Transcript: Marta Norton



Transcript: Marta Norton

The transcript from this week’s, MiB: Marta Norton, Morningstar Investment Management, is below.

You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Stitcher, Google, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.


ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, BLOOMBERG RADIO HOST: This week on the podcast, I have an extra special guest, Marta Norton is the Chief Investment Officer for Morningstar Investment Management. They advise or directly manage about $250 billion in flying assets. She has a fascinating career, starting a PLS working away up as an analyst and eventually, head of outcome-based strategies for Morningstar, 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 Morningstar’s, Marta Norton.

So BLS economist, how did that happen? Tell us about that opening gig.

MARTA NORTON, CHIEF INVESTMENT OFFICER, MORNINGSTAR INVESTMENT MANAGEMENT: Right. So it’s a pretty heady title, maybe a generous title for a 23-year-old. BLS 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, BLS is 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 producing service (INAUDIBLE).

RITHOLTZ: Throughputs, yes.

NORTON: That’s right. So I was on the research team. So putting together research, I wrote a scintillating piece on beef and cattle prices.

RITHOLTZ: Scintillating?

NORTON: Yes, 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 PPI, most people may not remember this, but in 2004, the PPI was a month and a half late. So sometimes that crosses my mind today, when people are watching the CPI. I can’t imagine how people would react.

RITHOLTZ: Why was it a month and a half late no for?

NORTON: 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.

RITHOLTZ: Why wouldn’t they use the old model until the new model is ready to go?

NORTON: You would think, you would think. I think it was just a bit of poor planning more than anything else.

RITHOLTZ: At the BLS, no.

NORTON: No. Yeah, you know that —


NORTON: — that can happen. And it’s funny, I had my first brush with, you know, media as a professional at that time. Journalists, of course, were calling in, folks were calling in.

RITHOLTZ: Where’s our PPI?

NORTON: Where’s our PPI? Conspiracy theories abounded. And a journalist, I think, could tell 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 paper.

RITHOLTZ: Listen what changing the model. You got to give it a couple of weeks.

NORTON: Yes, that’s right.

RITHOLTZ: So you wait, you know, sometimes the mover’s late. That’s very funny. So from Bureau of Labor Statistics, how did you transition over to Morningstar?

NORTON: Right. So I leave the Bureau 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 that — 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 a demanding work. It was pretty grueling. But the career paths from there were either kind of the PhD route, or the legal routes. And those weren’t paths 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 econ. I was in Chicago, Morningstar being —

RITHOLTZ: Right track.

NORTON: — a big research firm. So I applied and was hired as an ETF analyst in 2005.

RITHOLTZ: They were actually relatively nascent —

NORTON: They were.

RITHOLTZ: — back then.

NORTON: Right.

RITHOLTZ: You were there really, as they exploded 809, more or less after the crisis, right?

NORTON: That’s right. And so Morningstar coverage was really just getting started on ETFs, right in the 2005, 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 friends.

And so my coverage list kind of converted over time to focus more on mutual funds, to focus on five to nine plans, college savings. I was getting my CFA 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 Morningstar, and rightly so for the star ratings, which are performance measurements. But Morningstar spends a lot of time actually doing fundamental work, analysis on what makes a good mutual funds, you know, the people, the process and that work. And that’s where I was spending my time as an analyst.

RITHOLTZ: So how do you find your way from economist to analyst to asset manager? How did that transition happen?

NORTON: So in 2008, I just received my CFA charter, and I was beginning to look around and think about, you know, where else would I want to go in this company or outside the company. And at that time, the Morningstar Managed Portfolios team, which, as you mentioned, is a subsidiary of Morningstar had an opening. And so I tossed my hat in the ring and moved over in October 15, 2008.

RITHOLTZ: Oh, so that’s some timing, right, in the storm.


RITHOLTZ: You said, I know, I want to run assets.


RITHOLTZ: Let me catch the falling knife —

NORTON: That’s right.

RITHOLTZ: — here with no here. So you’re about to start the worst six months —


RITHOLTZ: — in a long time.

NORTON: That’s right.

RITHOLTZ: What was that experience like beginning in asset management in the aisle of hurricane?

NORTON: I’ve read that investors are really marked by the environment in which they kind of come of age. 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. 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 Morningstar Managed Portfolios.


NORTON: These are portfolios that we’re creating, whether they’re individual stocks, or whether they’re multi-asset portfolios that we offer to financial advisors who in turn offer them to their clients.

RITHOLTZ: So these are stocks, bonds, ETFs, mutual funds?

NORTON: They can be. Yeah, they can be kind of a very collection, varied instruments that we’re implementing the views in. And so our customer base is financial advisors and their underlying clients. And so over that period, we were having, maybe biweekly, weekly calls with financial advisors, just opening up the doors and having a conversation. And we were doing the same with clients.

And I can remember one client on one of our calls, I was sitting in a room 901 that I still sit in today, 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.

RITHOLTZ: It’s personal in all sorts of ways. It’s not just their security.


RITHOLTZ: A lot of people look at their portfolio values, and it impacts their sense of self-worth, their confidence, how they view the world.


RITHOLTZ: I mean, if you begin as a trader or a portfolio manager, you kind of learn like a surgeon, you have to compartmentalize it.


RITHOLTZ: You can’t wear it on your sleeve.


RITHOLTZ: But that’s not how individuals perceive it.

NORTON: Right.

RITHOLTZ: It’s visceral and real.

NORTON: 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 Morningstar. But there’s so much importance in the purpose of education and telling people what to look at, because that’s what I’ve benefited from going to Morningstar. Learning investing through Morningstar’s length, you don’t necessarily need to take your signals from recent market performance.


NORTON: There are other things that should be your signals in terms of how you’re doing as an investor.

RITHOLTZ: So you as an investor began as an economist then you’re an analyst, then you’re an investment manager, then you’re a portfolio manager. Now you’re in Chief Investment Officer. Each of those steps is a very different role and you’re looking —


RITHOLTZ: — at different things and experiencing different things. Throughout that progression, what really stands out, because that’s a really interesting career path?

NORTON: Yeah. You know, I look at my career in kind of three chunks. There’s the pre-Morningstar chunk of being an economist working in econ consulting, and I see a lot of value in that, 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 —


NORTON: — I was able to have some career experience from that. And then I had the period where I was with Morningstar, Inc. doing research and just soaking things up. And then I move into the money management part of my career. And I would say that there was a stretch from 2008 to call it 2015, 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 licensing developments. And so, it required us, 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.

RITHOLTZ: So how do these differences between being an economist and a researcher versus someone who has to execute on theory? How did the differences manifest in your day to day?

NORTON: 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 idealogue. 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 —


NORTON: — when you’re actually proven wrong. 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 — it’s going to come back in a second now, and I think people have had to reevaluate how they think about things.

RITHOLTZ: You know, I like that description. The feedback loop is so much more rapid in practice.


RITHOLTZ: In theory, you never are bitten by the seeds that you plant. But in actual practice, you find out very quickly, are you right or wrong?

NORTON: 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 any book on thinking in bets. And I think that perspective of don’t evaluate the outcome, evaluate how you’re making your decisions —

RITHOLTZ: The process, yeah.

NORTON: — that’s something I’ve learned as a practitioner, not so much as a theorist or —

RITHOLTZ: She starts the book if I remember with the story of, do you go for it on fourth down.

NORTON: Yeah. I love that story. That was a very good —

RITHOLTZ: It’s such a perfect —


RITHOLTZ: — summation of —


RITHOLTZ: — good process, bad outcome —


RITHOLTZ: — over time. That wins —


RITHOLTZ: — but you lost that one game.

NORTON: Yeah, that was a great story.

RITHOLTZ: And people can’t get past that.


RITHOLTZ: So let’s talk a little bit about Morningstar’s history there in Chicago. I know of them from their mutual fund rating business. Tell us a bit about your association with the firm.

NORTON: So Morningstar actually has a really rich history. And to hear Joe Mansueto, our founder at Tullet (ph), there was a bit of, you know, kind of an entrepreneurial spirit, he wanted to be an entrepreneur. 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 1980s. It’s not like it is today where mutual funds are ubiquitous.


NORTON: And he saw it as a really positive good thing for the individual investor to have access to these top money managers. But he found that Morningstar was making a lot of — or, excuse me, individual investors were making decisions based solely on trailing returns, which, as we all know, is not a good investing strategy.

So he founded the company in the early 1980s. 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 ETFs to, you know, individual stocks to credit, its software, its data, and of course, it’s Investment Management Group.

RITHOLTZ: When did the investment management side of the business began?

NORTON: There’s different kinds of histories to different parts of it. The managed portfolio business began in 2001. But we’ve had consulting arms, we acquired Ibbotson, which has its own rich history.

RITHOLTZ: I remember that. Sure.

NORTON: And then we also have global groups outside the U.S., in Sydney, in London and in another places that we’ve added to the mix over the years.

RITHOLTZ: So about halfway through the history, really full-bore asset management —

NORTON: That’s right.

RITHOLTZ: — is introduced, which kind of answers the question, hey, why would a research firm needed CIO, but really, it’s much more than research firm?

NORTON: 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 was one —

RITHOLTZ: Explain that.

NORTON: There’s one for each region. So I said in Chicago, I have a colleague in London and one in AsiaPac. And then we have a global CIO, who we report into, who sits in London.

RITHOLTZ: So when did Morningstar acquire Ibbotson? Because I interviewed Roger Ibbotson, I want to say 2019, something like that.

NORTON: So 2005-2006 timeframe.

RITHOLTZ: Oh, really?


RITHOLTZ: I didn’t realize that —

NORTON: Yeah, yeah, yeah.

RITHOLTZ: — Ibbotson associates was part of —


RITHOLTZ: — Morningstar at the time.

NORTON: Right. So now it’s all kind of folded together. What we did is we had these separate strands, the 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.

RITHOLTZ: So you do mutual funds, traditional mutual funds, you do ETFs, what about bonds and fixed income?

NORTON: So what we do is we have the individual security portfolios. We have our own mutual funds that we use within our model portfolios. And then we have model portfolios that rely on ETFs from third parties, and we mix the two together, as well and kind of an active-passive approach. Our fixed income exposure right now is through third parties. So we’ll buy ETFs or we use sub-advisors.

RITHOLTZ: So if someone else is doing it, it’s inexpensive why do you want to recreate that wheel?

NORTON: What we’re actually focused on is these model portfolios that we’re managing these multi-asset financial solutions. And, you know, this is an area of expertise, something that we’ve been doing for more than 20 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 fact, for a long time, we use third party mutual funds. That’s an area of expertise for Morningstar —


NORTON: — selecting those mutual funds and 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 ratio.


NORTON: So if we could take what we thought were best of 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.

RITHOLTZ: 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?

NORTON: 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 and the same thing on the fixed income side. So what our capital markets IP really is, is looking at what are the fundamental drivers have these asset classes? And how do we think about them from a valuation perspective? What do we think of them on a prospective basis?

And so you can think of that. Maybe I guess this thematic were sometimes focused on very narrow areas, like a country or a sector. We also have the ability within our mutual funds to create equity sleeves, so individual stocks that represent the opportunity, and we would do that when we think the ETF is too expensive, or we think the ETF isn’t actually capturing what we think is the opportunity.


NORTON: So we have that embedded in our mutual funds as well.

RITHOLTZ: 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 hedge funds?

NORTON: Within alternatives, we actually have a pretty rich history there. We’ve been managing an absolute return portfolio for a long time. But our focus and alternatives, we spend a lot of time thinking about what do we want to do with this space? What do, 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 drawdown. 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 an alternative to what we have within fixed income and equities.

So we have a merger arbitrage strategy, we have a convertible arbitrage strategy, we have a strategy — I wouldn’t necessarily classify it as global macro, it’s kind of a fund to funds approach with different models embedded in it. And actually, that sweet, that collection of strategies, which is in the Morningstar 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 dated bonds. So it’s been a good balance for us in this environment.

RITHOLTZ: Yeah, down 5 percent is better than down 25 percent.

NORTON: That’s right.


NORTON: That’s right.

RITHOLTZ: That’s a huge difference.


RITHOLTZ: 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 indexing?

NORTON: Yeah. So personalization is portfolio managers, and I was a portfolio manager for a long time, you really have your head down. You’re focused on your strategies. So I put my head up. As CIO, I get a vision on the broader picture and I start hearing a lot about personalization. And I don’t know what people are talking about, frankly.

And I ended up presenting on this at the Morningstar conference this spring. And so I spend a lot of time trying to understand it. And if you don’t mind, let me give you my —


NORTON: — understanding how it came about to how I see it. If you were like me, and you spent your high school wandering blockbuster, looking for something that you want to see that was in stock, you find 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 —

RITHOLTZ: Endless scrolling.

NORTON: Yes. And it’s algorithmically chosen just for you. Or, if you have the privilege of driving a Tesla, you don’t have the indignity of your husband messing with your mirror in your seat, you can just create a driver profile, and it recognizes you. So personalization is not just a marketing message where it’s, Dear Marta, 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, 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 two standard portfolios, mashing them together, or you’re doing direct indexing. 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.

RITHOLTZ: 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 ETFs. Tell us a little bit about what you’ve seen from Morningstar.

NORTON: Yeah. So I guess, to kick things off, I listened to the conversation you had with Eric Balchunas —


NORTON: — 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 Morningstar, called “A Piece of the Action” by Joe Nocera.

RITHOLTZ: Oh, sure.

NORTON: 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 1990s. I think, if he had continued it, or if the book were written today, if I were writing the book, I would add passive investing and ETFs on to 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, just giving people a much better outcome. So Morningstar Inc. 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 passive investing, the ETF 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 an active investor, I can say I’m a big fan of passive investing.

RITHOLTZ: So you brought up something that I have to give Morningstar a ton of credit for. Ross Kendall writes a piece, I think it was 2010, 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 —

NORTON: Right.

RITHOLTZ: — that was a pretty risky thing for not only Morningstar to release, but stand behind and keep it on the site for a decade later, a lot of companies would have would have buried that.

NORTON: So Morningstar has been — Morningstar Inc. clarify — the research side of Morningstar has been very clear on that expense case. So there was RECIST piece 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 —

RITHOLTZ: Right. Big difference in just returns.

NORTON: Right. Big difference from just returns and relative to category peers. Star rating launched very Alderaan, around 1985 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 and the process and how the performance relates to that and 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.

RITHOLTZ: Yes, no, that — to say the very least. So let’s talk a little bit more 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?

NORTON: Within Morningstar Investment Management, we are very much high conviction investors probably —

RITHOLTZ: Meaning concentrated portfolio?

NORTON: Concentrated portfolios or willing to stick our necks out and look different than a benchmark. And we’ve learned some hard lessons that way. You know as 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 calls that career risk, or —


NORTON: — you know, that kind of thing. So I think it’s always going to be part of human nature. 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 indexer successfully. You know, pretending to be active but mimicking the benchmark because of how big, you know, the big six companies in the U.S. have been. It’s been very hard to own them without becoming a non-diversified mutual fund —


NORTON: — at index weight. So I wonder if it’s been harder to play that game lately.

RITHOLTZ: And you talked earlier about how software and technology has progressed. It’s so easy today to look at concentrated risk, active share —

NORTON: Right.

RITHOLTZ: — and how different you are from the benchmark and whether that difference leads to outperformance or just expensive —

NORTON: That’s right.

RITHOLTZ: — differences.

NORTON: That’s right.

RITHOLTZ: 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?

NORTON: 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 2021, both U.S. equities and U.S. fixed income struck us as extremely expensive.

I mentioned that we’d put more assets and alternatives than we typically had. 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 $1 cost average market to us than than anything else.

RITHOLTZ: Not picking the bottom quite yet.

NORTON: That’s right.

RITHOLTZ: I’m right there with you.

RITHOLTZ: 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 2021, right about now, what are we? 25-year average for the S&P, 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 PPI. We don’t know what earnings look like quite just yet.

NORTON: That’s right.

RITHOLTZ: So we’re still dealing with the worst of 2022. And not knowing when the smoke clears.

NORTON: That’s right.

RITHOLTZ: Tell us what you think about the current environment, what looks intriguing.

NORTON: So there is 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 of what valuations are, you know, around the world here at home. And when we look at the broad U.S. bond market, the broad U.S. stock market, there isn’t as attractive as they’ve been since we’ve been running this program since, you know, about 2015-2016 timeframe.

So that’s good. But it’s not great. It’s not as though they’re pricing in Armageddon, or anything along those lines.

RITHOLTZ: It’s not March 2009.

NORTON: Right. So we are still somewhat cautious. We’re adding back to U.S. equities. It depends on the portfolio, of course, but we’re adding back to U.S. 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.


NORTON: 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. 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 in 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. I’m talking about Germany, and its, you know, close and epicenter nature to the European energy crisis, and the impact that the war has had on it. I’m talking about U.K. and the troubles that it has.

These are markets that are under pressure, and I so wished that markets could be absolutely cheap, and not being in trouble. But oftentimes, it’s the fact that investors overreact.

RITHOLTZ: And they love, right?

NORTON: Right. Yes.

RITHOLTZ: You’re not going to get stuff absolutely cheap, unless something hit the fan, right?

NORTON: Something went wrong.


NORTON: So what we’re weighing is, how much is priced in, what 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.

RITHOLTZ: 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 early. And if we keep DCAing over the next year, you’ll catch early bottom recovery and then —

NORTON: That’s right.

RITHOLTZ: — whatever the next cycle looks like.

NORTON: That’s right. I mean, as a fundamental investor, we’re never going to call 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. As markets are rising, the impulse should be maybe to hold tight or maybe, you know, not be adding. And so, we’re trying to find that behavioral discipline.

RITHOLTZ: 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 —

NORTON: That’s right.

RITHOLTZ: — buyer — when we’re recording this, the 10-year is not too far off from 10 percent, there’s some high quality corporates that are about 5 percent. And you could look around and find Munis running a tax equivalent —

NORTON: That’s right.

RITHOLTZ: — in the fours or higher.

NORTON: Right.

RITHOLTZ: Is there now an alternative? Can we no longer say, it’s Tina, and its equities or nothing?

NORTON: I’ve heard it’s Tina, it’s Tara, and it’s Cindy. All —

RITHOLTZ: So let’s go for — so Tina, there is no alternative.

NORTON: 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.

RITHOLTZ: The three sisters of fixed income.

NORTON: That’s right.

RITHOLTZ: So the era of you have no choice of but equity or nothing is over.

NORTON: The era is over.

RITHOLTZ: But the bottom line is there is yield in fixed income.

NORTON: There’s yield in fixed income.

RITHOLTZ: And even though it’s below the most recent CPI, the expectation is inflation is going to come down eventually.

NORTON: Right.

RITHOLTZ: And if you’re buying at 4 percent —


RITHOLTZ: — you’re locked in above inflation, hopefully 3 percent or maybe even —


RITHOLTZ: — a two handle.

NORTON: 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 a credit or a rate perspective. We are looking at at high yield, we are looking at areas like emerging markets that the yields are much more attractive.

But we haven’t seen a whole big pickup in defaults and emerging markets that has its own concerns in this type of environment. So we’re interested. But I think if we’re looking at where’s the net dollar going today, I think it’s going to some of those higher quality segments of the fixed income market. And tips, of course, tips have been a disappointment I think if people —

RITHOLTZ: Yeah, a little bit this year, right? You would think inflation is screaming and —

NORTON: That’s right.

RITHOLTZ: — tips were like, yeah, you know, they’re actually lost a little bit of that.

NORTON: 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.

RITHOLTZ: What else can a fund manager or advisor do to protect a portfolio in the face of, let’s say, transitory turns out to be wrong?

NORTON: Right.

RITHOLTZ: And that inflation is persistent for another couple of years. What should investors be concerned about?

NORTON: This is 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 of 2021, we started to think about what would inflation — if inflation isn’t transitory, what would that mean for our portfolio? Then 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 portfolio should hold up, you know, to the 60-40s of the world.

And now what we’re thinking about is what’s going to happen to financial assets if 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 1970s-1980s period.

There were 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 longtime holding for us, it’s no longer attractive from our valuation perspective.

RITHOLTZ: But last a year ago, it looked they’re cheap, didn’t it?

NORTON: A year ago, it looked they’re 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 markets.

RITHOLTZ: The day the war in Ukraine ends, you’ll see oil prices get shell up (ph), right?

NORTON: That’s right. So you don’t want to be at peak —


NORTON: — position size.

RITHOLTZ: But, you know, people have been wondering, when does this come to an end —

NORTON: Right.

RITHOLTZ: — now for this has gone on much longer than people expect. And it looks like —

NORTON: That’s right.

RITHOLTZ: — 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 10 years when these value start to outperform growth. The past year, it certainly has done better. How are you looking at value as an asset class?

NORTON: 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, and how it always wins out. If you look out over history, value always dominates. And that should have been a flag that maybe values time is done, and certainly it has been.

RITHOLTZ: Wait, chest pounding is not a good load from fund managers and researchers, I’m going to make a note of that.

NORTON: 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, LTCM moments, 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. 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.

RITHOLTZ: 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 looking —

NORTON: Crude oil (ph).

RITHOLTZ: — for the opposite of —

NORTON: That’s right.

RITHOLTZ: — value is always going to outperform —

NORTON: That’s right.

RITHOLTZ: — growth, well, here’s the other side of that argument.

NORTON: And I also think — and this is something we’ve talked about a lot — the value growth, fight or narrative value versus growth, I think is 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 assets.

RITHOLTZ: Using that with growth at a reasonable price was all about?

NORTON: Yeah, yeah. You know, I think —

RITHOLTZ: Right. You can combine both of them.

NORTON: 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.

RITHOLTZ: All right, 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.


RITHOLTZ: 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, deal with a fed that says, we’re going to keep hiking until we see the white of inflation’s eyes?

NORTON: You know, 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 —

RITHOLTZ: That’s what Twitter want (ph).

NORTON: That’s 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?


NORTON: And so what we’re really focusing on is that range of outcomes for our investors, 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, it can be a real distraction.

But that being said, of course, we’re watching how inflation develops. Of course, we’re watching how rates develop and how companies — how their fundamentals respond, and getting a sense for how pervasive is this environment going to be.

RITHOLTZ: I asked you earlier about personalization. One of the bigger new innovations that made possible by technology —


RITHOLTZ: — 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 —


RITHOLTZ: — in terms of tilting towards value or away, tilting to a specific sector or being able to work in all the various ESG and other thematic screens that you can build into direct index?

NORTON: 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 —


NORTON: — because I certainly needed it. Direct indexing is something that’s been around for a long time, 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 ETF, but instead of buying an index fund or an ETF, instead, you buy a basket of securities optimized to track that particular market.

And when you own the underlying securities, you can, as to your point, embed your preferences, and you can also do tax management and improve your outcomes after tax. And as you think about, we were talking about the development, the rise of passive investing. And I was talking about a piece of the action and these markers in 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 Morningstar Investment Management, we found that the tax Alpha that could be added on an annualized basis, of course, it ranges based on market environment, but with anywhere from 40 basis points to somewhere around 300.

I mean, when we think about —


NORTON: Huge. We think about —

RITHOLTZ: Specially if you’re sitting on things like —


RITHOLTZ: — founder stock or —


RITHOLTZ: — low-cost inherited stock —

NORTON: It’s —

RITHOLTZ: — that makes a giant difference.

NORTON: It makes a giant difference. I mean, think about the obsession we have expense ratios, it’s 10 basis —


NORTON: — points cheaper, sign me up.


NORTON: 300.


NORTON: And what’s also really interesting about this space is to the point that you raise, a lot of folks will have these bizarre portfolios, why this company stock, I inherited this thing.


NORTON: I don’t know what to do with it, but I know it’s not a good portfolio. Direct indexing allows you to smartly, you know, from a tax perspective, 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.


NORTON: Than it has been.

RITHOLTZ: The folks over at O’Shaughnessy Asset Management did a study and found in 2020, because you had this 34 percent whoosh down during the pandemic. And then a very quick recovery, they were seeing direct index portfolios that were doing 400 and 500 basis points —


RITHOLTZ: — of tax loss harvesting, which is just astonishing.

NORTON: 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 myopically total return —


NORTON: — 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’ll pick me up when things are going —


NORTON: — in the wrong direction.

RITHOLTZ: This is a year like 2022. If you have other appreciated stock that you want to sell, you should be —

NORTON: That’s right.

RITHOLTZ: — killing it on the tax —

NORTON: That’s right.

RITHOLTZ: — loss harvesting, even if you’re not doing direct —

NORTON: That’s right.

RITHOLTZ: But that just makes it even better. So I know I only have you for a limited amount of time.


RITHOLTZ: Let me jump to my favorite questions that I asked all my guests.


RITHOLTZ: Starting with, tell us what’s been keeping you entertained these days? What were you streaming during lockdown?

NORTON: Yeah. 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 content the way you see, 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 enjoy myself.


NORTON: It keeps me on my toes. So that’s what I’m watching.

RITHOLTZ: That sounds really interesting. In fact, I know everybody kind of went through all the big ones like the crown and what have you.

NORTON: That’s right.

RITHOLTZ: But I found myself during lockdown working my way through a bunch of French shows, a bunch of British shows for that exact reason.


RITHOLTZ: It’s like you have to work, you have to pay attention.

NORTON: You have to pay attention.


NORTON: And that’s a good thing. The thing with all this streaming is I’ll have it on in the background and 10 minutes later, I not know what happens.

RITHOLTZ: You’re lost. Right.

NORTON: Yeah. Yeah.

RITHOLTZ: Right. I totally get that. Tell us about your mentors who helped to shake your career.

NORTON: Okay. So I say this, knowing that you will hate that I’m raising her name. But — 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, you know, very, very deliberate, diligent person. And so I’m working nights and weekends trying to discover the Morningstar voice, which is where you explain complex things in very simple and accessible ways.

And also just learning how to tell a good fund from a bad fund. And Christine Benz, who is —


NORTON: — is a big name at Morningstar 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 helps me understand things so much better.

And she had a number of standing slots 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 the kind of endorsement and encouragement that I needed. And I think that’s kind of a special thing about Morningstar, this idea that nobody’s too big to help someone else grow in their career.

RITHOLTZ: I love that answer. And I’m going to do something I don’t normally do in the section, which is a follow up question. We were talking earlier, before we started recording, when we did the sound test —


RITHOLTZ: — you said your voice was your bane of your existence, your soft voice.


RITHOLTZ: And that led to a whole other discussion.


RITHOLTZ: Tell us a little bit about working with Christine and other women at Morningstar?

NORTON: That’s great.

RITHOLTZ: And why is the soft voice so difficult in a field like finance for a woman?

NORTON: I think one of the things people look at — and maybe this is broadly in business, and maybe it’s, you know, a 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.

RITHOLTZ: You’re relatively short.

NORTON: That’s right. So I don’t have that commanding kind of leader of a clan —


NORTON: — look to me, and 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 Morningstar is there have been a lot of women at Morningstar, who have had a lot of influence, who don’t necessarily fit a profile. And I think actually, as I think back to my days in research, there were a number of women who were really substantive, thoughtful people who, 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 tend to be fewer women. And that’s something that, of course, everyone’s wrestling with. How do we kind of make people feel like they are welcome to claim any invisible barrier that they might see because their voices is valued?

RITHOLTZ: It’s changing, although —

NORTON: It is changing.

RITHOLTZ: — it takes a generation —

NORTON: That’s right.

RITHOLTZ: — to really —

NORTON: That’s right.

RITHOLTZ: — have substantial invisible change.


RITHOLTZ: But there’s no doubt that there are more women in — listen, you’re —

NORTON: Right.

RITHOLTZ: — Chief Investment Officer —

NORTON: That’s right.

RITHOLTZ: — at Morningstar. There are lots of other very senior women at very large firms. I don’t think women are as visible as men, but it’s clearly shifted.

NORTON: There’s momentum.


NORTON: 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.

RITHOLTZ: Diversity of thought leads to better outcomes.

NORTON: That’s right. That’s right.

RITHOLTZ: Yeah, no doubt about that. Let’s go to everybody’s favorite question, talking about books.


RITHOLTZ: What are some of your favorite and what are you reading right now?

NORTON: Okay, so favorite books, and I’m thinking explicitly — I’m a big reader, I’m — but I’m thinking explicitly from an investment standpoint. I think one of the books that I really loved was Nassim Taleb’s “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’d 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 is because of X, Y and Z. And I would think it is. I mean, those things both happen, the market did that and that happened, but did one cause that? And they seem to 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 —


NORTON: — that’s a really important and, you know, the kind of truth that we should hold on to, especially as active investors, and we look for those stories, that a lot of it is actually quite frankly, noise.

RITHOLTZ: So I love that answer. What other books are you —

NORTON: Other books. Okay, so I’m reading — right now I’m reading “The Bond King,” I’m reading a book called, “How to Have a Good Day,” which is about how to prioritize and organize your day. So you get that satisfaction out of it that you long for. It’s by a woman named Caroline Webb.

RITHOLTZ: Is it a organizational tool, or —

NORTON: It’s —

RITHOLTZ: I do love checking those things off —

NORTON: Yes, well, that’s a kind of thing.

RITHOLTZ: That is very satisfying.

NORTON: That’s the kind of thing she talks about, she talks about just kind of the behavioral elements 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 to 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.

RITHOLTZ: I like that.

NORTON: 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 2000, 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. And it’s tracing that arc.

And it was fascinating, because, obviously, of COVID and lock downs, 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 our country.

RITHOLTZ: What sort of advice would you give to a recent college grad who is interested in a career in either — and for you, this is a long list — economics, analysis, fund management, or being a chief investment officer?

NORTON: 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. I 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 19 —


NORTON: — 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 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 and 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.

RITHOLTZ: Really interesting. And our final question, what do you know about the world of investing today that you wish you knew 25 or so years ago, when you were first getting started?

NORTON: Yeah, so there’s a few things. I mentioned 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 tranches. 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 profound than people think.

RITHOLTZ: Really interesting. We have been speaking with Marta Norton. She is CIO of Morningstar Investment Management. If you enjoy these conversations, well, be sure to check out any of the previous, I don’t know, 427 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 fix.

We love your comments, feedback and suggestions. Write to us at Sign up for my daily reading list at, follow me on Twitter at Ritholtz. I would be remiss if I did not thank the crack team that helps put these conversations together each week.

Sarah Livesey is my audio engineer. Atika Valbrun is my project manager. Our producer is Paris Wald. Our head of research is Sean Russo. I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.




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