On corporate earnings resilience, fund consistency and the rise of systematic investing
In our regular video series, we interview the wealth sector’s key decision-makers to discover how they think about life, both within the world of investment and beyond it; what brought them into the business and what keeps them here; and what makes them and their companies tick
It was Dr Ian Malcom, as played by Jeff Goldblum in Jurassic Park, who taught us that ‘Life, uh, finds a way’ – and notwithstanding the hugely challenging macroeconomic environment of recent years, suggests Rob Harrison, head of systematic and ESG at Progeny, so do companies.
“Corporate earnings have been really strong this year – and last year too,” he tells Wealthwise editorial director Julian Marr in the above video. “So, despite all the disruption, companies – and the economy – have got through it. We are also going through big technological change at the moment – and having that really gives you hope that, both economically and company-wise, you can see growth going forward.”
Systematic investing is massive in Europe and America – it has been for decades – and now we have seen this big explosion in growth in the UK.”
Asked what quality he most looks for from individual funds and the management teams behind them – and what he would consider a red flag – Harrison immediately picks out consistency. “You want to see a manager being able to consistently perform and do what they are expected to do – but it is about understanding how the investment will behave in different environments,” he explains.
“A fund does not need to behave well in every environment but you need to understand that, in certain environments, it will behave in a particular way. The red flag, then, is when the fund does something you are not expecting it to do.”
‘Controlled outperformance’
Turning to the ‘systematic’ part of his job description, how would Harrison define that approach to investing? “There are lots of different words for it – it’s ‘systematic’, it’s ‘smart beta’, it’s ‘multifactor’,” he replies.
“In my world, though, it is mainly factor-based investing. So using certain factors – quality, value, smallcap, momentum – to try to outperform the benchmark but doing it in a controlled way. So a tracking error of 2% or 3% rather than trying to outperform by 7% or 8% per annum.”
Staying in that general area, at what point does the world of investment reach ‘peak passive’? “It is really hard to tell because passive can be a self-fulfilling prophecy – and so we might just see it keep expanding,” says Harrison. “One thing I do think we are going to see, though, is a bigger rise in systematic investing. It is massive in Europe and America – it has been for decades – and now we have seen this big explosion in growth here in the UK.
“We have already seen investors become more benchmark-aware and more cost-conscious – that is why we have seen the rise in passive. Now, though, we are seeing people go, We want to outperform – so is there a way we can do that with a lower cost and a lower tracking error budget, but using proven historical-returns ways to do so? Systematic is definitely going to be the big growth driver going forward.”
A full transcript of this episode can be found after this box while you can view the whole video by clicking on the picture above. To jump to a specific question, just click on the relevant timecode:
00.00: What excites you about the current investment outlook? What worries you?
01.17: What do you most look for in an individual investment? What constitute ‘red flags’?
01.54: At what point do we reach ‘peak passive’ in investment? Or have we already?
03.28: What drives your approach to client communications? Should professional investors aim to attract the ‘right’ type of client?
04.52: What was your path into investment – and, if you hadn’t taken it, what do you think you would be doing now?
05.37: What is the biggest investment mistake you are prepared to admit to – and what did you learn from it?
06.26: Do you see AI as a threat or an opportunity to professional investors – or both?
06.59: Outside of work, what is the strangest thing you have ever seen or done?
07.40: Who or what has been the most important influence on your career?
08.19: Two Choice Words recommendations, please – one a book; one a free choice?
Transcript of Choice Words Episode 35:
Rob Harrison, with Julian Marr
JM: Well, hello and a very warm welcome to another in our series of ‘Choice Words’ videos, where we get to speak to key decision-makers in UK fund selection and UK fund research and find out what makes them tick. I am Julian Marr, editorial director of Wealthwise Media, and today I am delighted to be talking to Rob Harrison, who is head of systematic and ESG at Progeny. Hello, Rob, how are you?
RH: Hi, Julian. I am very good. How are you?
JM: I am going well, so far – let’s see how we go! Let’s start off with our traditional first question – what gives you most cause for hope about the economic outlook? And what worries you?
RH: There is a lot going on in the world at the moment. What gives me hope is the economy and company earnings have been really strong this year – and last year – so, despite all the disruption, companies and the economy have got through it.
We are also going through big technological change at the moment – and having that really gives you hope that, both economically and company-wise, you can see growth going forward. There is a lot of uncertainty – there is lots of political uncertainty, which looks likely to stay – but there is hope going forward.
Consistent behaviour
JM: So that was mostly upbeat – with a little bit of pause for thought! Good stuff. Narrowing in now – from the macro to the micro – as an investor, what are you most looking for in an individual asset, when you are buying? And what do you see as red flags?
RH: For me, it is consistency. You want to see a manager being able to consistently perform and do what they are expected to do – but it is about understanding how the investment will behave in different environments.
It does not need to behave well in every environment but you need to understand that, in certain environments, it will behave that way. The red flag, then, is when the fund does something you are not expecting it to do.
JM: Sure – no-one likes those sorts of surprises.
Systematic thinking
JM: I am going to take this opportunity to ask you a question about passive investing because you take an interest in that, obviously. It is provocative, perhaps, but at what point do we reach ‘peak passive’ in investment? Or, indeed, have we already? I am not expecting you to say ‘yes’ – that would be a brave statement! But what are your thoughts on ‘peak passive’?
RH: It is really hard to tell because passive can be a self-fulfilling prophecy – so we might see passive just keep expanding. One thing I do think we are going to see, though, is a bigger rise in systematic. Systematic investing is massive in Europe and America – it has been for decades. Now, it has really come to the UK market – we have seen this big explosion in growth in it.
We have seen investors become more benchmark-aware and more cost-conscious – which is why we have seen the rise in passive – but we are now seeing people go, We want to outperform so is there a way we can do that with a lower cost and a lower tracking error budget, but using proven historical-returns ways to do it? So, I think systematic is definitely going to be the big growth driver going forward.
JM: I am sure everyone watching knows what systematic is – but, for a moment, pretend I don’t! What would be your take on a definition?
RH: There are lots of different words for it – it’s ‘systematic’, it’s ‘smart beta’, it’s ‘multifactor’. In my world, though, it is mainly factor-based investing.
So using certain factors – quality, value, smallcap, momentum – to try to outperform the benchmark but doing it in a controlled way. So a tracking error of 2% or 3% rather than trying to outperform by 7% or 8% per annum. JM: Good – so I did know what that was! Always good to check.
Medium and message
JM: And now we go from you describing systematic rather beautifully to asking about client comms. What is the Progeny approach to client communications? And, additionally, do you think there is such a thing as the ‘right type of client’ – somebody who is going to come in with you at the beginning but then stay with you through the whole journey, so they get the full benefit of the Progeny and the Harrison wisdom?
RH: Client communications, I think, is one of the hardest things we do in our jobs. It is taking a lot of complex jargon and putting it in a form that everyone can understand.
With clients, you have different levels of experience and knowledge and the key for any investment solution, I think, is to be able to portray that to a wide audience. I think investing for the long term is key – especially in volatile markets. But for me and Progeny, we invest for the long term – 10, 20, 30 years – so everything we do is built around that.
JM: So then you really do have to bring the client along – you can’t have them jumping off after even 10 years or 15 years. It is tricky – so that involves a lot of personal communication, does it?
RH: Yes. A lot of personal communication – but also looking at different mediums. So videos, writing, blogs – the more we go into this new world, I think, the more communication is going to be key.
JM: Absolutely. Different people consume different information in different ways – and at different times of the day as well. So, yes, it is better to cover the whole spectrum.
Career evolution
JM: A more personal question now, What was your route into investment and, in an alternative universe, what do you think you would be doing if you had not taken that route?
RH: My route in was actually through financial advice. The first year I was in the industry, I did my financial planning exams and then, after a year of that, I moved to Investec and worked on the discretionary side, managing client portfolios.
I then went from that to RSMR – into the research side. And then into Progeny, where it has evolved into research and fund management, running investment funds.
JM: And in the alternative universe – what would you be doing?
RH: I think I would do something very different … open a wine bar.
Beware the falling knife
JM: That sounds like a good answer. What is the biggest investment mistake you are prepared to admit to and what did you learn from it?
RH: The biggest mistake I have made was when I was about 22 or 23 – so very early on in my career. Luckily, it was PA – so it wasn’t for clients. There was a company called Quindell, which was a smaller company in the UK that grew and became sort of a darling – a lot of retail investors went into it.
A short report came out saying half the business was a fraud and the share price was down 50% or 60% overnight. I didn’t quite believe it, though – I thought it was still a decent business, bought in – and it was down another 60% or 70% over the next three or four months. I learned not to try to catch falling knives – and I learned it the hard way.
Matter of interpretation
JM: Let’s talk about AI. Do you see it as a threat or an opportunity for professional investors – or both?
RH: I think it is a massive opportunity. I think it can make us more efficient in research and gathering data. A lot of this job is trying to gather data, format it and then interpret it.
I think we can move to a world where we are not spending our time collecting data but are just interpreting it, which should give better outcomes as we spend our time focused more on the important side.
Tall story
JM: Great stuff. Moving on to everyone’s favourite Choice Words question – outside of work, what is the strangest thing you have ever seen or done?
RH: That is a great question. I think the strangest one for me is probably having breakfast with giraffes. That is probably the oddest thing I have done. Very privileged to do it – it was an amazing experience – but that was very bizarre.
JM: Presumably this wasn’t at home in Yorkshire!
RH: No, it was in Kenya.
JM: Oh, right. So how are you on their level? Are you watching this all from down below or are they sort of coming up to you at a higher level?
RH: No, it was at a table like this and they put their heads through the windows – like the windows behind us – and they eat food off the bowl.
Intelligent investor
JM: That certainly counts. We are zipping through here – just two more questions. First, who or what has been the most important influence on your career?
RH: The most important person to help me in my career is a guy called Graham O’Neill from RSMR. A very intelligent investor, who spent a lot of time with me, teaching me how to research funds. He is someone who can just go back decades – he has been in the industry a long time.
And you would go to fund manager meetings and pick up stuff he spoke to the manager about 12 or 15 years ago – and then he would pull them up when they contradicted themselves. But the way he looked at the world – and taught me to look at investments and the world – has really changed my analytical ability.
On the Beats
JM: Nice answer. Thank you. Last question, then – we call these interviews ‘Choice Words’ because of what you do for a living but I am now looking for two personal choices from you. One would be a book – it can be on investment but does not have to be – and one is a ‘free hit’. It can be on anything.
RH: Book-wise, my favourite book I have ever read is Shoe Dog by Phil Knight – about how he created Nike. It is really interesting seeing him create a business from a garage to a multi-billion-pound global empire – and just the struggles you have throughout. It is not plain sailing – it is not an easy journey – but it is just really inspirational and fascinating.
The other choice is probably a TV documentary called The Defiant Ones, which is on Netflix. It is about Jimmy Iovine and Dr Dre and it basically goes through their history individually, how they came together, how they created Beats headphones and then sold it to Apple. But it is two very inspirational stories and two very different backgrounds in the music industry.
JM: Thank you. We don’t get enough TV recommendations now, I think – when I first started asking the question, we got lots of television but don’t anymore. So thanks for that – I will dig that one out. Well, those are great Choice Word choices, Rob. Thank you so much for those – and thank you very much for chatting to us today.
RH: Brilliant – thanks for your time.
JM: And thank you very much for watching. Do look out for further Choice Words videos as they are published.
