WEBVTT - TCW’s Horton on Transforming Legacy Industries 0:00:13.600 --> 0:00:16.680 Welcome to Inside Active, a podcast about active managers that 0:00:16.720 --> 0:00:20.440 goes beyond soundbites and headlines and looks deeper into their processes, 0:00:20.600 --> 0:00:24.439 challenges and philosophies and security selection. I'm David Cohne, I 0:00:24.520 --> 0:00:27.960 lead mutual fund and Active Research at Bloomberg Intelligence. Today, 0:00:28.080 --> 0:00:31.920 my cost is Brian Dharty, head of Thematic Strategy at 0:00:31.960 --> 0:00:34.560 Bloomberg Intelligence. Brie, thank you for joining me today. 0:00:35.159 --> 0:00:38.400 Always a pleasure. David love getting invited back. Actually to 0:00:38.520 --> 0:00:40.840 have these conversations with you highlight of my week. 0:00:42.360 --> 0:00:44.360 So I did want to ask about a note you 0:00:44.400 --> 0:00:46.560 put out last week. I think it's really topical to 0:00:46.800 --> 0:00:51.240 today's discussion. You describe how AI's next competitive edge lies 0:00:51.240 --> 0:00:56.200 in vertical integration were compute meets commodities, data center meets 0:00:56.280 --> 0:01:00.000 power generation. How should investors think about this new convergence 0:01:00.160 --> 0:01:02.400 between digital and physical infrastructure. 0:01:02.960 --> 0:01:05.679 Yeah, it's been something that's been actually really compelling for 0:01:05.760 --> 0:01:08.360 us to watch throughout twenty twenty five. Actually, we saw 0:01:08.400 --> 0:01:11.640 the first inclaims of it really starting to form in January. 0:01:11.760 --> 0:01:13.920 I think that the deep Seep disruption that we saw 0:01:13.920 --> 0:01:16.360 in January was that first a little bit of a 0:01:16.360 --> 0:01:18.479 Eureka moment for a lot of investors when they did 0:01:18.520 --> 0:01:21.640 actually see some of the more physical environment theme names. 0:01:21.680 --> 0:01:23.480 So when I say physical environment themes, that's where we 0:01:23.480 --> 0:01:26.560 put our themes are related to power generation, be they 0:01:26.640 --> 0:01:30.760 upstream or grid tech, all the way down to hydrogen 0:01:31.280 --> 0:01:34.920 and any of those other physical environment focused themes. So 0:01:35.080 --> 0:01:37.880 those names that include the likes of semen and Energy invertive, 0:01:38.200 --> 0:01:41.560 we saw those names actually see as much volatility off 0:01:41.600 --> 0:01:44.479 the back of the deep seep destruction as we did Navidia, right, 0:01:44.560 --> 0:01:47.840 So that was kind of the first inklaim that investors 0:01:47.840 --> 0:01:50.800 were cluing in, and then what we've seen throughout twenty 0:01:50.840 --> 0:01:53.360 twenty five is just more of that, right, and seeing 0:01:53.360 --> 0:01:56.920 more of that correlation emerge. We are actually identifying that 0:01:57.000 --> 0:02:00.560 several other physical environment themes, specifically decentralized Energy, which is 0:02:00.640 --> 0:02:04.440 quite focused on decentralization off the centralized grid for instance, 0:02:04.480 --> 0:02:07.200 are seeing rising correlations to AI. We have a lot 0:02:07.200 --> 0:02:10.120 of these physical environment themes actually hold high beta to AI, 0:02:10.240 --> 0:02:13.000 so moving quite aggressively off of any sort of movement 0:02:13.000 --> 0:02:15.919 we're seeing across our AI theme as well. The other 0:02:16.080 --> 0:02:18.800 thing that I think is something that's gaining more and 0:02:18.800 --> 0:02:21.240 more traction is naturally the fact that we're seeing tech 0:02:21.320 --> 0:02:28.399 investors block to those power generation materials, industrial's names. They're 0:02:28.400 --> 0:02:30.959 doing this through partnerships. I mean we can just in 0:02:31.000 --> 0:02:33.560 the last year there's been several partnerships that have been announced, 0:02:33.760 --> 0:02:37.040 be it from Meta or Amazon related to nuclear right 0:02:37.120 --> 0:02:39.840 as that nuclear buildout and the buildout opportunity that BI 0:02:39.919 --> 0:02:41.880 is estimated to be about three hundred and fifty billion 0:02:41.919 --> 0:02:46.320 dollars by twenty fifty for nuclear buildout opportunity set. We're 0:02:46.360 --> 0:02:48.960 seeing those types of relationships emergent. I think that's actually 0:02:49.000 --> 0:02:53.480 creating an entirely different shift in the equities landscape again, 0:02:53.840 --> 0:03:00.040 providing a lot more really identifiable technology tailwinds to do 0:03:00.320 --> 0:03:05.600 these physical environment themes, our generation industrials, data center build outs. 0:03:06.080 --> 0:03:07.640 And that's what brings me here today. Actually, I think 0:03:07.680 --> 0:03:09.680 it's gonna be a really compelling conversation because this is 0:03:09.720 --> 0:03:12.240 I'm hey, I won't I won't speak to it, but 0:03:12.280 --> 0:03:15.920 this feels very spot on to actually the product that 0:03:15.919 --> 0:03:18.200 we're here to talk about today and who we're speaking 0:03:18.240 --> 0:03:19.680 with today. So I'm excited for that. 0:03:20.520 --> 0:03:23.760 Great Well, speaking of which, I'd like to welcome our 0:03:23.800 --> 0:03:27.119 guest today. Eli Horton is a managing director of Equities 0:03:27.160 --> 0:03:30.720 at TCW and a senior portfolio manager for the firm's 0:03:30.720 --> 0:03:37.480 equity products, including the TCW Transformed Systems ETF ticker pwr D. Eli, 0:03:37.560 --> 0:03:38.880 thank you for joining the podcast. 0:03:39.400 --> 0:03:41.200 Thank you for having me. It's it's great to be 0:03:41.280 --> 0:03:41.880 here with you both. 0:03:42.880 --> 0:03:46.520 So let's talk about pwr D. How do you define 0:03:46.640 --> 0:03:50.680 transform systems? In other words, what kinds of transformations are 0:03:50.720 --> 0:03:51.440 you talking about? 0:03:52.640 --> 0:03:56.040 Well, it's a it's a good place to start because 0:03:56.080 --> 0:04:00.720 there are many transformations that are taking place in our 0:04:00.760 --> 0:04:03.240 economy and that are accelerating it and bre hit on 0:04:03.240 --> 0:04:04.720 one of them, which I know we'll come back to 0:04:04.840 --> 0:04:09.960 with power and the grid. But if you think about it, 0:04:10.000 --> 0:04:13.680 we're really going through somewhat of an energy and an 0:04:13.720 --> 0:04:17.440 industrial revolution, and there are multiple catalysts for this, but 0:04:17.839 --> 0:04:21.680 one is that we're trying to drive our economy forward 0:04:22.520 --> 0:04:25.719 to be based on renewable energy generation. 0:04:27.120 --> 0:04:28.760 That is a monumental task. 0:04:29.400 --> 0:04:32.360 We've been working on this for decades in the US. 0:04:32.440 --> 0:04:35.320 Still less than twenty percent of our powers from truly 0:04:35.360 --> 0:04:40.000 renewable sources, so we're nowhere close, and there have been 0:04:40.200 --> 0:04:43.960 targets in the past that we might accomplish this sort 0:04:43.960 --> 0:04:47.520 of net zero emission state. By twenty fifty, we were 0:04:47.640 --> 0:04:50.520 quite public with our view that we felt that that 0:04:50.680 --> 0:04:53.359 was just not feasible. I think that's now probably a 0:04:53.360 --> 0:04:55.760 consensus view, and I think current targets are twenty seventy 0:04:55.839 --> 0:04:58.599 or so. But the words trying to get to this 0:04:58.760 --> 0:05:04.919 renewable power energy generation state that has massive implications on 0:05:05.000 --> 0:05:07.480 a wide range of systems, and we tend to think 0:05:07.480 --> 0:05:09.520 about the world in terms of systems, not sectors. I 0:05:09.520 --> 0:05:14.000 think sectors are some arbitrary oversimplification of how the economy 0:05:14.000 --> 0:05:17.120 works just for an investor, but that's not how the 0:05:17.160 --> 0:05:20.160 world functions. Take the grid, for example, you have a 0:05:20.200 --> 0:05:23.799 variety of commodities, whether it's the metals, the construction materials 0:05:23.839 --> 0:05:28.880 I think concrete that they're building the infrastructure. You have 0:05:29.560 --> 0:05:33.440 the whatever's powering the power generation, coal, net gas, maybe 0:05:33.440 --> 0:05:36.960 the sun. You have the engineering and construction firms that 0:05:37.000 --> 0:05:40.600 are building these. You've got electrical equipment, you've got grid software. 0:05:40.839 --> 0:05:43.680 I just listed off a whole bunch of different sectors 0:05:44.240 --> 0:05:45.240 that form the system. 0:05:45.320 --> 0:05:47.120 And that's just for the grid. And that was even 0:05:47.160 --> 0:05:47.920 a simplification. 0:05:48.320 --> 0:05:52.400 Think electric vehicles, Think our agriculture economy, so on, so forth. 0:05:52.760 --> 0:05:53.720 For us to get to. 0:05:53.760 --> 0:06:00.159 This renewable state, we need all of these systems to 0:06:00.360 --> 0:06:04.640 function together. That's incredibly complicated. We also need trillions of 0:06:04.680 --> 0:06:07.680 investment and many many years, so it's a very long 0:06:07.760 --> 0:06:10.479 dated opportunity with a lot of capital behind it. 0:06:11.480 --> 0:06:11.760 Great. 0:06:12.600 --> 0:06:15.840 So with the portfolio, how many names do you typically 0:06:15.880 --> 0:06:19.880 carry and what drives your decision to overweight or underweight 0:06:19.920 --> 0:06:20.400 a company? 0:06:20.880 --> 0:06:23.880 So we have a slightly different investment approach I think 0:06:24.800 --> 0:06:29.440 than a lot of long only managers. We own twenty 0:06:29.440 --> 0:06:33.039 to thirty stocks in the powered portfolio. We believe that 0:06:33.200 --> 0:06:36.520 is an appropriate amount of diversification for our clients while 0:06:36.560 --> 0:06:40.440 allowing us to maximize our investors' capital and our best ideas. 0:06:40.920 --> 0:06:43.800 We believe strongly that that type of concentration is how 0:06:43.800 --> 0:06:46.240 you outperform the market through the cycle. So I think 0:06:46.240 --> 0:06:48.960 we tend to be a little more concentrated than many 0:06:49.279 --> 0:06:51.960 fund managers. We actually don't really think about the world 0:06:52.000 --> 0:06:54.600 in terms of overweight and underweight because that implies some 0:06:54.600 --> 0:06:57.080 sort of relative lens and relative to a benchmark. 0:06:57.600 --> 0:07:01.120 And while we absolutely do measure how we. 0:07:01.160 --> 0:07:05.920 Perform with our investors capital compared to the SP five hundred, 0:07:06.560 --> 0:07:09.760 we don't think about weights relative to the market. What 0:07:09.800 --> 0:07:14.000 we're trying to do is identifying this universe of businesses 0:07:14.040 --> 0:07:18.080 that are enabling or benefiting from the transformation of our 0:07:18.160 --> 0:07:21.800 energy system. What are the best twenty to thirty investment 0:07:21.800 --> 0:07:25.840 ideas on a resuggested basis that we can construct a 0:07:25.920 --> 0:07:28.920 portfolio with. So that's good of our starting point. 0:07:29.120 --> 0:07:31.600 I think this is really interesting because one, you're preaching 0:07:31.600 --> 0:07:33.320 to the choir here. I also spend most of my 0:07:33.440 --> 0:07:37.440 days making the argument for not being bound by sector classifications. 0:07:37.760 --> 0:07:41.240 So really appreciate that part of the conversation. But I 0:07:41.720 --> 0:07:43.720 think you touched on something else that's really compelling. I 0:07:43.720 --> 0:07:47.480 mean this energy transformation. I think that as those targets, 0:07:47.520 --> 0:07:50.920 for instance, starting merge related to renewable energy. I think 0:07:51.000 --> 0:07:54.520 the one thing that I used to be very focused 0:07:54.520 --> 0:07:57.160 on energy, and the one thing that we always kept 0:07:57.160 --> 0:08:00.240 mentioning was it's a journey, right that there's going to 0:08:00.320 --> 0:08:04.440 be some winding roads with respect to that journey. You 0:08:04.640 --> 0:08:08.000 launched this fund in twenty twenty two. I think what's 0:08:08.000 --> 0:08:12.800 interesting is that twenty twenty two time frame was at 0:08:12.800 --> 0:08:16.160 a bit of a swing, pretty significant swing, I would say, 0:08:16.200 --> 0:08:19.960 related to that renewables journey or the general appetite or 0:08:20.080 --> 0:08:23.920 acceleration of the renewables journey versus some very real world 0:08:24.400 --> 0:08:27.800 hindrances related to shifting towards renewable energies. So I think 0:08:27.840 --> 0:08:29.960 that's really interesting as to when you launched this and 0:08:30.000 --> 0:08:32.480 then where we're at right now, if you could talk 0:08:32.559 --> 0:08:38.960 through how maybe you've how your equities within this strategy 0:08:39.000 --> 0:08:42.079 have shifted through that time period, or has it been 0:08:42.200 --> 0:08:45.160 relatively stable. I'm just really interested to know how your 0:08:45.240 --> 0:08:48.640 mindset or your approach you've had to shift alongside some 0:08:48.679 --> 0:08:50.199 of these shifts we've seen in the broader market. 0:08:50.760 --> 0:08:53.640 Yeah, it's such an interesting topic that we could spend 0:08:53.679 --> 0:08:55.600 way too long on. Have a bunch of thoughts that 0:08:55.760 --> 0:09:00.480 flooded my mind here. So one I think, I think 0:09:00.520 --> 0:09:03.560 a sign of great investors and that we you know, 0:09:03.640 --> 0:09:07.160 we strive to be is that when facts change, you 0:09:07.240 --> 0:09:11.120 change your mind. You have to be able to not 0:09:11.240 --> 0:09:15.000 get dug in and to evolve and adapt to new 0:09:15.000 --> 0:09:17.760 information and to where you know the best opportunities are. 0:09:18.280 --> 0:09:22.360 So that would suggest that there should be changes from 0:09:22.360 --> 0:09:24.040 time to time, and I'll give you some examples of 0:09:24.160 --> 0:09:27.120 changes that we've made. I also, you know, I think 0:09:27.160 --> 0:09:29.560 that in any secular theme, and maybe this is what 0:09:29.600 --> 0:09:31.720 you meant by your comments on energy is going to 0:09:31.720 --> 0:09:33.440 take a long time. I don't remember the exact phrase 0:09:33.480 --> 0:09:37.000 you used, but in any secular theme, you're going to 0:09:37.160 --> 0:09:41.280 have periods of exuberance and then quite the opposite. And 0:09:41.559 --> 0:09:44.280 there's a lot of discussion right now trying to tie 0:09:44.320 --> 0:09:47.840 the current moment back to the two thousands dot com era, 0:09:48.840 --> 0:09:51.320 and there's some things that rhyme, and there's there's some 0:09:51.440 --> 0:09:55.400 that don't. But we have this tendency to overestimate trends 0:09:55.400 --> 0:09:57.520 in the short term and underestimate them in the long term. 0:09:57.600 --> 0:10:02.960 And oftentimes that type of volatility, even within a secular theme, 0:10:03.160 --> 0:10:05.120 really can be to an investor's advantage if you have 0:10:05.160 --> 0:10:07.920 a long term horizon and you can capitalize when the 0:10:07.960 --> 0:10:10.520 market's fearful. So a couple of random thoughts there, What 0:10:10.559 --> 0:10:13.000 have we actually done? So we launched the strategy in 0:10:13.000 --> 0:10:16.320 February of twenty twenty two. As you mentioned, that was 0:10:16.320 --> 0:10:19.080 a really interesting time because the world had moved from 0:10:19.160 --> 0:10:22.520 this growth at all costs is the way to invest 0:10:23.160 --> 0:10:28.240 into more of a value or into factor tended to perform, 0:10:28.800 --> 0:10:32.240 and that worked to our benefit. We had a significant 0:10:32.280 --> 0:10:34.680 amount of the portfolio invested in oil and gas. 0:10:35.360 --> 0:10:37.120 In twenty twenty two, we. 0:10:37.000 --> 0:10:42.000 Also had a very heavy investment in the agriculture economy. 0:10:42.040 --> 0:10:46.040 So agriculture is actually quite emissions heavy, whether it's the 0:10:46.040 --> 0:10:49.200 fertilizers or the pesticides, or how the machinery operates, and 0:10:49.280 --> 0:10:53.200 so throughout the agriculture economy we were finding pretty interesting investments. 0:10:54.320 --> 0:10:57.160 Moved forward into late twenty two to early twenty three, 0:10:57.400 --> 0:11:03.240 we had large investments in solar and in lithium electric vehicles. 0:11:04.080 --> 0:11:07.679 In twenty four we really added to our investments in aerospace, 0:11:07.720 --> 0:11:11.760 I think actually twenty three, and we've been building investments 0:11:11.760 --> 0:11:14.960 in power and great along the way. Today are to 0:11:15.040 --> 0:11:17.640 give you some numbers around this. When we launched the strategy, 0:11:17.640 --> 0:11:19.360 we probably had a third of our capital investment in 0:11:19.400 --> 0:11:21.680 oil and gas, and today we have probably four percent. 0:11:22.120 --> 0:11:23.840 Okay, so we will be active. 0:11:24.559 --> 0:11:27.679 We underwrite all of our investments to three to five years, 0:11:28.640 --> 0:11:32.479 but when opportunities change, will make changes with the portfolio. 0:11:34.480 --> 0:11:36.360 When we talk about, you know, kind of entering a 0:11:36.960 --> 0:11:40.520 new green world, you know, looking at the fund's website, 0:11:40.559 --> 0:11:43.280 there is an emphasis on not just pure green names, 0:11:43.320 --> 0:11:48.000 but brown to green transition opportunities such as legacy industries 0:11:48.040 --> 0:11:51.120 that you know must reinvent themselves. Can you give any 0:11:51.160 --> 0:11:52.920 examples of where you see value there. 0:11:52.760 --> 0:11:57.320 Today in the brown de green side. So look, it's 0:11:57.400 --> 0:12:02.280 like Charlie Munger was famous, this invert everything work backwards, 0:12:02.520 --> 0:12:03.840 and we do it all the time. 0:12:04.240 --> 0:12:09.880 So what is actually happening and why? So the why 0:12:09.920 --> 0:12:11.559 we talked about this earlier. The world's trying to move 0:12:11.600 --> 0:12:14.360 to some sort of renewable energy state. So what is 0:12:14.400 --> 0:12:20.000 it doing. We're electrifying everything, We're finding ways to capture carbon. 0:12:20.440 --> 0:12:24.560 We're going through these large scale transformations of old economy industry. 0:12:24.559 --> 0:12:30.120 So that's what's happening. You can't accomplish those goals without 0:12:30.280 --> 0:12:34.880 the missions heavy companies changing what they do and taking 0:12:34.880 --> 0:12:38.600 a leadership role. And there was a lot of investors 0:12:38.640 --> 0:12:40.960 for a number of years that said, we're going to 0:12:41.000 --> 0:12:43.160 starve those businesses of capital, We're going to divest them 0:12:43.160 --> 0:12:50.280 from investors' portfolios. And my view is that it was counterproductive. 0:12:51.480 --> 0:12:54.000 It by starving them with capital, it raised the cost 0:12:54.000 --> 0:12:56.760 of capital of these old economy businesses. And so if 0:12:56.760 --> 0:12:59.240 your CEO, your job is to invest your holder capital 0:12:59.600 --> 0:13:02.240 at a rate of return that is higher than your 0:13:02.240 --> 0:13:04.840 cost of capital and to add value. And if your 0:13:04.840 --> 0:13:06.920 cost of capital is going up, then by definition, some 0:13:07.000 --> 0:13:11.199 investments will no longer meet that hurdle. And we have 0:13:11.280 --> 0:13:14.160 the view that that is just the wrong way to 0:13:14.160 --> 0:13:16.520 further this transformation. It's also probably not the right way 0:13:16.520 --> 0:13:19.200 to make money either, and so we've always taken the 0:13:19.280 --> 0:13:23.000 belief that you have to change the eighty percent of 0:13:23.080 --> 0:13:27.839 equation the old economy industrials and energy businesses to accomplish 0:13:28.000 --> 0:13:32.480 this transformation. And we have also found that that's where 0:13:32.480 --> 0:13:35.040 the best opportunities lie. I think scale is a huge 0:13:35.040 --> 0:13:37.720 competitive mantage. I think many of these old economy companies 0:13:37.760 --> 0:13:42.320 have unit economics that are very attractive versus some green 0:13:42.360 --> 0:13:46.160 businesses don't without government incentives. And so we've always focused 0:13:46.200 --> 0:13:47.880 your older capital on that side of the equation. 0:13:48.080 --> 0:13:49.320 I would expect that continued. 0:13:51.360 --> 0:13:55.040 So, you know, some of these transitions are long in nature. 0:13:55.240 --> 0:13:57.440 How do you think about valuation and what's your signal 0:13:57.480 --> 0:13:58.400 for too expensive? 0:13:59.800 --> 0:14:03.679 And actually this completely ties with your last question on 0:14:04.160 --> 0:14:05.720 green and brown to green. 0:14:06.240 --> 0:14:09.839 So we've mostly. 0:14:11.200 --> 0:14:13.439 Mostly focused on the brown to green side because a 0:14:13.559 --> 0:14:17.239 number of let's say, solar and wind and experimental technologies 0:14:17.600 --> 0:14:20.000 didn't have unit economics that worked and had valuations that 0:14:20.040 --> 0:14:25.240 were unattractive. There's this SMP Clean Energy Transition Index, which 0:14:25.240 --> 0:14:27.440 I think launched in two thousand and four, so it's 0:14:27.480 --> 0:14:30.440 a little over twenty years. It's grown at about a 0:14:30.440 --> 0:14:33.000 one percent compound rate of returns since then versus the 0:14:33.000 --> 0:14:37.240 market at eleven. That's that's an area of the economy 0:14:37.280 --> 0:14:38.640 that you would have looked at in two thousand fourth. 0:14:38.640 --> 0:14:40.120 So that these companies are going to grow so fast, 0:14:40.560 --> 0:14:44.320 but it was profitless growth and valuations absolutely matter. I 0:14:44.360 --> 0:14:48.800 think that you know, when it comes to valuation discipline, 0:14:49.320 --> 0:14:52.960 our north star is owning a company with competitive vantages 0:14:53.200 --> 0:14:57.640 that is adding value to the system at a rate 0:14:57.960 --> 0:15:01.720 that is greater than what the marketppreciates. We care first 0:15:01.960 --> 0:15:05.080 and foremost about that. For every company we own, we 0:15:05.160 --> 0:15:10.560 have you know, expected IRRs, we have risk rewards, and 0:15:10.600 --> 0:15:14.520 we will anchor to those. And when an idea becomes 0:15:14.920 --> 0:15:19.480 somewhat unattractive, we probably have another idea on the sidelines 0:15:19.480 --> 0:15:21.240 that we've researched it. We're just waiting for a moment 0:15:21.280 --> 0:15:24.640 that we would replace that that stock with. But I'd 0:15:24.720 --> 0:15:28.160 say that valuation is not the top one or two 0:15:28.200 --> 0:15:31.360 things we care about. We first care about, you know, 0:15:31.360 --> 0:15:34.200 the quality of a company, the durability of its mode, 0:15:34.240 --> 0:15:37.320 the value it's adding, how it's understood. And then valuation 0:15:37.560 --> 0:15:38.560 usually comes after. 0:15:39.720 --> 0:15:42.920 You're touching on a couple of things. And unfortunately I 0:15:42.960 --> 0:15:44.600 do I do love to talk you life, so it's 0:15:44.720 --> 0:15:48.040 very possible I derail this down some rabbit holes. David 0:15:48.040 --> 0:15:51.120 will keep me in check. But when I mean the 0:15:51.120 --> 0:15:54.080 Brown Degreen conversation, that and of itself, I think is 0:15:54.120 --> 0:15:58.920 really interesting because it's something that I think sometimes gets missed. 0:15:58.960 --> 0:16:03.680 Here is just how critical again this transition actually is, right, 0:16:03.760 --> 0:16:05.360 And so when you look too heavily at the just 0:16:05.400 --> 0:16:08.160 the green side, when you think of how a grid 0:16:08.240 --> 0:16:14.480 works or how the actual infrastructure system works, you can't 0:16:14.560 --> 0:16:16.800 just you know, switch from one to the other seamlessly 0:16:16.840 --> 0:16:19.080 and think everything goes along right, That there really is 0:16:19.120 --> 0:16:22.120 a transition associated with it. And how critical, as you say, 0:16:22.160 --> 0:16:26.160 those more traditional companies and the traditional structures that were 0:16:26.200 --> 0:16:28.920 in place, how critical they are to maintaining that resiliency 0:16:29.000 --> 0:16:32.360 and that and the operational integrity of this broader system 0:16:32.400 --> 0:16:36.600 that you can't continue to electrify if you're jeopardizing the 0:16:36.640 --> 0:16:39.960 operational integrity and resiliency, right, So I think I think 0:16:39.960 --> 0:16:42.520 sometimes that gets forgotten and people think, I remember a 0:16:42.560 --> 0:16:45.240 conversation that I used to have all the time. People 0:16:45.240 --> 0:16:48.520 seem to think that a blackout happens because you know, 0:16:49.200 --> 0:16:51.640 it was some sort of giant failure and how much 0:16:51.640 --> 0:16:53.960 power is available. I mean, it is seconds that can 0:16:54.000 --> 0:16:56.280 cause a grid to go down right that you couldn't bridge. 0:16:56.320 --> 0:16:58.480 And you know, I think that people don't often think 0:16:58.480 --> 0:17:01.480 about it as far as just how critical that resilience 0:17:01.520 --> 0:17:06.280 factor is. With that in mind, and thinking about how 0:17:06.320 --> 0:17:11.320 there's such an acceleration in power generation demand right now 0:17:12.280 --> 0:17:15.760 and over the next ten years, whether we want to 0:17:15.760 --> 0:17:17.439 talk about it related to data centers, are just in 0:17:17.480 --> 0:17:22.360 general that everything's electrifying, right, How are you looking across 0:17:22.400 --> 0:17:27.960 this physical backbone, if you will, of innovation and where 0:17:28.000 --> 0:17:30.680 do you see the most compelling aspects of that investment. 0:17:30.720 --> 0:17:32.320 I mean, we can look at your holdings. It looks 0:17:32.480 --> 0:17:34.440 like to me, I'm looking at this and I see 0:17:34.440 --> 0:17:37.480 that you like downstream and upstream right, that you're kind 0:17:37.480 --> 0:17:41.440 of looking across the entire ecosystem there. So I think 0:17:41.440 --> 0:17:43.560 it'd be interesting to hear your thoughts on what you 0:17:43.560 --> 0:17:47.080 think is most compelling right now, considering the ten year 0:17:47.200 --> 0:17:49.560 roadmap ahead that people seem to have their eye on 0:17:49.600 --> 0:17:52.840 with respect to power generation needs. 0:17:53.560 --> 0:17:56.480 Power is short in this country, bull stop. 0:17:56.760 --> 0:17:59.240 And the problem is you have a demand side of 0:17:59.240 --> 0:18:05.000 the equation, that is, it structurally changes faster than. 0:18:04.960 --> 0:18:08.399 Supply can react. You were kind of alluding to this. 0:18:08.720 --> 0:18:11.159 You just can't bring new power online quickly. There's so 0:18:11.280 --> 0:18:15.000 many different moving pieces of that equation from all the 0:18:15.000 --> 0:18:17.879 different materials in the componentry and the technology and the 0:18:18.000 --> 0:18:20.520 people to build it, and then you throw in environmental 0:18:20.520 --> 0:18:23.560 reviews and permitting and I mean, look, we have interconnection 0:18:23.600 --> 0:18:25.840 delays in this country that are five years on average. 0:18:26.320 --> 0:18:28.800 I think there's seven in my home state of California. 0:18:28.880 --> 0:18:35.200 So we're doing great. So it's really tricky, and that 0:18:35.280 --> 0:18:38.680 creates a lot of bottlenecks. We love to invest with. 0:18:38.840 --> 0:18:40.119 There's bottlenecks. 0:18:41.400 --> 0:18:47.639 The intersection of demand that structurally outstrips power is a 0:18:47.680 --> 0:18:50.439 signal to us. If it's a durable bottleneck, it's a 0:18:50.440 --> 0:18:52.800 signal to us that unit economics will expand for those 0:18:52.840 --> 0:18:54.000 who can fulfill that need. 0:18:54.200 --> 0:18:56.879 And so we love to look there. So you were 0:18:56.880 --> 0:18:58.800 talking about ultream and downstream. 0:18:58.320 --> 0:19:03.240 And I would reflect back to that when we started 0:19:03.280 --> 0:19:05.920 investing in this sub theme, if you will, of power 0:19:05.960 --> 0:19:09.000 and grid. Well over two years ago, we did this 0:19:09.080 --> 0:19:13.000 exercise where sort of tore down the system, if you will, 0:19:13.320 --> 0:19:16.159 and so we actually had a graphic, but on one 0:19:16.240 --> 0:19:18.240 side of the graphic where the plants that generate the 0:19:18.240 --> 0:19:21.679 power your cold plants are great natural gas plants, utility 0:19:21.680 --> 0:19:25.879 scale solar or whatever. That power then goes into some 0:19:25.920 --> 0:19:29.760 sort of substation. It then goes through high voltage transmission 0:19:29.760 --> 0:19:33.359 cables to another substation. The power gets reduced, it gets 0:19:33.400 --> 0:19:37.320 transmitted all the way down to a community level and 0:19:37.400 --> 0:19:39.640 to the end use facility. 0:19:39.720 --> 0:19:41.040 So that could be a bunch of places. 0:19:41.040 --> 0:19:43.760 It could be a factory, it could be a data center, 0:19:43.800 --> 0:19:45.600 it could be our offices or our homes. 0:19:46.200 --> 0:19:47.880 It could be a charging station. 0:19:48.520 --> 0:19:52.320 And that whole system, that economic system. There's a couple 0:19:52.440 --> 0:19:55.280 hundred companies maybe a little more that we could invest in. 0:19:55.280 --> 0:19:58.439 It had some role in it, and we just started 0:19:58.440 --> 0:20:01.880 looking for the bottlenecks and we found them actually throughout 0:20:01.880 --> 0:20:04.800 the system. So on the power generation side, we've owned 0:20:04.960 --> 0:20:07.040 this business with I don't think people had really heard 0:20:07.040 --> 0:20:08.879 of at the time. It's now sort of a household 0:20:08.920 --> 0:20:11.639 name called Tistra, which is utility based in Texas and 0:20:11.680 --> 0:20:16.840 they have some attractive nuclear power assets and natural aids 0:20:16.880 --> 0:20:18.840 as well as we own Fistra and a couple other 0:20:19.119 --> 0:20:26.120 power generators. We own businesses that are manufacturing turbines, Doova, 0:20:26.359 --> 0:20:30.840 Ernova and Semen's energy businesses that are all the way 0:20:30.880 --> 0:20:33.760 at the far and use side of this equation that 0:20:33.840 --> 0:20:35.879 are downstream if you want to call them, that of 0:20:35.920 --> 0:20:38.760 electrical components like vertiv or Schneider Electric or eating. 0:20:39.800 --> 0:20:41.320 So there's opportunities throughout. 0:20:41.600 --> 0:20:44.640 And what we've really tried to seek out is where 0:20:44.720 --> 0:20:48.160 are the bottlenecks that are going to allow companies fundamentals 0:20:48.280 --> 0:20:50.520 to inflect in a way that the market doesn't appreciate. 0:20:51.400 --> 0:20:55.000 Do you think that there's very specific regions where you're 0:20:55.080 --> 0:20:58.440 more focused on those bottlenecks or we're just by nature 0:20:58.440 --> 0:21:00.040 of the fact that they might have more bottlenecks. So 0:21:00.119 --> 0:21:01.720 the regions that you're more focused on, because most the 0:21:01.760 --> 0:21:04.359 names you listed there, I would say are probably across regions, right, 0:21:04.400 --> 0:21:06.640 you know, they tend to we think of the Schneiders 0:21:06.640 --> 0:21:10.520 and the Siemens. They operate globally, But are there specific 0:21:10.600 --> 0:21:12.760 regional bottlenecks that you're. 0:21:12.720 --> 0:21:13.159 Narrowed in on. 0:21:14.240 --> 0:21:17.920 I think the US presents the best investment opportunity here. Look, 0:21:18.000 --> 0:21:22.200 I think this is a global theme, but we're particularly 0:21:22.640 --> 0:21:26.399 focused on the US because that's where the starkest change 0:21:26.480 --> 0:21:27.080 is taking place. 0:21:27.160 --> 0:21:29.840 So over the past couple of decades, electricity. 0:21:29.359 --> 0:21:32.280 Demand in this country was basically flat, and it was 0:21:33.440 --> 0:21:37.359 I think that's odd to think that electricity demand would 0:21:37.359 --> 0:21:40.040 be flat when the economy grew, when population grew, but 0:21:40.119 --> 0:21:42.680 it's because we took a third of our manufacturing base 0:21:42.800 --> 0:21:44.080 and we moved it over to Asia. 0:21:44.720 --> 0:21:46.720 We got a little bit more efficient with some of. 0:21:46.760 --> 0:21:51.200 The electrical equipment, and that led to roughly flat electricity demand. 0:21:51.520 --> 0:21:56.080 Despite that flat demand profile, the grid can still barely 0:21:56.119 --> 0:21:58.919 handle it. And you were talking about brownouts or blackouts earlier. 0:21:59.080 --> 0:22:01.480 We've had almost every single year we set a new 0:22:01.560 --> 0:22:03.840 record for the cost of brown outs in this country. 0:22:03.880 --> 0:22:07.560 So the grid's already fragile. But I mentioned that there's 0:22:07.560 --> 0:22:10.119 a stark change in the future versus the past and 0:22:10.160 --> 0:22:13.760 the US, and that's because that demand profile is going 0:22:13.800 --> 0:22:16.040 from flat to it's growing at three percent a year, 0:22:16.080 --> 0:22:17.560 which doesn't sound like a lot, But if you do 0:22:17.640 --> 0:22:20.160 that for you know, from twenty twenty to twenty fifty, 0:22:20.200 --> 0:22:24.119