After nearly 50 years in the investment industry, Ken Marshman has stepped back from direct involvement in the sector. But he does have some doubts about the direction of investing today.
After nearly 50 years in the investment industry, Ken Marshman has decided to see what life outside of work looks like. Marshman retired as Chair of superannuation fund REST and as Chair of its investment committee at the end of last year, while he had already relinquished his involvement with asset consultant JANA some time before then.
He is contemplating some smaller roles on investment committees, but at the moment he doesn’t have a permanent involvement in the industry.
Instead, he has taken up fencing.
“There are some limitations to how good you can get at my age, but we will see,” he quips in an interview with [i3] Insights.
Asked to reflect on the state of the superannuation industry, he says he leaves the sector with some concern.
It is not that he worries about the increasing size of super funds or the trend towards more internal asset management. No, he believes there are many investment models that can lead to success, whether a fund is large or small, and whether they outsource or not.
My view is that investing is largely about buying businesses that are seeking to create wealth over a period of time. But in my view, the whole industry has become too much focused on seeking hopeful gains by anticipating market behaviour, rather than the fundamentals of the businesses it is buying
He is more concerned about the changing nature of investing.
“My view is that investing is largely about buying businesses that are seeking to create wealth over a period of time. As an investor, you are providing money to entrepreneurs and risk takers to make things and then after a period of seven, 10 or 15 years you might see how well you’ve gone,” he says.
“But in my view, the whole industry has become too much focused on seeking hopeful gains by anticipating market behaviour, rather than the fundamentals of the businesses it is buying.
“We are concentrating too much on the second, third and the fourth derivative of investments and forgetting what investment is really about: backing entrepreneurs to make things, service the community, make a profit and return that to the shareholders.
“To some extent that is why private equity is growing, because valuation doesn’t come into it.”
Performance Test
There are many reasons why investors have become preoccupied with short-term valuations over long-term investments, but Marshman argues the Your Future, Your Super performance test is certainly not helping things.
“Tests like the annual performance test destroy that ability to back people for the long term. It has destroyed this concept of looking through shorter-term performance and into long-term position taking,” he says.
I think it is a piece of legislation that if it stays in its current form will be to the great disadvantage of the beneficiaries of the superannuation funds, because the trade-off between failing and outperforming is so distorted – there is little reward for outperforming and such a huge penalty for failure – that why would you take risks?
“I think it is a piece of legislation that if it stays in its current form will be to the great disadvantage of the beneficiaries of the superannuation funds, because the trade-off between failing and outperforming is so distorted. There is little reward for outperforming and such a huge penalty for failure that why would you take risks?
“The natural desire will be to head into the middle of the herd and in times of great financial market disruption, which will occur at some stage, investment committees will be challenged to have the courage to protect members’ returns, because to do so could mean failing the test.”
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Besides, he argues, the test does not give a good indication of success over the long term. The investment environment over the past eight years has been largely moving in one direction, where interest rates fell and inflation was low.
But today we find ourselves in a completely different environment.
“How you perform in a period of eight years which has been all in one direction and how you’re going to perform in the next eight years or the next 28 years or 38 years is pretty much unrelated,” Marshman says.
What Makes a Good Manager?
Throughout his career, Marshman has always been a firm believer in fundamental, active management. He has never been a fan of systematic or factor-based approaches or even plain-vanilla passive investing for a very simple reason: these approaches are retrospective and don’t cope well with regime changes.
“In a period of disruption, which will occur from time to time, I would want my money managed by a person who has imagination and flexibility, and not by a machine whose only source of information is what has happened in the past,” he says.
“Even if you are totally comfortable with the view that active management does not provide net relative outperformance to passive, the insurance policy of having an active manager involved for those one-in-a-decade periods when the markets are in disarray will for me justify the case.”
The impact of crises on markets is not always well appreciated, he says. But often these events have the biggest impact on investment portfolios, regardless of what investment style you adopt.
“Retrospective investment will work in stable environments, but I think is very high risk in non-stable environments,” Marshman says.
It is that ability to shift your thinking in periods of disruption, where you need that flexibility and imagination to change your portfolio. It might be once every five years or once every 10 years that these opportunities present themselves, but when they do you can make a lot of money
“It is that ability to shift your thinking in periods of disruption, where you need that flexibility and imagination to change your portfolio. It might be once every five years or once every 10 years that these opportunities present themselves, but when they do you can make a lot of money.”
So what makes a good active manager? Marshman has met a great number of asset managers during his career and he has distilled the requirements for great investors down to two key ingredients.
“The first is to be able to continually reinvent yourself, because the whole investment world is continually changing all the time,” he says.
“It is changing because we get different characters of investors. We get different central banks in different environments. And the whole nature of people who are making things, which is what we invest in ultimately, is continually changing too.”
Yet, often asset managers who have been successful are reluctant to modify their approach, which sets them up for failure when the conditions change.
“Many managers who are very successful in one environment … that success proves to be a burden for them in future environments because the world moves on,” Marshman says.
“It is a general weakness of our own human psyche that what has worked in the past is what we tend to stick to. It becomes a burden rather than a benefit and we become a slave to our past successes.
“So this ability to be able to reinvent yourself, to think differently, is what makes a really successful investor.
“Of course, that’s extremely difficult to do because consultants and investors don’t like people who change their spots. Style drift!”
The second ingredient is about how managers generate new ideas, he says, because this will help an investor to reinvent themselves in an informed way.
“How do you reinvent continually? It is by getting the broadest range of inputs that you possibly can,” he says.
“One thing that I’ve noticed in global research was that the best managers seem to have very concentrated decision-making teams but extremely broad and flat diversity of idea generators.
“There are some people, I guess, who can reinvent themselves and have the imagination just by their own reading, but they are few and far between.
“Most normal humans need others and need this very broad breadth of insights, and then being able to sift through those and be prepared to change your spots.”
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.