Transcript

Matt Heine (MH): 
Hi, John. John, before we get into a lot of the research that you've been doing, and some of the other interesting stories that we're hoping to cover, I thought it'd be worth just sharing with our guests, you actually were born and bred and started your career in New Zealand. Is that correct?

John McMurdo (JM):
That's it. That's exactly right. You've got a good memory, Matt. Yeah, I grew up in New Zealand, spent my youth there, and then most of my working life in Australia. And Sydney has been home for a long time now, and a couple of years of Melbourne as well, which I loved. But look, I'm an Aussie citizen, my family are Aussies, but your listeners might tune in even harder today and listen for the odd word or pronunciation that gives away my heritage. But you're exactly right. Grew up across the Tasman.

MH: 
And what was it that actually drew you to Australia or the reason that you moved at the time?

JM: 
Oh, Matt, it was career opportunity. But we were excited, we always have been, my wife and I to have fresh and new experiences. So we were excited to do it. And now proud Aussies. Love Australia and what it stands for. Love New Zealand and what it stands for, that said as well. And it was a great place to grow up. And thinking about that, I guess, it was a fairly typical childhood or youth, possibly even uneventful. But had loving family, great parents, not an affluent family, Matt, in financial terms, but a very generous set of parents with their time and their interest in me and my two siblings. And I guess it's something I reflect on a little today with our modern society and the pressures and busy-ness that life brings. And as a father of three teenager adult sons myself, I think in some respects we need to get back to some of those simpler times, and some of the values that a few of us grew up with as kids. But look, wonderful childhood.

Formative, probably the most formative part, Matt, when I reflect on it, or the most defining value from my childhood, there was a very clear social purpose that my parents obviously had. The amount of time they would spend after hours helping the homeless, the hungry, and always looking out for others in need. And I didn't know any different when I was young, it's just what they did. But I think as times rolled on that's become a more significant driver in my life, and certainly part of what's ultimately led me here to Australian Ethical. But wonderful childhood, formative, and love now being in Australia.

MH: 
And I think that's a really interesting point that you raise about your parents. Do you think that that had a large part or some part in you moving into financial services initially?

JM: 
Oh, there's no doubt. Look, I moved into it because I was just naturally interested in finance. It's interesting watching my three sons, two of them are highly interested in it. One of them has no interest whatsoever. I'm sure other parents would find the same with their kids. But I was naturally interested in finance. But I was also very keenly interested in how to help others, having observed that. And I thought financial services, investment management advice, was an avenue to do that. And that's clearly proven to be the case. And look, it's been a tremendous career, and something I've never had a regret about getting into, Matt.

MH: 
And you've covered lots of different parts of the financial services industry. You've run licensees and run salary planners, and obviously with the new role with Ethical. What are some of the other roles that you've had along your journey?

JM: 
Yeah, you're right. Look, it's always been in the finance sector. In fact, a little over 30 years have ticked over now, which is not something I want to say too often, by the way. But the first few years, in fact the first decade of that was in banking, but more than 20 years now, you're right, in investment management and wealth management. And nearly 20 years now, when I think about it, in CEO roles. And look, I've loved it. I've loved the investment management side. I've also, as you know, run three or four businesses that have integrated both investment management and advice. So I've worked with advisors for more than 20 years now, and loved every moment of that. And I'm a big believer in the power of both investment management, but certainly the power of quality financial advice. And so it's always been a pleasure to do it.

MH: 
And as you said quietly you have been in the industry for 30 years. It's probably changed somewhat in that time. But thinking back through some of the roles that you've had, what were some of the key lessons that you learned that you've taken forward into your CEO roles?

JM:
Look, something that helped me from a relatively early point, Matt, in my CEO career, was always having a strong purpose for the business, and what's being delivered for clients. Always being crystal clear about the why. The why for the business. But I think, additionally, I've always been clear to have a personal purpose for being there too. And for me, the sort of through line across the four previous CEO roles, and now certainly this one, has been the professional nature of investment and financial advice, or the professionalisation of it. I think that's really important. And as I said, the why. I really don't think you can be a successful CEO, or executive for that matter, just being focused on the business metrics and the balance scorecard. I always wanted to believe in, and certainly to lead, organisations with a noble purpose or to a noble purpose.

JM: 
And I think most people in wealth management would acknowledge that our sector was born ostensibly out of a sales-based culture and mentality. And I always thought there was a real dichotomy between that and where it should and could be, which was a much more professional services style of approach with strong quality and strong efficacy about really sitting on the client side of the table. And I guess, Matt, those who have worked with me for most of that time now would recognise that this is a consistent quest, I guess, that I've done my best to advance. Spurn that sales-based mentality, and try to inspire a true professional and client focused approach. And when I stepped out of wealth management, I thought actually for good in early 2019, Matt, I felt pretty satisfied and proud to have worked with some great professionals, great advisors, who shared those ideals and that cause.

MH: And purpose is obviously something that's becoming more and more important to businesses. It's moving away from shareholder value in its more traditional sense to what is the greater good of the company, and we can talk about that in a moment. But I think that marrying up of bringing yourself to work or that authenticity in and aligning purpose is really important.

JM: 
Look, hugely important. And after a tremendous career, working with some fantastic professionals in different organisations, I actually ... You're aware privately, Matt, but happy to share with the listeners. I stepped out of our sector in early 2019. I had had a tremendous career, thoroughly enjoyed it. The sector had been good to me, and that created some flexibility. But I wanted to better balance, I guess, three aspects of my productive life. And the first was still wanting to be deeply involved in commercial opportunity and causes. It's in my DNA. You sort of can't stop that. But in addition to that it was about doing more, I guess you'd say, for purpose work. And the third was to be more involved in philanthropy.

And so I was constructing that balance in my life, and took on some directorships and advisory roles, mainly outside of financial services actually, but working with some great entrepreneurs, working on some really interesting opportunities, mainly tech-based as it happens. But I was enjoying doing some angel investing alongside and separate to that. And then two sort of unexpected things happened, Matt, that tipped me back into taking on the CEO role at Australian Ethical in early 2020. And the first was actually watching the bushfires play out over that summer of 2019, '20. And decided, instead of complaining to my wife about it, I should actually try and do something more to help. And I distinctly recall someone earlier in my career saying to me years ago, "Why just do your bit, John, when you can do a lot?" And I thought it was time to actually go and do something about that.

And then actually having been made earlier about aware of the Australian Ethical opportunity, I thought it actually achieved all the things I was trying to construct in my personal life anyway, which was commercial challenge, undoubtedly for purpose, and with a substantial and growing foundation with a deep philanthropic desire. So it uniquely ticked all the boxes or the things that mattered to me in one sort of fascinating opportunity. So it is actually great to step back into our sector, and to be able to leverage a number of the learnings and some of the mistakes that have come before now, and try to put that to some good.

MH:
In many ways, a perfect marriage.

JM:
Indeed. And thoroughly enjoying it so far.

MH:
John, I'm really interested to get into the ethical and ESG part in a moment. But before we do that, you mentioned before that you were doing some angel investing, and I'd love to hear some of the interesting tech that you saw or invested in.

JM:
Yeah well, it's fascinating, isn't it? The world is changing at a rate of knots. You look at digitization, tokenization of the financial services sector, fractionalization, blockchain. Just fascinating. And so for people entering our sector these days, to me it's a much more interesting opportunity with so many different places it can go. You and I have had wonderful careers and opportunities in our sector, and I wouldn't change it for a moment. But I think it's even more fascinating than ever, what's going on, particularly in the technology space. But I've got to say also, I'm learning by the day. You're in a business there, Matt, at Netwealth who's on top of this, and it's tremendous, but I think the rest of us need to learn and stay abreast of the opportunities as they unfold.

MH:
Mm-hmm (affirmative). And things are moving at a rate of knots, as you say. And every day there's something new to learn about. More recently non fungible tokens, as they relate to online art world, which is a fascinating [crosstalk 00:13:16].

JM:
Just extraordinary. Extraordinary isn't it?

MH:
A $60 million price tag for a digital artwork.

JM:
Indeed.

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MH:
Now, going back to what you're up to now. So Australian Ethical Investments, the name of the company really says it all, but can you just give us a little bit of background on the business and what you're hoping to achieve there?

JM:
Yeah. Look, it's a fascinating business. It actually started 35 years ago, Matt, would you believe? And really, the premise was twofold. The first was seeking to invest in companies that were doing good things, for the planet, for the environment, for people, as opposed to what has probably been the modus operandi of capital markets, using finite resources and leveraging those. So definitely had a for purpose, which was about actually the power of money and using that for the good of the planet and people. But I think the other interesting thing is it was never an altruistic business. There was an investment thesis there that said, "If you do invest in sectors and businesses that are good for the planet, are good for people, are the go forward sectors of society and the globe, that that should start to turn up in our performance and in great investment returns, as opposed to being in sectors or businesses that are mature or decline or run the risk of stranded assets."

And so it was actually an investment thesis, not just as sort of an altruistic perspective on the world. And look, that's something I find candid, and I'm happy to be these days, is even in my own journey, as recent as five or six years ago, I would have been a sceptic about this approach. And those who know me where. And perhaps cynical, thinking that you would need to trade off investment returns, or this was some sort of altruistic play. And in fact, the opposite. As I started to dig into, it became quite evident to me, and happy to expand on that. But those learnings came from Europe and elsewhere, who've been ahead of this curve for some time now. And Australia is catching up. Catching up at a rate of knots, I must say, but catching up nonetheless.

MH:
So I think, fair to say, 35 years ago it would have been a very niche play, generally misunderstood, and attractive to a small segment maybe of the Australian market. When did you start to see a real turnaround? Because I think you touched on the bushfires before, and certainly in our own business we've seen the level of interest grow exponentially since the bushfires. Did you see much of a change in the years leading up to that?

JM:
Oh, undoubtedly. I think it's been interesting in the media recently, Matt, I've had a few journalists sort of ask me how Australian Ethical's become an overnight success. And the truth is it was 35 years of facing into headwinds, ahead of consumer and sort of market understanding and knowledge. But that's changed very substantially. I think even when I look at the data here as recently as two years ago, probably something in the order of 15% of the Australian population, Matt, were either interested in or prepared to consider an ESG or ethical style of investment. In research we just had conducted via investment trends, which interviewed nearly 3000 Australians nationally, and more than 300 advisors, that's moved to something in the order of 60 to 80%, now, of all Australians who either are or intend to, in the next 12 months, take advice about ethical investing. So quite a phenomenal, a seismic shift really, in the attitude of Australians towards this style of investing.

MH:
And what do you think is driving that in the main?

JM:
Look, I think it's a couple of things. The first is I think Australians are clearly becoming much more aware of the existential threats that exist around climate and environment. Not only that, but also social and other issues. So there's certainly an awareness that's emerging there. Second, I think that the sort of myth of this being altruistic, and not delivering the opportunity for great investment outcomes, has been busted. And happy to share some data on that from the research. But that's clearly the case now, that that sort of myth is busted. And now Australians know that, not only can their money do well for them, but they're becoming aware of the power of their money to do good elsewhere also. And saying, "Look, if I can have both of those things, why wouldn't I?"

And I think the other thing we're observing generally in the market, Matt, is that Australians now, not just in financial services but generally, want to be associated with brands and companies that reflect their values. And so that certainly plays into our sector where they want to know exactly where their money's being invested now, and does that align with their personal values? And that's a big shift, and I think a real opportunity for our sector and our advisors in general.

MH:
And initially a lot of that interest was from the millennial cohort, and we certainly saw that coming through in the nature of the inquiries. But do you have any statistics around the various age groups and their relative interest?

JM:
Yeah. Look, we do. And I think maybe that's been one of the most interesting transformations in the last 12 to 18 months, is you're exactly right, Matt. When I said two years ago something in the order of 15% of Australians were prepared to consider investing that way, that was significantly the millennial demographic, significantly. In some respects we consider that almost our only target market in this business. But the research now paints a very, very different picture. As I said, up to 80% now of all Australians. But I think the really interesting data there was that it's quite evenly distributed across all the demographics. So in fact, we now see that pre-retirees and retirees have an even greater knowledge or awareness or interest in investing this way. And that is now the case across every demographic in Australia. So quite a significant shift.

MH:
And ESG has become a extremely large bucket, and encapsulates a whole lot of different investing styles and also ways that you can go about investing ethically. Do you want to maybe just start and talk about how your ethical investments differ to a traditional ESG screen, and maybe some of the big investment thematics that you see within that very large bucket?

JM:
Yeah, and it is a really large bucket. I think too, if I tease out in as simple a manner as I can the difference between ESG and investing, and both are good, we're talking about degrees of good, I think here, Matt, is ESG is fundamentally about taking environmental, social, and governance issues into thinking around valuation. And to me that's smart. I can't imagine why any investment manager wouldn't be taking those key themes into their thinking about what's the future of sectors and businesses. So let's be clear about that for a start. But I think where I'm getting to is ESG is sort of limited to the valuation approach. And so it's possible, even in ESG, investment management house will take that into their thinking about valuation, but still may invest in businesses that are long on fossil fuels or nuclear arms or anything else.

So it's really not in all cases. There's a broad church of approaches. But in many cases it sort of starts and stop at valuation. So investors and clients can still end up with assets or companies in their portfolios that invest in things they wouldn't want them to, or don't indeed think they do do. Whereas our approach at Australian Ethical is certainly to take it into valuation, there's no question about that, but to actually take that a step further and say, "No, we're actually going to apply that thinking to our portfolio construction. We're going to make sure these assets aren't in client portfolios, and align that with the true values and beliefs of clients." And so it takes it that step further. And I think the other key aspect of that is we're looking, not only for assets or businesses to do no harm in the domains that we're talking about, but to actually do some good.

And increasingly we see showing up in the research quite a significant cohort of Australians who want to not be doing harm, or making sure there's harm avoidance, and that's good and important. But for the first time ever we now see an even bigger cohort that want to see that their money is actually doing something positive as well, not just avoiding harm. And so we play very strongly to both of those key thematics. And I think in simple terms that's the difference between a simple ESG approach and a proper, tailored and active ethical approach to constructing portfolios.

MH:
And even within that approach you've got negative and positive screens, and also some managers where they might take a similar approach, but do seek an activist role in their shareholding to force companies to change their behaviour.

JM:
That's exactly right. And there's a variety of approaches, or a confluence of approaches, in our domain. And so we are looking to avoid negative, no question. We're also looking to ensure there is at least some positive. And of course we're weighing any negative and positive factors, and looking for judgements on balance. It's quite nuanced, Matt. And I think this is the important part about having an active manager who ... We go and visit and speak with more than 400 companies annually to actually understand what are the actual practises, and make sure sort of what it says on the tin is real. So really important to do that. And so as part of those company visits we are, to your point of engaging, trying to engage companies about their own practises and how they can improve those. And I think that's a valued aspect of an active and ethical investment manager.

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MH:
Everyone always loves a good stock story. Are there any stocks in your current portfolio that might surprise the listeners as far as how they've entered the portfolio or even why they might've been exited?

JM:
Yeah, it's a good question. There are. And let me give you a couple actually. And I'll go for the less obvious ones, because I think listeners would naturally know we're looking to avoid fossil fuel companies and armaments and a range of other things. But what surprises investors sometimes, here's two examples for you. One company we've been in for some time, and has done extraordinarily well for investors, is Pilbara Mines. And I think it's a misnomer that we wouldn't be invested in anything in the mining space, but this is a lithium mineral mine. As some listeners would know, that's incredibly important for batteries, be that phones, in particular electric batteries for vehicles, so really plays to the sustainability theme. But is technically in mining, but has done extraordinarily well for investors, and is doing great things, and aiding our transition to a more renewable energy environment.

So that's one that sometimes surprises. Another one, interestingly Matt, is a company called Sims Metal, and they recycle metal, copper. It's an Australian company with presence in the UK, Europe, North America. But again, fundamentally about recycling. But because of the price of copper and metals generally, they've gone extraordinarily well. And has just had a prophet upgrade, and again is driving what is now a 20 year outperformance of our Australian shares fund verse the benchmark. So great companies in a variety of sectors doing fundamentally good things for the planet and the environment. But to your question, in sectors or businesses that most people might not logically think.

MH: 
Two very good examples. John, given your experience across all facets of the industry, and I'm sure you think about this a lot, what's next for the wealth management industry or financial advisors in particular? There's obviously a number of headwinds, but also a lot of tailwinds. Where do you see big opportunities?

JM:
I see lots of opportunity, Matt. I mean, I actually think it's an exciting future. And for any advisors listening, I know at times it's tough. You come through the back of Royal Commissions and whatnot, but the importance of advice to Australians is so important and so significant. But I do see a lot. In our space of ethical investing I actually think this is the biggest thematic and biggest opportunity for advisors that I've seen in decades. There are so many commentators domestically and internationally now, Matt saying, "Climate change, the response to climate and other change, will be the biggest change in capital markets now for the next few decades." Some liken it to what the internet has been to business and capital markets over the last 20 years. This will be the biggest thematic for the next two, three, four decades.

And so I think it's important we understand that, and advisors and investment managers start to position for that. But I've just talked about the significant or seismic shift in the attitude of Australians towards ethical investing. I see this as a massive opportunity for advisors. The best advisors, Matt, I've worked with in the last 20 years, and I've worked with a lot of very, very good ones, are leaders of their clients. They're proactive with their clients, and they are proactive about talking with their clients about what money is about for them, what sort of life they want to be living. And Australians are now highly interested in aligning their own personal values and ethics about their money, and how their money is being used with their own personal values.

And I just think for good proactive advisors, this is a wonderful opportunity. It's what advising is about. And so I just think ... There's risk in that as well. If advisors aren't having this conversation, there's a risk clients are going to have it elsewhere. I think one of the fascinating points in the research was, it said, something like a third of Australians are now having sort of ESG conversations or including that in their portfolio. But the next wave, 45% now of Australians, are saying they're about to have that conversation in the next 12 months. So for good advisors who see the opportunity to have a different conversation and a new conversation, this is a fascinating and fabulous opportunity, I think.

MH:
And that's a great point. And I think particularly having those conversations, there's no better way to know your client and to make best interest.

JM:
Well, that's it. What's money about to them? What's the purpose of it in their life? How do they want it to be used? That is best interest, I think. It's a broader definition than a pure best financial interest. But remember again, the international stats these days are proving out very clearly that the style of investing has delivered fabulous returns. I remember reading a Morningstar report last year that reviewed 745 European ESG or ethical managers. I think the first point is there's that many in Europe. But it was overwhelming in its conclusion that the vast majority of those delivered out-performance verse their relative benchmark not only over one year, but over three, five, seven, and even longer years. We would be the best example of that in an Australian context, Matt, with 20 year outperformance. But that sort of myth and that fear about investment returns is dissipated, and in fact disappeared quite quickly.

MH:
John, we've only really scratched the surface of ESG and what ethical investing is. Where would advisors be best to go for resources on the various sort of options available and also where they can self-educate?

JM:
Yeah, look, and it is tough. And I think this is one of the things that's probably held back even good advisors. The great advisors, of course they want to be well-informed, and across conversations that they're having with clients. But the help does exist. You can get that increasingly from the research houses and others now. But companies like ours, Matt. It's not just about communicating our product, but we are happy, we're delighted to educate and provide resource materials and background reading to help in that education process. So look, we're delighted to do that for advisors. But as I say, research houses, increasingly asset consultants, have access to a lot of that reading now. And look at European trends. They're the leaders. Unfortunately, we've been laggards in this country, both at a federal level and elsewhere. But I think we're starting to catch up. So look to international experience as well for that evidence.

MH:
That's very helpful. Thank you. John, before we go, you've mentioned a couple of times now that Australian Ethical is a 35 year old company. I know you and your career, and you've always had a love of technology, as you've expressed. What are some of the new and innovative things that you're doing in Australian Ethical to future proof it for the next 10 to 20 years?

JM:
Yeah. And Matt, we're doing a bit, and it's certainly beyond technology. But we're investing in brands. We're the most known, now, and respected ethical manager in the country, but we're investing in our brand recognition so Australians know who we are. I think to some extent we've probably been Australia's best kept secret up until now. And we can and will look to change that. We're investing in product, we're particularly interested in access. We've got a wide range of managed funds, across single sector and diversified. But as the desire of investors for managed accounts, for ETFs, we're extending that. We're on managed accounts now, including with you, Matt. So we extend that. But certainly, as I touched on earlier, we think there will be a move to digital currencies to smart contracts.

You look at particularly the younger generations today and how they like to access and interact with their finances and their technology in general. And I've got no doubt because we're looking at things now that will be providing access to our solutions in different and modern formats over time. But I see that as exciting. The key is to make sure that's demand-led as well. There's plenty of businesses that say build it and they will come, and it doesn't always play out that way. So I think being able to test, to validate, and do that in an agile manner is pretty important in business these days. But expect us to continue to be an innovator in the space.

MH:
Does that mean we should expect an ethical coin in the not too distant future?

JM:
Don't be surprised. And you can expect it to say AE on it. We may not be able to put all of Australian Ethical on it, but we're certainly contemplating that sort of development.

MH:
Very interesting. All great ideas. How are you actually implementing that within your business? It's not a typical funds management focus.

JM:
No, it's not. And this is important. And I think it's important in financial services businesses not to think as stayed, stereotypical businesses anymore. Look more to tech and other sectors for guidance. We've taken the unusual step of hiring a chief innovation officer in our business who is charged with looking at best practise across different sectors, across different continents and countries. That's immensely valuable. We're investing time and money in an incubator in essentially an R&D hub, and an incubator of those ideas where we test and validate a range of those ideas, as well as having a longer term view to the horizon. So I think important to put your money and your head count where your mouth is and where your thinking is. So look, we're excited about what might play out in the future.

MH:
Great. John, unfortunately we've run out of time. But in closing I'd just like to say I'm particularly pleased that you've come back into the industry and that we didn't lose you. And I'm looking forward to the Ethical coin and hearing what's coming up next for you and the team.

JM:
Far too much fun to be had, Matt. Great to be doing it, and great to be chatting to you and advisors and clients that are listening in.

MH:
Thank you very much.