HIGHLIGHTS: Peter Harrison - CEO of Schroders

0:00Hi, everybody. Tune in to this short version of the podcast, which we do every Friday. For the long version, tune in on Wednesdays. hi everyone today we have the great pleasure of having peter harrison on the show peter is the ceo of schroders one of the biggest asset managers in europe and amazingly schroders has been in business for nearly or for roughly 200 years peter great to have you here thank you great pleasure only 45 out of 1 million companies exist for 100 years and you've been doing it for 200 years what's the trick? So I think the key is committed ownership. We've got a family backing who takes a 20-year view of where we need to go.

0:40And because of that, the business has changed and evolved. And we've been in lots of different businesses in the finance sector throughout that time. But we've continued to change. And I think that's only possible if you've got a committed long-term ownership structure, which allows that change. If we do the last 10 years, what are the biggest changes you've seen in investment management huge yeah so massive growth of passive management huge growth towards privates um a collapse in fees so just to for the for the listeners uh private is like private equity passive is index funds absolutely and and private debt and the world the world is moving away from public companies towards private companies a revolution in governance, huge agenda on climate, collapse in fees.

1:27So a wholesale change. The industry is going through a major disruption. Why are the Americans doing better? Are the Americans working harder? Are they cleverer? What is it? No, no, they're not. They're not working harder. They're not cleverer. But they do have some innate advantages of scale to start with. They had more partnerships type structures, which I think is a very good structure in an asset management business because you're sharing 100 % of the pie with people in the business rather than a portion of the pie. And I think we've also seen this very big change of the growth of privates.

1:59And in private markets, the bigger you are, the bigger the moat. How does the decline of the UK capital market play in here? So if you go back 15 years, the UK has one of the largest pools of domestic savings in the world. And we regulated that out of existence. So it basically bought government bonds and stopped taking risk. And we put consumer protection at the center. And that shrank the UK as an equity market considerably. Saw huge outflows over the last 15 years. And then we put in a corporate governance code which said conflict between shareholders and companies is a good thing. And every league table was the more times you vote against management, the better.

2:44And those two things were unhelpful for listings. They were unhelpful for thriving domestic capital. Those are now changing and people are going back towards more risk-taking. They're going back to a more constructive environment. So the listed market has struggled. I think what's happened at the same time is London has boomed with private markets, with hedge funds, as a centre for people coming together. We've got some fantastic life sciences. The problem is it's foreign capital, which is driving those businesses, not domestic capital. So the returns are not going to UK savers. And I think as a country, that's a big problem.

3:22What does Brexit do to this? Well, Brexit was just, it undermined two things. It undermined confidence in the UK as a place to make long-term decisions. and it created two or three years of complete hiatus. And then after Brexit, you had Boris Johnson's government. You had a whole set of challenges around Liz Truss's budget and the gilts crisis. All of a sudden, the UK as a serious counterpart and a place to invest started to decline. We've started to see that correct, but those scars take a while to heal. Is there a danger that in order to attract companies, you loosen up on the rules and regulations to the extent that it becomes, you know, wild west?

4:02Well, that's the argument that a lot of people will make. The other question is, if you take no risk, you don't get a return. And so I think the answer is, you have a set of rules. And if companies abide by those rules, they can list in the UK. And then it's for active managers to choose which they want to own and which they don't want to own. And I think the UK has always has been good at active risk-taking. And I think you're slightly careful that you don't set a set of rules which are so prohibitive that no one wants to be here. And that's where we were five years ago. That's changed. Do we need a unified European equity capital market?

4:39Yeah. And will we get it? No. AI, how is that going to change the way you do things? Everything. In what ways? Well, I think it fundamentally changes the landscape of the companies we invest in. In the very short term, we will spend a lot of time trying to do things better. In the probably far more quickly than we realize, we will find we do things very, very, very differently. And the moment we're all thinking about the better bit, but actually the real change will come from when we do it differently. So I think the first place we'll see a major change is in wealth. because my sense is that people will turn to their beautiful AI assistant who will know them better than anybody and ask them for wealth advice in a way that they currently ask people.

5:25And I don't believe our portfolio managers are different from any other industry. If AI is helping understand the human genome backwards, the microbiome backwards, it can certainly help you become a better investor. I think it's beholden on us to make sure those tools and And that data is in front of our portfolio managers when they make decisions. Now you are on how to build good teams. How to build good teams. How do you build good teams? So first thing, you need brilliant leaders of those teams. You need to give them great tools. They need to be the right size. They need to be near their local markets.

6:01And you need to give them space to get things wrong. Because great investors don't get it right every single day. Then they might be wrong for three or four years at a time. And you've got to be willing to put your arms around them and support them. But the critical thing is you understand the risk they take and they're good risk takers and you've got your head around who is managing their way through that and the path dependency of returns. What kind of leader are you? Well, I've discovered that I'm connecting with the organization and trying to drive the hearts of the organization as much as the minds of the organization has ended up being the style that I've done.

6:37I'm passionate about innovation. I spent my time, paid my way through university writing code. So I'm a bit of a geek. So for me, getting the innovation, being really consistent about your strategic vision, just being resilient and not be banged off course, but making sure you take the organization with you. Because the problem in most businesses is the huge layers of permafrost that don't think change has got anything to do with them. And how do you bring those people through and create those new capabilities? How do you melt permafrost? I think culture change. So great teams, right, is the difference between a good company and a great company.

7:19And great leaders within those teams will drive that change. But you need to shine daylight into dark corners. It's the best disinfectant. Have you been bold enough? So if I look back, what's the thing I wish I'd done more of is be more bold. And in what ways should you have been more bold? So we should have done more private markets earlier because compounding up. We should have probably been more willing to acquire more teams and not do as much organically. And I think I look back the things. But you have acquired quite a lot. We have acquired quite a lot, but we acquired small because I didn't want to destroy the culture.

7:56And so for me, because the challenge I think is that public market culture and private market culture are really different. And can you get them to coexist in the same organization successfully is hard. And that was the thing which you've seen ruin many companies. So I said, we're going to work really hard at this, but we're going to go slowly. With hindsight, the disruption in our industry has been way quicker than anyone thought. What do you make of the recent swing in appetite for ESG? Well, first thing to say, it's been politicized. So you've seen this huge geographic diversion. And you absolutely have passed peak debate.

8:37I mean, so a lot of people don't want to talk about it now, and you've seen it. But I think in boardrooms and people's awareness of the importance of climate, I don't think that's debated at all. So what companies are getting on and doing is very real. It's just people spend a lot less time talking about it. In a world with increased geopolitical frictions between the US and China, for instance, what are the dilemmas of being a large player in China for you? Well, it's really interesting, isn't it? Most US players have stopped talking about their Chinese investments in their public statements, but they haven't pulled back from their activities on the ground because this is one of the largest savings markets in the world.

9:16It's a huge, you know, it's second only to the US. Have you stopped talking about it? No, we've said very open about it. What do you read? A lot. What? One of the greatest privileges is I'm a judge of the FT Book of the Year. So I read a lot of books. about business. So anything which is about society today, for me, so there's a brilliant book just out, The Longevity Imperative, that says we're getting ourselves thinking about longevity completely the wrong way. Jonathan Haidt's book about the impact of mobile technology on children, you know, the stuff ravenous about food systems being broken around the world.

9:57Those are the really big issues I think we face. Come on, give us some more titles. You read all these things. Oh, Supremacy on AI. I, Amy Edmondson was our winner last year, which you obviously covered in your podcast, which was a brilliant book on learning from failure. And I think there's so much great, I mean, there's so many brilliant books being written. Absolutely. I just don't have enough time to read them. I agree.