Welcome everybody, Simon Gregory here as your host for this session and I'm joined by Habib Subjally, who is the Head of Global Equities at RBC and Jeremy Richardson, Senior Portfolio Manager. As Head of the Team Habib, I'd like to ask you a few thoughts or maybe some searching questions today about the team. You set this team up in 2006 and that was your job, you were tasked with renovating an existing team and bringing in some new talent to the team. What was important to you when you were establishing your global equities here?
Hi Simon, um, okay. I think the first realization as a global portfolio manager is, is that you have to recognize that the world is too complex a place to manage a global portfolio singlehandedly. Managing global portfolios is a team sport, it's not an individual activity. So, it is a matter of building a team. And in terms of building a team, there's a real balance between two things: between the depth of industry knowledge, and effective decision-making. So, when one thinks about depth of industry knowledge, what would basically as a global stock picker, what you're looking to do, is to identify future trends before they happen, to identify future winners before they happen. So, you need to have a deep understanding of each industry, what's going on, what the drivers are, technological, behavioural, regulatory drivers.
And this would argue for a larger team. But at the same time, what we're really doing is building portfolios. And this is why we need effective decision-making units. The group of individuals have to come together as a team to make decisions, and we have to be able to take one person's best idea and compare it to another best idea, to another person's best idea to put it in a pecking order so that we know as a team, what our best ideas are. And, we kind of call this "calibrating conviction". And it is probably the hardest thing that we do. Because you know, everyone is different, some people are natural optimists and very good presenters, other people are naturally more pessimistic and more cautious and may not be as good presenters and we need to put all of this onto the same footing so that this actually argues for a smaller team. And it is a matter of striking this balance and you know, we as a team when we set up this team all these years ago, almost 12 years ago now, we focused on making sure that we had quality rather than quantity.
Do you think there's an ideal number?
Well, the way we looked at the industry groups, we thought we needed about seven people to cover the industry groups, they're certain things that naturally fit together like, telecom and technology naturally fit together, all the consumer areas actually fit together. But then it's very hard to combine healthcare with anything else, you need a healthcare specialist. So, I think we did have a lot of analysis and felt that, that was the kind of right number of industry specialists.
So, having put this team together, what do you see your role as, as team head? Arbitrator?
I'll just come back to the previous question though, cause it's not just having industry specialists, is it though, because actually you also need, what we think at least, somebody to keep score, somebody to tell you where you're making mistakes, how you can improve, somebody to reflect where your biases may be so that you can end up addressing those and hopefully coming up to more robust decisions in the future.
Yeah, you see there's another very important part of the whole team structure, that we can have a team of industry specialists that come up with the winners of the future, and these great business, great wealth-creating businesses to identify them. But a portfolio is more than just a collection of your best businesses. As I said, the world is such a complex place, there's so many things that can impact your portfolio at any one point in time. Well, that's what's going on at the various country level, what's going on with interest rates, what's going on with commodity prices, what's going on with the exchange rates, what is going on with markets, you know, volatility, liquidity, have small caps outperformed large caps?
All of these things can impact your portfolio in quite a material way. And, we as portfolio managers kind of aren't necessarily that attuned to those types of macro or market-type type risks. But we know that there are, there's a whole industry out there. There's a science out there around this. Around risk management and portfolio construction. So it was also important to bring in a couple of people who had those skills, and embed them within the team, to help us not just pick the stocks, but to build efficient portfolios. And I think that was a very important part of rounding out that team. It's a bit in sporting into football terms or in soccer terms for North American listeners, it's like having a defense and a goal keeper.
You know, you do need to, rather than just play offense all the time, you do need a structure.
But that was, correct me if I'm wrong, but that was very different, well, you know, 12 years ago and I'm struggling to think of other teams that have that, that capability embedded within it.
Yes, it sort of... our industry has typically broken down into this sort of fundamental stock because, and then these scientists with the computers and then the big risk models doing systematic strategies and never the twain shall meet. But I remember as I was sitting down in these early days when we used to sit down to write, okay we are going to be entrusted with client capital, how do we want to invest this? What do we want to do with this client capital? How are we going to grow it? And our answer to that was very simple: we want to invest in great businesses, wealth-generating businesses and transmit that wealth generation to our clients.
But we know that there are all of these other risks out there that we know nothing about, and that these risks can be very large and very material, you know, just, like I said, country risk, interest risk, oil price risk. So what do we do about this? And I remember as I was sitting there saying, you know, if your car's broken down, you need to go and find a mechanic to fix it. Well, let's go and get a couple of these guys onto the team who can help us, first of all, just be aware of what risks we're taking, and then help us manage these risks, so that they're not material to the portfolio.
And, finding these people is not easy. At least people who want to work with fundamental investors and that was, I think that was actually a really interesting time when we went out and completed the team by adding those skills to the team.
Did you ever have any conflicts between this risk side and the fundamental side? And you can't do this because of the risk profile? Did you have to manage these sorts of battles in the team?
Oh, absolutely, I think those were, those battles is probably where we learned the most and we improved the most. Because you have different people, everyone cares, their only purpose for that debate and for those arguments, because there were arguments about, was, they wanted to do the best thing for the portfolios. And different people came in from different angles and we had to educate each other about the different risks we were taking and the opportunities, and then it is about balancing those risks and opportunities. So, we can take calculated risks rather than uneducated risks.
Jeremy, you cover the consumer sector, have you ever felt you couldn't own as much of something as you wanted or you couldn't own it at all?
No, no, because that's neve happened. I mean the whole thing about the role of the portfolio construction experts is that they are helping us to create a portfolio that reflects the investment philosophy, but the idea generation and what makes a great business, which is often categorized by how that business is competing within a particular industry. That is a question of fundamentals, it's not a question of portfolio construction, so the industry experts, the industry specialists really own those insights into the particular industries and what makes a great company by industry and they're responsible for that fundamental view. The challenge though as Habib was just saying, is just, how you take those insights and build that into a portfolio, that then reflects what you're trying to do and you don't lose any of the value that you're trying to identify with your fundamental view through unattended biases or lumpy for the construction...
Such that you get these crosswinds impacting the portfolio, and therefore the investor gets these nasty surprises.
So, Habib, as team head, does that mean that you need to identify a certain sort of individual that can buy into the team ethos?
Yeah, yes, I mean absolutely, I think we...
You can't be a sort of loner or an individualist in this sort of structure it strikes me.
As I said, this is a team activity, running global portfolios is a team activity, everyone has a role to play on the team, we have a series of experts, but we come together as one team. And we have to work with each other, we have to help each other, we have to collaborate, we have to cover up for each other, we have to support each other. But it is, it's what the team does that dictates whether we stand or fall.
And in terms of the location, your team's located in one place? Do you think that's better than having people on the ground? You're a global team? Should you be globally dispersed?
I think we really value being all together in one place. Well, I was going to say... See, many of our, sort of most, sort of profound insights have actually come from casual conversations. And that ability for people to be together and just have these spontaneous conversations and the flow of information I think is really valuable. And also, just, you know, to be able to go out for a meal or go out for a drink together, you know, I think that's really important, but also, when you say be on the ground, as global investors, where is the ground? You know, it's everywhere and anywhere, so, we do spend a lot of time at airports travelling around, but, we think it's important to have a hub where everyone fits together.
And London kind of works, it's the right kind of time zone in-between North America and Asia. So, you know you can get Asia in the morning and North America in the afternoon. But it is important to be all together and that information flows freely within the team.
And fund management it's a quite a reasonably competitive industry, and often it seems as if there's a lot of movement between firms and, sometimes a bit of a merry-go-round, which is probably to the detriment of underlying clients. What do you think is important to motivate people to keep them in situ, how do you get the best out of them?
I think it's recognizing that the team is greater than the sum of the individuals. And I for one will be the first to say that I would not be half as effective as I have been if I didn't have this team. And I think probably many of the team would say the same thing.
Yeah, yeah. Absolutely, absolutely, I totally agree.
You've been onboard pretty much since the inception of the team as well.
Yeah, and the world is far too complicated for any one person to it and where people do try to do that, they end up with making shortcuts and try to simplify the world and those simplifications are root to bias creation, because instead of actually transmitting an investment philosophy into a portfolio, actually you're just transmitting a whole lot of biases into a portfolio and you end up with or can end up with quite volatile investment performance that is not really categorized by a nicely diversified portfolio of best ideas. So, having a successful team, having everybody which is buying into that same investment philosophy, and actually, you know, supporting each other.
And let's not forget, if you are owning a company, if you're investing your clients' wealth or capital into a company, you're doing that because you expect to be able to generate attractive returns over the long-term. And that's the price of that, the market is putting on those cashflows is wrong. That can be a very lonely place to be. You're assuming that the combined knowledge of the rest of the marketplace is wrong. That there's a price arbitrage that you can, that this thing is, less than its intrinsic valuation. To make that kind of statement and do that by yourself across a full portfolio is requiring an awful lot of self-confidence and (Inaudible)...
And the fact that you can do that with the support of a team behind you, sort of reaching the same conclusions, challenging you to get better, if they don't believe what you say is, your view is warranted, actually you end up actually improving I think overtime, and coming to more robust conclusions as a result.
So, just in conclusion, one thing, and please bear with me gents, sitting here looking at you, I wouldn't exactly use the phrase millennial to describe either of you. Obviously consumption path is changing, rapid pace of change in technology and how people are interacting with the world. Experience is great and you got a very experienced team, but how do you balance that with the fact that the world is changing and there's, you know, generational shifts are taking place?
Well, I think we do need to bring on younger people, and we do have some younger people in the team, and we are developing the next generation. But I think it's also a matter of being very openminded and learning, and the intellectual humility is a really important thing, you know. The market is a very humbling place. The day we feel because we've got some grey hairs, that we know it all, I'll tell you what, this market will just steamroll you.
Yeah, yeah. Yeah, I totally agree, experience is very helpful, but, attitudinal approach I think is probably more important, because it's not about age necessarily, it's about your though patterns that, I think that's what counts in the long run.
Well, thank you very much gentlemen, I certainly appreciate your insights on the team and the very best of luck in what are quite challenging markets. Thank you.