In this paper we talk to Gary Greenberg of Hermes. He is Head of Emerging Markets and manages the Global Emerging Markets Fund.
At shiniglights.co.uk we catch up with some of the leading managers in the industry to understand how they approach investing. In this paper we talk to Gary Greenberg of Hermes. He is Head of Emerging Markets and manages the Global Emerging Markets Fund.
My teenage years, in the 60s, were spent, apart from studies, trying to change the world. I marched for civil rights in the US, for an end to the Vietnam War, and for recognition of the new awareness of ecology, manifesting as protests focused on acid rain. I then realised that my political self-righteousness was itself part of the problem, and so began a life-long study of Buddhism in order to prioritise compassion before agitation.
I wasn’t interested in investing until my late 20s, when I bought my first stock. I took a combined International Relations and MBA degree in 1984, during which I found investing as a way to steer finance in what I considered the right direction: providing a return to shareholders, but with a moral compass. I undertook a bank training programme in Chicago after graduating with an MBA in 1985, and then worked with Chicago-based multinational corporations in relationship management, focussed mainly on corporate workouts in Latin America, M&A advisory, and using international financial products to cut tax rates. I liked the M&A work, which for me involved valuing companies, but helping corporations avoid taxes wasn’t particularly satisfying.
In 1987, I began working for a securities firm, partly owned by Citigroup, called Scrimgeour Vickers, in New York. Then in 1989 I secured my first investment role, back in Chicago at Harris Associates. This put me under the guidance of Ralph Wanger, one of the investing greats of the 70s and 80s, from whom I learned a tremendous amount. In 1992, as a partner at Ralph’s new firm, Wanger Asset Management, I co-founded and co-managed a new international small cap fund, Acorn International, which did very well. It took me over 20 years, however, to find a firm that valued responsible investing as much as I do, so by working at Hermes I feel that, in a sense, I have reached the destination of my vocational journey.
Of course I want to perform well and I like the recognition that affords, but more importantly, I want to do right by the people relying on me: my investors, company, family, and to the wider community. Why the wider community?
Because investing has consequences beyond financial returns, subtle though they may be, and involves supporting to companies who may pursue goals that are helpful, but also goals that can be harmful, to others. I think we are all coming to the realisation that companies don’t exist in a vacuum, and that the agents – boards of directors, company managements, fund managers and pension fund trustees – for the ultimate asset owners, primarily pensioners and retail investors, need to own up to their responsibility for the broader effects of the activities of portfolio companies.
It is not enough to say that a company is acting within the letter of the law if its profit-seeking activities cause deleterious side effects: sustainability and investment outperformance are not mutually exclusive, and professional investors must influence companies to pursue both outcomes. Having said this, job number one is to create an outstanding return for our investors, and I am happy that our return profile is very strong.
I think investment knowledge and wisdom is cumulative.
So yes, I think having experienced the Latam workouts, the 1987 crash, the Tequila Crisis, and the subsequent crises has been extremely helpful. I have seen reflexivity and contagion in action across markets numerous times – not enough to feel confident trading through a market tsunami to generate alpha, but sure enough to recognise the warning signs of a bubble and to recognise stocks and markets that may not survive its inevitable bursting.
One important skill in the craft of investing is knowing what to avoid, and another is developing a gut feel for a compelling business model, and my long experience (well over 10,000 hours!) has given me some ability in both.
First and foremost, we are looking for great companies, world beaters, with a franchise or expertise that is difficult to replicate – companies that a global portfolio manager would be happy to own if they knew about them.
These companies are efficient, sustainable and are guided by excellent management teams. They typically operate in political, economic and social conditions that are overall supportive of growth. Not many of these stocks are available at attractive prices, but if they are, we buy them and hold on to them.
We are also open to companies of less remarkable quality but which are true bargains, but at this point this is a smaller proportion of the portfolio. It is an eclectic style, which integrates bottom-up analysis with country and sector research, and also environmental, social and governance considerations.
“Many commentators say that the global financial crisis was a unique event, and a game changer going forward. Particularly as we don’t know the consequences of QE, how long we will remain in a low interest environment etc. If this is the case then everything we have learnt about investing goes out of the window because we just don’t know what will happen? What is your view, do you feel you need to adapt your style to reflect this new environment?
I agree with the comment that things are different post QE, and we are learning as we travel along this path to normalisation – whatever the future “normal” might be. This is always true in emerging markets, however, as emerging markets are constantly evolving. So an open-minded Socratic approach of inquiry is, we think, the best one: it relentlessly tests the evidence available.
I think it is best to find a good investment team to do the work for you.
Investing is hard without training: it takes a lot of time to really understand a company, its strengths and weaknesses, the competitive and regulatory environment it is in, and how it should be valued.
The 30-year Western bull market made many people forget that real investing, based on security analysis rather than a generally rising tide, is hard work, and why we get paid for doing it.
I think emerging markets are inefficient, so an active style is appropriate. Maybe the US and European large-cap sectors are significantly more efficient, so a passive approach may have some appeal.
Still, there are plenty of active managers in these markets whose track records show persistent outperformance, which leads me to think that a good investor will regularly find opportunities to beat the market while limiting downside risk.
We cap ourselves at $6-8 billion. Our analysis, and that of the Hermes Investment Office – which is focused purely on measuring performance, risk, liquidity and capacity on behalf of investors – concludes that investing with our style in emerging markets becomes unwieldy above that size.
Apply the principle of investing rather than trading, which requires research, commitment, patience and ongoing re-valuation.
Investors in funds should identify good managers and stay in touch with them. Stock-pickers need to do the work necessary to generate an informed investment view, buy stocks with the intention of owning them for long-term gain, resist the temptation to sell due to negative news flow alone and focus on the fundamentals. The emergence of new, meaningful information regarding fundamentals warrants a re-examination of the initial investment thesis. By following companies in this way, they will develop a clearer understanding of its long-term prospects.