Think slow: Kate Howitt's secret to winning the long game

Fidelity International’s Kate Howitt took the road less travelled in her journey to become one of Australia’s most respected fund managers.

After completing an education in one of the world’s leading business schools, the Booth School of Business at the University of Chicago, she pursued a career in management consulting where she became fascinated with understanding what separates great companies from mediocre ones.

That fascination unexpectedly became a competitive advantage when Howitt pivoted into funds management by joining Fidelity International, where she eventually started the Fidelity Australian Opportunities Fund, which now has more than $500 million under management.

“The inner workings of a company - that's a perspective that not a lot of fund managers have, and I think it does help unpack what's really going on in situations and that's been really formative for me.”

Howitt’s long-term alpha generation has also been aided by a “think slowly” philosophy, which ensures a steady hand in stormy markets and changing investment environments.

On Livewire’s Top-Rated Funds Series, Howitt shares insights on the lessons that shaped her career, why investors should expect a short-term dip following the market’s surge, and the attractiveness of the commodities sector. She also nominates her top ASX pick for investors seeking to capitalise on the decarbonisation thematic.

Edited Transcript

James Marlay: Hello and welcome to Livewire's 100 Top-Rated Funds Series. My name is James Marlay and we're down here in The Rocks in Sydney with Kate Howitt from Fidelity. Kate, it's lovely to see you, thanks for coming down. Let's start with a little bit about you. I'd love to know, what motivates you?

Kate Howitt: I think the most fundamental thing is I'm really curious. I just always love understanding what's going on in the world, why things turn out the way they do, the interplay between the human element and the kind of structural industry elements and just watching the world change. Funds management is such a great job where the world is constantly changing and our job is to make sense of it and see opportunities within it, and that's really great.

Understanding how the beast works

James Marlay: That's the part that comes naturally to you. Over the years you have experiences and people that have an impact and shape how you view the world. Is there anything in particular that stands out or an individual that has had a big impact on you?

Kate Howitt: I think for me, it's that I started off working within corporates. So I worked for Intel in the U.S. for a while, I worked for a startup, I moved back to Australia and worked inside some of our largest listed companies. And so I've kind of been inside the sausage factory.

James Marlay: You know how the beast works.

Kate Howitt: Yes - that's a perspective that not a lot of fund managers have, and I think it does help unpack what's really going on in situations and that's been really formative for me.

Hedging against inflation

James Marlay: Great, I'd love for you to take us inside the room with your team at Fidelity. What's the thing that you're feverishly debating at the moment?

Kate Howitt: Well, we're really a bottom-up house. And so it's rarely a really big topic of discussion. It's usually a lot of unpacking small situations and individual stocks, but for the past couple of years I'd say we've been looking at inflation and trying to say, "What if inflation comes back, how will that play out?". Because it's something that none of us in our careers... none of us were doing these professional roles back in the seventies when inflation was really rampant. And so it would be kind of a new world for most market participants.

James Marlay: I think it's a big topic on a lot of people's minds. How's it flowing through to the way that you're putting your portfolio together? What are some of the flow-on effects?

Kate Howitt: The issue is that we've had a 40-year decline in interest rates and inflation, and that has all reduced the discount rate and that flows through into the valuation regime, and it favours fast-growing companies and high yielding companies. And so if we're at the end of that we're asking:

• How much will that growth thematic reverse and what does that mean for overall market valuations? 
• What does it mean for relative factor performers: the cyclical, value, and growth stocks?
• How is it going to play out in individual sectors?

And so they are really a lot of different ways it can flow through into markets. Some business models have a lot of pricing power and they'd be fine, some are a bit mixed like commodities where their revenues would go up but their cost would also go up, and some have very little pricing power and would really find that their profits and their valuations would be hit. So it's really important to follow that through.

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An ESG-led supercycle could 'dwarf' the previous commodities boom

James Marlay: Have you started to make those tweaks at the portfolio level? Are there some examples of where you've moved, gravitated towards, you talked about companies with pricing power or commodity stocks, have you made those tweaks or is it something that you're still discussing?

Kate Howitt: Well, my approach is less about trying to predict the future and more about trying to understand potential future scenarios and making sure that I've got something that would work under each of those. So I've definitely got some things in the portfolio that I think would do better in an inflationary scenario, but I'm never going to kind of wholesale tilt the portfolio that way.

But commodities are in a great space and have been for a couple of years now, and it's not just inflation that can drive them. The whole shift towards decarbonising would be an incredibly metals-intensive process that, for certain commodities would completely dwarf the China supercycle that drove them in the last cycle. So there's a lot of things going on for commodities beyond just inflation.

Expect a short-term dip

James Marlay: Let's talk about cycles. Twelve months ago, we were in the depths of pessimism. Everyone was kind of thinking that the world was teetering on the edge. If we were to use a simple framework for thinking about market cycles - pessimism, scepticism, optimism, and euphoria - where would you see us on that schematic at the moment?

Kate Howitt: I would kind of look at it as cycles within cycles. In the kind of near term, yes, there's signs of some market fatigue, when you have markets travel this fast in 12 months, they tend to kind of collapse a little bit under their own weight. So we wouldn't be surprised if there was a bit of a weak patch mid this year or later this year.

But if you step back a bit from that in the broader market cycle, there's so much liquidity that's been put into the global economy to get us out of the impact of the pandemic. And so much of that is flowing through into asset prices, asset valuations, and that's not going to be unwound anytime soon. So a little bit of a pause, but then on a bigger picture basis, we think there's still room for optimism to continue to build.

Expect a focus on valuations (especially in tech)

James Marlay: If we're to put our longer-term thinking caps on, is there a particular trend or a thematic that you think will be really important for investors to get right over the longer term?

Kate Howitt: I think one of the things we've been discovering over the last couple of years is how profoundly different some software company business models can be. And these winner-take-all-markets, where they have very low asset intensity, very low cost bases, high margins, and an ability to grow their revenues at this extraordinary rate, and create new markets where there were none before. These are really kind of strange beasts from an economic point of view. Now the market has priced these very fulsomely.

So I think over the next couple of years, there's going to be this real tension between, you know, these companies might continue to capture the lion's share of the profits available out there, but then how much of that is already reflected in pricing? 

Because if you go back to 1999, even if then you'd been an amazing stock picker, and you'd figured out that Microsoft, Amazon, Google, that those ones are going to be the winner and Pets.com was going to blow up, you still had to wait 16 years to get back to the previous peaks. So you can have an amazing company that's a long-term winner that still can have some very big gyrations in the valuation the market will put on it.

Howitt's biggest tip: Think slowly

James Marlay: Now you've been investing, picking stocks, it's your profession. For those investors that are watching, if there was one piece of advice or a tip that could help them be more successful, what would that single piece of advice be?

Kate Howitt: So Nobel Laureate Daniel Kahneman wrote a book called Thinking, Fast and Slow. And he says that we evolved to try to conserve energy and make fast decisions, kind of snap decisions with a lot of assumptions and that's really good if you're trying to outrun a tiger.

But if you're trying to make money from investments, then you need to be thinking slow. So you've got to find out for yourself what kind of individual processes or habits you need to have so that when you're actually making those decisions, you're in slow thinking mode.

Now we don't like to think slow because it's very resource-intensive and we evolve to be kind of lazy. And so it's a lot easier to just make fast decisions, it feels really good, but I think personally, that's a really important thing is to find a way for yourself to get into your slow thinking mode.

Macquarie Group: The ultimate decarbonisation play

James Marlay: Well, let's put the slow thinking caps on. Can you pitch me an idea, something for the longer term?

Kate Howitt: I think one of the topics that has really been building in markets is the idea of ESG, and who's the ESG winner. And if you look at some markets offshore you can play a wind farm company or a solar company or something that's kind of right at the pointy end of decarbonising the world. 

That de-carbonisation process for the world is going to take somewhere between US$100 and US$150 trillion. That's a lot, right? The U.S. Economy GDP is only about US$21 trillion, right? So there's a lot of money. So if you say, "Well, okay, I think that needs to happen. I want something that's going to be part of that big tailwind. What do I own in Australia?". I have a slightly different view that a really great stock for that is Macquarie Group (ASX:MQG) because Macquarie is of the view that US$100 trillion - that's a lot of investment that's going to be made.

So the group has been focusing on the last couple of years of hiring in scientists and engineers, specialists who can really help them understand the real fundamentals about the various technologies that will be part of that, because they know if they understand that better than anyone else in the room, they can be the adviser to the wind farm developer, they can the adviser to the wind farm off-taker, they can be the adviser to the wind farm acquirer, they can co-invest. So they are positioning themselves to be the 'Green Investment Bank' to the world or the 'picks and shovels play on decarbonisation'. And we think that's got a long runway to go.

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