Markets and Career
Consuelo Mack: What do you think we should pay attention to in the current investment climate?
Katrina Sherrerd: We are in uncharted territory and it's hard to say where the world’s economies and markets are headed. Certainly, diversification has not worked as expected over the last decade, particularly for US investors. The US stock market has been a one-way ride, which does not bode well for value investors or those who rely on diversification as a core tenet.
Today’s extremely wide value-to-growth valuation spread is unprecedented. The huge discount of value stocks relative to growth stocks is unlikely to be sustainable and is, in fact, so large we believe that when value bounces back it will do so very strongly—possibly even overshooting—before it returns to a more typical relationship to growth. We are concerned that US stock returns will be flat over the next 10 years. We see better value, better pricing, and better bargains in other markets, particularly, emerging markets.
Consuelo: Are certain types of products more suitable for investors when markets are at crazy levels as they are now—extremely high and extremely low?
Katrina: Cap-weighted equity products are in our view generally a poor idea any time, but particularly right now with many of the FANMAG [Facebook, Amazon, Netflix, Microsoft, Apple, and Google] stocks trading at bubble-like prices. Our opinion is that any strategy that breaks the link between price and weight would be better in the long run than a cap-weighted index.
Consuelo: A common notion about ESG investing is that you give up some performance potential because you exclude entire sectors from your portfolio. However, the research over the last 10 years has shown this may not be the case. Your thoughts?
Katrina: Our research finds that investors can preserve performance potential with careful product design. We get many inquiries about ESG. In addition to our ESG index series that our partner firms such as PIMCO use to create funds and ETFs, we also do a lot of custom work for bigger individual clients. Many of them, particularly in Europe, are interested in low carbon or climate transition solutions. They want to build these on top of a RAFI™ or multifactor product. Many investors wish their investments to reflect a goal beyond pure risk-and-return objectives. With financial engineering that is possible. We believe ESG strategies will be in high demand as investors seek positive change in environmental and social issues.
Consuelo: What’s the biggest risk to investors? What are you and Research Affiliates thinking about?
Katrina: One of the biggest risks for individual investors is chasing trends, which are very unpredictable. Past performance does not predict future performance. Investors who are jumping in and making decisions based on recent past performance could face some unpleasant outcomes over the long run.
Consuelo: What are the greatest opportunities in the market today?
Katrina: For big risk takers, going all-in on emerging-market value stocks looks like a good opportunity—although most people wouldn't want that much risk on. I believe strongly in diversification and in diversifying outside of the US markets. A diversified portfolio is essential because it is very hard to predict which company is going to be able to capitalize on the opportunities that come along. Diversification ensures you have an opportunity to participate.
Consuelo: What are your thoughts on the active versus passive debate?
Katrina: I think the managers without skill will drop out of the market. However, many skilled active managers who remain are charging too much for what they are doing. The active strategies that can be replicated very easily with systematic rules-based approaches and delivered in a much cheaper, more transparent format are prime candidates for the switch to index-based delivery (passive, to many people). Rob [Arnott] and Jason [Hsu] created the Research Affiliates Fundamental™ Index nearly 20 years ago after the tech crash because so many investors were harmed by their overweight exposure to a few overpriced names. I see a parallel today with what happened 20 years ago.
Thoughts on career path
Consuelo: You have a BS in finance, an MS from MIT, a PhD in finance from UVA’s Darden School, and the Chartered Financial Analyst® designation. Education has been a theme in your life. How important have those degrees been to your career?
Katrina: I love education and learning. I also love teaching, and did consider pursuing an academic career. It turned out that I'm not really well suited to be a full-time academic. CFA Institute was in the middle. I went to college in the ‘70s when there were not many female role models, and certainly not many people inviting you to Wall Street or to an investment career. I had to work my way through. In college I started with economics, but realized I had a much more practical bent, so ended up in the business school. I tried a couple of things along the way. First, I tried corporate finance at DuPont, which did not appeal to me. I tried consulting in New York City, but after learning the routine, felt it was too boring. Ultimately, I decided to pursue my graduate credentials, which opened doors, particularly outside the United States. I hope that other women coming along now can choose whether they want the education, rather than needing it to succeed.
Consuelo: Why did you choose to work at CFA Institute?
Katrina: I was at the University of Virginia, where CFA Institute [formerly, AIMR] began, because my husband was a professor there. I entered the PhD program and taught undergraduates. Because I was teaching at UVA, I was eligible to grade CFA exams, which I first did in 1983. During grading, I got to know many people at the organization and they asked if I wanted to work for them after graduation.
So I had to choose between academics and practice. I knew I didn’t want the publishing lifestyle of an academic regardless of how much I love teaching and research, and I knew I did not want to be all-in at a big corporation or investment bank. I thought CFA Institute would be a stepping stone to a great investment firm, but 19 years later I realized I had joined CFA Institute at the exact right time for me. When I joined, the organization was small, but rapidly expanding globally. I was able to build various education programs and was responsible for the board planning committee and strategy. I had some great opportunities, and for 15 years it was everything I wanted—right at the intersection of education and business and practice. I learned a lot and met a lot of fabulous people in our industry.
Consuelo: How did you come to join Research Affiliates?
Katrina: When I was at CFA Institute, I hired Rob [Arnott] to be the editor of the Financial Analysts Journal. I hired him before he hired me. He liked the way I managed, how I worked with him. In 2006, he asked me to help build Research Affiliates. You have to take advantage of the situation, of the opportunities that come your way. I had made up my mind to leave CFA Institute when I was 50. Rob got me before my 50th birthday, so my plan didn't work. I had a great plan, but I was quick to jump off it as well.
Consuelo: How have you built up your self-confidence and willingness to take chances?
Katrina: I'm willing to take informed risks. I know that if something doesn't work out, I'll find something else that will. People shouldn't be afraid of making a mistake. You can learn something from everything. If you go somewhere and it doesn't work out, you can still learn about yourself.
Consuelo: As the CEO of Research Affiliates, what are you doing to build a culture where people can succeed?
Katrina: I am a big believer in collective intelligence. If we share different opinions and we work together with respect and curiosity, we are going to get to better outcomes. Rob is a strong personality, but no one person in our industry knows everything about investing and managing a business. We all have blind spots. We all have expertise in certain areas and certain biases. We make better decisions if we give each other direct, candid feedback, even dissenting views, and then talk about it, collectively. So, we try to create a culture where people are not afraid to speak up and where there is respect for different opinions and processes. We spend a lot of time building trust and creating a safe environment. It's very scary, particularly for young people, to come and tell me they disagree with me or Rob. That we call “petting the tiger.”
Consuelo: How do you encourage that discourse so that people are comfortable?
Katrina: I have an open-door policy. Some people are more comfortable going up their chain of command, telling the partner in their group, and then the partner will come to talk to me. It depends on the individual and how long they've been at the firm.
I also make myself available for lunches periodically, with a maximum of six or eight people. I find many people are more comfortable expressing feedback or asking questions, which is a form of feedback, in a smaller, more informal environment.
Consuelo: You mentioned that getting a PhD was a big step in earning professional respect. How do you attribute your success to breaking through the glass ceiling?
Katrina: Some of the professional respect is earned through confidence and risk taking. Continuous learning is important too. You can't slow down and cruise. I'm a goal-oriented person. I found I have skills a lot of people don't have in solving problems: the more complex the problem, the better for me. The more different points of view, the better. I learned that at the CFA Institute. Combining different points of view from different firms and different geographies really took diplomacy as we tried to weave it all together. I learned those skills there and realized I was good at it. Then kept building on those skills. Importantly, I don't let the little slights get me down. You have to take the long view. If I had gotten upset at all the things that went wrong or the people who didn't listen to my view or didn't want me in the room, I wouldn't be here.
Consuelo: What are you doing to dismantle the barriers that still exist for women and minorities in order for them to succeed?
Katrina: With all of the issues we are dealing with as a country this year, we are being curious and looking to identify our own unconscious biases, looking at how our practices are inadvertently creating barriers to achieving the type of diversity and equality we say we want. I admire Iris Bohnet’s work at Harvard on unconscious bias and how to be deliberate in “getting to change.”