Cognitive diversity is a game-changer

Never one to pull punches, Hostplus chief investment officer Sam Sicilia says there will be no shortage of talent in the investment management industry if the doors are flung wide open and people of all backgrounds invited in.

Sicilia is calling for cognitive diversity warning that institutional investors must take this more seriously or risk being left behind.

To uncover the best investment ideas, it is important to have people who "aren't the same as you and don't think like you," he argues.

"There is no need to fill investment departments with economics and finance specialists when there are plenty of arts and philosophy graduates out there with problem-solving and analytical thinking skills."

And critically, he argues, they can imagine a different world.

Sicilia is convinced that a finance degree should not be a prerequisite for a job in asset management.

"It's easy to teach numeracy skills, financial ratios, and investment metrics," he says. "But you can't easily teach financial people to be creative, you can't easily teach them to think radically forward.

Worse, he adds, you can't teach intellectual curiosity or instil a desire to understand how the science works which is necessary for predicting future technological trends.

Could they {finance specialists} imagine a world with flying cars for example? Companies like Uber have vowed to launch a flying taxi or on-demand urban air transport service in the next five to ten years.

"It's outside their ability," says Sicilia. "The first thing they look at is the economics, regulations, and rules. But none of that really matters when disruptive technology suddenly arrives."

What matters he goes on to say, is being able to envisage a parallel universe where today's problems are solved.

Looking through the mirror

Sicilia reckons people who invested early in driverless cars were those who could see the solution to a much bigger problem than just driving distances without touching the wheel.

"The problem is the distance and time. Aircraft require runways and getting to conventional airports still requires hours and hours of driving. The solution is flying cars despite the obvious obstacles."

Years ago, the Hostplus investment chief and his team imagined a carbon-free world with limitless clean energy.

The answer to that is fusion - a clean energy source that could replace fossil fuels.

"Anyone who can envisage a world that requires fusion with a background in mathematics, physics, biology, or pharmacology could join my team."

Hostplus was an early investor in this carbon-free, combustion-free energy source through the US-based, MIT-spinoff Commonwealth Fusion Systems.

Earlier this year, CFS achieved a historic breakthrough putting it well on the path to generating clean energy fusion by successfully testing the world's strongest high-temperature superconducting magnet, which is necessary for confining fusion plasma.

Having a diverse team is one of the key reasons Hostplus is Australia's biggest investor in venture capital with over $2 billion invested in the asset class. That, and the fact that the industry fund has a long investment horizon given its young member base.

Sicilia blames the use of excel spreadsheets for the lack of thought diversity.

In his view, spreadsheets have done humanity a great disservice. On the one hand, he goes on to say, it made financial modelling life easier. But on the other, those models contained only numbers easily manipulated to build an argument at the expense of thinking and intuition. "They fired up excel before they did the thinking rather than thinking first and, if necessary, firing up excel."

Nor is he crazy about economists who are driven by what they think should happen, rather than what will happen. He offers up the prevailing economic view of world debt. "Economists warn of a pending crisis since we have to pay it back. That is what should happen," he argues.

"But it is not what will happen. Now, run by me what happens to any national leader who suggests doubling taxes to pay back debt. They'll get thrown out of government."

"Given the global scale of the debt problem, no one is paying back that debt ever. It can't be repaid. But unfortunately, it's outside the sphere of economic thinking to reach this conclusion."

New lens for a different market

After the merger with South-Australia-based Statewide, Hostplus will be the nation's fourth-biggest super fund worth more than $90 billion.

As he sees it, the investment market will look radically different in the next decade with fewer, larger funds emerging in a rapidly consolidating market.

Sicilia notes that there will be two different types of super funds - those who bring asset management in-house and those who do not.

Over the next decade, those who internalise asset management will be largely subject matter experts consumed by compliance and human resources issues.

"If you're not a fund manager selecting assets then you are a capital allocator," he says.  "That's where it's going to be critically important to have people who are predominately thinkers rather than number crunchers."

The Hostplus investment chief predicts that allocation of capital in a near zero-yield environment over the next decade will see more bespoke deal activity such as public-to-private transactions.

In his view, the investment heads of capital allocators will have different skills They will need to look ahead and operate at the macro level rather than being subject matter experts. Moreover, he says it would be detrimental to returns if they were specialists.

Sicilia forecasts

Aside from his predictions on the importance of thought diversity, Sicilia famously made two other predictions before the pandemic hit and he is sticking to his guns: shares are cheap and bonds provide no returns.

"At today's level, equities are cheap relative to bond markets," he said a year ago. Equities have since risen over 30 percent.

Sicilia says the tailwind behind equities markets is strong. "In the normal course of events, I don't believe there will be a sustained downturn in the equities markets anytime soon."

He worries about war although he concedes that war is bad, it's not necessarily bad for equities.

Sicilia further predicts that Australia won't see evidence that coronavirus existed by the end of this financial year from an economics perspective.

Finally, he also forecasts the death of inflation - mostly because technology is massively deflationary. While there are forces pushing inflation up, it will be short-lived because it's driven by pent-up demand due to lockdowns.

"The central bank will be reluctant to use monetary policy and increase rates based on transient inflation. Unless we see big wage increases, we will not get sustained inflation."