Rules are well-intentioned but we're in 'unintended consequences' territory

Brocklebank says: "I loved studying economics at school and wanted to carry on doing that at university. During my A-levels I came across a sponsorship scheme offered by accountancy firm Arthur Andersen.

They put school leavers on their graduate training programme for eight months during their gap year before university and then gave them a travel grant, plus some sponsorship, as well as work opportunities through university. 

Although it wasn’t compulsory to work for them after university, they made it pretty attractive. I was in their tax department, which had some brilliant minds working in it so I knew it would be intellectually interesting.

I wasn’t really cut out for it long-term, but I figured that the accountancy qualification would be useful and getting to understand accounting and how deals are structured was really valuable training.

FTAdviser: What attracted you to fund management?

Various members of my family had talked about investing and the stock market on occasions. I remember my grandfather telling me about how his father had seen his portfolio absolutely annihilated in the great crash of 1929-30 so I had the seed of interest planted early.

Two things happened in the course of the training contract with Arthur Andersen that really influenced me, though.

Firstly, an opportunity came up through my politics tutor at Oxford, Vernon Bogdanor, to spend six months as an intern in the Policy Unit at 10 Downing Street.

The gap between analysis, decision and action was just too big.

To the enormous credit of the team at Andersen, they let me do it and kept my job open for me although I do remember one partner at the time saying “Why on earth would you want to do that?” when I first told him.

As expected, it was a wonderful opportunity just to see what it is like in that sort of environment.

David Miliband was leading the Policy Unit then and the intellectual horsepower round the table was huge. This was 1998-99 so the Blair administration was fresh and ambitious, but still struggling a bit to find the levers of state to actually make change happen.

All that said, the most powerful lesson from the experience for me was that it made me realise that I could not work in that type of environment.

I left with huge respect for everyone involved but the gap between analysis, decision and action was just too big and the process of building consensus for action was too vague and imprecise for me.

FTA: Bit like financial services, then? But what brought you back to the profession?

On returning to the business world though, the dotcom bubble was just getting going and it’s easy now to forget just how crazy it was: one of my bosses at Andersen was day trading internet stocks around his other work.

I remember going into his office and him saying to me “Dan, I’ve just generated £30,000 and have paid for my wedding”. 

When I said to him that that was 'pretty cool but he might want to bank that', because it didn’t feel particularly sustainable, he agreed and said “Yes, but I’ve just got to pay for the honeymoon first".

That was pretty much at the peak of the market and needless to say, he didn’t get out in time.

But the episode made me realise that this was genuinely interesting to me.

Thankfully, while I dabbled, I didn’t have enough money to get painfully burned at the time but it made me wonder how someone so intelligent in one dimension could get so wrapped up in this fervour.

'It was total carnage in the industry'

Coming into 2001 I knew that my training requirements were close to completion so I started looking around for the next step, but it was total carnage in the industry.

The bubble had well and truly burst and markets were just grinding lower relentlessly month after month, and there weren’t many opportunities. 

I discovered Orbis through an advert placed by a recruitment consultant and it really was like the cheesy 'lightbulb moment' for me.

The explanation of their investment philosophy was the first time anyone had really articulated that successful investing is really about operating at the intersection of micro-economics and psychology.  

Even better than that, here was a firm of ‘value’-orientated investors that had not only managed to side-step getting sucked into the whole dotcom boom, but one which had survived as a business through that.

Don’t forget that many investors with great track records in the late 1990s either capitulated during the mania, or were forced to shut up shop in the run-up to the peak of that bubble.

So it really was rare to find a firm at that time with both clarity of investment approach and proven long-term success. 

FTA: What has changed over the time for the better - and for the worse?

The collapse in the equity culture in the UK has clearly been the most worrying development that I’ve witnessed play out. The move by corporate pension schemes to Liability Driven Investing, driven by accounting regulations, was really the biggest blow.

The UK market feels moribund now; UK companies are trying to find ways to list in the US rather than here in the UK. This is a terrible shame.

I don’t think it’s a UK specific thing (other European capitals have the same problem), more of a testament to the ‘pull’ that the incredibly high valuations in the US have created.

The regulatory burden disproportionately impacts smaller firms and acts as a barrier to entry.

On the positive side, auto-enrolment of individuals into employer pension schemes seems like a seismic shift that will only be fully appreciated in a couple of decades.

In short, the government has used a behavioural nudge to get people to act on a subject that we know most people tend to put off dealing with. 

Ultimately, many people will benefit from the nudge towards investing and we hope to help people with their investment goals.

FTA: How much of a change has consumer duty made to Orbis?

We take the requirements under the duty seriously and have invested a lot of time and resources ensure we are meeting the expectations set by the duty, but the core of our culture has always been about putting our clients’ interests first.

It came directly from our founder Allan Gray, who was evangelical that if we look after the clients and do a great job for them then the business side of things will take care of itself.  

We’ve long had a mantra internally when faced with a decision: “What’s in the best interests of clients?”. This is a way of deciding complicated decisions – an approach that is closely aligned with the consumer duty. 

FTA: Are asset managers anticipating a great deal of regulatory change as the UK unwinds from EU legislation post-Brexit?

I have zero ability to forecast the rate of regulatory change post Brexit.

What I will say is that we operate across a number of regimes around the world and our experts in this area would all say that the UK regime is notably more onerous than average.

Personally, I believe that all the regulation in the UK is well intentioned but that we are well into “unintended consequences” territory here.

The regulatory burden disproportionately impacts smaller firms and acts as a barrier to entry.

Active management is a field in which big is not necessarily better.

We need an industry in which boutique and smaller managers can survive and prosper, not one in which there are barriers to entry constructed by the regulatory regime.

FTA: How difficult or easy has it been to maintain a focus on quality, when everything seems to be going in the same direction?

Our investment approach does not fit into any neat style boxes. Simply put we look to buy shares in businesses where we believe that we can do so at a discount to their true worth, a.k.a, intrinsic value.

The market is generally pretty efficient, but history shows that mispricings can occur, particularly when human emotions take over, normally when there is fear or investors are overly focussed on short-term developments.  

Our approach is therefore fundamental (we are bottom-up stock pickers), long-term (we think over cycles not quarters) and contrarian (we believe the best opportunities are found in areas of the market that are out of favour).  

No amount of diversification will protect you when trends change if all your holdings are highly correlated.

The period from 2012 onwards has been challenging, not least because the actions of central banks have depressed interest rates which has led to some pretty enormous valuation distortions.

While that has been challenging, we know that periods like this have happened in the past and will occur over time.

The flip side is that the valuation gaps within the market, a good measure of the level of investment opportunity, have opened to historic levels so we are really excited about the potential of our approach from here. 

FTA: What are your concerns around correlation, especially for investors in the UK?

Investors in the UK may be far less diversified in practice than they think. This will be a real problem if we see a regime shift in markets and I think there’s a good chance that the recent uptick in inflation will bring that about.

The reason this has built up is that markets have trended so strongly for the last few years driven by sustained low interest rates and a low term premium in particular.

Equity markets have been dominated by large, mega cap growth stocks and so indices are now unusually concentrated which is a risk for passive investors.

The rules are always changing.

However, looking at the large multi-asset funds in the market, the correlations between them average around 90 per cent, which seems very high to me and suggests a significant degree of convergence across the market.

Unfortunately, no amount of diversification will protect you when trends change, if all your holdings are highly correlated.

The year of 2022 provided a preview of what that could look like.

Our funds look different to their benchmarks as a result of where we see the opportunities today and we are much less correlated with the indices.

Therefore, we can act as a genuine diversifier for clients in an environment where it's hard to find anything that is genuinely different.

FTA: What stocks do you regret buying/not buying and what are the lessons to take from this?

We looked at the US railroad stocks a couple of times about 20 years ago and on both occasions ended up not investing in them, for reasons that today I certainly regret.  

The reason I find the episode so fascinating is that recently there has been a strong investment narrative develop along the lines of “all you have to do is buy high quality, capital light, compounders” and hold on for ever.

But, look at these rail stocks – they are extremely capital intensive and are almost the opposite of this mantra. And yet, over the past 20 years they have massively outperformed the US market, which in turn has significantly outperformed the world index.  

So, what gives?

Well, 20 years ago these railroad companies were considered to be un-investable.

But they were in the process of dramatically re-focussing on customer service and operational efficiency, as well as starting to return excess cash to shareholders. It was this change in perception that led to the really fantastic returns.

In short, the episode is a powerful reminder that there is no single golden rule that will guarantee investment success – that’s probably what makes it so interesting.

The rules are always changing. Yes, high quality companies can compound at high rates, but only if competition doesn’t erode that quality.

Too often when people look at ‘quality companies’ they ignore the survivor bias effect and the fact that a load of companies didn’t survive.

FTA: What happens outside of work? 

I’ve tried to be present for my family as far as possible, despite the long hours required by my role.

But I also perform better on all fronts when I am physically active, so I try to cycle regularly and get a few bike races in each year with London Dynamo cycling club.

There’s nothing quite like pinning a number on and being at the start line of a race, particularly if it’s surrounded by mountains.

At the same time, my younger son recently started investing and suggested going to Omaha for the Berkshire shareholder meeting so we did that as a father-son trip in May.

It was a terrific experience on so many levels but it does mean that the line between work and family time is getting a bit blurred these days.

That said, I’m very lucky in that I genuinely enjoy what I do during ‘work’ hours so it’s no real hardship.

simoney.kyriakou@ft.com

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