Should you invest with The Avengers? Or with Thanos?

The Avengers look chaotic, while Thanos’ investment process looks good on ‘E’ for Environmental (but should we mark it down on the ‘S’ for Social)?

This is an entry in my occasional, silly-season series examining how selected movie heroes and villains might fare as fund managers. I originally penned this one — which compares comic-book super-hero team The Avengers with their evil nemesis Thanos - at Christmas 2019, but it got snagged in corporate committee-based production hell. So this its first sight of daylight. Enjoy!

Environmental, Social and Governance (‘ESG’) investing is on the rise. This is a good thing, but it has made the task of picking good fund managers more complicated. And unfortunately, the more complicated something becomes, the more we humans are drawn to solutions that are neat, plausible and wrong.

This dynamic matters to the ongoing debate about whether to invest with The Avengers or with Thanos (their super-villain nemesis).

Let me be clear: the popularity of Thanos’s offering concerns me. He is winning plaudits for the clarity and simplicity of his sustainability policy. A policy which, environmentally speaking, looks like it would be effective. In the messy, fast-developing world of ESG investing, these are seductive qualities.

However, in the real world, messy problems are rarely solved with a click of your fingers; that’s why they’re messy. Consider investing in timber companies: Are you helping to cut back on plastics? Or chopping down healthy trees? The answer is both. So is that a yes? Or a flat no? Or do you go with the company you trust to operate in the most efficient and sustainable way (and to continue to do so too)? The latter makes more sense to us, but such decisions can’t be reduced to a rule of thumb.

Every ESG decision contains similar conundrums. So we should be sceptical of ‘silver bullet’ solutions. Yes, Thanos’s policy looks like it may reduce our carbon footprint, and would therefore score well on the ‘E’ of ESG. But you’d have to concede that, from the ‘S’ perspective of a well-balanced ESG policy, that his carbon-reduction plan involves killing half of Earth’s population is sub-optimal at best.

The environmental and social risks we face are too important to waste time fiddling with ineffective approaches. In this respect I’d put Thanos’s overly simplistic offering in the same bucket as the recent attempts to produce cheap, automated, ‘tick-box’ ESG investment products. They are rife with unintended consequences; most obviously being easily gamed by the kind of unscrupulous corporate managements a good ESG process should kick out.

Computers can’t solve these ethical dilemmas, only humans can. But humans aren’t cheap. So we must decide: Do we want the cheapest approach that won’t work? Or to pay for one that will? Choose carefully — there’s a lot at stake.

What are The Avengers’ ESG credentials then? Are they superior to Thanos’s? We’re yet to do the in-depth work on this. But in terms of environmental considerations, the early signs are encouraging, particularly their recent hiring of a tree.

When it comes to ESG investing, of course, the ‘ESG’ part is only half the story. The other is ‘investing’. Which is to say that, while the ideal ESG fund should have a positive impact on the wider world, it should make good returns too. And here I also have concerns about Thanos.

On paper, he and his team look powerful. However, I suspect he selected his colleagues for their willingness to obey, not their independence of thought. I, for one, don’t think he’s entirely joking when he refers to them as ‘The Children of Thanos’. It hints at a deeper truth: Their primary function is to agree with the boss.

So this isn’t five independent brains working together; it’s four brains echoing and amplifying the thoughts of the other one. This is group think, and that’s dangerous: one manager operating alone might not invest when they have reasonable doubt. But when that manager is told by four sycophants that even their weakest ideas are brilliant, they are more likely to invest in them, and at size too. This can lead to excessive exposure to bad investments and, ultimately, potentially catastrophic losses.

Fund pickers must avoid such hero-worshipped managers, regardless of previous success: It won’t end well.

I prefer the flatter decision-making hierarchy of The Avengers. Some interpret their mad bantz (as my kids are horrified to hear me call them) as chaotic, unproductive dissent. This is wrong: they are symptomatic of a healthy culture of robust challenge. In Avenger team meetings, no idea goes unexamined. So the weakest are less likely to make it into the portfolio, while the fewer baddies that do are less likely to be terminal. The Avengers’ record of success backs this view.

The world is an increasingly complex place. This is driving many into the arms of simple solutions offered by strongman leaders. But believing that one all-powerful individual has every answer to all of life’s questions is — and always has been — a mistake.

To invest well, which necessarily includes the consideration of environmental and social factors, it’s sensible to build a team that is not just talented and experienced, but talented and experienced in uniquely different ways. A multi-specialist approach, if you will.

Earth’s mightiest managers assembled in one portfolio? Now there’s an idea…