Disclaimer:

00:22

This podcast is for informational purposes only. Information relating to investment approaches or individual investments should not be construed as advice or endorsement. Any views expressed in this podcast are based upon the information available at the time, and our subject to change.

Rob Campbell:

00:39

Our CIO, Paul Moroz is on the podcast this week. Paul, good to have you back again.

Paul Moroz:

00:45

Thanks, Rob. I think I was just on.

Rob Campbell:

00:47

It wasn't too long ago. You said something the last time you were on that prompted me to reach out again. So, when you were talking about the post-mortem process, you mentioned this process that you and our Deputy CIO, Christian, had gone through and actually reaching out and interviewing various franchise business models to understand how they struck the right balance in ensuring quality and consistency. And, at least as I understood it, this was to better understand the pros and cons involved [and] trade-offs involved with creativity, efficiency, and process. And so maybe let's start there. Can you expand more on that series of interviews that you went through, what you are hoping to get out of them, and what you learned?

Paul Moroz:

01:28

I think to understand that, we have to go way, way back. And far enough back where, at this point I'm in my 20s, I'm in university, and I'm sketching out little diagrams and boxes on a piece of paper to fill out an investment process. Everyone finds their own way in life in a different way. For me, I knew from a very young age where I wanted to spend my time, not only in terms of making investments, but thinking about how I would make that investment. What sort of process that I would go through that would lead to a better or superior result. In a lot of ways, I'm just kind of out-of-the-box [full] stop. The reason that I came to Mawer in the first place, which was in 2004, was because I had this belief that there's a match in their investment philosophy. It matched with what I believed.

02:27

After reading books and talking to people and having various job experiences, I thought that this held water; just logically, the idea of fundamental investing where you're measuring value, you are investing in things that are wealth creating, you're investing with people that you trust… That seemed to all make sense to me. And as my career progressed at Mawer and I took on more leadership responsibilities, we began to develop this vision.

Paul Moroz

03:06

And the vision, which Jim Hall, who's our Chair right now and myself talked about, was his concept of a global franchise. How can you as an organization create an environment? And it might be processes, it might be mental frameworks. It might be elements of culture, that when wrapped together produce this consistent investment-making environment that ends up adding value. We're really in the business of making decision, and making decisions that add value on a repeatable basis.

Rob Campbell:

03:44

Got it.

Paul Moroz:

03:44

And so at one point we had this sign up that said, "Building a global franchise," or something like that. It hung over my desk. This was a vision for what we wanted to do. Now, we rolled out the global aspect of it in terms of our products, our solutions. Clients and friends and family and colleagues will know that we launched [Mawer] Global Small Cap. And then we expanded, we launched [Mawer] Global Equity and we launched [Mawer] Global Balanced, and [Mawer] Emerging Markets. That was the global push. But we were also doing things to improve the franchise. Now, so let's fast forward to what happened four years ago. So, that's when my role changed a little bit. I used to be the Deputy CIO, and it changed to the chief investment officer role. And my colleague Christian Deckart became the Deputy CIO. Or, as Jim Hall likes to remind us, “Night Store Manager.” Working really hard and mopping up [all] this. And we took a really hard look at this question of, again, building a global investment franchise—what would have to do to take it to the next level?

04:54

Christian had a vision of greater industrialization. And by that same sort of concept, we're really running this factory. Lots of organizations and investors they just kind of do their own thing. It's kind of like…it's more of a craft or maybe there's an apprenticeship. And we thought it would be really special if we could build out this platform. So what we did is we started looking around and talking to people who had this sort of experience of creating more consistency in their business. And we just reached out to different businesses. So, when you think about a franchise, what comes to mind? Well, people that manage brands: restaurants, organizations that create some level of consistency in their process so that the output and the result is similar. That's what we want for our clients. And it's a different industry, but we thought maybe we could steal some ideas. And so we spoke with a number of people.

Paul Moroz:

05:55

We spoke [with] people who have kind of developed this at McDonald's and developed the franchise globally. We spoke with some people from The Keg, if you're Canadians, you'd be—

Rob Campbell:

06:05

Steakhouse.

Paul Moroz:

06:06

—familiar with that. Both those restaurants—there's a level of consistency. I think at The Keg—and I'm not sure how exactly they do it—but every time I go in there for a steak, it's always really good, it's always very consistent. Have you had that experience, Rob?

Rob Campbell:

06:20

I don't dine out The Keg as often as you do, I guess. But yes, even the look and feel of the place often is the same [from] location [to] location.

Paul Moroz:

06:27

So, as we had these conversations and we started to try to steal…[and ask] what could we learn from these organizations? And what we realized is that fundamentally, a knowledge-based organization—even if we want a similar result—[is] very different than a lot of these other organizations. For instance, we learned with a lot of the restaurants, the franchisee in a franchise model, just simply doesn't have the choice to change your menu around and experiment and do whatever you want. There's actually a really tight level of control around that. It produces consistency, but there's a trade-off there. And so we came to recognize that this was actually what I classify as a tension problem. It's not just blanket right or wrong depending on how you do things, it's—if you try to solve the problem or configure it so that it's too tight, if you run your franchise too tight, if you don't allow enough creativity, you could have problems.

07:37

Your people might leave because they're…or you might not come up with enough creative ideas; you might be looking at the same sort of securities. If you run your franchise too loose— in a restaurant, if you just allowed your cooks to whatever they wanted to cook that day, that could be totally different. You'd run into all sorts of other problems. You'd run into chaos, you'd run into inconsistency. It was hugely helpful in framing the challenge that we have in building and developing our global investment franchise. That mental model of this…having the right tension: not too tight, not too loose, based on our conversations from some of the restaurant executives was hugely valuable.

Rob Campbell:

08:19

Hearing you talk about that—it's not that those restaurants' business models don't need to evolve or innovate. It's just that it's more of a top-down centralized innovation that comes from the actual franchise owner, I guess. Is that the right way to think about those particular businesses that you're thinking of? and why is it different, or is it different in our industry?

Paul Moroz:

08:41

I think that's the general theme. But also, there is elements of—and this is a concept we'll get into—field marking. So, for instance, if you walk into a McDonald's in a different country there'll be elements of the menu that are the same, but they've actually—and even though it's sort of a head office—they've decentralized or what we can call “field marked” some elements of the menu. They've said, "There should be an element of locality." If people are eating differently in Singapore or Japan, there might be different things that are adjusted on that menu. And if you don't sort of decentralize that, if you don't field mark that and say, "Actually in this, for this situation, there might be two items on the menu where the local franchise should have the flexibility and the choice to be a little bit more creative and adjust the menu to suit the local tastes and flavours and so on."

09:47

I think that's a really important element. So, the concept, this idea of field marking is you have to understand what things are set, and what things within a business, within managing your people, you can provide that creativity and flexibility. So, that's the first point. We can come back to field marking later. It's a really important element of what we do at Mawer. Now, I think the people involved in restaurants, businesses, often it's part-time people, sometimes it's younger people. That's very different than the makeup of the people that make up a knowledge business, like an asset manager. As well, culturally, our culture at Mawer has [a] lot flatter hierarchy. You kind of add these things up and you realize, wait a minute—a more centralized model may not work as well, in that you just don't get the benefit of all these brilliant people.

10:45

So we've created some processes where we've looked at the field marking and said, "You know what? People should have a little bit more flexibility to be creative." And here's an example of how we've turned this on the head with [The Mawer] Lab governance. We, years ago, had inserted tech people into our Research team. And we started getting them to help build technology and work on tools and problems that can get us ahead.

Paul Moroz:

11:17

And Justin Anderson runs our Lab and he's done a wonderful job. And one of the things that we started to think really hard about is the field marking and to understand, "Well, how do we deal with this IT and technology governance here?" We've sort of decentralized this. And for a while we were wondering—if you just let people do whatever they want in terms of developing new technology or tools, is that too much chaos? Is that too loose? Or if you go the other way and require that every decision be made by the CIO to roll out a new tool or to allocate resources, would that be too tight?

Rob Campbell:

11:58

Or just the bottleneck.

Paul Moroz:

11:59

What's the answer?

Rob Campbell:

11:59

Yeah.

Paul Moroz:

11:59

What did we end up doing? Well, for us given the culture, we thought that we’re going to field mark this and decentralize a lot of the development. We have some incredibly brilliant people. And so we said to our people, "If you want to change something, if you want to build a piece of technology, if you have an idea for innovation—don't ask me, don't ask the CIO. Don't wait three months until there's a governance meeting. Pick up the phone, go talk to one of our Lab tech people and start innovating, start working on it." Our people have very good judgment. There's good ideas, and we wanted to field mark that. Now, field marking also has a boundary. There's sort of boards to the ice rink, so to speak. And where we created the boundary of this in terms of IT governance is, we said, "Wait a minute. What if we've allowed that flexibility, but we got our IT people to track all their time of what projects they were working on?"

13:04

And then three months down the road we'd have a conversation with Justin. We'd look at how people were spending their time. We'd look at the projects, as a double-check we'd say, "Should we really be allocating capital to these projects? Do we need to have a conversation and maybe shift or adjust that?" Or maybe there's a spot where there's some projects where we're not allocating enough time there, and in order to improve the return on investment we should just be spending more time doing that versus something else. So, we kind of turned it upside down. It's not a top-down governance, it's almost a bottom-up governance. But we became very clear on how it was field marked and who has the decision right.

Paul Moroz:

13:50

And actually, Dave Ragan—one of our portfolio managers that people know, he's a tech guy who sits on our board—Justin Anderson and myself, we sit down in this governance meeting on a quarterly basis. And technically Dave has the decision right if something's gone too far and he could kill it. But most of the time, just like a leader with input decides, is, we provide this feedback and the projects evolve and it's worked really well. But solving that problem, creating, striking the right balance between the creativity running an efficient system… I mean, it kind of took us learning about this problem and incorporating those models from the restaurant franchise and then implementing something that might not be so common in some organizations. It works really well for us, but that's how we run our Lab team in terms of governance.

Rob Campbell:

14:46

That's interesting. I think there's some important things in there. So, clear boundaries, establishing them through clear agreements; clear decision making associated with them. Can you speak though just to the other side of it? So, for the person or the perspective of the person being field marked, what are the advantages to that?

Paul Moroz:

15:05

Field marking… If we go back to this concept that it's kind of like an ice rink, and in someone's career you have this ice rink and this enables you, you can skate around, but there are some boards. Now, the reason why there are some boards is because one, focus is good. You should have some focus on what you're doing. And so we have different goals amongst the organization, or objectives, key results. And having your role field-marked allows you to focus more on achieving those goals that you've set. I think that's the first thing. The second thing is it provides more clarity in terms of how you're contributing to the team. Your teammates know what your roles and goals and responsibilities are; they know how you're field marked. And so it just makes it easier to work together, it makes it easier to communicate who's doing what. But there's another element here—is that this isn't static.

Paul Moroz:

16:04

And what we find with people as they develop, they will have their own genius area. They'll want to grow in their career. So they'll have these ideas. You can allow some flexibility there. And I think there's a process where you go back and you check in and say, "Hey, are these boards in the right place? Is it now time to sort of expand or shift the field based on your genius area, based on the growth path you have, based on how you're working together as a team?"

Paul Moroz

16:41

And then you can have this really wonderful conversation around adjusting people's career. So, this is a never-ending process. It's why we check in with people in research every 60 days—because we're really constantly clarifying that field, helping them do as good a job as you can do within the field that they have. But also as leaders, recognizing when there is a new creative idea, when there needs to be a shift based on growth and personal development. And that's when you can have that coaching moment and give that feedback to say, "Let's shift, let's adjust our field."

Rob Campbell:

17:18

Can I shift a little bit, Paul? Your description of the field marking these frameworks makes me think that we actually have a lot of these embedded in our investment process. And perhaps the clearest example—and I wonder if this is one that's closer to the McDonald's end, where it's very tight—is just the investment philosophy itself. The three pillars: wealth-creating companies, excellent management teams, discount to intrinsic value. How do you view that with respect to that tension problem?

Paul Moroz:

17:46

I mean, I think it relates to—the investment philosophy are, I would consider, frameworks. And where Christian and I came out of our investigation of franchises is that we started to view quality control in an intellectual business as applying these mental models or these frameworks. In this case, is the company wealth-creating from an investment philosophy standpoint? What does valuation look like? What's the strength of the management team? So, we basically say, in terms of quality control, we should intellectually investigate and look at these mental models. So that's kind of the quality control. And then within that you can have coaching. And you can have conversations with people about the particular elements of a management team when capital allocation might be more relevant to an investment case versus, say, execution or something like that. That provides for, we believe, more flexibility in that.

18:53

And the same thing that you can move this down from our investment philosophy to our process, where really the framework of whether it's ESG or forensic accounting, or scuttlebutt talking to different competitors. We said, "Here's a framework that you can take a look at it." But how you sort of move around and navigate that sort of framework…that might be a little bit different. There's that flexibility within that field to investigate things as appropriate. There's some companies out there where they're forensic accounting checks when we do it, it's extremely clean.

Paul Moroz

19:32

Free cash flow conversion is good; not a lot of debt on the balance sheet; there's not a lot of off-balance-sheet debt. there's not legal cases; there's not other governance issues, maybe with share options or something like that. If there isn't that area for investigation that's required, the analyst, our investors, don't need to spend as much time on there. They can emphasize something else that matters more.

19:56

And so that's the balance in having these frameworks where it's really that judgment over time that's required to navigate, to say, "Well, what's really important?" And coming back to the tension problem, if you were too prescriptive with all the steps and the process and the investment philosophy, you would spend more time on things that might not matter to the investment case. If you had no North Star, if you had no frameworks, you might focus on something else that wasn't important and make a large mental error, behavioural error, because you didn't focus on, say, valuation, that wasn't part of the checklist. So that's the trade-off that you have and it relates to that same sort of tension problem.

Rob Campbell:

20:41

Can I ask—I mean, you mentioned the word checklist a few times. There are many things that are often described as, "Hey, this is a check-the-box exercise." And the negative connotation associated with that is, "Hey, I'm not putting a lot of effort into this. It's just something I have to do. So I'll put the bare minimum effort just to say that I checked the box." Is that a risk or an issue with having a series of frameworks that people have to go through in our process?

Paul Moroz:

21:05

It's like anything else in life: what you put into something, the effort, the intensity, the mental stimulus…what you get out of it is only as good as what you put into it. The comment around [the] checklist is making sure that you've thought about these different concepts and that there's not a blind spot. You don't miss something where that creates an error. Rob, I know you're into skiing. If the listeners out there don't know this, Rob's an excellent skier. I think even he used to race, some coaching… Is that right?

Rob Campbell:

21:40

A bit of both, yes.

Paul Moroz:

21:41

Bit of both, there you go. My question for you is, have you ever gone backcountry skiing somewhere?

Rob Campbell:

21:48

Yes.

Paul Moroz:

21:49

So if you're going to do that, let's use the checklist approach in that example. That's not a check-the-box exercise. And I know you're a pretty methodical guy. You probably have a checklist because you got to make sure you have your food, and you got to make sure you have your hydration, and you got to make sure that you have all those things that are going to make you successful. And the problem is, if you forget one of them, if you just make a mental error, if you just, I don't know, didn't bring water or didn't bring enough food or didn't bring your GPS device or lunch equipment, whatever it is. Yeah, you can really get into the glue.

22:26

I want to ask you, is that a check-the-box exercise? Well, it's more about making sure that you've thought about these things so you don't make an error. And that's what's so much about investing is about some people have this idea that it's really about stock selection, finding that amazing stock that goes up and makes a big difference. And yeah, that's sometimes that happens, but so much about what we do as a franchise is about reducing, mitigating, eliminating those errors. That's why I bring up checklists lots. And that's why when lots of times you have that checklist in situ—whether it's backcountry skiing or whether it's pilots flying and they go through a checklist to make sure that they have all those things—to avoid that error and that real negative outcome.

Rob Campbell:

23:17

One part of the process where we're perhaps at the most opposite end of the checklist flavour would be the beginning of the process. The idea generation. Where, at least as I understand it, we don't have a lot of prescriptive things that we say, "Here are the specific steps you must go through in screening the world." I think we give a lot of creativity and empower the people on our team to go out and find ideas and experiment. Can you talk a little bit about that? Why we do that at that part of the process, and then how we make sure that if we're doing that and really decentralizing, that we're not missing out on parts of the market?

Paul Moroz:

23:54

Well, I think you're absolutely right. There's a reason why that part of our investment process is less centralized. We believe that the more creative that you are, the better chance that you're going to come up with an insightful idea. And so there are situations where we've just simply read through the annual letters from CIOs to understand who is focusing on the right things, who writes their own letters and maybe is more engaged with shareholders and more of what we would call an “architect CEO,” someone that's built the company.

Paul Moroz

24:34

Gaining insights that way. Other situations where we go through individual companies, and sometimes as a company becomes public and kind of spun out of private equity, there's sort of this circular amortization that depresses return on invested capital. You just kind of have to adjust for it manually and understand the economics differently than if you were simply to go through a stock screen on a computer. You wouldn't pick that up.

25:06

There's lots of these instances where people have come up with a different technique, a different method. And remember too, the market is going to evolve. The thing that you did yesterday or the day before may not be applicable today because the market is a complex adaptive system. You have to always recognize that that's the game; the odds are always shifting and you have to look at things differently, look at a different lens. That's one element. How do we avoid not getting stuck or locked into one view and making sure that idea generation kind of comes from all sorts of angles, geographies, all that sort of thing? Partly that's why it's decentralized and we apply creativity. I think to the extent that you centralize that, there'd be more of a risk that idea generation became the same thing, and you wouldn't have that diversity of opinion, ideas, so on and so forth. And the other one is really about the people. And we've worked hard to find people that have different backgrounds and have lived in different parts of the world so that we get that global context.

Rob Campbell:

26:12

Yeah, a lot of it does seem to come back to the people; having great people that you can trust and that trust each other on the team. I wonder, Paul, as our team has grown…over whatever time period. But let's say since you and Christian had those conversations with The Keg. And as we've moved to mostly being all in the same office next to each other to working from home, how have you either dialled up or dialled down some of these tensions? Have you had to make adjustments in that regards in the last three or four years?

Paul Moroz:

26:43

I think that one of the things that we have to work harder with is, as a distributed organization, say, as people have worked from home, connecting people so that they have that emotional connection and that they're building trust so that they can share those different ideas. That's something that we dialled up. I just came back from Toronto, and one of the key purposes of the trip was to meet physically with people and get them to connect and share stories. Why do you do that? You do that to build trust so that you can share different ideas and different models.

Paul Moroz

27:23

So, that's a major change that I think the world is undergoing to the extent that the world goes more distributed. And there's pros and cons to this.

27:33

If people are working from home, it means you can draw from a more diverse set of people, that they don't have to necessarily come in. I think there's benefits in terms of the quality of life. You may not have to commute into the office. You can spend more time with your family, more time with productive work. But there [are] some offsets. And we're rolling out more programs to address how do you build trust more quickly in this environment so that you can share all these different ideas and really connect. Because that's the trick or the puzzle with diversity and global diversity—is you actually have to be really receptive to these different ideas. It's just not enough to bring on a different idea, because the first response is often, "Well, this isn't my idea, or I'm not sure about it. It sounds different." That's why there's these things called like a home bias or an endowment bias. Often people…they trust what they're more familiar with. The problem is how do you aggregate diversity? Well, it's through building trust with relationships.

Rob Campbell:

28:41

Fascinating. Well, this has been a meandering conversation, Paul. I know we covered a lot of ground, really fascinating stuff. I think for me just helps better understand leadership, some of the choices that we've made as an organization, how we've gotten there, and as always, really appreciate having you on the podcast, Paul.

Paul Moroz:

29:00

Thanks for having me, Rob.