Episode #51 Howie Li – Thematic Investing and the Future of Asset Management

Howie is the Head of ETF for Legal and General Investment Management (LGIM). Prior to joining LGIM, Howie was the CEO of Canvas, an ETF platform acquired by Legal and General in 2018. Prior to that, Howie trained and worked at Simmons & Simmons in London advising the hedge fund industry. LGIM is with 1.5 trillion USD AuM among the 20 largest Asset Managers in the world.

This episode is all about trends. We talk about thematic investments and the underlying trends. Howie leads us through the thematic investment process LGIM makes with examples like changes in e-commerce. We also talk about the three changes in the asset management industry: Quantitative Analyis, Digitalisation, Regulation. 

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Transcript

EPISODE 51

[00:00:04] ANNOUNCER: Welcome to The Wall Street Lab Podcast, where we interviewed top financial professionals and deconstruct their practices to give you an insider look into the world of finance. 

[INTRODUCTION]

[00:00:24] AVH: Hello and welcome to another episode off the Wall Street Lab Podcast. Today, we have for you Howie Li. Howie is the head of ETF for Legal & General Investment Management. Prior to Legal & General, Howie was the CEO of CANVAS, and ETF platform acquired by Legal & General in 2017. Prior to that, Howie trained and worked at Simmons & Simmons in London advising behalf from the industry.

Legal & General is worth over US$1 trillion among 20 largest asset managers in the world. This episode is all about trends. We talk about thematic investments and the underlying trends. Howie leads us exactly through the thematic investment processes Legal & General makes with examples like changes in e-commerce. 

We also talked about three big changes in the asset management industry, quantitative analysis, digitization and regulation. If you like this episode, please leave us a 5-star review on Apple Podcast or wherever you get your podcast from. 

Now, without further ado, our interview with Howie Li. 

[INTERVIEW]

[00:01:33] AVH: Howie, it’s a pleasure to have you on the Wall Street Lab Podcast. Welcome to the show.

[00:01:38] HL: Well, thank you, Andreas, for having me. 

[00:01:39] AVH: It’s a big pleasure for me as well. I’m really excited about what we’re going to talk in the next couple of moments. For a starter, can you tell us what are you doing, and maybe in layman terms? Explain to someone that does not a financial professional what’s your job.

[00:01:57] HL: That’s a big question. Let me try to explain that. It’s funny, you ask these questions. People say, “What do you do?” and you do try to explain in very simple terms. What I would normally say to people is, “You know what? We manage people’s money.” Essentially, we’re running investments and we’re building portfolios so that people can invest into the strategies that we create. That might be I think our most popular ones would be we find investments in robotics, or we find investments in cyber security, or we find investments in, let’s say, battery technology, and we put together those companies and investment fund, and our team essentially manages that. 

[00:02:39] AVH: That’s dive in right away. How do you find those investments and how do you package them to make it investable?

[00:02:48] HL: Yeah, it’s a good question. So it’s not easy actually, because we’ve been doing this now for over six years. If you’re trying to understand and find companies in a very fast-growing space, you really need to work with experts and you have to say to yourself, “You can’t be experts at everything.” 

Actually, collaboration is the key here and partnerships are the key where. We start our first investment fund focusing on robotics and automation and artificial intelligence. I come from a finance or a legal background, and robotics is something completely foreign to me. But there are plenty of people that were able to at least from a high-level tell you, “Okay, this is where the industry is going. This is what 20 years later is going to look like.” But what we always try to find is lots of people are saying this, but which of those people with the voice can actually tell us in huge amount of detail exactly how that new landscape is going to look? How is our society going to be structured and how are those technologies going to contribution to all the different businesses and industries so that we can essentially map out the future roadmap for industries using robotics, automation and artificial intelligence? That’s really what’s important in having the information and company data to handpick the companies for the portfolio.

[00:04:16] AVH: Basically, for every portfolio, you use the expert advisor group and then you pick each portfolio. Now, you’re the head of ETF, right? Is this also done in the ETF business or is this more in a big institution [inaudible 00:04:32], so you please manage my money?

[00:04:36] HL: So there are thematic investment funds in the wider asset management industry. Thematic investing is not exclusive to ETF’s. Everything I described there could’ve been done in an ETF or a fund. But what’s was fascinating for us of course is the asset management industry over the last 10 years is continuing to embrace the usage of ETF’s. ETF’s really are traditional investment funds, but they just happened to be listed on a stock exchange. So it’s very simple for investors to buy. If you can buy a share of Siemens as a company, a corporate stock, you combine ETF in the same way. That’s really important, because some people in the industry would say ETF’s essentially represents a digitalization of the traditional fund model. 

[00:05:26] AVH: That’s exactly one good term, digitalization off the old fund model. There’s a huge uptick. I don’t think we have to discuss that, but what kind of trends do you see there? Because it sounds to me like the process you do to find thematic investing are very complex. There’s a lot of work. Why not just build them into an active fund, but make them available in passive?

[00:05:50] HL: Yeah. You’re asking me a question around active versus passive. This is a debate that’s been going on the industry for quite a number of years, but I think what I find very fascinating is the asset management industry, including the firm that I work for, we’re not saying that it’s one or the other. In fact, the opportunities can sometimes be bridged in the middle. By explaining our investment process, quite often investors will say to us, “You’re an ETF, which generally we associate with passive, but I’ve just heard what your team does in creating investment portfolio for, let’s say, cybersecurity or our e-commerce logistics product.” You’re handpicking these companies with experts. That sounds like active to us. It’s active research. 

I think the difference here is, yes, we’re taking active steps in identifying investment opportunities, but what we’re doing with those by taking those active steps and identifying those opportunities is then putting it into a rules-based kind of methodology so that it’s completely transparent for investors. You can see and understand exactly what it’s going to do. 

Once it’s basically been designed and built, it can continue to dynamically run itself and include new companies that enter into the landscape, but also remove companies that have been acquired under mergers and acquisitions, or it could be removed, let’s say, no longer is part of that kind of high-growth universe. I suppose the difference here is what we’re not doing is trying to pick a winner and say, “You know what? That’s the company that’s going to make it vague and it’s going to be the eventual winner.” 

For a lot of these industries, it’s just too early. I’ll take cybersecurity, for example. Cybersecurity companies are trying to solve for different threats or different cybersecurity issues, whether it’s malware, or email encryption or kind of some brute force way of entering into a network. Companies generally focus on one thing, and you can’t have at the moment one company that services every single cybersecurity threat. That’s why building a global and diversified portfolio in order to attract that theme is extremely important. We don’t feel at the moment that it makes sense to try to pick that winner. It makes more sense to essentially capture the known growth for that particular theme. 

[00:08:23] AVH: You said sometimes companies get out of the portfolio. Sometimes they get in. Is then also once the expert established the rule set, that they are then handpicked in and out based on the rules and it like runs more or less automatically or do you have a quarterly review by experts what are the companies that should be in the portfolio?

[00:08:48] HL: Okay. That’s a great question. What I’ll do is give you another example. I mentioned e-commerce logistics earlier, and we work with some experts called transport intelligence to identify what is actually changing as it relates to e-commerce. when you want to invest in e-commerce, it’s not about choosing companies that essentially sell clothing or some sort of item on the shops, because pretty much every store you come across now has an online presence and the ability to buy something over the Internet. But the changing consumer behavior, for example, not going into the shop, but ordering it online on your phone and pressing a button. That’s actually changing the way that things are being delivered to you and the distribution model. That’s really about the logistics and the disruption to the logistics industry. So that it needs to catch up to how the future of commerce is going to look like, and that’s basically having goods delivered to your office or to your home more importantly within the next day or so. People’s kind of appetite and patience is much more reduced. You push a button, they want that item in the house the next day. 

What that means is you need to identify what’s being disrupted. If you look at logistics industry, you used to have a pretty simple model where a manufacturer would distribute it and send a big crate of goods into a warehouse. It sits in that warehouse until someone puts an order through. That order goes let’s say to a department store, and it goes to that department store maybe once a week, maybe once a month, and that’s pretty simple from a logistics point of view. 

Now imagine whether it’s you, me or our families pushing buttons on the phone or on the Internet and they need that computer, or toothpaste, or batteries in their home the next day, that still goes from the manufacturer to the warehouse, but all of a sudden that warehouse has a lot more things to do because it’s not just sending it once a week to a department store. It’s sending every single day in smaller boxes to different parts of the country, different streets, and that really requires a much more digital model and that requires a lot more change in how goods are essentially packaged and sent to the end consumer. 

What we’ve done here with transport intelligence is highlight, the disruption here is in warehouses. Warehousing is where you need to invest. That’s where you here at Amazon gets a lot of publicity around it, lots of warehouses. The other one is around fulfillment, i.e. going through a line of packaging goods and putting into a box. That’s called fulfillment. Let’s identify companies which are active in that. Then the last part is last mile delivery. The boxes are packed. It now needs to be put into a van optimized so that that travels the least distance as possible caring as much goods as possible in order to deliver it to that home the next day. 

We’ve actually had to work on breaking down that universe to warehouse, fulfillment and last mile delivery and put together a portfolio that purely focuses on this, because that’s what’s being disrupted. That’s what ecommerce is about. For us, that’s how you put companies into a portfolio.

[00:12:11] AVH: That’s a very interesting way to break down. I like how you break down the delivery chain from what is the obvious change in the world to what does it mean for the business. What does it mean for the markets? How do you come up with those trends? I get that once you identify a big trend like ecommerce, changes in ecommerce, you say, “Okay, let’s work with a company that can break down the like with a special advisor or expert that can break down each and every single step from how the world was before digitalization to how it is now from an online shop to my door.” But how do you come up with those trends?

[00:12:57] HL: There are a number of ways that these ideas come to fruition. There’re lots of market studies of course as to what’s being disrupted. So you got to stay focused on understanding where the structural and foundational changes of our society is coming from. Generally, a lot of this is powered by how technology is integrated into our daily lives. It’s also to understand how we as human beings are changing the way that we consume energy and also our resources. You can very clearly – There is pressure to move from a kind of a reliance on oil and fossil fuels over to cleaner source of energy. What does that mean? That is the trend that’s just going to happen. 

The other part of it is to understand demographics. What’s changing in terms of the human landscape? Is it the emerging markets that’s growing so that they are needing more goods? Is it an aging population? What demographics is very good at is giving color as to what the future drivers the demand is. That’s perhaps the initial three lenses that we certainly think about. 

Then in order to go kind of deeper into that and really look for those opportunities, then it’s actually –The best thing to do is look at traditional industries and say whether it’s the finance sector or whether it’s the agricultural sector, or let’s just look at chemicals completely and just ask the question what’s their threat? What is being disrupted? Then think about what of the industries being disrupted? 

This is perhaps a little bit more personal. I sometimes spend time on crowd funding websites or looking at private equity magazines just to understand first of all where those innovative ideas are coming from. Not just smaller companies, but entrepreneurs, people with great ideas. Quite often, you’re not in that field. People have ideas for solutions to problems that you didn’t even know existed, because we’re not experts in those areas. That’s where you learn and get kind of – You get a feed from that. Then once you start to link into, “Well, okay. That’s happening over there,” connected with something that’s happening on the other side, this is going to spell a big amount of change for a traditional industry and so you see disruption in every single sector now whether it’s like I said the financial industry. So you see disruption in every sector now, whether it’s, like I said, the financial industry, whether it’s ecommerce, whether it’s energy. That’s really how they think about it. Sometimes clients also are a good way to our investors or a good way for it, because we often get phone calls and say, “Hey, do you guys have such and such an investment?” Then you always like to ask the question, “Not the moment, but why do you ask? Where’s your thinking.” Then you start to work through that with them. 

Then if you’re getting more than one call and you get 5 calls and 10 calls, and normally people ask for different things, but then when you ask their reasoning, the background of it, actually it’s quite joined up. That’s when you know you’ve got something to work with.

[00:16:01] AVH: Super interesting. Basically, you look at the real-world and try to find how it impacts the world in the future and then you’re looking for experts to really dig deeper into whatever you see in the real-world.

[00:16:15] HL: Exactly. Also, it’s got to be investable as well, right? I mentioned that I get a lot of ideas personally just looking at crowd funding websites and private equity magazines. But some of these opportunities might actually be in private investments for the time being. I.e. because they’re not listed. They haven’t IPO’d yet. Generally, the companies are on a much less mature phase. They might not be investable and you might not be able to put it into a fund portfolio, but it’s still worth keeping an eye on it and see when that landscape eventually matures or actually perhaps joins up with another area. 

I supposed what’s really important is to understand how everything connects, and finding experts is one thing, but making sure that this is investable. But more importantly, a high-growth investment, long-term opportunity, is to see the landscape and understand from multiple sources that this is really a long-term, multiyear growth theme. 

When we talk about high-growth, we’re talking about industries, which are on a compound annual growth basis, double digits every year. So more than 10% every single year for the next 10, 15, 20 years. Those are the opportunities we like to focus on. 

[00:17:29] AVH: Do you see specific countries or regions that are far ahead in maybe most of these trends, or do you think those trends are all over the place? So we had one guest on. He was saying that he could identify, and he’s an angel investor. So he could identify in certain places are certain types of industry very common. E.g. Israel with cybersecurity, China with artificial intelligence. Do you also see that?

[00:18:03] HL: Yes. Yes, we do. I can definitely agree with that comment. What I would probably use is the term these are like hotbeds of novation. When you got great minds thinking together in a certain industry, they tend to gather in the same place. I imagine the angel investor that you’re referring to probably has a similar experience. 

Let’s take an example that many people are aware of. There’s a big technology industry that grew up in California and Silicon Valley, and the interesting thing is when you get some success for Silicon Valley and you’ve got investment going through an area, it attracts more entrepreneurs and more innovation in those same areas because it’s about networking. It’s about finding kind of collaborative solutions. It’s fundraising. 

So you start seeing pockets of it, and it’s probably of no surprise that many companies, technology-driven let’s say, end up – If they ever go public, going public in the United States, or if they’re looking for funding, they might get additional funding from Silicon Valley. That’s because there is expertise and capital that’s presiding over there and it essentially – Just in terms of how people think, it just flocks therefore the opportunities. 

That’s not to say that these technologies or processes which are created are not global by nature in scale. Clearly – And this is something that we also look at. Picking companies by where they are domiciled is actually no longer important. We live in a globalized world where we can essentially mobilize our ideas in any country as long as we got the technology to do it. 

What’s important is to understand when you do have a business, and let’s say it’s a service or a product and it’s generating revenue, where is that revenue coming from? If that revenue is coming from China, then you know that’s where your customers are. If that revenue is much more diversified and, say, it’s partly in North America, partially in Europe, or actually a large portion in your emerging markets, then you know the relevance of your business. I suppose this goes comes back to my point earlier about demographics. Understanding the levers for demand and revenue of any single company is a very good place to start.

[00:20:16] AVH: When you construct those portfolios, are you looking to diversify also across maybe not country of origin off this service, but more country of revenue, or are you just looking for the best players in the industry or maybe you try to strike both curbs on the one side? Like try to diversify according to revenue or just find the best players?

[00:20:41] HL: For a lot of themes, they’re quite early to be, let’s say, pegging the best players or the winners, right? You can peg some companies now and they might be hugely relevant or maybe even completely irrelevant in five years’ time. That’s the pace of change and competition. Rather than try to do that, our approach is to identify how that entire industry and ecosystem works together and give investors the opportunity to invest in that whole ecosystem partially because, one, it represents the opportunity accurately no matter where they’re based, no matter how they’re generating revenue. But it also gives them a diversified portfolio so that if one company doesn’t do so well, then you’ve at least got a lot of other companies which are able to support it. Because at the end the day, we already know that the forecast and the investment that’s going into these areas, it’s growing. It’s going to go somewhere, but it’s making sure that can you afford to just pick one company and hope it’s the winner?

To our mind, the better approach would be diversification, structure, these new industries and sectors in a way that you know that you’ve got the full value chain and continuously look at your data so that you know that these companies are having positive sales growth. They are growing businesses. They got good margins. Fundamentals is an important part of this, and it gives you the opportunity then potentially to have in your portfolio those eventual winners. 

But what we also see over the years now, what ends up in our portfolios are clear M&A targets. So companies that have done really well or have built very interesting technologies that are attractive to perhaps larger listed companies, sometimes private equity companies, to really take under their wing to, let’s say, help with their distribution, help integrate it into wider industries. We’ve seen examples of our portfolio where companies are required at – I think last quarter, we even had a company that was acquired at a 40% premium than what was traded on the stock exchange. This is because when you understand the power of the businesses that are being acquired, you start valuing these businesses differently. This again is why you have very focused expertise in the private equity space, and that’s extremely important, because people then are able to value appropriately rather than think, “Oh, yeah. That’s just in a traditional agriculture company or a traditional tech company. So I’ll just put those standard valuations on it.” It’s getting so much more focused. I think that’s where really our future industries are going.

[00:23:24] AVH: Does that mean that often in your portfolios you have a strong bias towards small-cap companies because the closest to private equity, but then on the other side maybe you have companies that go public with valuations way beyond any small-cap or mid-cap companies now with the boom in private equity? But do you see any particular bias towards small, large mid-cap within your trends?

[00:23:51] HL: Often, yes, and that’s mainly because not we’re purposely trying to find small mid-caps only. That’s not the strategy. Our approach is to capture the entire universe, the entire ecosystem. If that ecosystem naturally, because it’s early in its growth phase, it tends to be the pure ones. Smaller companies, medium-camp companies that we’ll be investing in them. That’s how our approach is. 

Again, we’ve got a couple themes where they’re actually being, in terms of the listed investments, they tend to be more large-cap in nature, then we’ll represent that as well. We’re not trying to bias one way or the other. What we’re trying to do is capture a pure opportunity sometimes with reference to revenue, but a lot of people I think over-emphasize revenue sometimes and not look at how investment is made. Where’s new capital going? 

This comes back to the valuation questions. One of the most frequent questions that’s asked is, “Oh, those valuations, are the high or are they low? Is this a good time to buy?” Valuations, probably one of the most popular measures is looking at price-earnings ratios. But the thing with price-earnings is that it depends on how people report it, but also earnings can be affected by how companies decide to invest for future growth. 

Really doing some homework around understanding how companies invest their capital will give you a pretty good idea of where their strategic direction for the future is. Let’s take example as a hugely successful one, a bookstore from almost 20+ years ago. Not a profitable business when it first listed. It was a bookstore. Now it’s a cloud company, fulfillment company, supermarket, whatever you want to call it. For a long time, it had so-called negative earnings, but it’s because you’re trying to invest. You’re reinvesting in the business. You’re trying to earn market share. You’re leading the way. 

Earnings is not always the best and only metric to look at. It’s important to the market share. It’s important to look at increase and sales growth. It’s important to look at how money is being deployed in terms of investment, but also where private capital is also being invested in the, say, private equity space for example. 

[00:26:10] AVH: That sounds like a lot of research for those kind of portfolios especially if you think about – Some of that sounds like factor-based investing or they’re active management and them some completely research takes on the whole thing. Now, it’s sounds super interesting, thank you for that. I want to switch gears a bit and want to ask what are trends in the asset management industry. We’ve talked a lot about trends within ecommerce, artificial intelligence, all those things. What trends do you see in your own industry?

[00:26:47] HL: Yeah, sure. Perhaps I’ll try to group them into a few areas. Maybe I’ll use a word quantitative as one. The second trend I’ll say is let’ talk about digitalization. Then third, another very popular topic, is regulation. Let’s maybe go through each of those three and then hopefully that gives them little bit of color in answering your question. 

Quantitative, and notice I didn’t say passive or active here and very purposely so. We’ve always been a big believer that data is extremely important to our future. In fact, I’d go as far to say that data will at some point be where the value is found and can almost be seen as a currency. Index investing, factor investing. Those words that you used there that are normally associated with the word passive. You can do a lot in so-called index-based investing and for it not to be passive. 

One of the fundamental kind of points that I’ve always keen to make is that index investing doesn’t mean passive investing. You can take active steps in constructing a portfolio just like I mentioned earlier and how we build things. We take active steps in engaging with companies so that when you’re invested in them, let’s make sure those companies are doing the best that they can. A lot of this is caught up in what people call corporate governance or ESG, but make companies just manage the risk and make sure that they’re doing the best that they can. You can actively engage in that point. Of course, how you buy and sell your securities or investments is hugely important as well. 

Good index fund managers don’t just buy when they’re told, sell when they’re told by an index. You find the right and efficient times and understand the markets in order to add value for your clients. That’s what I’ll say about that. But index investing is all based on information and data, and so that’s quantitative-based. That’s rules-based. That’s systematic. That’s where the growth of the so-called index investment is going certainly for us at Legal & General Investment Management. But we also see on the active side there is an increasing interest in this that you can sometimes see, and this is probably more helpful for your listeners, yet there’s quantitative expertise that people are trying to recruit for. 

If you look at some graduate recruitment programs and see what kind of skills and expertise that your large asset management firms are recruiting for, there are data analysts or quantitative experts. Just think about that, or maybe even computer scientists and you think, “Well, that’s not your traditional kind of fund selector or your kind of research or analyst.” This is now going down the text field. How do we analyze data and then how do we use that data to our advantage? 

I think across the industry, data and quantitative approach of coming up with an investment thesis is becoming more and more important. Now, whether you decide to then use that information data and quantitative analysis to say, “Systematically, we’ll invest it in this completely rules-based way. That’s perhaps more index,” or you take all the same information and say, “I’m going to use that information to inform me as an active or discretionary fund manager to then base my decisions.” That’s where kind of quantitative I think is really changing the landscape of asset management. 

Now, the second point I mentioned is digitalization, and where we see that is distribution and how people buy and sell investments. We’ve heard kind of robo advisors being more and more popular term. Investors like to use computers, like to use their phones and actually want to see things for themselves and buy things for themselves. Now that’s a generational change. That’s not the vast majority of investors now. We know that that’s where I suppose the movements is going, and that’s going to be only increased and only going to be powered up. 

We recognize that, then let’s make sure that the asset management industry is able to connect with these type of investors where they want access to investments through digital means rather than opening up a prospectus, looking through basically hardcopy files. Most investors don’t do that right now, but we’re talking about a much more digital way of buying things. 

The financial industry will probably benefit from that because we’ve seen digitalization work other industries, like retail as I mentioned. Ecommerce has changed the face of how people shop. I imagine digitalization and increased use of digital technology is going to change the way that we interact with investors, but also how we show investors, how we add value to investments. That will be the second bit. 

[00:31:45] AVH: That’s all it really interesting and really helpful. You actually took away one of the questions that I usually ask people on the podcast. What skills would students, young professionals, need to develop in order to land a job in this changing world?

[00:31:58] HL: Yeah. You know what is interesting? I mean, personally, I really like to hear and observe what people do outside the asset management industry or outside the finance industry, because it kind of really informs you of, let’s say, consumer behavior. I kind of look at our own website or websites with the asset management industry, and then I look at websites for commerce, or I look at websites for other businesses and you realize, “That’s the kind of consumer experience that people are used to. How do we replicate that consumer experience and that kind of journey that investors go through?” 

Quite a lot of times, the industry has a lot of work to almost make it as easy as click now to buy, let’s say, from Amazon or whatever shop. But really, that’s why ecommerce has been so powerful, is because it made it so easy to invest. It’s made people’s lives more efficient and easier. I think that’s where the asset management industry is going to be, and digitalization is going to be a huge contributor to that. Making investing simpler and easier for more people. 

[00:33:04] AVH: This is super interesting. We’re jumping around a bit, and I love it, because we get to cover so many topics. I want to circle bit to one fairly specific question. You mentioned corporate governance, and in the ETF or passive world, I really wonder how do you try to incorporate corporate governance as a passive asset manager? Because I think one of the typical terms that you see or one of the reasons people are a bit afraid of passive, because like, “Oh! Nobody is going to take care that actually companies are doing their best.” With active fund management, they often say, “Hey, we are here because we make companies better. We take a large stake and then we take our shares and we vote with index ETF’s especially.” You don’t usually do that. Is this something you see? What’s your approach on that?

[00:33:57] HL: I think that’s where the industry sometimes kind of needs to look deeper into how to action change? As I mentioned earlier, index investing doesn’t mean passive investing. It’s how you approach it. You kind of look at our own corporate governance kind of team and see how seriously it takes its role, and it’s separate from investments, decisions. Aside from portfolio managers, etc. You’re looking at your ability to influence change in companies. 

Essentially, if you own a company, you have the right to vote. That’s what asset managers have. They run investment funds on behalf of clients and they hold a huge amount of assets. Now, at Legal & General, we manage over a trillion in AUM, and that’s really important because that also means we own a lot of companies and in some of them in indecent sizes on behalf of our investors. That gives you a voice. 

The question is; as an asset manager owning those companies, whether it’s index-based or not index-based discretionary, how are you using those votes, or are you even using them at all? You can vote for better outcomes. Our team here would go into companies and say, “How do you manage risk with cybersecurity? How do you look at board diversity? How are you tackling climate change? Because if they can’t answer those questions and not make positive steps there, it brings a flag. It brings a flag that actually these companies can be at risk if these risks are not well-managed. This is about actually making sure that when we invest into a company, they’re going to continue to be robust and they continue to do the best that they can. 

Having a team that’s specifically carries that roll out then actually helps you to ensure companies do better, as you say, on corporate governance. Just to answer the index question and passive question, it can absolutely be done, but perhaps not enough is being done is what I would say. Very recently, there was a report by a body called Share Action that highlighted the 75 kind of asset managers in the industry and ranked how they did on such activities on engaging with the companies they invest in. 

Very fortunately, Legal & General was highlighted as number three and classified as the only passive so-called index investor within the top five there. That’s a great place to be, because hopefully addresses and it highlights the people, “You know what? Any asset manager can do it. Index investing doesn’t mean you have to be passive of how you engage with companies.” You can use that influence and structure to help enable companies to do the best that they can, but also more importantly to manage the risks that can come from things like climate change, and diversity, etc. 

[00:36:59] AVH: Absolutely, because I’ve very passionate about the topic myself. We see ESG coming more and more, and one of the things where some people speak out against passive investments, “Oh! They’re not going to put that much into corporate governance, right?” To see also passive vehicles, and this is honored to where the money is. If you want change on a large scale, you need to change how investors behave. If you are on the street and you say, “Okay, let’s buy less plastic,” or anything like that, that’s really good on a personal level. But if a company with US$1 trillion assets on the management comes, well, we are actively going after companies that do not invest into corporate governance or ESG. There you have a real power stab that really drives this change.

[00:37:49] HL: Absolutely. I want to make it very clear. This is not exclusive to actively management companies. We here at Legal & General manage both active strategies as well as passive strategies, but all those assets, the trillion+ that we manage are all aggregated together and it’s a separate team that basically looks at how much influence we have with companies and working with those companies going to board level CEO and ask some of these difficult questions to understand how their influencing change, on how they’re running and governing their companies. Again, make sure that they’re doing the best they can. If they’re asking for kind of shareholder votes in certain areas, if it’s not in line where it needs to be, then again , the firm here is quite happy to vote against it until they see some positive change. I think that’s where the impact is really going to be felt and made.

[00:38:44] AVH: Definitely. I fully agree. Now, I want to switch gears a little bit and I want to be respectful for time. So just some couple last questions may be to – We already started over some advice for people that want to start in the industry. Do you have anything else that you want to get cross to young people? What they may be even think about when they think about the future of asset management? What makes management today interesting? What makes it exciting? Also, maybe something personal. What do you look for if you interview someone? What is something that you say, “Okay, that can make a change.”

[00:39:20] HL: Yeah. I think the first thing I would always highlight, and perhaps this is me kind of thinking about my own experience and understand what drove me. When you first start off, you just want to actually get a job first, and you’d be very happy if you’ve got one. But just saying, “I want to work in asset management,” perhaps is not enough. Have the view of what you want to do in your career. But whilst you’re experiencing that in the early days, understand what is interesting and what drives you. 

I pretty early on recognized that I was interested in how businesses are run and how they make money and lose money, but that’s a very simple concept, right? People make money by driving revenue, and you can lose money by spending too much. If you kind of look at how and think about everything through that lens, you can take that into every department you work for, every kind of part of the business that you’re supposed to be working on and running, and you can do that to a small scale and you do that to a large scale. CEOs obviously do that to a large scale. But you can do that even for you own kind of responsibilities. I think as long as you have an eye on what drives the firm and where I suppose the future of innovation and potential disruptions is going to come from, are there areas that actually a digital solution could be better? If you have a finite amount of resources to hire people and invest in having people in the building, are their expertise better service facing investors or clients or whatever that industry might be? 

I think that’s a very good way to understand and get a very quick feel for whatever industry you’re working with. Where is the future headed and what do you want to be part of in that future? Because if you just look at how things are shaped now, then you’re not going to be able to fully see out where your own career will be in 10, 15 years’ time. But it also might not interest you in the same way. There are some really exciting interesting things out there. 

[00:41:25] AVH: It’s basically learn to think on your own feet, right? Learn to think for yourself and not learn whatever is here already.

[00:41:33] HL: Yeah. Yeah, learn but also be inspired by other people’s achievements. What they’ve done in other industries? Don’t just think I want to be in finance. I’m only going to focus here. As I mentioned, I love going on crowd funding websites looking at these great ideas for solutions to problems I didn’t know existed. One is inspirational, but two, it often gives you ideas of how to do your own tasks in a way that using a phrase that’s commonly used outside the box.

[00:42:02] AVH: Perfect. Howie, thank you so much for your time. This was super interesting. I think I have an entirely new perspective on themes and trends across the world and how to think about. You certainly challenged my thinking, and I hope our listeners did too. Thank you so much for your time.

[00:42:21] HL: You’re welcome. It’s so nice to touch base again, and I hope to speak to you soon.

[END OF INTERVIEW]

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[00:42:58] AVH: Disclaimer. Information contained in this podcast constitutes the opinions of individuals and should not be treated as investment, tax, financial or legal advice. We take no responsibility for the accuracy of any statements made in this podcast. This podcast is for informational and educational purposes only and does not contain an offered to sell or buy any sort of financial products and should not be treated as advertisement for such. Any coping, distribution or reproduction of this forecast without the prior permission of the creators of the podcast is strictly prohibited.

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