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Interview with Mallika Paulraj, author of “How the best invest”

March 31, 2021

Gabriela Herculano

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Mallika mentors investors on how to make better investment decisions. She was educated at Stanford University and at the London School of Economics, and has worked in Silicon Valley, Wall Street and the Citi in London. She has a solid expertise in ESG investments and index creation as she worked for several years at MSCI, at Carbon Capital Markets and at Trucost. She lives in London and I’ve had the pleasure of meeting with her in several occasions to talk about investment strategies and ask for her views and guidance.

Gabriela: You have a deeply quantitative background and you started your career as a computer programmer for companies in Silicon Valley. You had what you referred to as a Damascus moment when a former professor of yours recommended that you did research in the area of value investing. In your book you talk about investors having to make the decision of DIY or outsourcing investing. Is the success of Robin Hood in the US and Freetrade in the UK an indication that Millennials are interested in doing it themselves? You also advocate the use of technology in the investment process. Younger generations are also keen to use Apps and technology much more. Will that make a difference?

Mallika: My meditation teacher explains that when you are young, happiness is defined as excitement and when you are older happiness is defined as peace. I think millennials are, in general, looking for excitement which Robin Hood and Freetrade provide. You can DIY and people have been trying to DIY investments for an exceptionally long time. It is now easier and easier now with these apps, but the problem is as it gets easier there is also a lot more choices. There are thousands of funds to choose from: There are 6,980 ETFs, there are 10,000 hedge funds, there are 60,000 equities around the world, so I think the decision-making is going to get harder as well and people will get overwhelmed. I think that is where the trouble will come and I don’t see traditional asset management making the analysis of the multitude of options any easier.

Gabriela: You consider yourself to be a conscientious capitalist. Investors, at whatever age bracket, that are now very keen to invest into truly climate change solutions are inundated with at times, misleading information, what is now referred to as “greenwashing”. Retail investment products use “ESG investing”, “SDG aligned investments”, “green”, “impactful”, interchangeably. Could you tell us more about your analogy to the use of magnifying glass, telescope and binoculars as a possible solution to help investors not to fall for the misrepresentations in financial products?

Mallika: I have this looking at the horizon as a viewpoint and analogy. What is the best tool for looking at the horizon if you are going down Highway 1 in California? It is a very winding road, so if you look with a telescope stuck to your eye, you are looking at it too far in the distance and you can’t really see the curves because you’re looking out far in the horizon, and you might crash and burn. If you use a microscope stuck to your eye as you drive along, you are looking at every single bump in the road and that too wouldn’t be very helpful, you would just get frustrated and lost. I argue that binoculars, which you can take up and down, and give you a midterm view of the road is what you should use to drive home. So obviously the microscope is an analogy for day trading, looking at only the daily movements, and the telescope is analogy for us getting lost in big macroeconomic questions, like will inflation happen? Will China grow? I think people should have a three to five-year horizon.

There are a lot of misconceptions around ESG investing, and the so called “greenwashing” is a growing problem. So I think what individual investors should do is to just keep to your own investment methodology and investment ideas.

Gabriela: ETF or not ETF – that is the question. Joke aside, you say investors need to try to make sense of overwhelming options. Do you see ETFs as an answer to this need? By the end of 2019, the ETF industry surpassed $6 trillion in assets under management. ETFs continue to grow in popularity. Whey do you recommend the use of ETFs?

Mallika: I think the biggest misconception around ETFs is that it is an asset class. People keep talking about ETFs as if they were like equities or bonds. ETFs are just the newest wrapper we have to deliver investments. ETFs can be for equities or bonds or mixed. They are a much easier way to slice and dice all these investments and now we have the thematic ETFs based on thematic benchmarks, which Clima is doing so well. I think that, basically, one must think of ETFs as a lower cost way to access different asset classes and not as an asset class in itself.

Gabriela: Further on that, I wanted to talk to you on your views on ETFs as potentially very solid instruments for investors that are looking for solid thematic strategies. We are of course biased, as we have launched an equity benchmark index on the companies we think can decarbonise the planet. He have been doing research on this for over a year, we have developed a methodology to calculate CO2 avoidance, we are a team of finance and sustainability professionals. We expect many individuals to have a great interest for our approach, but it is not something one could easily replicate alone (the DIY).

Mallika: There are a lot of ESG ETFs out there. I think Clima’s is unique and credible because it is highly curated. For example, the MSCI Clima Index has 2,529 companies in it. The MSCI ESG Leaders index has 1,237 companies in it and that is based on scores yes but it is also just from that universe of companies. I think you have taken a very good approach of just minimizing, having 160 companies in your universe. That is a much more focused approach.

Gabriela: If we keep the focus on the energy transition solutions, to bring the world to carbon neutrality by 2050, we are talking about long term investing. In your book you tell readers to ask themselves the question: are you an invertor or a trader? Even though green solutions and the energy transition will take time, we are already seeing phenomenal share performances of companies that are keen to this transition, like Tesla. Do you think there is room to be both a trader and an investor in this space?

Mallika: I used to work for Carbon Capital Markets, which was one of the big traders of carbon credits, back in 2006 to 2008. So obviously there is massive scope to be a trader in the space, to make money and to do good. So I think if you stuck with such green products, that would be a very good way of making money in this space.

Gabriela: Warren Buffett once said, “price is what you pay; value is what you get”. We greatly value the opportunity to get your thoughts on investing and better understand your recommendations. Thank you!

If you would like to purchase Mallika’s book, you can find it here.  We believe you will enjoy getting “Your best investor score”. You can get your scorecard at her website www.mallika-invests.com/