Founder & CEO, Winton Group
FII THINKpod S2/008 | Sir David Harding | Is ESG worth the hype?
In this week's episode of THINKpod, we host Sir David Harding a philanthropist and CEO of Winton Group, and talk about how ...
About David Harding
David Harding, founder and CEO of Winton Group, has spoken extensively about the evolution of quantitative investing and the challenges facing the hedge fund industry. He has described the current environment for systematic strategies as "tough times," citing low interest rates and increased crowding of strategies as factors that have compressed returns. Harding noted that Winton has responded by diversifying beyond its traditional trend-following approach, shifting a greater proportion of its trading into equity portfolios and expanding the number of stocks it tracks from around 1,500 to 7,000. He has also highlighted the firm's adoption of cloud computing and the use of high-frequency data for measuring correlation changes, even as Winton maintains a relatively long-term trading horizon. Harding has also discussed his views on energy and philanthropy. He has expressed optimism about nuclear fusion, describing it as approaching a "Wright brothers moment" and noting that private investment and advances in high-temperature superconductors could enable smaller, cheaper reactors. He has been critical of what he calls the "bureaucracy of ESG," stating that he is not comfortable with external bodies imposing a definition of moral investing Poisson. Harding has said that his philanthropic giving has focused on educational causes in mathematics and science, particularly the public understanding of statistics and risk, as well as fundamental scientific research into sustainable energy.
Transcript (51 segments)
M
Mark Barton0:11
Powered by the FII Institute. I'm your host Mark Barton, and for over two decades I've been at the forefront of global conversations on the issues that matter the most. In this series, I'll be meeting the leaders who are rising to tackle the grand challenges that face humanity right now. Together, we'll be discussing the radical ideas and the transformative solutions that'll benefit both people and planet.
This episode, I'm joined by Sir David Harding, legendary financier, philanthropist, and CEO of Winton Group. In a refreshingly honest discussion, we joined David on a whistle-stop tour of the uncertain forces at play around the globe and ask whether ESG is all it's hyped up to be. David, thank you very much for joining us today. We sit here in a tricky backdrop of geopolitical upheaval, climate developments, and of course a macroeconomic background which is the most challenging in many a year. How do you view it from your pulpit?
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David Harding1:27
If you think back in history, people always think they live in times of exceptional turmoil. For the time being, we live in times of great prosperity really, and peace worldwide, if you compare it to 1939 or even the height of the Cold War. But certainly the developments in Ukraine have unsettled, I think, us all, and we're all cognizant of the new moral dimension of global warming and carbon emissions and the responsibility of the more prosperous people on the planet to oversee a gradual transition to a zero-carbon world.
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Mark Barton2:00
With regards to the geopolitics, what it's doing is it's causing food prices to rise, it makes us question our security of energy, and it's creating this inflationary backdrop. Do you look at it and think, 'Oh, this is stagflation, we're approaching a stagflationary era,' and stagflation pressures demand a certain sort of mentality?
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David Harding2:24
Well, I'm not an economist. I've spent my life as a quantitative hedge fund manager, so I like to tell people that I am a global expert in the statistical analysis and modeling of financial time series. So I'm not really allowed to have views about geopolitics and economics and so on and so forth. But as a child of the 1980s, my amateurish view is that if you print a lot of money, then stuff appears to cost more. And it seems to me since 2008 as though an enormous amount of debt has been issued by governments which has been bought by central banks, and I can't really understand why that isn't printing money, and therefore why you wouldn't expect inflation, which we now have.
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Mark Barton3:04
Is it a blessing that you don't have to worry about those things?
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David Harding3:07
I think it is. I mean, in my life, from time to time I develop very strong feelings about something, and then about five years later I find out that whatever it was that I felt very strongly about, I was wrong about. So because I've had an investment system that's based on mathematics, it's been painful for me not to be able to do what I want. It's been painful for me to be lashed to the mast of my investment system, but the investment system has protected me from the consequences of my own opinions, and generally it's had its ups and downs, it's done pretty well.
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Mark Barton3:38
Explain to our audience, both who are watching and listening, about trend following and what it is.
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David Harding3:45
Well, that's what we discovered in the 1980s. When you put into these newfangled computers, when you put time series in and I said, 'What happens if I bet on trends?' The computer would spit out the answer every time: you will make money. And the theory is you won't make money. The theory is the markets move around randomly, that they're efficient. That's what the theory that the economists and the politicians and the bankers all over the world have: a theory that you can't make money by betting on computerized analysis of prices. But we did it, and it made money for nearly 30 or 40 years. Definitely not easily. It's a roller coaster ride. We're making, we lose, we're making, we lose, but we've made more than we've lost over the decades, and we've found ourselves a comfy little niche in the global financial system. A well-paid niche.
M
Mark Barton4:34
COVID wasn't so easy for this type of strategy.
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David Harding4:37
Well, it wasn't easy. We wintered shockingly badly over 2020. It's not only trend following we use these days. Having seen the success of these computer models, we've extended into developing lots of other types of models and lots of other types of research, and it was more than that which went wrong than the original idea. But nevertheless, we had a bad year, one of our worst years ever.
M
Mark Barton5:03
What did you learn from that? You've recovered from that now.
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David Harding5:06
Well, you didn't learn anything really, other than that life is a game of chance. Some years are good, some years not so good. The point is, if on average over 20 years you come out fairly well ahead, then you've got a score of 20 years, but there's absolutely no way of avoiding a bad year. You've got to take the rough with the smooth. In the long term, it's like the stock market. People are suffering slightly from an illusion these days that the stock market always goes up, but you look at it over the last 200 years, it's had some shocking periods. Quite apart from 2008, in the 30s it was down 90% in America.
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Mark Barton5:42
Why is history about to be repeating itself? I mean, already if you look at some indices, the NASDAQ is down between 20 and 30 percent. Are we going back to 2000, 1929?
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David Harding5:54
Well, I hope not. I hope not. Stocks go up and they go down. There are bull markets and bear markets. I get very uncomfortable when they always go up.
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Mark Barton6:02
Were you uncomfortable in recent years then?
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David Harding6:04
More for the last 10, 12 years. Well, all I know is that the dynamics are, if you look at long-term charts on stock markets, they go up and they go down. They don't go up continually. And of course, when they've gone down for a couple of years, no one wants to invest in them at all. And when they've gone up for a few years, everybody wants to invest in them. That's human nature.
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Mark Barton6:25
Are we in a period where they're about to go down for a couple of years?
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David Harding6:28
I have no idea. I have no idea. But in terms of my investment portfolio, I'm positioned with different probabilities on different outcomes. What you can't be positioned is if they do go down a lot, then you're ruined.
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Mark Barton6:41
How are you positioned? Give us a taste of how you're positioned.
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David Harding6:46
Right now, Winton's funds are about flat on the stock market. We've been up, stock market's down 20% this year, 15%, and Winton's up 15% or something like that. But that's not because we've been short of the stock market. That's actually because we've been long of oil and other things like that, some of the commodities, the metals. This inflation is being manifested, as it has been in the past, first in commodity prices. The clue is in the name with a company like Winton. Even though we like to call ourselves quantitative investment managers, a lot of people will still call us CTA, commodity trading advisor. There's much more commodity trading in what we do because the commodity futures markets are the historic origin of our business.
M
Mark Barton7:25
Has that commodity surge run its course, or is there another leg to it?
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David Harding7:29
If one talks about the 70s, there was a big surge in the early 70s. Oil started off at probably three or something like that, and then it went up to 15 or something in 1974, and then later on it went up to 80. Gold, I'm more solid on it: started out at 35 fixed by Nixon, anchored from the dollar in 1971, went to 150 in '74, plateaued out for five years, and then went to 880 in 1980. So the point is that inflation over 10 years ultimately the thing went 20 times higher.
M
Mark Barton8:04
Why hasn't gold fared as well? It's still early in the decade. Things might play out. Gold, some say, hasn't fulfilled its inflation hedge store of value role in the last year or so.
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David Harding8:15
When money gets worth less, then everything eventually has to be worth a lot more. Eventually, it doesn't all happen smoothly at the same time. It's not like money depreciates a certain amount every day. If you compare everything to the 1950s, you could say, 'I could have bought a house for a thousand pounds and now it's worth 300,000 or 500,000.' A loaf of bread, school fees, but they don't all go up at the same time at all.
M
Mark Barton8:45
Are you suggesting gold will have its moment where it sails through two thousand, three thousand, and so forth?
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David Harding8:51
It could go through five times, but it could do it in 2031. It doesn't have to do it this year or next year or the year after. It doesn't have to hedge inflation as you are conscious of it at all. In fact, the inflation that's taking place now, the rise of gold over the last 20 years might have been the inflation hedge. Remember when Gordon Brown sold our gold reserves at 200, 280 in 1998 at the low? They call it the Brown Bottom. So gold is up seven, eight, nine hundred percent. Well, inflation isn't up seven, eight, nine hundred percent. Your bread isn't costing 700% more. Your house might be, but lots of things are.
M
Mark Barton9:35
Are you in soft commodities?
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David Harding9:37
Yes, coffee, cocoa.
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Mark Barton9:43
How much of your investing is socially responsible? Like a lot of people in my ilk, I tend to believe in creativity and adaptability and inventing technologies that can find our way out of this problem. Improving solar cells, where we invest in perovskite, or nuclear fusion. We're investing in fusion and many other technologies. I do a lot of venture capital investing. But I'm not a fan of the bureaucracy of ESG, a lot of codes and forms and stuff being filled in for the sake of it. When we're investing in our quantitative portfolios, we invest within the guidelines of the client and the law of the land. Sometimes we have gone a bit beyond that, we've adopted banned lists and so on and so forth. But I'm not really at ease with some body of people trying to choose what moral investing is and then impose moral investing. I know it's a tide that is resistible at the moment, but I fear like a lot of tides of bureaucracy, it's not necessarily optimal.
And within the VC, within venture capital, what technologies are exciting you in that space?
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David Harding10:51
Well, there's no shortage of choice, not least because everyone pegs every venture capital idea to climate change because it's a way of raising money basically. But I'm very excited by the prototype solar cells, which I'm invested in, and I'm excited by fusion longer term.
M
Mark Barton11:10
Does investing in ESG mean you have to sacrifice returns? Does that even matter?
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David Harding11:15
I'm rather tempted to sit out this debate and watch all the people discuss what ESG means to them. Everyone has a different set of morals. Is that the problem with it? Yes, I've always felt that the problem is to some extent that it's in the eye of the beholder. Everyone has their own morals. From the early days when we worked on behalf of Islamic investors, we didn't invest obviously in pork or in alcohol for those investors. That's from the 1980s, we had ESG constraints imposed on us.
M
Mark Barton11:48
But you're not in the camp that it's like a marketing ploy? You're not in that camp, or are you?
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David Harding11:52
Well, I thought of going into ESG, trying to develop quantitative methods, but my heart isn't in it. I can see the general idea. One of the only ESG concessions we've made in our hedge fund system was not investing in cluster bombing companies and landmine companies. In other words, we excluded a list of the worst companies. And yet, somewhat ironically now with the invasion of Ukraine, a lot of people are seeing that defense isn't necessarily evil, any more than oil can be, or pharmaceuticals, or banking.
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Mark Barton12:29
Tell us about these. If governments should make the rules, the free market players should operate within the rules. And if this is an attempt by governments internationally to create a common morality for investing, then it's probably a good thing. Tell us about the Harding Center for Risk Literacy.
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David Harding12:46
I endowed a chair for risk literacy at Cambridge. 20 years ago, David Spiegelhalter became a very familiar figure in British households, at least he was a sort of leading statistician of the COVID epidemic. So I'm pleased with that outcome. That center goes on and continues. There's a Winton Professor actually and a Harding Center, and the idea is to communicate risk to people so they can take better decisions. Because most people don't understand statistics, it's not intuitive to them. It's very, very valuable. H.G. Wells said in the future everyone will have to understand statistics in order to be a citizen. Florence Nightingale said to understand the mind of God we must understand statistics. It's very useful but very boring to most people.
M
Mark Barton13:33
Are people taking the risks around climate change seriously?
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David Harding13:35
I think it's much more useful statistics when it comes to taking decisions about whether you should have a sense of screening or prostate, or when you're considering juries' verdicts, beyond reasonable doubt, things like double cot death. They used to put people in prison if they had two babies die. The country's leading pediatrician said it was a one in a billion event having two children die of cot death, which is completely incorrect. That's a leading pediatrician, the top court in the land, and a woman who's had her children die. That's the kind of misunderstanding we could do without. My focus of my center originally was doctors and the judiciary. Neither of them understand statistics. I just think everyone should want the doctors to understand statistics because it's really important, but mainly used to polemicize and mislead people. As Winston Churchill said, there are lies, damned lies, and statistics. The main object of using statistics is to persuade somebody else of something. You're just using it as a political hammer.
M
Mark Barton14:38
You and your wife joined the Giving Pledge, which for those who don't know is a commitment to give away more than half their wealth during their lifetimes. Do you think that high net worth individuals have a responsibility to use their wealth for public good?
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David Harding14:55
My children don't need all the money that I'm going to leave, or necessarily any of it, hopefully. Bill Gates has said he was going to leave modest amounts to his children. Warren Buffett similarly. Among the kind of nouveau riche, the technocratic uber-rich of this generation, it's the norm to expect to give away a lot of the money before you die and not leave it to create a dynasty. I could of course build a spectacular thousand-bedroomed castle and then found a dynasty which would last for 500 years.
M
Mark Barton15:27
How do you imagine to do impact? Do you measure it? How do you ensure that your wealth has an impact?
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David Harding15:36
I don't have a very systematic or rigorous approach to that at all. I'm unusual in that I think a lot of philanthropists believe that you should measure things and use metrics and so on and so forth.
M
Mark Barton15:48
Why aren't you so keen on that?
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David Harding15:51
I don't know. Maybe I will be one day. Hitherto, I've tended to give money to people I like to pursue causes I think are worthy. But that doesn't mean that my decisions about either the people or the causes are going to be right or are necessarily going to make the world a better place. It doesn't really matter if they don't, not to you anyway. Obviously one hopes they don't make the world a worse place. There are always many people who suggest that I should give them my money, as you can imagine. I'm not sure what suggestion you mean. That's the situation with wealthy people down the ages. Traditionally, there have been social structures in which the rich have had obligations to the poor, like villages and castles, and Russian dukes had their serfs. I was reading yesterday that the number of people you owned was a measure of how wealthy you were in Imperial Russia.
M
Mark Barton16:41
For those watching and listening who know a bit about you and the successes you've had investing, what are the three main lessons that our audience should take away about successful investing?
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David Harding16:52
It's a matter of patience, and it needs to be as much as possible purged of emotion, and you should not take yourself and your opinions particularly seriously. Unless you're very, very knowledgeable on some subject, your opinions are of little moment.
M
Mark Barton17:05
It sounds like that's good advice for life, not just investing.
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David Harding17:09
It's not bad advice for life. Start by assuming you don't know very much and work forward from there, rather than starting by assuming you know everything.
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Mark Barton17:15
David, thank you so much. It's been fascinating. In these turbulent times, don't forget to like, comment, share, and subscribe to ThinkPod for more.