Latest / Masters in Business / Marta Norton on Direct Indexing and Investments

Transcript

Marta Norton on Direct Indexing and Investments · Masters in Business

0:02
Speaker 1: This is Mesters in Business with Very Results on Bloomberg Radio.
0:08
Speaker 1: This week on the podcast, I have an extra special guest.
0:11
Speaker 1: Martha Norton is the chief Investment Officer for morning Star
0:16
Speaker 1: Investment Management. They advise or directly manage about two hundred
0:20
Speaker 1: and fifty billion dollars in client assets. She has a
0:23
Speaker 1: fascinating career, starting at BLS, working a way up as
0:27
Speaker 1: an analyst and eventually head of outcome based Strategies for
0:31
Speaker 1: morning Star, eventually rising from that position and portfolio manager
0:36
Speaker 1: to chief investment officer. We talk about everything from when
0:42
Speaker 1: do you think about risk, how do you diversify a portfolio?
0:45
Speaker 1: At what point do you really have to rethink the
0:49
Speaker 1: fundamentals of what's going on in the economy and the marketplace.
0:53
Speaker 1: I found this conversation to be absolutely fascinating, and I
0:57
Speaker 1: think you will also with no further ado my conversation
1:01
Speaker 1: with morning Stars Marta Norton, so BLS economist, how did
1:06
Speaker 1: that happen? Tell us about that opening gig? Right, So
1:09
Speaker 1: it's a pretty heavy title, maybe a generous title for
1:12
Speaker 1: a twenty three year old. Bills recruits just like all
1:15
Speaker 1: other organizations, recruits at college campuses. So there are a
1:18
Speaker 1: number of us heading in out of college into the BLS,
1:22
Speaker 1: and of course b allst home to the Consumer Price Index,
1:24
Speaker 1: which we're all watching so closely. I was on the
1:27
Speaker 1: Producer Price Index, so the sister index, focusing on the
1:31
Speaker 1: prices that produces that's right. So I was on the
1:35
Speaker 1: research team, so putting together research. I wrote a scintillating
1:39
Speaker 1: piece on beef and cattle prices that's right, which you
1:43
Speaker 1: can find in the monthly Labor Review. And I spent
1:46
Speaker 1: a lot of time working with folks, helping with contract escalation,
1:49
Speaker 1: identifying the right index for them. And actually I was
1:52
Speaker 1: at the p p I. Most people may not remember this,
1:55
Speaker 1: but in two thousand four, the p p I was
1:57
Speaker 1: a month and a half late. So sometimes that process
2:00
Speaker 1: my mind today when people are watching the cp I,
2:02
Speaker 1: I can't imagine how people would react. Why was it
2:05
Speaker 1: a month and a half late? No, for so, we
2:07
Speaker 1: were converting from the Standard Industrial Classification system to the
2:12
Speaker 1: North American Industrial Classification System, so taking potatoes from one area,
2:17
Speaker 1: moving them into another area, making sure everything was in
2:19
Speaker 1: its right place, and like all things, it took longer,
2:22
Speaker 1: was more complex. Why wouldn't use the old model until
2:25
Speaker 1: the new model is ready to you would think you
2:27
Speaker 1: would think. I think it was just a bit of
2:29
Speaker 1: poor planning more than anything. No, you know that that
2:35
Speaker 1: can happen, and it's funny. I had my first brush
2:38
Speaker 1: with you media as a professional at that time. The journalists,
2:42
Speaker 1: of course, we're calling in. Folks were calling in, where's
2:45
Speaker 1: our PPI? Conspiracy theories abounded, and a journalist, I think,
2:49
Speaker 1: could how I was mostly a child and was trying
2:51
Speaker 1: to get the dirt out of me, and I said
2:53
Speaker 1: something like, we have no idea when the PPI is
2:56
Speaker 1: coming out, And that's the quote that I got into
2:58
Speaker 1: the papers. Let's it would change in model. You got
3:00
Speaker 1: to give it a couple of weeks, you know, sometimes
3:03
Speaker 1: the movers late. That's very funny. Show from Bureau of
3:06
Speaker 1: Labor Statistics. How did you transition over to Morning Star? Right?
3:10
Speaker 1: So I leave the Beer of Labor Statistics and I
3:12
Speaker 1: move into economic consulting. And this is distinct from management consulting,
3:16
Speaker 1: which I think a lot of people are pretty familiar with.
3:18
Speaker 1: With econ consulting, at least at the firm I was at,
3:21
Speaker 1: it was a lot of expert witness testimony, so litigation
3:24
Speaker 1: around unfair competition or the like. A company would pull
3:26
Speaker 1: in our expert witness, and I was part of the
3:29
Speaker 1: team to put together the case to explain the market
3:31
Speaker 1: size or the market share or what have you. And
3:34
Speaker 1: it was interesting work. It was demanding, work, was pretty grueling.
3:37
Speaker 1: But the career paths from there were either kind of
3:40
Speaker 1: the PhD route or the legal routes, and those weren't passed.
3:44
Speaker 1: I was necessarily interested in pursuing right then, So I thought, okay,
3:47
Speaker 1: let's stop trying to apply the major directly to the
3:49
Speaker 1: career and maybe have a little bit broader perspective. And
3:53
Speaker 1: I loved research. I knew finance had a close corollary
3:56
Speaker 1: to kN I was in Chicago, morning Star being the
4:00
Speaker 1: research firms, so I applied and was hired as an
4:02
Speaker 1: ec F analyst in two thousand five. They were actually
4:05
Speaker 1: relatively nascent, but they were back then. You were there
4:08
Speaker 1: really as they exploded, oh eight or nine, more or
4:12
Speaker 1: less after the crisis, right, that's right, And so morning
4:15
Speaker 1: Star coverage was really just getting started on e t
4:18
Speaker 1: f s right in the two thousand five period. And
4:20
Speaker 1: of course now it's a very robust coverage. It's sophisticated,
4:24
Speaker 1: it has a philosophy, but then we were still feeling
4:27
Speaker 1: our way and so there was a lot of need
4:29
Speaker 1: on the active mutual fund fronts, and so my coverage
4:31
Speaker 1: list it kind of converted over time to focus more
4:35
Speaker 1: on mutual funds, to focus on five to nine plans
4:37
Speaker 1: college savings. I was getting my c f A charter
4:40
Speaker 1: around that time, so it was a period of I
4:42
Speaker 1: guess I would call it intense study, intense focus on
4:46
Speaker 1: understanding different investment strategies. What makes a good investment strategy.
4:50
Speaker 1: I think a lot of people think of morning Star,
4:52
Speaker 1: and rightly so for the Star ratings, which are performance measurements,
4:57
Speaker 1: But morning Star spends a lot of time actually doing
4:59
Speaker 1: fun to mental work analysis on what makes a good
5:03
Speaker 1: mutual funds? You know, the people, the process in that work.
5:05
Speaker 1: And that's where I was spending my time as an analyst.
5:08
Speaker 1: So how do you find your way from economists to
5:10
Speaker 1: analysts to asset manager? How did that transition happen? So
5:13
Speaker 1: in two thousand eight, I I just perceived my c
5:16
Speaker 1: F A charter and I was beginning to look around
5:18
Speaker 1: and think about, you know, where else would I want
5:20
Speaker 1: to go in this company or or outside the company.
5:22
Speaker 1: And at that time, the morning Star managed portfolio's team,
5:26
Speaker 1: which as you mentioned, as a subsidia, morning Star had
5:29
Speaker 1: an opening, and so I tossed my hat in the
5:31
Speaker 1: ring and moved over in October. Oh, so that's some
5:36
Speaker 1: timing right in the storm. I know, I want to
5:39
Speaker 1: run assets. Let me let me catch the falling night here.
5:43
Speaker 1: No here, So you're about to start the worst six
5:46
Speaker 1: months in a long time. What was experience like beginning
5:50
Speaker 1: in asset management in the eye of the hurricane. I've
5:54
Speaker 1: read that investors are really marked by the environment in
5:59
Speaker 1: which they kind of of age. Um. And so I
6:02
Speaker 1: came of age in the global financial crisis, and I
6:05
Speaker 1: mean there were so many lessons learns that maybe I
6:08
Speaker 1: had to process over time. One of them was very smart,
6:13
Speaker 1: very credible, people with very good backgrounds and experience can
6:18
Speaker 1: be very very wrong. Um. And I saw that firsthand
6:22
Speaker 1: with some of the analysis that was done at that time.
6:26
Speaker 1: I saw how personal money is. Let me give you
6:28
Speaker 1: some background on morning Start managed portfolios. These are portfolios
6:32
Speaker 1: that we're creating, whether their individual stocks or whether they're
6:35
Speaker 1: multi asset portfolios, that we offer to financial advisors, who
6:39
Speaker 1: in turn offer them to their clients. So these are stocks, bonds, ETFs,
6:43
Speaker 1: mutual funds. They can be, yeah, they can be kind
6:45
Speaker 1: of a varied collection, varied instruments that were implementing that
6:49
Speaker 1: the views in and so our customer bases financial advisors
6:53
Speaker 1: and their underlying clients, and so over that period, we
6:56
Speaker 1: were having maybe bi weekly weekly calls with finance to advisors,
7:00
Speaker 1: just opening up the doors and having a conversation. We're
7:03
Speaker 1: doing the same with clients. And I can remember one
7:06
Speaker 1: client on one of our calls. I was sitting in
7:09
Speaker 1: a room nine oh one that I still sit in today, um,
7:12
Speaker 1: and he was saying, just go to cash, Please, just
7:14
Speaker 1: go to cash. And you know, it really struck home
7:17
Speaker 1: with me that money is very personal, that it's closely
7:20
Speaker 1: tied to security, and when we look at price movements
7:23
Speaker 1: on a chart, sometimes we forget what it feels like
7:26
Speaker 1: to be at those different points on the chart. And
7:28
Speaker 1: it just stuck with me this idea that this is
7:31
Speaker 1: a very serious matter when you're managing folks assets, it's
7:34
Speaker 1: personal in all sorts of ways. It's not just their security.
7:38
Speaker 1: A lot of people look at their portfolio values and
7:41
Speaker 1: it impacts their sense of self worth, their confidence, how
7:46
Speaker 1: they view the world. I mean, if you begin as
7:49
Speaker 1: a trader or a portfolio manager, you kind of learn
7:52
Speaker 1: like a surgeon. You have to compartmental opposite. You can't
7:55
Speaker 1: wear it on your sleeve. But that's not how individuals perceived.
7:59
Speaker 1: It's this role in real right, and I think that's
8:01
Speaker 1: why there's so much importance. And this is something that
8:03
Speaker 1: I think is close to the heart of Morning Star.
8:06
Speaker 1: But there's so much importance in the purpose of education
8:08
Speaker 1: and telling people what to look at, because that's what
8:11
Speaker 1: I benefited from going to morning Star learning investing through
8:14
Speaker 1: morning Stars lens. You don't necessarily need to take your
8:17
Speaker 1: signals from recent market performance. There are other things that
8:20
Speaker 1: should be your signals in terms of how you're doing
8:23
Speaker 1: as an investor. So, so you as an investor, began
8:27
Speaker 1: as an economist, then you're an analyst, then you're an
8:30
Speaker 1: investment manager, then your portfolio manager, now you're in chief
8:35
Speaker 1: investment officer. Each of those steps is a very different role,
8:40
Speaker 1: and you're looking at different things and experiencing different things
8:45
Speaker 1: throughout that progression. What really stands out, um, because that's
8:49
Speaker 1: really interesting career path. Yeah, you know, I look at
8:52
Speaker 1: my career and kind of three chunks there's the pre
8:55
Speaker 1: Morning Star chunk of being an economist working in econ consulting,
8:59
Speaker 1: and I see a lot of value in that UM,
9:01
Speaker 1: in part because I think if you're with the same
9:03
Speaker 1: company your entire career, you can sometimes fall into the
9:06
Speaker 1: fallacy that grass is greener somewhere else. And so I
9:09
Speaker 1: was able to have some career experience from that UM,
9:12
Speaker 1: and then I have the period where I was with
9:13
Speaker 1: Morning Start Inc. Doing research and just soaking things up,
9:16
Speaker 1: and then I move into the money management UM part
9:19
Speaker 1: of my career, and I would say that there was
9:21
Speaker 1: a stretch from two thousand eight to call it two
9:25
Speaker 1: thousand and fifteen where I was managing a ton of
9:28
Speaker 1: different types of mandates. I was on the road with
9:30
Speaker 1: clients and financial advisors sometimes once a week, understanding who
9:34
Speaker 1: they were, what they were looking for from us, and
9:36
Speaker 1: there was just a very rich development period, which I
9:40
Speaker 1: think at the time, I don't know if I fully
9:42
Speaker 1: appreciate it. I'm someone who likes to see change like
9:45
Speaker 1: sncy development, and so it required a you know, a
9:48
Speaker 1: bit of patience over that stretch, but it was I
9:51
Speaker 1: think a very foundational period for me to just have
9:54
Speaker 1: build that experience in the markets. So how do these
9:58
Speaker 1: differences between being an economist and a researcher versus someone
10:02
Speaker 1: who has to execute on theory. How do the difference
10:06
Speaker 1: is manifest in your day to day You know, it's
10:08
Speaker 1: a great question. I think the first thing that would
10:12
Speaker 1: come to mind there is that I think when you
10:14
Speaker 1: are a researcher or a theorist or an analyst, and
10:19
Speaker 1: you're not putting money to work, it's a lot easier
10:22
Speaker 1: to be an ideologue. And when you are an investor,
10:27
Speaker 1: you have to learn how to have a philosophy but
10:30
Speaker 1: remain flexible, be willing to be proven wrong in real
10:33
Speaker 1: time and know when you're actually proven wrong um, and
10:37
Speaker 1: being willing to know when you're not being proven wrong
10:39
Speaker 1: and when the payoff is still coming, and to not
10:41
Speaker 1: be so dogmatic. And I think that's a lesson that
10:44
Speaker 1: value investors have learned repeatedly over the past. You know,
10:48
Speaker 1: really since the global financial crisis on, I think there
10:51
Speaker 1: was an assumption that value is always is going to
10:54
Speaker 1: come back any second now, and I think people have
10:56
Speaker 1: had to reevaluate how they think about things. Huh. You know,
11:00
Speaker 1: I like that description. The feedback loop is so much
11:03
Speaker 1: more rapid in practice. In theory you never are bitten
11:08
Speaker 1: by the seeds that you plant, but in actual practice
11:12
Speaker 1: you find out very quickly. Are you right wrong? Yeah?
11:14
Speaker 1: And you know, Barry, I've been spending a lot of
11:16
Speaker 1: time reading about decision making. So I think a lot
11:18
Speaker 1: of folks have read Anti Duke book on on Thinking
11:21
Speaker 1: and Bets, and I think that perspective of don't evaluate
11:25
Speaker 1: the outcome, evaluate how you're making your decision the process.
11:29
Speaker 1: That's something I've learned as a practitioner, not so much
11:31
Speaker 1: as a as a theorist. She starts the book, if
11:34
Speaker 1: I remember, with the story of do you go for
11:37
Speaker 1: it on fourth down? And loves that story. That was
11:40
Speaker 1: a very It's such a perfiximation of good process, bad outcome.
11:45
Speaker 1: Over time that wins, but you lost that one game
11:48
Speaker 1: that people can't get past that. So let's talk a
11:50
Speaker 1: little bit about morning Stars history. They're in Chicago. I
11:55
Speaker 1: know of them from their mutual fund reading business. Tell
11:58
Speaker 1: us a bit about your association with the firm so
12:02
Speaker 1: Um morning Star actually has a really rich history. And
12:06
Speaker 1: to hear Joe and Suada our founder hell it Um,
12:09
Speaker 1: there was a bit of you know, kind of an
12:11
Speaker 1: entrepreneurial spirit. He wanted to be an entrepreneurial UM. He
12:15
Speaker 1: was in the investing world and he was intrigued by
12:19
Speaker 1: Warren Buffett, and he was looking for kind of that
12:23
Speaker 1: market opportunity and he found it in the mutual fund space. Now,
12:27
Speaker 1: as he tells it, the mutual funds space was a
12:30
Speaker 1: pretty nascent space in the early nineteen eighties. It's not
12:34
Speaker 1: like it is today where mutual funds are ubiquitous, and
12:37
Speaker 1: he saw it as a really positive good thing for
12:40
Speaker 1: the individual investor to have access to these top money managers. UM.
12:45
Speaker 1: But he found that morning Star was making a lot
12:48
Speaker 1: of or excuse me, individual investors were making decisions based
12:51
Speaker 1: solely on on trailing returns, which is we all know
12:53
Speaker 1: it's not a good investing strategy. So he founds the
12:57
Speaker 1: company in the early nineteen eighties. His focus is on
13:01
Speaker 1: mutual funds, providing data, providing analysis, and generally helping individual
13:07
Speaker 1: investors have better outcomes. And so that general sense of
13:11
Speaker 1: empowering investor success is the same mentality that Morningstar has
13:14
Speaker 1: now taken and its research to e t s, to
13:19
Speaker 1: you know, individual stocks, to credits. UM, it's software, it's data,
13:24
Speaker 1: and of course it's Investment management group. When did the
13:27
Speaker 1: investment management saw to the business begin. There's different kind
13:30
Speaker 1: of histories to different parts of it. The managed portfolio
13:33
Speaker 1: business began in two thousand one, but we've had consulting arms.
13:36
Speaker 1: We acquired Ibbotson, which has its own rich history, and
13:40
Speaker 1: then we also have global groups UM outside the U
13:43
Speaker 1: S And Sydney and London and in other places that
13:46
Speaker 1: we've added to the mix over the years. So about
13:49
Speaker 1: halfway through the history, really full bore asset management that's
13:54
Speaker 1: is introduced, which kind of answers the question, Hey, why
13:57
Speaker 1: would a research from new to CEE? I Oh, but
14:00
Speaker 1: really it's much more than a research front, that's right.
14:02
Speaker 1: That's right. So it's for the asset management business. And
14:04
Speaker 1: in fact, there are four CIOs in the business. There's
14:07
Speaker 1: one there's one for each region. So I sit in Chicago,
14:11
Speaker 1: I have a colleague in London and one in Asia
14:14
Speaker 1: pac Um, and then we have a global c IO
14:17
Speaker 1: who we report into, who sits in London. So when
14:20
Speaker 1: did Morning Star acquire Ibbotson? Because I interviewed Roger Ibbotson,
14:25
Speaker 1: I want to say something like that. So two, yeah,
14:30
Speaker 1: I didn't realize that Associates was part of morning Star
14:34
Speaker 1: at the time, right, so now it's all kind of
14:36
Speaker 1: folded together. What we what we did is we had
14:39
Speaker 1: these separate strands, these separate capabilities, and there was an
14:41
Speaker 1: effort to think about what do we want to look
14:43
Speaker 1: like globally as one cohesive unit. And so we've pulled
14:46
Speaker 1: together as an asset manager. Huh. So you do mutual funds,
14:50
Speaker 1: traditional neutral funds, you do uh, E t fs? What
14:55
Speaker 1: about bonds and fixed income? So what we do is
14:59
Speaker 1: we have the individ dual security portfolios. We have our
15:02
Speaker 1: own mutual funds that we use within our model portfolios,
15:05
Speaker 1: and then we have model portfolios that rely on e
15:07
Speaker 1: t f s from third parties UM, and we mixed
15:10
Speaker 1: the two together as well as kind of an active
15:12
Speaker 1: passive approach. Our fixed income exposure right now is through
15:17
Speaker 1: third parties, so we'll buy e t f s or
15:19
Speaker 1: we will use subadvisors. So if someone else is doing it,
15:23
Speaker 1: it's an expensive Why do you want to recreate that wheel?
15:26
Speaker 1: What we're actually focused on is these model portfolios that
15:29
Speaker 1: we're managing, these multi asset financial solutions UM. And you know,
15:33
Speaker 1: this is an area of expertise something that we've been
15:35
Speaker 1: doing for more than twenty years, and what we're doing
15:37
Speaker 1: now is thinking about how do we want to power
15:40
Speaker 1: those model portfolios, and so that's where the mutual funds
15:43
Speaker 1: come in. In In fact, for a long time we used
15:46
Speaker 1: third party mutual funds. It's an area of expertise for Morning,
15:49
Speaker 1: so are selecting those mutual funds and when we found that,
15:51
Speaker 1: we just wanted to try to reduce the layers of costs.
15:54
Speaker 1: When you're owning a bunch of mutual funds, you have
15:55
Speaker 1: all the ancillary expenses built into those expense ratios. So
15:59
Speaker 1: if we could take what we thought were best to
16:01
Speaker 1: breed thinkers and put them within our mutual funds, we
16:04
Speaker 1: could cut down on the layers of costs, and that's
16:06
Speaker 1: in fact what we did. So if you guys are
16:08
Speaker 1: driving the creation and exactly what these funds look like,
16:12
Speaker 1: how involved have you gotten in thematic investing? Is that
16:16
Speaker 1: something that's significant. So a big part of who we
16:19
Speaker 1: are is our global research platform where we're covering you know,
16:23
Speaker 1: equities any which way you can slice them globally in
16:26
Speaker 1: the same thing on the fixed income side. So what
16:28
Speaker 1: our Capital Markets i P really is is looking at
16:33
Speaker 1: what are the fundamental drivers of these asset classes and
16:36
Speaker 1: how do we think about them from evaluation perspective? What
16:38
Speaker 1: do we think of them on a prospective basis, and
16:41
Speaker 1: so you can think of that maybe I guess as
16:43
Speaker 1: thematic we're sometimes focused on very narrow areas like a
16:46
Speaker 1: country or a sector. UM. We also have the ability
16:50
Speaker 1: within our mutual funds to create UM equity sleeves, so
16:54
Speaker 1: individual stocks that represent the opportunity and we would do
16:57
Speaker 1: that when we think the e t F is too
16:59
Speaker 1: expensive or we think the e t F isn't actually
17:01
Speaker 1: capturing what we think is the opportunity UM, So we
17:04
Speaker 1: have that embedded in our mutual fense as well. The
17:07
Speaker 1: past two decades has seen a giant rise in alternatives.
17:11
Speaker 1: What do you look at in that space? How do
17:13
Speaker 1: you think about private equity, venture capital, or even head
17:17
Speaker 1: funds within alternatives. We actually have a pretty rich history
17:21
Speaker 1: there and we've been managing an absolute return portfolio for
17:24
Speaker 1: a long time, but our focus and alternatives UM, we
17:28
Speaker 1: spent a lot of time thinking about what do we
17:29
Speaker 1: want to do with this space? What you know, what's
17:31
Speaker 1: different that we could get with alternatives from stocks and
17:34
Speaker 1: from bonds, And what we landed on was a focus
17:37
Speaker 1: on identifying strategies that are not driven by the same
17:41
Speaker 1: factors that drive equity returns or you know, bond markets,
17:45
Speaker 1: and focusing on strategies that have had limited draw down.
17:48
Speaker 1: So our focus has been selecting these third party strategies
17:51
Speaker 1: that we think are somewhat predictable so that we can
17:54
Speaker 1: use them have a role in portfolio and also um
17:58
Speaker 1: an alternative to what we have with and fixed income
18:01
Speaker 1: and equities. So we have a merger arbitrage strategy, we
18:04
Speaker 1: have a convertible arbitrage strategy. We have a strategy would
18:07
Speaker 1: I wouldn't necessarily classified as global macro. It's kind of
18:10
Speaker 1: a fund of funds approach with different models embedded in it.
18:13
Speaker 1: And actually that that's suite. That collection of strategies, which
18:17
Speaker 1: is in the morning Star Alternatives fund, is where a
18:20
Speaker 1: lot of our portfolio managers were turning to at the
18:23
Speaker 1: end of last year when you know, fixed income is
18:25
Speaker 1: so poor on a prospective basis, equity valuations are really high,
18:30
Speaker 1: and so alternatives are alternatives haven't been positive, but they
18:33
Speaker 1: have lost a lot less than even short data bonds,
18:36
Speaker 1: So it's been a good ballast for us in this environment. Yeah,
18:39
Speaker 1: down five percent is better than down right, that's a
18:43
Speaker 1: that's a huge difference. So let me stay with the
18:45
Speaker 1: concept of not quite alternatives, but different way of thinking
18:49
Speaker 1: about investing. What are your thoughts on things like personalization
18:54
Speaker 1: and direct index in Yeah, so personalization is portfolio managers,
18:59
Speaker 1: and I was a portfolio manager for a long time.
19:01
Speaker 1: You really have your head down, your focus on your strategies.
19:04
Speaker 1: So I put my head up as a c I oh,
19:06
Speaker 1: I get a vision of the broader picture, and I
19:08
Speaker 1: start hearing a lot about personalization, and I don't know
19:10
Speaker 1: what people are talking about, frankly, um, and I ended
19:13
Speaker 1: up presenting on this at the morning Star conference this spring,
19:16
Speaker 1: and so I spent a lot of time trying to
19:17
Speaker 1: understand it. And if you don't mind, let me give
19:19
Speaker 1: you my understanding how I came about to how I
19:22
Speaker 1: see it. Um. If you were like me and you
19:25
Speaker 1: spent your high school wandering Blockbuster looking for something that
19:30
Speaker 1: you wanted to see that was in stock, you found
19:32
Speaker 1: yourself in a much different situation in the pandemic where
19:34
Speaker 1: you're sprawled on your couch and you're just streaming content
19:38
Speaker 1: through Netflix that is yes, and it's algorithmically chosen, just
19:43
Speaker 1: for you or um If you have the privilege of
19:46
Speaker 1: driving a Tesla, you don't have the indignity of your
19:49
Speaker 1: husband messing with your mirror and your seat. You can
19:52
Speaker 1: just create a drive out profile and it recognizes you.
19:55
Speaker 1: So personalization is not just a marketing message where it's
19:58
Speaker 1: dear Martha, you know whatever. It's actually products that are
20:02
Speaker 1: built and adjusted for you. And it began outside of
20:06
Speaker 1: financial services. Now, when I start to think about financial
20:09
Speaker 1: advisory work, I can't think of a place where personalization
20:12
Speaker 1: isn't already something that advisors are wrestling with. They want
20:15
Speaker 1: to know their clients, they want to invest according to
20:18
Speaker 1: what their clients need, but it's been a hard thing
20:20
Speaker 1: to do at scale. The technology just hasn't been there
20:24
Speaker 1: to be able to customize the way you want, from
20:27
Speaker 1: profiling the clients to creating the right strategy, managing that strategy,
20:31
Speaker 1: and then you know, a decumulation phase. It really hasn't
20:35
Speaker 1: been there for the mass market. And the technology has
20:38
Speaker 1: now advanced to the point where a lot of those
20:40
Speaker 1: capabilities can be available to a lot of different advisors,
20:44
Speaker 1: so they can personalize and create customized experiences for clients,
20:48
Speaker 1: and that customized experience can be through client profiling, where
20:51
Speaker 1: the profiling was far more iterative and behaviorally, you know,
20:55
Speaker 1: infused with behavioral finance insights. Or it could be the
20:59
Speaker 1: actual portfolio where you're taking to standard portfolios smashing them together,
21:04
Speaker 1: where you're doing direct indexing. UM. So there's a whole
21:07
Speaker 1: range of products and developments that are maybe changing the
21:12
Speaker 1: way financial advisors can interact with their clients and improving it.
21:15
Speaker 1: So let's talk a little bit about what's going on
21:18
Speaker 1: with mutual funds and ETFs. We talked a little bit
21:21
Speaker 1: about starting managing assets in the middle of the financial crisis.
21:25
Speaker 1: It seems that's kind of the line in the sand.
21:28
Speaker 1: After that, we saw a pretty robust appreciation for both
21:33
Speaker 1: passive investing and E t F. Tell us a little
21:36
Speaker 1: bit about what you've seen from from morning Star. Yeah, so,
21:40
Speaker 1: I guess to kick things off, I listened to the
21:42
Speaker 1: conversation you had with Eric but tunis the Vanguard Effect,
21:46
Speaker 1: and I hadn't read the book, and I enjoyed that conversation.
21:48
Speaker 1: I resonated with a lot of the insights, and as
21:50
Speaker 1: I think about it from my perspective, I think back
21:53
Speaker 1: to a book I read when I started Morning Star
21:55
Speaker 1: called Piece of the Action by Joe no sarah Um
22:00
Speaker 1: and he talks about how the middle class became part
22:05
Speaker 1: of the investing class, and he outlines credit cards, and
22:08
Speaker 1: he outlines mutual funds and money market funds and retirement accounts.
22:12
Speaker 1: And the book I read, its version was in the
22:15
Speaker 1: nineteen nineties. I think if he had continued it or
22:18
Speaker 1: the book were written today, if I were writing the book,
22:20
Speaker 1: I would add passive investing and e t F s
22:24
Speaker 1: onto those milestones or mile markers where we're really seeing
22:28
Speaker 1: great improvement for the average investor. And that's largely because
22:33
Speaker 1: of the huge impact that passive investing has had on
22:35
Speaker 1: fees um just giving people a much better um outcome.
22:40
Speaker 1: So morning Star Ink research has shown time and time
22:43
Speaker 1: again that fees are one of the few very reliable
22:46
Speaker 1: predictors of future performance. And I think that's just a
22:48
Speaker 1: mathematical reality, right that you just have more if you
22:52
Speaker 1: didn't take out a lot at the beginning. So I
22:55
Speaker 1: think there's a real benefit to the past of investing
22:59
Speaker 1: the ET trend. In terms of kind of what this
23:02
Speaker 1: means for active and passive I think there's a lot
23:05
Speaker 1: to that. I don't know if it's a one for
23:07
Speaker 1: one question. But as as an active investor, I can
23:10
Speaker 1: say I'm a big fan of passive investing. So you
23:13
Speaker 1: brought up something that I have to give Morning Star
23:16
Speaker 1: a ton of credit for. Ross Kinnel writes a piece.
23:19
Speaker 1: I think it was um about how expense ratios and
23:25
Speaker 1: star ratings predict success. And it's a pretty thorough analysis.
23:30
Speaker 1: But the too long, didn't read version is, hey, if
23:33
Speaker 1: you could look at nothing else, just look at expense
23:36
Speaker 1: ratios and buy the cheapest one. And really, for a
23:40
Speaker 1: company that built its reputation on the star rating, that
23:45
Speaker 1: was a pretty um risky thing for not only morning
23:49
Speaker 1: started release, but stand behind and keep it on the
23:52
Speaker 1: site for a decade later. A lot of companies would
23:56
Speaker 1: have would have buried that. So Morning Star has been
23:58
Speaker 1: Morning Star Larify. The research side of Working Star has
24:01
Speaker 1: been very clear on that expense case. So there's Russ's Peace,
24:04
Speaker 1: and there's many other pieces throughout time that have said,
24:07
Speaker 1: as we look at what we think predicts future outcomes,
24:10
Speaker 1: those expenses are key. It's interesting on the star rating side. Now,
24:14
Speaker 1: just for background, at a very high level, the star
24:16
Speaker 1: rating is looking at risk adjusted returns, right, big difference
24:21
Speaker 1: from just returns and relative to category peers. Star rating
24:25
Speaker 1: launched very early on around and it's gone through a
24:27
Speaker 1: lot of methodology updates over time, and it's a really
24:31
Speaker 1: elegant measure of performance and a great starting point. But
24:35
Speaker 1: I don't think there's an analyst on the research side
24:38
Speaker 1: of the house who would say, look, you have the
24:40
Speaker 1: star rating and you're all done. I mean, there's so
24:42
Speaker 1: many of them who are spending so much of their
24:44
Speaker 1: time analyzing the people in the process and how the
24:47
Speaker 1: performance relates to that in the price. There's a lot
24:50
Speaker 1: more that goes into picking a mutual fund or a
24:53
Speaker 1: strategy than just taking a look at its historical track record,
24:56
Speaker 1: and that to the very least. So let's talk a
24:59
Speaker 1: little bit more. Are about active fund managers. One of
25:02
Speaker 1: the criticisms that have been leveled by both other active
25:06
Speaker 1: managers and academics is, hey, a lot of this is
25:10
Speaker 1: just expensive closet indexing. How do you look at that
25:13
Speaker 1: when you're thinking about either a portfolio you're analyzing or
25:18
Speaker 1: creating your own portfolio. Within Morningstar Investment management, we are
25:22
Speaker 1: very much high conviction investors, probably concentrated. Concentrated portfolios are
25:27
Speaker 1: willing to stick our next out and look different than
25:30
Speaker 1: a benchmark. And we've learned some hard lessons that way. Um,
25:34
Speaker 1: you know is you can imagine we're not going to
25:35
Speaker 1: get every call right and that at times can be costly,
25:38
Speaker 1: and so we've put more thought on how you size
25:40
Speaker 1: into positions or not. But I think closet indexing was
25:44
Speaker 1: a big topic when I was in research, and there
25:46
Speaker 1: was a lot of work around active share and the like.
25:49
Speaker 1: And I think it's still it's always, I think, going
25:51
Speaker 1: to be embedded in the community because when you're wrong
25:55
Speaker 1: and you weren't close to the benchmark, it's incredibly costly.
25:58
Speaker 1: I think Jeremy Grantham caused a career risks or you
26:01
Speaker 1: know that kind of thing. So I think it's always
26:03
Speaker 1: going to be part of human nature. Um. I wonder,
26:06
Speaker 1: and I haven't done any research on this, but I
26:09
Speaker 1: wonder if it's been harder over the past few years
26:11
Speaker 1: to be a closet index or successfully you know, pretending
26:15
Speaker 1: to be active but making the benchmark because of how big,
26:18
Speaker 1: you know, the big six companies in the US have been.
26:21
Speaker 1: It's been very hard to own them without becoming a
26:23
Speaker 1: non diversified mutual fund at index weight. So I wonder
26:26
Speaker 1: if it's been harder to play that game lately. And
26:29
Speaker 1: you talked earlier about how software and technology has progressed.
26:32
Speaker 1: It's so easy today to look at concentrated risk active
26:37
Speaker 1: share and how different you are from the benchmark, and
26:40
Speaker 1: whether that difference leads to outperformance or just expensive differences.
26:45
Speaker 1: That's so, you're a long term investor, you work with
26:48
Speaker 1: clients who themselves have clients that are long term investors.
26:52
Speaker 1: What are some of the things you're doing now in
26:54
Speaker 1: terms of portfolio construction. How are you thinking about changes
26:59
Speaker 1: to be made and opportunities that are either available or
27:03
Speaker 1: might have been missed over the past year. So you know,
27:06
Speaker 1: as I think about a long term investor, and when
27:08
Speaker 1: I'm thinking about a long term investor, I'm thinking of
27:10
Speaker 1: anyone who doesn't have a need for their assets in
27:13
Speaker 1: the next few years. So maybe we're talking about five
27:15
Speaker 1: years and out. And you look at this investment climate
27:18
Speaker 1: that we've been in, and when we were looking at
27:21
Speaker 1: the markets at the end of both US equities and
27:24
Speaker 1: US fixed income struck US as extremely expensive. I mentioned
27:28
Speaker 1: that we'd put more assets and alternatives than we typically
27:31
Speaker 1: had um At this point, markets are a lot more
27:34
Speaker 1: attractively priced. I mean, there's a lot of nuance to that,
27:37
Speaker 1: but they are more attractively priced. So if I'm a
27:39
Speaker 1: long term investor and I'm thinking about what opportunities is
27:42
Speaker 1: the market serving up today, my impulse, all else held equal,
27:47
Speaker 1: should be to add back to exposures in the portfolio,
27:50
Speaker 1: whether that's dollar cost averaging new money, or whether that's
27:54
Speaker 1: looking at areas that have held up or been quite defensive,
27:58
Speaker 1: which you know, it's hard to find those areas, but
27:59
Speaker 1: they are out there, and adding back to more of
28:02
Speaker 1: the risky areas. But the caveat there is that I
28:05
Speaker 1: think that at least from our vantage point, markets are
28:08
Speaker 1: closer to fairly valued than extremely cheap. So it feels
28:11
Speaker 1: more like a dollar cost average market to us than
28:14
Speaker 1: than anything else. Not picking a bottom quite yet, that's right,
28:17
Speaker 1: I'm right there with you. So let's talk a little
28:20
Speaker 1: bit about the state of today's markets. You said earlier
28:24
Speaker 1: valuations were historically high, both stocks and bonds. Late right
28:29
Speaker 1: about now, what are we twenty five year average for
28:32
Speaker 1: the SMP International stocks look kind of cheap, small cap
28:37
Speaker 1: and value were interesting. Just for a little context, we're
28:40
Speaker 1: recording this mid October we really we haven't gotten the
28:44
Speaker 1: latest pp I. We don't know what earnings look like
28:46
Speaker 1: quite just yet, so we're still dealing with the worst
28:51
Speaker 1: of and not knowing when the smoke clears, tell us
28:55
Speaker 1: what you think about the current environment, what looks intriguing.
28:58
Speaker 1: So there are a lot of nuance to today's market.
29:01
Speaker 1: If we have proprietary models that we you know, update
29:05
Speaker 1: with our insight to give us a sense what valuations
29:08
Speaker 1: are you know, around the world here at home, and
29:11
Speaker 1: when we look at the broad US bond market, the
29:13
Speaker 1: broad US stock market there is as attractive as they've
29:15
Speaker 1: been since we've been running this program, um since you
29:18
Speaker 1: know about time frame. So that's good, but it's not great.
29:24
Speaker 1: It's not as though they're pricing in armageddon or anything
29:27
Speaker 1: along those lines. So we are still somewhat cautious. We're
29:33
Speaker 1: adding back to US equities. That depends on the portfolio,
29:36
Speaker 1: of course, but we're adding back to US equities, especially
29:38
Speaker 1: where we were severely underweight that area. We are interested
29:42
Speaker 1: in fixed income. But I think a lot of times
29:44
Speaker 1: when people talk about valuations, they act almost as if
29:47
Speaker 1: someone is in cash and equities, But if you're in
29:50
Speaker 1: a multi asset portfolio, and your fixed income is also
29:52
Speaker 1: getting a lot cheaper. That makes the calculus a little
29:55
Speaker 1: bit trickier. Um, so maybe you want to be adding
29:57
Speaker 1: to your fixed income as well, and that's something that
29:59
Speaker 1: we're weighing a bit too. Where is the better opportunity
30:03
Speaker 1: versus equities versus fixed income? And I wanted to follow
30:06
Speaker 1: up on the point that you made about international because
30:08
Speaker 1: those are meaningful positions for us. They've been relatively cheap
30:12
Speaker 1: for a long time, but now through our models they
30:15
Speaker 1: are looking absolutely cheap, and that means that they're cheap
30:18
Speaker 1: relative to the fair value that we've identified for them.
30:21
Speaker 1: And so I'm talking about really the nasty stuff here.
30:24
Speaker 1: I'm talking about China and all the concerns that are
30:26
Speaker 1: around it and the sell off that it's had. Talking
30:29
Speaker 1: about Germany and it's you know, close and epicent our
30:31
Speaker 1: nature to the European energy crisis and the impact that
30:35
Speaker 1: the war has had on it. I'm talking about UK
30:38
Speaker 1: and the troubles that it has. These are markets that
30:40
Speaker 1: are under pressure, and I so wish that markets could
30:43
Speaker 1: be absolutely cheap and not be in trouble, But oftentimes
30:48
Speaker 1: it's the fact that yes, you're not gonna get stuff
30:52
Speaker 1: absolutely cheap unless something at the something went wrong. So
30:56
Speaker 1: what we're we're weighing is how much is priced in
31:00
Speaker 1: it else could go wrong, And so we're sizing very
31:03
Speaker 1: carefully in these opportunities, but we can't deny that there's
31:05
Speaker 1: a valuation opportunity in them. So things are attractive, but
31:09
Speaker 1: it's not dirt cheap. And this is why you mentioned
31:12
Speaker 1: dollar cost averaging is an attractive strategy. We may not
31:15
Speaker 1: be at the bottom, but we're close enough that hey,
31:18
Speaker 1: maybe we're a few months earlier, and if we keep
31:20
Speaker 1: d c A ing over the next year, you'll catch
31:23
Speaker 1: early bottom recovery and then that's whatever the next cycle.
31:27
Speaker 1: That's right, I mean as as a as a fundamental investor,
31:31
Speaker 1: we're never going to call at the bottom. I know
31:32
Speaker 1: a few people who can do that consistently. But what
31:35
Speaker 1: we can do is have the right impulse as markets
31:38
Speaker 1: are moving, as they're selling off. In general, the right
31:40
Speaker 1: impulse should be to add. We know that um as
31:44
Speaker 1: markets are rising, the impulse should be maybe holds tighter
31:47
Speaker 1: or maybe you know, not the adding. And so we're
31:50
Speaker 1: trying to find that behavioral discipline you mentioned you're looking
31:54
Speaker 1: at fixed income as more attractive than it was. Not
31:57
Speaker 1: only has fixed income fallen double digits, pretty substantial, but
32:02
Speaker 1: you're now actually being paid when you're a fixed income buyer.
32:07
Speaker 1: When we're recording this, the ten year is not too
32:09
Speaker 1: far off from ten percent. There's some high quality corporates
32:13
Speaker 1: that are about five percent, and you could look around
32:17
Speaker 1: and find Muni's running a tax equivalent in the fours
32:21
Speaker 1: or higher. Is there now an alternative? Can we no
32:25
Speaker 1: longer say it's Tina and it's equities or nothing. I've
32:29
Speaker 1: heard it's Tina, it's Tara, and it's Cindy. Um, so
32:32
Speaker 1: let's go for so Tina. There is no alternative. Okay,
32:35
Speaker 1: there's Tina, there is Tara. There are reasonable alternatives, and
32:40
Speaker 1: then there is Cindy. Credit is now delivering yield to
32:44
Speaker 1: the three sisters, the three sisters of fixed income. So
32:48
Speaker 1: the era of you have no choice of but equity
32:50
Speaker 1: or nothing is over. The era is over. But the
32:53
Speaker 1: bottom line is there is yield in fixed income. And
32:57
Speaker 1: even though it's below the most re and cp I,
33:00
Speaker 1: the expectation is inflation is going to come down eventually,
33:05
Speaker 1: and if you're buying a four, you're locked in above inflation.
33:09
Speaker 1: Hopefully three percent or maybe even a two handle. So
33:13
Speaker 1: as we look at the fixed income landscape, I think
33:16
Speaker 1: what you're seeing, you're getting paid at the shorter end
33:19
Speaker 1: of the curve much more attractively than you had. You're
33:21
Speaker 1: not taking on enormous amounts of risk in that area.
33:24
Speaker 1: Either from our credit or a rate perspective, we are
33:27
Speaker 1: looking at high yield. We are looking at areas like
33:29
Speaker 1: emerging market debt. The yields are much more attractive, but
33:33
Speaker 1: we haven't seen a whole big pickup in defaults, and
33:36
Speaker 1: emerging market debt has its own concerns in this type
33:39
Speaker 1: of environment, so we're interested. But I think if we're
33:43
Speaker 1: looking at where is the net dollar going today, I
33:46
Speaker 1: think it's going to some of those higher quality segments
33:49
Speaker 1: of the fixed income market. End tips. Of course, tips
33:51
Speaker 1: have been a disappointment. I think, I right, you would
33:55
Speaker 1: think inflation screaming tips are like, yeah, you know, they're
33:58
Speaker 1: actually lost a little bit of that. Yeah, and they're
34:00
Speaker 1: really showing kind of their sensitivity to real rates. But
34:04
Speaker 1: because they've lost ground and because inflation expectations have come
34:07
Speaker 1: back down, it's not a bad time to be thinking
34:09
Speaker 1: about tips for a portfolio. What else can a fund
34:13
Speaker 1: manager or adviser do to protect a portfolio in the
34:16
Speaker 1: face of let's say transitory turns out to be wrong
34:20
Speaker 1: and that inflation is persistent for another couple of years.
34:24
Speaker 1: What should investors be thinking about the big struggle? And
34:26
Speaker 1: so we've been working on that analysis. In fact, we
34:29
Speaker 1: originally started analyzing our portfolios for inflation. What we do
34:33
Speaker 1: We have our research platform, which is basically defining the
34:35
Speaker 1: opportunity set for us based on kind of our viewpoints,
34:39
Speaker 1: and then as portfolio managers we get together and we think,
34:41
Speaker 1: how do we size this? What do we do with
34:43
Speaker 1: this information in a portfolio? And so back in April one,
34:47
Speaker 1: we started to think about what would inflation If inflation
34:50
Speaker 1: isn't transitory, what would that mean for our portfolios? And
34:52
Speaker 1: we started running a lot of scenario tests and we
34:54
Speaker 1: found that with this value lean that we have the
34:57
Speaker 1: energy exposure that we had on a relative basis, our
35:01
Speaker 1: portfolios should hold up, you know, to the sixties of
35:05
Speaker 1: the world. Um. And now what we're thinking about is
35:08
Speaker 1: what's going to happen to financial assets of for inflation persists.
35:12
Speaker 1: What's going to happen in a stagflationary environment? How do
35:15
Speaker 1: you think about these things and how do you size them?
35:17
Speaker 1: And you know, in a stagflationary environment, for example, when
35:21
Speaker 1: we look at this, we're obviously looking at that nineteen
35:23
Speaker 1: seventies nineteen eighties period. There were a few places to
35:27
Speaker 1: hide in that environment, commodities energy related being one of them,
35:30
Speaker 1: and tips weren't around back then, but you can kind
35:32
Speaker 1: of simulate the experience of stagflation those held up. So
35:36
Speaker 1: those are the types of assets. Energy has been a
35:38
Speaker 1: long time holding for us. It's no longer attractive from
35:41
Speaker 1: our valuation, but last a year ago it looked cheap.
35:44
Speaker 1: There ago it looked dirt cheap, and so it's paid
35:46
Speaker 1: off handsomely and we are slowly edging out of it
35:50
Speaker 1: because we're thinking about this range of outcomes, these different environments,
35:54
Speaker 1: and what can protect in these different the day the
35:56
Speaker 1: war in Ukrainians see oil prices get that's right, So
36:01
Speaker 1: you don't want to be at peak position size. But
36:04
Speaker 1: you know, people have been wondering when does this come
36:07
Speaker 1: to an end? Now? For this has gone on much
36:09
Speaker 1: longer than people expect, and it looks like it's going
36:12
Speaker 1: to go on much longer from here. So that's quite
36:15
Speaker 1: a challenge you mentioned value. I feel like value investors
36:20
Speaker 1: are the dog that keeps getting kicked. Everybody has been, well,
36:24
Speaker 1: you know, it's been ten years. When does value start
36:27
Speaker 1: to outperform growth? The past year, it certainly has done better.
36:31
Speaker 1: How are you looking at value as an asset class? Yeah? So,
36:35
Speaker 1: you know, when I was in research, there were a
36:38
Speaker 1: lot of articles at that time that wrote how superior
36:42
Speaker 1: value investing was to growth investing um and how it
36:45
Speaker 1: always wins out. If you look at over history, value
36:47
Speaker 1: always dominates and that should have been a flag that
36:51
Speaker 1: maybe values time is done and certainly it has a
36:54
Speaker 1: weight chest. Pounding is not a good look from from
36:57
Speaker 1: fun managers and researchers. I'm gonna make an know to
37:00
Speaker 1: that that's right. And so since then, growth has been dominant.
37:03
Speaker 1: I think it's caused a lot of value investors to
37:05
Speaker 1: do a lot of introspection. And I think one of
37:07
Speaker 1: the takeaways that value investors have had is that valuation
37:10
Speaker 1: itself is not a timing indicator. We've had our own
37:14
Speaker 1: you know ltc M moment I guess as value investors.
37:18
Speaker 1: But I think the very fact that we're talking about
37:21
Speaker 1: value investing being dead in the water is really reminiscent
37:25
Speaker 1: of the period when value investors were saying growth was
37:28
Speaker 1: dead in the water. Um. I think these things run
37:31
Speaker 1: in cycles, and I think paying attention to the price
37:34
Speaker 1: that you're paying is a valuable strategy, whether you're buying
37:38
Speaker 1: a growth company or a value company. David Einhorn was
37:42
Speaker 1: speaking at the Robin Hood Investor Conference, and quote he says,
37:47
Speaker 1: I don't know if value investing ever comes back. So
37:51
Speaker 1: if you're looting for the opposite of value, is always
37:54
Speaker 1: going to outperform growth. Well, here's the other side of
37:58
Speaker 1: that in an argument. And I I think, and this
38:01
Speaker 1: is something we've talked about a lot, the value growth
38:04
Speaker 1: fight or narrative value versus growth. I think it's a
38:08
Speaker 1: bit of a false narrative. I think you can be
38:10
Speaker 1: a growth investor or you can be a value investor
38:12
Speaker 1: and care about the price that you're paying for your asset. Hey,
38:14
Speaker 1: isn't that what growth at a reasonable price was all
38:17
Speaker 1: of the Yeah, yeah, you know, I think the I
38:20
Speaker 1: think both strategies have value. It's just a matter of
38:23
Speaker 1: whether you're doing fundamental work around the price that you're
38:26
Speaker 1: paying or whether you're not. And I don't think that
38:28
Speaker 1: belongs to one or the other. Alright, So two last
38:32
Speaker 1: questions before I get to my favorite question, and the
38:36
Speaker 1: first is, since you began at BLS and worked on
38:39
Speaker 1: inflation data, I have to ask about the data dependent FED.
38:44
Speaker 1: How does that affect you as a chief investment officer.
38:48
Speaker 1: It seems like everybody is hanging on every CPI, margin report, earnings,
38:53
Speaker 1: non farm payroll. Everything seems to take on extra weight.
38:57
Speaker 1: How do you these days? You with a FED that
39:02
Speaker 1: says we're gonna keep hiking until we see the white
39:05
Speaker 1: of inflations eyes? You know? Um? I think the one
39:10
Speaker 1: takeaway that you can have from this type of environment
39:13
Speaker 1: is that it's certainly creating a ton of opportunities, right,
39:16
Speaker 1: I mean, this type of volatility is where you can
39:19
Speaker 1: start to make money and markets if you are careful
39:23
Speaker 1: and if you're a thoughtful investor. Of course, I have
39:25
Speaker 1: opinions on the FED. I think everybody has opinions on
39:28
Speaker 1: the FED. Everybody has opinions on the macro environment, and
39:31
Speaker 1: it's so tempting to want to just blast them all
39:34
Speaker 1: out there. But the reality, right, But the reality is
39:38
Speaker 1: it's not going to matter even if I was right,
39:39
Speaker 1: which I wouldn't be what do I do about it
39:41
Speaker 1: in a portfolio? And so what we're really focusing on
39:44
Speaker 1: is that range of outcomes for our investors um and
39:47
Speaker 1: thinking about if this then that, or is this priced
39:51
Speaker 1: in or is it close enough to being priced in?
39:53
Speaker 1: What's the margin of safety? And I think not getting
39:56
Speaker 1: wedded to a worldview, and I think that can be
39:58
Speaker 1: the danger with a laser focus on the FED and
40:01
Speaker 1: on this macro data can be a real destruction. But
40:04
Speaker 1: that being said, of course we're watching how inflation develops.
40:07
Speaker 1: Of course we're watching how rates develop and and how companies,
40:10
Speaker 1: how their fundamentals respond, and getting a sense for how
40:14
Speaker 1: pervasive is this environment going to be. I asked you
40:17
Speaker 1: earlier about personalization. One of the bigger new innovations that
40:22
Speaker 1: made possible by technology is direct indexing. How do you
40:26
Speaker 1: guys look at that sort of style of investing. What
40:30
Speaker 1: do you think of its role within portfolios or people
40:35
Speaker 1: who really want to get very fine tuning in terms
40:38
Speaker 1: of tilting towards value or away, tilting to a specific
40:42
Speaker 1: UH sector, or being able to work in all the
40:44
Speaker 1: various E S G and other thematic screens that you
40:48
Speaker 1: can build in too. Direct indow that's right. And so
40:50
Speaker 1: for the folks who are a little slow on the
40:52
Speaker 1: uptake like I am, and have their heads down in
40:54
Speaker 1: their own work, let me offer a definition of direct
40:56
Speaker 1: indexing because I certainly needed it. Um direct the next
41:00
Speaker 1: thing is something that's been around for a long time.
41:01
Speaker 1: It's it's been around in the kind of high net
41:03
Speaker 1: worth area of the world. And what it is is
41:06
Speaker 1: you have your index, you have your e t F,
41:08
Speaker 1: but instead of buying an index fund or an ATF,
41:11
Speaker 1: instead you buy a basket of security is optimized to
41:15
Speaker 1: track that particular market. And when you own the underlying securities,
41:18
Speaker 1: you can as to your point and bed your preferences.
41:21
Speaker 1: And you can also do tax management and improve your
41:24
Speaker 1: outcomes after tax UM and as you think about we
41:27
Speaker 1: were talking about the development the rise of passive investing UM,
41:32
Speaker 1: and I was talking about the piece of the action
41:34
Speaker 1: and these markers and time where we've seen middle class
41:37
Speaker 1: you know, get a big win. I think direct indexing
41:40
Speaker 1: is another mile marker on that journey because it's another
41:43
Speaker 1: way to substantially or I guess maybe to say, to
41:47
Speaker 1: quantitatively tangibly improve outcomes for investors. When we run our
41:51
Speaker 1: own tax alpha study, at morning Star Investment Management, we
41:55
Speaker 1: found that the tax alpha that could be added on
41:57
Speaker 1: an annualized basis, of course it ranges based on environment,
42:00
Speaker 1: but was anywhere from forty basis points to somewhere around
42:03
Speaker 1: three hundred. I mean, when we think about the huge
42:06
Speaker 1: we think about especially if if you're sitting on things
42:09
Speaker 1: like founder stock or low cost inherited stock joint. It
42:14
Speaker 1: makes the difference. I mean, think about the obsession we
42:16
Speaker 1: have expense ratios. It's ten basis points cheaper, sign me up.
42:20
Speaker 1: And what's also really interesting about the spaces to the
42:24
Speaker 1: point that you raise a lot of folks will have
42:26
Speaker 1: these bizarre portfolios. Where have this company's stock, I inherited it,
42:29
Speaker 1: this thing. I don't know what to do with it,
42:30
Speaker 1: but I know it's sound a good portfolio. Direct indexing
42:33
Speaker 1: allows you to smartly, you know, from a tax per sspective,
42:36
Speaker 1: transition that into a more well rounded portfolio. So I
42:39
Speaker 1: think it's really powerful. It's not for everyone, it's not
42:41
Speaker 1: for every dollar size, but it's much more available to
42:44
Speaker 1: the mass market than it is that the folks over
42:47
Speaker 1: to oh shown us in asset management did a study
42:50
Speaker 1: and found in because you had this thirt woosh down
42:55
Speaker 1: during the pandemic and then a very quick recovery. They
42:59
Speaker 1: were seeing direct index portfolios that we're doing four hundred
43:04
Speaker 1: and five hundred basis points of tax less harvesting, which
43:07
Speaker 1: is just astonishing. I mean, I love it, and I
43:08
Speaker 1: think about a market environment like this, and I know
43:11
Speaker 1: you're interested in behavioral finance. We are as well. And
43:14
Speaker 1: one of the things that I think can really engender
43:16
Speaker 1: good behaviors if you have dual mandates, so your focus
43:20
Speaker 1: isn't just my opically total return, but indirect indexing world.
43:23
Speaker 1: It's yeah, I want this exposure, but I'm also getting
43:26
Speaker 1: all these tax benefits when the market sells off. So
43:29
Speaker 1: you have this, it will pick me up when things
43:30
Speaker 1: are going in the wrong direction. Listen to a year
43:33
Speaker 1: like two. If you have other appreciated stock that you
43:37
Speaker 1: want to sell, you should be killing it on the
43:39
Speaker 1: tax tax less harvesting, even if you're not doing directing.
43:43
Speaker 1: That's right, but that just makes it even even better.
43:46
Speaker 1: So I know I only have you for a limited
43:48
Speaker 1: amount of time. Let me jump to my favorite questions
43:51
Speaker 1: that I ask all my guests, starting with tell us,
43:55
Speaker 1: what's been keeping you entertaining these days? What were you
43:58
Speaker 1: streaming during lockdown? Yes, so you know this is the thing.
44:01
Speaker 1: With all the content, Barry, I have become really hard
44:04
Speaker 1: to please. So I'll be watching a show imagine Ozarks
44:07
Speaker 1: or imagine recently House of Dragons. As soon as it
44:11
Speaker 1: starts to lag, I'm gone. I have no patience for
44:14
Speaker 1: shows and constant the way us doe. But I am
44:15
Speaker 1: watching and I haven't yet turned on. It is a
44:18
Speaker 1: show called Endeavor. It's a British detective show. It's not
44:22
Speaker 1: quite as grizzly. I don't think anything's grizzly with a
44:24
Speaker 1: British accent. So I enjoyed myself. It keeps me on
44:27
Speaker 1: my toes. So that's what I'm watching. That sounds really interesting.
44:30
Speaker 1: In fact, I know everybody kind of went through all
44:33
Speaker 1: the big ones like the Crown and whatever you but
44:35
Speaker 1: I found myself during lockdown working my way through a
44:38
Speaker 1: bunch of French, a bunch of British shows for that
44:42
Speaker 1: exact reason. It's like, you have to work, you have
44:44
Speaker 1: to pay attention, you have to pay attention, and that's
44:46
Speaker 1: a good thing. The thing with all the streaming is
44:48
Speaker 1: I'll have it on in the background and ten minutes
44:51
Speaker 1: later I not know, right, I totally get that. Tell
44:55
Speaker 1: us about your mentors who helped to shape your career. Okay,
44:59
Speaker 1: So I say the US, knowing that she will hate
45:02
Speaker 1: that I'm raising her name, but um, and I don't
45:04
Speaker 1: even know if she knows that this was the case
45:06
Speaker 1: for me. But when I joined the research group, I
45:08
Speaker 1: was of course new to finance. I was new to investing,
45:11
Speaker 1: and I was you know, I'm a very very deliberate,
45:14
Speaker 1: diligent person. So I'm working nights and weekends trying to
45:17
Speaker 1: discover the morning Star voice, which is where you explain
45:20
Speaker 1: complex things and very simple and accessible ways, and also
45:24
Speaker 1: just learning how to tell a good fund from a
45:26
Speaker 1: bad friend. And Christine Benz, who is a big name
45:29
Speaker 1: at morning Star, was on that team, a senior team member,
45:32
Speaker 1: and the edits that she would give me were so
45:35
Speaker 1: robust and helpful. I would get pages of edits, which
45:38
Speaker 1: of course doesn't sound like a good thing, but it
45:40
Speaker 1: was a really good thing because it it helps me
45:42
Speaker 1: understand things so much better. And she she had a
45:45
Speaker 1: number of standing slots on on TV shows, and when
45:48
Speaker 1: she wouldn't be able to make it, she would ask
45:50
Speaker 1: if I would want to do it in her place,
45:52
Speaker 1: and it was just just the kind of endorsement and
45:54
Speaker 1: encouragement that I needed. And I think that's kind of
45:57
Speaker 1: a special thing about morning Star, this idea that nobody's
46:01
Speaker 1: too big to help someone else grow in their career. Huh.
46:05
Speaker 1: I love that answer, And I'm gonna do something I
46:07
Speaker 1: don't normally do in this section, which is a follow
46:11
Speaker 1: up question. We were talking earlier before we started recording.
46:15
Speaker 1: We did the sound test. You said your voice was
46:19
Speaker 1: your being, of your existence, your soft voice, and that
46:23
Speaker 1: led to a whole other discussion. Tell us a little
46:27
Speaker 1: bit about working with Christine and other women at morning Star,
46:31
Speaker 1: and why is the soft voice so difficult in a
46:35
Speaker 1: field like finance for a woman. I think one of
46:37
Speaker 1: the things people look at. And maybe this is broadly
46:40
Speaker 1: in business, and maybe it's you know, specific to finance.
46:42
Speaker 1: I don't know. I'd imagine it's broader, but a very
46:44
Speaker 1: commanding presence. I think the visualization and the audio of
46:49
Speaker 1: a commanding presence is what captures attention. And as a woman,
46:53
Speaker 1: I have a softer voice. I'm a smaller person. You're
46:56
Speaker 1: relatively sure, that's right, So I don't have that that
47:00
Speaker 1: commanding kind of leader of a clan um looked to
47:04
Speaker 1: me and um, I think that might not be an
47:07
Speaker 1: issue for other people, but it certainly can get in
47:09
Speaker 1: my head from time to time. And I think what
47:11
Speaker 1: was so what has been powerful about morning Stars? There
47:14
Speaker 1: have been a lot of women at morning Star who
47:17
Speaker 1: have had a lot of influence who don't necessarily fit
47:20
Speaker 1: a profile UM. And I think, actually, as I think
47:23
Speaker 1: back to my days and research, there are a number
47:25
Speaker 1: of women who, um, we're really substantive, thoughtful people who um,
47:30
Speaker 1: you know, looked like me or had features that I had,
47:33
Speaker 1: And I think that was a real source of encouragement.
47:35
Speaker 1: Now as you move into the investing world, there tends
47:37
Speaker 1: to be fewer women, and that's something that of course
47:40
Speaker 1: everyone's wrestling with. How do we kind of make people
47:43
Speaker 1: feel like, um, they are welcome to climb any invisible
47:47
Speaker 1: barrier that they might see because their voices is valued.
47:50
Speaker 1: It's changing, although it takes a generation really have substantial
47:56
Speaker 1: invisible change. But there's no doubt that there are more
48:00
Speaker 1: women and senior listen your chief investment officers at morning Store.
48:03
Speaker 1: There are lots of other very senior women at at
48:07
Speaker 1: very large firms. I don't think women are as visible
48:11
Speaker 1: as men. But it's clearly there's there's certainly momentum, and
48:15
Speaker 1: you know, it's not a thing on its own, but
48:18
Speaker 1: we do want to make sure that we're getting the
48:19
Speaker 1: very best from the whole cross section of populations. Diversity
48:24
Speaker 1: of thought leads to better no doubt about that. Let's
48:27
Speaker 1: go to everybody's favorite question, talk about books. What are
48:30
Speaker 1: some of your favorite and what are you reading right now? Okay,
48:34
Speaker 1: so favorite books? And I'm thinking explicitly. I'm a big reader,
48:37
Speaker 1: I think, but I'm thinking explicitly from an investment standpoint.
48:40
Speaker 1: I think one of the books that I really loved
48:43
Speaker 1: was Missing to Leads Fooled by Randomness. I love that
48:46
Speaker 1: book partly because not I read it. I don't know,
48:49
Speaker 1: maybe five six, seven years ago. And at the time,
48:51
Speaker 1: I've been writing a lot of commentary where I'd say
48:54
Speaker 1: what happened in the markets that month or that quarter,
48:56
Speaker 1: and then I would think, I'm reading everyone else's commentary
48:59
Speaker 1: and they said, and this has because of X, Y
49:00
Speaker 1: and Z, and I would think it is I mean,
49:02
Speaker 1: those things both happened. The market did that, and that happened,
49:05
Speaker 1: but did one cause that? And they seemed as such
49:08
Speaker 1: a brilliant job of clarifying the fact that a lot
49:12
Speaker 1: of the things that we build narratives out of are
49:15
Speaker 1: just noise. And I think that's a really important and
49:18
Speaker 1: you know, the kind of truth that we should hold
49:19
Speaker 1: on to a specialized active investors and we look for
49:22
Speaker 1: those stories. Um that a lot of it is actually
49:25
Speaker 1: quite frankly noise. So I love that answer. What other
49:27
Speaker 1: books are you? Okay, so I'm reading right now, I'm
49:30
Speaker 1: reading The Bond King. I'm reading a book called UM,
49:33
Speaker 1: How to Have a Good Day, which is about how
49:36
Speaker 1: to prioritize and and organize your day so you get
49:40
Speaker 1: that satisfaction out of it that you long for. Um.
49:43
Speaker 1: It's by a woman named Caroline Webb. Is it a
49:46
Speaker 1: organizational tool or I do love checking those things? Well,
49:50
Speaker 1: that's that's the kind of thing that is very satisfied.
49:53
Speaker 1: That's the kind of thing she talks about. She talks about, uh,
49:57
Speaker 1: just kind of the behavioral elements that that come into play.
50:00
Speaker 1: So as a prioritization standpoint, planning your day ahead of time,
50:04
Speaker 1: knowing what those key things are that you need to
50:06
Speaker 1: do and not the other things. She talks about making focus,
50:10
Speaker 1: putting your activities into blocks. So this is my email block,
50:13
Speaker 1: this is my deep think block, so some really common
50:16
Speaker 1: sense and it's just one practical piece of advice after another.
50:19
Speaker 1: And then the last book that I just finished recently
50:22
Speaker 1: was called Bowling Alone. It's by Robert Putnam. It was
50:25
Speaker 1: written in two thousand and it's about the rise and
50:28
Speaker 1: then decline of social capital. So social capital being kind
50:31
Speaker 1: of the trust that we have in our community and
50:34
Speaker 1: our neighbors and our peers um and it's it's tracing
50:38
Speaker 1: that arc. And it was fascinating because obviously of COVID
50:41
Speaker 1: and lockdowns and the way we were so separate from
50:43
Speaker 1: one another and now we're coming back together. And it
50:46
Speaker 1: just got me thinking about the value of social capital
50:49
Speaker 1: and what that can mean for a country. What sort
50:51
Speaker 1: of advice would you give to a recent college grad
50:54
Speaker 1: who was interested in a career in either and for you,
50:58
Speaker 1: this is a long list, economics analysis, fund management, or
51:04
Speaker 1: being a chief investment officer. You know, one thing that
51:07
Speaker 1: I was not good at in college. I'm a present
51:11
Speaker 1: oriented person and I wasn't good at envisioning a career,
51:14
Speaker 1: and so I had just very general careers. Well, I
51:17
Speaker 1: could go into medicine, or I could be a lawyer.
51:19
Speaker 1: It didn't really think about the wide array of careers
51:22
Speaker 1: that are out there, and so I don't You don't
51:25
Speaker 1: want someone to become a little professional at age of
51:27
Speaker 1: nineteen and have some sort of you know, envision of
51:30
Speaker 1: their future in mind. But you do want people to
51:32
Speaker 1: know of the enormous amounts of variety that there is
51:35
Speaker 1: in professional life, and so I would I would suggest
51:38
Speaker 1: that people really pursue that really get a sense for
51:41
Speaker 1: the variety, whether that's taking random internships or whether that's
51:45
Speaker 1: you know, going to networking events in random things, just
51:49
Speaker 1: that you get a sampling you kind of date the
51:51
Speaker 1: investment market or the broader career market and get a
51:54
Speaker 1: sense for what's actually a fit for you. Really interesting.
51:58
Speaker 1: And our final question, what do know about the world
52:00
Speaker 1: of investing today that you wish you knew twenty five
52:04
Speaker 1: or so years ago when you were first getting started. Yeah.
52:07
Speaker 1: So there's a few things I mentioned um at the
52:09
Speaker 1: beginning of our conversation that during the global financial crisis,
52:13
Speaker 1: I learned that a lot of very credible, experienced people
52:16
Speaker 1: could be very very wrong. And the thing that I
52:19
Speaker 1: would tell myself is that it's okay to ask the
52:22
Speaker 1: dumb question. The dumb question is probably something that a
52:25
Speaker 1: lot of people don't fully understand, and you need to have,
52:29
Speaker 1: you know, the confidence and the willingness to put yourself
52:31
Speaker 1: out there and be like, I don't get the subprime thing.
52:33
Speaker 1: You know, I don't get these trunches, or you know,
52:36
Speaker 1: I don't understand why we should be trading off of
52:38
Speaker 1: CPI prints every month. Ask those questions. I think those
52:42
Speaker 1: questions are way more profounds than people think, really really interesting.
52:48
Speaker 1: We have been speaking with Marta Norton. She is c
52:52
Speaker 1: i O of Morning Star Investment Management. If you enjoy
52:56
Speaker 1: these conversations, well be sure and check out any of
52:59
Speaker 1: the previous I don't know four hundred and twenty seven
53:02
Speaker 1: we've done over the past eight years. You can find
53:05
Speaker 1: those at Bloomberg, Spotify, iTunes and now YouTube or wherever
53:11
Speaker 1: you fill your podcast uh fix. We love your comments,
53:15
Speaker 1: feedback and suggestions right to us at m IB podcast
53:18
Speaker 1: at Bloomberg dot net. Sign up for my daily reading
53:22
Speaker 1: list at Bloomberg dot com. Follow me on Twitter at
53:25
Speaker 1: rid Halts. I would be remiss if I did not
53:27
Speaker 1: thank the correct team that helps put these conversations together
53:30
Speaker 1: each week. Sarah Livesey is my audio engineer. Attica val
53:35
Speaker 1: Bron is my project manager. Our producer is Paris Wald.
53:39
Speaker 1: Our head of research is Sean Russo. I'm Barry Hults.
53:43
Speaker 1: You've been listening to Masters in Business on Bloomberg Radio.