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The Long View
Hendrik du Toit: 'Small Things Can Make a Big Difference'
00:53:41
The co-founder of global investment manager Ninety One discusses trends in global ESG investing, the push toward ‘net zero’ emissions, and why he’s bullish on the asset-management industry.
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- [00:01]
Jackson Financial
At Jackson, we've created a digital retirement planning experience with you in mind. Visit Jackson.com to explore our easy to understand resources and user friendly tools that are designed to enable financial professionals and clients to plan a path to financial freedom. Jackson is short for Jackson Financial, Inc. Jackson National Life Insurance Company, Lansing, Michigan and Jackson National Life Insurance Company of New York, Purchase, New York. Please stay tuned for important disclosure information at the conclusion of this episode.
- [00:33]
Dan Lefkovitz
Hi and welcome to the Longview. I'm Dan Lefkovitz, Strategist for Morningstar Indexes.
- [00:37]
Christine Benz
And I'm Christine Benz, Director of Personal Finance and Retirement Planning for Morningstar.
- [00:42]
Dan Lefkovitz
Our guest this week is Hendrik Dutoi, CEO and co founder of 91 Asset Management, which is duly listed in London and Johannesburg, South Africa, and was formerly known as Investec Asset management, founded in 1991. In addition to running91, Hendrik is on the board of Nespers and its European subsidiary, Prosis, which is a cornerstone investor in China's Tencent. He has served on the Leadership Council of the Sustainable Development Solutions Network, a United nations initiative, and is a public figure in his native South Africa and in the United Kingdom. Hendrik holds degrees from Stellenbosch University and Cambridge. Hendrik, thanks so much for joining us on the Longview.
- [01:20]
Hendrik Dutoi
Thank you very much, Dan. Christine, great privilege to be with you.
- [01:24]
Dan Lefkovitz
Well, we're very honored to have you with us. It would be great to start with a little bit of background about yourself and about 91, the organization that you run, because it might not be super familiar to a lot of our listeners. First, just in terms of geography, you're joining us today from South Africa, but you seem to divide your time between the UK and South Africa.
- [01:42]
Hendrik Dutoi
I'm on a plane quite a lot and I I'm London based, but Cape Town, where I am right now and in the Office is where 91 started in South Africa. You know, we were a genuine startup, fortunately backed by a financial group, but we started with literally two clients in 1991 here in the southern tip of Africa.
- [02:08]
Christine Benz
So it looks like Africa is your firm's largest market in terms of assets under management. We're assuming that's mostly South Africa. But for those who are unfamiliar with the African market, can you talk about the South African market for investment management and how it differs from other markets where you operate?
- [02:28]
Hendrik Dutoi
Christine why it's the largest is simply the one where we've operated either the longest, we've subsequently grown organically internationally to a point where we are substantially larger. About two thirds of assets under management come from institutional investors from the rest of the world, including the United States, Europe, Asia and the Middle East. But this is our core market, where we started and it's a very interesting market. It's very similar to Canada, Australia and the way the United Kingdom used to, not today, but used to run pensions. So fairly sophisticated, even though it's in Africa. Fairly sophisticated market over a hundred year history of providing for pensions in a initially defined benefit and now defined contribution way. A mutual fund market developed shortly after it developed in the United States and has a very sophisticated intermediary community. Probably if you put them on par with most other markets where bank distribution is very strong. I would say the South African intermediary community is one of the more sophisticated and better ones in the world. So it's a very interesting small market compared to the developed world, but actually a very mature, interesting and highly developed and sophisticated financial market and long term.
- [04:00]
Dan Lefkovitz
Investment market in terms of strategies. Hendrik, can South African investors invest freely across the globe or are there controls and restrictions?
- [04:09]
Hendrik Dutoi
There are still exchange controls, which is a remnant of the days when South Africa was under sanctions before the apartheid system was abolished. But today just under half of institutional, that is pension and other institutional portfolios can move abroad. And as far as individuals, most individuals are concerned, there are virtually no controls. You simply have to inform the central bank or your bank, who will tell the central bank and you can invest where you want. So it's a very open market, very competitive. Managers from across the world compete here because there is a substantial pool of capital relative to the GDP simply because the savings industries are mature in terms of growth, but an old industry and therefore there is substantial pool of capital moving abroad and available for foreign fund managers to compete for.
- [05:08]
Dan Lefkovitz
Got it, Got it. And in terms of your US business, I know that 91sub advises a mandate for Vanguard. It's an impact fund actually, with an environmental mandate. Maybe you can talk a little bit about that Strategy and about 91's U.S. business.
- [05:22]
Hendrik Dutoi
Yeah, and firstly, our businesses elsewhere in the world are largely outside South Africa, largely institutional, either dealing with sovereign wealth funds, pension funds or financial institutions. Now, in this case, sub advice for a leading financial institution like Vanguard is not just an honor for us, but it is our way of doing business and that's how we reach clients. And that's why the 91 brand is a genuinely B2B brand. It is well known in the industry, in the wholesale end of the industry. But I don't expect people on the street, savers on the street will know a lot about 91, whether that's the United States or various European or Asian countries, because that's not what we do. We work through institutions. Now in the case of Vanguard, probably in the fund management folklore, these are the toughest mandates to win because they are not only a, you know, I think it's now a 9 trillion or near 10 trillion juggernaut that actually has a very large active business which is sub advised to other managers. But the diligence and the detail they go through puts any other manager or which most other manager searches, you know, just make them look like short term games. And in our case we were selected to fill a bucket they wanted, which is sustainable equities, but equities which make an impact to climate solutions and benefit from that. And it's our global environment strategy, as you can think. It's not a particularly popular strategy today or in the United States, but we've raised quite a lot of assets in the last few years in that strategy, particularly in Europe. But for us it's an important partnership and an important market where once the ideology is out of sustainability. And 91 is not a sustainability only investment manager, we are active public equities and emerging market equity and fixed income, including credit manager. That's our skill set. And we are very focused and we are very clear what we do at scale, particularly outside our home market, South Africa, where we have a slightly broader remit. So for us it's an important space to occupy because we know in the next 20 or 30 years there is going to be two huge transitions in the world. The one is the one which is currently getting all the publicity. It is the technology revolution which is going to go from current tech we know to AI driven to ultimately quantum. We know how big that is and how profound that is. The other one is we have to change the way we live on this earth, otherwise we are going to have an earth which is not pleasant to inhabit. The forest fires in Canada, the heat and the droughts in California, the heat in Texas, those are all very real issues. The plastic in the ocean. And so investing behind solutions when it's not sustainability in the sort of ESG box ticking paradigm that gets people, particularly the United States, so hot under the collar. It is solutions to live better in this world and to make sure this world can sustain 10 billion people, which is where we're going. So we believe that's an area which we should understand very well and it's particularly relevant in emerging markets. Now we deploy over US$100 billion in emerging markets. We're one of the largest emerging market specialists in the world. We can see the impact there much more than the developed world, because most of the developed world, excluding parts of the United States I've mentioned, is actually lying in the colder areas in the world. So their CL climate is getting a little bit more pleasant. They don't realize rising ocean levels, droughts, consistent droughts, how those affect communities and particularly poorer communities on continents like Africa. And currently we're experiencing that in Latin America with very sad social consequences. And it's one of the reasons why people walk over the border into the United States. So I think it's really important to understand and to invest behind solutions, not just to create a metaverse or to advance ourselves technologically, but to apply the tech to real world problems. And so at 91, we believe in something we call sustainability with substance. And we are not involved in the culture wars that you have in the us we look at sustainability through a risk lens. And second is every company in the world is facing risks because of climate change and we look at it through an opportunity lens, which is who are going to provide the solutions and therefore make money out of it.
- [10:22]
Christine Benz
So we want to follow up on several of the themes that you just referenced. But you did allude to the fact that ESG has become quite politicized here in the us it would be interesting to get your perspective on that controversy given all the markets that you operate in and maybe put the US market in that context. From the standpoint of esg, I think.
- [10:45]
Hendrik Dutoi
The world, the complexity. When we started out in 1991, we were in a single country and then we internationalized in inverted commerce. Now our biggest base today is London. We thought London would be the aircraft carrier from which we could serve the world. We built client facing businesses in all the major markets from the United States, Canada, Hong Kong. Even today we've got partners in Latin America and across Asia and the Middle East. So in those days, clients were sort of looking for similar, fairly similar things. They had slightly differentiated risk perceptions. Australia of course is a big market for us, so we should mention that. But they were broadly, there were people who did CFAs, they were broadly seeing the world in a unipolar sense. What's happened? The world is changing. It's not de globalizing, it is just regions are asserting and countries are asserting their own individualism or their own identity. And in Europe, for example, I mean, I heard a fantastic phrase from a US politician and I'm not sure it's going to be so well taken in Europe, but it says America innovates, Asia improves and Europe regulates. So the ESG or the sustainability paradigm in Europe is about taxing, regulating, demanding, not just data, but demanding very specific reporting. And it's trying to guide the industry that way. In the United States, part of the resistance against that ESG model. By the way, in Asia there's a very practical view of sustainability. Actually it's about the longevity of their companies. And when you talk to owners of companies that they think about how their businesses are going to be profitable in 50 to 100 years time rather than the issues of the now. And for them the reporting is less important, it's the substance of being competitive. Whereas in the US people want the freedom, they want to do what they want to do, and they want the market to sort it out. So when you tell American businesses or American people that this is how they should behave, they typically resist. And that's what drives the creativity of America, the world's, most of us, particularly the world's most dynamic economy. So I think one has to understand that before you talk to people. But interestingly, the Inflation Reduction act and in the US case, they just provided incentives for people to transition, to become energy independent, to use clean technologies. And it's probably been, the impact has been massive and massive on the whole world. So I'm not a bear on America's eventually, and as Churchill said, once Americans have exhausted all Optus, they will take the right one. And I think the US will get there in a different way from Europe and in a different way from Asia. And we therefore, as suppliers of investment offerings, need to understand and articulate these appropriately for the market. But at 91, we are not ideologues. We simply see risks and opportunities as a firm, not as an investor. As an investor, we invest according to the mandate that our clients, our capital suppliers have given us. But as a firm, we genuinely believe that our mission is to invest for a better tomorrow. And, and part of that is contributing to a better world. And I think contributing to a better world also means asking the big questions and thinking about solutions for the big questions of society, which is why we're interested in the field of sustainability. But we are definitely not interested in a world of straight jacketed, senseless capital allocation, which you may get if you overregulate.
- [14:52]
Dan Lefkovitz
Yeah, you refer to ESG as sort of a box ticking exercise. I know you've been critical of investment approaches that exclude fossil fuels related businesses or avoid companies that have high current carbon footprints. What do those kind of approaches.
- [15:06]
Hendrik Dutoi
Ms. Because we think to solve the problem, what's the problem of the world? We emit too much and therefore the world's getting warmer. That's one of the problems. That's one of the big problems. To solve it, there's no point cleaning our portfolios and buying a lovely green portfolio. And let's the carbon emitters simply be owned by less scrupulous owners and let them out of the bright light of public exposure. I'm a big believer in public markets because when you publish, when you show your data, people will have an opinion. If you are in the shadows, people will know what you're doing. They'll just feel the consequence of what you do and sue you later. So I think you need to go where the carbon is with capital. You need to help those businesses transition, those that can transition. I think the one thing we haven't spoken enough about is running down certain businesses that is not investing in them, but running them for cash. Because right now the world needs hydrocarbons for energy. There isn't enough renewable. Until we start building nuclear, there isn't going to be enough renewable. And with explosions of data centers and other things, electricity demand or power demand's going up. So what we need to do is help those businesses that are currently doing it to continue supplying the world economy, but also force the or encourage the economy to transition. Because if it doesn't transition, there will be an embedded liability. And do you know where the biggest court cases will be? Will not be in Europe, it'll be in the United States, where you have a litigious society, you have courts that will award damages, and these will be off the charts in scale and it'll destroy massive amounts of. So we are just encouraging our investors or our investment people to think about these issues, understand the risks, and then follow the mandate of the clients. But as a firm, I can tell you if we don't address it, and as a father, if we don't address the issues that face us, and humanity has many other issues that face us. But if we don't come to terms with how to govern AI and how to deal with our environmental challenges, we are going to leave a very sad society to our children. And that's not why we're here. So that's my personal driver. But we are not one trick, ponies or ideologues, because I think that is not sensible. And so you need to go where the carbon is to solve the carbon problem, not simply exclude that from your portfolio and deny them capital.
- [17:43]
Christine Benz
Net zero is a popular aspiration for companies, including yours. I'm curious, as both a company and an investor, how do you balance that goal of decarbonization with financial considerations?
- [17:57]
Hendrik Dutoi
I think it's about Christine. It's about managing a liability down the line. It is about being competitive. What's interesting, I'll tell you a story now which really got me to think about this, but it's about meeting consumer demand because in the end, my daughter doesn't wear new clothes because she says that's environmentally damaging unless she has no other option. She goes and buys from whatever they call it, vintage or what I call it, secondhand, right? She can afford new clothes, but she doesn't because he says, I don't want to help create more landfill. And I think more and more consumers are going to think like it. I personally try to avoid using single use plastic. I will not buy the product because I know what happens in my free time. I like being outdoors, I do lots of things, mountain biking, et cetera. But I also have a kayak on the ocean when I'm here in Cape Town. When you go out and you see a clean sea like the southern oceans, it's beautiful. But when you go to the Mediterranean and you see in certain parts of the ocean, you see these piles of plastic drifting around, you realize it's just not the right thing. So I think it's part of a societal endeavor, but not at the cost or it shouldn't be at the cost of decent financial returns because maybe there's a short term investment or sacrifice, but in the long run, there's a liability that awaits those who do not change, do not adjust the manufacturing technologies, who do not think about their carbon. I mean, I'm very proud to say what really made me think is when shareholders challenged me on our carbon disclosure and I said, what's the problem? You know, we're just a fund management business. We're not carbon intensive. They say, yeah, but your office in London, which is the same size as your office in Cape Town office building, is a quarter as intensive. And I say yes, because the South African energy system is based on coal. So what did we do when we refurbished our building, which is in process, we turned it into a green one because we purchased renewable energy from the same landlord which he generates on solar nearby. And it was a small investment and forever. In fact, our carbon footprint in our African office will now be lower than in our London office. And I think small things can make big differences and we feel better about it and we know Ultimately no one is going to come and sue us for, you know, for leaving a warm world behind because we have done our bit. We can, yeah. I mean clearly we've got to keep flying. So we hope there's technological advance, but I just think one must be very practical and ultimately returns matter and that's what clients give you the money for and that's your fiduciary duty. And I have no argument with that.
- [21:01]
Dan Lefkovitz
You mentioned coal in South Africa. Sometimes you hear the argument from emerging markets that the developed world got rich on the back of fossil fuels and now they're holding us to higher standards, expecting us to avoid them. How do you reconcile the needs of emerging markets for growth and their natural resources dependence with sustainability?
- [21:24]
Hendrik Dutoi
I believe in climate justice. I'm also very excited to see that the US has peaked in terms of carbon emissions, for example. I mean the US actually its energy system is being cleansed as we speak, even though it's still per capita a very big emitter. But it's not right that the rich world has been able to emit seven times more per capita. And the developing world, you know, historically that they could just say, sorry, we're not going to do exactly the same from now on. I think the poorer countries need lights for their children to be educated, to be able to compete in a modern economy. And if the only way they can do it is with local coal, they should be able to do it. I mean the carbon footprint of Africa's 2 billion people is minuscule compared to the US population or the European population. So it's actually a rounding error. Even if they emit, as countries get richer, I think the bar should get higher. And I'm very impressed what many countries are doing in their plans. And I think the net zero thing we must also be practical here is it was a statement of a goal, a broad goal. It's a bit like the sustainability goals. Let's try and get to net zero. No one knew how to, but we have made substantial strides by simply reporting and therefore being open to scrutiny. We all first time in my life I started asking questions about that in our business or in our investments, many companies have improved themselves and therefore made themselves better, more acceptable to consumers. And technology has received capital. People like Bill Gates and others have given a lot of money to accelerate technologies and now it's a whole business and a whole industry. Our industry and capital markets are providing that. And so we are not generating a market based solution for a social or a common problem which does make sense. So I'm always for a market framework because it's faster than having a regulated or legislated framework. But in the case of climate, I think governments need to step up. Paris Accord was a good one. Subsequently they haven't stepped up. And we've been arguing about small sideshows rather than the real solution. We only need 3,4% of global financial assets deployed per annum into these technologies and to these solutions to solve the world. In fact, it's probably less so. Think of it, we're spending a lot of time generating carbon to manufacture crypto. And crypto is now at a scale where it could have dealt with at least one continent or a few continents climate challenges. So I think we need to just keep a perspective. But that's not what either defines investment management or for that matter our business. It isn't part of it. And just because we're exposed to emerging markets and the realities of the impact is I guess, what is slightly more aware.
- [24:39]
Christine Benz
I wanted to follow up on your previous comments about the US and sustainability. You've observed that red states in the US are actually embracing the climate transition. That seems maybe a little bit counterintuitive, but maybe you can talk about that.
- [24:55]
Hendrik Dutoi
Yeah, it's not that they are kind of climate activists. It's simply they very commercial, very smartly took the benefits the US government or the incentives the US government gave them. And some of them are also quite rural. You know, farmers have been very quick adapters of new technologies and particularly manufacturers because it's simply ultimately cheaper and better. And so if you look at the benefits from what is the single biggest. I'm not sure what the Chinese size is, but I don't think it was this smaller but government intervention energy transition. The red states have been very, very substantial beneficiaries and takers of that federal subsidy. So that was the point, in spite of the fact that you don't want to talk about it, is actually you adapt to reality. And I think what's so impressive about the US is US businesses and Americans tend to face facts quite quickly and adapt. When the facts change, they change their mind. And I think we've just seen this. So my point was not to think that this is an ideologically driven transition. This is a real world. I mean, take an example of a company I respect very highly, Exxon. Exxon is clear it's going to produce hydrocarbon energy for a long time. That's its business. But it's also investing an enormous amount of money in carbon storage because it knows in order to do this this will be required later and it's going to make money out of it into your course. And in the end, those guys deliver more than people who just write nice annual reports and say things but don't do. So I just like the action.
- [26:55]
Jackson Financial
At Jackson, we've created a digital retirement planning experience with you in mind. Visit Jackson.com to explore our easy to understand resources and user friendly tools that are designed to enable financial professionals and clients to plan a path to financial freedom. Jackson is short for Jackson Financial Incorporated, Jackson National Life Insurance Co. Lansing, Michigan and Jackson National Life Insurance Co. Of New York Purchase, New York.
- [27:22]
Dan Lefkovitz
Wanted to switch gears and ask you about this very interesting company that you're involved with. I think you're on the board of Naspers and its European subsidiary Prosis, which is a big investor in China's Tencent. Maybe you could talk a little bit about how you got involved and what your involvement entails.
- [27:38]
Hendrik Dutoi
For my sins, I used to be a media analyst many years ago in fact, when media was still newspapers. When I was a young analyst and I got to know this company which was a think of the New York Times. The New York Times is still today largely, although it's now digital, largely a news business. This was a small South African Afrikaans language newspaper group that actually started here in Cape Town and they appointed a very visionary chairman, I guess it's about 40 years ago, decided to appoint a smart young fellow who just done an MBA at Columbia, said look, media business is going to change. We have to think about the future. And this man who is still the chairman of NSPL Process today, Chris Becker, he said the future is going to be digital. There is going to be a complete change in how people consume information, how they communicate, et cetera, mobile phones, Internet. And he literally spelled it out to me as a young analyst where I looked at this unlisted subsidiary where they were doing these things and he said, well I can't compete in the United States, but I can go into the emerging world and find businesses that are really going to drive this and we can start investing our newspaper cash flows. And they first went into pay tv which generated more cash flow and the pay TV was also a technology that would pass. And they said, well they're going to go into the Internet and where are they going to find the best people? Well, they're substantial investors in India today, they're substantial investors in Latin America and particularly Brazil. But they found this company in China and they bought 49% of a company called Tencent for I think it's 2003 bought it for $35 million or something and obviously this became a mega, mega business equivalent. If that was listed in the United States, it'd probably be trillion dollar market cap. So then eventually they asked me to join the board. I was just an ordinary investor in the country and my chairman told me, he said it's good to be on one outside board. You learn something, go and do it. And I learned about tech in China and Tencent is a remarkable company similar to the hyperscalers in the US and it's actually been delivered fantastic returns for many pension investors from particularly from this continent who had access to it through the NSPAS share and the process share.
- [30:21]
Christine Benz
So Tencent was caught up in a government crackdown. I'm wondering if you can share your perspective watching this situation unfold from your board position. What were your thoughts on that?
- [30:36]
Hendrik Dutoi
We have a fairly nspass is a holder of a large portion of Tencent, the largest investor. But it is not a directional or it doesn't influence what Tencent does. Tencent operates as it operates. That was the deal struck a long time ago. And they have to deal with their issues and challenges. But as you can see in their latest results updates, they fairly sang when that the crackdown in China, particularly on games, has relaxed because the Chinese government was, in my opinion, quite correctly, concerned about the amount of time people spent looking at a screen and they challenged the technology industry. I think that phase is over. But that's the right of a government, whether it's in China or the US to ask questions of business and business has to respond. But I mean, the business is doing pretty well today. I think again, we're having that debate right now in the United States around AI. The Biden administration was intent on regulating the Trump administration. The incoming Trump administration is saying it's going to deregulate it. Those are just normal debates similar to the one we discussed earlier on on the use of carbon hydrocarbons in energy generation.
- [32:04]
Dan Lefkovitz
Yeah. I wanted to ask you about emerging markets debt. I think it's an asset class that's a specialty for 91. Can you talk a little bit about it? It's not a fixture of many investors portfolios. Why do you see it as an asset class that's worthy of consideration?
- [32:19]
Hendrik Dutoi
I would take again near term, particularly in the world of an incoming Donald Trump, emphasizing US exceptionalism, a world of a strong dollar that we live today. By the way, a decade and a half ago we didn't have a world of a strong dollar. We were a decade plus ago. So in the decade before this decade, emerging market equities outperformed developed market equities. So there's a cycle, there's a cycle in the world. And I just think if you're a global investor and a very long term investor, you've got to access all the sources of return or as many of them as possible, if the price is right, wherever possible. Because then your portfolio is more diversified, particularly hedging yourself against regional risks. We just look at the value destruction that's happened in Eastern Europe with the Ukraine war that's on the borders of Europe. So one has to spread. And we currently live in a world where everyone thinks you've got to have everything in America. And that's the only game now that the most expensive bet in life is to be short of America. But it doesn't mean your entire portfolio should be in the US because there are also challenges. And so emerging market debt is just providing you with both a government but also corporate borrowers who are willing to pay most of the time, not right now actually, but most of the time a substantial premium over what developed markets offer. And often the risk is priced in there and you can actually get a pretty good return. I mean I look how many people made in Argentina in the last year. That was supposedly a basket case. The government followed through on its cost cutting and on its belt tightening. And then you made good money, you lost money in last few days in Brazil because for exactly the opposite reason. So I just think it widens your investment universe. It gives you access to substantial economies. Fifty years ago, 30 years ago, the emerging economy is really small. Today the second largest economy in the world, the largest on a purchasing power parity adjusted basis is China. India is substantially larger than Germany on a purchasing power parity adjusted basis. Brazil is a 200 million plus people is a substantial economy. Mexico, just south of your borders. And these economies are going to challenge the alternatives we had, which are the G7 economies, whether that's Italy or France or so. And one needs to start learning how to operate in these markets, how to capture opportunities. But in the world we live in, the ultimate risk free rate remains the U.S. treasury. So you start there, but it is absolutely necessary. And also great companies, we just mentioned Tencent, there are many other great companies that have been built from. I mean this week here in South Africa, a new unicorn was created, a digital bank. But the investment came from not from the US or a pension fund in Canada or something. It came from Nubank in Brazil, which is a phenomenal success story, one of the most modern and most digital banking groups in the world. And if you're going to read about nubank, you'll get very excited. And if you didn't invest in it, you'll feel very, very sorry that you didn't because it was a massive value creator. So these great businesses are being built by people in countries which are not daily. If I'm talking to savers or financial advisors from the developed world, this is not something you everyday learn about. And what 91 offers is we offer access in a very disciplined and structured way to these opportunities. Now, if I can bet here, the last 10 years, emerging markets didn't have a good run for a variety of reasons, not least of which was the way interest rates were managed in the developed world. I think if you look ahead, we live in a world of 8 billion people. The LA Frio billion is rich, old and white, and there are 7 billion people on the march every day trying to improve their lives. And if you go travel, Asia in particular, you see it, you want to have a slice of that action. That is what emerging market debt or equities would provide. And I think it gives you diversification against the old tried and tested formulae. But that doesn't mean that America isn't a great place to invest in.
- [37:07]
Christine Benz
We wanted to ask about private markets which have grown massively. You've talked about what you call excess capital flow into private credit, specifically as a risk that you don't think is being adequately priced in. Can you talk about that?
- [37:23]
Hendrik Dutoi
So I'll start off by saying right now I'm in a very unfashionable position because. Because public markets is being indexed and being commoditized and delivered very cheaply to investors. I think there's another golden age for public market investing coming. Why? Because you get transparency, you get liquidity, you get all the things and you get true price discovery. Private markets are really important and useful and it's index active, public active and private, which per definition is totally active, are all part of a sensible adventure, a sensible investing ecosystem. But when private starts trading at a premium, that is you get a lower yield in private than in the public equivalent. You should ask some questions. And currently lots of people are wanting to build because they're good for fees, et cetera. Private markets and particularly private credit businesses, we're doing the same, we're doing ours in Europe and related to the energy transition. But you should make sure that the pricing is always checked against the public equivalent. And there isn't The I sometimes call it a drug. But it's very easy to value your private investments the way you want because conventions are not very precise. Whereas the public price is the public price. You always think the price of your house is what you bought it at, plus some kind of appreciation that you thought you would get when you bought your house. Actually, no. The price of your house is what you get when you sell it, minus all the maintenance and investment you made in it. And I think similarly, a private asset can look less volatile simply because it isn't mark to market. And when there's a lot of money competing for the same private asset, often it gets expensive. So I'm not against private credit at all. I think it's a fantastic innovation and it adds to a world where banks are very increasingly restricted by regulation to do certain things. And it takes capital markets money or long term savings and directly applies them into credit opportunities that otherwise would only have been available to banks and therefore yields. But when too much money chases too few opportunities, you have to be very, very careful. And this boom has been going on for a long time. So I'm a bull. We're excited. We've got shareholders in Apollo. We think it's an exciting business, we really like it, we like what kkr, Blackstone and those guys are doing. But the scale is getting to a point where one just has to be very, very cautious that you go in at the right price points. I'm absolutely not in favor of regulators treating the private credit market in the way they regulate banks because these markets do not operate with depositors money, they operate with investment money and those investors are willing to take the risk. So it's not an anti private credit. It's a word of caution about relative pricing and reminding everyone that public markets are important and liquid public markets matter because they are the final true price point.
- [41:05]
Dan Lefkovitz
But it also sounds like you're still bullish on traditional asset management industry and specifically active, which is interesting. You mentioned it's sort of getting indexed and commoditized. Why do you think the future is still bright for active public?
- [41:17]
Hendrik Dutoi
I mean it's a really tough place to be now the traditional active industry, let's be clear that actually tougher outside the US than inside the US because US there's so much wealth being generated that actually it's still kind of getting its share of the flow, although less than before. But I can't see capital markets working without sensible active pricing. Settling those markets and being the arbiter of index fund is just buying yesterday's winner tomorrow and hoping for the best. Now you can do that if you want to pay no fee. But if people either apply quantitative technology or traditional fundamental ways of valuing stocks or bonds and they're doing that at a cost, you should be willing to pay. And if they don't achieve a result, you should switch to another provider. But collectively those active managers help markets or set sensible prices for capital in different markets and they have a massive social utility and, and they also have embedded in what they offer the opportunity for massive outperformance. If you outperform by a percent a year after costs over the long term, 50 years or so, you double your capital. I can't even remember the exact number now, but you know, a small margin of outperformance creates a significantly better outcome for a long term investor or saver. And I don't think I see no reason why an investor wouldn't pay what I call the option premium for a better outcome. So I think active management, there's an opportunity and where we see the opportunity is everybody else is trying to build, go into a metamorphosis to becoming a private manager when actually private markets didn't really seriously exist 30 years ago. And they forget that for all the private assets ultimately to exit one day they will have to come to a public market or publicly traded market. And that therefore the fewer people compete there and the more index driven product there is, the more the alpha opportunity will increase. And that is per definition. So I can see our industry delivering better on its promise post this disruption than before when everyone was an active manager. And we still in our industry make pretty good operating margins. And our financial, the industry as a whole, the financial characteristics are still pretty attractive even though it's deeply unfashionable right now. And I always like to go where it's not too fashionable because that's where opportunity is. So in a sense, if I had my life over again, I'd probably have started right here. But it's been tough the last few years and it will probably be tough for a few, but the winners are going to win really big. And in our case we back ourselves to be a winner. And that doesn't mean that you have to be a mega firm of $10 trillion. That does not mean that because in the most competitive industry of the world, which I think is hospitality, there are small hotels which are very successful and there are large hotel chains like Holiday Inn and others who are also successful.
- [44:45]
Christine Benz
We're curious, does 91 have ETFs? And if not Are they on the radar for your firm?
- [44:51]
Hendrik Dutoi
Yes, again they're very much on the radar. We don't have an ETF platform. I think 91 being a primarily institutional business is more and more wrapper agnostic. We provide our strategies in whatever wrapper clients want to consume or use them. And given the scale requirements in different regions and the regulatory requirements, we often prefer to work through the wrappers of others. Whether they're insurance companies, companies, whether it's Vanguard, whether it's, you know, the uk, we've got fantastic clients in Europe, we've got banking groups who purvey it. But we have no problem with being in an active ETF because our industry has become very transparent. Now you understand the etf, this is not just my understanding as a non ETF operator, so please bear with me if I'm wrong but the ETF really took off in the US because of the tax advantages and because of the fact that Wall street has always been the wire houses have been integral in the distribution of investment product in the rest of the world it hasn't really grown, it became an index, an exchange traded index. Now the active game is coming in I guess because for two reasons following the US because US is the world's deepest biggest capital market. So you think well if the US is doing it, why are we not doing it? And secondly the phone. You can trade a single priced vehicle very easily or a consumer can get one price. A mutual fund is a more complicated thing and it doesn't have same liquidity, it has certain governance rules. If you know there are lots of people redeeming at the same time it gets treated differently. Where ETF is a same day vehicle subject obviously to the liquidity of the etf. So I think as a vehicle in a digital world it is probably going to continue to win. But 91 being a vehicle agnostic business supplying alpha in specialist areas on an institutional basis. For us to build a large ETF platform outside South African market would probably not be the best use of our time and our capital. But we are definitely not against what ETFs bring. Anything that encourages investors to invest with more ease is a good thing and I think it's been a fantastic innovation.
- [47:29]
Dan Lefkovitz
Unfortunately we're running short on time and I wanted to make sure that we ask you a little bit about South Africa. I know you were involved in anti apartheid politics at one point in your life and you've been very much a part of building the new South Africa. Personally and through your business I'm kind of Curious. Obviously, the country faces massive challenges. Are you still bullish on its future?
- [47:51]
Hendrik Dutoi
I think if you ask any South African, it's a bit like any Brazilian. There's an amplitude. You get very happy, you feel very depressed from time to time. But it is a wonderful country. If you haven't visited, please do visit. It's a wonderful country to visit. I'm much more optimistic than I was a year ago or even six months ago. Definitely in the last decade because of the fact that there's now a government of national unity, because the president has drawn in everyone, not in a coalition, but in a cooperative form of government with a very clear executive government. There's still parliamentary politics where parties attack each other, et cetera, or one another and hold one another to account. But the governing party has dropped from a huge majority majority to now well under the 50%, 40% vote. And that has led to an understanding that we're all in the same boat and we have to cooperate, we have to work together and we have to face the challenges. Because the country faces many social problems, but also has many opportunities. It's politically neutral in a world that is very divided. It is on a continent where it is not that contested by the major powers and all of that can be. And it has a very young population. These are all advantages. So I'm optimistic relative to where we were. There's a lot of work to do because when you've suffered a decade plus of more than a decade, probably two decades of bad governance to get out of that, and that's my warning to people in developed countries. Institutions matter. Once institutions have been eroded or the functioning of those institutions, it's very, very hard to come back. But I have hope and I'm very glad to have been involved in the story. Remember, we've come from the apartheid era, which was despicable, to a free South Africa led by an amazing man called Nelson Mandela, to a ruling party which has lost its way and now got to listen to the message of the voters and actually formed a kind of government which is supported by the broad population. And that is optimistic. One can't be an investor, believe that there isn't a better tomorrow.
- [50:21]
Christine Benz
For our last question, we wanted to ask about your cycling. You referenced that you are an avid cyclist. Can you talk about the South African mountain bike race that you participate in?
- [50:31]
Hendrik Dutoi
No, I'm actually a runner. I'm actually a runner and because of having run too many marathons in my life, the doctor said, you better start cycling. A few years ago, I didn't particularly take to road biking. So I love mountain biking and with the nature we have in both Europe and South Africa, there's so many beautiful mountains to ride. I got involved and really like it. And I've now this year completed my second Cape Epic, which is they like to say it's the equivalent of the Tour de France. It's, you know, they're a lot more amateurs in the Epic than in the Tour de France, but it's eight days of, you know, climbing seven of them. You climb basically 2,000 meters on average in mountains, largely single track, big day, 3,000 climbs. So people go biking, will know that's a lot. But you see beautiful places, you ride with wonderful people, you have to train a lot, and it keeps you clears your head. So I love outdoor stuff, whether it's that, whether it's surf, skiing or kayaking on the sea, these are all wonderful things. And maybe that's why I care about the environment.
- [51:48]
Dan Lefkovitz
Yeah. Well, I'm not sure Christina or I will be participating in the Cape Epic, but we certainly would love to come visit you and your Cape Town offices. Yeah. Thank you so much for joining us on the Longview. Hendrik. This has been great.
- [52:01]
Hendrik Dutoi
Thank you very much, both of you. It was a pleasure talking to you.
- [52:05]
Christine Benz
Thank you, Hendrik.
- [52:11]
Dan Lefkovitz
Thank you for joining us on the Longview. If you could please take a moment to subscribe to and rate the podcast on, on Apple, Spotify or wherever you get your podcasts. You can follow us on socials, dan.
- [52:22]
Christine Benz
Lefkovitz on LinkedIn and hristinebenz on X, or Christine Benz on LinkedIn.
- [52:30]
Dan Lefkovitz
George Cassidy is our engineer for the podcast and Carrie Gretchik produces the show Notes each week. Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us@thelongviewstar.com until. Until next time. Thanks for joining us.
- [52:46]
Jackson Financial
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