Listen: Masters of Risk | Episode 9: Katrina Dudley

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Yashi Yadav

Welcome to Masters of Risk. The podcast where we uncover what is top of mind for business leaders today. I'm Yashi Yadav and I will be your host every month. Let's get started. Hello, everyone. I'm so excited to be kicking off our first episode of 2024 with none other than Katrina Dudley from Franklin Templeton Investments. Katrina, it is fabulous to have you here today. How are you?

Katrina Dudley

I'm great and welcome to 2024 as well to everyone.

Yashi Yadav

Great. All right, Katrina. Let's just dive right into it. Why don't we kick this off and you share with us a little bit about your background, the industry that you're in, the years that you've been in the industry and how you've gotten to the point that you're at today?

Katrina Dudley

Great. Well, thank you for having me. I've told you, I've been excited to be doing this, and I'm so glad to be the first speaker for 2024. So my career started in Australia, I have a background in both law and commerce, and I decided to follow my heart into business. I actually started my career in valuation and so I would value assets. I then went to school, I went, did my MBA part time here while I was in the United States.

And I kind of took the -- at the end of that process, took an assessment of what I like in my old position, which was interacting with management teams. You're finding out the strategies for their business. In that cab capacity, I was valuing things in hindsight, and I wanted the opportunity to have those interactions and to value things on a forward-looking basis. And that's how I ended up in investment management with that idea that I wanted to move into understanding what is the essential value of a stock or an asset, mainly stocks and equity investment.

So I came to investment management with that intellectual curiosity and that willingness and wanting to understand the business and act like a business owner, and I ended up at Mutual series, which is one of the Franklin Templeton investment managers. And I continue to do that and so I have been with Franklin Templeton most of my career as an investor. I progressed up through the ranks. I started as an analyst, worked to be an assistant PM and I currently manage some of our larger Mutual series products.

Yashi Yadav

That's quite a career that you've built Katrina, and it's just great to hear all around. I think given your experience and expertise in the industry, I'd love to hear your thoughts around what are some of the broader challenges being faced in the investment management industry today? And maybe even how they differ from, let's say, 10 years ago?

Katrina Dudley

I think the easy one, which we've all been talking about for so many years is the rise of passive investments. I think that the original forms of passive were fairly rudimentary and they've got more and more sophisticated in what they can address.

And I think that, that's been something we've talked about. But one of the things about active management, if I look at when I started my career and I started as a portfolio manager and as I manage the portfolio and the tools I have available today, I think that we have got so much more available to us to help us understand the risks in the portfolio and to get better information about that portfolio.

I always tell the story of one of my first projects when I started as an equity analyst, and I was working with a global portfolio team was to go through company 10-K filings and annual reports to work out their exposure to Brazil. And I went through every single company, and I use the search function and we did that. And we got an approximation, and it took a lot of time.

Now I think about what -- if I wanted to, as a portfolio manager, understand my exposure to China or my exposure to Brazil at any one of my companies, not just using listing, but say as a percentage of revenue, I could work with my risk team and they've got so many tools and so much better technology that they can have that answer very quickly.

So I think that as the access to information and the access to tools to help us to have jobs better and give us more time to focus on what we do best. So that project that took many, many hours for me to do now takes many, many minutes for me to do. And I've got those hours that I can put into speaking with company CEOs or understanding trends in the industry?

Yashi Yadav

Right. I think on that note, it's interesting because in a lot of the industry outlooks and sector outlooks that I've read, a common theme that I've been seeing is that there's almost 2 sides to this technology component.

There's the efficiency aspect of it, but then also with technologies like AI, there's sort of a lot of discrepancy and controversy around that in terms of the risks that it can pose, especially when it comes to things like cybersecurity and other factors. So how have you thought about that? Or how has the firm thought about that? Is it something that is top of mind for you right now? I'm just a little curious about this.

Katrina Dudley

I think AI will have an impact on investing. And I think that you've identified there are good and bad parts to any type of new technology. Exactly. So I mean, look, I think about some of the things that we do that can be done with AI. And I think that's the opportunity where we can have them write baseline commentary and then we review it. But even with some of these technologies, you're right, we have to ensure that they're going out to verifiable sources.

So we can't have an AI engine going out and pulling content that we can't verify or numbers that we can't verify. So I think that there still needs to be that human import. And there's also the sanity check on everything. I remember there was a professor that I interviewed and we were talking about an exam that she had given to her students.

And one student had answered the question that the answer was so nonsensical that she actually deducted marks for the fact that he didn't identify that it could never happen, and it was like just philosophically and fundamentally wrong. And I think it was from a common sense perspective. And I think that's the same thing we need to be treating AI with is that, yes, it can be helpful, but we often just need to have that common sense lens that will say, is this output reasonable?

Is this output adding to our investment process? We've talked a lot about data as well because if AI is obviously a lot of things. In investment management, if everyone is mining and using the exact data using the exact same algorithms, there's no longer an advantage to having those.

And so we really need to understand what is the competitive advantage or what are we trying to get out of the data. And then finally, everyone has a different investment lens. They have a different investment philosophy and different time frame. So we need to make sure some of these tools are aligned with those underlying values and philosophies.

Yashi Yadav

Okay. And in addition to how you're thinking about that, you mentioned a couple of different ways in how these risks center around data and technology. So what are some of the other risks that you've seen on the rise, whether that's geopolitical or macroeconomic. I don't want to put words in your mouth, but I was just kind of thinking of some things along those lines. So what are those areas or maybe some other areas that you've identified or are focusing on?

Katrina Dudley

I think you actually mentioned one of the areas we are very focused on, which is cybersecurity risk in terms of making sure that our companies have robust processes and Franklin Templeton has the same robust processes as well because data security in financial services and trust is such a big part of what we stand for as a company and how we operate. So I do think that cybersecurity is the front of mind.

It's been there for a long period of time, though. It's not some new risk that companies and everyone are paying attention to. On the geopolitical front, this is something in 2024 is very unique. Over 41% of the world's populations are going to head to the polls this year. And that's a lot of potential for change. And it is not just isolated change. So you think about it, you get a new president in a country, particularly a big country or an economically significant country of new Prime Minister, for example, they implement a policy not doesn't just affect the country.

It often can have ramifications outside of your own borders, and it should result in new policies. And I always give the example when Joe Biden announced the change in the United States to really invest in green and green infrastructure, how there was a response from Europe.

And so with these changes in government, I think typically, we've looked at whether or not there are going to be, for example, in the Euro region, a rise of anti-Euro sentiment, but also there is new policies where we just need to be aware of what's happening. And I think that this year is going to be very, very interesting, not just within the United States with our election but across the world because there's so much going on.

Yashi Yadav

No, I definitely agree there. I think that there will be almost an aggregation of these different risk factors that you have to consider when making those investment decisions. One of them, I mean, just looking at the example that you provided around the U.S. becoming more green, how does your firm factor in this concept and idea sustainability? Is it a part of the decision-making process for you guys?

Katrina Dudley

I don't think you can make an investment today without actually having considerations of the broader environment and what's happening. In Europe, you've got a significant rise, very much popular driven from the populous driven in terms of being environmentally conscious and being environmentally aware and being socially conscious. I think from an investment perspective, if you think of E S and G, we've always -- I mean, Mutual series grew up very focused on the G and governance and holding Boards accountable for good governance. But now, we've really migrated.

We continue to have that pillar, but we also now have a focus on social, what is the diversity of the Board? What's the diversity of the management team, what type of pay equity do they have and we consider that. And then on the environmental, I'd say a lot of that is what's their revenue platform, how do their products interact with society? Are they a polluter?

Do they clean the air? Because that actually informs us as to what the revenue and cash flow outlook for these companies are because we're looking at where the market is going, it's going to become more environmentally conscious. And so you need to have a company that's kind of going to where the pack is versus someone who's looking in that rear view mirror.

Yashi Yadav

Yes. And I think that those are all really great points there. I think it's a positive way to view investment and just in general, when you're thinking about how to stay on top of what matters, not just for yourselves, but your investors and individuals alike. So let's flip the conversation a little bit from risk and talk about your thoughts on growth or innovation.

Katrina Dudley

I think that growth is a stylistic term. Even as a value investor, we look at growth, we just look at growth in cash flows. And we're looking at companies which have the ability to grow their cash flow stream. So we are not typically the growth investors who are looking for TAM growth or looking for revenue growth, even though we're happy to take that.

We're looking at companies maybe they've had significant outflows from an investment program, a litigation program or restructuring and those are flipping or maybe they've got margin enhancement opportunities that will drive higher cash flows going forward. So even within a value investment mandate, you have growth characteristics.

Similarly, within a growth mandate, you have valuation considerations. People are not new value agnostic. As I look at the market where we're one of the areas where we're talking with our Institute, we have the FT Institute. And one of the areas they think is going to be the kind of surprise factor for 2024 is space. And I think that...

Yashi Yadav

Fascinating.

Katrina Dudley

Yes. If I look at last year, ChatGPT drove all of our conversations and then somewhat of an anemic finale. But I think the space has been overlooked. I think that we focused on space as a travel kind of derivative, if you think of the ability to be inside the rocket ship and to travel up and have that experience. The space actually offers some really unique opportunities for experimentation in a zero gravity environment. And we think that, that is actually going to be one of the innovation drivers of 2024, and we think it's one of the surprises if the market is not really factoring in.

Yashi Yadav

That's really interesting. I hadn't heard about that before. I mean I had heard about space as a concept around travel, but I hadn't thought of anything beyond that or heard of anything beyond that. I guess what I'm curious about is the kind of value that can be derived from there and will definitely be something interesting to look out for. And to follow up on the innovation question, for you personally, what are some of your key pillars?

Katrina Dudley

I think one of the areas where innovation we want to see is innovation driving productivity. And that is one of the problems that we've had with innovation over the last decade. In particular, is innovation has made our lives easier as consumers, for example, but it hasn't been the kind of productivity driven innovation that we've been looking for. You think of electricity is one of like the very early-stage productivity-driven innovations.

And I'm hoping something like AI, particularly as AI makes it its way into the manufacturing processes as we think of things like the Internet of Things, I think that, that's what -- where I think that we can see growth and innovation in terms of making our base economy better. In terms of other growth areas, I always love the fact that the United States is just a growth hub. And I think that comes down to the fact of our culture. And the culture of America is it's okay to fail.

And it is okay. I -- some people call it a badge of honor, I don't think that. But I think this idea, if you fall down to learn how to pick yourself up and that's really what drives our culture. And so if I think about it, I look at the U.S., and I think that a lot of innovation is going to continue to come from here because we continue. Despite everything else that's happening around us, we continue to have that culture that supports the idea that it's okay to fail. And with that culture, I think we're going to continue to innovate here.

Yashi Yadav

Okay. That makes sense. And I think this is a good place for us to talk a little bit about how it is okay to fail. I know one area where you actually have had quite a bit of success in is the book that you've written and published called Undiversified. I'd love for us to switch gears and chat about that for a little bit. So do you mind maybe sharing a little bit of background on the story and the motivation behind publishing Undiversified?

Katrina Dudley

Thank you, and thank you for speaking with me about it. So I have been a portfolio manager for 20-plus years and then over that time in this industry. And when I started, I was kind of the only woman often in the room. And I thought in 20 years, that will change. I won't be the only, but we haven't changed our statistics as an industry over that period of time. We're kind of flat and that really frustrated me. So when I'm frustrated, I try and do something about it.

It's one of my things I can't sit still. And in this case, I had a chance meeting in Central Park with an old friend of mine. Her name is Ellen Carr, she's my co-author and she had just come from a faculty meeting and it sat next to the editor-in-chief at Columbia Publishing. And he had kind of talked about the fact that they were looking for the adjunct faculty to publish.

We were talking about it. She talked about how she looked at diversity. I talked about the work that I've done initially. And I put my hand up and I said, "If you need a co-author for a book, I'm in." And that was the basis on what we did it. So it's that mutual frustration. From my perspective, Ellen's also a portfolio manager in high yield.

She is also a professor at Columbia and teaches a value investing class. And in that value investing class, she also saw very few females in the class. So the pipeline wasn't changing. So that's the other aspect of this is that we were concerned about the fact that the pipeline hasn't impacted. So we set out to understand why.

Yashi Yadav

And not wanting to give too much away from the book itself. But maybe what factors do you find in terms of driving the lack of increase in women in places like investment management or investing just broadly speaking?

Katrina Dudley

It's a really easy thing. We're stuck on a flywheel. We interviewed people, women and men across 10 different college campuses in the United States, both through survey and interviews. We partnered with Ruckus to do that. And what we found is that women were twice as likely to apply for a job in finance if they had exposure to a senior woman in finance. And that could be that person coming and speaking to their class. And I think that is very much linked to this idea that you can't be what you can't see.

So if you can see it, I can be it. And the idea is that if we are not getting women to apply for jobs in finance, we're not able to recruit them. If we can't recruit them, then we can't retain them. And if we can't retain women, we can't promote them so we don't have female leaders at the top. And so this was the flywheel that we're stuck on. So we talk throughout the book about strategies that deal with all the different parts of the supply chain.

So we talk about early intake and early interviewing. We encourage senior finance professionals to go and talk to students so that they can see successful women in successful roles, and we encourage firms to acknowledge that type of workers compensatable work because it is good for the firm, and we want to make sure the women aren't disadvantaged by the fact that they're bearing more of this burden. In terms of hiring processes, we talk about the need -- this is a job, and I always say this. This is a job that you need to do the job before you get the job.

And if I was giving -- if I was a doctor and I had to give an appendectomy before I got my residency, you wouldn't want that. But here, we make you do a stock pitch before you become a stock analyst. And I think we need to unbundle that because I don't think it really interviews for the right things. We need to take away some of the interviewing questions that we use.

And then as we talk about something called the 3Ps within the promotion cycle, which is equalizing pay, equalizing promotion opportunities and the time to promote and equalizing performance evaluation. That third one is that men and women performing at the same level on an objective basis, the women get lower ratings. And so we need to do something to address that. So we talk about the use of data a lot and the fact that the firms need to start using the data internally to identify where they have these gas.

Yashi Yadav

I actually hadn't heard of that last component in terms of the 3Ps where you talk about equalizing performance evaluation. At first glance, it seems intuitive, but I do find that incredibly interesting. The other piece that I kind of wanted to pick your brain on is, you spoke about taking into account or you're comparing, let's say, a medical career.

So what I found is that some people potentially find their calling later in life, maybe they go to medical school in their 30s or early 40s, and you'll hear residents that are at a much later stage when they actually go forward to become a doctor. When thinking about the investing industry, do you feel that there is a more specific timeline that needs to be followed or do you think that there's opportunities kind of at different points in your life when you can enter the industry and really develop some expertise or build your passion from that point forward?

Katrina Dudley

Look, I think this is -- that generally speaking, most people are recruited into this industry straight out of the MBAs. There's not -- it's not a huge industry, and so -- and it's not a well-known industry. And so that tends to be the process. Unfortunately, and we speak a lot about this in the book, but that whole hiring process within the MBAs, and we studied Columbia's hiring process. It is somewhat not geared towards people who haven't done the job already.

And that comes down to this stock pitch idea. So I think that, that MBA pipeline. I kind of got into it at that point. I finished my MBA and that's why I made the shift into investment management. There are some examples of people who are former doctors and then they shift into an analyst role where they're analyzing your companies where having that degree gives them a competitive advantage. I hear a lot about that on the health care side, you're with companies running biotech funds where you've got to understand a lot more of the science.

But as it relates to analyzing a GE or a Honeywell or you can see back here at Caterpillar or John Deere, being an engineer really doesn't make you a better investor. Understanding the markets, understanding macro, what's going to drive the construction cycle is much more important. And so I don't think you have -- I really just think it's set to a specific as to whether or not people are able to do that transition. So it's a little more rare in our industry.

Yashi Yadav

Okay. And given the fact that you and your co-author has seen if there hasn't really been, I guess, a material shift in the number of women that you're seeing as investment managers, what sort of risks do you think that poses to a firm in terms of them not having more diversity in the workspace or more diversity in areas like leadership if there are really any risks there that you see?

Katrina Dudley

So why do we want diversity is the real question that you're asking is what are the benefits of it? So let me first start with -- we had a surprise finding when we did the research for the book. And it's when you initially add diversity to an undiversed team, the performance of the team declines. And that was a surprise because we all thought diverse -- you're adding diversity, it's a positive return.

And the reason is, is that there are costs to communication. If you've got 5 people who all went to Princeton and they kind of know the lingo and then you introduce someone who went to NYU like myself and whose female, I don't kind of know the norming and that communication and everything. So that's part of the communication hurdle, but there's other factors as well. But that decline in performance is something that was very interesting to us. But then once you get past what it's called? It's about 30%. And at that point, you go from being a salient minority to being an acknowledged or heard voice. And that's where you get the return to diversity and having diverse perspectives.

And from an investment perspective, the reason we want diverse perspective is so that we get the best investment perspective and the best investment decision. And that is also only possible if the hip of the highest paid person in the room is willing to consider those diverse opinions because we talk about it, diversity is being invited to the dance, inclusion is being invited to dance. And you can assemble a diverse room of people around the table with investment and finance experience.

But if you're not listening, you're not getting the benefits. Now one final caveat on that, and I do talk about this. Just because you have a diverse perspective does not require me to follow it, okay? It requires me to consider it, okay? So it's the benefit of adding it into the mix and the consideration that gives you the better investment outcome, but we don't necessarily have to follow that minority opinion. And I want to be very clear about that. Now we may, but we may not. And that's why diversity is important because we considered it and we came to a better decision.

Yashi Yadav

I actually hadn't heard of the last component that you mentioned in terms of the equalizing performance evaluation piece. I think what I found interesting was that colleagues of the same caliber and similar tenure can have such variances in career progression. Where do you think these gaps stems from? And what is the material impact?

Katrina Dudley

It may be that, that promotion delay has meant that those women are still analysts when the counterparts have already been promoted to PM, so you need to give them that long overdue promotion. And believe me, I've heard that phrase so often that it is amazing to me. We're still talking about that. But that's one area you can kind of go shopping in your own backyard. The second thing as it relates to things like track records.

Women often take time out for -- and often, women will take time out for children. And so maybe we need to have an ability to piece together a track record. And so they get credit for their prior ones and that we kind of give them the combined impact of a track record without penalizing them for having taken that 1 year out. So there are a lot of creative ways that we can do that where we're using data and it's perceived as fair.

And I think that the best example of where people are very happy to have fairness-based alternatives when they know that the -- what was happening was unfair. And MIT is a great example. MIT looked and said that they're not getting enough female professors, tenured professors. And so they looked at the data and found out that women were not getting bigger -- the women were getting smaller labs and pure research assistant, so they equalize things.

So they're the easy wins that you can get. In terms of addressing historical biases, we really didn't go into how to do that as much in the book. I think we really wanted to address the current problem which was represented by the fact that there were these gaping disparities in terms of promotion, in terms of pay and in terms of performance evaluation. And I think that really firms need to address some of those issues and then embark on other aspects.

Yashi Yadav

Well, thank you so much, Katrina, for your insights. This has been a wonderful conversation. I know I've definitely learned a lot around your perspectives on risk, AI, the book that you've written. I know that you have another book coming out, and I can't wait to read it. I'm actually going to have it in my book club for the next month. So that's very exciting. So to close this out, I'd love to know what is -- if you're a resolutions person, one of the resolutions that you've made for 2024.

Katrina Dudley

So I have 10 museums that I want to see this year. So I am working my way through that list. I have a list of things that I like to do, and I try and think of 100 new things that I haven't done. Ten Museum is on the list this year, and then I have a whole lot of other different ones. And so I'm working my way through it and looking to enjoy it.

Yashi Yadav

In New York?

Katrina Dudley

Yes, they are. I'm a New Yorker by heart.

Yashi Yadav

Well, thanks again, Katrina. Love this conversation, and love having you on Masters of Risk, and I'm really looking forward to speaking to you again soon.

Katrina Dudley

Great. Looking forward to it as well.

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