Hello, I'm Dave Richardson and welcome to Personally Invested. This time on Personally Invested, we talk to Dan Chornous, the Chief Investment Officer at RBC Global Asset Management. One of the things that we're trying to accomplish with this podcast is to identify what are some of the personality traits, what are some of the factors that lead to success as an investment manager. This time, we're going to go one step further. We want to try and identify what are the keys to success for not just a great investment manager, but for someone who leads a team of investment managers and not just in Canada, but a team that's scattered all across the globe. Dan Chornous has had a tremendous amount of success as Chief Investment Officer at RBC Global Asset Management. The key to his success, in my opinion, is a constant desire to learn. An amazing intellectual curiosity. It's a hunger for Dan that is never fully fed. We talk with Dan about that intellectual curiosity, where that comes from, and why is he so driven to continually improve the process and the results that he generates out of his investment management team. I hope you enjoy it.
Dan, I think the hallmark - I've known you now for twenty years, and I think one of the things that separates you almost from anyone I've met, let alone people in the industry, is your intellectual curiosity. Every time I bump into you, you're reading something or you're listening to something or you're musing about something that may have an application in your personal life, but more often than not it has an application in the investment business at RBC Global Asset Management where you're the Chief Investment Officer. I've always been fascinated because again, I've only known you the last twenty years, and you had a few years before that in your life. Where did that start? Where did that come from? As a kid, were you like that?
The obsessive behaviour?
I guess you could call it that.
I think that this is not unique to me, but thanks very much. If you look at people who have found the investing business to be attractive to them and they've lasted a long time happily in the investing business, the one thing you notice is that they're sponges for information. And we also tend to feed off of each other almost in a competitive sense as to what we've read most recently, what's been most fascinating to us. If this business works for you over a long period of time, you probably have that wired deeply into you. You're the type that reads the cereal box in the morning after reading a couple newspapers and all the ads on the bus on the way downtown, etc. It's just part of what you are.
But it had to come from somewhere. Do you remember the first time you sort of stood out from your peers in high school or university as being someone who was looking out there to find something different, to learn something new?
Well I think I was very influenced by my father, and my father was a lawyer and had a deep interest in things like you know, history, and obviously the law, in literature, and he imparted that in my siblings as well. You know, I went to university with the hope of studying history, English, geography, and ended up with a degree in finance. But the funny thing is that it wasn't until I got to the stock market that I thought, "Wow, this is pretty much everything I'm interested in, all wrapped up in one. Perfect." And that was a great revelation.
So, you grew up in Winnipeg, and that was a good place to grow up, or you know, for me from a Toronto perspective, that seems like a cold and a mosquito-infested place in the summer. But it really is an essential element of who you are, right, where you grew up.
I think I was very fortunate to have had that background and obviously we all value our backgrounds. One of the things that I've noticed coming from a place like Winnipeg and having the Winnipeg-based education that I've benefitted from was I'm very much interested in my partners' backgrounds because they're so entirely different. Dave, I believe you were in a room in Hong Kong with us a few weeks ago and we were talking about the benefits of diversity. There was me, from suburban Winnipeg, and then there was Mayur Nallamala from India, educated in England, with a Thai wife, and then there was Habib Subjally, born in Pakistan, raised somewhere between Dubai and England, and then Dominic Wallington with more traditional English background, so that's a pretty diverse group of people that we draw upon. Again, maybe coming from suburban Winnipeg you're a little more fascinated with what happens around you than otherwise would be the case. The more direct benefit though that I can identify is that coming out of the University of Manitoba I got a great job, somehow, at Great West Life. I went through a training program, spent several months in commercial mortgages, commercial real estate, sovereign bond trading and then in the equity markets and then ended up being an analyst in equities. Very soon after joining that equity division I had real decision power across a variety of different U.S. equity funds and by 23 or 24, I think I had just got my CFA, so with that undergrad and a CFA I was actually managing an investment portfolio of U.S. equity stocks, and reporting to a board in Denver, no less. I had a huge amount of experience very early in my career that I don't think I would have really had, had I not stayed in Winnipeg, worked for the local company, and they moved us quickly through.
Don't get me wrong, I love Winnipeg. I was just proposing perhaps someone else from Toronto's view of a great city in the centre of the country.
Well, you are a hockey fan, I would think you would respect what's happening in Winnipeg.
We have to respect what's happening in Winnipeg, we also have to respect what's happening in Toronto right now, but that's... people aren't listening for our views on hockey. Certainly ours, anyway. What are you reading right now, Dan? What's piqued your interest right now and how are you looking at that from a business perspective?
Well, I've been reading too much about the destruction of businesses and instability lately. The last book I finished, in fact just last night on the airplane coming in, was How Music Got Free on how mp3 and streaming destroyed the recorded music industry as we knew it. Just before that, I read Black Box Thinking. I recommend both of these books actually, but Black Box Thinking in particular. This is Matthew Syed, who is a very famous business author. There's really nothing new there, but he does a great job of unpacking decision theory and helping us with making better decisions going forward, which is all that we do here, hopefully, is work on our decision processes. In particular, he says that we have to lose the fear of admitting to failure and mistakes, because as long as we can't admit to it, we can't work with it, and it's a gift. The FAA now characterizes airplane crashes as "data-rich incidents." Now, that might not be comforting if you're in the middle of one of them, but it is very important too. As he recharacterizes an accident or an error to the gap or the difference between an expected outcome and an actual outcome. Let's figure out what caused that gap and is there a way that we could modify our approach so it doesn't happen again. It's a terrific lesson and one that is so useful in asset management.
I know we had a conversation about this recently, this whole idea, and what comes out of it is one of the reasons why plane crashes continue to happen, either they happen for different reasons now and it's because the errors aren't brought forward. We learn from them. Every time there's a plane crash, we understand why it happened. That information is spread globally and then it doesn't happen again. How do you pull that together in terms of how you build the culture for your investment managers to help them get better and to avoid making the same errors in the future and to generate better results for customers.
To answer that question, Dave, let me go back several books, or several months, or maybe even a year or two. Anders Ericsson's Peak; this is a terrific book on expert learning, what it takes to master very, very difficult things, and I would include asset management as one of those really hard things to do. Many of us know this book because of Outliers, which really was based on the academic literature created by Ericsson and others. He says to become great at anything, it's going to take an awful lot more than 10 000 hours. He said sorry for that, it was a sound byte that we needed, but what we knew was that it wasn't ten thousand hours of doing something, it wasn't just repetition. But it was going to be really hard. It was going to take at least 10 000 hours to be good, so before you get into it, recognize that. But what you really need are these preconditions. The first thing is, you need expert coaching. That coaching should be based on a defined best practice. In asset management, and we as the leaders at RBC Global Asset Management have to recognize, we are those expert coaches, so we better be good at it, because everybody below us is reliant on our ability to transfer knowledge. I think we concentrate on that. We've done more concentration on that in the last several years than we did in the first years that we were all in this business. We used to think that people should learn by osmosis, I think. Just watch what the good ones are doing and you'll learn it that way. I think there's some truth to that, but we need a more robust approach, that's for sure. That defined best practice is also really important. What is the process that you're employing to generate alpha, to beat the market, to achieve your goal. You'd better be able to articulate that or maybe it really doesn't exist, or maybe it's not being applied all the time. So, expert coaching along a defined practice. The second element is the rigorous measurement of every element of the process. This has become quite popular. Measure everything. What can you learn from that pattern? And that loads us up for the third element which is deliberate practice. The combination of expert coaching and regular and robust measurement can help us identify what each individual has trouble with and what they could improve upon. There's no blame here. There's no "you don't get it." It's that you could do this better, and here's how we can help you. It's specific to what your own needs are, those of you who are involved in athletics, for example. I'm a skier, not a great one. I need more deliberate practice. More time away from here skiing I think, but you know, I carve a pretty good turn, but I drop my hand. Maybe you don't put your knee in when you turn, so you kind of slide out at the end, but you've got beautiful hands, so don't practice hands, practice your knee. You need to know what your issue is and get better at it. These books are really helpful to us in trying to make us better asset managers. We need to understand every element of what we do and how we can improve upon every single element.
So, what would you say are the defining elements of the culture that exists at RBC Global Asset Management?
I think, Dave, you put your finger on it right at the start. This is a culture of learning and I think if we got anything right when we built the asset manager or expanded out the asset manager, every person that joined us, that came in, that we brought up through our training, loves this business, is curious, and wants to be better at it. There could be no better definition of a culture of an asset manager than that.
So, the business is getting harder, though.
It is measurably getting harder. If you go back to the beginning of the formal asset management business in the 60s and 70s and it blossomed in the 80s, the proposition of asset managers was essentially that I can not only beat the market, but I can beat it by more than my competitors, and you should hire me to do that for you. That was largely true; there was a huge dispersion of outcomes between good managers and bad managers. Really most of them could beat an index because the competition wasn't all that hard. In 1980, when I came to the market, 25% of those putting trades up were professional investors. 75% of people were kind of trading on tips and rumours. It was an uneven playing field. It was also uneven not only by formal training, but by access to information. If you were a professional money manager, you had access to Wall Street research, you had lots of research coming at you, you probably had a bit of a crude knowledge of quantitative mathematics. You could put all this together to create an information and process advantage and three-quarters of the people you were essentially pitted against didn't have any of that. It was a much easier business. In the year I came to the market, the difference between winning and losing, called the first and the third quartile break points in large-cap U.S. equities was 1400 basis points or 14 full percent, now you've only got to win by 200 basis points so if you get, you know, two of the fourteen, you're doing okay. That's somewhere between 0 and 200 basis points. Now, that 14% is maybe 2%. So, it is demonstrably a much more difficult business. I think then it requires a very different approach. I think that some of those natural advantages that those of us that came to the market in the 70s and 80s had are no longer there. It's now flipped over. 75% of market participants are professional investors, so we're probably trained pretty much the same. Maybe they didn't go to the University of Manitoba but they all went to business school. They've got CFAs, they've got MBAs, or they're physicists or they're quantitative mathematicians. It's a pretty sophisticated group of people you're pitted against. You would be really, really arrogant to think that you are going to regularly be smarter than everyone else. The other thing is that the availability of investment tools is far greater. That limits natural advantage. And then access to information, boy that's really changed. I mean we looked at Regulation FD, Regulation Full Disclosure, and its impact on alpha since 2005. In many markets, alpha has kind of fallen in half beginning right around that date. If you level the playing field for information the edge that you can earn to that is also eroded and then as you say, if Regulation FD didn't get you, the Internet sure did. Access to information through technology is magnificent so those edges are all really, really diminishing. We all feel I think that our jobs are getting tougher all the time, that's probably human nature, but this one, we can measure it. Yeah, it's getting tougher.
So, with that you recently shared an article with me and I thought this sums up just what you've said, which is because we all have ready access to almost the same information, the probabilities continue to rise that any missed pricing particularly for the 300 large-capitalization stocks that necessarily dominate major managers' portfolios, will be quickly discovered and swiftly arbitraged away into insignificance. The unsurprising result of global commoditization of inside information, of all the competition, the increasing efficiency of the modern stock market makes it much harder to match them and much harder to beat. You've been doing this for thirty years. It's getting harder. What drives you to push forward and with all humility, what are you doing to make sure that we're still adding value or you're still adding value within RBC Global Asset Management.
Well first of all, fundamental to the answer, is that I actually still believe this is still a winnable game. But you have to come at it in a very rigorous fashion, reflecting on what we just said, how hard it is to win now. Let me go back again to one of these books, one of these lessons - I believe it was Black Box Thinking - and it was Team Sky. In the early years of the last decade, it was identified that England, the United Kingdom, had never won the Tour de France. The goal was set to win the Tour de France within the next five years. Well, that's like over hundred years of history you're coming up against. What can you do different in the next five years that you presumably were unable to accomplish in the prior hundred? That's a big problem and the thing you do with big problems is unpack them. Another big problem: beat the market, nobody else seems to. So, unpack the issue. So, what have you got when you're trying to win the Tour de France? Well, you've got a bicycle, but then bicycles have been perfected since they were invented. But Team Sky went to Pinarello and they did some amazing things with a pretty old product and they for example discovered that the chain rings are on the same side of a bike so there's an asymmetric transfer of power from the body to the bicycle because of that asymmetry so they put asymmetry into the frame to equalize that. I mean they make a gorgeous, gorgeous bike, even if you don't know anything about bicycles, look at one on the Internet and you'll see it's the nicest bike you've ever seen. And every year they bring a new version of the Team Sky Pinarello out and it's always a better version. Not a lot better because it's pretty close to perfect already, but every little thing on that bicycle is thought and re-thought. And they said well, we have the best bike in the world, let's get a good rider. Well, these aren't just any riders like you and me, these are people who have been taken out of school early and put into academies and they ride more than they study and that's where Bradley Wiggins came from. How do we make a Bradley Wiggins who has already come up through the system even better than the world's best cyclist? Well, let's get him some strength training, but strength training that's good for cyclists, perfect for cyclists, not just for strength training. You don't need a big neck, for example, to be a cyclist. Big legs, strong core, that would be an excellent thing to have, so that type of specific training. Now you've got the strength in, what about the cardio? But cardio for cyclists during the climbing and the sprinting parts and how can we train them perfectly for that? Well, you know, one thing that would help now that we've strength and cardio down, is let's make sure that the intake, what they're eating, is really driving improvement on those two things: the perfect cyclist diet. And then you're kind of running out of ideas. Oh wait, do these people sleep optimally? Do you know, if you go to work for Team Sky, you get issued a bed roll. Every day that bed roll has fresh sheets. You don't sleep on a bed anywhere. Even at home, you sleep alone in a dark room, you go to bed at the same time every night, you get up at the same time every morning. You sleep on that bed roll which is perfectly tuned to your size and shape. You sleep facing the door in a slightly modified fetal position. Why is that? Because great sleep drives great physical health, great strength, all that. You know, what they did was they decomposed every element of the game. They optimized every element. They insisted that everybody follow that. And how did it work out? Well, we know. They didn't win just once in the next five years, they won the first year, and for the first five years and something like seven of the eight years beyond the declaration they were going to win. So that was a success beyond anything anybody wanted to claim. So, to roll forward, to port that into asset management: it's not one big thing, it's every element of everything that we do. Decompose it, do it just a little bit better. It's not one big thing, it's a whole bunch of small things done just a little bit better and you can still win at this business.
I think that really is what makes what you're doing special, and why I've had numerous people in the industry, in Canada, the U.S., Great Britain, say, "Dan is the quintessential chief investment officer." That ability to be curious as we said, which is fundamental to your personality, who you are. The drive to understand, but then the ability to pull it together and then have it execute through an entire firm which isn't just based in Winnipeg, or Toronto, or Vancouver. It's based all around the world. You travel 300 000 miles a year roughly as you travel from continent to continent. It's really amazing how it all comes together. Which is really I think my last question, because it would be one thing again if you were applying it here in one office in Toronto where we're sitting here today, but how do you make that happen in Hong Kong and London and Tokyo and New York and Minneapolis and Vancouver. It's all around the world that these things are being looked at, they're being acknowledged, issues are being raised, so we know what the issues are, and they're being worked on so that we get better and better everyday.
It's an interesting question that you learn over time I think, Dave, in that when I first arrived here when I left the investment bank in 2002 and arrived here as CIO, George Lewis had asked me to come across because I was always very process-oriented in my approach to markets, and felt that the firm could do with a little more process orientation. So, you start with the view that there should be one process and if you have to impose it, you impose it. But I completely disagree with that view now. What you need is people to work with you that have a philosophical alignment. They might do things very differently, the actual process of investing, the elements of it might be different, but the goals are the same and the ways they think of them are the same. So, you know, the idea of accumulating vast amounts of information so that we can analyze that information around our processes and make those processes better appeals to everybody that works here. We all want to do that. And because we're a naturally collaborative group we tend to share our findings and that kind of helps float all the ships in RBC GAM no matter where they're located. We find many of the people in the teams naturally reach out to each other because they find that's sort of symbiotic and helpful. But this idea of it being philosophically consistent is powerful when you've got all the locations you just talked about. The United Kingdom and Hong Kong. The United States and Canada. There's not one way we're going to go out investing in all of these markets, but the approach is that we have very strong investors. We put very robust and constantly refreshed tools in their hands to make them better investors and we add to that new markets where there still is alpha, where there still are high returns to skill and knowledge and access to information. Those three things, they've driven our game for a long time and I think that's how we'll drive this place going forward too.
So, you still can win?
Absolutely. How does the Rolling Stones fit into all of this?
Well, you need to relax a bit, don't you?
Now what a lot of people don't know is you've travelled all around the world to see the Stones. What do you think is so special about that band?
Well it's interesting, I was asked that question the other day. That band only made 30 albums, 30 studio albums, but it's lasted 50 years on that material. I think what it was, was it's first of all very strong material and in a sense they kind of set the terms for what strong means in that material because it created the genre essentially, certainly arena rock. But they've always kept current as well. So, it's on a strong base, but it innovates, and rather than sticking with the same audience you started with, the audience actually grew. Famously, you go to a Stones audience, you see people my age who really don't look like they belong there anymore, except that the performers are even older, all the way to their children and in some cases even their grandchildren. They've kept an appeal which has grown and grown the size of their audience over many years. I think there's a lesson in that.
Yeah, and my favourite band is the Beatles and obviously they're together for eight, nine years really for their primary recording period, so they have this incredible top end, this incredible flash of brilliance over that short time period, but then it goes away. They break up. Whereas the Stones go on as you say for 50 years and there's a value to that, and a lesson to be learned from that from an investment standpoint as well.
I think that's true. The other thing, the Beatles are a great example, because you can go see Paul McCartney – in fact, this week you can go see Paul McCartney, somewhere in the world. Their songbooks are so massive. They've got so much to draw upon. They can be up there for three, three and half hours and you're still thinking they've got so much more to go. You know, we've got something like 275 different strategies out of here, maybe 10 years from now it will be double that. I know it's 50% larger than it was 10 years earlier, and two-thirds of that is now outside of Canada. We were 75% in Canada about a decade ago. So, always improving upon that and expanding upon that strong base you have. I think that's critical.
Well Dan, thanks for that. That was a great conversation. Hopefully this is something that we can do on a semi-regular basis because I'm sure the listeners will enjoy it.
Thanks very much.
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