The negative impacts of experimental monetary policy, the rise of political populism and distorted market valuations will become worse if the industry doesn’t start focusing on stewardship and corporate governance, according to Hermes Investment Management’s Saker Nusseibeh (pictured). 
The chief executive, who began his career in asset management in 1987, warns that most of the themes the industry is focusing on are problematic, but says not enough is being done to address the root of the problems.
As such, he believes long-term investors could be in for an increasingly tougher ride over the next two decades and is calling on investment professionals to re-think how they handle their clients’ money.
“Investment is partly about making money and partly about solution – the stewardship of companies, the environment and society,” Nusseibeh explained.
“If you don’t do that, there will be ructions in society and it is very clear that there is anger coming from certain areas of the United Kingdom, which has led to the Brexit outcome. That anger is also clearly there in the Midwest – the election of Mr Trump tells you that people are not happy with how the system works.”
“The joke is that these people in the Midlands and the north of England and those people in the Midwest of the US actually own the economy, it’s just that nobody has been directing it on their behalf or looking after their best interests.”
The CEO says that mismanagement of capital from both the investment industry and the wider economy has led to deep-seated dissatisfaction and wealth inequality.
For instance, he points out that it is “ordinary people” who own the world economy’s £75trn of capital, yet most people are lucky to retire with a total of £12,000 in their pensions pots.
He says this is because people are investing using entirely the wrong mind-set, whereby they focus on market movements but not the underlying factors that cause them.
“If you were invested in the FTSE 100 over a long period of time in the run-up to 2008, and let’s say for argument’s sake you don’t believe in active fund management, your shares will have gone up and up and up to 2008,” Nusseibeh continued.
Performance of index since start of data to 2008
Source: FE Analytics
“You would have looked at them and thought the banking shares were where all the profits were coming from because they were making supernormal profits,” he said. “Actually, they were making supernormal profits because they were effectively undermining the system, in the medieval sense of the word – essentially digging a mine under a wall to bring the wall down.”
“The system collapses in 2008 and you and me and everybody else out there is lumbered with £16,000 worth of debt, each and every one of us, as a result of that collapse.”
“Now, it’s true your index fund is suddenly back up to the same level it was at in 2007, but you’re still lumbered with £16,000 worth of debt that hasn’t gone away. So the investment was a bad investment and the return on it is negative not positive because actually you’ve lost money. It’s just we’re not looking at both sides of the ledger.”
Performance of index since 2007
Source: FE Analytics
Nusseibeh says that, because of irresponsible actions from companies globally over the years, the wider economy has failed.
As such, he warns that the uprising of populist and so-called ‘alt-right’ parties has only just started and could become increasingly detrimental to markets in the future.
“Four or five years ago, we wrote a white paper saying that investors are missing a trick, that politics is going to become much more important,” Nusseibeh said.
“If you go back to the last century and the century before that, politics was inseparable from the analysis of investments and most asset management firms do not have the capacity or the knowledge to analyse politics. They think they do because they earn a lot of money, but they don’t. It’s not the same thing.”
“The failure of 2008 has not been dealt with. Brexit and Trump are just some of the aftershocks and, unless it’s dealt with, we are going to have even more ramifications.”
“What kind of society are we building and for whom? Using whose money? The problem is we’re using ordinary people’s money but it’s only benefiting the elite.”
The CEO believes the ramifications of Brexit could be significant both for markets and the broader economy over the long-term and warns that its impact is likely to go beyond short-term volatility when Article 50 is triggered.
“Brexit is what it is, the country has voted and therefore we should carry on with Brexit and do what the people want. That is democracy and I’m passionate about this,” he continued.
“Having said that, it doesn’t mean that I believe in fairies and la-la land. If you think about the United Kingdom, we have three main industries – we do finance, we do media and we do technology – that’s it. We don’t make things. Mostly we import things.”
“As a trading partner for the EU, we’re important but we only account for 16 per cent. So if they were to lose 20 per cent of their trade with us, for example, they only lose 3 per cent of their GDP. That’s not a lot.”
“They, on the other hand, are 50 per cent of our GDP. So the pain on both sides is not the same, so they can afford to be more bolshie.”
In terms of the election of Donald Trump in the US, Nusseibeh argues that his proposals for fiscal loosening should be the least of investors’ worries, given his stance on climate change.
While it seems the president-elect has softened his rhetoric on global warming being a ‘hoax’, Nusseibeh warns that his unwillingness to act on climate change could have horrific ramifications both socially and economically.
For instance, if temperatures were to rise by two degrees globally, he points out that food prices would rocket, taxes would increase to pay for flood defences and there would be greater political tension.
“The short-term problem is populism, and the short-term problem is - in trying to get out of the 2008 issues - we have had too much loosening of policy which will lead to inflation,” Nusseibeh said.
“And, the short-term problem is - because the only part of the world this seemed to work on was America - the price of American assets are overvalued. The long-term problem is that the fault lines of the free market economy need to be sorted and, in order for these to be sorted, we need a different kind of capitalism.”
“We need a more inclusive kind of capitalism to make sure we dissipate the poisonous populist models. We need sustainable economic growth models which means we don’t harm the environment and we need to produce long-term growth that benefits a vast majority of stakeholders. To do that you need stewardship.”
“This is the struggle between the short and the long-term and everybody is concerned with the shorter term. What matters is the next 10 years. If we do not achieve environmental targets, things are going to get really bad.”