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Counsel Views – Episode 9: Insights and outlooks with Stu Morrow

Turning the tables: In this special episode, we turn the tables and interview Stu Morrow himself, getting this industry thought leader’s views on the markets, economy and key investment themes.

Counsel Views, hosted by Stu Morrow, Vice President and Head of Investments, RBC PH&N Investment Counsel, is an audio series aimed at bringing insights to clients from thought leaders and experts across Canada’s leading wealth management firm.

Episode guest: Stu Morrow, Vice President & Head of Investments, RBC PH&N Investment Counsel

In this special episode of Counsel Views, we turn the tables and interview your regular host, industry thought leader and Vice President and Head of Investments for RBC PH&N Investment Counsel, Stu Morrow.

Tune in to hear Stu’s thoughts on 2020, his outlook for 2021 and beyond, and what key investment themes and industry developments he is pondering these days. From his investment philosophy to his views on cryptocurrencies, Stu gets his chance to experience the world from the other side of the podcast “desk”, while also sharing his book, podcast and movie recommendations.

View transcript

Leslie Baker (Host):

Hello, and welcome to this edition of Counsel Views. For those who are familiar with Counsel Views and its incomparable host, you may be wondering why this doesn't sound like him and where he may have gone to. Well, you are definitely right. This is not Stu Morrow, and this podcast has in fact been hijacked.

However, there is no reason to be alarmed for Stu or the podcast, as Counsel Views is experiencing a turning of the tables where I, Leslie Baker, Senior Manager, Wealth Management Communications, and host of an internal RBC Wealth Management Canada podcast called Tips and Takeaways, is taking over as host of this episode of the show, and will be interviewing your regular host.

With a new year and a new decade upon us, it seemed like an ideal time to hear from RBC PH&N Investment Counsel Vice President & Head of Investments Stu Morrow, on a number of topics including insights into Stu's investment approach and philosophy, his views on the challenging year that was 2020, and what he sees for the year ahead. We'll also hear from him on some of the key topics he is pondering these days, including the rather timely subjects of alternative assets and cryptocurrencies.

Before we get started and engage Stu, I couldn't pass up the opportunity to say a few words about the background of your regular host of Counsel Views. Stu has enjoyed a long and successful career in the investment industry. He has collectively been with RBC for over 18 years in progressively senior roles. And most of that time was spent with RBC Global Asset Management, where he was a global equity analyst and then a U.S. portfolio manager. Actually, long before that, he started his career as a part-time bank teller and continued to work with RBC while he completed his undergraduate degree.

During the part of his career away from RBC, Stu was a sell-side equity research analyst, a portfolio manager in the investment counseling space, and an institutional portfolio manager at TD Greystone Asset Management, where he served institutional clients, including pension boards, and endowment funds, and investment consultants. Stu has been a long-time advisory board member at the Ted Rogers School of Management at Ryerson University, working with faculty and student groups in the finance and accounting streams. More recently, he joined the investment committee of Ronald McDonald House Charities in Toronto, and he remains the head coach for his sons’ hockey team, the Vaughan Rangers. Most people know him as Stu. Typically only his wife calls him Stuart, and that's when she wants to get his attention. I dare not ask why. Stu, welcome to Counsel Views.

Stu Morrow (Guest):

Thank you, Leslie. It's more than a pleasure to be on this side of the microphone. A little bit blushed. If there was a camera, you'd see that. But thank you for that humbling introduction. Appreciate it.

Leslie Baker (Host):

Thanks for letting me hijack your podcast, Stu, and turn the tables on you, sir. And I hope you enjoy the view from the other side. So, why don't we get started, Stu? Why don't we start with an overview of your investment approach and your philosophy around investing?

Stu Morrow (Guest):

Sure. I mean, I spent a lot of time talking about investment process and philosophy with our investment counselors. Like anyone, you go back through your own past and it's certainly evolved through experiences. And kind of been at this for about 15 years now, which in the span of markets is not a lot of time. But the idea of continuous learning, reading, webinars, podcasts, research, continuously trying to find answers ... I think that's sort of the underlying drive behind developing an investment philosophy and investment approach.

I started really in university, which was around the “.com” bubble. Everyone around me seemed to be making money hand over fist. It seemed to be investing was so easy, yet you were going through this period of learning about investing and finance in school, and it didn't seem that easy. And then the crash happened. Became quite apparent risk management was not only something that people had maybe forgotten about, but it's really wasn't a central part of investing. And that sort of formed my first experiences in investing is that more cautious, simplistic approach, which kind of still carries through to today.

When I joined RBC Global Asset Management in 2008, I joined at the height of the Financial Crisis. And that was, like you said in my intro, I was covering global financial institutions like global banks. Really, it was a great learning opportunity. Of course, it's sort of a very difficult to do in that environment, but you're learning not only day by day, but hour by hour. Again, another example of just how important risk management was to process into investing. Certainly something I took away from that.

And as I went on to other roles at RBC Asset Management, like in portfolio management, working alongside very successful managers who are there until this day and others who have left the organization, I was able to pick up a lot of things that sort of resonated with me. I was able to share thoughts and learn from people about portfolio construction, how to think about risk management, what a disciplined process really means, how you combine fundamental security analysis with technical analysis and quantitative analysis, and really the value of active management as a way to protect to the downside, and investing with conviction was sort of those questions I had.

My experiences outside of RBC I think are important too to how I sort of form an investment philosophy. And I spent time at Greystone, and then TD Greystone as they were acquired. And, I really there picked up a lot of parts of an investment process that I still hold true to this day as a very disciplined approach to managing money, investing with conviction, and how to use concentrated portfolio management as part of your approach to investing, further risk overlays and how important that is to managing concentrated investment portfolio. And then the benefits of private market investing alongside of public market investing is something I really picked up at Greystone, and took a lot of appreciation for that [which] I hadn't in the past.

So, all of that ... kind of the investment philosophy of where I am today and it's evolving. I kind of want to call myself a student of the markets, because it's not really going to be a finished product. It sort of evolves over time. But really, it's all about process. I think process is everything. This is the only way you can sort of do this thing called investing. Adhering to a long-term process for me is much more important than paying attention to the short-term noise in the market.

Time in the market versus timing the market, and a lot of people say that. But you really have to live it. And that's easier said than done at times, but I think it certainly holds true. We learned that pretty much after 2020. Active management still adds value in less efficient markets. I think that's part of my investment philosophy. And overall, it's more about simplicity over complexity. I think sometimes we're led to believe that the more fancy, or dressed up an investment approach is, or complicated it seems to be, there's an advantage inherit in that. And I don't believe that's the case. I think simplicity is certainly does trump complexity most of the time when it comes to the investment world.

Leslie Baker (Host):

You are as always, sir, very humble. Great investors like Warren Buffett, Howard Marks, Ray Dalio ... the same commitment to learning, and evolving, and becoming wiser over time through experience and learning from others I think really commends your approach. Now, as head of investments at PH&N Investment Counsel, you also have an important leadership role on the investment committee, and you also work very closely with a critically important partner in RBC Global Asset Management. Can you share your thoughts about your role, and key responsibilities, and how you approach those?

Stu Morrow (Guest):

Yeah, for sure. Head of Investments entails investment side, and operations, a little bit of compliance, a little bit of risk. And there is an investment committee that sits above the RBC counsel business and reports up into our operating committee. It's all a team approach, really, to managing the investment platform. I don't even entertain the thought of, “I have the answers.” I hardly have the answers. I think that the team approach is a needed part of the process.

So, the team that I work with, we manage the investment platform. What we follow is a very disciplined process in how we provide guidance and thought leadership to investment counseling teams, so that they can help our clients to achieve their investment goals and objectives. And we do work closely with our partners at RBC Global Asset Management. We collaborate with them on building risk models. So, the foundation of the portfolio, how we think about strategic asset allocation, what should be the right mix of cash, bonds, stocks, and perhaps alternative or private market investments.

We do all of this also in conjunction with RBC's Global Manager Research Team, which is responsible for looking outside the organization for the best of the best and bringing that to our platform. And we also collaborate with our partners on idea generation, and the development of investment solutions. And it's not just all with RBC Global Asset Management. Of course, there’s quite a bit of our product shelf [that] does contain solutions that are RBC solutions. But we do collaborate with outside business partners as well.

We're looking for those first-class investment managers that provide solutions to our Investment Counselors, which in the end benefit our clients, of course. And those include both public and private markets. We also spend time consulting with partners on thought leadership, and innovation, and technology outside of the firm to ensure that we have not only in-house capability, but we're smart to sort of look outside the organization and take on maybe some of those key initiatives that other organizations are taking on, and see if we could adopt that in our firm as well.

Leslie Baker (Host):

Fantastic. Stu, 2020 ... what a year. One for the history books. Admittedly, so many things that occurred that we've never seen before. We reached all-time highs in February last year, COVID-19 hit, markets plunged over 35% before bottoming out in March only to recover to deliver the shortest bear market in history. The massive turnaround saw us not only recover the losses that were incurred, but also to go on to post new all-time highs to end the year. In between, it was the establishment of a “new normal”, massive fiscal and monetary stimulus. And in a word, U.S. politics and ... shall we say, Trump. We'll leave it at that on that front. In terms of your considered view, what did we learn? What insights did we garner from this crazy mind-boggling year that was 2020, and what's ahead for 2021 and even beyond?

Stu Morrow (Guest):

Yeah. They're great questions. Like, what is it that we could have taken away from 2020? There were a number of takeaways. I think the first thing would be even some of those known/unknown risks we found out are very difficult to handicap or forecast. So, COVID was a surprise when it hit the markets in early 2020, when it became clear that the global economy was entering a very swift and a deliberate recession.

The subject matter experts before ... you know, years before or even shortly before warned that a global health pandemic could be quite impactful. I think that became clear that even though there's a risk out there, it doesn't necessarily mean it could be priced in, per se, into the market. You really had to follow that disciplined approach, a very systematic way of looking at your portfolio, and understanding what's inside your portfolio, and does that align with your goals, objectives, your risk tolerance, and risk capacity. I think that was sort of a good takeaway for me is you really can't plan for the unknown unknown, let alone the known unknown risks.

The second big thing too we saw, like you said in your comments, you had central banks and governments come in to sort of save markets, and save the economy from really becoming completely locked down. I think one of the investment industry terms that's thrown around all the time is “Don't fight the Fed,” meaning positioning for a very pessimistic view of financial markets, like we saw in periods of '08 and '09, I think central banks really learned from those periods of challenging liquidity in the market. And realized quickly that in order to ensure that the wheels are maintained and oiled, you have to keep liquidity in the system.

And that was certainly self-reinforcing in this crisis. So, the idea that positioning otherwise is a good way to manage money, I don't think is a lesson learned. I think the lesson learned is central banks and governments have come to the rescue before. I think that's something that we should expect in similar situations. And will it have the same outcome? Of course. But I think betting against them not coming in and providing policy response is another good lesson learned.

But the other one is for sure maintaining portfolio liquidity at all times. That was apparent in February and March. Like you said, equity markets were off more than 30%. If you were in a position where you needed liquidity, you were essentially selling things that were very cheap and inexpensive, and perhaps on sale. And if you didn't have liquidity, you probably didn't have the ability to buy investments that were on sale. I think having essentially a liquidity sleeve in a portfolio at all times, we've always talked about that. That's certainly part of our approach at PH&N Investment Counsel. I think that's one of the clear lessons that 2020 brings to all investors.

The good thing that I sort of took away is how difficult market timing is in 2020 made that so clear when we went through one of the most violent bear markets in history, and one of the most rapid rebounds in history and markets. Getting the timing on the get-out, and getting the timing on the getting back in was very difficult. The only market timing strategy investors really should care about is dollar-cost-averaging, where you're essentially on an autopilot disciplined approach of regular investing. So, as the market goes up, you're essentially buying less of expensive goods. And as it goes down, you're buying more of cheaper goods.

I think that's the one thing that would have kind of got people through the volatility of most of 2020, and it would have ensured that you would have stayed, and remained invested, and picked up something on sale for instance. And the last thing I'd say is just the humble. As much as the market quickly rebounded, no one really knew in the moment the fact that we were all sort of watching this very closely, and there was a bit of ... at times, emotion in this. Do we have it right? Is this going to continue on further? What is the Plan B, and Plan C, and Plan D?

I think it sort of goes back to check yourself, and ask, “Was that volatility ... was that level of expected loss too much to handle?” And I think revisiting now, which is a good time, your strategic asset allocation mix ... so, how much cash, how much bonds, how much stocks, how much other investments I have. I think that's a good lesson learned to check that regularly to make sure that your goals and your objectives are aligned with the risk assets inside of your portfolio.

Leslie Baker (Host):

So well said, Stu. One of the many things that has impressed me about your modus operandi and the way you approach the world of investing is that you're always looking at and for the edge of the curve, as I like to say. What's coming, what's brewing, what's the “next big thing” around the corner in the investing world. So, what areas, developments, or issues are you focused on these days?

Stu Morrow (Guest):

For sure. One thing I forgot to mention in the last question too was sort of what's ahead in 2021. I think there's a couple things, and we'll talk about what the team and I are working on at PH&N Investment Counsel. I think some of the things that we're looking out for now is are there signs of excess or speculation in the market. Very tough to call in terms of you throw out the term bubble or market bubbles. Timing is very difficult. We can certainly check boxes in a few parts of the market where there probably is excess speculation at this point. They started to creep in.

One is crypto assets, which we can talk about. And also something called Special Purpose Acquisition Companies. The term is SPACs, S-P-A-Cs for short, which are essentially “blank cheque” companies. And some of the symptoms of bubbles that we can talk about too is you see really sharp increases in the price of an asset to public excitement, which is accompanied by media frenzy, lots of stories of people earning money, causing envy amongst people who aren't earning a lot of money growing interest in an asset class amongst the general public. The sort of "new era," or “this time it's different” theories to justify very high prices and a decline in lending standards, which means people are borrowing more and leverage is increasing in the system.

I think in those two parts of that market ... and there's probably a bit of others in there as well. We can start to say there is that formation or the thinking there is a bubble. And then saying that is not a way to say, “Get out of the way,” and move to cash. It's nothing as dramatic as that. But again, it goes back to the principle of: do I understand what's inside my portfolio? Am I taking undue risk? And if so, maybe I should revisit that with the mix of cash, bonds, stocks, and other investments as well.

The last thing I think we're keeping an eye on too is the inflation outlook. That was one thing that carries over from 2020 that was probably less of a concern, but it seems to be more of a growing concern in the narrative that's out there today. I can understand both sides of the argument. On one hand, demographics, innovation, technology, those are deflationary trends. They're going to be with us for a long time. Hard to argue that. But on the other hand, we've experienced a lot of this quantitative easing, fiscal spending across the world that has traditionally meant higher inflation down the road are not too far away.

I think is the near term as the COVID crisis passes and the economy reopens, the question becomes: what happens to all of this pent up demand from business and consumers? How does that impact the inflation gauges that the market looks at? And then therefore, how will the bond market react to rising inflation expectations? How will large cap technology stocks - which they're essentially long duration asset - how do they react to higher inflation? And then what does this mean for alternative assets like gold, private markets, like real estate infrastructure? Where there's probably more opportunities there given those tend to be relative winners in an inflationary environment.

All of those things to say it's important for investors to keep an eye on that strategic asset allocation mix that aligns with your goals, and objectives, and risk tolerance, and diversification. We tend not to want to skew one way or the other for the reasons that no one can really foresee that future with great degree of confidence.

So, the question, Leslie, about what kind of exciting things we're working on in our group with RBC Global Asset Management and external partners, private markets ... so, we're trying to expand the investment opportunities that we have at RBC PH&N Investment Counsel to look at things like infrastructure, global real estate, additional private market opportunities as well, perhaps over the next year or so.

I’ve spent some time looking at some of the things I've just mentioned, like crypto assets – very early days, but trying to understand both sides of the investment case and trying to form a view. I think is important spending some time looking at different investments in private markets like farmland, which again is very early days, but some very interesting research going on there as well. When it comes to crypto assets, RBC doesn't offer any products or service for clients related to crypto assets like Bitcoin. They maintain an internal research and development team right now that's been monitoring the space, and building their expertise in crypto assets. We can talk about sort of the recent surge and past volatility is something to really watch out for and think about. In the future, I think maybe RBC thinks about products or services in the space. Obviously, it's going to be done in the best interests of RBC clients and RBC shareholders as well.

Leslie Baker (Host):

So well said, Stu. You always make the cryptic clear, and that certainly adds some real currency and value for our clients. And that's greatly appreciated. Lastly, as I know you like to do with your guests, I wanted to ask you for possibly a podcast, book, or movie, TV show recommendation that are keeping you informed, entertained, and sane during these days of lockdowns and social distancing. Any recommendations for our listeners?

Stu Morrow (Guest):

Yeah. I knew this question was coming, so I gave it some thought. I tried not to duplicate any of the great answers that previous guests have given, which I've actually taken on some of their recommendations in books as well and podcasts. But podcasts, I listen to daily. I find there's one ... the Bloomberg Opinion Podcasts, “Masters in Business with Barry Ritholtz,” I find that's a very well thought out show. It has very interesting guest speakers. It hits on not just topics of the day, but sort of more long-term investment themes. I enjoy listening to that one.

Books, there's so many. I think one of the more interesting areas of investment research for me at least has been around behavioral investing. One more recent book that came out, The Psychology of Money by Morgan Housel, is a really interesting book. Goes to the point that every person has those unique experiences that shapes their views about money, it stresses that not all success is due to hard work, and not all poverty is due to laziness. So, quite an interesting read. I think when it comes down to what really appealed to me about that is his take risk, on taking risks. You have to really think about it and protect to the downside, and that's probably mirroring from where I started in investing, I'm sure.

The Behavioral Investor by Daniel Crosby is also a good one. He's quite visible out there on YouTube. He has a podcast as well. A great book about risk, the catch all is Against the Gods: The Remarkable Story of Risk by Peter Bernstein. They give a bit of the history and the science behind finance, which I like as I’m a closet history buff. He goes back to how modern thinking about risk began. Modern risk management born in the 13th-century with the Hindu-Arabic numbered system. It goes back to the 17th-century from there, and then leads into sort of the work being done by behavioral economists today. I found that a really great read.

Movies, I don't know. I mean, you know I probably watched every investment related movie from the '80s and '90s more than I care to recount. Everyone can probably guess which ones those are. I'm more of a fan of the comedies, and documentaries, and some dramas. Like, Netflix sort of binging The Queen's Gambit, which we've got into a few weeks ago in the lockdown. I'll go back to the guilty pleasures like House of Cards and The Office from time to time, but it's also nice to have hockey back on even if it's without the fans. Can't really get into it as much, but it's nice to see some sports on. Yeah. That's kind of what's been taking up our time in the lockdown.

Leslie Baker (Host):

Well, once again, it shows the diversity of your thinking, Stu, and the way you like to challenge yourself, and reaching back into history, and also being a student of today's lessons as well. I want to thank you for those recommendations. I want to thank you for your time and insights today. And a huge thanks for the opportunity to hijack your show and to turn the tables on you. It really has been a pleasure, sir.

Stu Morrow (Guest):

Thank you, Leslie. It's been great. Thank you for turning the tables. It's interesting to see it from the side of the mic. Really appreciate your time. Thank you.

Leslie Baker (Host):

As always, thanks to our Counsel Views listeners. Rest assured, Stu will be back in the Captain's chair for the next episode of Counsel Views. Until then, stay safe and invested.


This session was recorded on January 20, 2021.

This has been provided by RBC Phillips, Hager & North Investment Counsel Inc. (RBC PH&N IC). All opinions and estimates contained in this recording constitute RBC PH&N IC judgments as of the date of this recording, and are subject to change without notice. This recording is not an offer to sell or a solicitation of an offer to buy any securities. Persons, opinions or publications quoted do not necessarily represent the corporate opinion of RBC PH&N IC. This information is not investment, tax or legal advice and should only be used in conjunction with a discussion with your RBC PH&N IC Investment Counsellor, qualified tax and legal advisors respectively. Information obtained from third parties is believed to be reliable but neither RBC PH&N IC nor any of its affiliates assume responsibility for any errors or omissions or for any loss or damage suffered.

Some of the products or services mentioned may not be available from RBC PH&N IC; however, they may be offered through RBC partners. Contact your Investment Counsellor if you would like a referral to one of our RBC partners that offers the products or services discussed. RBC PH&N IC, RBC Global Asset Management Inc. and Royal Bank of Canada are all separate corporate entities that are affiliated. RBC PH&N IC is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® /  Trademark(s) of Royal Bank of Canada.

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