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SIMON BROWN: I’m chatting with Sean Neethling, head of investments at Morningstar. Sean. appreciate the time. A recent note out from you and your colleagues talks around investment success and talking particularly around how markets have perhaps become structurally harder to predict. This isn’t just geopolitical. I’m thinking there’s also technology. Things are changing at rates that are unprecedented – even from, I don’t know, five, 10, 15 years ago.
SEAN NEETHLING: Yes, Simon. Firstly, thanks for having me on your show.
I think if you look at the world today, the way we look at things at Morningstar there are probably two main forces that are almost reshaping markets. The first is let’s call it geopolitics. We really are moving from a rules-based, almost multilateral system to a more fragmented world, where you are seeing the emergence and the influence of one or two key people in the political space.
So we’re seeing a world where a number of decisions are being made by a small group of leaders, and these decisions can impact markets – whether it’s equities, bonds, currency or commodities – in a very pronounced way.
So that’s, let’s say, the first I suppose force that’s mainly shifting – and predominantly out of the US.
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Then I think look at a theme which has been in play for a fairly long time but we’re seeing it accelerating in technology and technological advancements. This is really advances in machine learning and AI, that are accelerating the pace of change across industries.
So what you’re seeing here is that it’s compressing timelines. It’s creating a lot of uncertainty and you’re getting this really narrow grouping of winners and losers.
What we’re seeing there is this pace of change which is rapidly accelerating – and again, in an environment where it’s not especially clear how these technologies will necessarily unlock value in businesses.
I think those dynamics introduce a lot of uncertainty, a lot of unpredictability that’s difficult to model, especially using, I suppose, additional frameworks.
So I think the toolkit that investors need to rely on now needs to be a lot more deliberate. Instead of trying to be particularly right on something, it’s more important to prepare for those different potential outcomes.
SIMON BROWN: I like that. It’s more about managing probabilities, perhaps, than anything else – and probabilities because we’re not sure what’s going to play out. But you can sort of learn to adapt and respond.
SEAN NEETHLING: Yes, 100%. But I think the current environment is especially choppy, so trying to predict or speculate or forecast how things are likely to play out is not an especially useful way to spend time. It sounds a bit cliché, but it’s better to prepare than to predict.
So I think instead of trying to think about specific outcomes, look at the distribution of potential outcomes or probable outcomes. What do those payoff profiles look like in terms of being right or wrong?
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And then most importantly for investors, I think, is how to think about how portfolios behave under different scenarios. So the value of preparation in an environment like this – and in just being aware and thinking through those different probabilities – is massively important.
SIMON BROWN: I get that, and I like that. It’s how they respond. I imagine it’s also perhaps sort of around breadth, widening the net across maybe asset classes, maybe geographies in particular. A lot of it, I suspect – well, some of it – is certainly going to be looking for mispricing. And that’s going to need a wider net.
SEAN NEETHLING: Yes, absolutely. I think again – another cliché – but diversification is often cited as your only free lunch. In an environment like this it’s massively important to think about how you think about that diversification.
So, when you look at different regions around the world, we’ve been in this environment where the US has outperformed for a particularly long period of time despite being optically expensive, and if you choose to invest or under-invest or [have] underweight positions in the US, or not to invest, that is a decision in and of itself.
What you find in an environment like this is there are parts of the world that are especially attractive in terms of being cheap, and there are parts of the world that are more expensive.
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I think in this type of environment where you do have these uncertainties it doesn’t necessarily mean that you only buy cheap assets or you only avoid or underwrite expensive assets. I think the way you put that puzzle together in a client portfolio is probably one of the more important decisions to make.
SIMON BROWN: It’s less around strong views, and it’s a theme that you’ve been saying gets back to process.
SEAN NEETHLING: Yes, 100%. I think in an environment like this it’s important for investors to stick to their philosophy in terms of how they allocate capital and how they allocate money.
At Morningstar we are fundamental long-term investors, and our framework is anchored on that. Our process is very much iterative. So we learn from things that have worked really well, and when things don’t work out as they should in line with expectations, it’s important to pretty much revisit your assumptions and try to stress-test why things haven’t worked out as expected.
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So I think the investment process and being malleable about that, while making sure that you build robust portfolios, is something in an environment where there is a lot of unpredictability.
And, as I mentioned upfront, you have massive technological change, again plus one particularly influential figure in US President Donald Trump who can shift markets in a very pronounced way.
SIMON BROWN: I hate the phrase ‘this time is different’, but we really are in a different environment, as you said. One is the president of the US, the other is technology. These really are different times.
We’ll leave it there. Sean Neethling, head of investments at Morningstar, always appreciate the time.
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