Our editor-in-chief interviews Aberdeen Asset Management’s global chief investment officer, Anne Richards.
I meet Anne Richards in the board room at Aberdeen Asset Management on Princes Street in Edinburgh.
It offers one of the best views in the city, which might be one reason why it takes us a while to get to the point of our meeting.
We talk about the juggling act of work, children and parents, and the pressures (along with the joys) it all gives the modern ‘sandwich generation’. We briefly lament our lost flats in London (a common conversation among people who have sold in the south to buy in the north) and meander around the amazing prices some Scottish artwork has been selling for recently – the board room has a gorgeous painting by an artist called James Morrison whose work I have recently developed something of a passion for.
Then we get to the point of the meeting. How does she see markets today? The fact that bond and equity prices are increasingly moving in tandem, and that volatility is low, suggests that “the world doesn’t really know which way it wants to jump”, says Richards.
But in fact, all it really reflects is that people want equities for income, but also want to stay in the “longevity trade” in America, where the “stubborn refusal of inflation to appear” is keeping bond yields down.
I can’t let that go. Is she suggesting there is no inflation at all out there? That depends on what you call inflation, she says. We might not have consumer-price inflation, but we most certainly have asset-price inflation, and if we are concerned about “broader… financial stability” there is a “serious conversation” to be had about it.
In the US and the UK, for example, asset-price inflation tends to be ignored by central bankers, unless it manifests itself in house prices. But that’s not good enough – other asset prices matter too.
How to tackle inequality
This brings us to the rise in wealth inequality – for which super-low interest rates and the quantitative easing (QE) policies of central bankers are clearly partly responsible. “Wealthy people own more assets by definition”, therefore they “have benefited the most” from recent monetary policy, and so it should be no surprise that the wealth gap has widened.
So what do we do about this? The answer, says Richards, is not necessarily for central banks to adopt a method of measuring inflation that includes asset prices. But there certainly should be “a broader consideration of what should be taken into the mix in determining interest-rate policy”.
The debate has moved on somewhat – we now talk about employment targets and possibly growth targets alongside inflation targets – but there is further to go. Looking beyond the problem of wealth distribution, has super-easy monetary policy worked? The interesting thing, she says, is that while consumer spending and GDP as a whole have gradually clambered back to pre-crisis levels, investment by companies hasn’t.
Low interest rates “should have encouraged corporations to borrow” to invest. Instead, they’ve given in to the “endless quest for yield” and paid up for dividends and buybacks: there has been a “distortion of what should be the natural traction mechanism in the real economy of interest-rate policy”.
I’ve written a lot about this on our blog. We rather agree with the economist Andrew Smithers on this – the short-term incentives built into modern executives’ pay packages make them increasingly loath to spend money (that could be turned into bonuses!) on long-term capital investment.
“Intuitively that feels right,” agrees Richards. Aberdeen has a reputation for being engaged as a shareholder, which makes sense given it holds its position for “on average, eight-years plus”. But the issue of remuneration is, she says, “immensely complex”.
But isn’t that the core of the problem? I ask. Surely it shouldn’t be so complicated. You hire someone to do a job. You offer them a salary of, say, £500,000. If they do a good job they get to keep the job, if they don’t, the board fires them. Easy.
Fixing executive pay
Richards isn’t sure it’s quite that simple. When she was at business school the focus was on how to make compensation more variable, so it could shift with performance.
But now, amid all the complexity, it’s clear that “every time we create an incentive we create a disincentive somewhere else”, and so there is a move back towards fixed pay. This makes more sense in the context of what a good company director is really supposed to do.
Your duty, says Richards, is not just to the shareholders. It is “a multitude of stakeholders”, from staff to suppliers to shareholders. So the debate needs to move to asking: “how do you create incentive structures that better reflect the entirety of that firm?”
Surely, I say, if incentives were really geared for the long term, they would reward actions that focused on maintaining and expanding the company for decades to come, something that would work for all stakeholders? On this, we can agree.
It seems to have been decided somewhere along the line, says Richards, that the “long-term equals three years” when it really doesn’t. Where I suspect we don’t agree is on the absolute levels that corporate chief executives need to end up being paid. It doesn’t make sense to me that anyone should be able to transform their family finances for generations to come, simply by sitting atop a public company – however large – for five years.
Richards points out that we ask a lot of our chief executives: “they might get to sit at the front of the plane… but… they will spend a ridiculous amount of their life” on the plane. “We have to be prepared to pay people” for that.
The end of the bull market
We move on. I ask what she thinks might cause the current period of market calm to end. She thinks “we’re due a bout of volatility”, but as to what will cause it, “I really don’t know”.
The market has so far taken the coup in Thailand, the trouble in Ukraine, and the friction between China and Vietnam, and China and Japan entirely in its stride. What about a financial crash in China?
“We’ve never been great fans of China, but we’re not significantly more worried than we have been.” And as long as there is traction elsewhere, problems in China won’t “annihilate” global recovery.
This takes us to the US, where she sees the consumer “healing”, the banks “broadly fixed” and unemployment “heading in the right direction”. The US is a “resilient economy because it has so much micro-entrepreneurship… that’s a powerful force for good”.
Add in the fact that you have freedom of movement across the states – “the capital and people can flow to the jobs” and there is an environment in the US that we haven’t yet managed to recreate in Europe.
On the plus side for Europe, “the euro project is on track”, which is something of a surprise given the “dysfunctionality of decision-making you have in Europe”.
The periphery is starting to heal – Italy and France probably have the biggest issues at the moment, with France “definitely ahead of Italy in the queue for being the most problematic in Europe”. But “take it in the round” and Europe feels like it is “where America was two years ago, crawling up the path to recovery”.
So is Europe investable? “We still find companies that we like but it just feels a bit rich multiple-wise.” What about Japan? “The gloss has been rubbed off a bit… there’s a feeling that the ‘third arrow’ [economic reform] hasn’t got the traction” of the first (money printing) and second (government spending) arrows.
And emerging markets? “We’re waiting for a little bit of volatility” to get in at lower prices, but are “nudging” towards investing more in Asia. There “might be an opportunity” over the summer.
The money has to go somewhere
Overall, Richards finds this investing environment as difficult as we do (which is reassuring). “Nobody really thinks earnings are going to surprise on the upside, nobody really believes there is much multiple expansion out there, but everybody has to put this excess liquidity somewhere.”
Equities are the obvious place, and for diversification “we still quite like the quasi-real-asset-type diversifiers… whether it is property or infrastructure, or whether it is specific hedge funds where you can get something that looks or feels a little bit different”.
What about gold? I ask. “We don’t have any gold at the moment but… I do always like to be within touching distance of gold… it is the closest thing there is to a tangible store of value.”
One thing that 2008 “taught everybody is that in paper-based economies, when trust goes suddenly, all you have is a piece of paper”. I tell her we always recommend readers hold 5%-10% of their portfolios in gold as insurance against all the terrible things that can happen in the global economy. “I think that’s dead right,” she says.
Who is Anne Richards?
Anne Richards graduated with a first-class honours degree in Electronics and Electrical Engineering from the University of Edinburgh. After completing a research fellowship at CERN (the European Organisation for Nuclear Research in Geneva), she realised “a life in research was not for me”, according to an interview with WomenOnBoards.co.uk.
She spent two years with technology group Cambridge Consultants before taking a year out to study for an MBA at INSEAD in Fontainebleau, France, which is where she “fell in love with financial markets”.
She began her City career as an analyst with Alliance Capital in 1992. She moved on to portfolio management, firstly with JP Morgan Investment Management, and then with Mercury Asset Management (later MLIM). In 2002 she joined the main board of Edinburgh Fund Managers plc (EFM).
She continued in her role as global chief investment officer when EFM was taken over by Aberdeen Asset Management in 2003, joining the main board of Aberdeen in 2011. Anne is also a non-executive director of insurer Esure, and a lay member of Court of the University of Edinburgh.