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We're excited to revive this series as John Hustleby, the head of multi-asset at Lion Trust. John last dreamed this for our Meet the Managing Series and we're thrilled to have him back. With 38 years of experience, John is a seasoned fund manager and analyst, specializing in multi-asset multi-manager funds. He leads the team managing target risk portfolios and bespoke investment solutions.
Before joining Lion Trust in 2013, John co-founded North Investment Partners and services the director of multi-manager investments at 100 Sync Global Investors. In this episode, one in Andrew Little will sit down with John to discuss how his experience as an investor and business leader has shaped his career.
The challenges of founding businesses and asset management today, the balance between active and passive strategies, and the role fees play in decision making, plus key insight from John's work with top managers over the years. Enjoy. John Hustleby, welcome to the Value Prospective Podcast. He's a pleasure to have you here. How are you? I'm good. Thank you very much for having me. I'm a fairly regular listener to your podcast, some of your steamed guests on here.
I'm quite old, I'm very humble, actually, to be with you today. That is very kind. We are very honored to have you finally on the pod. We've been trying to set up dates for quite some time and it was our fault that this got delayed. When do we find you today? Yeah, in London today. Our offices are based in the Westside. I suppose something slightly different in that respect, right next door to the Savoy Hotel.
So a nice location to have something different away from the financial end of London amongst the tourists. It gets quite busy here Wednesday, Thursday, Friday with tourists, but something different. Before we continue with our conversation, let me say hello to my co-host of today, Andrew Lidon. Andrew, how are you? Very good. Thanks. Nice to meet you, John. Like wise. Like wise. John, why don't we start by asking if you could please provide our audience with your story?
What has been the journey? Yeah, I will try and keep it brief one, but that's going to be difficult for me as you will know. So, in fact, I think probably today or around about today, it will be 39 years. That is 39 ago that I first started in the city with Ross Chalde's. And I've enjoyed every single minute of it.
I think over those years, if I sort of reflect upon them, the three things that always keep coming back to me as the world has changed in investment markets is regulation, taxation and technology. When I think about technology, when I first started, my most sort of exciting thing was the CFACS. Indeed, it was 50 years old this week, I believe, you know. And as a comedian once said, posting was literally writing a letter and taking it down the post office.
And tweeting was something that was only left for the burst to make the sound of. And so, technology is something that has evolved enormously over my career. But I started at Ross Chalde's late 85, September 85, you know, very much joined as a school lever. I had a place to go to university, but I didn't take it. I'm one of three brothers. I'm the baby of those three brothers.
And I suppose to start my sort of contrarianism to some extent, you know, I was always being compared to my two brothers, one of which who was educationally elite to some extent. And the other one who was basically in terms of sporting gifting, being gifted at sports, then he certainly had that. So when I arrived at the local grammar school, I was supposed to be sort of top of the class educationally and top of the class in terms of sports as well.
Until the point that I didn't have to go to school trials, I was straight into the team. A little did they know that I was probably straight out after the, after the one as you get. So there we are. But my, I didn't, I had a place to university. I just wanted to crack on with life. I just felt that, you know, the thing that appealed to me was, was the city and not that I knew much about it. But one thing I didn't know about the city was investing.
And that comes from my grandfather, my grandfather, my mother's side. He was a company secretary, local company for many, many years. My, my dad died when I was quite young, but we used to stay with Granddad. And many of the time actually, it was just myself, Stamie with Granddad. My, my brothers were very good swimmers and they used to go off to garls and things like that. So I found myself on a Saturday morning waking up, waking up at Granddad's house.
And I think he would do, by the way, was, we would have to not only make the bed, but we'd have to do exercises. We have to do stretching. That Kendra was army days. And, you know, he did that. He lived right into his mid-90s. But the next thing we would do is wander down the road. We go to the local news agent. And he would buy two things. Well, three things actually. What I was with him. It by the FT, it by, you know, the racing post.
And then any comic that I really wanted at the time, we would come back. He would make breakfast and over breakfast, I would basically write in his ledger. And his ledger basically were all his share holdings. All his share holdings and what I had to do was basically, he was shout out the price. And I would put that in the column.
And then, mentally, I couldn't use a calculator, by the way, when the calculator is around, I would have to calculate the value of each of his holdings and top the model up. So, a bit of a mass lesson on the Saturday morning. Once we finished that, it was straight into looking at the form of the horses and, you know, picking at six horses. By the way, you know, Gabbars be aware. And that would be back down to the bookies. I would wait outside, normally with a bag of sweets.
And Grapner would place the bets in the afternoon. We would probably, first of all, kick a ball around in the park. And then we would watch the horse racing and follow by the wrestling as well. Now I'm really showing my age in that respect. But what was fascinating to me was how those shares moved, you know, week by week. And Grapner had a, if Grapner had a theme, the theme was very much retail. He wanted to invest in things he could see around him.
So, you know, it wouldn't be a surprise to say that, you know, he had investments in pubs and restaurants in retail. You know, I remember he had an investment in the ferries as well. You know, ferries and things like that. Things he'd use, things he could understand. That really started my sort of passion, I think, for investing. So, you know, 85 markets were sort of flying. And, you know, what I thought, well, you know, blow the sort of, you know, university bit.
Let's try and get into the city. I basically, you know, my link, if I mentioned it once or many times, you know, golf is one of my passions. And, you know, a clean golfer and the link I had to the city was from the golf club. There were plenty of people where I grew up who basically had jobs in the city to find out what that was all about. And, in doing so, you know, I find, I've sort of found myself, you know, where do I want to work? What should I do?
And, you know, the overwhelming advice came back, which was you want to basically find yourself at a merchant bank. Merchant banks these days, I suppose, the equivalent we would have would be an investment bank, but, you know, a merchant bank, which would have banking, it would have its corporate finance. And then it would have its asset management. In other words, you're a banking client, you floated your business through the corporate finance and then asset management would manage your money.
And that's basically the route I took. I applied for 12 jobs as school leavers, like, like months, 12 merchant banks. I got 12 jobs and then I had a problem which was, you know, which one do I choose? Now, you know, being 18 years old is pretty obvious, which you choose. You choose the one that pays the most. Unfortunately, when I sat down at the Gold Club with someone who was older and much wiser, they basically, my list of one to 12 with Rothschilds was the 12th because it paid the least.
And then basically reversed my pile and said, Rothschild is the one, the ones that are paying the most, there was a reason for that. And they're right. The only one I can think of today, apart from Rothschilds and Troids, by the way, the origins, which are very similar to Rothschilds, you know, they're the only two names which are really floating around today. So I think I think that was a good advice and making a good choice in that respect.
So I found myself a school lever, it was a great program, you got yourself to sort of move around from department to department. But, you know, my real training came in doing the sort of admin roles for basically, you need trust, mutual funds, funds. I did everything from the sort of the booking of trades to dealing funds, marketing funds, selling the funds.
And therefore, you know, I found myself as a natural progression into private clients and lucky enough, you know, at the time, they were basically thinking about launching a fund of funds or a portfolio management service where they would use funds. And obviously, my sort of training and experience in sort of admin in terms of funds came into play. I think the other thing just to say at the time, which was, you know, late 80s, early 90s, you know, staff on managers were in retail.
The staff on managers were all institutional managers, they're all pension fund managers. That's where all the action was. That's where all the quotes were in the papers. And, you know, again, coming back to that sort of regulation, taxation and technology, you know, I suppose regulation technology, sorry, taxation, sort of played its part when I was in the introduction of PEPS, which now are our ISIS today.
And that really, to my mind, created the retail market, created retail fund managers from there. Post that, I moved on to Henderson, so I was, you know, asked to join Henderson's, having worked at Ross Charles for 10 years. I worked at Henderson's for 10 years. And then we bring ourselves to sort of like, you know, the early notice where basically, you know, it was fairly easy, again, because regulation had changed and technology had evolved.
It was fairly easy to basically, you know, set up your own business. And that's what I did in 2005 when I co-founded Northeastern Park. There are so many different questions from that incredible journey. I think that I will start with. You've funded your business, but then that business got acquired by Lion Trust. And that's the piece that it's kind of missing from the last decade, I guess. Could you please explain what Lion Trust is and how that came about?
Yeah, I hope that Northeastern Park is on how I've the journey to Lion Trust. I mean, you know, I suppose as I said, you know, early notice, it was, there was a, because of the TNT boom bust shorting became a thing. And retail fund managers moved to basically managing long short portfolios. And then there was a, there was a definite sort of school of thought that basically said, if retail managers can choose, you know, stocks that they think that can go up.
And in doing so, avoiding stocks, which they thought they were going to go down, then why couldn't they run long short? And, you know, that was something that I definitely explored at Henderson's by launching a fund of hedge funds, which we did in 2001, I think it was. We IPOed it. You know, we raised about 115 million quid in a fund of hedge funds, which is the largest IPO of that year. And, you know, at the same time, Deutsche relaunch in one HSBC or Lorschwammer.
And we raised more money on that because we basically thought about, you know, retail managers, famous names, famous brands and how people can feel very, very, very comfortable with that. So, you know, people were launching their own, their own businesses and it was a fairly sort of common thing to do. My father, indeed, my brothers, have, have all owned their own businesses and continue to own their businesses, my brothers do today.
And, you know, I know very much about what a business owner meant. You know, if I think about my father and as I grew up, you know, as an entrepreneur, you knew where my dad was doing well because basically we went on very nice holidays and the car got changed from the driveway. You knew when we were doing less well because we got in a caravan and went up to South of it. So, I knew about the ups and downs of an entrepreneur when it's good, it's very good, when it's bad, it can be very, very bad.
But as I said, you know, it's something that I felt that, you know, we could do as a business, providing sort of solutions, working in partnership with advisors, which still today is very much at the sort of, you know, the very essence of what, of what we do. You know, and we put together that business, we founded it in 2005. We had the support of actually Neptune, Robby Gephinon. Neptune as well, in building that, in building that business.
And, you know, to get something off the ground, I think the first thing you have to do is you have to have the right people and you have to have the right people around you. The exciting thing is that you get the right people around you, you can then set what you think is the best working environment. That sort of culture, culture around you. And then the other thing you get to set is your belief, your reason why, your, your purpose. And that's all on you. You get to, you get to own that.
So you really get some real skin in the game. And you know, that skin in the game, to some extent, I think has also shaped my investment process and how that evolved over the year. And it shaped it in one important way, which is you are very aware of the downside. You are very aware of downside protection. Staying in the game and, you know, staying in the game is something I must repeat to my team all the time.
You know, often we used to refer to it, you know, winning by not losing, which I think is a great phrase to use. But, you know, and so you are very aligned, if your clients do better, you do better. If your clients do worse, you do worse. And I think that's basically has become very aligned to the investment process that what we have developed, I have many, many years. Before we go on to explore, I'll read it in more detail, your journey as an entrepreneur and then being acquired by Lian Trost.
There's a very important aspect of your journey that I think that you have left out. And it's a fact that for a significant amount of time, you were helping retail people to understand stocks on TV. Could you stop? Yes, I'll stop. It was, in fact, again, it was, so very much at the sort of early stages of retail.
You know, as I said, peps, isas, you know, it began with bases and said it was the institutional financial pension fund managers that got quoted, you know, on the, in the Sunday papers in those sort of money sections. And then, you know, then it was people, such as myself, people selecting managers, you know, allocators of capital who got the focus. So yeah, I found myself very regularly appearing in the Sunday papers.
I found myself basically then leading into, you know, radio and then very quickly after that on TV. And some of those sort of, you know, with the invention of sort of the satellite TV and the various channels, some of the money channels which were launched as well. I found myself being a regular guest on that. And of course, the one that I did most frequently was Bloomberg and used to do that, you know, almost, I think every Thursday morning for a period of time.
And then I got invited, in fact, again, you know, Jeff Randall, who was retired now, but he's a member of my, my culture was actually ex-journalist, but used to present Sky money on an evening as well. I got invited to do his program a couple of times, but then I got invited to do Sunday morning at Sky and I did a couple of those to the point that basically I was asked to do on a regular basis, which was, I think it was either three or four out of five Sundays.
Having a young family, it was a pretty big decision to make, but there was basically a reward in terms of do the program. And you know, I felt that that reward was sort of compensated. Anyway, so I then went to my employers at the time and said, look, I've been offered this regular slot with Sky TV on a Sunday morning, I have to review the papers, I get a couple of researchers, et cetera, et cetera. You know, I quite like to do it.
I was asked by the sort of head of HR at the time, you know, do you get paid for this? Yes, I do. You know, of course, I've got a contract with you. How does that work? Anyway, a few days later, they told me how it worked, which is basically the money would go to them and not to me. And on the basis of that, on the basis that compensation, that reward was removed. I never sort of furthered my career in television. But yeah, I think it's funny.
I've never been diagnosed dyslexic, but I certainly feel and know I am in terms of, you know, the sort of the traits that I've got. I've always find it really quite easy to explain, and I find this comes through from some of the very best investors as well, not trying to put myself in a class of that respect. But I've always found it really quite easy to explain. I think rather complex, you know, sort of market conditions to people.
I think that's, if I have built a reputation, hopefully it's one of that, being able to explain, you know, sitting down with my father or, you know, on a regular basis and telling him what's going on in markets is every time I sit down with a client, and I think this is my father that I've got to explain to. I just find it quite easy. I find analogies quite easy. I find, you know, thinking in pictures quite, quite easy. What I don't find easy is writing it down. I don't find that hard.
I love reading books, but I find it really hard to read books. I make notes in books. I highlight books. And you know, all of these traits are very much dyslexic, but as I said, I find it, I find easy at talking about things rather than I do writing about things. And again, you know, I've always been able to surround myself with people very good at writing. So, you know, at Lyon Trust, there's a couple of very good people at writing. I can sit in the room, have a chat with them.
And you know, a few days later, they're produced a Finnish art school. They're like, yeah, wow, that's really good. But it's something that would take me forever to write. Warren Buffett famously once said that he was a better investor because he was a businessman and a good businessman because he was an investor. And you've had throughout your journey the privilege of having been both. You have sort of touched upon how much that influence, or it has influenced you in your career as an investor.
But we would like to ask for a few highlights on how that has been insightful for you. Yeah, I think one of the insightful things is what you learn about yourself. And I think, you know, another thing we should, again, has sort of evolved or changed. I like evolving rather than change, by the way, over time is that, you know, to get on in the industry, you basically, you know, the ladder was one of management progression.
So to get on, you know, if you were any good, people gave you management responsibilities. And, you know, that was very much an 80s, 90s, and probably notiest thing. It's, you know, to me, it's completely, completely gone. And, you know, because you have a skill at something, it doesn't make you a skillful manager.
So I think what I, a few things I realized from, you know, founding and managing my business, that, you know, I, you know, I wasn't a very good manager, but I was, I believe, a good leader. I believe that, you know, leadership and management are two totally different things. And indeed, one of the reasons why I enjoy it, Lion Trust so much is because I think we have a leadership model here.
And it starts right at the very top with John Irons, you know, the CEO, who I've known for many, many years, you know, he's, he's has a leadership style rather than a, rather than a management style. I think the thing that I also sort of realized was that, you know, when you're working hard for something that you really love, you know, you have a real passion for it, then that's, that's fine. That's easy to do.
But when you're working hard for something that you really don't like, it becomes very stressful. And that's really what happened in the business. I mean, never really found, I think, the right people to manage the business. I never could find it very comfortable in delegating the business management away from myself. And as such, I took it on. And when I took it on, you know, you know, I realized that, you know, I wasn't the greatest manager in the world.
I was a good leader, but I wasn't a great manager. And I needed people around me to basically, you know, compensate for my weaknesses. And that really led, in the end, to sweat the fat that, you know, we had some good investors, had some good help around us. But that was one of the deciding factors when in 2013, you know, we sold to Lyon Trust. Another deciding factor was again, coming back to regulation, technology and taxation. You know, regulation came along. RDR.
And you know, that's something changed the whole game as well. And the smaller sort of boutiques were sort of played out of the game. Quite rightly, after the global financial crisis, we survived the global financial crisis. But you know, regulators came along. More cap ad had to be put forward. More of this had to be done, etc. You're starting to build a business where, you know, you needed more people to manage, you could outsource, like you can today, you can delegate a whole load of stuff.
However, the thing you can't do, you can delegate out the work, which you can't delegate the responsibility. So even when the work was done for you, externally, you had to then check it internally. And so what it did was to just push me further and further away from the thing I had a real passion for and I do today, which is investing. And therefore, I had to do something to get myself out of it.
And to get myself out of it, I needed to basically persuade my investors that actually, you know, the best route for the clients that we've been managing to date was to basically sell ourselves. And you know, the best home I felt was, was Lyon Trust. I think that Envy Diaz founder recently said on a podcast or an interview that starting a business is so difficult. And if he had to do it all over again, he said that he wouldn't do it.
What are, in your opinion, the challenges faced by the different founding members of asset management businesses in today's world? I think in today's world, I think that, I think, I think that's interesting. You know, would I do it again, knowing what I know now? Of course you would. However, do I have any regrets? No, I don't. It was a tremendous learning experience. We made mistakes, learned from mistakes. I've learned a lot to be, you know, that I'm very grateful for.
And, you know, the people like work with the clients that supported me throughout. I think launching a business back in the early notice was a lot more, it was less challenging than it is today. I think today, particularly an asset management business, you know, that, if you're going to launch, I think it's very difficult to do it with no assets. In fact, I think you're crazy if you've got no assets. However, that's what we were doing in the notice.
In the notice, we were basically literally, you know, you know, selling the dream, building a label carbon type scenario. And you can build a, and that's an asset management business, you know, with a bit of capital in the bank, you can build a different scratch. I don't know that you can do that today. I think today, you have to build it, you know, around some solid foundation. You have to build it around assets. You have to build it around investors who are going to support you from day one.
One of the big reasons for that is that particularly the retail market, the UK retail market, which is the one I'm most familiar with, again, if you think of, you know, the sort of the solutions that I run, the outsourcing of discretionary fund management, then over many years, basically, you know, it's changed. There are now fewer people running larger amounts of money. Again, you know, the way that we run that money is far more regulated than before. There are more committees involved.
There's more process. There's more risk management involved. And as a result of that, there is less risk taking. You know, I could tell you in the early notice, if someone came to us, they launched a particular hedge funds. I mean, you know, they launched a new business. You know, I've known them from the past. You know, I've got their sort of experience. I think, yeah, you know, this feels right. I'm going to give them some money to see the launch of fund.
You know, I think that's very, very difficult to do these days because the industry has thousands and thousands of law funds and investment opportunities that it had before. So therefore, you know, the competition is a lot greater. So I think today, you know, it's not a case of it can't be done because I think it can be done. However, I think the most important thing is on day one, you need some assets. You know, it really is today that classic, you know, chicken and egg game.
If you don't have those assets, then it's going to be very hard to build from zero. You know, lots of people have in place, you know, minimum investment sizes. So, you know, minimum investment size into a fund could mean that quite frankly that you'll have to have 100,200 million of fund before you can get other investors. You know, how do you go about that? It's very, very challenging. More challenging than it was, as I said, you know, what was that 19 years ago when we did it?
And perhaps move on to some of the, some more details of the bit of the job that you're already passionate about, which is the investing side. The funds that you and your team run, I believe, are mixed, are built from a mixture of active and passive investment instruments. Could you just quickly give us some thoughts on what any it is that you decide to use passive versus active and how you blend those together?
Yeah, no, I mean, I think that, I think if you've gone back, as again, you know, to the early days of passive investing, you know, I think that then, you know, there was a limited number of indices and they certainly were cheap. So, with the way that passive investing has grown, and particularly in the US, over a number of years, of course, as it grows, obviously, you know, the product grows as well.
And, you know, we've seen that growth not only across, obviously, you know, US markets, but across other markets, equities, bonds, and in some strange ways, some of the terms, as well. And we certainly embraced that. I think the argument 10 years ago, there was a lot of these, you know, I'm pretty sure you're maybe participated yourself, but there were lots of these sort of active versus passive conferences or debates, et cetera, et cetera.
And it was, you know, one against the other and, you know, why invested passive, why invested in active? To be honest with you, I think that for a short period, I certainly was, you know, very much involved in that in terms of, you know, active, active, active. But as the market opened up for passive, you appreciate it. Well, hang on a minute. Actually, it doesn't have to be that way. You know, passive can live with active.
And what you can actually now do is get yourself a broader opportunity set and create more efficient portfolios and give clients better value for money. So when it comes to day for the decision between active and passive, I have a, by the way, a very clear sort of, I suppose, idea of when you should use passive and active as an investor. But for us, when we are basically, as I said, we are asset allocators. So we're top down, you know, we're running target risk portfolios.
We work with Hyman's Robinson with our street gas allocation. We do some tactical tilts, which basically, you know, are more driven by more value decisions over the medium term. And then we look to implement. So our first thing is we've got an asset class. Let's take US equities as I've just been speaking about them. So we go, right, okay, how are we going to implement it? We go, right, the first thing is passive. Is there availability of passive? So the answer in the US, there is.
Is that availability suitable? Well, suitability means to us, does it track the index that is in our street gas allocation? Yes, there is. There's one or two of those. In fact, there's a number of them. And what about price? You know, is it tracking at a suitable price to us? So the answer in the US is, yes, you know, there's plenty of availability, plenty of suitability. The next thing we ask ourselves is, do we believe we can add value over the long term?
And that's obviously always the key tool, this by selecting active, active, managers. And I think that we have certainly have a process, which is quantitative. And I do think it's the qualitative part, the process that gives me the confidence. And also, you know, the results, which we can demonstrate over long term, that we can select active managers. However, I think there are a couple of things. I think, first of all, you need to select managers as a blend.
So therefore, I think you have to make sure that you have basically a selection of managers who have a consistent style approach over long term that leads to those active returns. The other thing is, as well as basically, that you need to, I think, work out. When do you perhaps should be impassive and when you should be more inactive? And there's no two ways about it that, you know, passive has outpourformed, you know, in more recent years.
But when you actually start to look at this, I'm pretty sure that I'm not teaching anyone that I think you here. If you just take the S&P market cap versus the equally weighted, I think that is the best comparison to look at today, to look at the risk that you've got in passive management by basically what you've got. You know, over a five year period to around about the end of June, in July, the market cap weighted S&P is outperformed, equally weighted by 37%.
You know, that's quite unique, you know, the concentration risk according to what our US managers, the last time that that concentration risk was seen in the US market, you have to go back to the great depression of the late 20s and the 30s to find that concentration risk. Conditions then, you know, it goes without saying, well, we're far different to where they are today.
If you take the S&P, we know it represents basically the US economy and on an equally weighted basis, you know, you will see a whole lot of consumer stocks in there, whole lot of financial stocks, etc, etc, etc. Then you apply the market cap to it and then suddenly what happens, well, again, you know, it's those are fries, you know, technology, balloon, services, balloon, always lots of places balloon. And as such, you know, what you're leaving behind is all of this, this value.
At some point, you know, that value will be unlocked, unpicked by active managers. The only trouble is, and you know, I think all three of us would basically love to know when that is. What date, you know, is it the 22nd of March next year? If I can tell you that, the basic, I'd be out of a job because, you know, what the reason is I can't tell you that, but what I can tell you is that, you know, diversification is your best way, basically, of handling it.
The diversification are all levels very much in terms of, you know, asset class, the geographical mix you have, the style mix you have in your portfolios. I still think, I mean, one of the things that I think, when I think about active management is that quote that I think it's general pattern that you as general, it talks about, which is that one of, if we're all thinking the same, then nobody's thinking at all.
It's along those lines, I've probably bespoke it in, which is very embarrassing, but, but, you know, that's what I think, you know, I think you've got to be actively different. And I do think that, you know, whilst active management feels like it's probably in some water recession, you know, I feel that when that rotation comes, you know, that having a blend of being diversified is going to be the best way to exploit that. Okay, that's interesting. You've preempted a little bit.
My next question there was, if you do think about it in that simple, you know, pros and cons of active pros and cons of passive over the last little while, the shift has been very much to passive. Do you think that is a cyclical thing? And in addition to that, is there anything that the active industry isn't doing that it could be doing in order to help make the case for its existence really?
I think it's cyclical on the basis as again, if you take the comparison of the S&P market cap equal weighted, that the market cap certainly has a large cap bias to it and the equal weighted has a small cap bias to it. Again, you know, it's not new. It's, you know, you can find that information and anyone can from themselves.
So I think in terms of that cyclical trade in terms of passive, it certainly has been supported by, well, it's facing US large caps, you know, and what's been left behind, in small caps, and, you know, we can see here and sort of, you know, debate the reasons why and what, why not in that respect.
So I think it's cyclical in that way, but I also think it's securing that on the basis of, as I said, you know, passive investing, I think has, you know, certainly enhanced our investment process and certainly basically meant that what we can construct for clients are better portfolios and portfolios which, you know, I think are a very good value for money. In other words, you know, investing and spending that risk budget where it's worth spending.
You know, if you want short-term performance and you want to be at the index, there or there about every year for the next 10 years, then there's only one way to go, which is passive. However, if you basically want something more over the long term, then I think you've got to put some active into your blend. The one thing you can guarantee over the next 10 years that a passive fund will definitely underperform the index. It has to.
If it's trackin' an index, I mean, without any fannies of, you know, stop lending or that's something, if it's trackin' the index, less the cost, it's going to underperform 100% guaranteed, you know, in 10 years time. You don't get that guarantee with active management. You get the guarantee that effectively, you know, if we're all the market, half will outperform and half will underperform.
And then where the sort of 40% number comes from over the long term, you know, simple mass, mass is something, as you can tell from my granddad's early mass lessons on the Saturday morning, mass is something that comes very easy to me, numbers in that respect. If you've got 50% outperforming and 50% underperforming an index, you then take the charges away, you get to 42% plenty of good studies on that for you.
So the numbers haven't really changed that much over a 10 year period of active managers outperforming. You have all this survival bias and basis and sort of things like that that go on. But for me, you know, it's about basically thinking about where you want active management, where you want passive management.
As I said, if you want there or there about to the market, what a great product passive is, if you want to exploit, you know, value over the long term, then you've played some active management in. Blender's much active management in, as you can stomach because as you well know, you know, you are going to get more volatility throughout your management. So that's where you correct the return, of course.
And how big a part does the fee charge, you know, the fee differential between the active and passive? How big a part of that is it in your decision making there? I think, obviously clearly there's been, and it continues to be pressure and pressure on price. But at the same time, you know, I think you've got to look at the outcome. I think the world has become obsessed with outcomes on the short term and not on the long term.
And when you take the outcome over the long term, you know, one of the decisions you have to make is, is it worth paying for active management? So that goes straight back to, you know, you asked me earlier on, how do I decide between active and passive? Well, the first thing we do is that, that's it, availability and suitability. And, you know, the next thing is, do we think we've got, you know, the, the, the ability to then look for active managers? You know, and we would say, yes, we do.
I think one of the, I think one of the big differences that we have, or the advantage that we have and others, you know, might be doing a similar job as well, is that we have access to fund managers. And when you have access to fund managers, what you're doing there is basically, you're looking to confirm the consistency of process. You're not looking to confirm, you know, the consistency of short term performance, because you know that you ain't going to find it.
You're looking for consistency on process. And the only way to do that is to sit down with the fund manager and ask questions and, and listen to them. So I think, you know, I listened to, it was, it was the great debate. I think it was with, obviously, with John Google, the late John Google. And I think it was Grant's, the Grant's journal. I think it was. It was a great debate. And there is a recording online you can receive.
And John Google was sort of, you know, the great debate was active versus passive. And even John Google basically was asked, you know, what about active management? And one of the things that he said, probably add dividend in a bit here. But one of the things he said is, you know, you can take on board active management if you've got the time and access to fund managers. Well, that's what we've got. We've got the time and access to fund managers. That's all we do all day long.
You don't think you have to realize as well that clearly Vanguard, one of the most successful passive managers, you know, has a lot of money in active management as well and have done for many a year. So, you know, it's not entirely a passive house. So it's even now still when I, when I basically show that to clients, they're still surprised.
John, back in the summer of 2015, you had the privilege of conducting a very nice project, to use articles that you wrote for fund strategy, trade investment from journal, where you interviewed a thing you occurred to have wrong, eight different fund managers, including Nick Kirich, who is the head of the global value of $2.00 and others including retail fees, time and Thomas and Richard Bxton.
Could you share with us what was that about and what do you take away from those very interesting interactions? Yeah, I mean, I think that part of managing money, part of the privilege of managing money is, is the ability to, you know, always be learning, always wanting to do, to do better, always wanting to try and find other ways of selecting managers and, you know, in joining Lyon Trust, it gave me an opportunity to explore different things.
And, you know, what I explored was basically this whole concept of nature versus nurture. And in doing so, you know, I was supported by Lyon Trust, one of the investment writers, the next journalist, Heltwin. We had a psychologist, helped us. And we basically put together a script, a Q&A, and we sat down with eight at the time, and it said, you know, including your Nick Kirich as well, of perhaps, you know, some of the biggest retail names in the marketplace.
And basically went through, in a similar way, actually, which I did on the podcast when I was hosting, you know, very much, you know, from, from preschool all the way through to how they started their career. And really, it was trying to sort of, I suppose, look for some commonality and commonality in their, you know, sort of character on their personality. And I think it is a subtle difference between the two. That was the sort of starting point of it all.
And I think that as we went through the different managers and we had managers running equity, we had managers from different backgrounds, we had both, you know, we had a lady who very kindly gave her time as well. We have this real mix of people. And when we then gave the, we basically asked permission to record all of the meetings. And where the psychologists came in was to basically go through the artists, which was fascinating to look for personality traits for us, which was great.
There was one of two things that sort of started to come out out of it. That there was commonality. I think one of the things that struck me, by the way, was that the one that had the best education, in other words, you know, all of the exams, basically, probably out of the eight of them, was probably not the best investor. And that's what I mean by that. That was probably because their results were probably not as good as the one, which basically had the least of the educational accolades.
When we sort of sort of thought about that little bit more, it was almost like you could overthink things. And when you overthink, you actually don't do anything. And that came through very clear. There was lots of little bits like that that came through. As a result of all of it, I tried to think, right, I need to put this all together and think, well, where is the commonality?
And we ended up with basically an acronym, which made give away the Fumple Team that I support, which basically was around, you know, it was Spurs. So the acronym was Basie Spurs. It stood for Staminer Process, Understanding, Resilience and Spur. And basically what that meant was when we were interviewing the eight manages, in terms of Staminer, they all had patience. They all had persistence. They all stayed in the game over time. Then the P was process.
They had a process that they believed it. They stuck with it. They didn't mean that it didn't evolve. They did evolve. And they didn't mean that they didn't evolve when something went wrong or something. It felt was, you know, there was a mistake was made and they learned from it. And then the other thing to me was that they were understanding the knowledge that they had gained over many years.
And the people they surrounded themselves with as well was something, again, which was very common, common. The Resilience, which was, you know, I suppose it's two things. It's really sort of sticking to your guns. And that's again, which again, it takes credibility in order to do that. I tend to refer to that as the stripes.
If you've got three stripes, then you're probably in the game and you're probably allowed to go on longer in terms of performance that those who had not basically had that credibility. And that also, that willingness to, I suppose, be the only one in the room to sort of, you know, up here, present you clothes, stand up and say, you know, hang on, you know, he's wearing nothing. You know, it's that type of Resilience. And then spur for me is basically about what drives them.
What is the driver here? You know, what is the incentive? And I think the interesting thing for me is not one of them talked about the economics. Not one of them talked about, you know, it was money. It was basically winning and winning, each of them had a definition of what success looked like and what winning looked like. And you know, the commonality there was probably more about the long term than anything else. But no one talked about basically, you know, probably, you know, something.
Yeah. As we've talked about, you've in your career been both, you know, you've founded and run a business and also been an investor and head of investment teams. In both there are aspects of behavioral psychology, behavioral finance that come into play. How have you put in place strategies or other structures to manage those risks over time? And particularly, I think you have some strong thoughts on group thinking how to avoid that within organizations.
Yeah, I think, as I said, I think that certainly my learning curve was one that, you know, I think the realising that you're a leader and not a manager. I think that's really important. And therefore, when you're building a team round yourself, making sure that, you know, you cover your weaknesses in that respect. I think a good leader can be a coach, can be a good communicator. But I think the most important thing is to sort of build the glue that binds everyone around it.
And that's very much driven for me by trust. You know, I rather select people upon, you know, the trust aspect of them, rather than the ability because I think a lot of stuff you could train and coach people in that respect. But the trust bit, you know, the attitude bit, I think is the most important thing. So I think for a successful team, not only teams that I've managed, but also, you know, years of interviewing successful managers and successful teams.
And I think there's far more teams than there are managers out there. Then I think the sort of thing that they have is, you know, they surround themselves with the right people. They've got the right product. They've got the passion for it. And then, you know, they have the process which they stick to. And then importantly, creating the right culture. And that culture can be done within a team. But it's better done within a team and within a business as well.
And I, you know, I've seen how many businesses have failed and succeeded by getting that right culture. I think that, you know, in terms of building teams, it's always, it's an ongoing process. Recruitment is happening all of the time. I think, you know, and in that recruitment, I think you've, you've got to basically, as I said, you know, in selecting people. I think you've got to work out, you know, the motivation. And I think that comes very much by a purpose and a belief in a liban.
If people are all following the same purpose, belief in a liban, it all sorts of works, you know, you've got to make sure that people are putting the team first and not themselves first. And I think one of the hardest jobs you have, you know, in being a team leader is letting people go. You can let really good people go. But what you've always got to think of, what you've got to put first is the integrity and integrity of the process, integrity of the team, integrity of the company.
You know, it's, I suppose, a bit like a, having a football striker who basically scored you three goals on Saturday, scored you a hat trick, but never turns up to training. What message does that send? You know, you've got to be trying to be fair and consistent with everybody. If he doesn't want to turn up to training, then, you know, he's got to be on the transfer mark. He's got to go. Doesn't matter how good he is. He's got to have a game to win for you.
And I think that, that is one of the hardest tasks of leadership that, you know, from time to time, you find yourself letting very good people go simply because they just do not fit with what you were trying to achieve within the team. And you need other people to build around you. The other thing as well, which I think is important and this comes to the group thing, question is basically allowing everyone to have a voice.
And this very much started when I was a Hennessean's for a brief time and not to go to many details right now, but for a brief time, I was C.I.N.
So, and as part CIO, I had to share a meeting, which was an acidification meeting, which basically meant that all the fun managers would sit around a room and they would all give their views in terms of where to allocate capital, overweight and underweight, etc, etc. And it came very clear to me that basically towards the end of that meeting, when I had my say, suddenly everyone was agreeing with me. Well, of course, they were agreeing with me because I was their boss.
So, you know, funny enough that, you know, if I wanted to go overweight to a pad and the consensus the room wasn't, then, you know, suddenly the consensus of the room changed. So again, it's a great learning moment for me in that sense. So, to avoid group think here, what we do and the group think very much comes in in terms of, as I said, where allocations are capital top down, strategic allocation, the tactical authentication.
When we're doing tactical authentication, we have 20 assay classes in which we allocate to. The first thing we do is a blind poll. We literally put it online. Each of the members of the team basically will have to score each assay class from 1 to 5. They're provided with data, market data, valuation data, sentiment data. We all get the same pack and we can all interpret it. But along with their own other reading and there are other thoughts.
Each member of the team will then score each assay class 1 to 5. 5, we think it's good long term value. One we think it's expensive in the short term. So only do you have to score it but you have to give your rationale why. Once we've done that, we're clay-tooled and we sit down and basically we go through each assay class. It is anonymous. So we don't actually know who scored a 3 and a 4, etc. etc. and we build a discussion from that.
Once that discussion has been had, we then create our scoring system, tactical scoring system. Then the next stage for this is to basically have an independent review. Therefore we work with the consultant. He comes in there, there is strategic authentication, company authentication, they score the assay classes separately to us. They present it to us. Then they review our scores and through that we get ourselves, I think, a way of making sure that every voice in the room is heard.
Therefore we get all the good ideas, everybody owns those ideas and they go into all the poor values. That's very powerful. John, we're coming to an end of our session and we ask all of our guests for a book recommendation or something that they have been listening to or podcasts. TV documentary, something that might cut our audience attention. I'm pretty sure that you have some fascinating suggestions.
I am, as I said, despite the fact that perhaps not the fastest reader of books, I read plenty of books and we have shared in the past the books I'm reading how big things get done, which is fascinating. There are a number of books. The funny thing is a few of them appear in your podcast. The richer wise are happier. If you're doing fun selection, I thought the fascinating podcast you had with William Green, the two of them. I think that is a must.
I think if you're in this, if you're just you into the business, then I think one of really good books to read is Range, David Epstein, which talks about specialist or generous, I think that's great. I think if you haven't read, mastering the market cycle by how it marks and his regular posts, then again, you're missing out. Start with why I think is a fascinating book. I could go on and on and on.
However, I think perhaps I just sort of talk about one book I read over the summer, which was The Biggest Bluff and The Biggest Bluff is Maria Connacova. I think I've said that right. I hope he apologies if not. A journalist working on a street or maybe New York Times, one of those. Anyway, it's her journey basically into being literally a journalist with no really idea of how poker worked. And to 12, 18 months later, becoming a poker star in Vegas winning money.
The learning there is what's poker got to do with investment management. Well, it's all about this idea of luck and skill. And I think that, again, one of those successful traits of fund managers or successful managers basically is they can recognize when they have been lucky and equally they have that skill in the long term. And I think if you want to understand luck and skill, then if I had my time again, I think I would have learned how to play poker. That is one of our favorite books.
Maria Connacova was actually in the podcast many years ago and it was a blast having her on. Very insightful. General Sable, thank you very much for coming on the Valpheus Book of Podcast. Thank you. Thank you for your curd online dialog.