feature not only significant AUMs, but also very strong underlying business management structures. Asset managers can no longer simply ride a growth tide. They have to have strong business practices to differentiate themselves and generate the needed scale to solidify a foothold in a lower-growth marketplace with well-capitalized competitors.
Q: Do you think industry consolidation is a result of the Global Financial Crisis and increased regulation?
Industry consolidation was taking place prior to the GFC, no question. Fee pressure, the rise of passive investing and less secular growth, in general, were all putting pressure on the industry prior to 2008. In the aftermath, the shock of the GFC certainly increased fear about downside risk, so it created additional challenges, but I think there were plenty of forces already at play.
That said, I don't think anybody's shedding any tears for asset managers, nor should they. We've got to meet customer demands and make sure we are as efficient as possible with our resources, just like every other industry.
Q: What is your outlook for a potential recession over the next three years?
All signs seem to point to a recession at some point. Of course, no one can predict a recession. If you asked the same question in 2011 or 2013, the answer would probably been “yes, sometime in the next three years,” because that's been typical of an average cycle up to now.
Clearly, the shock of the GFC, along with a slow recovery, has had an effect on the business cycle. Additionally, the willingness of central banks to use all the tools available has made an impact. Absolute leverage seems pretty large at this point, but when you consider the companies, the general level of interest rates and current coverage ratios, things don’t look too alarming. From our point of view, despite a slow global economy, the outlook for global growth still looks positive.
Loomis Sayles investment teams have long investment horizons. Our fixed income investors always have a view on the Fed, but do not devise their investment strategies based on trying to predict a recession over a relatively short time frame.
Our equity teams focus on identifying strong businesses that should prosper regardless of the economic backdrop.
Q: Do you believe China will become the biggest economy in the world, with the ability to set the benchmark for global growth? Or do you think the US will retain the top spot?
I think that over time we’re going to see a shared leadership model between the two countries. I think it's naïve to think that the US will remain the sole growth engine while Chinese growth comes to a halt.
China will certainly have to evaluate the most efficient way to allocate capital across the economy, and that process will likely cause some bumps in the road. But China is an industrious nation and will be a dominant global player going forward.
We're a global investment manager so if we're not good investors in Asia, my hunch is we're not going to be successful investors over the next five or ten years. Asia’s public markets are getting bigger and improving capital allocation, and the region is growing faster than overall global economy, indicating that it will house an important share of the investable universe. Managers will need people on the ground in those growing markets to evaluate the full investment opportunity set and make the right choices for clients.
I have no doubt that when I look at global portfolios in five to ten years, they will reflect a significant balances of the markets we see opening and growing now.
Q: What do you think are the most important themes investors should be watching over the next three years?
I think the major themes are always universal, so I would say that everybody should allocate based on risk tolerance. The biggest mistake an investor can make is trying to tactically move on macro themes without some fundamental research underpinning. Most investors do not have the skill and insight required to successfully invest this way.
Now that doesn't mean that if you're concerned about a potential recession, you shouldn’t get a little more conservative to protect yourself. But I worry that there is now this general ethos that passive investing is incontestable and investors just need to hire someone to tactical allocate across passive capabilities. Investors need to consider valuation and the impact valuation can have on a portfolio, which is why a certain amount of active management is critical. Passive is here to stay, but I think there is a need to marry active and passive together in portfolio construction. Without fundamental research talent, it is hard to have the conviction to counter conventional thinking and take advantage of market weakness.
Q: What makes for a great investor?
To be a good investor—to generate returns—you must buck consensus thinking. Nobody invests successfully by following conventional wisdom.
There are two key components to this: first, you need to conduct deep, fundamental analysis on your holdings, so that when the rest of the world changes its mind on a name, you've done the work that gives you the conviction to stick it out. Second, you have to be comfortable being uncomfortable sometimes. There will be times when markets turn and you’re tempted to second guess yourself. Investors must have confidence in the underlying investment philosophy in order to weather the storm.
I think the industry needs to do a better job educating investors on the two key ingredients required to be successful, which is the benefits of compounding and the need to be patient. We need to communicate in a way that builds investor confidence and gives them the conviction to hang in there when markets get ugly. Investing is ultimately about having the knowledge and conviction to get in to a market when everybody is getting out. That's the only way to be a successful investor.
Finally, I think investors in general have to be more global. Having spent the last few days here with the IML team and Anton Tagliaferro, I’m very aware of how much savings is being built here in Australia. There’s such strong public policy in terms of helping people save for retirement. But when you understand the narrowness of the local market opportunity, it's clear Australian investor need to have a global perspective in order to effectively deploy all the savings.
Australia is one of the big opportunities in asset management. Most countries have a home country bias. So, for us, the opportunity to come in and help investors expand and get more diversified is very exciting.
Q: How is technology impacting the industry?
Our portfolio managers consume a lot of information. It’s critical that our technology infrastructure helps them cut through the noise and help them identify opportunities as efficiently as possible. Technology is constantly evolving and it requires continuous investment. Currently, we spend US$30 million a year on programming. Our programmers work directly with our investment teams to build tools that reflect the way our portfolio managers want to consume information. This is particularly important for our fixed income managers due to the complexities of global fixed income markets.
The technology is remarkable, but I don’t think we’ll ever get to a place of totally replacing human judgement. There's an art to investing—you can assemble all the information but at the end of the day, somebody's got to make a call.
Q: What is your favourite thing about your job and Loomis Sayles?
The great thing about Loomis Sayles is that I work with incredibly brilliant people who are hyper-focused on alpha generation. The intellectual firepower that I see every day makes it fun to come to work, and I love helping to create the environment that enables these people to thrive.
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The information in this article is provided for general information purposes only and does not take into account the investment objectives, financial situation or needs of any person. Investors Mutual Limited (AFSL 229988) is the issuer and responsible entity of the Loomis Sayles Global Equity Fund (‘Fund’). Loomis, Sayles & Company L.P. is the investment manager.
This information should not be relied upon in determining whether to invest in the Fund and is not a recommendation to buy, sell or hold any financial product, security or other instrument. In deciding whether to acquire or continue to hold an investment in the Fund, an investor should consider the Fund’s Product Disclosure Statement, available on the website (VIEW LINK) or by contacting us on 1300 157 862. Past performance is not a reliable indicator of future performance.
Investment in the Fund are not a deposit with, or other liability of, Investors Mutual Limited and are subject to investment risk, including possible delays in repayment and loss of income and principal invested. Investors Mutual Limited does not guarantee the performance of the Fund or any particular rate of return.
There is no guarantee that the investment objective will be realized or that the strategy will generate positive or excess return. Excess return objectives are subject to change and are not based on past performance.
Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the presenter only, and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. Investment recommendations may be inconsistent with these opinions. There is no assurance that developments will transpire as forecasted and actual results will be different. This information is subject to change at any time without notice.
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