In 2013, Carl Benedikt Frey and Michael Osborne conducted a study which attempted to work out the number of US jobs that are at risk of automation. They found that, for 702 occupations, 47% of workers carry a high risk.
As investors, we are not immune from these pressures either. According to research firm Morningstar, $130.7bn has flowed out of all US mutual funds, while $240bn has flowed into US algorithmic-driven exchange traded funds (ETFs) in the last 12 months. However, while passive investing is making inroads to the active investment industry, it can never eliminate it. The reason comes back to the companies themselves: running them requires human judgement. So, therefore, does investing in them.
Leadership and creative problem-solving require softer skills.
Leadership and creative problem-solving require softer skills. On the former, it is hard to imagine being inspired and led by a robot. Rousing troop-rallying speeches could never be delivered by a machine. Humans may be fallible, and many jobs are genuinely under threat, but we still have our uses. Indeed, a 2014 McKinsey article argued that “executives in the era of brilliant machines will be able to make the biggest difference through the human touch”.
Take problem-solving. X doesn’t always equal Y. Organisational problems cannot always be reduced to a mere equation. Firms are complex, layered with conflicting strategies and goals. They are often riddled with siloes and politics. How you weight decisions, with competing projects vying for attention and dysfunctional time horizons dictated by a myriad of stakeholders, cannot easily be reduced to a formula. Computers hate ambiguity, yet humans accept and embrace it.
As an example of the limitations of straight logic, renowned economist Ronald Coase’s Theory of the Firm, while elegant in theory, was wrong: the size of a company is not always dictated simply by whether or not a particular function is cheaper to perform in-house or not. By the same token, mergers and acquisitions (M&A) require not only subtle negotiation skills but intuitive judgements on slippery and hard-to-define factors like culture. When M&A fails it is more often because the organisations do not meld culturally than because the numbers did not add up.
I have confidence that active management’s place at the investing table is secure.
Yet, while I have confidence that active management’s place at the investing table is secure, that by no mean implies that we do not need to adapt. For us, a major challenge will be identifying the industries that are most at risk of disruption – those that are most susceptible to automation and the efficiency and productivity gains that technological advances can offer.
There are two angles to attack this problem from: disrupters and incumbents. As long-term investors, we have a bias towards the latter – preferring companies to prove themselves before convincing us to part with our clients’ hard-earned money. Our dogged insistence of never investing in a company without having met the management first means that we are able to effectively assess management’s competency, vision and risk awareness. Our process also requires an ongoing active dialogue, including meeting management at least twice a year, to maintain a clear sense of our expectations and refresh our understanding of the business and its current state.
Increasingly, incumbent companies are required to have the sleight of foot to pivot their business models in the face of disruptive forces caused by new entrants waving new technological solutions. The speed at which industries and therefore business models are changing allows no time for complacency. Calm and calculated decision making is vital – particularly that which allows for high conviction decisions, but while protecting against knee-jerk reactions that have been ill-thought through.
Beyond the analytical considerations, there are also environmental, social and governance aspects to consider. We are stewards of other people’s money; responsible for using their capital to allocate to the most productive businesses and areas of the economy. Without wanting to get too philosophical, it is hard to imagine a computer with such a conscience.
We are not traders. Instead, we buy companies with conviction and hold them for the long term. No company is perfect, and by having this ‘ownership’ mind set we are able to nudge management away from risks and toward opportunities as we see them.
The UK’s Stewardship Code launched in 2010 is a leading initiative in corporate governance globally, with many countries having launched their own versions since. Better reporting standards and transparency on activity such as voting behaviour on corporate issues such as executive pay will instil investor confidence in the role that asset managers play. Our recent inclusion in the UK Financial Reporting Council’s Tier 1 list of asset managers is a welcome endorsement of the work we do in this area.
Effective stewardship is also complex, replete with nuances. Diplomacy and tact are needed, as is the bravery to speak up and vote against the herd. Relationships with senior management of companies must be maintained, but not at the expense of clients’ best interests. Our role is to ask uncomfortable questions. These are not skills that you would naturally envisage an algorithm mastering.
Pablo Picasso, not a natural commentator on these things, once said “Computers are useless. They can only give you answers”. The insight here is vast because he correctly identifies that we as humans are here to ask the right questions. As computer power grows, this point will only grow in importance for senior leaders and managers. Shareholder engagement can err into difficult territory if it promotes a single answer to a problem; we have found ourselves most effective as stewards when we clearly identify the question and insist that the board provides an answer to that problem.
In 1970, American cognitive scientist Marvin Minsky predicted that “in from three to eight years we will have a machine with the general intelligence of an average human being”. We are still waiting. And in the meantime, if human judgement is required to run a company, then it follows that investing effectively in one requires it too. Those who write-off active management would do well to remember this.
A version of this article originally appeared in the FT on 20 December 2016
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