NBI's Terry Dimock: Governance in Portfolio Management Through Several Angles

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Pierre Daillie [00:00:00]:

Welcome back. I’m Pierre Daillie, managing editor at AdvisorAnalyst.com, and this is Insight is Capital. We’re thrilled today to have with us a luminary in the world of investment management, Terry Dimock, Chief Risk and Execution Officer at National Bank Investments. In his pivotal role at National Bank Investments. Terry oversees asset allocation and portfolio manager selection for a diverse suite of investment products, including mutual funds, exchange traded funds, and managed solutions. Before his tenure at National Bank Investments, Terry made significant contributions at the Caisse de Depot et Placements du Quebec as the portfolio manager and head of investments for sectors encompassing technology, health, an consumption. And tracing back to the start of his illustrious career, he was a portfolio manager at Standard Life. Terry is a proud alumnus of McGill University with a BA in commerce and an MBA.

Pierre Daillie [00:00:55]:

He’s been a distinguished CFA charter holder since 1998. Today, Terry’s sharing his views on risk management in volatile markets, the emergence of new asset classes, responsible investing, due diligence and accountability, and the future of portfolio management. This is the Insight is Capital podcast.

Terry Dimock [00:01:19]:

The views and opinions expressed in this broadcast are those of the individual guests and do not necessarily reflect the official policy or position of adviser analyst.com or of our guests. This broadcast is meant to be for informational purposes only. Nothing discussed in this broadcast is intended to be considered as advice.

Pierre Daillie [00:01:32]:

Terry, welcome, and thank you so much for honoring us with coming on the show today.

Terry Dimock [00:01:39]:

Thank you very much, Pierre. Really happy to be here to have the chat on topics I’m really passionate about. You know, hearing my history, you know, I can’t, stress enough how, it really it’s a team of faith when you do investing, and, I’ve been lucky enough over my career to be surrounded by really brilliant people. And, usually, that’s how, You know, it starts in investing is having the right people.

Pierre Daillie [00:02:09]:

Absolutely. Terry, having said that, before we get started, tell us about the arc of your career. I know I know I went over it, in brief, but tell us about the arc of your career, how you evolved in the business, and what you’re working on these days at National Bank Investments.

Terry Dimock [00:02:26]:

Well, I started off as a, you know, investment analyst in equities, really looking at fundamental analysis, how you look at a stock, how you value a stock, and if it’s a good investment or not. And, Standard Life was a really good school, really. What they thought, they they brought to me was, process, and that’s something that stuck with me, across my career. You don’t define you can’t predict the outcome. What you control is a pain test, how you do things. And if you do it in a disciplined manner using, approaches that have been shown to work, usually the outcome over time is quite positive. And I’ve seen that, at Standard Life. I’ve seen that at the depot.

Terry Dimock [00:03:13]:

And in my career here with my colleagues, we’ve tried to implement really solid processes. What I’m working today is, one, ensuring that our process is intact and, that we’re continuously looking to improve it, not changing, a good process. Usually, you don’t change or hold your whole overnight or or on a constant basis, but you do look to, you know, add to it. I’m also looking at, how new technologies like AI and other occasions to looking at data will influence what we’re doing, will complement what we’re doing, and that’s an area that that I think is gonna bring profound change in the next few, years decades.

Pierre Daillie [00:03:55]:

Yeah. I I you know, you can’t stress enough how important process is. It really helps to eliminate, the behavioral obstacles that that occur. You know, you follow the rules and and, you eliminate that, you know, all the biases that that we’re, you know, we’re prone to as human beings. In your, in your work at National Bank Investments, you have created something called open architecture, the open architecture framework, o p four plus, which helps in managing risks, especially when markets are experiencing increased spikes and volatility. Can you can you talk about that?

Terry Dimock [00:04:37]:

Well, in 2012, National Bank made a pretty bold move, a bold decision by deciding to sell its asset manager, and that was pretty unique. We had good portfolio managers. It was a good team, but we felt for us to be able to serve our clients, give them the best portfolio managers in the world. We had to operate in an open architecture, and that means, not having your own portfolio managers, but going out in the world and finding the best people, the best teams to really manage every single asset class. And then we bring those PMs together in our solutions, fund of funds, with the work of our CIO, Martin Lafayev, and my colleague on the product team, Don Apley, the 3 of us supported by an extraordinary team, build solutions using these best managers in the world. And OP 4 plus for us was really an approach to define what are we looking for in a portfolio manager. So it’s an acronym, OP 4 Plus. It will be o is for organization.

Terry Dimock [00:05:47]:

We’re really looking to partner with the best firms in the world that have all of the infrastructure, all of the surrounding team to support the portfolio managers, you know, around risk, compliance, trading. We wanna make sure that it’s a solid firm on a solid coding that will be around for decades to come. And then there’s a series of p’s. There are 4 p’s, Chenoweth people. We wanna be, partnering with teams of portfolio managers and analysts that really, have a, you know, a very long history together, low turnover or no turnover, are diversified in thought. So not having PMs and teams that are all from the same school, all from the same geography, but really, you know, a diverse group of individuals that will bring, foster better discussions, better challenging, and make better investment decisions. The 2nd p is really thesis, and we talked about process earlier to get, in the conversation. We’re looking for a very clear investment process in every single asset class.

Terry Dimock [00:07:00]:

How have they created value in the past? What’s the approach, why do they get dead rails, how do they implement it, how do they make sure that they remain true to that, process. And that’s something that we spend a lot of time on, on and something we’ll discuss later on how we actually follow-up. But that is the key, you know, the people and the process, and that’s what, you know, we’re really looking for. So the first 3 pillars in the Ocon 4 plus are really what we’re spending a lot of time when we actually bring in a PM or analyze a PM, organization people and proset. Then and you start looking at areas on how we actually monitor them, look at them. Portfolio for us is, the next p is we actually have the positions of every single portfolio on a daily basis. And there, we’re trying to look at, are they buying securities that are consistent with the basis? Are they, you know, are they trading, in an abnormal type of, frequency? Are they, you know, are they taking risks that they don’t normally take in the portfolio? And that for us is will be a testament that the paychecks is actually being followed. So usually that’s one of the areas where we, you know, we can see glitches in the processes when we start buying securities that really don’t fit the process that, you know, we’ve come to know in that particular PM.

Terry Dimock [00:08:28]:

Then there’s performance. And, you know, We don’t buy performance. Performance is a result of having, you know, the right process, the right approach, but we analyze performance. Is it consistent with the style of the PM, where we are in the market and the economy, and is it delivering the results that we’re expecting? Every PM will under for short periods of time, and usually that’s tied with their process. But if they’re underperforming because they’re actually not doing good security selection, they’re not being or they’re buying securities that don’t fit their approach or their process, and that’s where we start questioning, we start digging into it and see if we’re still confident that this team, these group of individuals can still deliver performance for our clients. And then the last, one in the, acronym in the plus, which we added in, 2018, his ESG integration. You know, we added ESG integration because we believe in it. We think it’s an area that, portfolio managers and analysts have to dig into to really find opportunities and also find risks than me, you know, each individual company or security may have because of, changing environment or social policies or just bad governance.

Terry Dimock [00:09:45]:

So it’s For us, it adds to the traditional financial analysis that, you know, I started within my career at Standard Life, having done the CFA program, that ESG has been complementing that approach, and I think it leads to better outcomes for our clients.

Pierre Daillie [00:10:03]:

I think it’s really an under recognized you know, I going back in, you know, in my own career, it seems to me like like, the portfolio manager selection process was always important, but it’s different when when you at your expertise level and your level of management are able to, actually make the the correct types of, you know, or or effective types of evaluations of your portfolio manager selection. Like, the capital allocator selection is is is actually an underrecognized risk. And, you know, it it it so thank you thank you for elaborating on on the, you you know, the design of o p four plus and and what it actually means to advisers. I think when you can take the responsibility of, manager selection out of the picture for the adviser that manager selection risk, you know, reducing that manager selection risk for the adviser is very beneficial, and it’s it’s it’s hard to quantify. I’m I’m sure on your end you can quantify it, but for the advisor and for the end client, for the end investor, it’s extremely hard to make an evaluation without the level of data and information that you have at your disposal. And it’s also under recognized, Terry, that that you and your team are doing this all day long. Advisors, on the other hand, have many other responsibilities to their practice, to their clients, the end investor, their clients also have their own priorities each day. It’s not their job, and and, I think that’s an underrecognized quality of what, you know, of your work at National Bank Investments, which is to to stay on top of these developments within the, the the stable of portfolio managers that you oversee.

Pierre Daillie [00:11:57]:

Terry, how does the ongoing due diligence and accountability features of o p four plus provide an edge in adjusting a portfolio based on a macro view.

Terry Dimock [00:12:07]:

I find it it’s, you know, kinda related to selecting stocks. You know? When you analyze the stock, you’re looking for a good company with a good product that can have consistent, you know, sales growth, margins, and have a, you know, pristine balance sheet, on Xi, growth over time. And I think, you know, when you look at it, there are two main reasons why we would, you know, change, portfolio manager. And one would be just no longer meeting our OP 4 plus criteria. And that, you know, we we spend a lot of time on and, you know, we every time there’s a a breach of one of the pillars, we do a new o p four plus report. But, Neil, you’re talking about macro review. And with our CIO office, Martin Lafave and his team, they build long term market expectations. Every year, we review what are the expectations for the next 5 years, the volatility that is expected in every single asset class, and what are the the different portfolios, different asset classes we wanna put together to build a diversified solution.

Terry Dimock [00:13:13]:

You know, like a 60 40 portfolio depending on the risk profile of the client. So that work is really done, you know, a lot of teamwork at the CIO office to make sure that, what they’re identifying as asset classes and, what they want in the portfolio. We have the right portfolio managers to answer that, those needs, those requirements. So it may happen that in a year, you know, certain asset classes would be underrepresented in, geography or in a style, and then that could lead to selecting another new asset manager or a portfolio manager. And then that would lead to a new search using the OP 4a Plus criteria. So, again, being in an open architecture, that gives us a lot of, flexibility, to add an asset class or to add a portfolio manager to diversify away from a style. Let’s say we all have quality growth type managers, and we want a value manager while we can go out, do a search, and add a portfolio manager into our, list of PMs that we put, to build a solution. So, I think for us, you know, the the o p four plus approach and the open architecture really is, gives us all the flexibility in the world to continuously build the best, you know, diversified portfolios for our clients.

Pierre Daillie [00:14:39]:

With the advent of new asset classes like alternatives, liquid alts, private credit, private equity assets, CTAs, and cryptocurrency. How does the o p four plus model adapt or integrate these into portfolio management.

Terry Dimock [00:14:57]:

You know, OP part plus is an approach, so it’s very flexible on looking at different asset classes. And, you know, our whole, portfolio management team that builds their solutions, as I mentioned earlier, the CIO office, our team that manages selection of OP four plus and our products team. That we meet together, you know, on a regular basis to look at, you know, do we have the right portfolios, portfolio managers, asset classes, the work I spoke about earlier on long term market expectations. So over the past few years, that brought us to add new asset classes for clients that could tolerate less liquid assets in their portfolio. Usually, these are more high net worth, individuals, that can have part again our portfolio in a less liquid asset, don’t need, those assets, in the short term. Because private equity, private real asset, private credit usually have a lockup periods that are much longer, 5 to 10 years, so you need a, a client with a portfolio that can tolerate that type of liquidity risk or, reduce liquidity. But then, you know, working again, through our process, and this time on privates, we’ve partnered with our pension fund team, the pension fund of National Bank, because they had expertise in private investments.

Terry Dimock [00:16:21]:

And we’re, you know, looking always looking to, you know, who are the best people to recommend, different types of portfolio managers. And we felt that they had a long track record of, you know, 10 plus years, of looking at these more complex type of vehicle, you know, that are a lot less liquid. And once you invest, you’re invested for, as I said, 5 to 10 years. So the work that goes into it, understanding it, making sure that, we’re with the right portfolio manager, we’re paying the right fees, which is very, expensive to invest in in these, type of private vehicles. But they use the same approach, you know, very similar to P4 Plus, looking at all the characteristics, making sure that they’re selecting the right portfolio managers, the right vehicles, the right structures that will fit, in that part of the less liquid, sleeve of our portfolio for our high net worth, clients. And, you know, in portfolio construction, It is, you know, part of a, sleeve that is less liquid as I said, but, we wanna make sure it adds to diversification. You know, the you can’t you know, adding an asset class in a Leslie fit area doesn’t mean you’re improving diversification, so our portfolio construction committee, goes through the analysis of every single fund and asset class we wanna add to make sure that, it is bringing the characteristics we’re looking for in a diversified portfolio. Interesting.

Terry Dimock [00:17:54]:

Terry, can you elaborate on on how the

Pierre Daillie [00:17:56]:

cycle of monitoring the organization, people, and process assists in in safely navigating these new investment avenues.

Terry Dimock [00:18:05]:

Absolutely, and that, you know, spent a lot of time in the beginning selecting a new portfolio manager, but the real work happens when they’re actually managing the money. We’re trusting them with really large mandates of our clients, investments. So we wanna make sure that we’re verifying, monitoring, along the way on a very consistent basis. So, we have, you know, a a very thorough, due diligence process, that we we really look at on a monthly, quarterly, and and yearly basis. So on a monthly basis, even if I said poor performance is not important, We look at performance to understand, are they outperforming or underperforming for the right reasons? Or are they taking, you know, risk that is, abnormal or owning securities that are, doesn’t don’t fit the process. You know, significant outperformance, while good, can be, an example of taking too much risk, which, you know, could lead to underperformance later on. So, we really look at for abnormalities, inconsistencies in the process, and we we did every single portfolio, every month, we go through the list. And if we need to follow-up with the PM, we’ll have a call, or if it’s, serious enough, we’ll we’ll have an on-site visit.

Terry Dimock [00:19:28]:

On a quarterly basis, we really do the, complete performance attribution, and we have a call with every single portfolio managers, that we have on our roster, to really go through, you know, their explanation of their performance and to confirm that, you know, all of the pillars of the OP 4 plus process for still intact. So that work is something that, you know, every, 2 weeks, at the beginning of a new quarter. The team is on calls with a lot of different PMs across the world to make sure that if we’re still comfortable or are there areas of research or follow-up that we need to do to make sure that they’re, fulfilling the mandate that we gave to them. And then there are, you know, yearly on-site visits. Yes, in the world of, virtual and, and, meetings. We’ve learned to do it by video, but, sitting in front of someone face to face, going through what they’re doing, asking them questions, even sharing a meal. You wanna really understand how they’re thinking, how they’re, how disciplined they really are, what they’re really doing. It gives you insight if, you know, you feel you can trust them that the answers they’re giving you are are the are accurate or are they spinning a little bit or or adding a little bit of marketing explanation to something that, you know, needs a little more, detailed and accurate information.

Terry Dimock [00:20:58]:

So a lot of work on that and my team, he he is really focused on that. Every time we We see something that is abnormal, you know, if a pillar is broken, we have to do a new o p four plus report. And the OP 4 plus report is updated every single year and is presented to a committee. And so they can question us. They can, you know, challenge us on well, I’m hearing this on this, different this PM. Have you looked at this? What are the concerns? I find this performance is abnormal. Can you explain it to me? Why is it you know, why are they underperforming in this particular quarter when I I expected that they would they would be outperforming. All that work, is, you know, making sure that we’re held accountable in doing the work, the diligence, and making sure that we’re, delivering for our clients.

Pierre Daillie [00:21:48]:

It’s checks and balances. I mean, it it’s very, very interesting. Sting. I mean, like, your point was very interesting. I think ordinarily, you know, an investor would see a spike in performance on their, you know, holdings and say, oh, this is this is wonderful. But, as you said, it it points out that abnormality highlights a departure potentially from a strategy, and that could be you know, it’s a red flag potentially. Just because, you know, someone is is winning in the market doesn’t mean, you know, they’re doing it responsibly.

Pierre Daillie [00:22:25]:

I think that’s that’s that’s something that could easily be underestimated. You know? Somebody you know, a manager could have a great run for for a year, and then and then the following year, you discover that they were completely overexposed to to, you know, a particular sector or stock or holding that that, you know, makes you scratch your head and say, you know, how can we you know, how how could we have missed this? Acting on behalf of everyday investors and advisors, in that regard is extremely beneficial. You mentioned ESG. Could you talk about the added value of integrating ESG criteria into portfolio management? How does OP 4 plus facilitate this.

Terry Dimock [00:23:10]:

So, you know, for the beginning part of doing this pain test, it was OP 4. And we decided to add the plus in 2018, because we, you know, we continue to challenge ourselves to, are we doing everything that we can to, select the best managers? And we felt that integrating ESG is in addition to good financial analysis, financial analysis, traditional investing, and that’s why we added it because we felt it would increase risk adjusted returns. We didn’t do it because we felt, you know, it was value based or but we felt it could improve, our investment decisions. And on top of it, it can be good for the planet. I’ll give you an example of a company that was in the S&P 500 in, 2018 Pacific Gas and Electric, PG and E. Company that, you know, well regarded, to be in the S&P 500, you have to be one of the biggest companies in the world. They manage the electric grid in California. And some of the good poor villa management teams that had ESG started noticing lack of governance, the governance in how they manage their grid and how they cut down trees and, the lack of investment in that area to start feeling there may be an environmental risk.

Terry Dimock [00:24:29]:

You know, when you identify a risk, you wanna make sure that, you know, you’re talking to the management team of the particular company you’re investing in in in making sure that they’re looking at addressing those risks. Well, what happened? We had forest fires in 2019, significant lawsuits where PG and E was held accountable for bad management of the their electric grid and they had to, you know, file for a chapter 11 bankruptcy. They restructured they were held liable because and, analysts and PMs who had ESG criteria. You know, they identified it as a risk, they never could there would be a big fire, but they reduced or eliminated that position because they felt the risk is too high, and their environmental the management is bad, and they’re not they don’t have the right governance to manage us. And it’s an example, and I think this added layer of analysis is just logical. You know? If people aren’t doing this, why are you know, are they, not seeing certain risks that could be bad for the the asset they’re investing in and and couldn’t, you know, detract from value or lead to a negative outcome. And that’s why we added it, and we do a lot of work on understanding that pillar as well, how they’re investing you in it, and are they really serious about it? Because, you know, you’ve heard the term greenwashing. The last thing we wanna do is say that we have an you know, a PM that, integrates this and then verify afterwards that they’re not really doing it.

Terry Dimock [00:26:10]:

They’re not they’re getting an ICSG report from one of their teams, but they’re not integrating it in their decision making process. So for us, it it’s as important as all the other fillers. It adds value, reduces risk, and that’s why we added it, and that’s why we feel we’re you know, we continue, looking at this and looking for firms that would, you know, are the best at this on top of being good financial, analysts or investors.

Pierre Daillie [00:26:39]:

There’s a lot of skepticism and, you know, surrounding ESG, but I think if you actually strip out the political and the idealistic view on ESG. There remains a a logic to ESG, and there remains an opportunity in ESG, which stems from the political process, such as the Inflation Reduction Act, but identifying companies that are either very you know, that are governing themselves responsibly and taking measures and updating infrastructure and making sure that they’re on the right side of of safety concerns, environmental concerns, as well as the s and the g parts. There’s an opportunity in in risk management on that on on the side of the on the the logical side of ESG. And then when you look at something like the Inflation Reduction Act where there’s, you know, potentially 1,000,000,000,000 of dollars flowing into this movement and and this movement to to, you know, energy transition, for example. There are also some some incredible investment opportunities, for as long as that lasts. And so I think I think when when, you know, when people get caught up in the arguments and the the the, you know, the politicized part and the idealized part of ESG, You get a lot of polarization, but but when you actually strip that away and you look at the logic of it and the opportunity of it, there are some some significant, and very important tailwinds to to ESG.

Terry Dimock [00:28:10]:

Well, you know, we don’t believe that we should exclude energy, completely. You know, like, there’s gonna be a transition. And, you know, we all use energy today and some of us have started buying electric vehicles, but, you know, we’re still very dependent on fossil fuels. But what we believe is we wanna be invested in companies that are doing the right thing to transition, evolve, make sure that all their employees will have a job in, you know, renewable energy later down the line and not be stuck with stranded assets that will not be useful anymore. And I think it’s just good practice to look at your business, if you’re an energy producer and say, well, what’s gonna happen in 5 years, 10 years, 15 years, and am I doing taking the right steps to ensure the viability, fee sustainability of my business? And I think the politicians, some of them have made it very personals, you know, trying to scare people and thinking we’re trying to take away their jobs, which is actually the opposite. We’re trying to make sure that companies are doing the right thing to keep those jobs, improve those jobs, and make sure that, you know, the skills that people had in, exploration and production can be transferred to renewable energy in the future. And, you know, I think, unfortunately, you know, some of the politicians have made it personal, but I think from a logical point of view and investment point of view, just the best outcome for everyone to look at transition and to make sure that hold the companies accountable to move in the right direction.

Pierre Daillie [00:29:46]:

Are there are there specific performance metrics that you look at to gauge the effectiveness of ESG investments within the o p four plus framework?

Terry Dimock [00:29:56]:

Well, again, and I’m repeating myself. We start for process, though. What are you really doing as an investor? Is it credible? And are you putting the resources, required to really be, using ESC to benefit your decision process. You know, one of the areas we you know, to show how serious you are is to be a signatory of the United Nations, principles for responsible investment. We became a signatory in 2019, and I can easily say that it made us a better a better team, a better approach to selecting your portfolio managers because you’re held accountable in your reporting of what you’re doing, how you’re doing it. And and then we really go, you know, in the process. How are you using ESG factors to create value and and manage risk? We want proof points to show us why you sold the security because of ESP factors or why, you know, you’re concerned about a certain stock or security while you added a company because they’re in the right transition area, and they’re gonna, you know, create a lot of value over time because They have this technology or this approach that is, you know, very avant garde. All that, you know, we we wanna make sure it’s real they’re really incorporating it, doing it the right way.

Terry Dimock [00:31:20]:

How many people are actually dedicated to responsible investing? You know, if you’re a a group of, 50, investors and 1 person in ESG. Well, I don’t know. I think it probably not very creditable, or are the 50 educating themselves, making sure that they have the right knowledge to to implement this. Along with ESG comes, you know, being a responsible investor. So are they voting, their proxies accordingly? Are they engaging with companies to make sure that, they’re looking at the right risk factors, right opportunities to continue, delivering value. Are they looking at their portfolio footprints, you know, on carbon, on water? Do they have real targets on diversity? All things that we think are important, not because they’re the right thing, because they’re actually gonna deliver value or reduce risk. And then stewardship, you know, how are they looking at the their overall role as an investor? I think it’s important. I I think it also adds value over time and and and adds credibility.

Terry Dimock [00:32:30]:

So all these things we’re looking for, we’re questioning, we’re making sure that, they have incorporated in their culture, their approach. And I think it just makes for a better portfolio management team, a better

Pierre Daillie [00:32:44]:

firm to actually do this, with credibility. It makes for a very busy day.

Terry Dimock [00:32:50]:

Yeah. Well, we had really passionate people that really enjoyed this. They really wanna deliver to our client, and, you know, they know that the process is what we control, and they work on it day in, day out. Honestly, the culture we have at NBI, best culture I’ve had in my career. People are really focused on delivering for our clients and, it makes go by very quickly and is very fun. So, you know, also have having the right culture in what we’re doing is important and holding ourselves accountable to our process as well. And, we’ve been fortunate enough to attract really good talent.

Pierre Daillie [00:33:28]:

Well, I think if people are are tap dancing into work, can’t you can’t ask for, for more than that. How does National Bank Investments open architecture framework ensure full accountability, especially when it comes to evaluating and selecting external sub advisers. Well, you know, we have our own key performance indicators as well. You know, are we selecting portfolio managers that are actually delivering over 1, 3, and 5 years of time time frames?

Terry Dimock [00:33:57]:

Are the EOP 4 plus criteria being followed, and if not, why are we waiting to change them? So we’re held accountable on a regular basis and We actually calculate, you know, how many are actually beating, and here we’re looking at active managers. So and our KPIs actually comparing them to an ETF and investable comparison, that is in the same passive asset class. So we would, you know, compare a Canadian equity manager in f class to the ETF, that replicates the Canadian index, to make sure that, you know, you know, we’re we put ourselves in the shoes of our investors while I’m selecting this, you know, this, manager that is an active manager that’s supposed to deliver value and has to deliver value above fees. If not, I should just buy the passive ETF. And so we’re making sure we’re holding ourselves accountable to that metric, because, we wanna be doing this to add value to our customers, not just to sell mutual funds. And, that metric, if, you know, we we’ve done quite well on, but it’s as I said before, is we never get too, excited when, you know, we’re we’re, beating that metric by a lot. We don’t get too concerned if we’re, a little behind on the metric. What we work on is the process, and over time, it’s delivered quite well for our clients.

Pierre Daillie [00:35:28]:

Some of the evaluation methods that are that are considered important at the layperson’s level, like, you know, did the active fund beat the index, is is is far too simplistic and and misunderstood. You know, from what I gather, like, from what you’re saying, it’s it’s obviously Lee, very important to you to either have the, to to either outperform if you can, where you can with the same amount of risk as the index or less, or to at least do as well as the index, but with less risk. And and, you know, again, the risk adjusted return the risk adjusted return statement gets used a lot, to describe the process, but it’s but it’s it’s under it’s also under regarded. Can you can you give an example of where, o p four plus has been instrumental in identifying a gap an opportunity, thanks to your focus on due diligence.

Terry Dimock [00:36:25]:

Usually, you will find gaps in process a portfolio not being aligned or people, you know, with departures or changes that are not having the right diversity. You know, we have identified in the past PMs where they started adding, it’s a it was a Canadian equity portfolio, that was supposed to be, you know, very high quality companies, you know, motes or or various to entry to their businesses and pristine balance sheets that would deliver, you know, good com confounding over time. And at some point, they started adding mid cap size energy companies with that were very levered. And, you know, we we were concerned, so we went to meet the portfolio manager, find why are you buying these, and what’s your thesis, and why does it fit your process? And, that PM didn’t have a lot of answers to give us that made us feel comfortable, buying them because they were cheap. Well, that’s luck. It it’s not a process, and it’s not the process you told us you would be following. And we actually changed that PM, a short time later because we had lost confidence that they could deliver on the process they told Melissa we’re following.

Terry Dimock [00:37:46]:

And, you know, often PMs are ones that get into trouble, had a, you know, a period of underperformance. If they start tinkering with their process, hoping to, you know, catch up performance. Well, that leads to bad, you know, bad outcomes most of the time. And it becomes based on luck and not based on the process. Something with people, you know, we’re buying, we’re investing with a team, that is, you know, portfolio manager, 1 or 2 good animals behind that those people, and, you know, very robust, a approach and they’re aligned to the portfolio management process and the outcomes of the portfolio. And every time you get a departure, you have to question, is the team still able to deliver? You know, if you look at it as horse and all analogy, you know, I have a hockey team and my star player, the one who scores all the goals is injured. Well, can they still deliver? And, you know, that’s a question that we need to ask ourselves. So every time someone depurge, we do a new u o p four plus analysis and we try to make sure are you able to deliver.

Terry Dimock [00:38:54]:

And if we’re not comfortable that they can still deliver, we will change the part of the, you know, that portfolio manager.

Pierre Daillie [00:38:59]:

Well, it it it’s critical. Right? I mean, it’s critical because if you if you stop and consider that, you know, everybody, every single individual, especially I mean, particularly in this profession has career risk, attached to them that when when, you know, they’re they become more worried about career risk than process, there’s definitely a a tendency to you know, that where where you could see style drift happening or or, you know, out of bounds decisions occurring in in their portfolios in order, you know, to to play maybe, you know, catch up against their career risk, and that’s potentially dangerous. And if you don’t if you’re not able to identify it in the ways that that you and your team are able to, through your process. Then you’re potentially putting yourself at at great risk to somebody’s personal biases or problems and and, or affirms personal, you know, affirms interpersonal biases and problems. Terry, what trends or challenges do you foresee in portfolio management, and and how is, your open architecture, the o p four plus model position to address these?

Terry Dimock [00:40:10]:

Now let’s start with one thing, what is not going to change. And And what’s not going to change is, you know, having a well defined disciplined process and having passionate people to execute that process. And, you know, what we’re looking for in a portfolio management team is what we’re looking for in, benchmarking ourselves, we do in the open architecture and 0 p four plus process. So that’s not going to change. But what is evolving very quickly are is the tools and the data that we have to analyze portfolios and portfolio construction. So, you know, data transparency is improving, we’re getting more data on ESG, but still, you know, need more to and more consistency and standards in that area. And, we’re you know, we’re we’re seeing improvements in the ISSB, coming to Montreal will help corporations have a a standard based approach to looking at, sustainability metrics.

Terry Dimock [00:41:11]:

I think artificial intelligence, and the advent of, generative AI like Chat GVT and others will provide better tools, help us better analyze information and do it faster than ever before. You know, I didn’t coin this phrase, but, you know, someone, Brian, said that, you know, AI is not gonna steal your job. Someone using AI, it could steal your job. And I think, you know, AI and ChargeGbt will be good tools, to help us automate certain functions that are less critical and really allow people to focus on the critical part of their process, the analysis, you know, making sure that they have the right data and the right format. And and I think that you know, those improvements, those, that progress Has been part of my entire career. You know, when I started, I was I was receiving faxes. You know, now email came in, and the Internet came in, and, it just allowed you to do everything better, faster, but you still had to follow the same process, Still had to make, you know, the right decisions based on the right information. And I think, you know, the young people we have today, you know, they they can program, they can, you know, add the tools more quickly to the process you’re doing.

Terry Dimock [00:42:37]:

And I think that, you know, will allow new people in the industry to probably exceed what we do. But what, you know, what they need to learn is to make sure that they have a very well disciplined process. And that’s what we’re teaching the people, here at NBI. We’re making sure that, you know, when I leave, NBI and investing business. Well, those processes are gonna stay there in place, because they’ll be part of the culture, they’ll be part of the approach, and they’ll have proven over time to bring value to our customers.

Pierre Daillie [00:43:12]:

Terry, could you share any planned enhancements to the framework that could offer even, greater governance and risk management in the

Terry Dimock [00:43:22]:

future. Well, you know, we part of the OP 4 process is qualitative. You know, what are we looking for and asking the right questions? But we’re all always trying to improve the quantitative side to really give us better information, proof points that every part of the OP 4 plus process, is being followed. And so, you know, the process itself will not change, and I think I’ve repeated this many times. You have to have a disciplined process, but how were we, go about, finding the right information, and making sure we have the right metrics. You know, we’re trying to improve on that all the time. You know, 1 one area we’ve worked on, we continue to work on is making sure that we have the right factor analysis. You know, if a PM is more value based and are we looking at the PM in the right length, with the right data, with the right comparison to make sure that they’re delivering what they told us they were, you know, but independent metrics to prove it.

Terry Dimock [00:44:25]:

We also wanna, you know, improve risk management, make sure that We can have red flags pop up more quickly, make sure that we can react more more quickly. And so really making sure we have the right risk metrics without being inundated in too many of them, and so we can really pinpoint the right areas, is important. You know, we wanna retain that flexibility. You don’t want a bureaucratic process. You want just the right amount of metrics to follow everything, but that allows you to be, disciplined and react in the right time frame. It’s finding that right balance that is important, and we’ll always look to, improve, the quality of the the output of our analysis to make sure we always find the best PMs for every single asset class.

Pierre Daillie [00:45:18]:

Terry, that’s been an amazing conversation. I I’m I wanna thank you so much for your incredibly valuable time and insight. The o p four plus framework is, is actually, you know, discussing it, has really provided a fascinating look at your process. And, so, Terry, thank you so much for your incredibly valuable time and insight.

Terry Dimock [00:45:42]:

Pierre, thank you very much. It was a pleasure to chat with you, and, look forward to chatting with you again in the future.

Pierre Daillie [00:45:51]:

Yes. Likewise. Thank you so much.

Listen on The Move

Terry Dimock, Chief Risk & Execution Officer, at National Bank Investments is our guest. In this episode, Terry takes us on a journey through NBI's OP4+ Open Architecture Investment process and framework, shedding light on the importance of creating value, the prioritization of organization, people, and process, and the meticulous monitoring of portfolios. Terry shares valuable insights into the selection of portfolio managers, the logic of integrating ESG factors, and the challenges and opportunities in the ever-changing investment landscape. We explore the inner workings of NBI's investment management process and discover how they navigate the complexities of the market to deliver exceptional results for their investors.

Timestamped Highlights:

[00:00:00] Opening remarks and introduction to Terry Dimock, a luminary in investment management.

[00:04:37] In 2012, National Bank sold its asset manager and adopted an open architecture approach to build solutions using the best portfolio managers in the world. They created OP4+, an acronym that defines what they look for in a portfolio manager, with "O" standing for organization.

[00:07:00] Where does value come from? How was it evaluated in the past? How value is created, and the importance of people and process. Terry explains the pillars of OP4+ and monitoring portfolio positions. The goal is to ensure that the process is followed and glitches are avoided.

[00:10:03] How are NBI's sub-advisor portfolio managers evaluated? Terry emphasizes the importance of portfolio manager selection, and the under-recognition of the risk involved is discussed. We discuss his team's role at National Bank Investments in reducing advisor and client burden in evaluating managers.

[00:13:13] The CIO office uses teamwork to identify asset classes and portfolio needs. They may add or change managers to diversify portfolios. Thanks to scale, NBI's Open Architecture allows flexibility in adding a multitude of asset classes and managers.

[00:16:21] We seek the best portfolio managers with a long track record, particularly in less liquid investments. Fees in these categories can be high, but we value diversification, careful selection, and scale.

[00:19:28] Quarterly performance attribution calls are held with all portfolio managers to assess performance and confirm adherence to OP4+ process. Bi-weekly check-ins and yearly on-site visits ensure trust and accuracy in information provided.

[00:24:29] Investors should consider environmental risks and the management of companies they invest in. For example, PG&E faced lawsuits and bankruptcy due to poor management after 2019 forest fires. Analysts reduced positions in companies with high risk and poor governance. It is important to analyze potential risks and ensure investment aligns with environmental objectives to avoid negative outcomes. Considering and factoring in ESG concerns was a logical decision.

[00:28:10] Terry emphasizes the need for a transition to renewable energy, ensuring job security and sustainable business practices, despite political opposition.

[00:29:56] Investors should use ESG to make credible and accountable decisions. Becoming a signatory of the UN principles for responsible investment demonstrates seriousness. Proof points about using ESG factors are necessary.

[00:33:57] We assess performance criteria and compare active managers to ETFs to ensure value for end-investors. Focus on process, not short-term metrics.

[00:36:25] Gaps in portfolio, lack of diversity, and changes can unearth reasons to lose confidence in a portfolio manager's inclusion in NBI's program.

[00:41:11] AI, like ChatGPT, will enhance analysis and automation, allowing focus on critical tasks. Progress in technology has consistently improved efficiency. Younger generations adapt quickly.

[00:43:22] Terry closes the conversation noting that NBI is constantly working at improving qualitative and quantitative aspects of the OP4+ process, focused on finding the right information and metrics for future success.

Where to find Terry Dimock

Terry Dimock on Linkedin
National Bank Investments



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