Simple, but Not Easy

We'll have a new episode next week, then every other week for a temporary period. Thanks for listening!

Stocks have generally roared back from their pandemic lows about a year ago. But what about income? Many dividends were cut when COVID-19 shuttered businesses and kept us at home. What’s the outlook for dividend investors now that stock prices have rebounded? George Metrou, portfolio manager for the Dividend Select Equity Portfolios at Morningstar Investment Management, shares his thoughts on managing through the pandemic, and on the current landscape and his outlook for dividend-paying stocks.

While we're off for spring break, we're reprising this episode featuring Terry Hawkins, sales manager at Morningstar Investment Management and Paul Kaplan, research director for Morningstar Canada. They discuss dollar-cost averaging, or the practice of investing slowly over time instead of in one lump sum. Research by Kaplan and others show that dollar-cost averaging might be expected to underperform a lump-sum approach. But what if it's what gets an investor into the markets?

While we're off for spring break, we're revisiting this episode that considers whether and when retirees should buy annuities to insure a steady stream of income, based on David Blanchett's research at the time of original airing. Few products are as polarizing among financial advisors than annuities, but certainly they have a place in the retirement picture for some individuals. In this episode, we look at Blanchett's research, which may help advisors decide when a client should annuitize or not, as well as a way savers can self-annuitize. Blanchett is head of retirement research at Morningstar Investment Management.

People often use simple mental shortcuts, also called heuristics or rules of thumb, when they make everyday decisions. And while the behavioral sciences tend to focus on how these shortcuts can backfire and create biases that lead us astray, much of the time these shortcuts lead to pretty good outcomes. But can these rules of thumb improve financial well-being? Ryan Murphy, head of decision sciences at Morningstar Investment Management, discusses his recent research in which he studied commonly used rules of thumb in four financial categories--saving, spending, investing, and managing debt. Some rules were somewhat correlated to better financial well-being —that is, those who used a rule tended to report they were more on track to meet their financial goals—while for other rules, the opposite was true. To view slides for this episode, find a link below in Episode Notes or email us at simple@morningstar.com.

In this episode, Gareth Lyons and Nabil Salem discuss the somewhat unusual South Korean stock market--unusual in that, this tech-dominated market remained attractively priced until recently. Lyons and Salem review the recent valuation history of this market, analyze drivers of outperformance in 2020, and summarize their current views on South Korea as an asset allocation opportunity. Gary Lyons is a portfolio manager on the Asset Allocation team at Morningstar Investment Management LLC, as well as co-lead on active-passive portfolios. And Nabil Salem is an Associate Portfolio Manager on the Asset Allocation team, as well as the global asset class lead for emerging markets stocks at Morningstar Investment Management.

Paul Arnold and Dan Kemp join Drew Carter to discuss how advisors can better understand why ESG is important to a client–whether it’s the expression of one’s values or something else. We also look at how advisors might think about matching each client with a portfolio that addresses their unique ESG preferences and needs. Slides for this episode may be found in the Episode Notes section or by emailing simple@morningstar.com.

In January, the stock price of struggling retailer GameStop shot up to nearly $500, having started the year at below $20. A main cause, according to many news reports at the time, was a coordinated effort by individual investors to topple hedge funds who’d bet heavily against the stock. The uprising couldn’t be sustained, however, and GameStop shares plummeted. They traded around $44 at the time of this recording on February 23. The GameStop phenomenon offered spectacle, but what did it tell us about the democratization of investment markets? Host Drew Carter of Morningstar Investment Management LLC speaks with guests John Owens, David Whiston, and Steve Wendel about the contrasts between meme stocks or viral investing with taking a fundamental, long-term approach. Owens is senior portfolio manager at Morningstar Investment Management LLC, where he oversees two focused stock portfolios. Whiston is equity strategist at Morningstar Research Services LLC, where he covers mostly auto stocks, including Tesla, as well as auto dealers and Winnebago. And Wendel is head of behavioral science at Morningstar, Inc., where he researches and writes about the intersection of finance and human behavior.

Roger Ibbotson and Philip Straehl join host Drew Carter to trace the evolution of our asset allocation approach from Ibbotson Associates and the SBBI yearbooks, to supply-side forecasting research, to the valuation-driven approach we use today. Ibbotson and Straehl also discuss five lessons learned from the past five decades of allocating assets. Roger Ibbotson founded founded Ibbotson Associates in 1977, which became part of Morningstar Investment Management at the close of business on Dec. 31, 2015. Today he is Professor in the Practice Emeritus of Finance at Yale School of Management and also chairman and CIO of Zebra Capital Management, LLC, which is an equity investment and hedge fund manager. Philip Straehl is global head of research at Morningstar Investment Management LLC.

2020 was roller coaster of a year for investment markets, with the US stock market surging early, crashing in March with news of the pandemic and related shutdowns, then rebounding quickly and continuing to rally—especially in the fourth quarter—to end the year up about 20%, depending on the index you look at. So where does this leave asset class valuations? Philip Straehl and Edward Fane explore the global aggregate reward for risk picture, then discuss their current outlooks on major asset classes. Philip, based in Chicago, is global head of research at Morningstar Investment Management LLC, and Ed, based in London, is head of research for Europe, the Middle East, and Africa at Morningstar Investment Management Europe, Ltd., which is an FCA-regulated firm.

In this panel discussion, portfolio managers from Morningstar Investment Management discuss how to match portfolios with key investor characteristics. The panel is moderated by Marta Norton, CIO for the Americas, and looks at five investor profiles.

The move to passive investing and the rise of ETFs has been one of the most powerful forces in asset management in the past decade. A corollary to this has been the decline of active management. But is active management really in decline? In this episode, Daniel Needham, president and global chief investment officer at Morningstar Investment Management, explores how active management has evolved, how ETFs are often used actively, and how investors may benefit from these changes--if they get a few things right. ALSO, in the Episode Notes section, please use the link to take our short survey. If you don't see Episode Notes, email us at simple@morningstar.com.

Why might contrarian investing outperform, and how might an investor know when it's time to head in the opposite direction from the crowd? Daniel Needham, president and global chief investment officer at Morningstar Investment Management, explores why markets are frequently efficient and what makes them become inefficient; explains how contrarians can act like a thermostat for markets; and explains how bees can be better decision-makers than humans at times. He also shares a checklist his team uses to help them make rational decisions that go against the crowd.

Advisors and investors are hearing more and more about behavioral science and behavioral economics, essentially how our humanity gets in the way of rationality, and what we can do to improve our decision-making. But what about investment managers themselves? Are they naturally more rational? How can a portfolio manager avoid making behavioral errors? Dan Kemp, chief investment officer for EMEA at Morningstar Investment Management joins host Drew Carter to discuss who is susceptible to behavioral biases and Annie Duke's book, "Thinking in Bets."

While we're off for the holidays, please enjoy this rerun of Episode 34. In "The Tipping Point," author Malcolm Gladwell looks at how ideas can spread like viruses. Citing psychological studies and using many examples, Gladwell shows how people, environments, and changes in an idea itself can lead to explosive growth in popularity. In this episode, Jarred Watts considers how the ideas in this book, which turned 20 years old in February, apply to investing. Watts is a client portfolio manager at Morningstar Investment Management.

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Just like that, the U.S. stock market has risen into overpriced territory, according to Michael Corty and John Owens of Morningstar Investment Management LLC. Fortunately for them, they manage concentrated portfolios of 20 to 40 stocks and continue to find opportunities in parts of the market. Mike and John discuss the overall market and share some examples of where they see value today. Mike is head of U.S. equity strategies and portfolio manager for the Tortoise and Equity Income portfolios. And John is senior portfolio manager for the All-Cap Equity and Small/Mid-Cap Equity stragegies.

Stocks of just six Big Tech firms have dominated performance in recent years, having grown to take an unusually large chunk of the U.S. market. Philip Straehl, global head of research at Morningstar Investment Management, analyzes these firms' performance through four drivers: secular growth, a COVID-19 bump, falling interest rates, and beating expectations. Then Paul Arnold, portfolio manager at Morningstar Investment Management, considers the likelihood that these companies will continue to outperform in years to come. The six Big Tech firms discussed are also known as FAANGM: Facebook, Amazon.com, Apple, Netflix, Google (Alphabet), and Microsoft.

From all of us at Simple but Not Easy and Morningstar Investment Management, Happy Thanksgiving! If you’re in a mood to give thanks—or just want to hear others do so—you might check out Episodes 23 and 24, in which a passel of our guests share what they were thankful for this time last year, or something they’d be thankful to see in the future. Or, here we rebroadcast Episode 16, a conversation with Daniel Needham about value investing and why we take a valuation-driven investing approach. We were reminded of this episode after reading a recent article in the Financial Times by one of our favorite market commentators, Michael Mauboussin. In this episode, Needham, president and global chief investment officer at Morningstar Investment Management, shares his views on value investing and the way his team uses a valuation-driven approach to multi-asset investing. As Charlie Munger has famously said, “All intelligent investment is value investment because why would you want to buy something which wasn’t worth as much as you were paying for it, and who wouldn’t like buying something for less than it’s worth?" Needham describes how we aim to do this in an asset allocation and portfolio construction context.

Good decisions are often built on good forecasts. But forecasting is hard, in part because it requires us to be aware of both what we know and what we don’t—or even can’t—know. Dan Kemp and Ryan Murphy discuss what good forecasting looks like. Dan is CIO for EMEA at Morningstar Investment Management Europe Ltd., an FCA-regulated firm. Ryan is head of decision sciences at Morningstar Investment Management LLC.