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Sustainable Investing

Matarin: ‘Human emotions and behavioral biases drive markets’

“We have always been proud of the returns we can generate for clients, but we had a broader vision for the role that asset management firms could play in the industry, as true stewards of capital. We decided that the best way to realize this was by starting our own company.”

What factors are driving your investments? As a majority women-owned business, we spoke with all the women leaders of asset management firm Matarin, to learn more about their views on the drivers of investment returns. Valerie Malter, Nili Gilbert and Marta Cotton, share their insights and tell us why they say their job as an investor goes beyond avoiding risks, but “about deeply understanding … and focusing on taking risks that you’re good at managing.” [8 minute read]

Thomson Reuters Sustainability: Could you tell us a bit about the journey to your current roles as Principals of Matarin?

Matarin: We have always been proud of the returns we can generate for clients, but we had a broader vision for the role that asset management firms could play in the industry, as true stewards of capital. We decided that the best way to realize this was by starting our own company.

In 2010 Valerie Malter, Nili Gilbert and Stuart Kaye co-founded Matarin.  Not too long thereafter Marta Cotton and Ralph Coutant joined the team.

By way of background, most of our team has been together for a very long time.  Matarin’s Managing Principal, Valerie Malter, first met Matarin Co-founder and Portfolio Manager, Stuart Kaye, in 1990 when he worked at the AT&T pension plan and was a client of her firm, Chancellor Capital Management.

In 1994, Stuart went to work at Chancellor which soon became part of Invesco. Stuart moved into the Chief Investment Officer role of Invesco Quantitative Strategies, and Valerie went on to build two businesses: one at Scudder, Stevens and Clark, and another at JP Morgan. In 1999, Stuart recruited Ralph Coutant to join his team at Invesco, and Ralph would later join Matarin as a Principal and Portfolio Manager.

Marta Cotton had been a Managing Director of Goldman Sachs, a valuable employee for 17 years. Valerie had first met Marta at a women’s networking event in 2009, and the two were later reconnected in 2011 when Matarin was searching for its Head of Client Development, the role which Marta would eventually fill.

Our team has always had the same philosophy about investing: that human emotions and behavioral biases drive markets and create systematic inefficiencies.

We believe we can profit by identifying these inefficiencies, and taking the other side of the trade.

Matarin Co-Founder and Portfolio Manager, Nili Gilbert, first became interested in the connections between economics and culture when she was quite young. By the time she went to college at Harvard, Nili designed her own field of study to focus on these issues. Six years later she was introduced to her Matarin co-founder Stuart when he was recruiting for a position at Invesco – by then the Invesco Quantitative Strategies group was managing over $25B in assets. Ralph had joined the Invesco  group four years prior to Nili, so most of the Principals at Matarin have come out of Invesco or its predecessor business, and we have been together for going on 15 years or more.

TRS: Why is gender equality crucial to business success? How can men in particular lead on the empowerment of women?

Matarin: At Matarin, we see building a diverse culture as a broad organizational strategy, whose benefits are sought and reaped by all members of the team.

Because diversity is recognized as a competitive advantage, willingness to champion it goes beyond the personal interests of our own backgrounds, genders or ethnicities – it’s an all-hands-on deck initiative.

For us, diversity includes traditional notions like gender and ethnicity, and extends to include diverse upbringing, education, ways of seeing the world, solving problems, and so on.

Some important traits demonstrated by the men on Matarin’s team that support women’s voices in our diverse culture are curiosity, good listening, low ego, and a strong foundation of collegial trust.

It’s not always relaxing to work in an environment where people may see things in a radically different way than you do!

But that’s what true diversity means to us: diverse perspectives.

So, when faced with a different perspective, all team members have got to be curious about what it is, really listen, and be humble enough to consider that our own view could be strengthened through collaboration.

TRS: On balancing quantitative and qualitative analysis, how does this work?  Don’t you ultimately have to reduce the qualitative to quantitative aspects?

Matarin: The philosophy is that we can add value as investors because the market tends to be inefficient in the intermediate term.

A lot of what drives market inefficiencies are emotions like fear and greed and behavioral biases like ego and short-term focus which can cause stock prices to stray from their true value.

What we do at Matarin is identify and research unique, long-term, fundamental insights about what works in predicting asset prices through time, and we then quantify these fundamental insights so that we can express them in the marketplace in such a way that gets our own emotions and biases out of the way. This allows us to take advantage of those mispricings when they occur. Ultimately, we do have to express our insights in a way that is quantifiable.

But there are several reasons why we wouldn’t want to have too much emphasis on just pure number crunching alone. For one thing, the markets are forward looking, and constantly evolving, while most quantitative data is backward looking – the observations in most of the data have happened in the past.

That’s why we always seek to emphasize something that we call the “future investment merit” of every idea in our process. We’re not just mining data, we are thinking as investors first.

TRS: Do you see a particular opportunity or risk in any particular Environmental, Social, Governance (ESG) issue? Is there an opportunity for individual retirement investors in pension or 401(k) plans to build a better world with their investments?

Matarin: In terms of specific ESG issues, we see opportunities in good governance, and risks in different types of energy sources. For several clients, we also vote proxies based upon ESG principals.

At Matarin, we are relatively long-term holders of stocks. Sustainability issues are also longer-term issues. By being willing to consider a longer time horizon, investors make room for management teams to look further in the future than the next quarterly report when considering risks and opportunities for their business.

Retirement assets are in many cases very long-term assets as well, especially in the case of pension funds which are adding new beneficiaries all the time. The Teacher Retirement System of Texas, for example, has been known to say “We’re in the forever business.”  By being patient capital and looking over a longer time horizon to evaluate the merits of an investment, investors create the potential for alignment of perspective with management teams who want to focus on long-term issues like sustainability.

TRS: Is there more risk in values-based investing? Opportunity?

Matarin: Depending on the approach that’s taken to values-based investing, the risk profile may be higher or lower than what you’d see with a traditional investment. The nature of risk difference can also vary through time, and depends on your benchmark. For example, if you exclude fossil fuel stocks from your portfolio, the risk profile of the whole portfolio will change. The nature of that difference in risk will vary as oil prices go up and down over time, and even as oil prices themselves become more or less risky.

Other values-based investment approaches, such as direct impact investments, may feature more prominently in certain industries, in smaller companies, or in certain geographies.

As an investor, our job isn’t really about avoiding risk, it’s about deeply understanding the risks that you’re taking, and focusing on taking risks that you’re good at managing.

TRS: What advice would you give young people looking at the problems faced by our world?

Matarin: Each of us has our own unique skills and potential to contribute to the world. It’s exciting when you can appreciate your own unique talents, and find a way to leverage them to the best of your ability, in order to make the world a better place.

In many cases, this will mean finding great teammates and allies who complement your efforts.

None of us will be able to change the world alone, but each of us has something special to contribute to progress. Working together, we believe we can make a real difference.

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