TOP WOMEN

TOP WOMAN: HANNEKE SMITS

Millions of pension recipients around the world depend on the performance of BNY Mellon Investment Management, led by alumnus Hanneke Smits MBA (19840086) as its CEO, to execute investment strategies for institutional investors such as pension funds and insurance companies. Now on share in a short time about 20% have lost their value and a recession is looming, Hanneke looks to the specialist expertise of the eight investment firms under her to help customers get the upcoming investment opportunities by means of a active asset allocation and equity selection. The good news is that there are plenty of companies with high profit margins and lots of cash. The rise in interest rates will also make it easier to select bonds for those long-term liabilities of pension funds. However, inflation will have to be restrained!

BY OELE STEENKS

Question: today is July 19, the warmest day ever recorded in London, while the whole world seems to be heating up. The big question is whether a global recession is inevitable or can adjustments be made just in time?

HS: "We think the risk of a recession has increased, but it is not yet entirely inevitable. We need to focus on the question, what will it take in the leading economies over the next 12 months for a recession not to happen? First, inflation will need to fall significantly to acceptable levels. What matters is what the US Federal Reserve Board is going to do. Will there be aggressive interest rate hikes now that could trigger a recession? At the same time, expectations in financial markets that more interest rate hikes are coming should ease. At the same time, consumer spending should slow so that spending matches supply. Inflation has so far been fueled by the surge in oil, gas and food prices. However, consumers have emerged from two years of corona crisis and are now looking to spend. On the business side, we now eagerly await the second quarter results of the world's major corporations. These will provide important direction for business and consumer confidence in the international economy. The impact of the end of almost free investment money; the impact of the war in Ukraine and the impact of an overheating labour market, which will fuel inflation with wage increases, are now coming together and will be reflected in companies' results. What we need to see is a sort of balancing act between the aforementioned conditions. The cost of goods will have to come down and the international logistics chain will have to get back in order. During the corona pandemic we saw containers of medical supplies waiting unused at the wrong ports. Industries must be able to rely on being able to produce immediately, which will prevent price increases. Furthermore, the PRC will need to get out of the lockdown pattern. We have all seen that economic growth in China has almost come to a standstill. After all, the Chinese are the largest producer of consumer goods in the world. The world needs to get rid of the scarcity created by China's lockdown policy as soon as possible. The labor market will have to cool down. During the corona crisis, we noticed that many people withdrew from the labor market; it is important to see if there is an opposite trend so that more people will work to cover household expenses. This would allow companies to further solve their capacity problems. All in all, with today's knowledge, a recession is not inevitable, but at the same time, the necessary factors will have to undergo a positive adjustment. "

Question: have you ever experienced such a confluence of circumstances before in your career?

HS: "I started in private equity in the early 1990s. Then we were slowly coming out of a recessionary period and there were high interest rates. The economy was developing at a moderate pace then. And of course I experienced the great crisis of 2008 in the financial world. The big difference was that the economic problems then were caused by the banking world itself. It started, of course, with the unrestrained underwriting of irresponsible mortgages and the piling up and reselling of 'bad debtors.' And with easy lending to households to speculate in the stock markets, driving up stock prices with no economic rationale, it was a real asset bubble. What makes this time challenging is the correlation between asset classes. For many investors who rely on a traditional 60/40 asset risk allocation - meaning 60% invested in equities and 40% in bonds - this traditional approach is not currently immune to interest rate movements and the threat of recession, as we see return on investment declines across all asset classes in the face of rising interest rates and equity market volatility. This makes it more difficult to realise the differences between 'asset classes', bringing profit amounts closer together. As a result, we are working with many clients to move from a risk-based investment approach to one that focuses on investing with tangible results."

Q: Can you elaborate on this shift?

HS: "We are coming out of a remarkable period of stock market growth where many investors were used to being able to match benchmarks across financial markets through passive investment strategies that work like 'index trackers', which we also offer ourselves. In this period of a market downturn, investors no longer just want to follow the market and are moving more towards investing for an outcome, whether that be income protection, inflation protection or tax efficient investing, for example. We call this 'outcome investing', for investments where the financial outcome is predetermined and very different from the classic 60/40% approach."

Question: does it also temporarily limit the growth potential of the world economy?

HS: "My generation grew up with the idea of a steadily growing economic world. We all benefited from the outsourcing of manufacturing to China that began in the 1980s. It ushered in an era of globalization and for the past 15 years Western consumers have been able to spend at very low interest rates and very low inflation. Now we see some of these global trends reversing. The era of easy money lending is at least over. We are now entering an era of decoupling global trends, towards deglobalization! World powers are retreating to their own territories. Be it in the US with an America-first economic policy, the UK leaving Europe with Brexit, and more recently Russia trying to restore its historical political and economic sphere of influence. This is similar to the approach in

Newsflash: BNY Mellon Investment Management had $1.9 trillion of assets at June 30, 2022. under management'. In calendar year 2021 revenue $2.834 billion.

HANNEKE SMITS, CEO OF BNY

MELLON INVESTMENT MANAGEMENT: "We are heading for deglobalization!"

TOP WOMAN: HANNEKE SMITS

China aimed at emphasizing and strengthening the economic dominance of the PRC in the world. This worldview is so different from the international atmosphere of increasing unity that emerged after the fall of the Berlin Wall in 1989. It was then that the idea arose that the world could become 'a better place' through international cooperation."

Question: what does BNY Mellon advise pension funds, sovereign wealth funds and insurers as a way out of this development?

HS: "As a collection of independent asset managers, it is important to note that within BNY Mellon Investment Management we do not have a 'house investment view' on the development of the investment landscape. Instead, we let our investment firms form their own opinions based on their specialist experience of their asset classes. Our mission is to optimize investment opportunities and outcomes based on this shared thinking to meet our clients' desired outcomes. We do not give one-dimensional advice but listen to the client's investment goals. What kind of risk diversification do they want and how much risk are they willing to take? Based on our clients' mandate, we select the right investment strategies from our investment companies, such as Insight in fixed income, Newton in equities or Mellon in index. Therefore, each client's needs and goals are very different and often depend on their individual circumstances and goals. Again, the market environment has changed significantly for companies with the era of cheap finance over, with a rising US dollar and with Europe in a difficult position. This is against the backdrop of an inflationary crisis due to the sharp rise in oil, gas and food prices. And a process of de-globalisation is underway. In this constellation, we look very closely at the companies and stocks that can perform well or benefit from this transition. But we also weigh broader themes such as ongoing automation, mobility and climate change that affect all our lives. So depending on a client's risk-spreading profile, the underlying choice of investment options has really become crucial at this point. When it comes to equity investing, we are looking for companies with high profit margins and decent financial reserves. Secondly, we are looking for companies that offer some form of dividend. In addition, it's important to have geographical diversification, which also extends to corporate holdings in emerging markets."

Question: do circumstances change the call for good business performance, Environment, Social Responsibility and Governance (ESG)?

HS: "We see no change in the long-term commitment of those clients who also want to invest for a purpose. The ideological underconstruction of that vision is still there, and it only increased during the pandemic, as the world became more attentive to climate change and social issues. In addition, the war in Ukraine caused major investors to partially rethink stakes in fossil fuels or the arms industry. Investors focused on ESG outcomes, or responsible investing as we call it, have long avoided investing in certain sectors, such as defense. However, if you are an investor who believes that Ukraine has a right to self-defeat, you are now likely to be more open to defence stocks being included in the investment mandate. So the alternative sentiment of no investment in the arms industry has shifted for that client under current circumstances. The same reasoning applies to interest in fossil fuels. This may contribute to a worsening climate in the short term, but it reduces Western dependence on Russia. I am not saying that these adjustments in investment principles apply to all investors. The beauty of the current situation is that governments have become more aware of the importance of the energy transition in the shorter term and need to speed up the provision of incentives. In addition, many investments in renewable energy are local in nature, which means that there is also a national security benefit associated with wind or solar energy. It is clear that wind power from the North Sea is in principle a safer choice for the UK or Scandinavia, than buying oil from Saudi Arabia. All in all, the demand for ESG has not changed that much, but the way of thinking about ESG has changed since the invasion of Ukraine. That may change again in the coming months."

Question: the differences between rich and poor, between educated or less educated, between employment and unemployment, between food or food shortages seem to be

widening in this period. Can companies improve this and can investors benefit from this in

the medium term?

HS: "In general, this burden falls on the shoulders of both the public and private sectors, which must work together to combat inequality. It is not always about the difference between developed economies and developing countries. The challenge will be to devise creative ways to mobilize private sector investment and support companies/organizations best positioned to deliver tangible success in this area, through diverse and inclusive distribution models that are more efficient, competitive and have socio-economic impact in local markets. As investors, the companies we want to support are those with the most resilient business models that can better withstand the higher inflationary environment and disruptions caused by the pandemic."

Question: how do the investment companies under BNY Mellon Investment Management work as a total package for large investors?

HS: "We work with eight investment companies, all of which have their specialisation and are driven by separate leadership teams, with their own investment teams, research staff and sales teams. We describe our approach as specialisation at scale, with each investment company being a leader in a particular type of asset class. Insight is an international leader in fixed income, particularly in liability investments. Most of Insight's clients are pension funds, for whom we hedge their future financial obligations with investments in bonds. The horizon is ten to twenty years, during which Insight deploys knowledge and experience with fixed-return investments. Insight can also implement various strategies for long-term fixed income. Walter Scott specializes in global equities with a high conviction investment approach, in that capital is invested in a small universe of stocks expected to grow significantly over a number of years. Newton Investment is a leading investment company and a leader in responsible investing focused on equity and multi-asset investing, with investments in a variety of asset types. At Newton in particular, clients' ESG goals can play an important role. Then there is Alcentra, which specialises in loans to companies, both in the liquid and unlisted markets. Incidentally, we have just announced that we are going to sell Alcentra to Franklin Templeton. Mellon is our US indexing and ETF business. We are very pleased with the new ETFs we have launched, both passive and active, including the first true zero fee ETFs in the U.S., which are doing well. These trackers offer clients an excellent way to benefit from a lowcost, liquid and tax-efficient investment vehicle. Dreyfus is the investment company active in the cash management markets. We also own Siguler Guff, an international private equity investment company. And finally, we own ARX Investimentos, a smaller investment company in Brazil. While many institutional clients work with a single strategy as offered by one of the investment companies, it is also common for us to be able to set up a combination of different strategies for institutional and intermediary clients,

where they are served by two or more investment companies, but where communication with the client is through a centralized BNY Mellon sales team in one of the 35 offices we have set up in financial centers around the world."

Question: what is happening from the offices of BNY Mellon Investment?

HS: "From our BNY Mellon Investment Management headquarters, spread across offices in New York and London, we support the international distribution of our services to many of the most sophisticated institutional investors in the market, including sovereign wealth funds, private foundations, insurance companies, large multinational corporations and state pension funds. In both offices, we have teams of economists who can help investment firms interpret economic conditions. They can also help sales offices explain to clients specific economic conditions and investment risks and opportunities. Especially in these volatile times, we develop positive and negative scenarios and discuss them with the client. Depending on the outcome of these discussions, the client gives us an investment mandate that may involve the investment expertise and capabilities of one or more of our investment companies. We like our investment companies to use their own expertise, scenarios and sales policies. In this way, clients benefit from the power of independent thinking, because each firm does not think alike. It's no accident that we create a competitive environment within the BNY Mellon Group, where investment firms are encouraged to adopt entrepreneurial policies and maintain their own investment culture. My job is to ensure that we as BNY Mellon Investment Management, so as a whole, navigate the current environment while investing for the future on behalf of our clients. Centrally, we provide our investment companies with 'seed capital' to develop innovative new investment solutions that clients are looking for. In this way, we can help investors worldwide achieve their investment goals. We use our experience and our position as an important part of the market structure to do this, after all, we are one of the largest institutional investment managers in the world and part of the oldest U.S. bank."

Question: about half of the BNY Mellon Investment group is of American background and the other half is of British origin. How does this affect the management of the whole?

HS: "Any time there's diversification within a team, whether it's geographic, or gender specific, or in attracting people from different backgrounds in terms of nationality, education and age, you get more diversity of perspectives and opinions, and you should achieve a better company culture and results. From a financial revenue standpoint, we're also pretty diverse, with part of our revenue coming from the United States and the other half coming from the rest of the world. We have the great advantage of having a sales team in 35 countries, and also being able to operate with that global perspective for customers. This is especially true in the Asia-Pacific region and having a presence in cities like Hong Kong, Seoul, Tokyo, Sydney and Singapore."

Question: from 1992 you have been an investment director at Pantheon (5 years), Adams Street (17 years) and Newton Investment (4 years) and then the last two years as CEO of BNY Mellon Investment Management . What's so great about asset management?

HS: "I am by nature a curious person who likes to think about long-term developments. What intrigues me is how companies and business people are able to turn trends and technologies into products and services with investment value. I am also fascinated by the question of whether end-users can actually benefit from a product or service. I love talking to customers and putting myself in their position. Also, when it comes to delivering a result or beating a benchmark in the stock market, ultimately a person at a pension fund decides to work with us. I feel at home in a complex composite environment and enjoy contributing to solving complex issues."

Q: You are the founder of Level 20, an initiative to get more female senior investment managers into the private equity and venture capital business; what drove you to do that?

HS: "After working as an investment manager and Chief Investment Officer for 25 years, I took an 18-month sabbatical. As I had held more senior positions, I had realized more emphatically that at the top of equity firms there were really only white-skinned men in management positions. I am a passionate advocate of diversification and have encouraged many talented young women to pursue careers in private equity. I supported some of them as a mentor, but at some point that could no longer fit into the schedule. This was the reason to contact female colleagues in the relatively small private equity world. With eleven women we founded the Level 20 organisation in 2015 of which I was chairman for two years. The focus is on offering cross-mentoring, where talented women can get a mentor from another investment firm, with whom they can talk about their work experiences and get advice in a confidential atmosphere. I'm no longer involved in the organisation, as I felt it was time to move on to other initiatives. But it is a success. Level 20 now has about 100 sponsors and 3000 members. Although, we haven't reached our goal of 20% women in senior positions yet, but we have reached the goal of involvement in PE organizations."

Question: in the meantime, you have also shown social commitment by founding Impetus, an organisation that helps underprivileged British youngsters on their way. Can you explain that?

HS: "I had parents who encouraged me to get and finish a good education, to achieve something in life. In the Netherlands, most young people have basically equal access to secondary and higher education. In the UK, it's different. Here, a teenager's future depends heavily on the possibility of going to a private or public school. In addition, there are around 2 million young people in the UK who do not go to school, are not in vocational training or do not have a job. Impetus seeks to improve this situation by working with the tools of private equity. We have put together a portfolio of charities in which Impetus invests. These charities try to engage young people by getting them to join a football or rugby club, for example. From there they can be inspired to go to school and finish it. Then help them get their first job. I am happy to do my bit to help solve the youth problem. I have been chairman of Impetus since 2018 and am now in my second term."

Question: can you tell something about your personal background?

HS: "I was born in Sittard, where my father René Smits worked for DSM. However, most of my youth was spent in the Utrecht area, where I went to the municipal grammar school. My original ambition was to study classical languages. Together with my father, who was one of the first venture capital investors (Oranje Nassau Participaties/Halder Holdings) in the Netherlands, I went to an information day at Utrecht University. I was over the moon about studying, but my father had listened carefully to a session where they talked about the career opportunities for a classicist. He lovingly guided me towards studying economics or business administration. I chose Nyenrode because there was a campus, there were American students and there were exchange programs with universities in the US and Europe. This also allowed me to do something with my passion for languages and travel."

Question: what is your personal life like in the UK?

HS: "I live in London and am married to an Englishman. We have two sons, one of whom is already studying and the other will go to university in September. Then we have a daughter who will be with us for another year or two. For the past 16 years my husband has looked after the family, so I have been able to give all my attention and time to my career."♦