Mark LaMonica: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or need. 

Shani Jayamanne: One of the most common questions we get is what we hold in our portfolio.  

LaMonica: And we always are a little bit reluctant to share that information because we pick the investments that are due to very specific circumstances that have to do with us. So what our goals are, what we need to achieve to get there and a variety of other factors that makes the investments we hold right for us.  

Jayamanne: So what we try to do in Investing Compass is provide a framework. A framework that allows investors to add structure to their investment process but customise and apply to their situations.  

LaMonica: That’s right, Shani – investing is deeply personal.  

Jayamanne: And it is an ever-evolving process. What we can do is keep learning and understanding what works for us as our situations and our goals evolve. So, for those that are asking about our portfolios, we’ve got something infinitely better. 

LaMonica: We have a very special guest. So we recently had Matt Wacher on the podcast, and he is the CIO of Morningstar Investment Management Asia Pacific. So Matt is in a dream team of CIOs that are based in the US, Australia and the UK and the US team is led by Marta Norton. 

Jayamanne: Marta started her career as an economist at the Bureau of Labor Statistics. She then moved on to work as a fund analyst, and then to portfolio management, and then her current role as CIO of Americas for Morningstar Investment Management. 

LaMonica: And Marta is a special guest because not only is she accomplished, we also are extremely lucky to have her at Morningstar because she champions the Morningstar voice.  

Jayamanne: And the Morningstar voice is something that we try to do on this podcast – distil investing concepts to be more understandable. 

LaMonica: And we’ve asked Marta to come onto the podcast to share how her career has influenced the way that she thinks about investing. When a lot of CIOs get interviewed, they get asked what they are overweight in their portfolio. They get asked what they have high conviction in, in an effort to get stock picks. 

Jayamanne: Much more valuable than this, is asking a professional investor about their frameworks. Asking about how she measures her success as an investor, how important it is to stick to your investment philosophy and as an active investor, how she thinks about passive investing. 

LaMonica: We also asked how to respond to macroeconomic trends within your portfolio and a little look at direct indexing – an emerging way to invest in Australia, but more established in the US.  

Jayamanne: We’re both very excited about this episode and the insights that Marta has to offer. 


LaMonica: We have a great guest today, so we have Marta Norton, the CIO of Morningstar Investment Management in the Americas. So Marta, first of all thank you very much for joining us – really appreciate it.

Marta Norton: Yeah, my pleasure.

LaMonica: We always start these things out just because a lot of listeners are not as familiar with the industry, so we always start these out talking a little about your role and how you got there. So maybe if you could just go through, what do you do as a Chief Investment Officer and just from your background how you went from an economist at Bureau of Labor Statistics to CIO of MIM Americas 

Norton: Sure, yeah. You know its funny because I get that question a lot – what do you do as CIO? And terrifyingly enough my mind goes blank of course anytime that question comes up but when I think about what my objective is as Chief Investment Officer it’s really to drive the best outcomes I can from my team. So, it’s really to remove every barrier that might be there. So it can be as trivial to making sure we have the right resourcing, the right technology, the right tools, to as meaningful and strategic as making sure our team makes sense, that we have the right structures in terms of team structure in place and that people are all driving forward in the same direction. So I spend a lot of time thinking about how to motivate people, how to create the right incentive structures, and of course spend time thinking about investing and making sure that we’re making really good decisions – I think decision making is really critical in investing, and making sure you have the right processes and procedures in place. So I spend a lot of time doing that and then of course with the other senior leaders of the team – think about our research and our capabilities and that kind of thing.

As far as my path into this role, I’ve been at Morningstar since 2005 so I’ve been a long-time member of the Morningstar family so to speak and a lot of my career progression has really just been taking the next logical step in front of me. So I started as an analyst, I moved over to the investment team, I became a portfolio manager and then I had a team of portfolio managers and then the CIO it was really just a matter of progression. And the prior to Morningstar, I had an Econ background – that was what I studied in college, and I put that to work. But found my way to Morningstar mostly because I was drawn to a company that focused on research and allowed careers to go in a lot directions. That was kind of my path here.

LaMonica: Okay great and one question also that we tend to ask professional investors – and we’ll get into your views of markets and how that actually plays into the decisions you make for clients, but I assume you also invest personally. Are there lessons you’ve learned in your professional career that apply to how you approach investing personally?

Norton: Yeah, there’s no question. I mean as an investor I was really fully formed at Morningstar. I didn’t have a tonne of investing experience before I joined Morningstar. And when I joined as an analyst, I joined our Management Research group, so I had what I consider to be the great privilege of talking to, you know, a lot of great investors in the United States and understanding how they thought and understanding how they you know structure their investment processes and what they were trying to achieve. Because it’s a very bold claim to aim to beat the market and that’s what most you know active professional investors are aiming to do. And so I think a lot of the lessons learned or the way I think focuses a lot on the long term, so you know tuning out or at least putting into context the headlines that we see in newspapers or that we see we’re turning on the TV – putting that into context. Not overreacting to it. Not underreacting to it, just adding it to the mosaic I guess so to speak.

And also thinking in very long-term perspective as to what I’m actually trying to achieve as an investor. And I think this is the thing that can get lost on a lot of us. When we – when any of us, whether its me as an individual or you or anyone else. When we’re entering the market, we’re doing it with a particular goal in mind. We want to achieve something. We want our money to you know grow to x amount so we can do something. But as soon as we start actively investing, then we start watching the markets and we change our objective from this particular goal to you know, beating the S&P500 in the case of an US investor or something along those lines. And it can be really distracting. So I think one of the bigger lessons I’ve learned is to remember what I am trying to achieve and to make sure I am measuring what’s happening in my portfolio relative to that ultimate objective. So I think that’s a kind of another lesson for me there.

LaMonica: Yeah and how should – you know we do talk a lot about goals on this podcast and a lot of the other content we put out and you know I agree that it’s a very important thing for investors to be focus on goals. But you know I think a lot of investors take the same approach that professionals do right – it’s that focus on a benchmark. And if you’re out there choosing investments and you’re not beating the benchmark then I guess it’s kind of, you’re not successful. So I mean what are the things – you talked at high level about goals, but goals are often very long term. Are there certain signals that investors should look at along the way to see if they’re performing adequately and if their portfolio is doing well?

Norton: So I think you know, you have to have those check-ins in terms of what kind of progress toward goal are you making. One of the things that I think is really distracting is a lot of the way we measure performance over short and long periods is through the lens of trailing returns. So the idea that you know, this is your investment and over the past three months, over the past one year, over the past three years, this is the return relative to that of the benchmark. And what I’ve found looking at trailing returns for a vast number of strategies – our own- and third-party strategies, is that trailing returns, even over long periods, deviate meaningfully. You know so one bad quarter rolls off and all of a sudden, you’re ahead of the benchmark. One bad quarter rolls on and all of a sudden you’re 2, 3 percentage points behind benchmark. And so a lot of folks feel though, well yeah I can’t gauge the effectiveness of my strategy over a three month period but if I’m looking at 5 year trailing returns or 10 year trailing returns then I’m getting a really good indicator as to the success of my investment and how on track I am.

And I think the analysis that I’ve shown, you know per my earlier comments, suggests that’s very much not the case. That those trailing returns deviate very quickly and very meaningfully over a very long period. So at a very basic level, I prefer to look at kind of growth of $10 000, progress toward goal and you can see kind of your initial investment, call it $10 000 and how it deviates with market gains and losses over time and you have this longer perspective of how it’s tracking and I think that’s a really helpful way to look at things. And I say this last consideration with a lot of caveats around it. But I do think that, you know, whatever your mix of stocks and bonds are, there should be a certain expectation – a conservative strategy is different than that of an aggressive strategy. And so if you find that your conservative strategy is behaving more like an aggressive strategy, so you have predominately fixed income but it’s swinging around just as wildly as if you had 100% equities, then I think that is something that is a greater concern. But the dependencies on trailing returns is something that I would be pretty suspect of.

LaMonica: Okay great, yeah no, that’s some great advice because I think some people struggle with that and I think that’s why end up chasing performance. And an ETF they have underperforms for half a year – all of a sudden, they’re going and looking at moving their money and that can obviously cause a lot of bad consequences.

So let’s talk a little bit about, and we’ll keep on the theme of individual investors and what they can do to manage their own portfolios but we’ll also incorporate I guess the approach that Morningstar Investment takes, but you know we always tell people to put structure around their investment decisions. So I think as you mentioned, understanding their goals, understanding the types of vehicles, the investment vehicles that align with your goals and help you achieve them. But also, we talk about investment philosophy. And this is where we can go back to your approach professionally, and you know the Morningstar Investment Portfolio has had a tilt towards value for I think quite some time now. And maybe if you want to talk a little about that and why it’s important to be consistent with, philosophically, how you invest.

Norton: Yeah you know it’s a really good question and I talk about our philosophy with a lot of respect for investors who have very different philosophies. I think that there are many different ways to look at maybe some are better, some are worse but there are many different ways that you can end up at the destination. But a well-formed investment philosophy should put investors in a position to achieve whatever their goals are and should also deliver the kind of experience that allows them to hang on over the time period that they need to, to achieve those goals. And that second consideration is actually more important than it sounds because Morningstar Inc. research shows that investors have a tendency to behave increasingly poorly the more volatile something is. So the more swinging around, especially experiencing losses or maybe not even just keeping up in the good times, the harder investors have with hanging onto that. So our investment philosophy is predicated on the idea of, what are the known things that we think, can put portfolios in a good position to deliver strong returns relative to benchmarks and the like, and peers and the like, over time, and how can we manage it in such a way that people are going to hang on over the many years that they need to hang on to achieve those objectives.

And as we look at the research and as we look at our own experience, what we found is when we look at a long-term orientation – meaning that you’re focused on what something’s actually worth and not kind of where the headlines are saying or what other investors are doing but you’re really focusing on what something is worth to make your decision. And you care lot about what you’re paying relative to the price of what something is. And we can understand this so well in so many other areas of our lives but sometimes when it comes to investing, we just get clouded vision.  So one of the ways I look at it. Is if a store, you know that I love called, you know, say, Nordstrom is having its half yearly Sale. I know what these shoes typically sell for. I know what they're selling for now, and I know that's a great bargain. And that same idea, you know what something's worth, and you know when the price is deviating from its value and you're trying to buy it when it deviates below its value - that's what we're doing with investing. And as we study a lot of the great investors who've really been able to compound wealth over time, you know Warren Buffett's of the world, they have the same mentality. I'm going to try to buy something below what it's worth. I certainly don't want to pay way above what it's worth. And so that's the philosophy, that kind of undergirds what we're doing.

And then we have this second consideration. Yes, we want to buy things below what their price, but we also want to make sure that over the three year period, over the five year period that we're generating a consistent enough performance profile that people aren't going to run for the hills because you know so often times and, and you mentioned we've had you know kind of a tilt toward value for a long time, so oftentimes it can take many years for some of these investment stories to, to wrap themselves up to, you know, come to fruition. And so we want to make sure we have a diversified set of investments so that we're not just experiencing the same thing over and over again, but we have lots of different things that can behave differently in different market environments. So we call it building very robust portfolios and that's been something that I think we've always done. But over the past few years, we've learned the value of all the more and we've put this into practise in in a much more effective way, and I think it's really helped us navigate the past few years pretty well.

LaMonica: Yeah. Great that is. And, and I think the problem is so many times just when you're consuming media, you're reading the newspaper, you have advocates for very specific investment philosophies that are coming out and of course, saying now is a great time to take a growth approach or value approach, and I think a lot of investors don't know what to do. Are they supposed to switch back and forth? And yeah, that can be really problematic.

Norton: Yeah. And you know just following up on that point – one thing that jumps out at me. Every, every now and again we'll come across the financial advisor who says I really want a momentum strategy. I really want a momentum strategy and to me it's kind of like someone saying they want to bake a cake just with butter, you know? A lot of these strategies, there's truth. There's, you know, there is a momentum factor, right? But you don't want to just have a momentum factor. You want to have all of these different pieces within the portfolios and that's what we're trying to do.

LaMonica: Yeah, that butter cake sounds delicious, by the way, but that's, that's just me.

Let's talk maybe a little bit about the environment right now. There's a lot of things that I think are worrying investors. And once again, if we  turn and look at the overall economy. We've got still pretty high inflation, interest rates that we don't know if they can continue to go up, but they've risen very fast. A lot of talk about recession. When you look at some of these macroeconomic trends, how does that input or how does that impact the way that you invest and how should an individual investor think about that?

Norton: Yeah, we spend more time than I think people might guess, considering the environment that we're in. So, you know whether you call that the macrotrends of the day or whether you just think about the kind of structural conditions that are undergirding the economy and the markets, we spend a lot of time thinking about that. But what distinguishes us from what you would elsewhere, is that we're not trying to necessarily forecast where inflation is going to be, where rates are when the recession is going to hit. What we're trying to do is plan for a whole range of different environments and this kind of harkens back to that idea of building robust portfolios. But we're trying to say, what does the market expect and so what's built into prices. But you know what does the market already know and think is going to happen and then what if that doesn't happen? Where can we go for some protection from that environment.

And so we really put this philosophy to work in the spring of 2021 when Jerome Powell was saying that inflation was transitory and so was everyone else. Everyone was saying inflation was transitory. And of course there were a lot of people internally who felt like, yeah that that's a pretty solid argument that, that things sound. We had this economic freeze, with all the lockdowns. Now people are coming out of their homes and there's going to be inflation. It's going to cool off really quickly.

But what we asked ourselves is, what if that's not true? And how would our portfolios behave if inflation sticks around for longer. And what we found is some of the positions that we had owned for a long time that we're now getting more fully valued like energy, we're actually a really good hedge if inflation turned out to be far stickier than people realise. And so we held on to those, to those positions and actually really improved performance over, over the stretch of, of years since then. And so what we're often trying to do is say, okay, we know what markets are saying – what if that's not true? And how do we build a portfolio that's robust across those conditions? And then the last thing that we do is we hold our own convictions really loosely. So if we were, you know sitting here last year, inflation seemed to be peaking, but was still really pervasive. You didn't really know where rates were heading, and recession was all the talk of the town. And it was really tempting given all the concerns about, you know, the economy to actually stick our heads in the sand. Get rid of equities. And just hold our nose and, and you know, just kind of take comfort in really safe and secure investments. But despite all of these scary headlines, equities, especially in the US, which had been so expensive for so long, we're getting increasingly attractive. And so we were buying in despite concerns about the headlines. And actually that move moving into equities despite the macro concerns have served our portfolios really well.

And I think it just reminds us that timing the market based on when you think a recession is coming or what you think is going to happen with rates or inflation is just a very dangerous game to play. And so you want to have things that protect your portfolios, but you also want to be focused on valuation and making sure that you're taking advantage of prices as they fall. And so it's, it's holding these two things, you know in both hands. This idea that you want to care about the macro environment you want to care about how well protected you are from it, but you also don't want to be trying to time the market. And that's kind of how we think about some of that stuff.

LaMonica: Yeah and a lot of a lot of what you were talking about, whether it's looking at specific sectors, looking at the economy, this is very much an active strategy.

Norton: That's right.

LaMonica: Now you have also talked about, you're a big fan of passive investing. So I guess you know, how do I guess overall, not how do you reconcile those, those two things, but you know, where do you think that passive investing actually has an edge for investors?

Norton: Yeah. So for one thing, I think passive investing has had a huge leg up on active over the past 10 years. And especially, I mean in the US, when you look at the big tech names and there was a handful of them that accounted for more than 1/4 of the S&P 500 as we were heading into 2022. So any index that is just continuously reallocating rebalancing into the winners, and in an environment where there's winners, just keep going up. It's going to be a strategy, that is, you know, well suited for that environment. But I do think passive has been a really profoundly helpful investment strategy, even if you're an active manager, because what passive investing has done, what Vanguard has done, has been to push fees lower and lower and lower. And that's been really good whether you've been a passive investor or an active investor, because even the active funds have had to lower their fees to be more competitive with their passive counterparts. And I also think that passive investing can lay a great foundation for a strategy.

So one of the strategies that I'm really positive about here in the US is our active passive strategy because we have a, you know, a group of passive index funds or ETF that make up kind of the bedrock of the strategy. And then we layer in active management on top of it. So sometimes I, I think in the industry we have this tendency of saying either or – I'm either active or I'm passive. I'm either ETF or a mutual fund. I only invest in stocks. And I think that's a really false binary choice. I think what we ought to be doing is taking all the tools that have been developing over the years and using them together in a portfolio.

LaMonica: Yeah, I think that's – I think it's great advice number one and also probably a great place to end this. I think we did cover a lot of ground from your history to what's going on in the world right now and certainly the approaches investors can take to align to their goals. So, Marta, thank you very much for joining us. I really appreciate it. And I’m sure the listeners do as well.

And yeah, thank you everyone for listening. As always, we'd love comments or any questions you have, you can send to my email address and any comments on your podcast app would be much appreciated. So thank you very much.