09: The Ethical Money Man

John O'Neill

In early 2017 Morphic Asset Management co-founder and stock picker, Jack Lowenstein, announced the creation of an Ethical Investment Fund that won’t invest in mining, alcohol, tobacco, factory farming, old growth forest logging or armaments. Since then, his 16 and 19 year old daughters have suddenly become incredibly engaged with what he does. Not only is he out to make steady returns for his investors, he understands they want it to be done in a way that leaves the world a better place …

John: So I’m sitting here in downtown Sydney in Macquarie Street with Jack Lowenstein. Jack’s what’s commonly known as a stock picker, a funds manager, but Jack’s always been a little bit different. He’s a disrupter and a pioneer in what’s known as ethical investing and we’re going to talk to Jack today about his Customer Centricity and the way the investment markets have been run and evolve during his career. Jack welcome to Customers Matter.

Jack: Thank you very much indeed.

John: Okay so Jack you and I first met, I dread saying this but it was more than twenty years ago…

Jack: I think it’s pushing close to thirty actually, it’s pretty scary, we’re so young still.

John: Yeah well exactly. I mean I’m sure it was at Bondi Beach and I remember at the time when I met you, you had a philosophy degree from Oxford and you were working as a finance journalist on a pretty interesting finance publication. Have I got all that correct?

Jack: Yeah absolutely. I was working for Euro Money Publications which was a ?? large publication group specialising in what you we call might recall in the old days we called it high finance you know how companies fund themselves and the banking industry in a big sense and I worked there until the early ‘90’s when I brief career in stockbroking and then a very good friend of mine at the time, a guy called Peter Hall, had a problem with a company who had an investment in called Kresta Blinds, who we all know Kresta was a pioneer of blinds and the company had fallen on hard times and he asked me to go into the company and have a stake a corporate coup if you like to get rid of the people who were running it because he thought they were doing a pretty bad job and not very honest and I, we bought in a new team and I stayed on board and we had a long turnaround strategy there, we managed to take the business from being on death’s door basically to quite a settled business.

John: So it’s kind of interesting that and it’s amazing what careers journalism sets people up for but, so you’ve made this transition from being a humble scribe into stockbroking first and then into turnaround. How, so what, just tell me how you went from A to B to C there?

Jack: Well look I think in like in life you either like you that I’ve always found that that luck is very important and what’s even more important is when you sense a bit of luck is to actually seize the opportunity with both hands and sometimes it turns out to be not to be so lucky, that’s the nature of the game, but in this case I was very lucky. The opportunity in stockbroking, I was getting a bit bored with journalism and I was a bit tired of being an observer not an actor the whole time and so I got the chance to go into small cap, raising money for small companies. It’s a very, you meet some interesting characters there, some are great entrepreneurs and some frankly spivs, but I was very glad I had that experience because it broadened up my contact base if you like from the very top end of the market where I made many great friends, but was never going to be playing legal terms with those guys, so the bottom end of the market where I could probably enter and learn my trade more and so that was the opportunity and the Kresta thing was fantastic for me.

John: So how did that come about? You knew Peter and Peter is a bit of a legend in the industry and maybe for the people who are listening and watching this, you might just explain who Peter is and how you came to meet him because I know a bit of the back story, but I’d be fascinated to hear a bit more.

Jack: It’s a wonderful story with a slightly sad ending. So, Peter was a journalist himself before and then he went into stockbroking and funds management. He set up this business called Hunter Hall and when I joined him in 1997 we had $30 million dollars under management. It was just the two of us in this very little office in Double Bay and he has this very large exposure to one stock which was Hunter Hall, so which was Kresta and it was vital to his business that we actually got a turnaround there. It really mattered to his business and the investors in the Hunter Hall global value globe trust. I learnt an awful lot from Peter and Peter had, he’s still a brilliant guy and one of his great strengths is the ability to see kind of like a bifocal way the big picture and the fine detail almost in the same glance, it’s an incredible skill to have and I wish I had it.

John: As I mentioned earlier and it had struck me immediately you’ve been educated in philosophy, Peter as we know became famous for bringing I guess a new philosophy and you must have been part of this too to funds management. Can you tell me what did you guys bring to the table in common that disrupted the funds management market?

Jack: Look I think at that time besides being an ethical investor was regarded as being very brave, we did make that decision shortly after I joined the firm. We as I said we only had $13 million dollars under management and I think it what the disruption it created was for the first time people as we had very good investment numbers, people believed and I that there was no impediment to good returns from having ethical screen as not investing in certain designated sectors, so I think that was a very important proven concept for the industry in Australia. The other thing that was quite disruptive was the fact that we were very activist. We were investing quite a lot in smaller companies in Australia and frequently we found we had problems in the companies we invested in, we made changes. In one particular case, we actually bought into the company which already had a problem which we knew about which was a company called Reassurance Australia Corporation which was reassurers provide insurance for other insurance companies and it got into trouble when it basically didn’t have enough capital and we bought into that company with the view to try and turn it round, rescue the capital that was there and then start a new insurance company which we did and there was a ten year engagement for me. Like I went on the Board of the company, brought another guy who was very expert with that Richard Hill to join me and together with one other person who was already there, a fantastic guy called Ian Crowe, we managed to get and a few other people joined us at the time, we managed to get a fantastic turnaround there and we started a new insurance company called Çalliden which got acquired by Steadfast in Munich about two years ago, so it was a ten year cycle and again I’ve been very lucky to get these opportunities.

John: So that’s what you call patient capital?

Jack: We bought in about five cents and the eventual exit price was forty five cents, so it was a pretty good outcome even though it took a long time.

John: And my business has been exploring, we’re in the you know the job of customer experience design and delivering against that, but increasingly we’re also interested in understanding how to help businesses surface a higher purpose. Purpose, not so much before profit, but purpose which enables profit rather than anyone can buy what you do, but when people buy into why you do it, it’s another level of engagement again and I think I’m interested to understand whether that’s something that you and Peter appreciated when you made this decision to only invest in ethically screened stocks. Was that, did you say we’ve got a value here that exceeds the thing we’re doing, it’s more important than what we’re doing, there was a higher purpose to it? Is that a…?

Jack: I think it’s very interesting. We’re just launching a sort of the Morphic Ethical Equities Fund which is a listed investment company, so I’ve really re-engaged all these issues and the world just moves on and I hopefully have matured a bit in the years gone by. But I think the first point to make is that when you’re investing ethically, you’ve got to make sure you remember you’re investing. You’ve got to get returns to people. You cannot compromise those returns, but the ethical bit is about making sure you make your investors money without making the world a poorer place, it’s as simple as that basically. You know the mechanics for how you get there are complex, but the aim is very clear. Now you know I’m not only a philosopher by training, although I’m not a very good philosopher, I was lucky enough to go to Harvard Business School on a course called [inaudible] Management Course and the Head of the Department of Strategy was teaching us there was also a philosopher by training, she was on the Board of Gucci for a while, she’s a bit, she’s a very top level person, but she is a philosopher and her approach to strategy is to say think of the world without your enterprise and think of and then try and understand what space sort of the value add you’re creating and that’s your reason for existing is that the world with you and how it’s different if it’s a world without you. You’ve got to think about that and if it’s not big enough, you don’t really have a value proposition and in terms of customer focus, what do we aim to our customers? We’re trying to add to our customers a good return for their retirement and we’re trying to do it in a way that has very low volatility so the returns they don’t think they’re very rich one day and very poor the next and we’re trying to do it in a way that means that they’re not going to have in the back of their minds the thought oh I’ve made a lot of money, but I wasn’t very happy about the way I made it. We’re trying to give them the confidence that they’re not making money from things that they are not happy about in their broader life.

John: So the journey from Hunter Hall to Morphic and the Ethical Fund you’ve just established, what happened? How did, you’re in Double Bay, you and Peter had a shared vision, you started to do some turnarounds, you’d happened upon a higher purpose, what was the journey from there to here?

Jack: Look the business was incredibly successful. We started off, as I said, $13 million. We got to a peak of nearly $3 billion just before the GFC and we were very lucky we had a chap called David Buckland who joined us as the CEO and that allowed Peter to do some philanthropic things he wanted to do. The business was going pretty well. The GFC was a bit of a shock for everybody. We didn’t have a particularly bad GFC. We didn’t have a particularly good GFC, but I think it was it really was I think very exhausting for Peter and I don’t think he ever fully recovered from the shock of the GFC in the sense of just how much emotional drain it was because remember how it was, we were all managing other people’s money and it’s not a game, these are real people’s lives that are being affected and we were you know we were at the intersection between the people, their assets and our problem, our challenge to respond to the GFC, I think he just got a bit racked up by that. I don’t think he ever fully recovered and certainly his attitude changed and I grew increasingly uncomfortable with some of the things that were happening with the company and in late 2011, I decided it was time to move on because I had a reasonably good reputation and I was just worried that you know for various things, I was just worried that there were things going on that I wasn’t comfortable with, so I moved on quietly. When I left, my partner in this business Chad Slater who is a brilliant young guy who I’d recruited somewhat against Peter’s will, but you know he turned out very well at Hunter Hall, he said well if you’re leaving I’m leaving too and I said that’s fantastic because I was too young to retire and probably not rich enough either, so I said that’s great, come and join me and we’ll start this business which we’ve done and we’ve built it up now to a seven person investment team. We’ve been, not it’s been tougher and I’m sure everybody who has done a start-up knows what it’s like, it’s always, you always think you’re discounting how hard it’s going to be and it turns out to be even harder. But it’s all been worthwhile, it’s been a tremendous learning exercise for me. I’ve been privileged to work with a fantastic team of people and we have achieved the investment returns we wanted which is to deliver, roughly a 17% return to investors since we started, with very low volatility, so and this is very important to me. People do worry about their money and if they see the thing going up and down the whole time, they get very anxious.

John: So tell me in terms of understanding your customers and in terms of the use of technology in funds management today compared with how it was when you first got involved, what’s changed? Are customers more important than they used to be and has technology disrupted in and of itself the way in which the industry works or is it still business as usual?

Jack: It has so much changed. I mean I just I remember, I mean one of the most important changes has been change to media. When I first started at Hunter Hall and we had this big proxy battle to try and get control of Kresta, you know if you spoke to seven or eight newspapers and a couple of TV station, maybe a bit of radio, you were done. Today, you know to get the same message across involves talking to a hundred people and because the whole media has become so much more, you know there’s so much more specialisation and dispersion in the media, that’s one very important, so the channel to your customer has changed enormously. The, when we first started at Hunter Hall, almost every investor we had came direct to us. They may have been financial planner advisor but they were our investor, we knew their name, their address, their phone number, didn’t even have an email in most cases at that time and we could contact them. Now most financial planners use wrap platforms that create, that basically meaning we’ve got a barrier between us and our end customer, rating, asset consultants, a whole swarm of people who come up to advise clients and I think my view is that is it worth, yeah like everything goes in cycles, I’m sort of [inaudible] everything goes in cycles, I think we’ve reached the point now where the cost to the end consumer has that enormous amount of interaction between you and your end customer have gotten so high, we’re probably seeing a reversal of that and one of the reasons why I am so pleased with a multi listed investment company is it gives the chance to go back to a much more direct one to one relationship with our clients. It’s very important because especially in the ethical space. I expect to get tremendous value from our customers from hearing their feedback about the companies we’re investing in and whether that is ethical, I think they are.

John: So in terms of the way the worlds turned, in a way what you’re saying is that perhaps unlike in other industries where the consumers have suddenly got more power, the consumers have become more distanced from the fund managers, the people who are managing their money because of the platforms that the financial planners are using and the way in which the money is actually placed? Are you saying there’s always distance remediation that’s gone on between…

Jack: Or intermediation…

John: …or intermediation?

Jack: Yeah it’s in a very strange form and I think it’s partly response to the fact that there probably were some cowboys out there and there needed to be a bit of a intermediation between you know the fund managers, some of the fund managers and their clients, they weren’t necessarily selling the right products to the right people, but I think it has come at a cost, a financial cost and it’s also come at a cost to intimacy because ultimately nobody is going to explain what I do better than I will. I may not explain that well, but I’ll do my best you know and I think that you need that intimacy. It’s very interesting in this same building where we operate there’s a chap called Jeff Wilson who runs Wilson Asset Management, who has got 45,000 shareholders in his stable listed investment companies and his relationship is all direct. In other words, he, stockbrokers do introduce people to his fund, but ultimately he has a direct personal relationship with them and that’s an incredible thing and I’ve seen Jeff in action, he goes around the country every six months to meet investors in every capitol city and has a one to one relationship with everybody who wants to come along, there’s been some, and believe me hundreds of people come along and I think this is a wonderful thing and I think the opportunities to get, as a cycle you know changes, is to go back to that. It saves money for investors and it also means that you are going to get that more intimate relationship which is how you improve your product and your performance.

John: So thinking about Morphic and going back to your Harvard strategy philosophers view that you need to think about the space your business occupies and what the world would be like if it wasn’t there. What does that mean for what you’ve thought about you want Morphic to be and to do and what do you think it’s doing that is unique and special and giving it its purpose?

Jack: Well unique is always a dangerous word, but I think we have definitely carved a place for ourselves in terms of our focus on risk management which is a hard concept to manage, to explain in practicalities, but what it means is making sure people don’t spend time worrying about you’re having a terrible month one month and a great month yet the next. We definitely carved a niche in that area in the way and I think after four and a half years we’re pretty confident that the method we’ve chosen to achieve that outcome does work. I think that’s you know is generally a bit different from most of the other managers out there. We haven’t really compromised our returns that much to do it, there is always a cost for insurance but it hasn’t been that great, so and the other thing is the ethical screen. To us the ethical screen elements that matters the most are things that are associated with global warming and climate change. It was Barak Obama who said that our generation is the first generation to experience the effects of climate change and the last one that will be able to do anything about it. Since we launched the new fund, the Morphic Ethical Equities Fund, my daughters who are aged nineteen and sixteen have been incredibly engaged, you finally get to talk to your teenage daughters again, it’s an incredible experience, and what they you know what’s emerged to me is how much anxiety they have in a very deep underlying sense about the effects of climate change. I’m sure your son feels the same and they know it’s an issue and they’re really looking to us, our generation, to make sure we don’t make things worse and my little bit towards that is to have a very, very strict prohibition on our fund investing in fossil fuels and we hope to make a statement on that. We also hope it’s going to be good for investment returns and we think ultimately that sector that has to shrink otherwise we will not be in a world we can live in.

John: So in a very practical sense, the businesses that you won’t invest in are anything with fossil fuel. Is there anything else that you don’t invest in?

Jack: Yes we’re not going to invest in alcohol, tobacco, factory farming, or growth forest logging. We’re not going to invest in armaments. I think that is the main things we’re not going to invest in and we’re also because it’s not all about negativity, we’re also going to make sure that at least 5% of the fund at all times is invested in things we think are going to make the world a better place and that’s principally things like new energy technologies and we ?? we’ve got an example we’re investing in Alstom, who were the guys for those who are in Sydney, they’re the guys who are digging up George Street, well they’re not actually digging it up themselves, but their trams are going to go in there and they’re a world leader in mass transport, ground mass transport and we’re investing in a company called Power Grid in India which is a development in what’s called the Green Energy Corridor which is a corridor you know the emerging market countries like India and China have a great opportunity, they are the world’s fastest growing carbon emitters, but they’re also the ones who’ve got the most underlying growth in their power sector, so they’re very focused on more and more of that growth be coming from alternative energy and they’re having to build specialist grids to carry that energy and Power Grid is an example of the company doing that.

John: So what’s extremely interesting is that you’ve suddenly discovered maybe re-discovered an incredible passion. You’ve connected with your daughters?

Jack: Yes which is a good thing isn’t it.

John: You’re proud to be, not only screening companies out, but finding companies that are really innovating and adding value to the world in that way not only has it given your business purpose, it’s allowed you to find other businesses that have got purpose and both celebrate, associate and potentially grow with them?

Jack: Yes that’s absolutely right and but I do stress we’ve got to do our main objective is to help our clients have you know grow their savings and have good retirements. Our secondary objective which we’re not going to compromise, we’re not going to compromise either, but our secondary objective is make sure that we do that without giving them the feeling that they’re actually making the world itself a poorer place.

John: So Morphic has been going four and a half years, but your Ethical Fund is recently launched?

Jack: Yep.

John: Was it a flashbulb moment? How did you come to go right and was it something you’d been wanting to revisit or where did it come from?

Jack: Well look, like every start-up you are always conscious of the fact you’ve got lots of risks and you don’t want to limit your market unduly, so when we started up we felt it was tough enough starting a new business with all these new intermediaries who are making it very hard to start new businesses compared to when we started Hunter Hall, so we decided we couldn’t afford to have an ethical screen. The reality is nothing in our current fund, the multi global opportunities fund, would not pass the ethical screen we’re going to currently apply. So it’s more a question of applying the brand more formally to what we’re doing, rather than changing what we’re doing. I’m not saying we’ve never had stock that we couldn’t have in here, but we’ve had very, very few.

John: But what was the catalyst moment to go okay I understand why you might not have, you might have been anxious about that when you started out, but obviously something crystallised for you at a certain point in time and you’ve said well we’re going to make this statement and it will, it’s a choice and yes you’re focused on delivering returns and stable rates of return, but you’re still making a choice and it’s an important choice it seems to me, but what crystallised in your mind to say yes we’re going to do this now?

Jack: Well look I was the proponent within Hunter Hall for the what’s called the Hunter Hall Global Value which they listed as an investment company which was the first and still the only ethically screened listed investment company in Australia or still the only one to win the ultimate arm in the market place and I felt that with the implosion of Hunter Hall which happened over Christmas, there was a real need for an alternative to Hunter Hall because Hunter Hall as you may or may not know has been effectively taken over by Soul Pattinson which is a business which is it’s a conglomerate but its largest single business is coal mining and I felt that there was going to be a real issue there with the integrity of the brand and I felt it was important that investors who want an ethically screened global equity exposure have a choice, so that’s what really brought forward this opportunity for us and we’ve been incredibly pleased, we got great broker support from the major brokers in the sector including NAB Trade and Westpac Investing online, Macquarie, Morgan Stockbroking and Taylor Collison who’s our arranger, so we had tremendous support. We’ve had a very successful social media campaign, in the space of a week we’ve 5,000 website visits, unique visits which is for us unprecedented. We’ve had 900 prospectus downloads and I think that we’ve really, you know like all things you seize the opportunity and what we’ve realised was a gap in the market and put it in context in America 20% of all funds under management now have some kind of social responsible screen, ethical screen overlaid on them. In Australia, it’s probably less than 1%. We’re way behind and the reason has been lack of innovation by fund managers, it’s not lack of demand.

John: So finally, think about your career and your values, your customer relationships, what are the key learnings that might be relevant for people, not just in your industry, but in other industries as they grapple with the kind of issues of disruption and commodification that we’ve discussed and I guess even as importantly purpose?

Jack: Look I think the most important thing and I’m learning, I’m still learning all the time is that ultimately what works in any financial service industry and many other industries is you’ve got to have a relationship of trust between your consumer and yourself. Now the challenge with changing technology, particularly in media technology, is how you build that trust one to many. How you maintain your sense of integrity and try and convey it to your consumers. To me that’s the biggest challenge in any business, but particularly where you’ve got people giving you their money or not literally you know in pound notes, but especially when people are giving you money and expecting you know it to be cared for, they really want trust and that’s the challenge and I think that what I’m learning during the campaign we’re having at the moment for the Ethical Equities Fund is you’ve actually got to, you can’t fake it, you’ve got to, people have got to feel it’s real.

John: So there’s something here about authenticity and value actually informing your brand and your behaviour would you agree with that?

Jack: Absolutely. You can’t afford any dissonance I think in your messaging. If you do, you’re lost. It’s extraordinary how one blemish can mar an otherwise perfect picture, that’s the challenge and by the way none of us are perfect, so they’re going to find that blemish somewhere.

John: Jack it’s been great talking and thanks for sharing at a time of such high demand…

Jack: Well.

John: …a bit of your time with us.

Jack: It won’t last, I should enjoy it while I can.

John: Thanks very much.