"A little madness changes your perspective immensely."

Switzerland’s openness to the world and willingness to see things from different perspectives have had a strong and positive influence on the Swiss economy. Investors, too, would do well to be open to innovative topics such as edutainment, as the online education market harbors enormous potential.

December 13, 2019

Interview with Burkhard Varnholt

CIO Credit Suisse Switzerland

Mr. Varnholt, does it take a certain degree of madness to be open to all ideas and options nowadays?

Burkhard Varnholt: As George Bernard Shaw, whom I admire very much, once said, “We want a few mad people now. See where the sane ones have landed us!” To me, madness is closely related with openness – which is why it carries positive connotations in my book. In German, this relationship is expressed quite clearly in the very word for madness, “Verrücktheit,” which is a derivative of the verb “verrücken,” which means to move or displace something. So if I move the chair I’m sitting on now, I change my perspective – I see things differently, I am open to other views. Looking at the world without blinders significantly expands your view.

Switzerland traditionally does well in the Innovation Indicator of the Federation of German Industries (BDI) and ranks first in the openness indicator. Do you agree with this view of Switzerland as being very open?

Yes. In my experience, Switzerland is extraordinarily open. One sign of this openness is just how present the Swiss economy is abroad. Wherever I travel in the world, I find outposts of Swiss companies. This local presence as well as generally very good local ties would not be possible if Switzerland were not already culturally open.

"We have to use our financial expertise to promote ESG investing."

Trade restrictions are increasing, governments are preaching unilateralism – what price will we have to pay for this reversal in openness?

As a liberal-minded economist, I prefer open borders to closed barriers. Politicians engaging in trade disputes are ultimately shooting themselves in the foot. This is really about geopolitical rivalries. Ten years ago, China had a gross domestic product (GDP) of USD 2 tn, compared with USD 10 tn in the US. Today, China’s GDP is USD 12 tn, while the US generates USD 18 tn. So the US’s lead has shrunk from fivefold to 50%. This drastic change is making many people uneasy.

And this unease can be exploited politically, as can be seen in the US…

“Angry society,” comprising people who feel that they haven’t adequately participated in the success of globalization, is not a US-only phenomenon. It exists in Europe, too. What else could explain the Brexit vote? Or the success of populist parties in so many European countries?

What about the openness of investors to investments that are compatible with ESG criteria (environmental, social, governance)? They are estimated to account for less than 10% of the total market in Europe.

When the then UN Secretary, General Kofi Annan, launched the Principles for Responsible Investment (PRI) in 2006, he triggered a movement to which the vast majority of institutional asset managers now subscribe. The concept of responsible investing has come of age and is now established in asset management. If there is one thing the financial industry can do for the good of the world we live in, it’s to follow these principles. This means taking an open-minded approach to investing and a holistic view of how a company operates and how it benefits people today and, above all, tomorrow. However, private investors are not actually that aware of ESG investments yet.

Will this change?

Almost certainly. When I talk to young investors or representatives of the next generation, ESG is always the number one topic. I regularly meet members of the Young Investors Organization across the globe. Every time, the conversation turns to ESG within the first five minutes. It’s way more interesting to young investors than P/E ratios, stock prices, book values, or interest rate forecasts.

What’s the most frequently asked question?

What can we as asset owners do to ensure that, in 30 or 40 years’ time, the world will still be as livable as it is today? We have to use our financial expertise, our core business, to promote ESG investing. Based on my professional experience and the academic literature on ESG investing that I have read, risk-adjusted returns on such investments are fortunately improving.

How does an investor know whether a product actually is ESG compliant?

That can be quite difficult and time-consuming. Credit Suisse therefore documents the ESG-compatibility of client portfolios in a clear monthly fact sheet. With the aid of charts and tables, it shows how a portfolio has been performing in terms of its ESG rating, including a comparison with benchmarks.

How do you rate emissions certificates as a way of reducing greenhouse gases?

It’s probably the best idea we’ve had to efficiently and purposefully reduce our ecological footprint in terms of CO2 emissions. Millions of tons are securitized in certificates. It is then up to the market to decide how much a ton of CO2 emissions is worth. Companies that have funds left over after paying for their emissions will continue to operate. The others will disappear. That’s why I’m convinced that if nature could choose a patron saint, it would choose the market.

What would be the alternative to emissions trading?

Myriad regulations governing the emissions of each sector.

Which investment themes should investors be open to at the moment?

Themes that promise strong growth. If the theme and the timing are right, thematic investments will generate profit growth that is not only higher than that of the overall market but also more resilient to economic cycles. Funds that focus on themes such as security, robotics, or digitalization in healthcare have demonstrated in impressive ways that they can outperform the MSCI World not merely by one or more basis points, but by one or more percentage points.

Physical proximity

Despite the rapid expansion of online education, being physically present is invaluable. Which is why the Swiss Federal Institute of Technology Lausanne (EPFL) deliberately runs museums and exhibitions that promote dialog and greater awareness of historical contexts.

What are the key success factors of thematic funds?

A long-term orientation – we’re talking three to five years here – and a strict focus on pure plays, that is, companies that have a clear business model aligned to a clearly defined market.

How do you identify pure plays?

By searching patiently and thoroughly. By making numerous personal visits to medium-sized companies that occupy leading positions in very specific industries and that aren’t part of the familiar investment universe.

That sounds like a lot of effort…

It is. For fund managers to feel entirely confident in buying a company’s stocks, they will have had to visit about ten other companies beforehand. This groundwork tends to happen in the background and is scarcely noticed by investors, but it is valuable and, in most cases, adds value.

Do you sell an investment if a company no longer qualifies as a pure play, for example following a takeover or merger?

It’s the fund manager’s job to always consider all circumstances. But, yes, we are very anxious to comply with the requirements. Our clients expect no less.

Let’s take a closer look at global education. Will technological change in education mean that traditional schools and teachercentered instruction will become obsolete?

No. Old and new will coexist. It’s widely accepted that we learn better if we’re emotionally and practically involved. As a kid, you don’t learn to walk by reading a book on the subject but by falling over. That’s not new. What is new, though, is the enormous range of educational offers based on play and fun that are available online. Infotainment and gaming are only just entering the education market because traditional educational establishments have yet to embrace the concepts. Edutainment currently accounts for only about 2% of total spending in education. However, I have no doubt that in ten years’ time, this percentage will be closer to 20. Edutainment is a real megatrend. In the US, 81% of college students already report that online offerings help them improve their grades1 . The e-learning market is expected to generate revenue of more than USD 243 bn by 2022. 

"Parents in emerging markets will invest everything they can in the education of their daughters and sons."

E-learning providers tend to be privately owned and profitoriented. Isn’t the education of our children first and foremost a public responsibility?

In our part of the world, schools at all levels are for the most part public. However, if public structures and services are lacking or insufficient, private players should and must fill the gaps.

What constellation are you thinking of?

In my personal experience, I have seen the lasting effect that online education or edutainment can have via the children’s charity “Kids of Africa,” which I founded 16 years ago. We chose to work with the Indian provider Aptech Global Learning Solutions to provide some of our kids in Uganda with IT training. The company was founded in 1999 and today offers well-run IT training courses in more than 50 countries, enabling 7 million people to obtain a state-accredited degree in recent years.

Are digital learning techniques particularly suitable for developing countries?

No. Demand for edutainment services is highest in the US2. The main reason is the cost of education.

Can you elaborate on that?

In the US, education costs have risen by 1,225% over the past 40 years – almost five times more than cumulative consumer inflation. But the expensive US education system is financially inefficient. The dropout rate is far too high: 37% of all students fail to graduate from college. What’s more, 40% of US students pay for extra tuition in addition to their studies. The average American college graduate is left with USD 37,000 in student debt. Reason enough to improve the cost-benefit ratio of education with the help of accredited online courses. These are cheap, effective, and popular because they are interactive. They are accessible round the clock and offer participants immediate individual feedback, promoting students’ learning progress more effectively than traditional methods do.

But the greatest growth potential for edutainment probably lies in Asia.

That’s true. With 4 billion inhabitants, Asia is the biggest market. It has a 45% share of the global market and the highest growth rates. The US and Europe have a market share of around 43%. I spent three weeks in China this summer. Almost no one there speaks English, even if everyone claims that English is a compulsory foreign language. There just aren’t enough good English teachers. How do you solve this type of problem in a country that has a population of 1.4 billion? By using the internet and teaching English online, too. In coastal regions, the urban landscape is teeming with private language schools advertising English courses with online training and edutainment offers.

Are people willing to invest in education?

Especially in emerging countries, where most people receive no academic training, the value of an academic degree is disproportionately high, at least much higher than in Europe. This is precisely why parents in emerging markets will invest everything they can in the education of their daughters and sons. Although, “everything they can” is less than in Europe or the US. That’s why the edutainment business, which is much more scalable than teacher-centered instruction, will prevail. In emerging markets, online education represents a window to the world. It opens up huge opportunities for social groups that would otherwise have no hope of receiving an education.

Which companies in the edutainment sector have impressed you personally?

The largest private language school in China, the Swiss-Swedish company EF Education First. Founded in 1965 by Swedish entrepreneur Bertil Hult, the company is a pioneer in the global edutainment market. EF was quick to understand how to earn good money with fun and attractive language training. It opened its first foreign language school in Shanghai in 1983, followed by one of the first online language schools in 1996, Englishtown. EF was a national partner of the Olympic Games in 2008 in Beijing and again in 2016 in Rio de Janeiro. Today, EF has more than 45,000 employees and generates revenue of more than CHF 2 bn a year, making it the world’s largest private-sector education company according to its own estimates. The example of EF shows that edutainment is not only a rewarding business, but can also provide valuable impetus for sustainable social development.  

"Physical proximity is one of the reasons why Switzerland is so innovative and competitive."

Martin Vetterli, the president of the Swiss Federal Institute of Technology Lausanne (EPFL), which was founded 50 years ago, recently said in an interview that while you can learn a lot on a distance learning course, the atmosphere of a lively campus is irreplaceable. Do you share his opinion?

Absolutely. It’s no coincidence that there are clusters in the world. The “start-up valley” surrounding the EPFL in Lausanne or the wonderful success stories of the many start-ups from the Swiss Federal Institute of Technology Zurich (ETH) speak for themselves. If it hadn’t been for the ETH, Google would not have come to Zurich. As a hightech cluster, you cannot compete with Silicon Valley by opening a government-funded innovation center somewhere or other. It’s the clusters that never stop developing that prevail.

How important is physical proximity in this context?

It’s indispensable. You absolutely need young, hopefully slightly mad people who are fully dedicated to an idea to be physically present in the same place. You will never be able to replicate this campus spirit in the digital space. The physical proximity of like-minded people who view challenges from different perspectives and approach solutionfinding differently is irreplaceable. It’s one of the reasons why Switzerland is so innovative and competitive.

You mentioned successful start-ups. But when successful young entrepreneurs want to grow, they often find it difficult to obtain funds…

Yes, that’s true. The venture capital scene in the US is more mature, broader, and deeper than in Switzerland or generally in Europe. That’s a shame, because we have great human capital. People should be free to concentrate on their core business rather than having to spend so much time raising money. However, financing options are better now than they were five or ten years ago, and there is far more interest in venture capital in Switzerland.

To what do you attribute this increased interest?

The zero interest rate policy, the lack of alternatives, and the fact that many such investments are quite successful.

Mr. Varnholt, like most economists, you expect the zero or negative interest rate policy of the central banks to continue for a long time to come. What does this mean for investors?

Zero interest rates are favorable for investments. For calm, patient investors, the environment for equities in particular remains attractive. Across Europe, institutional and private investors’ equity holdings are still far too low. They will no doubt be increased in the next few years.

Burkhard Varnholt

Scope – the magazine

The views and opinions expressed in this article are those of the author(s) and do not represent the views of Credit Suisse. Assumptions made in the article are not reflective of the position of Credit Suisse and may be contrary to that of Credit Suisse.