According to the CFA survey, ‘The investment professional of the future’, investment industry leaders rank ‘T-shaped skills’ as the most important future skill category. Some 49% of respondents rank these first, followed by leadership skills (21%), soft skills (16%) and technical skills (14%).1 T-shaped people are subject matter experts; they adapt to changing environments, and can work across disciplines. They combine deep knowledge in a single field with wider knowledge in other parts of the ecosystem, and have the competencies to connect them.
We would argue that most investment professionals actually have T-shaped skills, being experts in analyzing companies, but always curious and interested in the world around them. However, working across disciplines comes less natural to the portfolio manager. To keep up with developments on the sustainability front, portfolio managers need to read up on the work of climate and human rights experts. Being able to use big data and machine learning in an effort to exploit behavioral biases is another skill that the future portfolio manager needs to have.
This is also the reason why we believe consultants and clients of asset managers focus more on the topic of diversity. The investment industry has already moved from the star manager model to the investment team model. However, the investment teams of today are mostly compiled of people that come from rather similar backgrounds, and more importantly are mostly trained to be an expert in the same subject matter. There is hardly any investment professional who does not have a CFA or similar qualification. But there are a very limited number of climate scientists or psychologists with a focus on business ethics, for example.
In the field of AI and big data, it is already quite common for investment teams to include data scientists2, making the team more T-shaped. Moreover, the two trends can complement each other; to make up for the lack of data on ESG, at Robeco we employ two climate data scientists. Of course, all of these professionals also need to understand finance. And for the portfolio manager, this means he or she needs to manage a team with different specialists and characters to come to better-informed investment decisions.
When Robeco started the process of integrating ESG in its investments about 10 years ago, portfolio managers needed to become familiar with the subject. They needed to start thinking about how topics like climate change, the rising costs of health care, use of child labor in supply chains, and the ever-growing mountain of single-use plastics was affecting the ability of companies to create value in the long run. How these trends are changing markets, affecting brand value, or if not managed, simply increasing risk.
Focusing on financial material ESG issues was a good place to start, as it was closer to the heart of portfolio managers, and did not have any impact on their investment universe. This leaves the most room to create alpha according to the good old fundamental law of active management. However, 10 years on, we see that our clients, the regulator and society are moving towards focusing on the actual (negative) impact our investments have. This is adding another dimension to analyzing companies and constructing portfolios: return, risk and social and environmental impact.
So, we see the portfolio manager 2.0 as a professional who can take a carbon budget into account as well as a tracking error and alpha. Someone who understands that decarbonization through time is a given, and that negative externalities (like waste or carbon emittance) should be priced. Because policy makers will push for externality pricing, while stranded assets are the minefields of the coming years.
The portfolio manager 2.0 understands that real world impact via our investments is equally important, in some products at least, to generating alpha. Taking into account real world impact is the future.
Combining these efforts is a whole new challenge. Not adapting will make you extinct.
1 CFA Institute, Investment professional of the future, May 2019