In early 2017 Morphic Asset Management co-founder and stock picker, Jack Lowenstein, announced the creation of an Ethical Investment Fund that won’t invest in mining, alcohol, tobacco, factory farming, old growth forest logging or armaments. Since then, his 16 and 19 year old daughters have suddenly become incredibly engaged with what he does. Not only is he out to make steady returns for his investors, he understands they want it to be done in a way that leaves the world a better place …
Transcript: John and Jack Lowenstein – Customers Matter
John: I am sitting here in downtown Sydney on Macquarie Street with Jack Lowenstein. Jack is what is commonly known as a stock picker or a funds manager, but he has always been a little different. He is a disruptor and a pioneer in what is known as ethical investing. We are going to talk to Jack today about his customer centricity and the way the investment markets have been run and have evolved during his career. Jack, welcome to Customers Matter.
Jack: Thank you very much indeed.
John: Jack, you and I first met—I dread saying this—but it was more than twenty years ago.
Jack: I think it is pushing close to thirty, actually. It is pretty scary; we are still so young.
John: Exactly. I am sure it was at Bondi Beach. I remember at the time I met you, you had a philosophy degree from Oxford and you were working as a finance journalist on a pretty interesting finance publication. Have I got all that correct?
Jack: Yes, absolutely. I was working for Euromoney Publications, which was a very large publication group specializing in what we might recall as “high finance”—how companies fund themselves and the banking industry in a large sense. I worked there until the early ’90s, followed by a brief career in stockbroking. Then, a very good friend of mine at the time, Peter Hall, had a problem with a company he had an investment in called Kresta Blinds. We all know Kresta was a pioneer of blinds, but the company had fallen on hard times. He asked me to go into the company and stage a corporate coup to remove the people who were running it because he thought they were doing a bad job and were not very honest. We brought in a new team, I stayed on board, and we had a long turnaround strategy. We managed to take the business from death’s door to being quite settled.
John: It is amazing what careers journalism sets people up for. You made this transition from being a humble scribe into stockbroking first, and then into turnarounds. Tell me how you went from point A to B to C?
Jack: In life, I have always found that luck is very important. What is even more important is to seize the opportunity with both hands when you sense a bit of luck. Sometimes it turns out not to be so lucky—that is the nature of the game—but in this case, I was very lucky. Regarding the opportunity in stockbroking, I was getting bored with journalism and tired of being an observer rather than an actor. I got the chance to go into small-cap fundraising for small companies. You meet some interesting characters there; some are great entrepreneurs and some, frankly, are spivs. I was very glad I had that experience because it broadened my contact base from the top end of the market—where I made many great friends but was never going to be on equal terms—to the bottom end of the market where I could learn my trade. The Kresta situation was fantastic for me.
John: How did that come about? You knew Peter Hall, who is a bit of a legend in the industry. For the people who are listening and watching this, you might explain who Peter is and how you came to meet him.
Jack: It is a wonderful story with a slightly sad ending. Peter was a journalist himself before he went into stockbroking and funds management. He set up a business called Hunter Hall. When I joined him in 1997, we had $13 million under management. It was just the two of us in a very little office in Double Bay. He had a very large exposure to one stock, Kresta, and it was vital to his business that we achieved a turnaround there. It really mattered to his business and the investors in the Hunter Hall Global Value Trust. I learned an awful lot from Peter. He is a brilliant guy, and one of his great strengths is the ability to see the big picture and the fine detail in a “bifocal” way—almost in the same glance. It is an incredible skill to have.
John: As I mentioned earlier, you were educated in philosophy. Peter became famous for bringing a new philosophy to funds management. What did you bring to the table in common that disrupted the market?
Jack: At that time, being an ethical investor was regarded as being very brave. We made that decision shortly after I joined the firm. As I said, we only had $13 million under management. The disruption it created was that, because we had very good investment numbers, people began to believe there was no impediment to good returns when using an ethical screen or avoiding certain designated sectors. That was a very important proof of concept for the industry in Australia.
The other disruptive element was our activism. We were investing heavily in smaller companies in Australia and frequently found problems in them, so we made changes. In one particular case, we bought into a company that already had a known problem: Reassurance Australia Corporation. Reinsurers provide insurance for other insurance companies, and this one got into trouble when it lacked enough capital. We bought into it with the view to turn it around, rescue the capital, and start a new insurance company, which we did. That was a ten-year engagement for me. I went on the board and brought in an expert, Richard Hill, to join me. Together with Ian Crowe and a few others, we achieved a fantastic turnaround. We started a new insurance company called Calliden, which was acquired by Steadfast about two years ago. Again, I have been very lucky to get these opportunities.
John: That is what you call patient capital?
Jack: We bought in at about five cents, and the eventual exit price was forty-five cents. It was a pretty good outcome, even though it took a long time.
John: My business has been exploring the concept of purpose—not necessarily before profit, but purpose which enables profit. When people buy into why you do something, it creates a different level of engagement. Did you and Peter appreciate that when you decided to only invest in ethically screened stocks? Did you feel there was a higher purpose?
Jack: When you are investing ethically, you must remember you are still investing. You have to get returns for people; you cannot compromise those returns. The ethical component is about making sure you make your investors’ money without making the world a poorer place. The mechanics are complex, but the aim is clear.
I was lucky enough to go to Harvard Business School for an Advanced Management Course. The Head of the Department of Strategy, who was also a philosopher by training and was on the board of Gucci, approached strategy by saying: “Think of the world without your enterprise.” Try to understand the value-add you are creating. Your reason for existing is the difference between the world with you and the world without you. If that difference isn’t big enough, you don’t really have a value proposition. In terms of customer focus, we aim to give our customers a good return for their retirement with low volatility so they don’t feel rich one day and poor the next. We also want to give them the confidence that they aren’t making money from things they are unhappy about in their broader lives.
John: What was the journey from Double Bay and Hunter Hall to Morphic and the Ethical Fund you have just established?
Jack: The business was incredibly successful. We grew from $13 million to a peak of nearly $3 billion just before the GFC. We were lucky to have David Buckland join us as CEO, which allowed Peter to pursue philanthropic interests. The GFC was a shock for everybody. We didn’t have a particularly bad GFC, but it was very exhausting for Peter. I don’t think he ever fully recovered from the emotional drain of managing other people’s money during that time. These are real people’s lives being affected.
His attitude changed, and I grew increasingly uncomfortable with some of the things happening at the company. In late 2011, I decided it was time to move on. I was worried about things I wasn’t comfortable with, so I moved on quietly. When I left, my partner, Chad Slater—a brilliant guy I had recruited at Hunter Hall—said that if I was leaving, he was leaving too. I was too young to retire and probably not rich enough, so we started this business. We have built it up to a seven-person investment team. It has been tougher than a typical start-up; you always discount how hard it will be, and it turns out to even harder. But it has been a tremendous learning exercise. We have delivered roughly a 17% return to investors since we started, with very low volatility. People worry about their money, and if they see it going up and down constantly, they get very anxious.
John: Regarding technology in funds management today, what has changed? Are customers more important than they used to be?
Jack: So much has changed. One of the most important changes is the media. When I first started at Hunter Hall and we had the proxy battle for Kresta, you spoke to seven or eight newspapers and a couple of TV stations and you were done. Today, getting the same message across involves talking to a hundred different outlets because the media has become so specialized and dispersed. The channel to the customer has changed enormously.
When we started at Hunter Hall, almost every investor came to us directly. We knew their names, addresses, and phone numbers. Now, most financial planners use “wrap platforms” that create a barrier between us and the end customer. There is a swarm of rating agencies and asset consultants in between. I think we have reached a point where the cost to the consumer for all that interaction has become too high, and we are seeing a reversal. One of the reasons I am pleased with a listed investment company is it allows for a direct, one-to-one relationship with our clients. This is very important in the ethical space because I expect to get tremendous value from customer feedback regarding the companies we invest in.
John: Unlike other industries where consumers have gained more power, it sounds like consumers have become more distanced from fund managers due to these platforms.
Jack: It is a form of intermediation. It was partly a response to “cowboys” in the industry, but it has come at a financial cost and a cost to intimacy. Ultimately, nobody is going to explain what I do better than I will. You need that intimacy. In this same building, Jeff Wilson runs Wilson Asset Management. He has 45,000 shareholders and his relationship is direct. Stockbrokers introduce people to his fund, but he has a direct personal relationship with them. He travels the country every six months to meet investors. It saves money for investors and creates the intimate relationship needed to improve product and performance.
John: What does Morphic do that is unique or special to give it purpose?
Jack: We have carved a place for ourselves in terms of risk management. It means making sure people don’t spend time worrying about having a terrible month followed by a great one. After four and a half years, we are confident our method works. The other element is the ethical screen. To us, the ethical elements that matter most are associated with global warming and climate change. Barack Obama said our generation is the first to experience the effects of climate change and the last that will be able to do anything about it.
Since we launched the Morphic Ethical Equities Fund, my daughters, who are nineteen and sixteen, have been incredibly engaged. It is an incredible experience to finally talk to your teenage daughters again. What has emerged is how much deep anxiety they have about climate change. They are looking to our generation to make sure we don’t make things worse. My contribution is to have a very strict prohibition on fossil fuel investments. We also think this will be good for investment returns because that sector has to shrink; otherwise, we will not have a world we can live in.
John: Beyond fossil fuels, what else do you avoid?
Jack: We do not invest in alcohol, tobacco, factory farming, growth forest logging, or armaments. However, it isn’t all about negativity. We make sure that at least 5% of the fund is always invested in things that make the world a better place, such as new energy technologies. For example, we invest in Alstom. They are the world leaders in mass ground transport and are responsible for the new trams in Sydney. We also invest in Power Grid in India, which is developing the “Green Energy Corridor.” Emerging markets like India and China are the fastest-growing carbon emitters, but they are also building specialized grids to carry alternative energy.
John: It sounds like you have rediscovered an incredible passion and connected with your daughters. You are finding companies that are really innovating.
Jack: That is right. But I stress that our main objective is to help our clients grow their savings for retirement. Our secondary objective is to ensure we do that without making the world a poorer place.
John: Morphic has been running for four and a half years, but the Ethical Fund is a recent launch. Was there a “flashbulb” moment for this?
Jack: As a start-up, you are conscious of risk and don’t want to limit your market unduly. When we started, we felt it was tough enough to start a new business with all the new intermediaries involved, so we didn’t apply an ethical screen initially. However, nothing in our current Global Opportunities Fund would fail the ethical screen we apply now. It was more a matter of applying the brand formally to what we were already doing.
The catalyst was the implosion of Hunter Hall over Christmas. There was a need for an alternative because Hunter Hall was effectively taken over by Soul Pattinson, a conglomerate whose largest business is coal mining. I felt there would be an issue with the integrity of that brand, and it was important for investors to have a choice. We have had great support from brokers like NAB Trade, Westpac, Macquarie, and Morgan Stockbroking. Our social media campaign had 5,000 unique website visits in a week and 900 prospectus downloads. In America, 20% of funds under management have a socially responsible screen; in Australia, it is less than 1%. The reason has been a lack of innovation by fund managers, not a lack of demand.
John: What are your key learnings regarding disruption, commodification, and purpose?
Jack: The most important thing I am learning is that what works in financial services is a relationship of trust. The challenge with changing media technology is how to build that trust with many people while maintaining a sense of integrity. People want to know their money is being cared for. During this campaign, I have learned that you cannot fake it. People have to feel it is real.
John: Authenticity and values actually inform your brand.
Jack: Absolutely. You cannot afford any dissonance in your messaging. If you do, you are lost. It is extraordinary how one blemish can mar an otherwise perfect picture. None of us are perfect, so they are going to find a blemish somewhere, but you have to be authentic.
John: Jack, it has been great talking to you. Thanks for sharing your time with us.
Jack: It won’t last; I should enjoy it while I can.
John: Thanks very much.