The new permanently-altered macro landscape of deglobalisation, a shrinking toolkit for central banks and limited natural resources means inclusion and diversity across investment teams is more vital than it ever has been, according to Newton’s Mitesh Sheth MBE (pictured).
Former Redington CEO Sheth, who joined the firm as chief investment officer in February last year, said it was “obvious” 18 months ago that the world was entering a “very different regime”.
“Russia had just invaded Ukraine. Global governments were starting to become focused on security over efficiency, and we were moving into deglobalisation – after decades of globalisation and its disinflationary benefits,” he explained.
“We were starting to spend more money on defence again, having spent years focusing on decarbonisation. Central banks could no longer print more money without losing their credit ratings. It started to feel as though we would end up with a very fragmented and divergent world.
“I didn’t just want to be on the advisory side of that. I wanted to be part of an organisation that was trying to help clients work their way through that. And Newton felt that we were going into a market environment that perhaps nobody had never seen before – certainly not for the last 40 years.”
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But rather than focus attention on reactive asset allocation as a result of these changes, Sheth said it is vital to begin at a team level in order to achieve strong risk-adjusted returns for clients.
“I don’t run money – I run portfolios of people. People are my stocks. I don’t want a portfolio that’s 100% full of tech stocks, for example, or indeed any single style of company,” he reasoned.
“If we are in a regime that has not been experienced in at least 40 years, we cannot use history and historic data to guide us. We have to rely on learning, experimenting, making mistakes and adapting.
“We have to build diverse teams that monitor everything with different perspectives.”
Combatting ‘groupthink’
Prior to joining Newton, Sheth headed up consultancy firm Redington, where his job included developing a framework and process for screening and selecting fund managers.
“The reality is, I find that most fund management firms hire very similar people, who studied similar subjects, who were good at similar things – usually maths, stats, and economics – who went to similar universities to study similar courses,” he said. “They were then hired as part of similar graduate programmes, and then they all do the same investment qualification – the CFA. Then, they were given the same Bloomberg terminals using the same data, and we suddenly expect them all to give us differentiated performance.
“It does not make sense when millions of people are indoctrinated in the same way. Some of the best fund managers I have met over my career have not come off of the same manufacturing belt – they have had a break in their career, or something has affected their risk appetite, the way the look at the world, the way they join the dots together.
“This is particularly important in terms of more macro, multi-asset strategies.”
Eight blind men and an elephant
The CIO said it is a common misconception that fostering an inclusive and diverse environment is an HR box-ticking exercise. Rather, he argued it is basic due diligence when being put in charge of investors’ capital.
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“I am a Jain by background, and there is a wonderful parable in Jainism about a crazy elephant running through the forest, and everybody in the village wanted to see it. There were eight blind men who wanted to see the elephant, too.
“So, they go and try to figure out what an elephant is – because none of them had ever seen one before. They all hold hands in a circle and gradually approach the elephant.
“One of them says an elephant must be thin and slippery, because he is holding its tail. The other said it must be like a big and flat like a brick wall, because he was leaning into the side of the elephant. Another said it must be like a tree trunk, because he was holding onto the elephant’s leg – and so on.
“But essentially, these eight people had a completely different view on reality. But the only way for them to really know what the elephant was, was to talk to each other and compare notes.”
Sheth said this is what he is trying to achieve as CIO – to firstly foster an inclusive environment which, by proxy, naturally improves diversity, reduces groupthink and creates a team that is well-equipped to deal with unusual market or unprecedented headwinds.
“How does the industry behave? How does a certain sector react when interest rates are high? How does it deal with some of the climate risks we are facing? How does it deal with deglobalisation? Is it dependent on China, or Taiwan? Is it impacted by Russia?
“Diversity, equity and inclusion isn’t about ticking a box. It’s not about meeting some quota or target. Yes, it is morally the right thing to do. But commercially, this is the only chance we have of trying to navigate what is an incredibly difficult market environment.”
Taking action
In terms of how firms can create a more inclusive environment for its employees – which in turn will produce better investment returns, improve staff retention and boost employee productivity – Sheth said it is “super simple” as a concept, and that the first step is to “actually want to do it” rather than appease the CEO, or the company board.
“You have to first ask yourself, ‘what are the voices that I am missing at this table?’ [Diversity Project workstream] #TalkAboutBlack uses a very good hosepipe analogy, in that you must address all the individual kinks which are stopping various voices being heard.
“All it takes is a little bit of curiosity. Is that person suffering from imposter syndrome? Are they introverted? Were they skipped over for a promotion? This requires willingness and some investigation.”
From here, Sheth said companies can produce shadow boards, or shadow investment committees, to challenge the status quo.
“On the one hand, I’d say it is easy. But on the other hand, it is hard to some extent. Because broken systems exist and remain broken for a long time, because they serve somebody’s interests to stay broken.
“There is a reason why we hire people who grew up in the same area, who speak the same language, whose kids go to the same school, who go to the same places on holiday. It makes it more fun, it makes things easy. It means there is less friction.”
However, Sheth stressed that investment firms are not being paid by their clients to ‘keep things easy’.
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“You need to build a team that disagrees a lot,” he said. “That requires real effort, real skill and a lot of time for everybody to calibrate and understand each other’s communication style.
“But you only have to do it once. And once you’ve done it, you reap the benefits of not being in an echo chamber.
“The reality is that we do what is easy, and we have to embrace a bit of discomfort. But I don’t know any decent asset manager that can deliver sustainable returns that doesn’t know how to deal with discomfort.”
