Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond soundbites and headlines and looks deeper into their processes,
Speaker 1: challenges and philosophies and security selection. I'm David Cohne, I
Speaker 1: lead mutual fund and Active Research at Bloomberg Intelligence. Today,
Speaker 1: my cost is Brian Dharty, head of Thematic Strategy at
Speaker 1: Bloomberg Intelligence. Brie, thank you for joining me today.
Speaker 2: Always a pleasure. David love getting invited back. Actually to
Speaker 2: have these conversations with you highlight of my week.
Speaker 1: So I did want to ask about a note you
Speaker 1: put out last week. I think it's really topical to
Speaker 1: today's discussion. You describe how AI's next competitive edge lies
Speaker 1: in vertical integration were compute meets commodities, data center meets
Speaker 1: power generation. How should investors think about this new convergence
Speaker 1: between digital and physical infrastructure.
Speaker 2: Yeah, it's been something that's been actually really compelling for
Speaker 2: us to watch throughout twenty twenty five. Actually, we saw
Speaker 2: the first inclaims of it really starting to form in January.
Speaker 2: I think that the deep Seep disruption that we saw
Speaker 2: in January was that first a little bit of a
Speaker 2: Eureka moment for a lot of investors when they did
Speaker 2: actually see some of the more physical environment theme names.
Speaker 2: So when I say physical environment themes, that's where we
Speaker 2: put our themes are related to power generation, be they
Speaker 2: upstream or grid tech, all the way down to hydrogen
Speaker 2: and any of those other physical environment focused themes. So
Speaker 2: those names that include the likes of semen and Energy invertive,
Speaker 2: we saw those names actually see as much volatility off
Speaker 2: the back of the deep seep destruction as we did Navidia, right,
Speaker 2: So that was kind of the first inklaim that investors
Speaker 2: were cluing in, and then what we've seen throughout twenty
Speaker 2: twenty five is just more of that, right, and seeing
Speaker 2: more of that correlation emerge. We are actually identifying that
Speaker 2: several other physical environment themes, specifically decentralized Energy, which is
Speaker 2: quite focused on decentralization off the centralized grid for instance,
Speaker 2: are seeing rising correlations to AI. We have a lot
Speaker 2: of these physical environment themes actually hold high beta to AI,
Speaker 2: so moving quite aggressively off of any sort of movement
Speaker 2: we're seeing across our AI theme as well. The other
Speaker 2: thing that I think is something that's gaining more and
Speaker 2: more traction is naturally the fact that we're seeing tech
Speaker 2: investors block to those power generation materials, industrial's names. They're
Speaker 2: doing this through partnerships. I mean we can just in
Speaker 2: the last year there's been several partnerships that have been announced,
Speaker 2: be it from Meta or Amazon related to nuclear right
Speaker 2: as that nuclear buildout and the buildout opportunity that BI
Speaker 2: is estimated to be about three hundred and fifty billion
Speaker 2: dollars by twenty fifty for nuclear buildout opportunity set. We're
Speaker 2: seeing those types of relationships emergent. I think that's actually
Speaker 2: creating an entirely different shift in the equities landscape again,
Speaker 2: providing a lot more really identifiable technology tailwinds to do
Speaker 2: these physical environment themes, our generation industrials, data center build outs.
Speaker 2: And that's what brings me here today. Actually, I think
Speaker 2: it's gonna be a really compelling conversation because this is
Speaker 2: I'm hey, I won't I won't speak to it, but
Speaker 2: this feels very spot on to actually the product that
Speaker 2: we're here to talk about today and who we're speaking
Speaker 2: with today. So I'm excited for that.
Speaker 1: Great Well, speaking of which, I'd like to welcome our
Speaker 1: guest today. Eli Horton is a managing director of Equities
Speaker 1: at TCW and a senior portfolio manager for the firm's
Speaker 1: equity products, including the TCW Transformed Systems ETF ticker pwr D. Eli,
Speaker 1: thank you for joining the podcast.
Speaker 3: Thank you for having me. It's it's great to be
Speaker 3: here with you both.
Speaker 1: So let's talk about pwr D. How do you define
Speaker 1: transform systems? In other words, what kinds of transformations are
Speaker 1: you talking about?
Speaker 4: Well, it's a it's a good place to start because
Speaker 4: there are many transformations that are taking place in our
Speaker 4: economy and that are accelerating it and bre hit on
Speaker 4: one of them, which I know we'll come back to
Speaker 4: with power and the grid. But if you think about it,
Speaker 4: we're really going through somewhat of an energy and an
Speaker 4: industrial revolution, and there are multiple catalysts for this, but
Speaker 4: one is that we're trying to drive our economy forward
Speaker 4: to be based on renewable energy generation.
Speaker 3: That is a monumental task.
Speaker 4: We've been working on this for decades in the US.
Speaker 4: Still less than twenty percent of our powers from truly
Speaker 4: renewable sources, so we're nowhere close, and there have been
Speaker 4: targets in the past that we might accomplish this sort
Speaker 4: of net zero emission state. By twenty fifty, we were
Speaker 4: quite public with our view that we felt that that
Speaker 4: was just not feasible. I think that's now probably a
Speaker 4: consensus view, and I think current targets are twenty seventy
Speaker 4: or so. But the words trying to get to this
Speaker 4: renewable power energy generation state that has massive implications on
Speaker 4: a wide range of systems, and we tend to think
Speaker 4: about the world in terms of systems, not sectors. I
Speaker 4: think sectors are some arbitrary oversimplification of how the economy
Speaker 4: works just for an investor, but that's not how the
Speaker 4: world functions. Take the grid, for example, you have a
Speaker 4: variety of commodities, whether it's the metals, the construction materials
Speaker 4: I think concrete that they're building the infrastructure. You have
Speaker 4: the whatever's powering the power generation, coal, net gas, maybe
Speaker 4: the sun. You have the engineering and construction firms that
Speaker 4: are building these. You've got electrical equipment, you've got grid software.
Speaker 4: I just listed off a whole bunch of different sectors
Speaker 4: that form the system.
Speaker 3: And that's just for the grid. And that was even
Speaker 3: a simplification.
Speaker 4: Think electric vehicles, Think our agriculture economy, so on, so forth.
Speaker 3: For us to get to.
Speaker 4: This renewable state, we need all of these systems to
Speaker 4: function together. That's incredibly complicated. We also need trillions of
Speaker 4: investment and many many years, so it's a very long
Speaker 4: dated opportunity with a lot of capital behind it.
Speaker 3: Great.
Speaker 1: So with the portfolio, how many names do you typically
Speaker 1: carry and what drives your decision to overweight or underweight
Speaker 1: a company?
Speaker 4: So we have a slightly different investment approach I think
Speaker 4: than a lot of long only managers. We own twenty
Speaker 4: to thirty stocks in the powered portfolio. We believe that
Speaker 4: is an appropriate amount of diversification for our clients while
Speaker 4: allowing us to maximize our investors' capital and our best ideas.
Speaker 4: We believe strongly that that type of concentration is how
Speaker 4: you outperform the market through the cycle. So I think
Speaker 4: we tend to be a little more concentrated than many
Speaker 4: fund managers. We actually don't really think about the world
Speaker 4: in terms of overweight and underweight because that implies some
Speaker 4: sort of relative lens and relative to a benchmark.
Speaker 3: And while we absolutely do measure how we.
Speaker 4: Perform with our investors capital compared to the SP five hundred,
Speaker 4: we don't think about weights relative to the market. What
Speaker 4: we're trying to do is identifying this universe of businesses
Speaker 4: that are enabling or benefiting from the transformation of our
Speaker 4: energy system. What are the best twenty to thirty investment
Speaker 4: ideas on a resuggested basis that we can construct a
Speaker 4: portfolio with. So that's good of our starting point.
Speaker 2: I think this is really interesting because one, you're preaching
Speaker 2: to the choir here. I also spend most of my
Speaker 2: days making the argument for not being bound by sector classifications.
Speaker 2: So really appreciate that part of the conversation. But I
Speaker 2: think you touched on something else that's really compelling. I
Speaker 2: mean this energy transformation. I think that as those targets,
Speaker 2: for instance, starting merge related to renewable energy. I think
Speaker 2: the one thing that I used to be very focused
Speaker 2: on energy, and the one thing that we always kept
Speaker 2: mentioning was it's a journey, right that there's going to
Speaker 2: be some winding roads with respect to that journey. You
Speaker 2: launched this fund in twenty twenty two. I think what's
Speaker 2: interesting is that twenty twenty two time frame was at
Speaker 2: a bit of a swing, pretty significant swing, I would say,
Speaker 2: related to that renewables journey or the general appetite or
Speaker 2: acceleration of the renewables journey versus some very real world
Speaker 2: hindrances related to shifting towards renewable energies. So I think
Speaker 2: that's really interesting as to when you launched this and
Speaker 2: then where we're at right now, if you could talk
Speaker 2: through how maybe you've how your equities within this strategy
Speaker 2: have shifted through that time period, or has it been
Speaker 2: relatively stable. I'm just really interested to know how your
Speaker 2: mindset or your approach you've had to shift alongside some
Speaker 2: of these shifts we've seen in the broader market.
Speaker 4: Yeah, it's such an interesting topic that we could spend
Speaker 4: way too long on. Have a bunch of thoughts that
Speaker 4: flooded my mind here. So one I think, I think
Speaker 4: a sign of great investors and that we you know,
Speaker 4: we strive to be is that when facts change, you
Speaker 4: change your mind. You have to be able to not
Speaker 4: get dug in and to evolve and adapt to new
Speaker 4: information and to where you know the best opportunities are.
Speaker 4: So that would suggest that there should be changes from
Speaker 4: time to time, and I'll give you some examples of
Speaker 4: changes that we've made. I also, you know, I think
Speaker 4: that in any secular theme, and maybe this is what
Speaker 4: you meant by your comments on energy is going to
Speaker 4: take a long time. I don't remember the exact phrase
Speaker 4: you used, but in any secular theme, you're going to
Speaker 4: have periods of exuberance and then quite the opposite. And
Speaker 4: there's a lot of discussion right now trying to tie
Speaker 4: the current moment back to the two thousands dot com era,
Speaker 4: and there's some things that rhyme, and there's there's some
Speaker 4: that don't. But we have this tendency to overestimate trends
Speaker 4: in the short term and underestimate them in the long term.
Speaker 4: And oftentimes that type of volatility, even within a secular theme,
Speaker 4: really can be to an investor's advantage if you have
Speaker 4: a long term horizon and you can capitalize when the
Speaker 4: market's fearful. So a couple of random thoughts there, What
Speaker 4: have we actually done? So we launched the strategy in
Speaker 4: February of twenty twenty two. As you mentioned, that was
Speaker 4: a really interesting time because the world had moved from
Speaker 4: this growth at all costs is the way to invest
Speaker 4: into more of a value or into factor tended to perform,
Speaker 4: and that worked to our benefit. We had a significant
Speaker 4: amount of the portfolio invested in oil and gas.
Speaker 3: In twenty twenty two, we.
Speaker 4: Also had a very heavy investment in the agriculture economy.
Speaker 4: So agriculture is actually quite emissions heavy, whether it's the
Speaker 4: fertilizers or the pesticides, or how the machinery operates, and
Speaker 4: so throughout the agriculture economy we were finding pretty interesting investments.
Speaker 4: Moved forward into late twenty two to early twenty three,
Speaker 4: we had large investments in solar and in lithium electric vehicles.
Speaker 4: In twenty four we really added to our investments in aerospace,
Speaker 4: I think actually twenty three, and we've been building investments
Speaker 4: in power and great along the way. Today are to
Speaker 4: give you some numbers around this. When we launched the strategy,
Speaker 4: we probably had a third of our capital investment in
Speaker 4: oil and gas, and today we have probably four percent.
Speaker 3: Okay, so we will be active.
Speaker 4: We underwrite all of our investments to three to five years,
Speaker 4: but when opportunities change, will make changes with the portfolio.
Speaker 1: When we talk about, you know, kind of entering a
Speaker 1: new green world, you know, looking at the fund's website,
Speaker 1: there is an emphasis on not just pure green names,
Speaker 1: but brown to green transition opportunities such as legacy industries
Speaker 1: that you know must reinvent themselves. Can you give any
Speaker 1: examples of where you see value there.
Speaker 3: Today in the brown de green side. So look, it's
Speaker 3: like Charlie Munger was famous, this invert everything work backwards,
Speaker 3: and we do it all the time.
Speaker 4: So what is actually happening and why? So the why
Speaker 4: we talked about this earlier. The world's trying to move
Speaker 4: to some sort of renewable energy state. So what is
Speaker 4: it doing. We're electrifying everything, We're finding ways to capture carbon.
Speaker 4: We're going through these large scale transformations of old economy industry.
Speaker 4: So that's what's happening. You can't accomplish those goals without
Speaker 4: the missions heavy companies changing what they do and taking
Speaker 4: a leadership role. And there was a lot of investors
Speaker 4: for a number of years that said, we're going to
Speaker 4: starve those businesses of capital, We're going to divest them
Speaker 4: from investors' portfolios. And my view is that it was counterproductive.
Speaker 4: It by starving them with capital, it raised the cost
Speaker 4: of capital of these old economy businesses. And so if
Speaker 4: your CEO, your job is to invest your holder capital
Speaker 4: at a rate of return that is higher than your
Speaker 4: cost of capital and to add value. And if your
Speaker 4: cost of capital is going up, then by definition, some
Speaker 4: investments will no longer meet that hurdle. And we have
Speaker 4: the view that that is just the wrong way to
Speaker 4: further this transformation. It's also probably not the right way
Speaker 4: to make money either, and so we've always taken the
Speaker 4: belief that you have to change the eighty percent of
Speaker 4: equation the old economy industrials and energy businesses to accomplish
Speaker 4: this transformation. And we have also found that that's where
Speaker 4: the best opportunities lie. I think scale is a huge
Speaker 4: competitive mantage. I think many of these old economy companies
Speaker 4: have unit economics that are very attractive versus some green
Speaker 4: businesses don't without government incentives. And so we've always focused
Speaker 4: your older capital on that side of the equation.
Speaker 3: I would expect that continued.
Speaker 1: So, you know, some of these transitions are long in nature.
Speaker 1: How do you think about valuation and what's your signal
Speaker 1: for too expensive?
Speaker 4: And actually this completely ties with your last question on
Speaker 4: green and brown to green.
Speaker 3: So we've mostly.
Speaker 4: Mostly focused on the brown to green side because a
Speaker 4: number of let's say, solar and wind and experimental technologies
Speaker 4: didn't have unit economics that worked and had valuations that
Speaker 4: were unattractive. There's this SMP Clean Energy Transition Index, which
Speaker 4: I think launched in two thousand and four, so it's
Speaker 4: a little over twenty years. It's grown at about a
Speaker 4: one percent compound rate of returns since then versus the
Speaker 4: market at eleven. That's that's an area of the economy
Speaker 4: that you would have looked at in two thousand fourth.
Speaker 4: So that these companies are going to grow so fast,
Speaker 4: but it was profitless growth and valuations absolutely matter. I
Speaker 4: think that you know, when it comes to valuation discipline,
Speaker 4: our north star is owning a company with competitive vantages
Speaker 4: that is adding value to the system at a rate
Speaker 4: that is greater than what the marketppreciates. We care first
Speaker 4: and foremost about that. For every company we own, we
Speaker 4: have you know, expected IRRs, we have risk rewards, and
Speaker 4: we will anchor to those. And when an idea becomes
Speaker 4: somewhat unattractive, we probably have another idea on the sidelines
Speaker 4: that we've researched it. We're just waiting for a moment
Speaker 4: that we would replace that that stock with. But I'd
Speaker 4: say that valuation is not the top one or two
Speaker 4: things we care about. We first care about, you know,
Speaker 4: the quality of a company, the durability of its mode,
Speaker 4: the value it's adding, how it's understood. And then valuation
Speaker 4: usually comes after.
Speaker 2: You're touching on a couple of things. And unfortunately I
Speaker 2: do I do love to talk you life, so it's
Speaker 2: very possible I derail this down some rabbit holes. David
Speaker 2: will keep me in check. But when I mean the
Speaker 2: Brown Degreen conversation, that and of itself, I think is
Speaker 2: really interesting because it's something that I think sometimes gets missed.
Speaker 2: Here is just how critical again this transition actually is, right,
Speaker 2: And so when you look too heavily at the just
Speaker 2: the green side, when you think of how a grid
Speaker 2: works or how the actual infrastructure system works, you can't
Speaker 2: just you know, switch from one to the other seamlessly
Speaker 2: and think everything goes along right, That there really is
Speaker 2: a transition associated with it. And how critical, as you say,
Speaker 2: those more traditional companies and the traditional structures that were
Speaker 2: in place, how critical they are to maintaining that resiliency
Speaker 2: and that and the operational integrity of this broader system
Speaker 2: that you can't continue to electrify if you're jeopardizing the
Speaker 2: operational integrity and resiliency, right, So I think I think
Speaker 2: sometimes that gets forgotten and people think, I remember a
Speaker 2: conversation that I used to have all the time. People
Speaker 2: seem to think that a blackout happens because you know,
Speaker 2: it was some sort of giant failure and how much
Speaker 2: power is available. I mean, it is seconds that can
Speaker 2: cause a grid to go down right that you couldn't bridge.
Speaker 2: And you know, I think that people don't often think
Speaker 2: about it as far as just how critical that resilience
Speaker 2: factor is. With that in mind, and thinking about how
Speaker 2: there's such an acceleration in power generation demand right now
Speaker 2: and over the next ten years, whether we want to
Speaker 2: talk about it related to data centers, are just in
Speaker 2: general that everything's electrifying, right, How are you looking across
Speaker 2: this physical backbone, if you will, of innovation and where
Speaker 2: do you see the most compelling aspects of that investment.
Speaker 2: I mean, we can look at your holdings. It looks
Speaker 2: like to me, I'm looking at this and I see
Speaker 2: that you like downstream and upstream right, that you're kind
Speaker 2: of looking across the entire ecosystem there. So I think
Speaker 2: it'd be interesting to hear your thoughts on what you
Speaker 2: think is most compelling right now, considering the ten year
Speaker 2: roadmap ahead that people seem to have their eye on
Speaker 2: with respect to power generation needs.
Speaker 3: Power is short in this country, bull stop.
Speaker 4: And the problem is you have a demand side of
Speaker 4: the equation, that is, it structurally changes faster than.
Speaker 3: Supply can react. You were kind of alluding to this.
Speaker 4: You just can't bring new power online quickly. There's so
Speaker 4: many different moving pieces of that equation from all the
Speaker 4: different materials in the componentry and the technology and the
Speaker 4: people to build it, and then you throw in environmental
Speaker 4: reviews and permitting and I mean, look, we have interconnection
Speaker 4: delays in this country that are five years on average.
Speaker 3: I think there's seven in my home state of California.
Speaker 3: So we're doing great. So it's really tricky, and that
Speaker 3: creates a lot of bottlenecks. We love to invest with.
Speaker 3: There's bottlenecks.
Speaker 4: The intersection of demand that structurally outstrips power is a
Speaker 4: signal to us. If it's a durable bottleneck, it's a
Speaker 4: signal to us that unit economics will expand for those
Speaker 4: who can fulfill that need.
Speaker 3: And so we love to look there. So you were
Speaker 3: talking about ultream and downstream.
Speaker 4: And I would reflect back to that when we started
Speaker 4: investing in this sub theme, if you will, of power
Speaker 4: and grid. Well over two years ago, we did this
Speaker 4: exercise where sort of tore down the system, if you will,
Speaker 4: and so we actually had a graphic, but on one
Speaker 4: side of the graphic where the plants that generate the
Speaker 4: power your cold plants are great natural gas plants, utility
Speaker 4: scale solar or whatever. That power then goes into some
Speaker 4: sort of substation. It then goes through high voltage transmission
Speaker 4: cables to another substation. The power gets reduced, it gets
Speaker 4: transmitted all the way down to a community level and
Speaker 4: to the end use facility.
Speaker 3: So that could be a bunch of places.
Speaker 4: It could be a factory, it could be a data center,
Speaker 4: it could be our offices or our homes.
Speaker 3: It could be a charging station.
Speaker 4: And that whole system, that economic system. There's a couple
Speaker 4: hundred companies maybe a little more that we could invest in.
Speaker 4: It had some role in it, and we just started
Speaker 4: looking for the bottlenecks and we found them actually throughout
Speaker 4: the system. So on the power generation side, we've owned
Speaker 4: this business with I don't think people had really heard
Speaker 4: of at the time. It's now sort of a household
Speaker 4: name called Tistra, which is utility based in Texas and
Speaker 4: they have some attractive nuclear power assets and natural aids
Speaker 4: as well as we own Fistra and a couple other
Speaker 4: power generators. We own businesses that are manufacturing turbines, Doova,
Speaker 4: Ernova and Semen's energy businesses that are all the way
Speaker 4: at the far and use side of this equation that
Speaker 4: are downstream if you want to call them, that of
Speaker 4: electrical components like vertiv or Schneider Electric or eating.
Speaker 3: So there's opportunities throughout.
Speaker 4: And what we've really tried to seek out is where
Speaker 4: are the bottlenecks that are going to allow companies fundamentals
Speaker 4: to inflect in a way that the market doesn't appreciate.
Speaker 2: Do you think that there's very specific regions where you're
Speaker 2: more focused on those bottlenecks or we're just by nature
Speaker 2: of the fact that they might have more bottlenecks. So
Speaker 2: the regions that you're more focused on, because most the
Speaker 2: names you listed there, I would say are probably across regions, right,
Speaker 2: you know, they tend to we think of the Schneiders
Speaker 2: and the Siemens. They operate globally, But are there specific
Speaker 2: regional bottlenecks that you're.
Speaker 3: Narrowed in on.
Speaker 4: I think the US presents the best investment opportunity here. Look,
Speaker 4: I think this is a global theme, but we're particularly
Speaker 4: focused on the US because that's where the starkest change
Speaker 4: is taking place.
Speaker 3: So over the past couple of decades, electricity.
Speaker 4: Demand in this country was basically flat, and it was
Speaker 4: I think that's odd to think that electricity demand would
Speaker 4: be flat when the economy grew, when population grew, but
Speaker 4: it's because we took a third of our manufacturing base
Speaker 4: and we moved it over to Asia.
Speaker 3: We got a little bit more efficient with some of.
Speaker 4: The electrical equipment, and that led to roughly flat electricity demand.
Speaker 4: Despite that flat demand profile, the grid can still barely
Speaker 4: handle it. And you were talking about brownouts or blackouts earlier.
Speaker 4: We've had almost every single year we set a new
Speaker 4: record for the cost of brown outs in this country.
Speaker 4: So the grid's already fragile. But I mentioned that there's
Speaker 4: a stark change in the future versus the past and
Speaker 4: the US, and that's because that demand profile is going
Speaker 4: from flat to it's growing at three percent a year,
Speaker 4: which doesn't sound like a lot, But if you do
Speaker 4: that for you know, from twenty twenty to twenty fifty,
Speaker 4: you'll double the amount of aggregate electricity demand in this country,
Speaker 4: which means trillions of dollars of capital investment to support
Speaker 4: it on the grid side. And I would argue that
Speaker 4: if power demand doubles, you probably have to increase supply
Speaker 4: by more than double because we are adding so much
Speaker 4: intermittent power to the grid, intermittent being solar and wind,
Speaker 4: which you cannot function twenty four to seven like our
Speaker 4: economy does.
Speaker 2: I think that's the other interesting point, right, is that
Speaker 2: we have become more of a twenty four to seven.
Speaker 2: It used to be that in the power when you
Speaker 2: were scheduling power, you had peak off peak times. We think,
Speaker 2: guess if R is going to look at that profile
Speaker 2: these days, it's a very different wave pattern than there
Speaker 2: was ten years ago. Twenty four Our nature, I think,
Speaker 2: also just adds a new layer of complexity to the
Speaker 2: needs from a power generation perspective. I mean, we look
Speaker 2: at decentralized energy, so I look at a grid tech
Speaker 2: one where we're very focused centralized grid, obviously critically important, modernization, resiliency,
Speaker 2: all those things that we've just been talking about, how
Speaker 2: or if are you guys really looking at the rise
Speaker 2: of more decentralized energy systems. So when we think of
Speaker 2: large scale storage or kind of moving off centralized grid
Speaker 2: as these industrials in particular, these manufacturing plants might be
Speaker 2: looking to sort of own their whole vertical integration and
Speaker 2: not have vulnerability to a centralized grid. Do you think
Speaker 2: that's compelling or not yet really in your mix.
Speaker 4: I think it's incredibly compelling. And we obviously are focused
Speaker 4: on the public markets, and there are quite I think
Speaker 4: there's a my view, there's a misperception that oftentimes the
Speaker 4: way to invest in energy transition is in the private markets,
Speaker 4: and I would push back strongly and say that that's
Speaker 4: a misconception. There are scaled businesses that have huge advantages
Speaker 4: in the public markets that we think are the winners
Speaker 4: of this transformation. And one area that I think would
Speaker 4: be counter to what I just said, though, is around
Speaker 4: energy storage and distributed power.
Speaker 3: So we own Tesla.
Speaker 4: They have a wonderful energy storage business, and there's obviously
Speaker 4: other parts of Tesla that comprise its valuation, but their
Speaker 4: energy storage businesses is very good. Well, we we don't
Speaker 4: see a lot of storage opportunities that are just pure
Speaker 4: playing in the public markets though, that's that's been an
Speaker 4: area that we look for and it's still too early now.
Speaker 4: What we do see is a lot of time to
Speaker 4: power solutions that comes up a lot in AI data centers,
Speaker 4: and so these companies are fully engaged in an arms
Speaker 4: race and they need to bring their data centers on yesterday.
Speaker 4: The sooner the better, and when you have interconnection delays
Speaker 4: of five years, that creates a lot of problems. And
Speaker 4: so if you can build on site power, there's some
Speaker 4: meaningful time value to a company like Microsoft or Amazon
Speaker 4: or Google. And so we see some innovative solutions on
Speaker 4: the time to power side, but the battery storage is
Speaker 4: a little trickier in the public markets right now.
Speaker 1: How do you how do you look at policy, regulation, government,
Speaker 1: subsidy dynamics. Does that drive your investments at all?
Speaker 4: So I wouldn't say that it drives it, but it's
Speaker 4: incredibly relevant. We are focused on making explicit bets and
Speaker 4: avoiding implicit bets with the portfolio, and.
Speaker 3: With that in mind, it.
Speaker 4: Would be unusual to see us lead with a policy
Speaker 4: point in an investment thesis because I don't think we
Speaker 4: have a differentiated perspective on policy or regulatory re outcomes.
Speaker 4: But we just want to size the risk of it,
Speaker 4: and I can give you an example of this. So
Speaker 4: the we own this business called First Solar. They're the
Speaker 4: largest manufacturer of utility scale solar panels in this country,
Speaker 4: and it's been very embroiled in the potential repealing of
Speaker 4: tax credits through the Inflation Reduction Act. And if you
Speaker 4: go back six months, eight months, maybe the stock was
Speaker 4: trading around one hundred twenty dollars. Consensus estimates for the
Speaker 4: business were twenty five twenty seven dollars per share of earnings,
Speaker 4: and I'd say about twelve ten to twelve dollars of
Speaker 4: that twenty five was the company's own earnings power. The
Speaker 4: rest of it was due to incentives from the IRA.
Speaker 4: And so we looked at that twelve bucks of earnings
Speaker 4: power that was standalone for First Solar, and that our
Speaker 4: thesis was around.
Speaker 3: We said, look, this is probably.
Speaker 4: One hundred and sixty one hundred and eight dollars value
Speaker 4: in the stock train in one twenty and so we've
Speaker 4: got actually meaningful upside on this with a call option
Speaker 4: that the IRA doesn't get repealed in a way the
Speaker 4: market is fearfull of So that's an example of how
Speaker 4: we would absolutely factor policy.
Speaker 3: Or regulation into our investments, but we would rarely lead
Speaker 3: with it as part of our thesis. Now this wasn't
Speaker 3: your question, but at a much higher level, I think
Speaker 3: energy security is a big focus of policy and where
Speaker 3: the administration and probably i'd be comfortable saying future administrations
Speaker 3: are focused and I think that's generally a good thing
Speaker 3: for us.
Speaker 2: ELI. It's like you read my mind because that off
Speaker 2: the back of the regulation, That's where I wanted to
Speaker 2: go next was when we think about that focus on
Speaker 2: energy security. For instance, we are seeing a lot of
Speaker 2: that drive towards the materials component, right, so very very
Speaker 2: much upstream, be it rare earths, We've seen a lot
Speaker 2: of obviously attention come to We've seen it our transition
Speaker 2: metals across our electric vehicles indices because EVS also has
Speaker 2: that materials component to it. We've seen it naturally within
Speaker 2: the Uranian names, within our nuclear We are definitely seeing
Speaker 2: some of that policy prioritization, not just within the US
Speaker 2: but globally, everybody prioritizing their own access to critical materials.
Speaker 3: I think.
Speaker 2: But you know, correct, if you're wrong here. I don't
Speaker 2: see what I would say was probably explicit materials exposure,
Speaker 2: but I might be missing as I'm scanning the holdings here.
Speaker 2: How are you looking? Is that too much volatility in
Speaker 2: that real upstream component? Related to that more commodities exposure?
Speaker 2: I mean obviously not commodities, but equities that are developing
Speaker 2: commodities themselves, or what are you guys thinking there?
Speaker 4: Yeah, I think you know, energy, security, defense security, critical
Speaker 4: mineral security.
Speaker 3: We talk about things like shipbuilding.
Speaker 4: Those a very headline grabbing and it might be a
Speaker 4: bit of a red hearing, but there's a lot of
Speaker 4: focus on security, and I think that's a long duration opportunity.
Speaker 4: You're right, we don't have a lot of critical mineral
Speaker 4: investments in the portfolio.
Speaker 3: We've looked at some.
Speaker 4: We have invested in nuclear though, and I think nuclear
Speaker 4: is one very key strategic element of driving innersecurity policy
Speaker 4: in this country. And so we own a few businesses
Speaker 4: that are in that value chain. One that that I
Speaker 4: highlight that has the mineral side is Camico. So Chemico's
Speaker 4: roughly fifty percent of the value is in the Uranian
Speaker 4: business and the rest is in a stake in westing House,
Speaker 4: which is involved in the manufacturing process and equipment side
Speaker 4: of large scale reactors. So that's one area we've invested.
Speaker 4: But I think it's a very powerful theme that we
Speaker 4: certainly look around for ideas.
Speaker 2: Do we think that the rising tech company or tech
Speaker 2: investors focus on I'm trying to think of a way
Speaker 2: to frame this that doesn't sound as though I'm just
Speaker 2: feeding into news headlines the tech interest, if you will,
Speaker 2: that's flocking towards industrials materials. I mean for people who
Speaker 2: have been looking in this space for now a very
Speaker 2: long time, sometimes having tech valuations or tech investors flocking
Speaker 2: into that space is disrupting, if you will, say, the
Speaker 2: natural way of things looking and being valued across those
Speaker 2: areas of the market. Do you think that there's some
Speaker 2: risk there now that we're getting more of this intersection,
Speaker 2: or do you think generally this is you know, it'll
Speaker 2: work through towards the new era where we are naturally
Speaker 2: combining these two things.
Speaker 3: Yeah, again a couple things again working backwards.
Speaker 4: Right, So why are we seeing interest in these really
Speaker 4: boring old economy and industrial businesses emerge. I think it's
Speaker 4: because there's increasing awareness of two things. One, there's a
Speaker 4: regime regime change taking place, that headwinds have dissipated in
Speaker 4: are turning into structural tail I can flesh that out,
Speaker 4: but that's one two. I think there's appreciation that many
Speaker 4: investors are very heavily exposed to a certain type of
Speaker 4: business that has certain types of style factors, and they
Speaker 4: are very under exposed to a lot of these old economy, industrial.
Speaker 3: Infrastructure supporting types of companies. I think that's why it's happening.
Speaker 3: On point one.
Speaker 4: Look, we hollowed up the manufacturing base of the US
Speaker 4: and moved it to China. That was a headwind for
Speaker 4: our domestic industrial business.
Speaker 3: For a long time.
Speaker 4: We have not invested in the grid gapex to sales
Speaker 4: ratios up until a couple of years ago have been
Speaker 4: near twenty year lows, and that has been at the
Speaker 4: expense of the manufacturing equipment base and the infrastructure in
Speaker 4: this country. So there's been a bunch of headwinds. There's
Speaker 4: a need to repair those situations or to reinvest in
Speaker 4: the industrial and infrastructure based in this country for cyclical reasons.
Speaker 4: Just as there's these accelerating structural themes with the energy transition,
Speaker 4: with power demand, with energy security, and that's driving a
Speaker 4: change in fundamentals role economy companies. And we owned GeV Vvernova.
Speaker 4: They no one cared about this company when it was
Speaker 4: inside of g it was Gpower. People only cared about
Speaker 4: the aerospace business. Aerospace business is fantastic, but giev Renova
Speaker 4: is one of three companies in the world that makes
Speaker 4: large scale natural gas turbans. That portion of the not
Speaker 4: gas turbans didn't grow for about a decade. Giev Renova
Speaker 4: is now sold out through twenty twenty eight. They're growing
Speaker 4: earnings at sixty percent a year. It's gone from a
Speaker 4: business that was X growth to a company that is
Speaker 4: growing very rapidly. And so this is that regime shift
Speaker 4: that's taking place that I was talking about.
Speaker 3: So I think that's why you see tech interest.
Speaker 4: And last thing I'll say, at risk of being long
Speaker 4: winded on this, so I was at this conference two
Speaker 4: and a half years ago, I think it was September
Speaker 4: of twenty three, and I was in a meeting with
Speaker 4: Eaton Electrical Equipment Square and there was an analyst at
Speaker 4: a tech focused edge fund that was in the meeting,
Speaker 4: and I was just shocked to see this fund in
Speaker 4: the meeting because they never invest in these types of names.
Speaker 4: It turns out they were investing in this space. And
Speaker 4: the very next day, I think Eaton was down seven
Speaker 4: percent because they said something in the conference about their
Speaker 4: backlog not growing as fast in the future. And I
Speaker 4: don't know this, but you can imagine that a number
Speaker 4: of folks who were newer to that space could have
Speaker 4: easily blown out of this dock. I don't know if
Speaker 4: this fund or not, but it was one hundred and
Speaker 4: eighty bucks back then. Now this doc's three eighty. You know,
Speaker 4: something about really knowing what you own is critical here
Speaker 4: when you have these pockets of volatility.
Speaker 2: I think it's interesting I talk about this a lot.
Speaker 2: We've talked about this with respect to our defense theme
Speaker 2: we talk about with industrials, and one of those things
Speaker 2: whenever I speak to that tech migration towards these types
Speaker 2: of themes and these types of potential pockets of opportunity
Speaker 2: is very much that tension. Tech investors live and breathe
Speaker 2: by quarter to quarter, Right, investors who typically are looking
Speaker 2: at these types or you know, in this space that's
Speaker 2: not the same type of investment profile or of the
Speaker 2: same way that they're approaching these companies. They really do
Speaker 2: look at the durability the stuff their growth trend. So
Speaker 2: I think that that tension will be interesting to see
Speaker 2: what happens over the next year.
Speaker 3: You hit it earlier on the deep seek moment.
Speaker 4: So in February, a lot of these businesses on the
Speaker 4: power side of AI sold off as much or more
Speaker 4: than some of the AI semi conductor companies we ownvert
Speaker 4: if it was down sixty percent or something peaked a.
Speaker 3: Drought, and that's obviously it's painful, full stop.
Speaker 4: But we took a step back and we kind of
Speaker 4: reunderwrote all of our investments in the thesis, and our
Speaker 4: thesis on the demand side for why power is growing
Speaker 4: is far more than just AI. So AI is one
Speaker 4: leg of the stool. It gets all the news, and
Speaker 4: that's totally fine. But we're electrifying our entire economy. We're
Speaker 4: electrifying transportation buildings, We're bringing manufacturing back, which is very
Speaker 4: electricity intensive. And if AI just went away, that's about
Speaker 4: one percent of the three percent electricity growth demand that
Speaker 4: we expect for many years to come, and for some
Speaker 4: of the businesses we own to be cut in half.
Speaker 4: On some concerns around AI capex because the deep seak
Speaker 4: model we.
Speaker 3: Viewed as.
Speaker 4: Over the punitive, and so you have to know what
Speaker 4: you own as an investor, otherwise you end up selling
Speaker 4: at the bottom, and that's obviously the worst.
Speaker 3: Thing you can do.
Speaker 2: I think that. I think that's a really good point.
Speaker 2: And these were secular growth trends that people were investing in,
Speaker 2: as you say, long before the data center excitement, if
Speaker 2: you will. That's adding, if you will, and that's if anything,
Speaker 2: that's just adding the urgency, adding sort of the amount
Speaker 2: of investment opportunity that's potentially going to be surrounding this.
Speaker 2: And I do think it's going to be really interesting.
Speaker 2: As you say that that was an overreaction. Those names
Speaker 2: did bounce back, I'm remembering correctly, did bounce back relatively
Speaker 2: quickly and quicker. Then we saw some of those tech
Speaker 2: names bounce back. But again it spoke to just how
Speaker 2: aggressively some of the investment landscape was immediately worried about opportunity.
Speaker 4: There one hundred percent. I like to say the AI
Speaker 4: poured gasoline on the fire. This was already happening, right
Speaker 4: the electricity man And to your point, you know the
Speaker 4: way they sold off like it could have just been
Speaker 4: a week set of hands and maybe two hours in
Speaker 4: the stocks, who knows, But we we don't care about quarters.
Speaker 4: We believe that have having differentiated perspective and anchoring to
Speaker 4: a longer time horizon gives us some competitive advantage, and
Speaker 4: so volatility like that, while it's not fun in the moment,
Speaker 4: we've background and recognition tells us that it's our.
Speaker 2: Friend, and you've handled those those things in the past.
Speaker 2: I'm sure I'm going to avoid the question of does
Speaker 2: that mean we should go to less frequent reporting, because
Speaker 2: I don't want to have that conversation today. But I
Speaker 2: am going to ask one other question, and I think
Speaker 2: you nail at least what I would probably say was
Speaker 2: what I would think was the most unappreciated thing right
Speaker 2: underappreciated thing right now. But I'm going to put the
Speaker 2: question to you anyways, because actually, maybe you've got something
Speaker 2: else that you're hiding in your back pocket to answer
Speaker 2: on this. But what are you watching really closely that
Speaker 2: you think the market isn't getting right now, or that
Speaker 2: is really unappreciated by the market right now that you
Speaker 2: think could surprise people over the next year, let's say,
Speaker 2: Or I'll let you choose your time and what you
Speaker 2: think is underappreciated.
Speaker 4: Look, I don't have a fancy answer for you on that,
Speaker 4: but we really focus on this theme and where we
Speaker 4: think there's either an extreme amount of pessimism or they're
Speaker 4: just is non appreciation for how large an opportunity is.
Speaker 4: And our portfolio speaks for itself right now. We think
Speaker 4: that power scarcity and a need for good reinforcement is
Speaker 4: an incredibly large opportunity. There are a number of businesses
Speaker 4: that I think are still quite unknown within that space, and.
Speaker 3: We do our best to uncover them.
Speaker 4: We've allocated quite a bit of capital to nuclear over
Speaker 4: the past six to twelve months, and it's not in
Speaker 4: some of the smaller cap names that are experimental technologies.
Speaker 4: It's businesses like Miriaan Technologies, which have a presence in
Speaker 4: almost all the large scale nuclear reactors in this country
Speaker 4: and in the world, providing nuclear radiation detection systems. It's
Speaker 4: a really high quality company that most folks have probably
Speaker 4: never heard of. So we stick to ournating and we
Speaker 4: look for opportunities in those, you know, in those areas
Speaker 4: of the theme that we think are most exciting, and
Speaker 4: we've talked around this a few times, but you just
Speaker 4: can't solve the power side of this equation quickly.
Speaker 3: You need years and a ton of capital. So these
Speaker 3: bottlenecks remain. We think they persist for years to come.
Speaker 1: Well, great, we need to end here unfortunately, but this
Speaker 1: was a great conversation. Eli, thank you again for joining us.
Speaker 3: Thanks every thanks pre I enjoyed it.
Speaker 1: Eli and brit thank you again for being my co host.
Speaker 2: David always appreciate the invite anytime, and.
Speaker 1: I want to thank you for listening. If you liked
Speaker 1: the episode, please subscribe and leave a review. Also, if
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Speaker 1: Go on the Bloomberg Terminal until our next episode. This
Speaker 1: is David Cohne with Inside Out.