Collaboration, open-mindedness, trust, dynamism, accountability – as we will discover a little later, these are all qualities Hanneke Smits views as integral to Newton Investment Management, the business of which she has been CEO since August 2016. The more you speak to her, however, the plainer it becomes she also sees them as fundamental to the future success of the entire investment sector – as well as everybody who works within it.
From co-founding the not-for-profit Level 20 organisation with a view to inspiring women to join and succeed in the private equity industry, to involving Newton in the KickStart Money financial education campaign and her concerns about attracting new blood to the sector after the UK leaves the European Union, Smits clearly believes the world of investment cannot afford to overlook any potential, wherever it might be tucked away.
In light of that, and ahead of learning how she ended up at Newton and her thoughts on the UK’s investment sector post-Brexit, it seems apposite to reference a line from an interview Smits gave a few years back. “I grew up in the Netherlands,” she told the Cityparents website in 2017. “It is a small country and you soon realise at an early age how important it is to be global in your views and connected to the rest of the world.”
So what brought Smits to her current role? “After 22 years in private markets, I took some time off to explore non-exec roles,” she says. “One of the things I did at that time was to found the Level 20 campaign, which led me to Newton and BNY Mellon Investment Management, which were so important in founding the 30% Club. Later, when Helena Morrissey decided to move on, we ended up in a whole different conversation.
“At that point, I had realised I was not ready for a life of non-executive roles. I like being part of a team and, as my own background is a bit more global, I thought there was a great opportunity to help ensure Newton remains relevant for our UK client base but is also able to grow in other markets where we are supported by BNY Mellon IM – particularly in the US – and that is really what we have been investing in.”
This outward-facing attitude is also to the fore when our discussion turns to the UK’s departure from the European Union. “We have worked very actively with our colleagues at BNY Mellon IM and we do feel we are well prepared,” says Smits. “At Newton, where we have always started with our Brexit planning is to test how our portfolios will be impacted under different scenarios.
“And, to a large extent, these stress-test scenarios were showing any impact would be limited because most of our portfolios’ exposure is to relatively large companies that are not really confined to the UK market. From an investment performance perspective, we felt we were in a good place and could move on to a second set of questions around whether we can continue to serve our clients in the EU.
“Can we continue to be the investment adviser to the funds that are run out of Dublin through the offshore range BNY Mellon IM runs for us? So far, that appears to be the case. BNY Mellon IM has strengthened its offices in Luxembourg and so, for now, we believe we can continue to be the sub-adviser on those funds on the same basis as we have in the past.”
Brexit is creating barriers for talent acquisition
A third element of Smits’ and Newton’s Brexit thinking focuses on the retention and acquisition of talent. “We do not have many people from the EU as employees of Newton – although I am one of them,” she says. “I have applied for ‘settled’ status, so there is that aspect but, on a more important note, investment management clearly needs to attract talent from diverse backgrounds to do the best we can for clients.
“Of course, that is important for Newton and BNY Mellon IM – but it is for everyone else, too. For a long time now, the UK has been vying with New York to be the number-one financial centre in the world and that has enabled it to attract very talented people from all over the globe to apply to come and work here. So, throughout the Brexit process, my worry has consistently been: will it stop that talent coming to the UK?
“It might only be temporarily and we do not know yet what the long-term impact is going to be. The government has always been very clear it looks favourably upon industries that attract highly skilled labour, if you will – and clearly investment management is part of that. Still, having spoken to young people in continental Europe, in the short term the whole Brexit question has created some barriers.”
One crucial factor determining the degree to which Brexit impacts the domestic investment management sector, Smits believes, is whether EU supervisors ultimately deem the UK to have an equivalent regulatory regime. “The best-case scenario for UK investment now is the government moves forward with adopting the concept of ‘equivalence’ so we can continue to serve our clients in the EU in the way we have so far,” she says.
“Those negotiations are currently underway but what we do not know are the terms being negotiated that will impact financial services. I believe we are going to see some clarity on this over the next six to nine months but it would not be good for investment management in the UK if somehow we move away from equivalence. That would just increase costs.”
‘Human plus machine’
Continuing the forward-looking nature of our conversation, Smits says Newton is in the process of upgrading its technology infrastructure across its back, middle and front-office systems.
“Looking ahead, I expect more of investment’s front-office functions to be supported by technology,” she continues. “We still very much believe in the concept of ‘human plus machine’ but it is about learning how best to work with those machines.
“We are in an industry that relies on judgement, which – as far as I can tell – humans are still better placed to deliver than machines.” Of the various projects currently being undertaken at Newton, Smits picks out two front-office ones centring on the fields of natural language processing and ESG reporting – noting of the former: “Technology can be really helpful in the investment process through filtering out noise.
“So our CIO Curt Custard has hired some people with more of a data scientist background, who use natural language-processing tools to support our thematic framework. Through this, they can better identify what securities might fit certain themes and give the analysts who are selecting stocks a more focused list to pick from.
Newton steps up its responsible investing reporting game
“On ESG, we need to up our game in reporting. As a business, we are by no means alone in this but, certainly, a lot of end-customers are now used to having their reports on an app and we are not quite there. Additionally, as the focus on climate change increases, for example, we have found a number of our clients want to see not just financial reports but more practical illustrations of the effects of their portfolios.
“How, for example, does my portfolio help lower carbon emissions? What is it doing to reduce water use? How diverse are the boards on my portfolio? So we now have a technology working group that is looking at how we can report, on a quarterly basis and in a user-friendly way, how our portfolios are tracking both financially and on certain other metrics that are relatable to the end-investor.”
Since we are on the subject, how does Newton counter the risk of portfolio managers becoming so swept up in ESG considerations they lose their investment bearings? “You do need a framework – which we have – but part of the problem here is there is a lot of noise,” replies Smits. “One thing we find, for example, is that different agencies can give the same company very different ESG ratings.
“When our responsible investment team have pulled in all the external data they can, they perform their own review and assign their own rating, which then informs our equity analysts. We aim to identify companies that will make a positive contribution to society as well as to financial performance, but the responsible investment team can also veto a lowly-rated security, which means it will not be included in a sustainable strategy.
“We do need to be selective with our sustainable strategies but we also believe we need to engage with certain businesses – and we do. As stewards of capital, it is also about positively influencing how capital is allocated and, to do that, you need to engage with businesses and use your vote. If everybody chooses to divest, it does not really solve anything.”
Getting to grips with Newton’s own ESG score
Reinforcing the idea that everybody in the investment world is part of a bigger whole, Smits highlights her ambition that, when it comes to ESG, Newton should hold itself to the same standards it expects of the companies it owns. “When I joined, I had my own assessment of Newton as a business but I asked our head of governance how we would do if we rated the company on its ESG score,” she explains.
“Newton is not a listed company but it was a very useful exercise because it meant we were able to identify certain gaps – some of which I had identified myself – and we are now working towards closing them. Yet this is also a matter of culture and I believe it is crucial the values we think are important as investment managers are also reflected in Newton as a business.
“‘Culture’ is always a bit of a nebulous concept, isn’t it? But I tend to think of it as: how do we do things around here? There are usually a number of values that, combined in a certain way, make a company what it is and so, when I think about Newton, for example, I think about collaboration – we have a team-based approach to investing, we collaborate with our partners in BNY Mellon IM and the wider group and we clearly collaborate with our clients.”
Another value Smits views as key to Newton is open-mindedness. “As an investment firm, it is so important to be open to new ideas as it helps you form your security selection,” she says. “That may sound obvious but then we also need to be open-minded to changes around us. Asset management is under a lot of pressure – we can’t stick our head in the sand. We need to make sure we remain relevant, which means we must continue to adapt.
“Trust is very important, too – both internally and externally. Clearly our clients need to trust us but we also need to trust one another as colleagues because, in firms like this, people have to feel safe to speak up when they think things are not being done as they should be. And then I would add in dynamism – so being able to adapt – and accountability.
“Again, that is accountability to clients – we own our track records; we have to deliver investment performance – but it is also accountability to ourselves. How are we doing things at Newton? So culture is important – and you need to work at it, you need to lead by example, and you need to call it out when you see people are not behaving in a way that is consistent with your culture.”
Quickfire Q&A
What single issue should most concern professional investors at present?
Educating your end-investors about ESG. Many investment firms define ESG differently so there is confusion around ethical, sustainable, impact and so on. Make sure your end-investors are advised appropriately so that, when they look at ESG labels or sustainable labels or whatever, they know what they are buying. Do they understand it? How do you measure it? What does it mean to them?
What is your ‘top tip’ for professional managers to help them run a better business?
Focus on nurturing teams and nurturing diversity.
And what is the best piece of advice you have ever been given?
Have courage. In the investment world, the way to make money is to be non-consensus and be proved right. So having the courage of your convictions is really important.
Does anything about your job keep you awake at night?
The human aspect of investment. As I say, your courage can be tested at times and so it is not so much how I think people at Newton will react but how they could react when markets become more volatile.
What most excites you about your job?
Again, it is people – our clients as well as my own team. I like interacting with people and that is what makes me come into the office every day.
What advice would you give to someone starting out in investment today?
Be patient – building up a track record and acquiring the relevant skills does not happen overnight.
