Quarterly conversations

Staying relevant in the changing investment landscape

Head of Investment Product Philip Fontana joined Hassell McClellan, chair of the board of trustees of the John Hancock Group of Funds, to discuss innovations in the investment industry and how John Hancock Investment Management is keeping pace with accelerating change.

Hassell McClellan: Phil, thanks for joining me today to have a conversation about some of the major changes we’re seeing in the investment industry, particularly mutual funds. I think we both agree that the industry is dramatically changing in terms of the range of available investment vehicles. For the average investor in a 401(k), or individuals working with a financial advisor to build a diversified or targeted portfolio, mutual funds and exchange-traded funds (ETFs) aren’t the only ways to access the markets. What’s your sense of where the industry is headed and what are the major issues that the industry is wrestling with?

Philip Fontana: Thanks, Hassell. Good to be here. As I think about how the industry is changing, I look for where the growth is. Over the last few years, we’ve seen mutual fund assets in decline. And much of the market share that’s coming out of mutual funds is going into other vehicles—including lower-cost ETFs—but also retail separately managed accounts (SMAs) and collective investment trusts (CITs). What’s driving this secular change? I believe it’s technology and data improvements that enable these other vehicles to grow, as well as fee reduction advantages that you can find in these other investment types.

A lot of the movement here has happened with equity investments, but we’re beginning to see that more visibly with fixed-income investments as well. And it’s definitely more than just activity in ETFs. Retail SMAs are also winning from a market share perspective, and I believe that will continue. In terms of retirement investment vehicles, CITs are also taking market share away from mutual funds.

All of that said, mutual funds constitute a significant asset base, which means they won’t be going away anytime soon. Industry estimates I’ve seen suggest the total market share of mutual funds will decline incrementally—by a few percentage points—over the next few years. But there will be double-digit growth in other vehicles. That’s a trend we see extending well into the future.

"Transparency is critical in the investment business, and it goes both ways between a board and the asset manager."

Hassell McClellan: From a board’s perspective, your outlook suggests that there are areas that will be responsible for determining an asset manager’s future viability: first, the ability to launch products that investors need and want; second, the ability to deliver strong risk-adjusted performance over time while staying competitive in terms of fees; and third, the ability to invest in technology. If a firm isn’t effective in all of these areas, it risks losing an edge in today’s market. Fee pressures, for example, drive a good deal of consolidation, and so business scale becomes a key issue. As you consider these points, do any of them give you any pause for concern?

Philip Fontana: I worry about the buildout of scale in some areas that are less stringently regulated. Take retail SMAs, for example. This is a product type where virtually everything can be customized. Investors can decide which securities are owned or avoided and can take advantage of certain forms of tax-loss harvesting to potentially reduce their tax burden. These are positive features of the vehicle, but the more you customize—and the more the investor plays a role in that customization—the more risk you can inadvertently take on. Unintentional sector overconcentration is a good example. And so, ultimately, customization without clear guardrails can put investors at risk of not meeting their desired investment objective. 

Hassell McClellan: With the growth of unregulated, or as you say, less stringently regulated investment vehicles, can shareholders take comfort in their asset manager’s ability to follow this trend in the marketplace?

Philip Fontana: I think a lot depends on how an asset manager responds from a product structure perspective. As an example, what we’re emphasizing at John Hancock Investment Management is being product agnostic for all of our clients. As we launch products in these alternative structures, we’ve tended to mirror the strategies that we already had on our mutual fund platform. John Hancock Bond Fund, for example, is also available as an SMA—which we call Core Plus SMA. Aside from key structural differences, the SMA is effectively a clone of the mutual fund and, prior to any customization, would provide an investor with a very similar experience.  

We find it’s very important to set the same risk and performance expectations that investors would have in the mutual fund. This goes for SMAs as well as CITs. For example, about three years ago we launched our target-date CITs, and these have the same glide path that you’d find in our mutual fund versions of the same. Some of the underlying building blocks may vary, but the asset allocation to fixed income and equities is essentially identical.

Hassell McClellan: One of the differentiators of John Hancock Investment Management is its multimanager business model. This describes your approach and that of the John Hancock funds to seeking out the strongest asset managers in any given investment category and then offering that expertise to investors in the form of a mutual fund or any of these other vehicles we’ve been discussing. What makes this business model durable, in your view?

Philip Fontana: Without a doubt, it puts us in a strong competitive position for the future given the expected trend of continuing consolidation among asset managers. Also, there’s a lot of effort that goes into working with financial intermediaries. Some asset managers may invest in building tremendous investment teams, but they don’t have as many resources to put into a distribution team. This is part of what John Hancock offers—a distribution team that can support and educate financial intermediaries and make the products of strong investment teams available where otherwise they’d be inaccessible to the retail investor.

Hassell McClellan: As you think about the changes taking place with investment vehicles, how has your organization adapted?

Philip Fontana: We’ve had to make sure we have the expertise—from a variety of angles—in order to keep pace with these changes. Not just from a product perspective, but also from a distribution, marketing, legal, and compliance perspective. And we need to make sure we have the operational expertise that’s so integral to building the infrastructure of this business. This has led us to expand our resources in these areas—effectively to raise our IQ. We can’t just launch an actively managed ETF. We also have to know how to distribute it to the marketplace. And we need to know how to support an ETF when it rebalances in line with a benchmark, as well as all the technical details of share creation and redemption, and be able to educate others on that.

We’re also getting into even newer areas, such as the semi-liquid private fund business; for example, with private credit, real estate, and infrastructure offerings, and finding ways to bring liquidity to these alternatives. It’s an evolution, but we have a strong foundation that helps us rise to the public/private fund challenge.

Hassell McClellan: As a board, we like to say we trust, but always verify. Putting you on the spot a bit, how would you characterize your, and your team’s, relationship with the board?

Philip Fontana: The reality is that the board of directors of the John Hancock funds is very informed. For that reason, we’ve come to rely on you and the other trustees as a source of information and validation that what we’re doing is in the best interest of shareholders. I think the management team at John Hancock Investment Management takes pride in the transparency that we have with the trustees. Transparency is critical in the investment business, and it goes both ways between a board and the asset manager.

Hassell McClellan: You can rest assured that the board agrees with you wholeheartedly, and this extends to us talking about risks as well as opportunities. From your perspective of being in the trenches of product development and distribution, what are some of the questions that you think boards should be asking—not just the John Hancock funds board but really any board with oversight of an asset manager?

Philip Fontana: Questions about the future of the industry and a company’s place in it are certainly valid. And with that, there’s a lot of innovation—particularly on the financial technology side—that boards will want to stay informed about. Because technology is likely to continue to rework just how the asset management industry and the financial advisory industry operate. I also think this will continue to lend momentum to industry consolidation.

If you have the know-how and the resources to pivot with technology, that enables you to move more swiftly to new products, new mandates, and make the most of connections with subadvisors and others in the marketplace. We’ve seen this recently with the launch of John Hancock Asset-Based Lending Fund. So as a board, I would be asking how is an asset manager unique in this industry, and how is it positioned against the backdrop of continuing consolidation and accelerating technological change? What’s the business case for the long term?

Hassell McClellan: These are very impactful topics and issues that we as a board frequently talk with you about because we want to understand your team and how you’re positioning our fund complex for the future. And I can say it’s very impressive that you’re putting together the kind of team that inspires such confidence, which we believe redounds to shareholders’ benefit. Many thanks for the discussion and your insight today, Phil.

Philip Fontana: Of course, Hassell. It’s always a pleasure.

The commentary is provided for informational purposes only, is subject to change as market and other conditions warrant, and is not an endorsement of any security, mutual fund, sector, or index. Any economic or market performance is historical and is not indicative of future results. Investing involves risks, including the potential loss of principal.

Generative AI and the mutual fund industry

Robi Krempus, head of advanced analytics at Manulife Investment Management, sat down with Hassell McClellan, chair of the board of trustees of the John Hancock Group of Funds, to discuss recent developments in artificial intelligence (AI).

Hassell McClellan: The latest technological breakthrough—generative AI—has been making headlines this year. I’d venture to guess that even to casual market observers, the technology inside generative AI models like ChatGPT seems poised to disrupt virtually every industry. That’s why I’m delighted to have Robi Krempus, head of advanced analytics at Manulife Investment Management, here to talk with me today. In our conversation today, we want to explore why generative AI is an important consideration for the mutual fund industry as well as for investors.

If it sounds like we're assuming AIs importance is a given, that’s because we do. Our assessments suggest that the effects of generative AI may well cascade through the opportunities and challenges confronted by asset managers, and the technology itself may shape the questions that boards of directors need to ask of investment advisors and management.

Let’s start, though, with some definitions. What is generative AI, and how might we begin thinking about its potential risks and opportunities?

Robi Krempus: Thanks, Hassell. Great to be here. To answer the question, I’d begin by talking for a moment about the building blocks of math—data and computation. Neither of these, of course, is new; in fact, the concept of data and practice of computation are both ancient; what's new about generative AI is the math behind the machine. In this case, it’s the complexity of the mathematics involved, the sophistication of its algorithms, and the creation of a remarkable neural network that’s modeled, in its way, on the human brain. And what’s been built by various companies in this space is elegant in the way it ingests enormous amounts of data and instantaneously performs a blizzard of complex computations. But it goes beyond data and computation: It’s designed to mimic certain basic human learning patterns.

How do humans get smarter? We go to school, we learn, we study, and we acquire information. We make decisions—and mistakes, and we learn from them, too. Generative AI is about creating this kind of intelligence. It's a real breakthrough because it goes beyond automation and predictive calculations. It's really nothing less than a new form of intelligence without consciousness—intelligence that can learn on its own and create novel solutions.

So, in my mind, that’s a new principle. I think it has enormous power to affect pretty much any industry we want to talk about.

And if you take the concept of this new intelligence, then we can ask what is it good for, what can it do? And we can relate that to human beings. Take writing as an example. Generative AI is very good at summarizing a text and identifying its sentiment. And if you think about an asset manager’s workforce, there’s enormous potential to use generative AI to support the company’s internal keepers of knowledge.

We need a coherent, integrated strategy around generative AI. That way, a board can have a clear understanding of how an asset manager is integrating it and then where it may affect the board of trustees as a fiduciary.

Hassell McClellan: As a trustee and steward for shareholders, I'm always interested in performance, efficiencies, and lowering costs, and it sounds like generative AI could have the potential to enhance efficiencies across industries, not the least in financial services.

But beyond efficiency, how do you see us potentially using it to make fund governance more effective? Not just in terms of doing things faster—because doing the wrong things faster doesn’t do anyone any favors. We don’t just want faster decision-making, we want better decision-making.

Robi Krempus: I think it’s helpful to think about this in terms of the components of a mutual fund company. There are the parts that manufacture the funds themselves. Then there are the parts that perform fund oversight, as well as parts that distribute and market the funds. And, of course, there are the technology components that underpin everything and can lend efficiency to each as well as the whole.

But let's start with the manufacturing side, which is about the management company’s efforts to create mutual funds that seek to provide attractive risk-adjusted returns to shareholders.

If you consider the work of analysts or portfolio managers—the human intelligence at the core of the actively managed mutual fund, if you like—they're deep in the world of collecting information about individual companies and securities. They read through quarterly earnings calls and third-party research, and they create sophisticated cash flow models to project scenarios for future company results, yields, and security prices. Also, they must connect with the sales side of the management company with whom they manufacture and market the mutual funds. In other words, many different inputs come from various places that analysts and managers have to synthesize according to their investment process and ultimately make an investment decision on behalf of shareholders.

Now when you consider generative AI, we find that it has the ability to analyze and create content that gets to the heart of the complex tasks performed by analysts and portfolio managers. And so it has the potential to provide useful summaries that may even sharpen human understanding of the available information. That means it could enhance decision-making, which could ultimately be to the advantage of the company manufacturing the products as well as to the shareholders who are entrusting their money to their financial representatives and fund managers.

Hassell McClellan: I agree that it may well prove valuable to different facets of the industry, as well as for shareholders. But I imagine, too, that generative AI could affect the industry in ways that we cannot yet see clearly.

It seems there’s a process of learning about how it can be used, as well as a process for learning how best to teach it. And as with any tool, we can hammer out its applications by trying it out on specific issues. The computer itself may be a good example. Not unlike the history of mathematics, as you spoke about earlier, the computer was essentially first used for computational purposes only and was gradually built out to handle more sophisticated accounting and operations. Now it doubles as a powerful communications device, facilitating virtual meetings, as well as broad and targeted communication through email, social media, and complex visual design. So as the utility has evolved, the computer effectively has changed its users by shaping the skills they need to be its operators; ultimately, it has changed the industries—virtually every industry—in which it has been applied. The same could be said for the potential of generative AI, which may have even more profound applications down the road. But these could well be around the corner of our vision.

Let’s come back to the idea of data. When you talk about data inputs for generative AI to analyze and summarize, a key task will be to develop the database itself. In reality, there’s much potentially relevant data that’s not well understood because it isn’t collected systematically or because it’s being resisted or ignored since it’s thought of as being unimportant. In my view, collecting these types of less organized or underappreciated data and making it available for generative AI tools could allow us to do an even better job of assessing relative performance and doing so in imaginative ways that may provide new insight.

Robi Krempus: I think it’s useful to think of it as an assistant—one that can potentially help managers have an edge. But it's also an assistant for governance: It could be trained to learn about stewardship principles, to test its own hypotheses for governance, and to help a trustee and a board to see the fruits of this analysis.

Hassell McClellan: As you talk about the idea of the assistant, I'm thinking about how that might get integrated into existing systems and processes. I know there's a lot of fear that generative AI could lead to job destruction—replacing people’s jobs, whether they’re clerks or accountants, administrators, or analysts. But as you said, it can be approached in the spirit of thinking about it as a powerful tool to assist rather than replace. And then we’d need new roles to think about how generative AI can be adapted, evolved, and applied.

In other words, it seems like we need a coherent, integrated strategy around generative AI. That way, a board can have a clear understanding of how an asset manager is integrating it and then where it may affect the board of trustees as a fiduciary.

It also raises another issue that’s important for us: What's the risk associated with this technology? It may become an active intelligence—without consciousness, as you said—but it’s still based on processing data and information through the medium of computer code. And that implies that it’s all still very much subject to the biases of its creators. So mutual fund trustees, for example, will want to ask how shareholders are protected against biases within generative AI that may have unintended consequences. What’s your perspective on this?

Robi Krempus: A limitation of these models is they’re only as good as the data we give them and how we instruct them to manage it. I agree with your point about bias. The models aren’t automatically immune from that, and their construction may embed certain values. Now we can also begin to manage this by pushing a generative AI model to a certain edge so it becomes clearer how it’s biased already—before you even come to it with new data.

Another important aspect comes back to the mathematical complexity of generative AI models. It exists as such a large and complex network that testing its quality becomes a challenging task. For this reason, I’d say an essential protocol of internal governance needs to be developed if generative AI is operable anywhere in our systems. Also, I believe it would be crucial for us as an organization to ensure that the outputs we produce are fair, unbiased, and ethical—principle driven, in other words.

I think one of the advantages of Manulife/John Hancock is that we’re ready for dealing with data science models. We already have processes in place that follow certain guidelines for review and testing. But I acknowledge that we’re entering a new era by introducing these sorts of intelligent systems, and that may lead to a rethinking of our organizational approach to data science governance.

Hassell McClellan: As a person who's involved in developing these applications, what concerns do you have, and what would you say I should be concerned about as a trustee?

Robi Krempus: Well, the good news is we’ve put our best and brightest people on this so they can understand as much as they can. As the advanced analytics team, we believe that having the practical ability to look closely into data models, including generative AI, is crucial; if we didn’t have that ability, it would worry me. Common sense has to be involved here, and we would never want to be in a situation where we’re blindly following others. We want to get inside any model’s inner workings, literally dismantling, rebuilding, and testing this technology as much as we can before we pilot any projects.

Hassell McClellan: That’s excellent, because while we understand the desire to be at the forefront of an industry, that has to happen without compromising our ability to manage risk.

As you know, the board reviews the management contracts with the subadvisors of the John Hancock funds, and we review advisors not only for their relative performance, but also for the quality of their services and the risk that may be associated with them from a compliance standpoint. In this regard, it’s important for us to grapple with new technologies to understand the possibility for growth in their applications and what this could mean from a regulatory standpoint.

That means we want to feel confident that we know how to ask the right questions of our advisors who, just like Manulife, may be seeking to apply this technology to their business. We know that many firms are investing significantly in the exploration of generative AI applications across their platform for effectiveness and efficiency advantages as well as for strategic and competitive advantages.

What would be your advice around the kind of questions that boards should be asking advisors?

Robi Krempus: I believe it’s important to think about whether generative AI is happening somewhere in a corner of a given company while the rest of the company isn’t aware of its purpose or potential. So the question becomes whether a company is taking a holistic approach to generative AI and then what is the company’s system of governance for its development and application. If it’s being allowed to develop in a virtual corner, then that could be a recipe for negative outcomes. In my view, generative AI requires robust governance—including checks and balances that involve senior leadership, compliance, legal, and distribution—and it will be of utmost importance to know how it’s being regulated.

And to just give you an example, there's such excitement about AI from so many angles within many companies and across different teams, but generative AI models consume a significant amount of energy. How might that affect a company’s plan to be carbon neutral? So the application of these models must be looked at as holistically as possible.

Let me pose a question to you, Hassell: When you consider regulation, do you think there should be a single agency that regulates generative AI?

Hassell McClellan: Robi, I’d say that the SEC has guidelines and rules around a lot of things, including disclosures to ensure that shareholders are adequately informed about financial products. My analysis suggests regulators will have to impose the same on AI technological development within the industry, essentially to ensure investors’ confidence by giving them a transparent view into how their funds continue to operate.

And from my perspective, it's incumbent on fund trustees not to equate regulation with an undue burden; guidelines and rules can be justly imposed and may prove quite helpful in terms of making sure everyone is playing according to the same basic rules. That may be something that won’t satisfy everyone, but I believe regulation here could in fact help make our industry stronger and sustain the confidence that shareholders place in mutual funds—and in asset managers such as Manulife Investment Management.

The commentary is provided for informational purposes only, is subject to change as market and other conditions warrant, and is not an endorsement of any security, mutual fund, sector, or index. Any economic or market performance is historical and is not indicative of future results. Investing involves risks, including the potential loss of principal.

Multiperspectival governance

Hassell McClellan, chair of the board of trustees of the John Hancock Group of Funds, discusses the economy, cycles of legislative and regulatory change, and how sustainable investing may help improve the functioning of capital markets. 

Q: One of the biggest worries on investors’ minds right now is the economy and the possibility of a recession. Does the board have an outlook for the economy? If so, how do you develop it?

Hassell McClellan: As a board, we don’t try to come to one conclusion regarding an outlook but rather a general consensus about factors that have important implications for the direction of the economy and investment environment. The perspectives we develop, collectively and individually, reflect access to considerable data and information; for example, every quarter we bring in an outside economist to share that economist's views. This could be an economist from Manulife Investment Management or from a nonaffiliated asset manager with whom we have a relationship, such as Wellington Management, State Street Global Advisors, or Bain Capital. We solicit the economist's opinions and analysis, but we challenge them, too, and test those ideas through the lens of other perspectives.

Given the dynamic nature of the economy, making economic predictions is a bit like playing a game of three-dimensional chess, no matter how good the data you may have. But the challenge in developing a sound view of the economy is that it’s not something you can do with just more data. It takes perspective, multiple perspectives, to develop an insightful interpretation of the data that signals a changing economy. And I say insightful because interpretation has to take into account not only the math of economic probabilities but also the psychology of consumers’, investors’, and corporate decision-makers’ behaviors in the face of economic uncertainty. That’s something we’re always trying to stay informed about because they can affect everything from product development plans to oversight of fund manager operations and performance.

Q: What is your general consensus on the economy in 2023?

Hassell McClellan: At the moment, there’s reason for cautious optimism. It’s well recognized that we’ve entered a new regime of higher interest rates and historically elevated inflation, and we see no easy path to return, for example, to the era of easy money—when companies and governments could get low-interest-rate loans for everything from business expansion to public infrastructure projects. That said, there are signs of consumer and corporate resilience in the face of otherwise challenging conditions. There will be volatility in the markets but also good reasons to expect significant opportunities for investors.

The challenge in developing a sound view of the economy is that it’s not something you can do with just more data. It takes perspective, multiple perspectives, to develop an insightful interpretation of the data.

Q: It’s a postelection year, and there’s a new set of developing legislative priorities in Washington. These may herald uncertainty in regulations affecting the investment industry. What’s your perspective here?

Hassell McClellan: Our perspective on these issues comes together in a way that’s not unlike how we develop our macroeconomic perspective. Every two years, regulatory and legislative priorities face inflection points as a result of national elections. To try to understand what these mean for our industry, we hold biannual meetings with senior regulators, legislators, and legal experts who we ask to share their insight on the prospects for material changes in the regulatory and legislative environment. We supplement these views with the legal expertise offered by the chief legal counsel for John Hancock Investment Management, fund counsel, and independent trustees’ outside counsel; the latter’s job is to advise the board on all matters related to our practice of fund governance. This constant triangulation of views is a critical part of the board’s decision-making.

Q: Who are some of the guests you’ve asked to present to the board on regulatory and legislative matters?

Hassell McClellan: It’s a varied list. Invited participants have included the outgoing head of the investment management division of the SEC, senior law enforcement officials and congresspersons, and/or senior staff who were able to comment on congressional priorities affecting the mutual fund industry. The list also includes the head of the Investment Company Institute, editors from Board IQ, and a representative from the Information Technology Industry Council.

In our view, there’s no substitute for speaking directly with individuals who help direct, seek to influence, or otherwise have intimate knowledge of the inner workings of the legislative and regulatory process. Our perspective on regulatory matters and their potential impact on shareholders is enriched by these conversations.

Q: Laws and regulations don’t always progress in a linear fashion. What are your thoughts on recent disclosure proposals and political responses to environmental, social, and governance (ESG) investing?

Hassell McClellan: ESG investing is a good example where the wide array of choices, lack of uniform definitions, the improving but still largely absent consistency of disclosures by companies and asset managers, and conflicting views on potential trade-offs and/or benefits present particular challenges. The debate regarding taking ESG factors into consideration in investment decisions versus pursuing purely financial objectives has attracted divergent views, including from regulators and lawmakers. On one hand, the SEC has proposed harmonizing how companies disclose their greenhouse gas emissions and how asset managers disclose their approach to identifying and managing ESG risks. On the other hand, some have taken a more aggressive stance against anything that could appear to be ESG related. So in this sense, deserved or not, ESG investing is experiencing headwinds as well as tailwinds both in the United States and globally.

These reactions expose the divergent ways in which corporate and political interests respond to changes in capital markets. ESG investing, it’s worth recalling, grew out of what was known as the corporate social responsibility movement, which opened important but difficult legal questions around accountability beyond corporate responsibility to shareholders. The movement evolved to include impact investing and efforts to divest from certain industries, notably things like tobacco, alcohol, and firearms. These historical underpinnings continue to precipitate emotional reactions, and sometimes these are amplified and distorted by powerful entities with vested interests. This dynamic isn’t new, but it can create oversight challenges for mutual fund boards.

I don’t see questions around ESG investing going away anytime soon, but I do think demand for sustainability-focused products is likely to continue to grow. The G in ESG is essential, as investors increasingly are aware that governance matters for long-term company strength and resilience. This broadening of investors’ perspective is a good thing, especially as companies focus on managing systemic risks related to the environment, corporate integrity, investor confidence, and societal impact. These are pressing issues that affect global economic health and security. Overall, sustainable investing has the potential to contribute to the healthy functioning of capital markets, and that’s worth the debate and divergent views. Given our fiduciary responsibility, it’s imperative that our board continues to develop perspectives on ESG and other issues that are important to investors.

The commentary is provided for informational purposes only, is subject to change as market and other conditions warrant, and is not an endorsement of any security, mutual fund, sector, or index. Any economic or market performance is historical and is not indicative of future results. Investing involves risks, including the potential loss of principal.

Strategic board composition

Hassell McClellan, chair of the board of trustess of the John Hancock Group of Funds, discusses board composition, why it’s important, and how the board takes a strategic approach.

Q: Board composition is a much-discussed topic in fund and corporate governance. Why does board composition matter?

Hassell McClellan: From the perspective of fund oversight, everything we do as a board is a function of the people and the team that make up the board. Whether we’re talking about monitoring fund performance, evaluating new prospective subadvisors, or meeting or exceeding industry standards for fund governance, our success or failure at these things comes down to how well we work together. In this way, board composition—or, as we might say, strategic board composition—is critical for fund oversight and our efforts to act in the best interests of fund shareholders.

Q: How does diversity figure into the idea of strategic board composition?

Hassell McClellan: When we talk about diversity at the board level, we primarily mean diversity of perspectives rather than diversity of race or gender, which are commonly intended by the term diversity. That’s not to say that racial, ethnic, and gender diversity—or, by the same token, geographical, cultural, or linguistic diversity—aren’t important. But we see these forms of diversity as a natural fallout of our practice of strategic board composition rather than the other way around.

What do I mean by this? The strategic aspect of board composition is about ensuring that the board represents both the diversity of skills and the complementarity of roles required for the board to optimally fulfill its fiduciary responsibilities—that’s our goal. To accomplish this, we cast a wide net for candidates that includes women and people of color. So while gender and racial diversity isn’t our goal in strategic board composition, it is a by-product of our approach.

"The strategic aspect of board composition is about ensuring that the board represents both the diversity of skills and the complementarity of roles required for the board to optimally fulfill its fiduciary responsibilities."

Q: How do you go about seeking a complementarity of roles when you’re interviewing board member candidates?

Hassell McClellan: One of the outside firms we’ve worked with is a talent optimization company called The Predictive Index. This firm provides a platform for systematically getting beyond the resumé, so to speak, to help us understand the types of roles individual candidates might play on our board.

This has been most helpful for our recruitment efforts during the pandemic that resulted in the recent appointment of four new trustees. There are intangible things about a person that are hard to perceive when you don’t have the luxury of scheduling multiple in-person visits. How do they interact with you in real-time conversation? What does their body language say about their curiosity or how well they listen? How well might they fit with the personalities and communication styles of an existing team?

In a standard prepandemic context, this sense of how people think and how they work with others is a function of the individual perceptions of perhaps 10 different people who participate in in-person interviews with each of the top candidates. But in the absence of this during the pandemic, The Predictive Index gave us a way to standardize certain aspects of our evaluation of these intangibles. The questionnaire-based framework offered by The Predictive Index provides insight into individual psychological profiles, offering ways of mapping individuals’ tendencies for how they lead, how they collaborate, and how well they move between different types of strategic, creative, and tactical roles. Interestingly, the framework gave us insight into the tendencies of the existing board members as well and what we might stand to lose when any one individual retires.

Q: So strategic board composition is part of the board’s succession planning process?

Hassell McClellan: Absolutely, yes. A key aspect of our responsibility is to help ensure that the board remains a strategic asset for the funds and for shareholders in perpetuity. We believe the current state of the board is strong, that it represents that diversity of perspectives that we discussed, and that it represents a robust and interactive team that contains the right balance of skills and roles. This is important—now more than ever—because we believe changes in the investment industry require us to be even more intentional than we’ve been in the past with our board structure. That’s why we strive to ensure that we’re strategically composed with a complementary and comprehensive set of skills to assist investors today and into the future.

The commentary is provided for informational purposes only, is subject to change as market and other conditions warrant, and is not an endorsement of any security, mutual fund, sector, or index. Any economic or market performance is historical and is not indicative of future results. Investing involves risks, including the potential loss of principal.