Blue Wave Fails to Reach Shore
November 6, 2020
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Terry Welch: Hello and welcome. I'm Terry Welch. Thank you for joining us for a conversation with Carol Geremia, President of MFS Investment Management. Carol recently spoke at Institutional Investors, Defined Contribution Institute, 30th year anniversary. Sharing some of her observations over her 36 year career in the industry. Carol is joining us today to share some of those perspectives and help us grapple with some of the challenges that we're meeting in today's environment.
So Carol, so much has changed in the past several decades. What were some of your observations when you first joined the industry?
Carol Geremia: The globalization is probably a huge piece of that. And when you think about how the industry has grown and how many people now are investing around the world and having access to the public markets, and for that matter, even the private markets, it's really amazing. It's incredible to see the capital markets working at this level. I don't think I would have ever imagined. But when you kind of hone in on the industry itself, the change is really about thinking about the end investor.
And I'll speak just to the public markets, and the public company. 25 years ago, 30%, 35% of the public markets were owned by institutions. Today, that number is well over 80%, is now owned by institutions. And that means all of us. Mutual funds, sovereign wealth funds, pension funds, endowments, and foundations. And so you've got this real, real longer investment chain that didn't exist when I first started. And so that really, over time, has changed massive amounts of the dynamics, in terms of who your customer is, who are you focusing on in terms of, the intermediary that is holding us accountable, and how are those relationships along that chain?
Terry Welch: Now, it seems, unfortunately, with that greater disintermediation, there seems to have been some erosion of trust, in terms of the general public and the financial industry in general, the investing industry in particular. To what do you attribute some of that erosion of trust, and how should we really be trying to address that and improve that?
Carol Geremia: Well, I think when you think of the public and the end investor, clearly, especially the global financial crisis, you had some bad actors. And that was a major industry debacle right? To erode trust, that's the most obvious one. But I think the one that's not obvious is the level of intermediation we have between the end investor and the public company. And so I think what needs to change is so much of us thinking about the alignment that we should have more of with each other, and how we hold each other accountable. Because as that intermediation and that professionalism has grown, you would think, for example, that time horizons would have gotten longer, but the irony is, is they've only gotten shorter. And that in itself is a huge problem of misalignment, in terms of what we're really striving for, and when we should hold each other accountable, and how we should hold each other accountable, as it relates to measurement.
And so I think a lot needs to change there. And I think if we don't change it, then the level of trust, down to that end investor, doesn't get better. It gets worse. I've spent a lot of time refocusing the dialogue, thinking about reporting, thinking about all the issues that as we show up into the marketplace with end investors, is to make sure that we're aligned in everything that we're doing, and that people really understand what our core purpose is. And that is, for all of us in the investment chain, is to create value responsibly. How do we do it and how do we help people measure that we're doing that well for them?
---------------------------THE LONG VIEW-----------------------
Terry: So we've talked about staying focused on the longterm and how important that is. What are some other real key factors that you've experienced that lead to successful investing?
Carol Geremia: I think so much of it is holding true to the discipline of having a longterm view, but then you've really got to answer the specifics of what does that mean and what are the behaviors that need to happen during that time. And so much of it is about deep research and getting to the truth and getting to the information to give you the best analysis advantage and the best opportunities. But what is the core of formulating the ability to do that? And it really does come down to collaboration and teamwork.
At the end of the day, it comes down to trust. Trust within your organization and with each other so that information could be shared to the best of your ability.
Terry Welch: We talked about collaboration being one of the most overused words and probably least well-defined and maybe least well-practiced, but also culture is also becoming a kind of hackney term. What is it about a culture that really leads to good investing from your experience, from what you've seen?
Carol Geremia: Well, as an active investor, culture is at the core. If you don't have good culture today, I do not know how you perform as an active manager, because culture is actually what supports you taking a long view, culture is what supports the trust that you have with each other in terms of sharing the information. You can put all the structures in the world in place to get people to talk to each other, but if they don't have the culture supporting that trust and that free flow of information and that, by the way, that's also incentive behavior, it's how you operate as an organization.
It was interesting I was just talking to a group of young women who are so interested in getting into this business and I said not only is it sometimes hard to attract women into the industry, which we're finding is getting hugely, hugely better, but what she said to me I said to this small group of women. I said, "If you come into this industry what would make you stay?"
And one of the women's response was, "I want to be somewhere where it's more than just a job." And I said, "You're exactly right because that's describing culture that it's more than just a job" and that everybody is united on that sole purpose, and it's really clear from the top down and from the bottom up, and that people are centered on understanding that really clearly in their day-to-day work and that is what builds trust, and that's what builds humility, and that's what builds teamwork, but it's got to be constant, it has to be clear, and it's got to be led.
Terry Welch: Any examples maybe conversely, of what hurts culture, what can lead to less effective collaboration or a culture that really isn't focused on achieving the best investment outcomes for clients?
Carol Geremia: I think in a lot of ways, the industry is very much more about a blame environment than a trust environment today. And it's not on purpose. It's not because people want that. It's because we're so focused on micro measuring everything in short periods of time, that we think that's a way to hold everybody accountable, which is critically important. You can't manage what you can't measure, but what you measure matters a ton.
And so as timeframes have shortened, everybody sort of is looking for that accountability and it actually erodes trust. It doesn't build on trust when you're trying to micromanage short periods of time. When in fact, something that you need to be doing over long periods of time is what you should be measuring and the behaviors that get you there.
Terry Welch: In many cases we've defaulted to looking at the quarter first and then thinking about how the longer term is affected. What have you done to help change maybe the focus in terms of what people really should be using as the best measurement for longterm success?
Carol Geremia: I just think that we've got so much misalignment in the whole investment system that needs a different change, a different change of how we think about talking to each other. So one of the basic ways to do that is change how we look at investment performance. Because we do not exist to generate short term alpha when we're managing to people's longterm outcomes. That's not what we're hired for. What we're hired for is to create that alpha over full market cycles and longer periods of time.
But the interesting thing is the industry has all gotten us anchored into one, three and five year returns as the core thing to focus on. And the three year number is that primary focus for every region in the world. While the reality is, is that a full market cycle is longer than that. It's much longer than that. And so I think the simple, low hanging fruit is to change some of the reporting to start with the 10 year number.
---------------------------WHAT GETS IN OUR WAY-----------------------
Terry Welch: So there's been a lot of different severe events and stresses that we've seen as a team and as a firm. But this whole issue with COVID-19 has really brought a host of new challenges and the havoc and devastation that it's reeking globally has been significant both on society, on people's health and on the economies and markets. Can we really take any of our learnings from history to help us through this type of a challenging time?
Carol Geremia: I would say the older I get, I guess the more I like history, but history is a really good guide especially when you're in a fiduciary role, because the one thing I have learned decade over decade, crisis over crisis, is any time we've responded in a short-term way to a long-term problem, it's usually been a bad answer.
And I guess when I look back not only in my career, but even just in history, history does show us and tell us that we can get through this. There has been major pandemics, as we know in history, and world Wars and depressions and major market corrections and volatility. And I personally never lived through a pandemic before. So I have to tell you, I still feel like I'm in shock sometimes. But at the same time, I know from the core is staying connected to the human element of what we all do, and knowing that taking a long view and being very diligent and deep, being responsible and taking care of other people's money is what we have to hold fast to, and be optimistic and hopeful that we will come out of this if we stay focused on the long-term in doing the right thing.
Terry Welch: Carol, we've talked a lot about the environment that we're in, the challenges that the pandemic brings. We also have other challenges, longer-term issues that are affecting the investing landscape, whether it's the rapid evolution of technology and how that's impacting all industries, whether it's some of these sustainability factors around environmental and societal impact, how are we keeping all of that in perspective as we focus on investing in this challenging environment?
Carol Geremia: You have to take it all in. You cannot be asleep at the switch on any of these huge disruptors. Technology, as I said, has disrupted everything we all do in terms of understanding the information and the onslaught of information and how you formulate your investment information, your investment ideas, and ultimately, your investment decisions. And how can technology help you in doing that, and actually, how can it hurt you?
As it relates to sustainability, and I'll add in inequality and diversity inclusion, all of these things, I guess if there's a silver lining to COVID, it has accelerated all of it and the importance of all of it. And many of us knew from before COVID that these were the biggest signals in the world that was going to hit not only our economies and our world and our societies, but they were acutely critical to long-term investment decisions and any, quite frankly, any investment outcome.
---------------------------FOCUS ON WHAT WE CAN CONTOL-----------------------
Terry Welch: We've talked a lot as an industry about the focus on diversity and understanding that we need diverse perspectives in order to make good decisions in order to make sure we're considering everything. What are some means that firms like MFS or others implement or have implemented that really help in that regard?
Carol Geremia: If you don't have an authentic culture that is going to support inclusivity and support different views and different voices, you're going to have to start back at ground zero, not only in terms of just getting the diverse population, but how that culture is going to change and evolve to make sure they're a supportive, inclusive environment, that people feel safe, they feel comfortable. They feel that their voices are heard.
We have an opportunity to humanize so much more and recreate the trust that we absolutely need, not only internally, but externally to the people we serve.
So I think all of these conversations about diversity and inclusion and what has accelerated is just a huge opportunity to get right, to do differently, have a different response. And so at MFS, you name it, we're doing it in terms of looking at so many different ways, whether it's on the recruiting side, whether it's the mentoring, sponsorship, working with schools, making sure we've got leadership development for a diverse crowd. My thing, having been at MFS for 36 years, is I want to leave MFS more diverse and inclusive than when I came.
Terry Welch: So Carol, over your time in the industry and time working with clients what have you really found most inspiring?
Carol Geremia: Working with clients in itself and learning from them is tremendously inspiring to me, especially being able to do it all over the world, but if I think more deeply what inspires me is working together to get to a better place, a better outcome, trusting each other, and knowing that trust takes time. I think about any of our relationships with clients or even internally, you realize that you want to have trust but actually it takes time, and it builds on the actions and the behaviors that you put forth in any relationship.
And I think what's inspiring is to watch those relationships grow and that trust grow, and to see the reinforcement of the right behaviors that are very clear about what builds trust and what doesn't.
Terry Welch: So we've talked a lot about market cycles and history and challenges that we've had in the past, but do those really apply when we're facing a huge challenge that we are through the pandemic, not to mention all of these other disruptors that we're dealing with as investors?
Carol Geremia: Yeah. I think it does. I think it does, because when you look at some of the most traumatic times in history, or even now, it comes back to the basics of sticking to the core that you know, really ultimately prevails. The truth prevails, right?. So if you stay close to that truth, what is that? Knowing that connecting with each other, staying connected with each other, sharing information, trusting in each other, all of those, and most importantly, sticking to the plan of having a long view. That actually is what allows you to survive.
Terry Welch: And do you feel optimistic? Do you think we'll get through all of this?
Carol Geremia: I do. I do. I am hopeful. I'll tell you this story. Before the lockdown, I went to this little shop and it had this book, and it was a very pretty book. And I picked it up just because it looked good. But when I looked at it was called, "Optimism." And then when I saw who wrote it, Helen Keller. I opened it up. Now I didn't read it when I bought it. It was pre-COVID. But in the middle of COVID, I read it. It's a short book, worth picking up and having everybody read. She wrote this in 1903. And she talked about leaders, nations, and people. And what she said, and I'll quote her, "Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence." And I think the resilience of, not only all of our world economies, but the resilience of our industry, the resilience of a firm like MFS that is going on to celebrate a hundred years of being in business in 2024, that our response will be what it needs to be.
And that is to change, and evolve around that change so that we can still stay focused on the core purpose of ensuring that we're creating value responsibly, creating value sustainably, creating value for other people, so that they can retire with dignity.
So in times of stress you kind of come back to the core, a core of what you know works, and that is to stay connected with each other. Stay connected with clients, stay connected with colleagues, to be incredibly committed to not just the focus of three to five months but really that longer term view and what are the markers to get you to that longer term destination.
And then, at the end of the day if you know you're doing the right thing and you're focused on the sole purpose of creating value responsively like so many of us are in the industry then we'll come out of this thing okay, but you have to stay focused and you have to be committed to that long-term plan, and be incredible committed to looking at things differently.
Terry Welch: Oh, that's great. And that's probably a good place to close and wrap it up, and really appreciate your time and sharing some of your experiences with us and giving us optimism for the future. At a recent company meeting, you had asked where we were a year ago today, and you mentioned that you and I actually were both in Australia, meeting with clients. And I know that's something that we both really miss during this period of not being able to travel.
So we do appreciate everybody tuning in for this conversation virtually. And we look forward to, hopefully, the not too distant future, when we can be out meeting with people in person once again. So thank you very much for joining us.
Carol Geremia: Thanks, Terry.