Magazine Issues » September 2019

Executive interview: Social mobility incorporated

Hanneke_SmitsNewton Investment Management chief executive Hanneke Smits, one of the few female heads of a UK fund house, tells Mark Latham that increasing diversity in the asset management industry will lead to better decision-making.

When Hanneke Smits became the chief executive of Newton Investment Management in 2016, she – unusually in the male-dominated funds industry – succeeded another woman. The 53-year-old Dutch national, who came to asset management from the private equity world, replaced Helena Morrissey, one of the City’s most prominent advocates for gender equality.

The topic is close to Smits’ heart too, though she thinks that ethnic diversity and the need for the industry to recruit from a wider socio-economic pool is just as important. “If you think asset management firms aren’t doing well on equality, private equity is considerably worse,” she tells me when we meet at Newton’s head office in Blackfriars, London (to which she commutes by riverboat from Putney).

In 2015, prior to taking up the top post at Newton, she helped to found Level 20, which lobbies to increase the percentage of women in senior posts in private equity firms to 20% by 2020. At that time, the proportion was just 5%. Smits, who stepped down from Level 20’s board last year, says that, while the target may not be achieved in the next four months, the campaign has “absolutely” made a difference.

“Level 20’s biggest achievement has been engagement with the private equity industry, as we got into a conversation with the leaders of significant firms who agreed that the numbers of female employees in senior roles was quite shocking. They started to see that the companies they wanted to buy and manage could become more diverse and successful with a more balanced team. Of course, we ultimately want to get to 50/50, but setting a target of getting to 50% within five years would have been too ambitious.”

At Newton, roughly a third of investment staff, irrespective of seniority, are female – a figure that Smits claims is roughly double the industry average.

“For us, it is not so much about the pay gap: it’s an issue of making sure that we have enough women transitioning into senior roles and that is the way to address diversity,” she says. “I am actually very pleased by the number of very able women that we have in the middle ranks and up-and-comers.”

Asked whether Newton has any targets for gender equality, Smits says that she doesn’t believe in setting rigid targets. “I do believe in initiatives that support us on the path to get to a more balanced workforce, so we are proactively working with recruiters to ensure that we get a more diverse workforce,” she says. “We try to ensure that we have not just diverse candidates, but also that our interview panels are diverse as there is an unconscious bias which means that most people tend to hire in their own image.”

Smits is a keen supporter of the charity Brokerage Citylink, through which Newton recruits up to five school-leavers each year, sponsoring them through qualifications in accounting, finance or technology before they start work as graduate trainees.

“It will take time, but as we keep adding these trainees to our workforce [currently around 400], in five years our workforce mix is going to look quite different.” She believes that the industry is “trying and making a good effort” to become more diverse in terms of socio-economic and ethnic backgrounds as well as gender, but more needs to be done. Having a diverse workforce, she says, leads to better decisions all round. “There is a value in having different perspectives within a company. Having a workforce with different training, socio-economic backgrounds or gender brings different angles into discussions,” she says.

Crunching the numbers
Total assets under management (AuM) at Newton currently stands at just over £50 billion (€55bn) and, measured by assets, it is the third of the four UK-based asset management firms owned by New York-based BNY Mellon. The others are Insight Investment (£665bn of AuM), Edinburgh-based Walter Scott (£54bn) and Alcentra (£27bn).

Last year Newton experienced net outflows of £6.1 billion, with significant outflows from its real return, global equity and multi-asset strategies. These were only partially offset by net inflows into its fixed income and emerging markets strategies.
Newton’s largest fund, the Newton Real Return fund, had a below benchmark return of 0.85% in 2018 (the fund targets at least Libor plus 4%). Its second-largest, the Newton Global Income fund, enjoyed a positive return, while its benchmark, the FTSE W World, was negative.

Pre-tax profits last year dropped 17% to £79.2 million, while revenues fell 11% to £191 million. But after a “challenging” 2018, Smits says investment performance, and Newton’s ability to outperform the market, has so far been good this year.
In line with industry trends globally, Newton has seen large outflows in recent years as investors move out of actively managed funds. However, Smits does not believe that all the outflows are necessarily pouring into passive funds. “Some of it is about the de-risking of defined benefit schemes, so the outflows don’t always go to passive,” she says.

While other parts of the BNY Mellon group run passive funds, she says Newton is committed to active management. “It’s very difficult to be both active and passive,” she adds. “At its core, Newton is about reviewing companies, not about synthetic investing and replicating what you get on the stock market through passive.” 

One of Smits’ key aims has been to internationalise Newton’s business. UK clients accounted for over 80% of revenues when she joined the firm in 2016; that figure now stands closer to 70%, she says. “Clearly our UK client base is incredibly important to us, but I thought when I joined that there was a missed opportunity, given the fact we are owned by BNY Mellon.”

A concerted effort to increase the distribution of Newton’s strategies in Europe, Asia-Pacific and the US could, she believes, eventually lead to at least a half of revenues and AuM coming from outside the UK. Despite steady growth in Asia and Europe, she thinks the US is likely to be Newton’s largest growth market in the immediate years to come. “The US is the largest market on the planet and also the most competitive, so it’s a little bit of a double-edged sword,” she says. “We need to defend our market share in the UK but also gain share in other markets to achieve the growth goals we have.”

Smits subscribes to the idea “that if our clients are happy with what we deliver, existing clients will stay – and long term, we will gain new clients. Growth for growth’s sake is not a goal we should set ourselves as an investment firm. It really has to be about creating good client outcomes and the growth will follow – but that does take time.”

Passion and conviction
The otherwise softly-spoken CEO speaks with passion about Newton’s credentials in environmental, social and governance (ESG) investing, pointing to the fact that the firm was one of the earliest signatories to the UN’s Principles of Responsible Investing (UN PRI). She also mentions the recent launching of seven sustainable strategies, which have been “very well received” by investors.

“ESG investing is a very pure form of active management because, to be effective in that space, you need to engage with companies,” she says.

But she admits that there is confusion among investors and within the industry about the specifics of ESG, with one firm’s definition of what constitutes an ethical investment, for example, often differing from that of its rivals.

“There definitely needs to be a better understanding for funds with respect to definitions,” she says. Indeed, she hopes that an ESG working group set up by the UK’s Investment Association (whose board she sits on) will soon come up with proposals to firm up industry-wide definitions.

While for Newton, the noughties were dominated by demand for its global equity suite of products, this decade has been dominated by the growth of its absolute return strategies. “I think the next decade is going to be about sustainable and thematic investing for Newton, so from a strategy perspective, the balance has changed,” she says.

Unlike her predecessor, a keen advocate for Brexit, Smits has steered clear of taking a political stand on the UK’s exit from the EU. She says Newton will be largely unaffected by Brexit and, unlike some other London-based firms, has not needed to redomicile any of its funds to continental Europe.

Newton’s funds are distributed in continental Europe through BNY Mellon offices in Luxembourg and Dublin, so no staff relocations or setting up of subsidiary companies will be necessary, she says. “We have been doing a lot of modelling and stress-testing of our portfolios and we have very limited exposure to UK plc, so the impact will be limited. The main impact of Brexit will be around portfolios that have sterling exposure.” She is concerned that Brexit might impact the funds industry’s ability to attract talent into the UK, but “frankly we still don’t have much visibility around that process”.

On a personal level, Smits – who has lived in the UK for three decades and is married to a Brit – is having to apply for ‘settled status’ to ensure her right to remain post-Brexit. The mother of three has not considered taking out British citizenship, even though the Dutch government, in response to Brexit and to protect Dutch citizens living in the UK, recently rescinded a law banning dual citizenship. “I don’t believe that Brexit will be an issue for me personally. I hope that Newton will still have its Dutch chief executive in a couple of months’ time,” she says.

Unorthodox move
Until 2014, Smits was chief investment officer of the private equity and venture capital investor group Adams Street Partners. The unorthodox career move from the private markets of private equity to the public markets of asset management went smoothly, she says, with her job at Newton less focused on investment and more on managing risk and people. “The questions that need to be asked and ensuring that there is a robust investment process in place are broadly similar processes to both sectors,” she says. Apart from sitting on the board of the Investment Association, the trade body for the UK’s £9 trillion funds industry, Smits holds an impressive number of other external positions, including that of non-executive director of the Bank of England. She is also a trustee of the Impetus Private Equity Foundation, whose charitable work targets 11 to 24-year-olds who are not in education, employment or training (so-called NEETs).

“For me it’s about encouraging social mobility and education and ensuring that everyone has a chance at that,” she says. “I am in the privileged position where I can give something back to society. Education improves social mobility, which I think is hugely important to reduce income inequality.”

Coming from the Netherlands, where income disparities are less marked, Smits says her background influenced her interest in social issues and education. “Holland doesn’t have the same inequality of access to good education that I have observed to be the case in the UK,” she adds.

“A second strand is that I come from a family in which it was considered very important that you finish your education. My parents and my grandparents didn’t discriminate between sons or daughters. Education was about equipping their children for life.”

Stories of the Great Depression have influenced her outlook, in particular the hyperinflation that robbed her paternal grandparents of their farm. Her maternal grandmother, meanwhile, invested her widowers’ pension in educating her two daughters after the death of her husband, a Dutch army officer based in Indonesia.

When we meet, Smits has just come back from an alpine holiday in Austria. The family normally visits Kaprun, near Zell am See: in winter for skiing and in summer for swimming in lakes and hiking. Outside of work, she cites reading, golf (she has a handicap of 30) and cooking as weekend hobbies. “My children say I subject them to too many culinary experiments,” she says. “I like chopping: it’s very therapeutic.”

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