Research Affiliates CEO on Leading and Investing in a Time of Uncertainty
By Dave Hendrick
As CEO of global asset management firm Research Affiliates, Katrina Sherrerd (Ph.D. ’87) is leading the influential financial services firm through a period of deep global uncertainty, as world financial markets continue to show great volatility amid the coronavirus pandemic.
Sherrerd, who was named one of Barron’s 100 Most Influential Woman in Finance in 2020, says the firm’s investment beliefs and long-term trends serve as guides for Research Affiliates, which produces research and offers innovative investment products, many with a value investing focus.
At the close of the first quarter of 2020, more than $145 billion in assets were managed worldwide using investment strategies developed by the company.
Sherrerd, who holds an undergraduate degree from the University of Virginia McIntire School of Commerce and has taught at both Darden and McIntire, recently spoke about leading through crisis; environmental, social and governance (ESG) investing; and the value of diversity of thought.
The smart beta strategy pioneered by Research Affiliates has been described as essentially a passive investing strategy tweaked to generate above market returns. Is that fair?
Yes, but I would describe it a little bit differently. We produce rules-based, transparent investment strategies that are intended to beat the cap-weighted benchmark. We could have created a rules-based strategy in a black box — as many other firms do — and charge more, but we chose to deliver the strategy via an index construct for the benefit of investors.
The real question is whether our strategies are passive. If you believe passive means you are not making any decisions or taking active bets, then our smart beta strategies are active, because we are making active bets against the cap-weighted benchmark. If you believe passive means you deliver your strategy via an index, well then our smart beta strategies are passive. The term “passive” is not clear and, to be provocative, some people at Research Affiliates consider cap-weight to be an investment strategy delivered via index because they involve decisions on both constituents and weighting.
We also offer active strategies. Our active strategies are research and rules-based, but they are not as transparent as our RAFI strategies.
You told a Darden class recently that you were skeptical of your own ability to pick stocks. How do you come about that humility with regard to investing?
There are two aspects of it. First, I think stock picking is extraordinarily difficult. Some people are really skilled at it and others aren’t. Stock picking involves making buy and sell decisions using, for the most part, backward-looking data and management-filtered information. Skilled stock pickers tend to dig deep, and they’ve got a good sense for what’s said and what’s unsaid. They commit to gathering the necessary information and have the skill to synthesize it effectively. I am not that type of person. I’m not going to invest the time to become expert enough to have competence in making individual stock picks.
Second, I don’t like making bets on a few companies that I think will outperform the market. I’m much more comfortable diversifying across a larger number of securities in a systematic way that doesn’t leave me overly exposed to any one company or my own biases. I am also much more comfortable letting an expert do the hard work of selecting, weighting and — importantly — rebalancing the companies in a strategy, like a smart beta strategy such as a RAFI index.
How are you and your colleagues thinking about equity markets and getting your arms around the scale of what has happened to the global economy amid the coronavirus pandemic this spring?
It’s really difficult because there’s huge uncertainty and it’s very different from other crises. You can’t compare it to the tech bubble or the great financial crisis. It’s different, and it’s unclear what the future will look like.
Our general practice is to rely on research and long-term historical relationships to guide us. In times of uncertainty like this, we can’t tell you with much certainty whether value stocks will outperform growth stocks in the next 12 months. We have much more confidence saying that value stocks will outperform growth stocks within a couple years. Our analysis shows that the difference between the pricing for the average value stock versus the pricing for the average momentum stock is at its widest ever. We’ve passed the Depression-era delta between the two. We think the current relationship is not sustainable.
How do you think about ESG investing in the current environment?
The trend was growing pretty rapidly before 2020, and people often point to millennials investing as leading to demand for protecting the environment and being socially responsible, by various definitions. I think that trend will continue, regardless of the current pandemic. If anything, the pandemic is highlighting cases where governance, social and environmental practices are falling short. We are seeing, for example, which companies offer health and sick leave benefits — and which ones don’t. This may not be important to all investors, but it certainly is important to many. We believe investor preferences are broader than simply risk and return. Many investors have environmental and social preferences, as well, and they should have the right to reflect their preferences in their investment decisions. This will lead to more ESG investing — assuming there are good Investment options.
Also, the increased transparency and dialog about ESG will, I believe, lead many companies to address perceived ESG deficiencies.
You are passionate about cultivating diversity of opinion in an organization. How do you seek to cultivate that?
Culture is important to me, and it is a distinguishing feature of Research Affiliates. An important part of our culture is our belief in collective intelligence, and the idea that a cognitively diverse group of individuals will make better decisions — particularly with difficult decisions and lots of uncertainty —than the smartest person in the group alone. With a team of very intelligent people, you can imagine that the leadership team must be totally committed to the benefits of our culture if we are going to succeed.
In building our culture, we seek to create an environment of curiosity, trust and respect for others. Building and maintaining the culture involves living our values, taking steps to promote the desired behaviors and minimize the undesired behaviors. I find describing the undesired behaviors can be more effective than the desired behaviors. For example, blame versus taking responsibility or putting a personal agenda ahead of a team objective. People tend to see the difference when the options are so stark.
We have a number of specific things that we do internally to make sure that we are being respectful of the different points of view and being curious about what people have to say. For example, we take steps to go around the room and make sure we hear from everybody. We discourage people from dominating conversations and the meeting leaders are expected to cut people off if they start dominating.
You have recently written about leadership in an age of uncertainty. How are you thinking about leading your team right now?
For starters, we’ve initiated more firm-wide communications than we had before. Zoom is helpful, but it doesn’t replace in-person conversations.
Also, I’m a big believer that we need to spend more time reaching out to the team now, because of the heightened uncertainty and anxiety. When people are anxious, they tend to want more guidance and assurance that they are making the “right” decisions in the face of significant uncertainty. To manage this, our leadership team needs to provide more guidance and increase communication. No one wants to be out of step with the direction of the firm and things that seem manageable in an office become much bigger issues when you’re sitting by yourself at home.
So we are proactively reaching out. We’ve instituted regular weekly meetings with all employees. We have weekly management meetings, where before they were monthly. I send out notes to people; other people are sending out notes regularly to try to engage people and give direction.
And we’re trying to find ways to show people that life is continuing on as normally as possible in these uncertain times. We have a saying at the company that to effectively communicate a message, you need to do more than have one person just say it. You also need to show people with multiple voices and visual images. So if you’re telling people that you’re aligned about something, you need to show people that you’re aligned. Thus, in the current environment, we have lots of voices expressing the important messages via Zoom, so we — the leadership team — can say and show at the same time.
The University of Virginia Darden School of Business delivers the world’s best business education experience to prepare entrepreneurial, global and responsible leaders through its MBA, Ph.D., MSBA and Executive Education programs. Darden’s top-ranked faculty is renowned for teaching excellence and advances practical business knowledge through research. Darden was established in 1955 at the University of Virginia, a top public university founded by Thomas Jefferson in 1819 in Charlottesville, Virginia.
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