David Harris:
Global has been at the core of what we've been doing for well over 30 years as a firm. And I've spent my career focused on global related categories. So this is really part of the ... It's the world I know where you wake up, you go to bed thinking about Asian markets, looking at them, you're waking up with European news and you have all of that digested heading into the U.S markets. Our trading days don't start at 9:30 and end at 4:00, and it's really a 24 hour clock. And you just have to really be passionate about global affairs to do global investing. It matters a lot.
Welcome to Distinctively Active Investing: Profiles and Perspectives, presented by Touchstone Investments. I'm Blake Moore, President and Chief Executive Officer of Touchstone. On this show, you'll find out what makes Touchstone, and its portfolio managers distinctive. We share in-depth interviews with people who are actively engaged in leading and managing the Touchstone funds and you will hear from other industry professionals, as well.
Tim Bray:
Hi, I'm Tim Bray, divisional vice president here at Touchstone Investments. Our guest today is David Harris. David is the chief investment officer and president of asset management at Rockefeller Capital Management. David is portfolio manager of the Touchstone Global ESG Equity Fund, as well as the Touchstone International ESG Equity Fund. Rockefeller serves as sub-advisor to the Funds. We'll learn about his personal story as well as the investment philosophy behind Rockefeller. First, I asked David about his upbringing and how he got into the investment business.
David Harris:
My childhood was split into two very different locations, until age nine, I lived in suburban New York. It's right across the river in New Jersey. At nine, I moved to Western New York to Rochester, which was a much smaller city, but a big corporate town. And it had some of the leading companies back in the day. So my interest in the investment business did start when I was a young kid, because I always liked numbers. And so I started reading stock tables and prices, and was always kind of intrigued with that.
And so I moved to Rochester in 1973, and I started following the share prices of Xerox and Kodak. And those were two of the so-called nifty 50 companies that had this incredible period in the late '60s, early '70s. And by the time I started following them, those were their peak share prices. Those are the highest prices I think. And I'd have to fact check this, but those might've been the all time high share prices reached for those companies were in the early '70s, which is an interesting lesson as a kid, because you can see how things sometimes just don't last forever in companies.
So my childhood led to a lot of interest in following what makes good companies great, how sustainable it is. My interest in investments was always about, it's a really numbers oriented business. I always enjoyed that.
Tim Bray:
David, do you remember your first investment?
David Harris:
Unfortunately, I do. It didn't pan out so well, but it was a stock tip from a relative and it didn't do so well, but I must say the hundreds of dollars I lost then that taught me valuable life lessons that have probably saved me more money. And so it was a good long-term return on investment bad initial investment. But I think I was about 10 years old when I bought my first stock.
Tim Bray:
Can you describe Rockefeller Capital Management and the history behind the firm?
David Harris:
Sure. The history starts from the Rockefeller family office managing the affairs of John D Rockefeller Jr. And future Rockefeller's. In 1980, we became SEC registered advisor and opened up to other families and eventually foundations, endowments and other institutional business. So that it has evolved from a family office or maybe the earliest family office known. But it's been quite the evolution in the last 40 years since 1980, that we are in a broad array of financial services now.
So we have a legacy and a history of being in the advice business. And that's important because when you're in the advice business, you are a horizon that is a little bit different than you would think about if you were just in the transaction business. So as we think about and frame investments, we've had this historic alignment, which is unusual in that we've had clients who are shareholders, they've been directors and they're also clients. And so the interests are uniquely aligned that allow us to think for the long-term as we think about what differentiates us on the investment side, is our ability to extend our horizons longer, arguably than our competitors.
Tim Bray:
Can you tell us something about an anomaly that Rockefeller Capital Management is trying to exploit?
David Harris:
There are a few anomalies as we think about it. Some of my background has been very helpful for me to think about these anomalies. I started out after undergraduate school as an actuary. My interest in numbers translated very well to that profession, but spending a couple of years there was great quantitative training, but it wasn't something I decided I wanted to do long term. So I go from having a quantitative bent to business school and had the fortunate timing that one of the leading theorists of behavioral finance, Richard Baylor was a professor at business school.
I ended up being a teaching assistant for him my second year of MBA program and learned more lessons about behavioral finance in afternoon sessions grading papers in his office, than you can in years of studying the subject. And so this is dating myself 1989, 1990 years before it became in vogue. So we ended up winning the Nobel prize in 2017, but many years earlier, I had this formative yearly foundational base that we’re not always rational, how we think about things. And that's really an important lesson to apply to investments.
And that comes 180 degrees from where I was as an actuary, where it was all about the numbers. And so, as we think about the anomalies we're trying to exploit, it's one - where our numbers, the hard data and numbers useful and two - where do we make mistakes in applying the data to make decision-making. And they're both very relevant. So you actually do need a very strong framework of data and numbers to make good decisions, but even when you have that, we don't always make rational decisions because there's these very strong behavioral impulses we're all hard wired for.
So, it's thinking about both of those elements really applying a strong, rational decision-making framework, on top of strong fundamental analysis matters. And then we need to extend our horizon longer than our competitors, because the most inefficiency lies a few years out from where most eyeballs are focused. So if we look, for example, at most companies will have anywhere from 30, 40, 50 sell side analysts, following them, formulating earnings estimates for the upcoming quarter, upcoming year.
But if you go two or three years out, that number drops pretty substantially. And if you go five years out, you will rarely find an estimate. Where are we more likely to find anomalies? If we train our eyes on the next quarter, or we train our eyes on what a business looks like three, five years out. And so let's weave those elements together, extend our horizon for the direct competitors, utilize sound fundamental traditional analysis, but then be rigorous how we apply the behavioral framework to it.
Tim Bray:
With respect to the Touchstone Global ESG Equity Fund and the Touchstone International ESG Equity Fund, it must be hard to keep track of businesses all over the globe. What is the process for synthesizing all of that information so that everyone is fully up to speed on everything that is going on in the world?
David Harris:
Yeah, no, that's a very good question. First, I think you have to start with the global framework, because you are actually missing out on vital parts of the world if you're not. So we could simplify things down to one geography, but does it give an advantage? So if we're only following the U.S, are you going to know as much as critical information as you need to know, or if you're only following Japan or Germany or any single geography.
So for us, part of this framework for decision-making is we need to focus on what we think is important. We don't have to know everything, but we do need a framework for thinking about everything, but it has to be a global framework. So when we're looking at our companies, we have to know all of their competitors. So to do international products. Well, I believe you to start with a global framework to understand their competitors because over half the world's capitalization is based in the U.S. So, if you're analyzing non-U.S companies, it's a pretty good chance most of them are competing against U.S companies unless they're truly very local businesses.
So global framework it is important to start with that. To synthesize all this information, you need to have one, a strong team and two strong processes, and this filters up information about what's important what isn't important. And unfortunately, this data is so readily available in conductivity to companies in the light that all of that information flows very readily. Ithe art is really figuring out what is important to know, and really what isn't important to know. And for us, we've been doing this a long time.
Global has been at the core of what we've been doing for well over 30 years as a firm. And I've spent my career focused on global related categories. So this is really part of the ... It's the world I know where you wake up, you go to bed thinking about Asian markets, looking at them, you're waking up with European news and you have all of that digested heading into the U.S markets. Our trading days don't start at 9:30 and end at 4:00, and it's really a 24 hour clock. And you just have to really be passionate about global affairs to do global investing. It matters a lot.
So the investment team meets every morning to review news of the day, company portfolio news, news affecting competitors of our companies. It's an important exercise that we pull all the elements of the team together and have a discussion every morning. And that's not the only meeting we have, but that is a daily meeting, daily update. And the team is located in New York, Investment team or the surrounding areas of New York. It's easy to pull everyone together for meetings. And so we've been running a morning meeting like this since I've been there and is part of the cultural DNA that we have a lot of collaboration.
In addition, every company which we invest, we will pull the team together around a table and debate and discuss because it's important to crowd source differentiated views on any company in which you invest, what you don't want as a rubber stamp or group thing, what you do want are analysts who are looking at companies from different dimensions and raising potential issues before the markets raised them.
So we need to come out of a meeting with conviction before we buy a stock, that we have a differentiated view and why, and be able to express that, and if we can get to that point where we believe we have a clearly articulated vision that the consensus was missing, that to us becomes an interesting idea.
Tim Bray:
Can you share how you try to avoid groupthink within your investment team?
David Harris:
It's important to create a culture where independent voices can be heard. And so when we are debating companies, the PMs on the strategy we will not tip our hands in terms of our view, because we don't want rubber stamps. We don't want an impressionable analyst to say, "Well, David really likes this stock. So I'm going to be in favor of it." I would rather hear the analysts on a varnish view, how were they thinking about it? How are their colleagues thinking about it? And we will record that information, how their views on a stock are. So we can go back and evaluate was when an analyst doesn't like an idea, was that the proper call?
So you actually connect the team to the decision making process that analysts know that their voice and their vote, if you will, matters because you're going to be measured. And there's an old expression, what doesn't get measured, doesn't get done. So we will record measure how the inputs are into the process and review it. We've done interesting analysis with this data. I was curious if an idea is being presented on a downmarket day, are we more likely to reject an idea? Because the notion is you just get influenced. The S&P is having a terrible day, are you more likely to be gloomy and negative?
And conversely, are you more likely to approve something on an upday? And we found no correlation between that, which is good. This is what I'd want to see that we're not being overly influenced by the sentiment of the day. And this gets back to the behavioral roots of how do we correct for irrational decision-making.
Tim Bray:
Rockefeller has one of the longest track records for global ESG investing relative to its peers. Why the emphasis on ESG and impact investing?
David Harris:
It's interesting. In my earliest days of it first at Rockefeller, we were already there when I joined out of business school in 1990. Prior to that, the first time I had heard ESG, we were early in it, but first was when I was a freshman in college in 1981, I saw there was a big divestment movement for South Africa. You had lots of student protests about Nestle. And at that time I was just a young freshman. I'm like, well protests against chocolate bars, what's going on here? But it was about infant formula and what it was doing in the developing world and the health effects of it.
And it was an eye opener on the power of activism and investing. And it's evolved quite a bit from 1981, which was purely a blunt instrument with divestment to where we are today with ESG as a tool for alpha2 generation and identifying better companies. So from 1981 to 1990, you saw some evolution where with Rockefeller divestment was still an important issue, but you started to get more data disclosure that was starting early days of it, but it was starting in terms of other metrics besides is it a good company, bad company? Do they make coal? Okay, can't own them.
Things are a lot more sophisticated today than they were. But the family's interest in ESG does go back to even before those days that I described in the early 1980s. Their interest goes back to the 1970s. So there's a lot of cultural DNA and interest that has been long standing at Rockefeller. And I've been able to be associated with it for most of my career and seen quite the evolution of it. So we see now that it's almost universal when we were the outliers on ESG and socially responsible investing way back in the day.
Tim Bray:
Rockefeller talks about ESG leaders versus ESG improvers. Can you frame that for us and share your thoughts on which is the better investment?
David Harris:
So traditionally, ESG leaders have dominated ESG category because they have been companies that tend to score very well on most metrics. And so they are frankly, the easiest ones to own. If you have a leader in alternative energy, if you have companies who have the best hiring practices, the best lending practices, you have typically well acknowledged, well established and very widely owned companies in ESG portfolios. And I'd like to draw an important distinction between improvers and leaders, because improvers are companies that with proper engagement are making strives to become leaders.
And our view is from a shareholder return standpoint, you're going to have a bigger impact owning companies that have room for improvement versus the ones who are already scored as leaders in respective categories.
Tim Bray:
So, David, let's talk about the future. Over the next 10 years. What do you think are the biggest trends that might drive market performance?
David Harris:
I think market performance of the next 10 years is going to continue to rely on innovation. And I think realistically, we have to assume global GDP as the world matures, we have aging demographics, will also diminish over time. So where do you find the best winners when you have economic growth flattening or stable? In this environment, you're going to see companies who are share takers and some who are share losers.
And we have seen this trend already for the last 20 odd years and it has accelerated. So if you look at a major index, like the Wilshire 5000, there aren't even 5,000 companies that are in the Wilshire 5000. Years ago, I think there were about 7,500 companies that could have qualified. And now the number I believe is roughly 3,700. And that's been a long-term trend that we've seen with this consolidation - a little bit more of a winner take all.
And I think over the next 10 years, it is actually likely to continue because you need to have the size, scale, global reach to compete in so many sectors. And so you've seen this incredible consolidation in retailing, likely to continue media, it could certainly continue in a host of sectors. Energy could be one as well. So where do we get performance? I think it's going to be a bit of a barbell approach. You're going to have these dominant market leaders and then smaller, innovative, nimble companies that will probably ultimately end up being targets for acquisition by some of the market leaders.
Tim Bray:
Why do you believe active management matters going forward?
David Harris:
There's a point with passive investing, where it reaches diminishing returns and active should reap more rewards going forward. Let me use a specific example here. We're all familiar with the negative interest rates in Europe. So if you buy a German 10-year bond, you are paying the government money to own that security. Who are the largest owners of negative yielding debt, Europe or using Germany as a specific example. One - the European Central Bank is the largest owner, two - second largest owner are index funds. U.S Index funds and why are they large owner? Because it's part of their passive universe, as it's defined. They have to own everything.
And whether debt is yielding or not. So if you are an active manager, bond manager of Europe, you don't have to own a negative yielding bond. And to me, that illustrates that passive can get so large, that it actually starts to undermine. The original argument was you could own a slice of the market, it wouldn't distort the market and provide cheap returns. It gets to a point where markets get so distorted it leaves great opportunity for active managers.
Tim Bray:
David, what's the best career advice you've ever received?
David Harris:
In business school I had a professor that said, "We all want to do, pursue things that we love and ultimately you end up pursuing things you're good at. And when you're good at them, you tend to like them." And I think that it was very good advice. So we can follow our passions, follow our dreams, the reality it is I would have loved to play for the New York Knicks, but I'm probably not good at it. Well, it's the Knicks? So you never know, but we all have dreams and ambitions, but find what you're good at. We're all good at different things. We're all suited for different things.
I took what I thought was a very influential quiz in business school, the Myers-Briggs Personality Assessment, and I highly recommend it if anyone's taken it, you can find a lot of those online. The number one career for what I scored said, security analysts. So I'm like, "Okay, it's right." In my wheelhouse, I ended up becoming an analyst after business school. But you'd find your aptitude, follow it, it's great if it's something you end up loving, then it's ideal. But ultimately this is probably where the best career choice is going to be, is where your skill sets lie?
Tim Bray:
What are your hobbies outside of work?
David Harris:
Well, fortunately too, that sync up very nicely with what I do. One is, I do like to read a lot and consume information and I do like to travel to interesting places and experience and enjoy new cultures. And that's the important part of global investing, because one of the insights you draw is that most people around the world want the same things. We all want to live better lives, enjoy better things and have healthier, longer lives. And when you can extrapolate products, goods and services that tend to do well in one geography to many geographies, we're all really not that different.
Even though there are many interesting quirky cultural differences from country to country.
Tim Bray:
You mentioned you're an avid reader. Do you have a book you would recommend to our listeners?
David Harris:
The one book I would recommend to anyone going into investment business is a great history book called Capital Ideas from a fellow named Peter Bernstein, who was just a brilliant writer and quite a gentleman. And I had the fortunate pleasure of getting to meet Peter. Peter published well into his 90s. So I did meet him when I started the business, but he wrote this book that's spans back well over a hundred years. And it started with the early days of how people thought about markets and numbers, and was a great history lesson and really the evolution of the industry and how it came to be today.
Tim Bray:
David, lots of leaders have daily routines to keep them at their best and stay focused. Do you have anything like that in your daily routine?
David Harris:
My routine is just very disciplined driven by the cycles of the markets. So I like to get to the office early, it certainly speeds up the commute. Traders are there early, I like the market banter before the office starts filling up, so that you can catch up on emails, catch up in reading well before you get into the floor of our 8:30 meeting. I think it's important to get regular exercise, grab a workout in when I can. Often it's at night after I get home. And that works me. But during the weeks are very full, there tend to be busy and I like that. I like staying engaged.
Tim Bray:
Thanks to David Harris for sharing his story and discussing the investment philosophies of Rockefeller Capital Management. Until next time, I'm Tim Bray.
Blake Moore:
Thank you for listening to Distinctively Active Investing. You can find the resources mentioned in the episode, and learn all about Touchstone at www.touchstoneinvestments.com/podcast. If you like the show, please share it with someone you know. We appreciate when you subscribe to the show and take the time to leave us a rating and review. Find our podcast on Apple Podcasts, Spotify, or your favorite podcast app. I'm Blake Moore and from all of us at Touchstone Investments, thank you for listening.
The companies mentioned in this interview are not held in the Touchstone Global ESG Equity Fund or the Touchstone International ESG Equity Fund.
1 ESG is an acronym for Environmental, Social and Corporate Governance.
2 Alpha is the portion of a fund’s total return that is unique to that fund and is independent of movements in the benchmark.
Investment return and principal value of an investment in a Fund will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. All investing involves risk.
Performance data quoted is past performance which is no guarantee of future results.
The information provided is for general information purposes and is not investment advice. Opinions may change without notice based on economic, market, business, and other conditions.
Please consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one at TouchstoneInvestments.com/resources or call Touchstone at 800.638.8194. Please read the prospectus and/or summary prospectus carefully before investing.
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