The NOW conference is always memorable, but this year’s conference included some particularly compelling and provocative ideas. I wanted to make sure we considered those ideas and their implications for the portfolios we manage for our clients, with truly open minds. So, after the NOW conference, I invited a number of colleagues to join me for dinner so we could gather in a comfortable off-site environment, free of distractions, and connect the dots between what we heard at NOW and what we’re thinking about as investors. I'd like to thank my colleagues Lisa Cuesta, Taylor Graff, Amy Hauter, Jane Korhonen, Stephanie McCormick, Adi Padva, Keith Stone and Lyn White for their contributions to a rousing and wide-ranging discussion.
I was not surprised at all when the conversations started at a polarizing moment from the conference. At one point, Skip Gates brought up the concept of reparations for historical injustices against African-Americans. If you attended NOW, you’ll remember the nearly physical reaction that rippled throughout the auditorium when the word “reparations” was spoken. A good number of attendees recoiled in displeasure and an equivalent number perked up eagerly.
What pleased me to no end was that our entire group said that they enthusiastically welcomed that uncomfortable moment, and other uncomfortable moments that occasionally occur at our NOW conferences. They all believe what I believe, which is that the point of NOW is to not just to expose us to provocative ideas. We want the conference to force us to open our eyes, look at those new ideas, and consider whether we should respond by redirecting our actions and energies along a more fruitful path.
Our group covered a wide range of topics during a freewheeling two-hour conversation. I’ve done my best to capture the more interesting takeaways in the summary you'll find on the next few pages. There is no doubt that the NOW conference, and our small group’s recap conversation, addressed many important questions about the future of society; in this write-up, we have tried to keep the focus on our efforts to invest successfully for our clients.
On the Social and Environmental Factors That Are Driving Business and Investing
Race, gender, political and identity schisms are roiling our society to an extent not seen since the civil rights era. While the direct ties to our work as investors may not be immediately obvious, they are definitely there: We strongly believe that the companies that thrive over the long term will be the ones that can openly address these challenges and in so doing find opportunities for growth. Moreover, we want to be one of those companies.
In that vein, it was interesting to hear the results of the Edelman Trust survey in the session led by Matt Harrington, Edelman's COO. We heard that people are losing faith in governments and placing more trust in corporations; notably, 64% of respondents want CEOs to take the lead on a lot of society’s issues. Jane Korhonen, a portfolio manager in our Washington, D.C . office, saw this as an almost unimaginable shift in trust away from traditional institutions and toward corporations to solve the world’s problems.
But the shift is occurring nonetheless. I asked Lisa Cuesta and Keith Stone, both of whom focus on the startup/venture universe, for their thoughts on the movement among startups to align business with mission. They are both seeing a lot more mission-aligned thinking on the part of companies and venture funds alike. In many cases, mission drives passion, and this passion can be a powerful force for startups in their initial push to get off the ground. They said, that mission is often a clear catalyst for recruitment, customer delight and business growth; one example is Grove Collaborative, a firm whose entire business is based on providing “clean living” e-ecommerce—a collection of organic household products made available through a subscription service. There is no real reason for that company to exist—there are plenty of ways to get organic household products already. But Grove succeeds because it is so passionate and mission-driven. This drives their people, the information they offer, the community they’ve built. They’ve earned a position as a deeply trusted source and beloved brand, and grown very rapidly. In this case, the mission alignment drove their superb execution, which led to success.
Taylor Graff noted that today’s corporate environment is truly different than what it was 20 years ago: in the past, profit versus mission was a binary choice and a trade-off, but today, markets, consumers and prospective employees have all shifted considerably in a manner that allows companies to earn positive ROI when they allocate capital in line with their mission.
With this in mind, I asked Adi Padva, Lyn White and Amy Hauter—all of whom examine public companies for us in the equity and credit markets—how they engage with companies on these social and environmental issues. They all identified the surge in the number of companies that proactively address these issues today in quarterly presentations, versus just a few years ago. Sustainability is becoming almost a required component of corporate presentations to the investment community; however, companies vary widely, and they also noted the need to be watchful and separate authentic business commitments from greenwashing.
Amy also noted that the merits of an investment may be straightforward when it comes to financial returns, but mission-related evaluation is more subjective. She cited a number of renewable energy bonds we own that were issued under the Green Bond Principles, so we know that the proceeds are going to good projects. But some of those bonds are issued by oil companies, utilities that also burn coal and so forth. Investors will respond differently to these—some are uncomfortable with the issuers, while others are pleased by the positive environmental impacts produced by the projects being funded. We consider all of these things when we invest, but we need to make sure we’re transparent about what we own and why so our clients can make these judgment calls for themselves.
On Artificial Intelligence
This year’s conference was subtitled “Humanity in a Time of Intelligent Machines,” and the ramifications of AI were discussed throughout the day—not just the viability of the technology, but the challenges of integrating AI into society.
Lisa shared an interesting anecdote related to self-driven cars, a market that is providing a spark for AI innovation. When she worked at Google, she wrote an internal article about her fear of driving, and as a result the company invited her into its pilot program for autonomous vehicles. She commuted in a self-driving car for an extended period, and the car worked perfectly. This was in 2013. The technology is there. Her point was that the big hurdles for AI will be just as much about adoption, acceptance and psychology as they will be about the technology itself.
We asked each other for guesses on when we will see the tipping point for autonomous vehicles and what will catalyze the big push for driverless vehicles to become the rule, not the exception. No one wanted to take the bait with a specific guess—a moment of pride for me, we strongly discourage speculation at our firm!—but a number of folks were quite optimistic about anticipated progress. Adi noted that there are some really strong business drivers here and that they may override resistance faster than some think. Insurance companies will factually benefit from driverless cars, based on the actuarial numbers. The cost for the self-driving systems are declining rapidly. And constant connection with mobile devices makes driving less desirable for people, and FAR less desirable for a family whose kids are learning to drive.
On the question of who will win the driverless vehicle race, Keith noted that in the end, miles driven will be a key success factor, both for developing robust technology and for winning approval from regulators. Google has a big head start, and new entrants face the natural and financial limits on how many physical miles a given company can record in a day. But he cited Zoox, a portfolio company of one of our venture managers, as an example of a company using AI creatively; it is using AI to run simulations of driving miles, which is letting the company build knowledge much faster than it could by logging physical miles on the road, and it is catching up rapidly with companies like Google. This approach is also helping Zoox in its efforts to reimagine cars from the ground up—it is testing vehicle concepts that depart significantly from standard vehicle designs, and virtual simulations allow them to evaluate various designs before building physical models.
In terms of other applications for AI, Lisa noted that while we are still many years away from “real” AI, the machine learning capabilities available today can still be commercialized, and there are markets where this machine learning is in high demand. NextGen Venture Partners (which recently joined Brown Advisory) invested in a company called Customer Science that, in a nutshell, helps firms with a lot of customer data make use of that data. It has lots of offline customers with a dire need to compete with Amazon and other digitally native companies, and understand how their customers think and behave the way the digital companies do. Another example: Unilever bought Dollar Shave Club for $1 billion, and it wasn’t because they’re selling $1 billion worth of razor blades—it was for the company’s ability to understand how its customers think and shop. It was DNA that Unilever didn’t have.
Jane raised the uncomfortable issue of how AI might directly affect the investment management business. She doesn’t think we should fear losing our jobs to robots, and neither do I, but we both see AI as a great opportunity for companies like ours. She hopes to be able to use AI to better understand our clients; to better understand how to translate each client’s risk profile into concrete portfolio parameters; to better understand how clients they want to see information reported to them. I wholeheartedly agree, and I suspect that AI will affect our business in a lot of ways that aren’t yet fully apparent.
On Trade Wars
Taylor had a number of thoughts regarding the healthy debate on trade we enjoyed at the conference. Those who attended the conference heard a friendly but spirited debate over the merits of protectionism versus free trade. Rather than argue on one side or the other, Taylor noted that the policy developments we’ve seen this year are less about who’s right on trade and more about the fact that free trade opponents are winning the war of words among a wide swath of the voting public. As investors, we know that companies have been huge beneficiaries of free trade, and if they can’t successfully convince the public of the merits of free trade, they may lose the favorable environment they’ve enjoyed.
The U.S. has staked out a highly protectionist stance so far this year, at least by the standards of the last few decades of U.S. policy. Where we go from here is really in the hands of other countries and how they respond. As we have noted in other settings, we don’t want to venture guesses about how trade negotiations may play out, but we know that the overall environment is a bit of a minefield for multinational companies whose earnings guidance this year and next depend on free trade and open borders. As such, we’ve tried to account for this rising risk in our asset allocation work, leaning away from large caps and into smaller companies, in both the U.S. and emerging markets, whose businesses are relatively local and not dependent on exports.
On Blockchain
Everyone at our gathering agreed that blockchain technology offers enormous potential. But so far, the bulk of the activity in this market has been focused on cryptocurrency, and as we’ve seen, participation in Bitcoin or other cryptocurrencies is really more about speculation at the moment than it is about investment in a disruptive technology. Lisa noted that NextGen has met with a number of companies in the past 12–18 months, some of which had pretty solid businesses—but these companies are becoming hopelessly distracted by the initial coin offering route and by trying to build convoluted business models around the issuance of their own currency.
I struggle to support arguments in favor of buying into cryptocurrency right now. Some people tout the network effect that will buoy a cryptocurrency if enough people get behind it, but the value of the currency today is largely based on its scarcity—it takes a significant investment of resources to produce even one incremental unit of Bitcoin. How can you build network effect when it is so hard to scale up volume? Lisa noted that proponents of these currency systems argue that their value stems from their stability and reliability in comparison to fiat currencies, especially from sovereign entities that perennially struggle with inflation. But that is also a tough argument to support given the volatility we see in the crypto market today.
The real issue with cryptocurrency is that it is a product created for the purpose of transacting, but it is still in the early stages of scaling up and does not yet make sense as a transaction medium. Keith noted that the wild speculative environment that has occurred around Bitcoin has essentially no relation to the eventual intended purpose of Bitcoin. Not only is the price far too volatile today, but it is still essentially cost-prohibitive to conduct Bitcoin transactions over normal financial channels.
But we have to recognize that even in its immature state, the market is building rapidly. Coinbase booked $1 billion in revenue last year, and it oversees more accounts than Charles Schwab. That’s a major company. Whether or not we think any of this makes sense right now, a lot of people do, and we need a view on it.
Lisa warned that this wave feels different than previous technology waves. In the past, the “nerds in the garage” were always the ones leading the charge at first, and the money followed behind. But with crypto, a lot of the early attention is just driven by the money pouring in. It remains to be seen whether the attention we’re seeing in the space translates to real transformation. When I think back to the dawn of the internet, we saw the creation of world-changing technology that started to change the world, but the early companies were eviscerated because they didn’t really understand how to translate the technology into a really transformative business. We had companies like Pets.com trying to move traditional business models to the web in a very ham-handed fashion or companies that spent investor capital without restraint. There are for sure thoughtful people building thoughtful businesses around blockchain as we speak, but I also think it’s likely that 10 years from now, there will be transformative blockchain businesses that are not even scribbled on a napkin yet.
On Philanthropy and Leadership
We were fortunate to hear from David Rubenstein during the NOW conference, and he gave us a lot to think about regarding how the successful and fortunate can think about giving back to the world.
Stephanie McCormick offered several thoughts during our dinner conversation about how Rubenstein’s words related to her experience counseling clients on matters of philanthropy and legacy. She made a point of emphasizing how personal a matter it is when a client is exploring how much of their wealth they should give back. The Giving Pledge is a wonderful commitment, and we admire folks like Warren Buffett, Bill Gates and David Rubenstein, who have signed up to give away a majority of their wealth to philanthropic causes. With any of our clients, we can only help them answer the question of “how much” through an extended series of conversations over time, in which we discuss family obligations, legacy goals, estate planning constraints and a host of other factors. The answer for everyone is different.
That being said, she really appreciated Rubenstein’s discussion about aligning mission with giving. We have a number of clients at Brown Advisory who have come to us in just the past few years, and they really haven’t had people talk to them before about that alignment or encourage them to really explore that question of mission. It’s worth exploring, and sometimes you need a push to get outside your comfort zone. Helping your local community is of course an admirable and worthy goal, and in most communities, there are a variety of established structures to help you do that. When you define your mission more ambitiously (in Rubenstein’s case, his mission is to help America be a better place—that’s fairly ambitious!), you can end up a little bit further out on a limb. There’s less structure to help you accomplish your goals, you probably need to work harder to define your goals crisply and you may want to be more creative in your activities. Obviously, we aren’t all in a position to buy copies of the Magna Carta and essentially gift them to the public commons as Rubenstein has! But Stephanie felt strongly, and I certainly agree, that his model for thinking about philanthropy can be of value for a lot of our clients.
In fact, I felt like the discussion of the Rubenstein session helped us to really pull together a lot of the lessons from the day and tie them to this fundamental notion that it’s wise to really open up our minds when it comes to how we can contribute and give back to society. We talked during the day about grand philanthropic efforts, about making investments in companies that think wisely about society, about the societal implications of technologies like AI, and about individual actions to build a more diverse and inclusive workplace or community. It all makes a difference.
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