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Simon Hallett: What Football Can Teach Investors About Franchise Value and People Management

The Harding Loevner co-CIO discusses owning a soccer team, behavioral finance, and the people and processes that make up the firm.

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Our guest today is Simon Hallett. He is the co-chief investment officer at Harding Loevner, an investment boutique that manages more than $70 billion for individuals and institutions. Harding Loevner's specialty is global-equity investing, which it offers through its flagship International Equity and Emerging Markets strategies. In his role as co-CIO, Hallett oversees research and decision-making for the firm. Prior to joining Harding Loevner in 1991, Hallett was stationed in Hong Kong, where he did research and portfolio management stints at Kleinwort Benson and Jardine Fleming Investment Management. He's a graduate of Oxford University and a CFA charterholder. In addition to these duties, Hallett is also the chairman and majority owner of the Plymouth Argyle Football Club in Plymouth, England.


Harding Loevner

Plymouth Argyle Football Club

Behavioral Finance and Decision-Making
"Taking the Emotion out of Investment Decisions," by Barry Ritholtz, Bloomberg, Aug. 4, 2020.

"Simon Hallett: Original Thought Is Overrated, Good Decisions Matter More," by Alex Steger, Citywire, Sept. 11, 2020.

Prospect Theory definition

Michael Maubboussin 

Harding Loevner strategies

Harding Loevner Emerging Markets

Harding Loevner International Equity

Harding Loevner Global Equity 

Jeff Ptak: Hi, and welcome to The Long View. I'm Jeff Ptak, global director of manager research for Morningstar Research Services.

Christine Benz: And I'm Christine Benz, director of personal finance for Morningstar.

Ptak: Our guest today is Simon Hallett. Simon is co-CIO at Harding Loevner, an investment boutique that manages more than $70 billion for individuals and institutions. Harding Loevner's specialty is global equity investing, which it offers through its flagship International Stock and Emerging Markets Stock strategies. In his role as co-CIO Simon oversees research and decision-making for the firm. Prior to joining Harding Loevner in 1991, Simon was stationed in Hong Kong, where he did research and portfolio management stints at Kleinwort Benson and Jardine Fleming Investment Management. He's a graduate of Oxford University and a CFA charterholder. In addition to these duties, Simon is also the chairman and majority owner of the Plymouth Argyle football club in Plymouth, England.

Simon, welcome to The Long View.

Simon Hallett: Thank you very much. Thank you for having me.

Ptak: At least some of our listeners are familiar with your firm but not all. Can you start by providing a quick thumbnail sketch of the firm, what you offer, to whom, and why you built it that way?

Hallett: Sure. We're a $70 billion assets-under-management investment management firm based in Central New Jersey. We've been going for 30 years founded by Dan Harding and David Loevner, who were portfolio managers at the Rockefeller family office in the '80s, joined by me very early on in January 1991.

We offer long-only equity. It's a very traditional investment style based on fundamental research, stock-picking. Loosely called a global equity style, our founding principle was that investment geographies were really borderless and that a global equity approach was the best way for a bottom-up fundamentally based manager like us. Pretty early on in the firm's career, we recognized that the U.S. marketplace was going to split U.S. equities away from non-U.S. So, we offer Global Equity, International Equity. In the '90s, we added Emerging Markets Equity, and we've subsequently added Small Companies and Frontier strategies. But the common thread is fundamental research, bottom-up stock-picking, and a very, very focused and consistent emphasis on high-quality, long duration growth companies.

Benz: Your role is co-CIO and that title chief investment officer can mean many different things, depending on the organization and how it defines it. What does it mean at Harding? What's the essence of your job? And how do you execute it day to day?

Hallett: The essence of the job is that I'm responsible for people, for the process, and for adherence to our investment philosophy. So, our investment philosophy is very straightforward, has been consistent over the life of the firm, that as I mentioned very briefly, we focus on high-quality, long-duration growth companies, we identify the companies that we want to follow through doing fundamental research. So, my job has really been not what's often associated with being chief investment officer forming strategy, allocating assets in the portfolio, maybe even picking stocks. It's been very much about setting up the process, setting up the structures that we use to do research and construct portfolios and making sure that the people are, in the first place, suitably qualified, have the right personalities to fit in with our culture--so hiring, and then making sure that our processes and structures are adhered to. So, very much people and process, rather than stocks and assets.

Ptak: We're going to talk about some of those facets a little bit later in our conversation. Before we get to that and before we talk about the capabilities of your firm, I wanted to see if maybe you could take us back to the firm's early days and some of the more important choices that were made about how it was going to operate as an investment manager. My question is, were the founding partners, were they financially secure enough at that time and to what extent do you think that influenced some of the decisions that were made about the firm's focus, its specialty and its modus operandi, if you will. We know that sometimes the circumstances in which a firm is formed can have an indelible impact on the choices that they make about what it is they're going to offer. And so, I wondered whether that was true of your firm?

Hallett: The answer to whether we were financially secure was absolutely not. In my case, I left a well-paid job based in Asia as the director of a successful investment management firm to join a startup. We had, I think, one $10 million client when I joined. And I joined with a wife and three very young daughters on a three-year visa. So, it was an act of the greatest folly in many ways, which is an interesting thing, because we think of ourselves as very conservative investors, but in our personal lives, we've been risk-takers. And throughout the early days of the firm, we would often say, when we struggled…today we manage about $70 billion. But after about 15 years of going, we only managed about $1 billion. So, we were like many successful ventures in many different fields--we were unknown for a long time and then suddenly successful. I think Malcolm Gladwell, or somebody, wrote about how the Beatles weren't really an overnight sensation. They, for seven years, were playing in clubs every night, and they'd been honing their craft. And it was very much the same with us.

So, we led a very precarious existence for about 10 years, arguably even more. What really brought us together was a belief in fundamental research, a belief in global equity investing, and a taste, I think it's fair to say, for being long-term investors in high-quality companies. So, that brought us together. And early on in the firm's life, it really was what kept us together. We've taken a very long-term approach to our portfolios. Our portfolio turnover is about 12% to 15% a year in most of our strategies, maybe a little higher, where prices tend to be more volatile, such as in frontier or emerging markets. But what brought us together was a willingness to take personal risk in order to come together and stick to an investment philosophy.

And in the early days, it really did determine quite a lot about how we structured the firm, the most obvious thing being that we've pretty consistently, until March this year, had all the research people, with only a couple of very minor exceptions, based in central New Jersey. So, when it came to structuring the firm, we felt that a common philosophy--developing firm culture--was much more important than what the fashionable idea that to do company research, you needed boots on the ground. So, we've structured our research activities around a common culture, common philosophy, and a team that's been based in a single location, rather than the more traditional way of managing a research-based investment firm through having local offices throughout the world. I think in some ways that was probably the most significant structural decision that we made early on. And of course, it's one that in the last nine months since COVID, has been tested. And we've actually had to kind of think again--do we really need to be in a single office to have a strong culture and do the kind of research that we do?

Benz: And what have you concluded about that?

Hallett: We've yet to draw firm conclusions and make decisions about what we're actually going to do. But it does come in the context of several years when we've been under pressure to permit more working from home or remote working. And interestingly, that pressure has come from two ends of the firm. By ends, I mean, in terms of age cohorts. So, there have been the people like me who, I've been in the business for over 40 years. I'm on Medicare now. And frankly, I'm at the, toward the end of my career, and I want to spend less time in the office, more time doing one or two other things that I've not had the opportunity to do in the last 20 or 30 years. So, I want to spend a bit less time in the office.

At the other end of the firm, we have a cohort of both investment and operational people who are, let's say, 25, 35, who see their friends working from home very naturally. They want to live in an urban area with access to the entertainment, the culture that you get in urban areas, and they can't see the point of commuting. So, for a year or two, we considered allowing more working from home, more remote working. And with what now seems a hilarious decision, at the end of last year, we said, look, if you want to work from home one day a month, feel free. You don't need to check with your supervisor or anything. It now seems absolutely absurd that we were prepared to experiment with such a minor concession to people's preferred working habits. Because like many people the switch to working from home, to remote working has been very, very smooth in terms of the research that we do; very, very smooth in terms of portfolio returns; very, very smooth in terms of our operational trading and accounting activities; very smooth in terms of client service. And it's been a real eye-opener to the people like us who were convinced that you needed to be in a common workplace. So, I'm pretty sure that we're going to change how we operate. I'm just not ready yet to be able to say affirmatively that it's going to be two days a week or three days a week in the office or no days a week. We've yet to make up our minds.

Ptak: I wanted to shift gears and talk about how it is that you've defined the firm's capabilities. You've alluded to this, I think, a few times so far in our conversation. One of the things that struck me in reviewing your fund lineup is it looks like you haven't mothballed, merged, or liquidated away too many funds over the course of the firm's history. And when you consider how many strategies firms typically burn through, that's a pretty good track record, suggesting you've been judicious about how you've defined your capabilities. So, my question is, how do you make decisions about what is and isn't a capability the firm possesses?

Hallett: I think in one particular sense, we only have one capability: that's doing company research, assessing company strength, assessing growth opportunities, and relating our assessments of company quality and growth to stock prices. And above all, I think where we've been successful, particularly in the last 20 years, is in wrapping around that company research that we do--and I'm emphasizing company rather than stock research--wrapping around that research with a decision-making process that I think has enabled us to overcome some of the behavioral biases that plague markets, but present opportunities. I think a core belief that we have is that at least a large percentage of the inefficiencies that exist in the marketplace are the result of behavioral biases for which people suffer.

When it comes to the product lineup, we think that investing in high-quality, long-duration growth companies and paying attention to price is not just a core competence, but it's something that's consistent with our personalities. We tend to be, as I mentioned, rather risk averse when it comes to thinking about stocks. We tend to be prepared to look at things over the very long term, we're very patient. And when it comes to the strategies, we wanted ones that were as wide ranging as possible. So, the first strategy that we offered was actually Global Equity. We're going to be bottom-up stock-pickers, why should we be constrained by artificial boundaries, particularly in a world which, in the late '80s, early '90s, appeared to us to be globalizing rapidly? And in portfolio-management terms, where we expected the geographic factor, the regional factor to give way to sector and industry factors, which kind of happened--not kind of, it did happen. So, our core competency is investing globally.

Over the years, we've come to recognize that certain asset classes within Global have return streams and risks associated with them that are specific to that subsegment of global equities. So, non-U.S. equity, then emerging a little bit later, small companies. So, we think of these as subsets all of a global equity market. And frankly, it was also a concession to the marketplace. Now, the U.S. marketplace, there's still to this day, a distinction made between domestic and non-U.S. equity markets. And people quite often prefer to hire different people for one subasset class compared with the other. So, it was a concession to reality. Again, we were taking risks personally to pursue an ideal. And when you're in your mid-30s, taking risks personally to pursue an ideal, you are, by definition, prepared to be about as idealistic as possible. But pretty early on, we recognized that we were going to have to make a concession to commercial reality.

So, we've been very reluctant to expand the strategy lineup, which, of course, has meant that our business has not been very diversified. So, we're focused on high-quality growth companies. So, we're heavily exposed to what's become not just the growth factor, but obviously to us become increasingly recognized as a quality factor. And so, when it comes to product lineups, we're not terribly diversified. We're even less diversified, I think, than would appear if you just take a quick look at the products or strategies that we offer our clients. So, we've really tried to diversify rather through being exposed to as many distribution channels as we can. So, our business has actually been pretty stable, apart from when markets have collapses, I'm obviously not going to pretend that our businesses were stable then. But we have a diversified client base and that has helped us have this rather constrained product lineup.

But if I could just get back to your point about not starting products and then closing them down, we kind of find that behavior rather distasteful. Just trying things, seeing if they work and then if they don't work, closing them down, it obviously leads to survivorship bias in the databases. We prefer to think about new products as doing three things: first, providing an investment opportunity for our clients; secondly, providing something beneficial internally--I'll come back and explain that; and thirdly, having some commercial benefit to the firm. When it comes to commercial benefit, we're prepared to take about as long a view as you could possibly imagine. Our first investment strategy role for the clients, Global Equity, took 18 years to become of significant size. And that was fine for us because it met the second criterion, that it provided the kind of intellectual background for the research activity that we were doing. So, that was important to us.

When it comes to the investment opportunities, sometimes we're right, sometimes we're wrong. We started Frontier strategy in 2007. And not only has it not been commercially terribly successful, but it also hasn't offered great investment returns. On the other hand, it's enabled us to build a team of people doing research into frontier stocks that have had great influence on our Global Emerging Market strategy. So, although not commercially successful, and we were wrong about the investment opportunity, we think of it as a successful product offering. And we're prepared to wait a very, very long time for it to become commercially successful.

On the other hand, we launched the Emerging Markets strategy in the teeth of the emerging-markets collapse in 1998. So, we thought it was a great investment opportunity, and that time we were right. Again, it provided the basis for doing research into a bunch of emerging-markets companies that we didn't previously know that were additive to our Global and International Equity strategies. But it took about five or six years to become commercially viable. So, we're prepared to give things a very, very long time by which--measured in decades, so long as they are meeting at least one of those three bases for starting a new strategy.

Benz: You've said before that you think originality tends to be overrated a bit when it comes to research and portfolio management, that success is more a function of leveraging the good work that's already been done than it is innovating, to paraphrase. So, do you think your firm's edge mainly stems from time horizon and minimizing behavioral errors rather than producing original analytical insights?

Hallett: I have definitely said that. I was referring to myself when somebody I think was asking me about our investment processes. I think you have to generate insight at the individual company level. And I think it's very important that our analysts continue to generate insight into companies, into the duration of growth, and into the stability of management, into corporate culture and so on. So, I think at the individual company level, insight is important. What I think is critical, though, is that it's important to learn from other people. And that's where I think it's overrated, where I think originality is overrated.

There are many, many people who have written about behavioral finance, how to overcome bias in all organizations, but how to overcome bias specifically in investment institutions. And what we found is that its implementation of some of these suggestions that other people have come up with, the implementation is where the edge comes. Getting investment professionals, decision-makers to accept that they need to restrict their autonomy, which is effectively what you're doing when CIOs say, Oh, yes, we have a structured and disciplined investment process, but we have a team of brilliant investment professionals,” they're kind of being slightly contradictory. And of course, my investment team, I'll say the same thing. My investment team is full of brilliant professionals, but they're professionals who've been willing to say, my judgment is sometimes forty and therefore, I'm going to restrict my autonomy. I'm going to make precommitments to the kind of companies we're going to look at, to the objective data on which we're going to filter the selection process for deciding which companies out of the available universe we're going to cover, and I'm going to allow myself to be restricted and going beyond.

So, I think what I'm saying is that we can learn from other people how to run an investment company. But that doesn't make it easy. Actual implementation of a lot of the theory, a lot of the suggestions that have come from academia and from other practitioners. I'm always very eager to credit somebody like Michael Mauboussin for so many suggestions about how to structure an investment process that helps you overcome bias in individual decision-making. And the point I always make is that you can get access to Michael's suggestions for $50. I think some of his books are available on your Kindle for $50. But that doesn't mean that you're going to be able to implement it. And I think a lot of the edge comes from having people who accept the need for discipline, who accept the need for structure, and are prepared to subjugate their autonomy to it.

And, of course, you're overcoming a culture that in financial services and in the financial-services media that raises up genius, that praises individuals--people become household names and you'll notice that not many of our portfolio managers or analysts are actually household names. So, we think that being smart, being hard working is necessary, but it's by no means sufficient, and that's where the process and the structure and the discipline comes in.

Ptak: I want to return to behavior on decision-making with a focus on this concept of autonomy, or lack thereof, in decision-making a little bit later in the conversation. Before we did that, though, maybe we'll take a bit of a left turn. In addition to your day job at Harding Loevner, you also own a professional football club in England, Plymouth Argyle. Not only does it have to be fun and gratifying in a lot of ways, I would imagine it's probably conferred some lessons. My question is, what is it taught you about things like franchise value and talent management that you've been able to apply in your firm's company research and internal management?

Hallett: Is it fun and enjoyable? It always reminds me when people say it must be fun of that old joke about the statistician who has his head in the oven and his feet in the fridge and, on average, he's just fine. If you own a football club, it's either the heights of delirious happiness or the depths of despair. And it's very rarely just about OK. So, what's been interesting to me so far has been not so much the transfer of learnings from football about franchise value, about recruiting, about player selection, but just how the learnings actually go the other way.

So, a football team is 11 players on a pitch, who are a portfolio and the portfolio will play together better than any individual. Now, you obviously couldn't have an 11-man team made up entirely of goalkeepers. So, fit is important. The interaction between players is important. We've actually at Argyle in the nearly two years that I've been chairman, have been implementing processes and structures that are eerily parallel to the processes and structures that we have at Harding Loevner. So, it starts with recruitment, talent identification, where we are using data to identify players that are candidates for our playing squad. And we're using objective data that increasingly defines the playing philosophy that we want to have at Plymouth Argyle, which is, again, eerily similar to what's happened at Harding Loevner over the last 20 years where we've become increasingly objective about what we mean by quality, what we mean by growth.

So, using data analytics, becoming much more objective, and having a philosophy that we make sure that the manager of the football staff is committed to, so they're precommitted to playing in a certain style and only hiring players who fit into that style and using data not just their own judgment to do so. So, I'm having exactly the same problems in getting this structure implemented as we've had at Harding Loevner. People don't like their autonomy being restricted. And in football, there's a culture that the manager of the team is the person who decides everything, runs everything, and uses his contacts, uses his gut feel to make player selections and make adjustments to the portfolio when he sees fit. Luckily, we have a manager who is embracing all this. And so, it's not proving as problematic as it would do at many clubs.

So, at the structural level, the processes we're putting in the football club mirror the processes we have at Harding Loevner, down to how you value players as well. So, all that structured discipline is very similar. But the fun thing here is that the biases you see in financial markets are very much the same as the biases you see in football, particularly from the fans. So, what seems like, I think three weeks ago, people were talking about putting a statue up to me and being unbelievably grateful about how we built this fantastic squad, and Simon is a hero, our CEO is a hero, everything of the club is fantastic. Since then, we've lost three games, and the reverse is now true. People extrapolate. And at root, of course, it's because investing and sports are activities where the outcomes of any individual event are the result of a combination of skill and luck. And people massively overestimate the role of skill.

The classic is the manager makes a change in the 60th minute of a soccer game, and the new player comes on and scores the winning goal, and the manager is a genius. And if the ball had been six inches to the left, it would have been past the post, and he would have looked a fool. And of course, he's neither a genius and/or a fool. He made a reasonably good decision and had a bit of luck. So, I've really enjoyed the parallels. But so far, it's been a transfer of knowledge from investing to the football club rather than the other way around.

Benz: In other interviews you stress the importance of investor education, which you view as a shortcoming of the broader financial-services industry. If you are trying to educate an investor about Harding without telling them anything about your people, process, or products, what would you convey to help them make an informed choice about whether to entrust their money to you?

Hallett: It's a very interesting question. I don't think I could do it, to be honest. I don't think you can disaggregate people and process from what we are. We're obviously an intellectual--a human capital. We're a large dollop of human capital. We've managed to exploit that human capital through, I think, good process. So, asking me to say what it is apart from that, I think is an impossible question to answer. It's a very interesting one. I'm going to have to give it some thought. But my immediate reaction is, you can't disaggregate the people and the process from Harding Loevner because that's really what we are.

Ptak: We'll talk more about it later. But your investment style emphasizes business quality. Over the last decade, the most profitable firms, which are often associated with high quality, had been among the international market's best performers. That's probably given your strategies a lift. Knowing styles can go in and out of favor, how have you tried to help current or prospective investors in your strategies to set appropriate expectations about the future?

Hallett: Well, first, you're absolutely right, it's not probably; it's certainly. We can actually look at--if we look at our available universe, we can see that there's been a tailwind from the factors that we have chosen to emphasize. I mean, essentially, we can see that there's been a hierarchy of risk that starts with the style and goes through our selection process and then, obviously, the alpha that our analysts and portfolio managers have been able to add. So, yeah, absolutely no question whether there's a tailwind. I mean, all we can do is warn our clients, and you go back over our quarterly reports and see us agonizing over valuations, over the price of quality.

And again, if I can reminisce for a little, if you'll excuse that indulgence, when we started the firm, we wanted to buy good businesses. We didn't think that quality was a factor that was going to be identified by academics as having a return associated with it. As I mentioned briefly, it was something that suited our personalities. We did think that short-term trading was damaging to clients' health. We felt it wasn't something that we were able to do. We wanted to be long-term investors. We believed that price was important but the return on invested capital trumped price over the kind of long enough time periods that we were prepared to put up with and that we thought were appropriate for the private clients that we thought would be in our client base from day one.

So, we got lucky. There's absolutely no question but that we got lucky and stumbling across this quality factor. But we care about quality, we care about growth, but we do also care about price. And frankly, it's been a problem for us in the last two or three years that when we look at style boxes, your own, for example, we tend to be categorized as large-cap growth. We think of ourselves not as large-cap managers but as all-cap managers. It's just that, at the moment, we tend to have a slight tilt toward large cap, we tend to have a tilt toward growth, and we'll always have a tilt toward growth as defined as growth in cash flows, not as defined as high price/book or low book/price. So, we worry about price.

The portfolio transactions that we've done over the last four or five years have tended to trade away a little bit of growth in favor for slightly better prices. And it's been expensive. So, when people compare our performance over the last couple of years against the broad benchmarks, we've done very well. But when we compare against managers who are much more wholeheartedly committed to growth and less committed to looking at price, we haven't done so well. So, really, we just try to be consistent in what we're doing and try to relay the risks and allocation to Harding Loevner to our clients. We just try to be very, very clear about that--that if people come to us and expect us to have very large amounts of our portfolios invested in the high-flying stocks over the last couple of years, they're probably going to be disappointed.

So, we'd like to think of ourselves as generating excess return over very long periods, but the timing of those excess returns tends to be unpredictable. But I can look at our Global Equity portfolio and see that if we look at rolling 10-year periods over the last 30 years that when markets are very, very strong, when there's a lot of momentum in markets, it's a toss-up quite literally. It's actually quite accurate to say that it's a coin toss in that we outperform about half the time, underperform about half the other times. But over these rolling 10-year periods when markets are less strong, we outperform almost all the time. So, we are committed to our investment philosophy. We're committed to long-duration growth. We're committed to a long time horizon, which as mentioned, we think forms part of our edge. And we are prepared to undergo those periods in which our ability to add value is restricted or in which those tailwinds have turned to headwinds. We're prepared to undergo them. We've undergone them in the past. And we try to make sure that our clients understand that there will be periods in which we underperform, and they shouldn't expect us to change to try to time our way in and out of a period of underperformance. So, it's really about client expectations.

Benz: You're a big champion of behavioral finance and decision science as we've discussed. Can you give practical examples of where you've made the biggest changes and how the firm operates to incorporate tenants of behavioral finance and decision science? What would we notice now that wasn't part of your process a decade or two ago and maybe what have you scrapped that used to be there?

Hallett: Well, the first thing that we've scrapped was all the Bloomberg machines. One of the problems we've had with the Internet and the availability at your desktop of stock prices is that all our PMs and analysts now have access to stock prices. We used to have two Bloomberg--actually, we only had one Bloomberg terminal. And it was in a very public place. And if people spent too much time looking at stock prices, they'd get a tap on the shoulder from the CIO saying, "You're spending too much time looking at stock prices."

One of the core tenets of behavioral finance of the Prospect Theory is that we care about losses much more than we care about gains. Yet, the stock market goes up on, whatever it is, 51% of days and goes down on the other 49% of days. So, if you look at stock prices every day, it's basically another coin toss, whether you're going to get positive reinforcement from stocks going up or negative reinforcement from stocks going down, but you care much more about stocks going down--it has a much greater emotional impact on you. So, essentially, if you spend all your time looking at stock prices, you're going to become too risk-averse. So, we took away all the Bloomberg machines.

And one of the differences now is that people can look at them surreptitiously at their desk, which I find distressing. But we try to discourage people from looking at stock prices all day. So, all of our research, all the way up to the decision-making by an analyst to recommend a stock or to forecast outperformance in his or her sector by a stock is based on analysis of businesses, of companies, not of stocks. So, that's one thing. Our process from the beginning is about companies, not about stock prices.

A very general principle is that we don't make decisions by consensus. So, we have a team of very smart, hardworking men and women across all age groups, across many nationalities. It's a cognitively diverse, socially diverse group. But we don't make decisions by consensus. We require collaboration. We call this collaboration without consensus. We require people to collaborate, but collaboration means disagreement. So, one thing you would notice if you were to insert yourself into Harding Loevner is that people are squabbling the whole time. People are disagreeing. We actually mandate disagreement. We require people to disagree. We believe that agreement is easy. But the disagreement, although uncomfortable, is what enables good decision-making. So, people are required to collaborate. But that doesn't mean coming to a comfortable consensus. It means coming to uncomfortable disagreement.

But what we've really done is eliminate completely the need for consensus-building anywhere in the investment process. So, in very general terms, it's all about individual accountability. So, it's about the nature of incentives, how people are incentivized and how we, as I say, disaggregate the investment process into a series of individual decisions that people make very transparently, exposing themselves to the disagreement of their colleagues, but then eventually having to make a pick themselves. We then take all those decisions and re-aggregate them in order to essentially produce the portfolios that our clients receive. But this transparency and accountability has really engendered a culture where people take responsibility for their own decisions. They're very transparent about when things go right. They're very transparent about when things go wrong. They're prepared to analyze when things have gone wrong and to think about why things have gone wrong. So, it allows us to examine our errors, examine actually not just our errors, but to think about when we've got things right for the wrong reasons, when we've been lucky. You know, too often in investing, when things go well, you think it's gone well because you're skillful when it could have been just lucky. And similarly, when things go badly, you assume that it was a poor decision, whereas in fact, it could just be the kind of randomness of markets. So, that transparency, that individual accountability enables a lot of inward analysis of the process where it works, where it doesn't work.

It also avoids the culture of blame, which in any organization is just so, so debilitating. But it's particularly problematic in any decision-making organization where you're making decisions under conditions of such uncertainty. When things are so uncertain, when there's so much luck involved in short-term outcomes, it's very, very easy for people to turn around and blame other people. But this principle from decision-making theory of individual accountability matched with transparency means that people have nowhere to hide. And it means that we're much more open about discussing our mistakes, because we all make them. Our whole investment process has resulted in us making roughly 53%, 54% of our decisions being good ones. So, why be ashamed of a bad one? It's had a very, very positive impact, I think, on the firm culture that we have been able to avoid--actually, I'm slightly exaggerating. There have been one or two times when people will turn around and try to blame their colleagues. But it can't last long because we are so transparent, and the structure is one of individual accountability.

Ptak: I've been struck by comments you've made previously about how portfolio managers maybe have less autonomy at your firm than perhaps they would at other firms that advertise themselves as full-fledged discretionary portfolio managers, if you will. And I think you've referenced it a little bit earlier in the conversation. So, I wonder if you can give us an example where the process is more structured, and perhaps the PM has less leeway than in other firms and talk about how you concluded this as a more effective approach.

Hallett: So, a very good example is that our portfolio managers by happenstance tend to be the older, more senior people at the firm. Part of the problem is that nobody leaves. So, if you were managing a Global Equity portfolio 20 years ago, you're still managing it today. And that actually is the fact. Our Global Equity portfolio today is still managed by Ferrill Roll and Peter Baughan who have been managing it together, I think, for--they'll hate me for not remembering the exact date--but I'm going to say, 18 years. So, that's one part of it. They are gray hairs around the firm, but they are not allowed to say to analysts, I want you to cover company X. I think at a lot firms, the senior portfolio managers basically direct the analysts toward stocks or companies that they are already inclined to put in their portfolios. That's absolutely not how it works with us.

We came to the decision many years ago that what we do is company research that we wanted analysts organized mostly by companies’ sector, one or two exceptions, that they would be experts in their sector. And therefore, if there was any value to expertise, they should be the ones who decided the candidates for our portfolio. So, our analysts decide what's in their coverage universe. They are not directed by portfolio managers. So, that alone, I think, is a very distinguishing feature of how the structure works.

Research, company research is the core of what we do. And today, I think without exception, our portfolio managers also have responsibility for individual companies--not as many as somebody who is a full-time analyst, but they still cover companies. And one reason is to signal to analysts that company research is important. It also signals to analysts that in this slightly argumentative, slightly uncomfortable culture of collaboration without consensus that if the portfolio manager is constantly disagreeing with your views on a particular company, or indeed stock, you're going to get a chance to get back at him. So, it kind of evens out the playing field a little bit between the portfolio managers and analysts. There's often a kind of power struggle in firms whereby portfolio managers tend to be higher up in the hierarchy. We try to avoid that through some of the structures we've put in place.

Benz: You mentioned that you try to foster an environment of collegial disagreement. So, what's the most divisive investment topic at the firm right now and what role do you play as CIO in trying to mediate that?

Hallett: This one is very easy to answer.

Benz: Good.

Hallett: The most divisive subject at the moment, and it is very divisive, is whether we should allow our strategies to increase their holdings in Chinese securities beyond precommitted limits that were laid down in the past. So, actually, this is a great example sometimes of how the restriction on autonomy works in the context of what we know about decision-making.

So, let me say at the outset that we've been bullish on the Chinese stock market and on our ability to add alpha through stock selection in China for a number of years to the point where early on when we were given access as foreign investors to the A-share market, we started pretty quickly the process of going through the regulatory filings that we're allowed to have access to Chinese A-shares. We hired 10 or 12 years ago an individual whose half his responsibilities was purely to do with Chinese stocks. Four years ago, four-and-a-half years ago, we hired another analyst whose job was to go out and find us China A-shares that met our criteria and that which we could put into portfolios. So, we're a firm that's dedicated extra resources to finding Chinese stocks that will help us add alpha in client portfolios. So, bear that in mind.

On the other side, we have a series of risk limits across our strategies that are what we like to think of as mostly common sense. They're loosely based around the opportunities that we think we may have in a particular market, which is itself loosely based around market capitalization and breadth. So, the market in which our Global Equity portfolio managers are allowed the largest amount is the U.S. Our International managers are, I think, the largest market for them is Japan, which I think is still the largest by market cap outside the United States. So, they're loosely based but they're not completely based. They're based on experience, what's appropriate for our client portfolios, as well as the need for diversification. They're not based on the inputs of an optimizer. We use optimizers in a different context.

So, these really come under the category of precommitments. So, again, going back many, many years, in our Global Equity portfolio, we were very bullish about emerging markets, emerging markets and global equity portfolios at the time were 6%--sorry, global equity benchmarks were about 6%. We thought that they were--they could easily become as richly valued as developed markets. Therefore, without any expansion of breadth emerging merely through P/E expansion, emerging markets could go to being 12% of the global equity benchmarks. So, we put a limit in Global Equity at 15%. Very, very rule of thumb, very heuristically based on experience and some judgment, and then recognizing that markets could over-exceed even your best expectations. But they were precommitments.

So, what we wanted to avoid was that when emerging markets got to 15%, when they’d had a few years of price appreciation, we wouldn't be tempted to put more in. So, we're now at exactly that stage with China, where the markets have been very, very good, where our portfolio managers have wanted to be at the limit, but where the limit is now, actually less than the benchmark weight. So, we're under pressure from parts of the firm but from perfectly reasonable, intelligent people who are entitled to give their views to increase the limits that we permit--as co-chief investment officer that I permit, along with my other co-CIO, that we permit--and we have pushed back. We basically said, yup, we understand about the issue with a structural underweight in China. But this was a precommitment and the role of precommitments trumps any particular view that we may have about China.

So, rather than being tempted to chase a market that has been a very good one over the last few years, we're going to stick to the rule that says: don't increase permitted exposure after a period of massive outperformance. So, that's where we are today. It's very controversial. It's controversial with our clients, some of whom think that we are doing the right thing to stick to our precommitments, some of whom think that we're foolish to have a structural underweight and it's something that we're continuing to debate, to ponder, and to think about. But it's been  unpleasant to have disagreements. And so, it's been unpleasant. And it's been controversial internally as well as externally.

Ptak: For our last question, I wanted you to touch on something that should be quite familiar, which is, business quality. We've already talked about it previously. Your firm puts a very heavy emphasis on it. We've asked a number of guests, their views on the durability of competitive advantage. What have you seen? Are moats narrowing faster than before? And if so, why, and what are the implications for a firm like yours that puts a premium on business quality the way you do?

Hallett: Yeah, I think we have to accept that moats in certain industries have narrowed. But I think as a result of the Internet, maybe they've narrowed, the acceleration of that narrowing has been seen in the last nine months with the response to the global pandemic. But moats narrow the whole time. The whole point about the theory, the porter structures of competitive structure of industry, people often forget that the whole theory is about pressure. It's not about flows. So, quite often I'll see people writing that intensity of rivalry changed, and it didn't. The barriers to entry were always low but margins weren't high enough to encourage people to jump over barriers. So, I think in some industries moats change, moats have narrowed. But in other industries, I think moats have widened. And I think you can obviously see this perhaps best in the retail industry that for bricks-and-mortar retailers the moats have narrowed, but for the online retailers, particularly the big ones, the moats have expanded. So, I think this is just the nature of competitive advantage. It's just the nature of competitive structure of industries that is subject to change, because it's pressures. It's pressures, not flows. And sometimes those pressures turn to flows and people think something has changed. But in reality, it hasn't. It's just been laid bare.

Ptak: Well, Simon, this has been a very illuminating discussion. Thanks so much for your time and insights. We really appreciate it.

Hallett: It's been a pleasure. Thank you. I've enjoyed your questions.

Benz: Thanks so much.

Hallett: Thanks, Christine. Thanks, Jeff.

Ptak: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts.

Benz: You can follow us on Twitter @Christine_Benz.

Ptak: And at @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at Until next time, thanks for joining us.

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Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.