Marta Norton on Direct Indexing and Investments

and fifty billion dollars in client assets. She has a fascinating career, starting at BLS, working a way up as an analyst and eventually head of outcome based Strategies for morning Star, eventually rising from that position and portfolio manager to chief investment officer. We talk about everything from when do you think about risk, how do you diversify a portfolio? At what point do you really have to rethink the fundamentals of what's going on in the economy and the marketplace.

I found this conversation to be absolutely fascinating, and I think you will also with no further ado my conversation with morning Stars Marta Norton, so BLS economist, how did that happen? Tell us about that opening gig? Right, So it's a pretty heavy title, maybe a generous title for a twenty three year old. Bills recruits just like all

other organizations, recruits at college campuses. So there are a number of us heading in out of college into the BLS, and of course b allst home to the Consumer Price Index, which we're all watching so closely. I was on the Producer Price Index, so the sister index, focusing on the prices that produces that's right. So I was on the research team, so putting together research. I wrote a scintillating piece on beef and cattle prices that's right, which you

can find in the monthly Labor Review. And I spent a lot of time working with folks, helping with contract escalation, identifying the right index for them. And actually I was at the p p I. Most people may not remember this, but in two thousand four, the p p I was a month and a half late. So sometimes that process my mind today when people are watching the cp I, I can't imagine how people would react. Why was it

a month and a half late? No, for so, we were converting from the Standard Industrial Classification system to the North American Industrial Classification System, so taking potatoes from one area, moving them into another area, making sure everything was in its right place, and like all things, it took longer, was more complex. Why wouldn't use the old model until the new model is ready to you would think you would think. I think it was just a bit of

poor planning more than anything. No, you know that that can happen, and it's funny. I had my first brush with you media as a professional at that time. The journalists, of course, we're calling in. Folks were calling in, where's our PPI? Conspiracy theories abounded, and a journalist, I think, could how I was mostly a child and was trying to get the dirt out of me, and I said something like, we have no idea when the PPI is coming out, And that's the quote that I got into

the papers. Let's it would change in model. You got to give it a couple of weeks, you know, sometimes the movers late. That's very funny. Show from Bureau of Labor Statistics. How did you transition over to Morning Star? Right? So I leave the Beer of Labor Statistics and I move into economic consulting. And this is distinct from management consulting, which I think a lot of people are pretty familiar with.

With econ consulting, at least at the firm I was at, it was a lot of expert witness testimony, so litigation around unfair competition or the like. A company would pull in our expert witness, and I was part of the team to put together the case to explain the market size or the market share or what have you. And it was interesting work. It was demanding, work, was pretty grueling. But the career paths from there were either kind of the PhD route or the legal routes, and those weren't passed.

I was necessarily interested in pursuing right then, So I thought, okay, let's stop trying to apply the major directly to the career and maybe have a little bit broader perspective. And I loved research. I knew finance had a close corollary to kN I was in Chicago, morning Star being the research firms, so I applied and was hired as an ec F analyst in two thousand five. They were actually

relatively nascent, but they were back then. You were there really as they exploded, oh eight or nine, more or less after the crisis, right, that's right, And so morning Star coverage was really just getting started on e t f s right in the two thousand five period. And

of course now it's a very robust coverage. It's sophisticated, it has a philosophy, but then we were still feeling our way and so there was a lot of need on the active mutual fund fronts, and so my coverage list it kind of converted over time to focus more on mutual funds, to focus on five to nine plans college savings. I was getting my c f A charter around that time, so it was a period of I guess I would call it intense study, intense focus on

understanding different investment strategies. What makes a good investment strategy. I think a lot of people think of morning Star, and rightly so for the Star ratings, which are performance measurements, But morning Star spends a lot of time actually doing fun to mental work analysis on what makes a good mutual funds? You know, the people, the process in that work. And that's where I was spending my time as an analyst. So how do you find your way from economists to

analysts to asset manager? How did that transition happen? So in two thousand eight, I I just perceived my c F A charter and I was beginning to look around and think about, you know, where else would I want to go in this company or or outside the company. And at that time, the morning Star managed portfolio's team, which as you mentioned, as a subsidia, morning Star had an opening, and so I tossed my hat in the ring and moved over in October. Oh, so that's some

timing right in the storm. I know, I want to run assets. Let me let me catch the falling night here. No here, So you're about to start the worst six months in a long time. What was experience like beginning in asset management in the eye of the hurricane. I've read that investors are really marked by the environment in which they kind of of age. Um. And so I came of age in the global financial crisis, and I mean there were so many lessons learns that maybe I

had to process over time. One of them was very smart, very credible, people with very good backgrounds and experience can be very very wrong. Um. And I saw that firsthand with some of the analysis that was done at that time. I saw how personal money is. Let me give you some background on morning Start managed portfolios. These are portfolios that we're creating, whether their individual stocks or whether they're multi asset portfolios, that we offer to financial advisors, who

in turn offer them to their clients. So these are stocks, bonds, ETFs, mutual funds. They can be, yeah, they can be kind of a varied collection, varied instruments that were implementing that the views in and so our customer bases financial advisors and their underlying clients, and so over that period, we were having maybe bi weekly weekly calls with finance to advisors, just opening up the doors and having a conversation. We're doing the same with clients. And I can remember one

client on one of our calls. I was sitting in a room nine oh one that I still sit in today, um, and he was saying, just go to cash, Please, just go to cash. And you know, it really struck home with me that money is very personal, that it's closely tied to security, and when we look at price movements on a chart, sometimes we forget what it feels like

to be at those different points on the chart. And it just stuck with me this idea that this is a very serious matter when you're managing folks assets, it's personal in all sorts of ways. It's not just their security. A lot of people look at their portfolio values and it impacts their sense of self worth, their confidence, how they view the world. I mean, if you begin as a trader or a portfolio manager, you kind of learn like a surgeon. You have to compartmental opposite. You can't

wear it on your sleeve. But that's not how individuals perceived. It's this role in real right, and I think that's why there's so much importance. And this is something that I think is close to the heart of Morning Star. But there's so much importance in the purpose of education and telling people what to look at, because that's what I benefited from going to morning Star learning investing through morning Stars lens. You don't necessarily need to take your

signals from recent market performance. There are other things that should be your signals in terms of how you're doing as an investor. So, so you as an investor, began as an economist, then you're an analyst, then you're an investment manager, then your portfolio manager, now you're in chief investment officer. Each of those steps is a very different role, and you're looking at different things and experiencing different things

throughout that progression. What really stands out, um, because that's really interesting career path. Yeah, you know, I look at my career and kind of three chunks there's the pre Morning Star chunk of being an economist working in econ consulting, and I see a lot of value in that UM, in part because I think if you're with the same company your entire career, you can sometimes fall into the

fallacy that grass is greener somewhere else. And so I was able to have some career experience from that UM, and then I have the period where I was with Morning Start Inc. Doing research and just soaking things up, and then I move into the money management UM part of my career, and I would say that there was a stretch from two thousand eight to call it two thousand and fifteen where I was managing a ton of

different types of mandates. I was on the road with clients and financial advisors sometimes once a week, understanding who they were, what they were looking for from us, and there was just a very rich development period, which I think at the time, I don't know if I fully appreciate it. I'm someone who likes to see change like sncy development, and so it required a you know, a bit of patience over that stretch, but it was I think a very foundational period for me to just have

build that experience in the markets. So how do these differences between being an economist and a researcher versus someone who has to execute on theory. How do the difference is manifest in your day to day You know, it's a great question. I think the first thing that would come to mind there is that I think when you are a researcher or a theorist or an analyst, and you're not putting money to work, it's a lot easier

to be an ideologue. And when you are an investor, you have to learn how to have a philosophy but remain flexible, be willing to be proven wrong in real time and know when you're actually proven wrong um, and being willing to know when you're not being proven wrong and when the payoff is still coming, and to not be so dogmatic. And I think that's a lesson that

value investors have learned repeatedly over the past. You know, really since the global financial crisis on, I think there was an assumption that value is always is going to come back any second now, and I think people have had to reevaluate how they think about things. Huh. You know, I like that description. The feedback loop is so much more rapid in practice. In theory you never are bitten by the seeds that you plant, but in actual practice

you find out very quickly. Are you right wrong? Yeah? And you know, Barry, I've been spending a lot of time reading about decision making. So I think a lot of folks have read Anti Duke book on on Thinking and Bets, and I think that perspective of don't evaluate the outcome, evaluate how you're making your decision the process. That's something I've learned as a practitioner, not so much as a as a theorist. She starts the book, if I remember, with the story of do you go for

it on fourth down? And loves that story. That was a very It's such a perfiximation of good process, bad outcome. Over time that wins, but you lost that one game that people can't get past that. So let's talk a little bit about morning Stars history. They're in Chicago. I know of them from their mutual fund reading business. Tell us a bit about your association with the firm so

Um morning Star actually has a really rich history. And to hear Joe and Suada our founder hell it Um, there was a bit of you know, kind of an entrepreneurial spirit. He wanted to be an entrepreneurial UM. He was in the investing world and he was intrigued by Warren Buffett, and he was looking for kind of that market opportunity and he found it in the mutual fund space. Now, as he tells it, the mutual funds space was a

pretty nascent space in the early nineteen eighties. It's not like it is today where mutual funds are ubiquitous, and he saw it as a really positive good thing for the individual investor to have access to these top money managers. UM. But he found that morning Star was making a lot of or excuse me, individual investors were making decisions based solely on on trailing returns, which is we all know it's not a good investing strategy. So he founds the

company in the early nineteen eighties. His focus is on mutual funds, providing data, providing analysis, and generally helping individual investors have better outcomes. And so that general sense of empowering investor success is the same mentality that Morningstar has now taken and its research to e t s, to you know, individual stocks, to credits. UM, it's software, it's data, and of course it's Investment management group. When did the

investment management saw to the business begin. There's different kind of histories to different parts of it. The managed portfolio business began in two thousand one, but we've had consulting arms. We acquired Ibbotson, which has its own rich history, and then we also have global groups UM outside the U S And Sydney and London and in other places that

we've added to the mix over the years. So about halfway through the history, really full bore asset management that's is introduced, which kind of answers the question, Hey, why would a research from new to CEE? I Oh, but really it's much more than a research front, that's right. That's right. So it's for the asset management business. And in fact, there are four CIOs in the business. There's

one there's one for each region. So I sit in Chicago, I have a colleague in London and one in Asia pac Um, and then we have a global c IO who we report into, who sits in London. So when did Morning Star acquire Ibbotson? Because I interviewed Roger Ibbotson, I want to say something like that. So two, yeah, I didn't realize that Associates was part of morning Star at the time, right, so now it's all kind of

folded together. What we what we did is we had these separate strands, these separate capabilities, and there was an effort to think about what do we want to look like globally as one cohesive unit. And so we've pulled together as an asset manager. Huh. So you do mutual funds, traditional neutral funds, you do uh, E t fs? What about bonds and fixed income? So what we do is

we have the individ dual security portfolios. We have our own mutual funds that we use within our model portfolios, and then we have model portfolios that rely on e t f s from third parties UM, and we mixed the two together as well as kind of an active passive approach. Our fixed income exposure right now is through third parties, so we'll buy e t f s or we will use subadvisors. So if someone else is doing it, it's an expensive Why do you want to recreate that wheel?

What we're actually focused on is these model portfolios that we're managing, these multi asset financial solutions UM. And you know, this is an area of expertise something that we've been doing for more than twenty years, and what we're doing now is thinking about how do we want to power those model portfolios, and so that's where the mutual funds come in. In In fact, for a long time we used

third party mutual funds. It's an area of expertise for Morning, so are selecting those mutual funds and when we found that, we just wanted to try to reduce the layers of costs. When you're owning a bunch of mutual funds, you have all the ancillary expenses built into those expense ratios. So if we could take what we thought were best to breed thinkers and put them within our mutual funds, we could cut down on the layers of costs, and that's

in fact what we did. So if you guys are driving the creation and exactly what these funds look like, how involved have you gotten in thematic investing? Is that something that's significant. So a big part of who we are is our global research platform where we're covering you know, equities any which way you can slice them globally in the same thing on the fixed income side. So what our Capital Markets i P really is is looking at what are the fundamental drivers of these asset classes and

how do we think about them from evaluation perspective? What do we think of them on a prospective basis, and so you can think of that maybe I guess as thematic we're sometimes focused on very narrow areas like a

country or a sector. UM. We also have the ability within our mutual funds to create UM equity sleeves, so individual stocks that represent the opportunity and we would do that when we think the e t F is too expensive or we think the e t F isn't actually capturing what we think is the opportunity UM, So we have that embedded in our mutual fense as well. The past two decades has seen a giant rise in alternatives.

What do you look at in that space? How do you think about private equity, venture capital, or even head funds within alternatives. We actually have a pretty rich history there and we've been managing an absolute return portfolio for a long time, but our focus and alternatives UM, we spent a lot of time thinking about what do we

want to do with this space? What you know, what's different that we could get with alternatives from stocks and from bonds, And what we landed on was a focus on identifying strategies that are not driven by the same factors that drive equity returns or you know, bond markets, and focusing on strategies that have had limited draw down.

So our focus has been selecting these third party strategies that we think are somewhat predictable so that we can use them have a role in portfolio and also um an alternative to what we have with and fixed income and equities. So we have a merger arbitrage strategy, we have a convertible arbitrage strategy. We have a strategy would I wouldn't necessarily classified as global macro. It's kind of a fund of funds approach with different models embedded in it.

And actually that that's suite. That collection of strategies, which is in the morning Star Alternatives fund, is where a lot of our portfolio managers were turning to at the end of last year when you know, fixed income is so poor on a prospective basis, equity valuations are really high, and so alternatives are alternatives haven't been positive, but they have lost a lot less than even short data bonds,

So it's been a good ballast for us in this environment. Yeah, down five percent is better than down right, that's a that's a huge difference. So let me stay with the concept of not quite alternatives, but different way of thinking about investing. What are your thoughts on things like personalization and direct index in Yeah, so personalization is portfolio managers, and I was a portfolio manager for a long time. You really have your head down, your focus on your strategies.

So I put my head up as a c I oh, I get a vision of the broader picture, and I start hearing a lot about personalization, and I don't know what people are talking about, frankly, um, and I ended up presenting on this at the morning Star conference this spring, and so I spent a lot of time trying to understand it. And if you don't mind, let me give you my understanding how I came about to how I

see it. Um. If you were like me and you spent your high school wandering Blockbuster looking for something that you wanted to see that was in stock, you found yourself in a much different situation in the pandemic where you're sprawled on your couch and you're just streaming content through Netflix that is yes, and it's algorithmically chosen, just for you or um If you have the privilege of driving a Tesla, you don't have the indignity of your

husband messing with your mirror and your seat. You can just create a drive out profile and it recognizes you. So personalization is not just a marketing message where it's dear Martha, you know whatever. It's actually products that are built and adjusted for you. And it began outside of financial services. Now, when I start to think about financial advisory work, I can't think of a place where personalization

isn't already something that advisors are wrestling with. They want to know their clients, they want to invest according to what their clients need, but it's been a hard thing to do at scale. The technology just hasn't been there to be able to customize the way you want, from profiling the clients to creating the right strategy, managing that strategy, and then you know, a decumulation phase. It really hasn't

been there for the mass market. And the technology has now advanced to the point where a lot of those capabilities can be available to a lot of different advisors, so they can personalize and create customized experiences for clients, and that customized experience can be through client profiling, where the profiling was far more iterative and behaviorally, you know,

infused with behavioral finance insights. Or it could be the actual portfolio where you're taking to standard portfolios smashing them together, where you're doing direct indexing. UM. So there's a whole range of products and developments that are maybe changing the way financial advisors can interact with their clients and improving it. So let's talk a little bit about what's going on

with mutual funds and ETFs. We talked a little bit about starting managing assets in the middle of the financial crisis. It seems that's kind of the line in the sand. After that, we saw a pretty robust appreciation for both passive investing and E t F. Tell us a little bit about what you've seen from from morning Star. Yeah, so, I guess to kick things off, I listened to the conversation you had with Eric but tunis the Vanguard Effect, and I hadn't read the book, and I enjoyed that conversation.

I resonated with a lot of the insights, and as I think about it from my perspective, I think back to a book I read when I started Morning Star called Piece of the Action by Joe no sarah Um and he talks about how the middle class became part of the investing class, and he outlines credit cards, and he outlines mutual funds and money market funds and retirement accounts. And the book I read, its version was in the

nineteen nineties. I think if he had continued it or the book were written today, if I were writing the book, I would add passive investing and e t F s onto those milestones or mile markers where we're really seeing great improvement for the average investor. And that's largely because of the huge impact that passive investing has had on fees um just giving people a much better um outcome. So morning Star Ink research has shown time and time again that fees are one of the few very reliable

predictors of future performance. And I think that's just a mathematical reality, right that you just have more if you didn't take out a lot at the beginning. So I think there's a real benefit to the past of investing the ET trend. In terms of kind of what this means for active and passive I think there's a lot to that. I don't know if it's a one for one question. But as as an active investor, I can

say I'm a big fan of passive investing. So you brought up something that I have to give Morning Star a ton of credit for. Ross Kinnel writes a piece. I think it was um about how expense ratios and star ratings predict success. And it's a pretty thorough analysis. But the too long, didn't read version is, hey, if you could look at nothing else, just look at expense

ratios and buy the cheapest one. And really, for a company that built its reputation on the star rating, that was a pretty um risky thing for not only morning started release, but stand behind and keep it on the site for a decade later. A lot of companies would have would have buried that. So Morning Star has been Morning Star Larify. The research side of Working Star has

been very clear on that expense case. So there's Russ's Peace, and there's many other pieces throughout time that have said, as we look at what we think predicts future outcomes, those expenses are key. It's interesting on the star rating side. Now, just for background, at a very high level, the star rating is looking at risk adjusted returns, right, big difference

from just returns and relative to category peers. Star rating launched very early on around and it's gone through a lot of methodology updates over time, and it's a really elegant measure of performance and a great starting point. But I don't think there's an analyst on the research side of the house who would say, look, you have the star rating and you're all done. I mean, there's so many of them who are spending so much of their time analyzing the people in the process and how the

performance relates to that in the price. There's a lot more that goes into picking a mutual fund or a strategy than just taking a look at its historical track record, and that to the very least. So let's talk a little bit more. Are about active fund managers. One of the criticisms that have been leveled by both other active managers and academics is, hey, a lot of this is just expensive closet indexing. How do you look at that when you're thinking about either a portfolio you're analyzing or

creating your own portfolio. Within Morningstar Investment management, we are very much high conviction investors, probably concentrated. Concentrated portfolios are willing to stick our next out and look different than a benchmark. And we've learned some hard lessons that way. Um, you know is you can imagine we're not going to get every call right and that at times can be costly, and so we've put more thought on how you size

into positions or not. But I think closet indexing was a big topic when I was in research, and there was a lot of work around active share and the like. And I think it's still it's always, I think, going to be embedded in the community because when you're wrong and you weren't close to the benchmark, it's incredibly costly. I think Jeremy Grantham caused a career risks or you know that kind of thing. So I think it's always

going to be part of human nature. Um. I wonder, and I haven't done any research on this, but I wonder if it's been harder over the past few years to be a closet index or successfully you know, pretending to be active but making the benchmark because of how big, you know, the big six companies in the US have been. It's been very hard to own them without becoming a non diversified mutual fund at index weight. So I wonder

if it's been harder to play that game lately. And you talked earlier about how software and technology has progressed. It's so easy today to look at concentrated risk active share and how different you are from the benchmark, and whether that difference leads to outperformance or just expensive differences. That's so, you're a long term investor, you work with clients who themselves have clients that are long term investors. What are some of the things you're doing now in

terms of portfolio construction. How are you thinking about changes to be made and opportunities that are either available or might have been missed over the past year. So you know, as I think about a long term investor, and when I'm thinking about a long term investor, I'm thinking of anyone who doesn't have a need for their assets in the next few years. So maybe we're talking about five

years and out. And you look at this investment climate that we've been in, and when we were looking at the markets at the end of both US equities and US fixed income struck US as extremely expensive. I mentioned that we'd put more assets and alternatives than we typically had um At this point, markets are a lot more attractively priced. I mean, there's a lot of nuance to that,

but they are more attractively priced. So if I'm a long term investor and I'm thinking about what opportunities is the market serving up today, my impulse, all else held equal, should be to add back to exposures in the portfolio, whether that's dollar cost averaging new money, or whether that's looking at areas that have held up or been quite defensive, which you know, it's hard to find those areas, but they are out there, and adding back to more of

the risky areas. But the caveat there is that I think that at least from our vantage point, markets are closer to fairly valued than extremely cheap. So it feels more like a dollar cost average market to us than than anything else. Not picking a bottom quite yet, that's right, I'm right there with you. So let's talk a little bit about the state of today's markets. You said earlier

valuations were historically high, both stocks and bonds. Late right about now, what are we twenty five year average for the SMP International stocks look kind of cheap, small cap

and value were interesting. Just for a little context, we're recording this mid October we really we haven't gotten the latest pp I. We don't know what earnings look like quite just yet, so we're still dealing with the worst of and not knowing when the smoke clears, tell us what you think about the current environment, what looks intriguing. So there are a lot of nuance to today's market.

If we have proprietary models that we you know, update with our insight to give us a sense what valuations are you know, around the world here at home, and when we look at the broad US bond market, the broad US stock market there is as attractive as they've been since we've been running this program, um since you know about time frame. So that's good, but it's not great. It's not as though they're pricing in armageddon or anything along those lines. So we are still somewhat cautious. We're

adding back to US equities. That depends on the portfolio, of course, but we're adding back to US equities, especially where we were severely underweight that area. We are interested in fixed income. But I think a lot of times when people talk about valuations, they act almost as if someone is in cash and equities, But if you're in a multi asset portfolio, and your fixed income is also getting a lot cheaper. That makes the calculus a little

bit trickier. Um, so maybe you want to be adding to your fixed income as well, and that's something that we're weighing a bit too. Where is the better opportunity versus equities versus fixed income? And I wanted to follow up on the point that you made about international because

those are meaningful positions for us. They've been relatively cheap for a long time, but now through our models they are looking absolutely cheap, and that means that they're cheap relative to the fair value that we've identified for them. And so I'm talking about really the nasty stuff here. I'm talking about China and all the concerns that are

around it and the sell off that it's had. Talking about Germany and it's you know, close and epicent our nature to the European energy crisis and the impact that the war has had on it. I'm talking about UK and the troubles that it has. These are markets that are under pressure, and I so wish that markets could be absolutely cheap and not be in trouble, But oftentimes it's the fact that yes, you're not gonna get stuff

absolutely cheap unless something at the something went wrong. So what we're we're weighing is how much is priced in it else could go wrong, And so we're sizing very carefully in these opportunities, but we can't deny that there's a valuation opportunity in them. So things are attractive, but it's not dirt cheap. And this is why you mentioned

dollar cost averaging is an attractive strategy. We may not be at the bottom, but we're close enough that hey, maybe we're a few months earlier, and if we keep d c A ing over the next year, you'll catch early bottom recovery and then that's whatever the next cycle. That's right, I mean as as a as a fundamental investor, we're never going to call at the bottom. I know a few people who can do that consistently. But what we can do is have the right impulse as markets

are moving, as they're selling off. In general, the right impulse should be to add. We know that um as markets are rising, the impulse should be maybe holds tighter or maybe you know, not the adding. And so we're trying to find that behavioral discipline you mentioned you're looking at fixed income as more attractive than it was. Not only has fixed income fallen double digits, pretty substantial, but you're now actually being paid when you're a fixed income buyer.

When we're recording this, the ten year is not too far off from ten percent. There's some high quality corporates that are about five percent, and you could look around and find Muni's running a tax equivalent in the fours or higher. Is there now an alternative? Can we no longer say it's Tina and it's equities or nothing. I've heard it's Tina, it's Tara, and it's Cindy. Um, so let's go for so Tina. There is no alternative. Okay, there's Tina, there is Tara. There are reasonable alternatives, and

then there is Cindy. Credit is now delivering yield to the three sisters, the three sisters of fixed income. So the era of you have no choice of but equity or nothing is over. The era is over. But the bottom line is there is yield in fixed income. And even though it's below the most re and cp I, the expectation is inflation is going to come down eventually, and if you're buying a four, you're locked in above inflation.

Hopefully three percent or maybe even a two handle. So as we look at the fixed income landscape, I think what you're seeing, you're getting paid at the shorter end of the curve much more attractively than you had. You're not taking on enormous amounts of risk in that area. Either from our credit or a rate perspective, we are looking at high yield. We are looking at areas like

emerging market debt. The yields are much more attractive, but we haven't seen a whole big pickup in defaults, and emerging market debt has its own concerns in this type of environment, so we're interested. But I think if we're looking at where is the net dollar going today, I think it's going to some of those higher quality segments of the fixed income market. End tips. Of course, tips

have been a disappointment. I think, I right, you would think inflation screaming tips are like, yeah, you know, they're actually lost a little bit of that. Yeah, and they're really showing kind of their sensitivity to real rates. But because they've lost ground and because inflation expectations have come back down, it's not a bad time to be thinking

about tips for a portfolio. What else can a fund manager or adviser do to protect a portfolio in the face of let's say transitory turns out to be wrong and that inflation is persistent for another couple of years. What should investors be thinking about the big struggle? And so we've been working on that analysis. In fact, we

originally started analyzing our portfolios for inflation. What we do We have our research platform, which is basically defining the opportunity set for us based on kind of our viewpoints, and then as portfolio managers we get together and we think, how do we size this? What do we do with this information in a portfolio? And so back in April one, we started to think about what would inflation If inflation

isn't transitory, what would that mean for our portfolios? And we started running a lot of scenario tests and we found that with this value lean that we have the energy exposure that we had on a relative basis, our portfolios should hold up, you know, to the sixties of the world. Um. And now what we're thinking about is what's going to happen to financial assets of for inflation persists.

What's going to happen in a stagflationary environment? How do you think about these things and how do you size them? And you know, in a stagflationary environment, for example, when we look at this, we're obviously looking at that nineteen seventies nineteen eighties period. There were a few places to hide in that environment, commodities energy related being one of them, and tips weren't around back then, but you can kind of simulate the experience of stagflation those held up. So

those are the types of assets. Energy has been a long time holding for us. It's no longer attractive from our valuation, but last a year ago it looked cheap. There ago it looked dirt cheap, and so it's paid off handsomely and we are slowly edging out of it because we're thinking about this range of outcomes, these different environments, and what can protect in these different the day the war in Ukrainians see oil prices get that's right, So

you don't want to be at peak position size. But you know, people have been wondering when does this come to an end? Now? For this has gone on much longer than people expect, and it looks like it's going to go on much longer from here. So that's quite a challenge you mentioned value. I feel like value investors are the dog that keeps getting kicked. Everybody has been, well, you know, it's been ten years. When does value start to outperform growth? The past year, it certainly has done better.

How are you looking at value as an asset class? Yeah? So, you know, when I was in research, there were a lot of articles at that time that wrote how superior value investing was to growth investing um and how it always wins out. If you look at over history, value always dominates and that should have been a flag that maybe values time is done and certainly it has a weight chest. Pounding is not a good look from from fun managers and researchers. I'm gonna make an know to

that that's right. And so since then, growth has been dominant. I think it's caused a lot of value investors to do a lot of introspection. And I think one of the takeaways that value investors have had is that valuation itself is not a timing indicator. We've had our own you know ltc M moment I guess as value investors. But I think the very fact that we're talking about value investing being dead in the water is really reminiscent of the period when value investors were saying growth was

dead in the water. Um. I think these things run in cycles, and I think paying attention to the price that you're paying is a valuable strategy, whether you're buying a growth company or a value company. David Einhorn was speaking at the Robin Hood Investor Conference, and quote he says, I don't know if value investing ever comes back. So if you're looting for the opposite of value, is always going to outperform growth. Well, here's the other side of

that in an argument. And I I think, and this is something we've talked about a lot, the value growth fight or narrative value versus growth. I think it's a bit of a false narrative. I think you can be a growth investor or you can be a value investor and care about the price that you're paying for your asset. Hey, isn't that what growth at a reasonable price was all of the Yeah, yeah, you know, I think the I

think both strategies have value. It's just a matter of whether you're doing fundamental work around the price that you're paying or whether you're not. And I don't think that belongs to one or the other. Alright, So two last questions before I get to my favorite question, and the first is, since you began at BLS and worked on inflation data, I have to ask about the data dependent FED. How does that affect you as a chief investment officer.

It seems like everybody is hanging on every CPI, margin report, earnings, non farm payroll. Everything seems to take on extra weight. How do you these days? You with a FED that says we're gonna keep hiking until we see the white of inflations eyes? You know? Um? I think the one takeaway that you can have from this type of environment is that it's certainly creating a ton of opportunities, right, I mean, this type of volatility is where you can start to make money and markets if you are careful

and if you're a thoughtful investor. Of course, I have opinions on the FED. I think everybody has opinions on the FED. Everybody has opinions on the macro environment, and it's so tempting to want to just blast them all out there. But the reality, right, But the reality is it's not going to matter even if I was right, which I wouldn't be what do I do about it

in a portfolio? And so what we're really focusing on is that range of outcomes for our investors um and thinking about if this then that, or is this priced in or is it close enough to being priced in? What's the margin of safety? And I think not getting wedded to a worldview, and I think that can be the danger with a laser focus on the FED and on this macro data can be a real destruction. But that being said, of course we're watching how inflation develops.

Of course we're watching how rates develop and and how companies, how their fundamentals respond, and getting a sense for how pervasive is this environment going to be. I asked you earlier about personalization. One of the bigger new innovations that made possible by technology is direct indexing. How do you

guys look at that sort of style of investing. What do you think of its role within portfolios or people who really want to get very fine tuning in terms of tilting towards value or away, tilting to a specific UH sector, or being able to work in all the various E S G and other thematic screens that you can build in too. Direct indow that's right. And so for the folks who are a little slow on the uptake like I am, and have their heads down in their own work, let me offer a definition of direct

indexing because I certainly needed it. Um direct the next thing is something that's been around for a long time. It's it's been around in the kind of high net worth area of the world. And what it is is you have your index, you have your e t F, but instead of buying an index fund or an ATF, instead you buy a basket of security is optimized to track that particular market. And when you own the underlying securities, you can as to your point and bed your preferences.

And you can also do tax management and improve your outcomes after tax UM and as you think about we were talking about the development the rise of passive investing UM, and I was talking about the piece of the action and these markers and time where we've seen middle class you know, get a big win. I think direct indexing is another mile marker on that journey because it's another way to substantially or I guess maybe to say, to

quantitatively tangibly improve outcomes for investors. When we run our own tax alpha study, at morning Star Investment Management, we found that the tax alpha that could be added on an annualized basis, of course it ranges based on environment, but was anywhere from forty basis points to somewhere around three hundred. I mean, when we think about the huge we think about especially if if you're sitting on things like founder stock or low cost inherited stock joint. It

makes the difference. I mean, think about the obsession we have expense ratios. It's ten basis points cheaper, sign me up. And what's also really interesting about the spaces to the point that you raise a lot of folks will have these bizarre portfolios. Where have this company's stock, I inherited it, this thing. I don't know what to do with it, but I know it's sound a good portfolio. Direct indexing allows you to smartly, you know, from a tax per sspective,

transition that into a more well rounded portfolio. So I think it's really powerful. It's not for everyone, it's not for every dollar size, but it's much more available to the mass market than it is that the folks over to oh shown us in asset management did a study and found in because you had this thirt woosh down during the pandemic and then a very quick recovery. They were seeing direct index portfolios that we're doing four hundred and five hundred basis points of tax less harvesting, which

is just astonishing. I mean, I love it, and I think about a market environment like this, and I know you're interested in behavioral finance. We are as well. And one of the things that I think can really engender good behaviors if you have dual mandates, so your focus isn't just my opically total return, but indirect indexing world. It's yeah, I want this exposure, but I'm also getting all these tax benefits when the market sells off. So you have this, it will pick me up when things

are going in the wrong direction. Listen to a year like two. If you have other appreciated stock that you want to sell, you should be killing it on the tax tax less harvesting, even if you're not doing directing. That's right, but that just makes it even even better. So I know I only have you for a limited amount of time. Let me jump to my favorite questions that I ask all my guests, starting with tell us, what's been keeping you entertaining these days? What were you

streaming during lockdown? Yes, so you know this is the thing. With all the content, Barry, I have become really hard to please. So I'll be watching a show imagine Ozarks or imagine recently House of Dragons. As soon as it starts to lag, I'm gone. I have no patience for shows and constant the way us doe. But I am watching and I haven't yet turned on. It is a show called Endeavor. It's a British detective show. It's not quite as grizzly. I don't think anything's grizzly with a

British accent. So I enjoyed myself. It keeps me on my toes. So that's what I'm watching. That sounds really interesting. In fact, I know everybody kind of went through all the big ones like the Crown and whatever you but I found myself during lockdown working my way through a bunch of French, a bunch of British shows for that exact reason. It's like, you have to work, you have to pay attention, you have to pay attention, and that's

a good thing. The thing with all the streaming is I'll have it on in the background and ten minutes later I not know, right, I totally get that. Tell us about your mentors who helped to shape your career. Okay, So I say the US, knowing that she will hate that I'm raising her name, but um, and I don't even know if she knows that this was the case for me. But when I joined the research group, I was of course new to finance. I was new to investing, and I was you know, I'm a very very deliberate,

diligent person. So I'm working nights and weekends trying to discover the morning Star voice, which is where you explain complex things and very simple and accessible ways, and also just learning how to tell a good fund from a bad friend. And Christine Benz, who is a big name at morning Star, was on that team, a senior team member, and the edits that she would give me were so

robust and helpful. I would get pages of edits, which of course doesn't sound like a good thing, but it was a really good thing because it it helps me understand things so much better. And she she had a number of standing slots on on TV shows, and when she wouldn't be able to make it, she would ask if I would want to do it in her place, and it was just just the kind of endorsement and

encouragement that I needed. And I think that's kind of a special thing about morning Star, this idea that nobody's too big to help someone else grow in their career. Huh. I love that answer, And I'm gonna do something I don't normally do in this section, which is a follow up question. We were talking earlier before we started recording. We did the sound test. You said your voice was your being, of your existence, your soft voice, and that

led to a whole other discussion. Tell us a little bit about working with Christine and other women at morning Star, and why is the soft voice so difficult in a field like finance for a woman. I think one of the things people look at. And maybe this is broadly in business, and maybe it's you know, specific to finance. I don't know. I'd imagine it's broader, but a very commanding presence. I think the visualization and the audio of a commanding presence is what captures attention. And as a woman,

I have a softer voice. I'm a smaller person. You're relatively sure, that's right, So I don't have that that commanding kind of leader of a clan um looked to me and um, I think that might not be an issue for other people, but it certainly can get in my head from time to time. And I think what was so what has been powerful about morning Stars? There have been a lot of women at morning Star who have had a lot of influence who don't necessarily fit

a profile UM. And I think, actually, as I think back to my days and research, there are a number of women who, um, we're really substantive, thoughtful people who um, you know, looked like me or had features that I had, And I think that was a real source of encouragement. Now as you move into the investing world, there tends to be fewer women, and that's something that of course

everyone's wrestling with. How do we kind of make people feel like, um, they are welcome to climb any invisible barrier that they might see because their voices is valued. It's changing, although it takes a generation really have substantial invisible change. But there's no doubt that there are more women and senior listen your chief investment officers at morning Store. There are lots of other very senior women at at very large firms. I don't think women are as visible

as men. But it's clearly there's there's certainly momentum, and you know, it's not a thing on its own, but we do want to make sure that we're getting the very best from the whole cross section of populations. Diversity of thought leads to better no doubt about that. Let's go to everybody's favorite question, talk about books. What are some of your favorite and what are you reading right now? Okay,

so favorite books? And I'm thinking explicitly. I'm a big reader, I think, but I'm thinking explicitly from an investment standpoint. I think one of the books that I really loved was Missing to Leads Fooled by Randomness. I love that book partly because not I read it. I don't know,

maybe five six, seven years ago. And at the time, I've been writing a lot of commentary where I'd say what happened in the markets that month or that quarter, and then I would think, I'm reading everyone else's commentary and they said, and this has because of X, Y and Z, and I would think it is I mean, those things both happened. The market did that, and that happened,

but did one cause that? And they seemed as such a brilliant job of clarifying the fact that a lot of the things that we build narratives out of are just noise. And I think that's a really important and you know, the kind of truth that we should hold on to a specialized active investors and we look for those stories. Um that a lot of it is actually quite frankly noise. So I love that answer. What other books are you? Okay, so I'm reading right now, I'm

reading The Bond King. I'm reading a book called UM, How to Have a Good Day, which is about how to prioritize and and organize your day so you get that satisfaction out of it that you long for. Um. It's by a woman named Caroline Webb. Is it a organizational tool or I do love checking those things? Well, that's that's the kind of thing that is very satisfied. That's the kind of thing she talks about. She talks about, uh, just kind of the behavioral elements that that come into play.

So as a prioritization standpoint, planning your day ahead of time, knowing what those key things are that you need to do and not the other things. She talks about making focus, putting your activities into blocks. So this is my email block, this is my deep think block, so some really common sense and it's just one practical piece of advice after another. And then the last book that I just finished recently

was called Bowling Alone. It's by Robert Putnam. It was written in two thousand and it's about the rise and then decline of social capital. So social capital being kind of the trust that we have in our community and our neighbors and our peers um and it's it's tracing that arc. And it was fascinating because obviously of COVID and lockdowns and the way we were so separate from one another and now we're coming back together. And it just got me thinking about the value of social capital

and what that can mean for a country. What sort of advice would you give to a recent college grad who was interested in a career in either and for you, this is a long list, economics analysis, fund management, or being a chief investment officer. You know, one thing that I was not good at in college. I'm a present oriented person and I wasn't good at envisioning a career, and so I had just very general careers. Well, I could go into medicine, or I could be a lawyer.

It didn't really think about the wide array of careers that are out there, and so I don't You don't want someone to become a little professional at age of nineteen and have some sort of you know, envision of

their future in mind. But you do want people to know of the enormous amounts of variety that there is in professional life, and so I would I would suggest that people really pursue that really get a sense for the variety, whether that's taking random internships or whether that's you know, going to networking events in random things, just that you get a sampling you kind of date the investment market or the broader career market and get a

sense for what's actually a fit for you. Really interesting. And our final question, what do know about the world of investing today that you wish you knew twenty five or so years ago when you were first getting started. Yeah. So there's a few things I mentioned um at the beginning of our conversation that during the global financial crisis, I learned that a lot of very credible, experienced people could be very very wrong. And the thing that I would tell myself is that it's okay to ask the

dumb question. The dumb question is probably something that a lot of people don't fully understand, and you need to have, you know, the confidence and the willingness to put yourself out there and be like, I don't get the subprime thing. You know, I don't get these trunches, or you know, I don't understand why we should be trading off of CPI prints every month. Ask those questions. I think those questions are way more profounds than people think, really really interesting.

We have been speaking with Marta Norton. She is c i O of Morning Star Investment Management. If you enjoy these conversations, well be sure and check out any of the previous I don't know four hundred and twenty seven we've done over the past eight years. You can find those at Bloomberg, Spotify, iTunes and now YouTube or wherever you fill your podcast uh fix. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Sign up for my daily reading

list at Bloomberg dot com. Follow me on Twitter at rid Halts. I would be remiss if I did not thank the correct team that helps put these conversations together each week. Sarah Livesey is my audio engineer. Attica val Bron is my project manager. Our producer is Paris Wald. Our head of research is Sean Russo. I'm Barry Hults. You've been listening to Masters in Business on Bloomberg Radio.