A quick detour today into the field of sport, albeit with plenty of potential investment lessons. We’ll finish with our latest maths concept and market outlook, which remains focused on inflation and rate sensitive regions/sectors, fading long-duration and expensive growth with continued enthusiasm for the UK and Japan. But first: my reasons why September is such an important month to remember, for sports fans and historians. Even goats.

Lest we forget

September is a significant month. WW2 started (and finished) in September, so too the American civil war. Lincoln abolished slavery and Tsar Peter of Russia imposed a tax on beards, hoping to Westernize Russian society (not sure if successfully, but it inspired a lot of barmen). Mother Teresa was canonized in September. It’s when the grapes get harvested (just in time for schools to reopen after summer holidays), and when Buffett and Beyonce celebrate birthdays. In sport it means the US Open, the NFL, UEFA Football, often the Ryder Cup and this year – (and as a Kiwi, more on this in a moment) – the Rugby Union World Cup. For me, I married, survived the Lehman crisis, hit my peak weight, stayed married, watched the first ever Williams sisters tennis final live and Lleyton Hewitt’s first grand slam (v Sampras) in New York. The next day, the Jackson Five Reunion. The day after, my first day at Merrill Lynch in the World Financial Centre, NY, was September 11, 2001. Lest we forget. I never will.

Bring Back Buck

The 2001 US Open was not only known for the results but also for a sign, the only sign allowed in the Arthur Ash stadium that day, that said: BRING BACK BUCK. Few will understand the reference. It refers to a well-known catch-cry in late ‘80’s New Zealand to reinstate legendary and unbeaten All Black rugby union captain, Buck Shelford, after he was dropped for a younger player. Now rugby union is not only the national sport of NZ, it's part of the national identity. And his fans felt he brought a degree of experience but also toughness (Google ‘Battle of Nantes’), grit and resilience, that younger players lacked. Despite having retired more than a decade earlier, die-hard fans continued the tradition. Even in America. At tennis tournaments, the US Open.

This caused a stir as you can imagine and some colourful commentary from John McEnroe trying to figure out who the hell is Buck? The episode is recounted in Ron Palenski’s book, ' Our Game', about the 150 Year history of the All Blacks. I was at this particular tournament with the fans in question, and was captured on TV performing a NZ maori haka (with photo to follow in a future article).

Why Now?

Why mention it again? Well, it’s September, the US Open has just finished, Monday was 9/11 and the Rugby World Cup kicked off last Friday between France and NZ. While Buck holds the record for being the only unbeaten captain, he was only in charge for 14 games. Richie McCaw captained NZ an astonishing 110 times, only lost 11, a win ratio just shy of 90%. He was the first captain, of any sport, to lead a national team to two successful World Cups, holds the record for most consecutive wins (18) and was international player of the year three times during his tenure. Few, in rugby circles would argue, McCaw was the Greatest Of All Time. The GOAT.

Take your chances

Don’t ask how, or why, but myself and Northern Trust’s Global Head of Capital Markets, Banking and Treasury Services, Guy Gibson (another Kiwi), were invited to a lunch before New Zealand's first game, hosted by the All Blacks Performance Labs. This is an executive coaching experience that gives access to the DNA of what it takes to create and sustain high performance teams (highly recommended). At lunch were two famous All Blacks, Sir John Kirwan and Richie McCaw (aka The GOAT). I was sat next to McCaw. Now, picture this. It’s outside, late-summer in Paris, 32 degrees, we’re shaded under a giant fig pergola, the rosé is flowing and – being taught you miss 100% of the shots you don’t take – I took my chances. I hammered McCaw with questions, milking what lessons I could from one of the greatest leaders, of any discipline, of all time. Poor bloke. It was relentless.

Lessons from the GOAT

There’s something impactful about burley blokes talking about pressure, about vulnerability (a ‘superpower’), humility. They talked about accountability, about legacy, that they were just a custodian whose job is leaving the jersey in a better place, and that no one is bigger than ‘the team’, even the GOAT. They talked of the importance of getting perspective, being present, especially under-pressure and ‘to breathe’. And they talked of hard work: ‘opportunity is missed by most people because it is dressed in overalls and looks like work’ – Thomas Edison (American inventor and businessman). All great lessons for business. For life. But what about investing? The market doesn’t care for your efforts, humility or legacy. Your investors may not either? What they might care for more is returns.

Failure

Now, the idea of learning from failure is well known. Perhaps, even, a little overused. Some seem to assume it’s part of the process and may even seek it, in order to learn, to galvanise effort, to pivot. McCaw himself talks of his ‘failure’, an early exit from the 2007 Rugby World Cup, which forced the team to face some harsh realities, but ultimately became the ‘defining moment’ in catalysing the success that followed. But hang on. What if you can’t tolerate failure? And what if, like the All Blacks who went on to 18 wins in a row, you don’t fail much? Where are the lessons then? There has to be another way, one that generates learning, without failure. And there is. Just learn.

Just learn

McCaw is humble enough to know that many of his team’s victories were not always down to skill, superior strategy or ability. But sometimes luck. (The same, I’m sure, can be said for many of your investments). As a consequence, they embraced the ‘de-brief’. They would review each performance, win, lose or draw, knowing there were always things they could work on and improve, during training the following week. Failure wasn’t necessary, nor was it tolerated. Instead, they reviewed their process, identified errors. They just learned. Another tool employed was the use of pre-mortems, where they would identify, in advance, what to do in extreme pressure situations, how they would act/react and what triggers would cause them to change tactics. This helped them better prepare. It also removed the power, the impact of such events when/if they occurred. It allowed them to keep their heads in that moment, make good, rational decisions and improve their likelihood of success.

The debrief

This idea of the debrief is really powerful and I see flavours of it with successful managers. Some utilise data tools to help codify/quantify their investment process, which not only makes it more scalable (and sellable) it provides a way to measure, and therefore improve their process through time. Granted, it’s not easy to review your wins/failures. It takes time and intellectual honesty which are not always in abundance. But it’s a discipline that good investors seem to share, in some form at least. It’s also starting to become a requirement for asset owners in manager selection. They seek more quantifiable metrics to assess a manager’s skill, noting that past performance – in a changing world – may be a less reliable indicator than it once was. It may also have been due to luck. As doers do as checkers check, I would bear this in mind, if a manager. If interested, here is a paper from The Journal of Investing that features Essentia Analytics. The title: Assessing Portfolio Managers Based on Skill, Not Past Performance.

Preparing to fail

A pre-mortem is another powerful technique that has relevance to investing. Risk managers are always thinking about what triggers, what limits, would cause managers to change direction, to exit. Tail risk hedging, is another area where a CIO has to think about what situations would kill an idea, and how they might, in advance, prepare for such or hedge that risk. Many are trying to build out these capabilities internally – for it can be hard to get alignment with an external manager when performance fees are linked to that tail risk occurring (there are some good consultants in this space). Another more nascent, but growing area, is behavioural analytics. Some investors have incorporated behavioural analytic tools into their risk and data functions. By analysing past decisions, they can identify, in advance, certain behavioural patterns that have in the past led to good or bad outcomes. Armed with such they can nudge managers to reassess their thesis, and either cut or size up the position. This reframes the CRO or CTO more as a coach, a collaborator, and not part of business prevention. That, and once again, allocators are starting to incorporate these tools to help them make better, more evidence based decisions when it comes to manager selection. See above: doers do.

The Observer Effect

Enough of rugby. We talked last time about the field of mathematics called fractal geometry where outcomes are highly dependent on the measure, the yardstick used. Many were shocked to learn New Zealand’s coastline was longer than America’s, if using a metre to measure it. Investors might soon be shocked to learn the perceived volatility of their illiquid portfolio has risen thanks to the growing pressure for more frequent valuations (see what Gary Gensler has planned here). Higher volatility might mean less leverage. Less leverage, lower returns? Thanks to a kindly client, I was introduced to another mathematical concept this week from the field of quantum physics, The Observer Effect. This applies to markets, simplistically, as being that the mere observation of value can affect the actual value. Now, this concept may soon apply to PE where increased disclosure and transparency act as deflationary forces and may, in doing so, highlight the relative value in public alternatives. The Observer Effect may also act to re-rate material world assets, which seem to be getting a lot more attention, thanks principally to science (Yale), storytelling (Ed Conway) and incentives (industrial policy).

The science

If you haven’t the time to read Counterproductive Sustainable Investing: The Impact of Elasticity of Brown and Green Firms you may enjoy listening to this interview with its author, Professor Kelly Shue. As a reminder, she argues brown firms—not green firms—will drive the greatest emissions savings and warns against thinking proportionally and to think more in level terms. If a construction company that emits 1,000,000 tonnes of CO2 pa reduces its emissions by 2%, that is twice as impactful as an IT company that emits 10,000 tonnes hitting net zero. Yet the system only rewards the latter, and so we need incentives (i.e. capital) to help brown firms transition quicker. Pleasingly I’m seeing more asset owners and impact funds focused on transition finance, suggesting her logic is gaining ground.

The story telling

This logic above presents itself as Ed Conway forces a narrative change on material world assets, by highlighting their importance to the ethereal world, and without which no modern world or greener future. Through this lens we learn where the real scarcity exists; it’s in the incredibly rare materials and processes that in some instances have no known substitutes. And yet for the princely sum of Apple’s market cap, one can still buy every mining company, most of the FTSE and some of Brazil. I’m not beating up on Apple of course, simply asking whether that calculus seems right in light of the above?

The incentives

The Inflation Reduction Act, Chips Act, Infrastructure Act and enormous subsidies (and global responses thereto) represent a modern form of Military Keynesianism. It’s an arms race to secure the critical materials and technologies for climate, for quantum, for space, and AI. The current fiscal response is unprecedented outside of wartime, meaning investors need to read more Keynes, less Friedman, unlearn the framing of a Fed Put, replace with a Fiscal Put and allocate accordingly. The energy transition is the world's largest construction project and you simply can’t build factories without commodities, without German or Japanese machines. You can’t build US factories without steel (see US Steel consolidation), or construction workers (see Buffett’s latest purchase). Regions and sectors that trade on enormous discounts versus the proxy for material world assets: The S&P. There will be, I believe, a value transfer from Ethereal to Material assets and I would remain a buyer of these assets and those countries with claims thereto: like the UK, Japan, Germany and Brazil. (And I still wouldn’t be buying DM bonds, unless of course, you have to).

This has to be the trade of the decade. For the climate’s sake.

Gary