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About this podcast

Dave Richardson sits down in London with Dominic Wallington, Senior Portfolio Manager & Head of European Equities at RBC Global Asset Management, to discuss his background and approach to managing money, particularly the value he places on a skeptical mindset.

Transcript

Welcome to Personally Invested. I'm your host Dave Richardson. This time, I sit down with one of the most interesting individuals I know: Dominic Wallington, who is a Senior Portfolio Manager and the head of European Equities at RBC Global Asset Management. Similar to a previous episode, where we sat down with Dan Chornous, and, I think, a hallmark of great investors is an incredible intellectual curiosity, a fascination with almost everything-getting beneath the surface, trying to understand it more, and to bring to the surface what's critically important to constantly improve your process, to constantly deliver better results. Dominic applies that intellectual curiosity, and particularly in the area of history, and the knowledge of European history, to be a truly great investment manager in the European space. An expert on Europe: Dominic Wallington. I hope you enjoy..

Hello.

I have wanted to have you on for a long time because you are such an interesting person to talk to, for so many reasons that we are going to get into today. And, fortunately, I am in London to meet several of your colleagues and get a podcast taped. So, it created an opportunity. I really thank you for taking the time to sit in with us today.

Thanks, Dave.

So, Dominic, you have such a fascinating history, personally. Why don't you tell us and the listeners about how you got into the business and what you find so exciting about being in the investment management business in today's world?

Well, I think there was no great strategy on my part, but I was vaguely aware that my grandfather was a stockbroker. Or, more specifically, I think he was a rubber broker. And there is a family myth that he introduced rubber trees into Malaysia, and there is a wonderful story about a British guy who went into South America and stole seeds-rubber tree seeds. And trees were planted elsewhere in the world as a consequence of that. So, if it was true, it would be wonderful, but I'm slightly skeptical. But I have this notion: the idea that it was an exciting field to be in-it was at the centre of commerce.

Sure.

And then once I'd moved to London and worked in a few roles associated with the investment industry, I got an opportunity to become an institutional portfolio manager.

Okay, and what did you do in terms of schooling?

Well, I guess that the sort of end-result was a postgraduate degree in finance and investment. So, in that sense, my education is fairly narrow and pretty vocational. And, I think, I've tried to correct that ever since.

Really? Now, I know you're also-one of the things I love about getting into a discussion with you, aside from food and wine and music, is history. You have a huge fascination with history and deep, deep knowledge of history. And that didn't come from your formal education-that just came from interest?

Yes, exactly. I think it came with age, to a certain extent. We have the kind of job that requires a lot of reading, and I think that that creates the person you become. You know, it's a necessity for the job, and you begin to convert to someone who reads a lot. And I was very interested in the history of ideas. I remember reading keynes saying something along the lines of: "an understanding of the history of opinions is required to emancipate yourself." And I didn't really understand it at the time, but the more I've read about the history of ideas and the strange alchemy of the way we convert our cultures and change our cultures, and the way that we are slaves to ideas that are indivisible to us has always fascinated me. So, that's probably the area that I'm most interested in, to be honest.

And so, if we now start to shift to a discussion of the way you and your team manages money and thinks of investing in companies in Europe, and really all over the world, do you think there is a tie-in between what you've learned from that study of history, and again some of its an off-shoot of what you are reading as a part of your role to begin with, but your interest in history and what you have learned from that and the approach you have to managing money?

Yes, I think it's very closely aligned. Dwaipayana used to say that "doubt is a virtue." What he was talking about is the scientific method: having a skeptical mindset because all the time people are doing things and are not thinking about why they're doing them. They're trapped within these ideologies that tend to be passed down by economists and philosophers, just the cultural idiom of the day. And people don't test these things. I had begun to realize that it was actually a very powerful tool from an investment perspective. And, again, it's the rigour of the scientific method. You can't test everything, but there are popular ideas-notions that exist that create opportunities from an investment perspective. Perhaps the first and one of the most powerful ones that we noticed about 10 years ago was the growth in diabetes and chronic illness, and the advice at the time was to avoid saturated fat and to eat lots of carbohydrates. And if you read back through the history of nutrition, you realized that was a remarkable departure that didn't actually have a lot of scientific evidence underpinning it. And because of the fact that this was such a powerful theme, we expected these growth rates unfortunately to pick up. And that is what has happened. And we have invested very heavily in diabetes care and that has been a very good long-term investment.

A very good investment theme. And then that skeptical view and mindset, has led to very many other interesting investment themes that you have been able to capitalize on.

Yes, I mean, the other thing that we do-that's absolutely correct-t he other thing that we do is: we are constantly testing ourselves. So, we turn it in on ourselves as well. Why are we making these decisions? What is it that we are doing? Does it bear merit or are we just not thinking about what we are doing? Are we being lucky? So, in all ways it's given us a kind of tightness of approach, a discipline that I think has been very helpful. But yes, if we look around, there's all sorts of themes now, which, to a certain extent, are the sort of things where a skeptical line of inquiry is very helpful. If we look at the political environment, then having an historical understanding of political developments is very useful, as is a skeptical mindset. And one of the biggest things that we are seeing at the moment is this incredible explosion in technology. The power of humans now in their technologies is remarkable. And the way in which technology changes business has been a very important theme in the last two or three years in the way that we construct the portfolios.

Now, if we come back and we are looking for a more technical view or a more classical mathematical or analytical view of your philosophy for managing money, what would be at the core of that?

Yeah, I still think there is room for the art of investing. Not everything can be quantified. But if you were to look at it from a numbers perspective, then what we tend to do is we focus on companies with higher stable returns on equity that do not require leverage on a balance sheet to obtain that, it's probably better articulated as "return on assets." They don't have to spend a lot of money in order to grow their businesses or run their businesses. So, they produce huge amounts of free cash flow. Those are the key criteria. And we recognize those sorts of businesses quite easily using a number of different instruments, which are quantitatively articulated. But to bring it back to a sort of a more naturalistic conversation, they tend to be businesses that have been around for a very long period of time. Many of them have been around since the middle of the 19th century. And even some of those-t he companies that exist now-own brands that have been around for even longer than that. Dom Pérignon, which is a well-known champagne brand, has been around since 1666.

We sip that at dinner every night. It's lovely.

I would expect that of you. Château d'Yquem, which is another brand-it's actually a wine brand owned by LDMH, which is a constituent of our portfolios. That's been around for 400 years. So, often, even though the company itself might be relatively new in terms of its structure, the services or the products within it have been around for a very long period of time and have cache because of the fact that they have been around for a long period of time. They have got this sort of narrative, this wonderful narrative that people really enjoy. And, at the same time, they have demonstrated that they have gone through a lot of history. The 20th century was an exceptionally turbulent time. Any companies that have survived through that and excelled and grown to be global in nature, we are willing to bet will be good investments in the future.

I think the hallmark-having known you now for over a decade and listening to you and your presentations around your approach, and just in some of the ways you look at the world and the team looks at the world-It's that intellectual curiosity. I always think that the hallmark of great investors is that they are naturally curious, and curious in a way that is very thoughtful and leads to different opportunities. And you may be one of the best or the most intellectually curious that I have ever met.

Well, I think it's great fun, but I think I was shaped by the industry. I mean I have a great team, many of whom are younger than I am, who seem to demonstrate this curiosity. So, either the industry draws people in and/or it shapes you. I am not entirely sure. But I remember reading something by Charlie Munger about learning from the eminent dead, and that just seemed like such a cool idea to me It kind of spurred me on. And I really do enjoy that aspect of the job, I really do have to admit.

Yeah, it's amazing, as I speak to different investment managers all over the world, the extent to which they read. Reading is just a-I mean we associate reading, and not just reading balance sheets, but reading about history and business culture, so many different things, we associate with other professions. But it seems to really, really be a critical factor in driving success as an investment manager.

I completely agree with you. It is totally key. I think the longer you do it, the more you realize that having a broad church of interests is actually very additive because there's nothing that I've selected about investment. You're essentially investing in businesses that operate in the real world. An understanding of the real world, a broad approach, is very useful and therefore just reading investment notes by stockbrokers, I think, is minimum criteria. You should be doing more than that. You should be trying to understand how things are developing, why things work the way they do. And all of those things are fascinating in themselves as well.

And then that rigour, which you talk about, to constantly go back and test what you have always thought and be able to adjust and be flexible when you have new information and new knowledge.

Yes, I think that's very important. We don't always get it right, but we are always working at it. We're always questioning what we are doing without undermining the foundation of what we are doing. But that would be being too hard on yourself, if you will. I don't think it's constructive. We are constantly trying, in a sense, to dissect the decisions that we make to try and see the key criteria with them. And that should enable us to be able to establish when we have made a mistake. We see mistakes, in a sense, as a form of feedback, as opposed to something entirely negative. It's something to learn from and to push on from.

Yeah, and that willingness to learn is another element that's critical to success. So, Dominic, I'd love to get you back on a future trip where we can go almost go nuts and bolts into your view of what's happening in Europe right now. We're actually taping this on March 28, with all kinds of stuff is going on around Brexit here in the U.K., and I know you have some interesting thoughts on that. So, we'll hold that for the next podcast. But I really thank you for taking the time today.

Pleasure, thanks very much, Dave.

Disclosure

Recorded on March 28, 2019
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