WEBVTT - Avantis’ McInnis on Active vs. Passive Spectrum 0:00:14.760 --> 0:00:17.840 Welcome to Inside Active, a podcast about active managers that 0:00:17.880 --> 0:00:20.560 goes beyond sound bites and headlines and looks deeper into 0:00:20.600 --> 0:00:24.880 their processes, challenges and philosophies and security selection. I'm David 0:00:24.920 --> 0:00:27.880 com I lead mutual fund and active research at Bloomberg Intelligence. 0:00:28.520 --> 0:00:30.880 For the better part of the last decade, the story 0:00:30.880 --> 0:00:33.640 in the markets has been simple, passive is winning. But 0:00:33.800 --> 0:00:36.720 recently that narrative has started to shift, and the question 0:00:36.840 --> 0:00:39.280 is whether that shift is real or just another cycle 0:00:39.360 --> 0:00:42.199 and a very long debate. Today, I wanted to look 0:00:42.240 --> 0:00:45.479 at that through a more teumatic lens. What's actually changing, 0:00:45.520 --> 0:00:47.879 where active might have an edge and what tends to 0:00:47.880 --> 0:00:51.040 get more competed away over time. So here to talk 0:00:51.080 --> 0:00:56.040 about that is Phil mckinnis, Chief investment strategists at Vantis Investors. Phil, 0:00:56.120 --> 0:00:58.200 thank you for joining me today. Thanks David, it's a 0:00:58.240 --> 0:01:00.640 pleasure to be here. I'm excited about this. So we're 0:01:00.640 --> 0:01:03.000 hearing a lot right now about you know, the shift 0:01:03.080 --> 0:01:06.000 back to active. What part of that narrative do you 0:01:06.040 --> 0:01:10.319 think is overstated or misunderstood. I think there's there's a 0:01:10.319 --> 0:01:13.240 couple of things that are really important to really contextualize it. 0:01:13.240 --> 0:01:16.880 Because you have the types of strategies that are out there. 0:01:16.959 --> 0:01:19.800 You also have the vehicles through which people are accessing them. 0:01:20.200 --> 0:01:23.440 And so if we're talking about active relative to passive, 0:01:23.520 --> 0:01:25.760 I think right alongside it you have to talk about 0:01:25.760 --> 0:01:29.399 ETFs and mutual funds because for a long time, you know, 0:01:29.520 --> 0:01:32.400 many of the ETF options, or the predominant ETF options, 0:01:32.440 --> 0:01:35.120 were passive of some sort, right, there was some sort 0:01:35.120 --> 0:01:38.679 of index based mechanism. And so if we think about 0:01:38.840 --> 0:01:42.039 kind of market share there between mutual funds and ETFs, 0:01:42.440 --> 0:01:46.200 you know, ETFs had around fourteen percent, sixteen percent market 0:01:46.200 --> 0:01:48.800 share if we go back to say twenty fourteen, go 0:01:48.880 --> 0:01:50.400 back to a little bit more than a decade ago. 0:01:50.920 --> 0:01:52.160 If you think about, you. 0:01:52.120 --> 0:01:55.400 Know, the end of last year, that split is a 0:01:55.440 --> 0:01:59.520 fair bit different. Right, You've got mutual fund share coming down, 0:01:59.520 --> 0:02:03.040 You've got each you have share coming up mid high thirties. 0:02:03.080 --> 0:02:06.840 So that's a pretty significant increase if we think about that, 0:02:06.920 --> 0:02:10.320 kind of contextualize it with some netflows since twenty twenty, 0:02:10.720 --> 0:02:13.640 I think around two and a half trillion dollars out 0:02:14.080 --> 0:02:19.400 of mutual funds and four point eight trillion dollars into ETFs, 0:02:19.440 --> 0:02:22.120 just a massive amount of money. So I think the 0:02:22.520 --> 0:02:26.120 concept of what vehicles are people choosing and then what 0:02:26.240 --> 0:02:29.399 is the kind of the strategy of those underlying vehicles 0:02:29.440 --> 0:02:32.080 is something that's pretty important to start with. 0:02:32.400 --> 0:02:32.440 You. 0:02:32.600 --> 0:02:36.040 Once you get into ETF specifically and you look at 0:02:36.080 --> 0:02:39.480 the share of passive relative to active flows, that dynamic 0:02:39.560 --> 0:02:41.600 is shifting as well. To your point, So if we 0:02:41.639 --> 0:02:44.079 go back to twenty nineteen, I think it was less 0:02:44.120 --> 0:02:47.360 than ten percent of flows, we're going into two active. 0:02:48.080 --> 0:02:51.480 If you look at twenty twenty five, you're over thirty percent. 0:02:51.639 --> 0:02:55.639 So that's materially different and there I think that there 0:02:55.720 --> 0:02:59.359 is more options for investors, for sure, but I think 0:02:59.360 --> 0:03:02.480 it has to be still contextualized. Of it's a big 0:03:02.720 --> 0:03:05.640 choice of the ETF vehicle over the mutual fun vehicle, 0:03:05.680 --> 0:03:09.000 and I really don't see that reversing. So I mean 0:03:09.160 --> 0:03:09.880 market leadership. 0:03:09.880 --> 0:03:11.480 If we just think about the market right now, it's 0:03:11.480 --> 0:03:15.240 still pretty concentrated, you know, handful or so megacap names 0:03:15.720 --> 0:03:18.120 in this type of environment, you know, most people think 0:03:18.120 --> 0:03:20.400 that passive tends to work. Well, why do you think 0:03:20.440 --> 0:03:23.040 we're really seeing this push towards active right now? 0:03:24.440 --> 0:03:27.040 I think there's a few different things. Because I think 0:03:27.200 --> 0:03:31.880 with passive, so I think about passive and active as 0:03:31.880 --> 0:03:35.200 being way more of a spectrum than like take a 0:03:35.240 --> 0:03:38.080 company like Meta, for example, is it a value stock 0:03:38.160 --> 0:03:41.520 or is it a growth stock? According to MSCI right now, 0:03:41.560 --> 0:03:44.360 it's a value stock. According to Russell, right now, it's 0:03:44.400 --> 0:03:47.440 a growth stock. So is that a passive decision or 0:03:47.480 --> 0:03:50.880 is that an active decision? Right there? These they're even 0:03:51.560 --> 0:03:56.200 among indexes. If it's a non total market index, I 0:03:56.360 --> 0:03:59.520 contend that there's still some form of security selection that 0:03:59.600 --> 0:04:02.880 is going on. Right you have to determine how is 0:04:02.880 --> 0:04:04.920 it how are we constituting it as a value stock? 0:04:05.000 --> 0:04:08.080 What's our ceiling for a small cap portfolio or a 0:04:08.120 --> 0:04:11.280 floor for a mid or large cap portfolio. These are 0:04:11.320 --> 0:04:15.360 active decisions. And so if we look at the growth 0:04:15.400 --> 0:04:18.520 in indexing and where it's come from, I really don't 0:04:18.520 --> 0:04:20.760 think a lot of it has come from people stepping 0:04:20.800 --> 0:04:23.960 back and just buying the total market. That's happening, but 0:04:24.080 --> 0:04:27.120 not nearly to the same level as people are buying 0:04:27.200 --> 0:04:29.760 components of the market that can be sectors, that can 0:04:29.800 --> 0:04:32.440 be styles, that can be market cap segments, it can 0:04:32.480 --> 0:04:35.400 be factors as well. Right, different sort of slices of 0:04:35.440 --> 0:04:38.600 the market that technically track an index. There's a set 0:04:38.640 --> 0:04:41.000 of rules, there's a methodology that you can go and read, 0:04:41.360 --> 0:04:44.960 and so the funds are tracking that index. But is 0:04:45.000 --> 0:04:48.160 that really passive. No, I don't really think that it is. 0:04:48.240 --> 0:04:50.400 I think that it might be passive at implementation, but 0:04:50.440 --> 0:04:53.520 there's still some active security selection that's going on. It's 0:04:53.560 --> 0:04:57.159 just a matter of who's doing it. So has it 0:04:57.200 --> 0:05:01.359 been concentrated at the top? Yes? What's really led to 0:05:01.400 --> 0:05:04.680 that two things. There's been really tremendous earnings growth at 0:05:04.680 --> 0:05:06.760 the top end of the market, and there's also been 0:05:06.800 --> 0:05:09.719 some pretty significant multiple expansion, Right, so as fast as 0:05:09.760 --> 0:05:13.760 the earnings have come out, the prices have extended further 0:05:13.839 --> 0:05:19.360 beyond that, they've risen even faster. I think it's still 0:05:19.360 --> 0:05:21.880 a time where folks should not be overlooking the rest 0:05:21.880 --> 0:05:24.200 of the market. I would contend there's still plenty of 0:05:24.279 --> 0:05:27.400 really really good opportunities that are out there where you 0:05:27.480 --> 0:05:30.279 can get a lot of the same characteristics that you 0:05:30.360 --> 0:05:33.240 might appreciate in a total market kind of passive strategy. 0:05:33.240 --> 0:05:36.920 You can get things like broad diversification, low turnover, low fees. 0:05:37.360 --> 0:05:41.080 Those options exist, but you can still pay attention to valuations, right, 0:05:41.120 --> 0:05:43.159 That's really one thing we try to center ourselves on 0:05:43.440 --> 0:05:46.280 at Avontics is paying attention to valuations, and so I 0:05:46.960 --> 0:05:51.120 think there's still an element of just not paying attention 0:05:51.160 --> 0:05:54.359 to price and isolation, not paying attention to fundamentals and 0:05:54.400 --> 0:05:57.600 isolation thinking about those in concert. There's always a place 0:05:57.600 --> 0:06:00.680 for that in the portfolio. So the further I. 0:06:00.600 --> 0:06:04.600 Mean Evantis is kind of known for its systematic equity approach. 0:06:05.560 --> 0:06:07.440 How does that approach kind of change the way you 0:06:07.440 --> 0:06:10.320 think about where active you know, adds value. I know 0:06:10.360 --> 0:06:13.200 you mentioned valuations, but if you go a little deeper. 0:06:13.800 --> 0:06:17.600 Yeah, so the systematic piece of it, right, we get 0:06:17.640 --> 0:06:19.839 a lot of questions around well what does that mean? 0:06:20.040 --> 0:06:22.960 Does it just mean you're a quant right? And I 0:06:23.000 --> 0:06:25.200 think I think even with some of these labels, and 0:06:25.440 --> 0:06:27.560 I'm going to stay it sound maybe like a curmudgeon 0:06:27.600 --> 0:06:29.120 as it comes to all these labels. So I don't 0:06:29.160 --> 0:06:32.360 mean to, but I think sometimes you get categorized as 0:06:32.360 --> 0:06:34.840 a manager by things that you don't do relative to 0:06:34.920 --> 0:06:37.800 things that you do. So the fact that we are 0:06:37.839 --> 0:06:42.279 going down going and sitting across the table from you know, 0:06:42.360 --> 0:06:46.039 CEOs and CFOs of portfolio companies and listening to them 0:06:46.080 --> 0:06:49.679 about their outlook for their respective businesses and it's like, oh, well, 0:06:49.760 --> 0:06:52.400 you must not be a fundamental manager. We care about 0:06:52.440 --> 0:06:54.919 fundamentals as much as anybody out there. I would contend 0:06:54.960 --> 0:06:57.280 as much as or more than anybody out there. What 0:06:57.360 --> 0:07:00.560 the strength the underlying fundamentals of businesses are relative to 0:07:00.600 --> 0:07:03.240 their prices, if they're going to have a spot in 0:07:03.279 --> 0:07:05.560 our portfolio or not. But we're trying to do it 0:07:05.600 --> 0:07:08.240 in a really objective way. And so when I think 0:07:08.279 --> 0:07:12.120 about systematization, that's existed for a long time, right, it's 0:07:12.160 --> 0:07:14.760 existed ever since computers have been around, is to varying 0:07:14.800 --> 0:07:17.600 degrees and forms. If we think about kind of the 0:07:17.680 --> 0:07:21.120 market and options for people to invest, and how that's 0:07:21.120 --> 0:07:23.720 evolved over time, it used to be everybody was just 0:07:23.760 --> 0:07:26.280 out picking stocks, right there. There were stock pickers, and 0:07:27.160 --> 0:07:29.520 maybe some things started to get systematized a little bit 0:07:29.520 --> 0:07:32.880 within there. But I would argue the systematization really started 0:07:32.920 --> 0:07:36.240 with indexing of people started to build indexes of you know, 0:07:36.320 --> 0:07:40.120 large cap indexes or small cap indexes, but really just 0:07:40.120 --> 0:07:42.800 just looking at how big is the company in the market. 0:07:42.880 --> 0:07:45.080 That's the share it makes up of the index, and 0:07:45.120 --> 0:07:47.040 that's the share it makes up of your portfolio, and 0:07:47.040 --> 0:07:50.440 that's really it that's now advanced a fair bit more 0:07:50.560 --> 0:07:53.160 right over a long period of time of different styles 0:07:53.200 --> 0:07:56.760 of indexes and different factors and things. So at avontis 0:07:56.800 --> 0:08:00.120 what we think about in terms of the systematization is 0:08:00.200 --> 0:08:03.760 there's parts of our process that if you can systematize it, 0:08:04.080 --> 0:08:07.360 you can do it faster, you can do it less expensively, right, 0:08:07.400 --> 0:08:10.400 you can do it more more efficiently, and potentially even 0:08:10.400 --> 0:08:13.520 at higher quality and better quality control checks than those things. 0:08:13.560 --> 0:08:16.880 So anything that we're doing in a very repetitive, repeative, 0:08:17.920 --> 0:08:21.440 repeated frequency, we try to make sure we have good 0:08:21.440 --> 0:08:23.480 systems in place to help us do that, to help 0:08:23.520 --> 0:08:26.840 us do it really consistently, really cost efficiently, because going 0:08:26.920 --> 0:08:29.240 back to the days of just the pure stock picking, 0:08:29.760 --> 0:08:33.280 you know that that's a pretty labor intensive and costly 0:08:33.360 --> 0:08:35.480 kind of an exercise to go and do this really 0:08:35.480 --> 0:08:38.880 deep due diligence on individual portfolio companies. So if I 0:08:38.880 --> 0:08:42.600 can systematize aspects of that and deliver a portfolio that's 0:08:42.640 --> 0:08:47.240 significantly lower fee but still has that end that sort 0:08:47.280 --> 0:08:50.920 of bend toward valuations and having good risk management and 0:08:50.920 --> 0:08:52.600 everything else, we think that that can be a really 0:08:52.600 --> 0:08:53.959 great deal for investors. 0:08:55.360 --> 0:08:57.160 You know, you mentioned you know kind of a spectrum 0:08:57.160 --> 0:09:00.520 of you know, between active and passive and you know, 0:09:00.520 --> 0:09:02.280 what do you think you know? And we also talked 0:09:02.320 --> 0:09:04.520 about the different things that are labeled as active today 0:09:04.559 --> 0:09:06.160 and you know that could that can mean quite of 0:09:06.160 --> 0:09:08.800 different things. What do you think you know of what's 0:09:08.960 --> 0:09:13.520 actually labeled active today? What's genuinely differentiated versus just you know, 0:09:13.800 --> 0:09:16.760 repackage factors, you know, exposure, you know, I know there's 0:09:16.760 --> 0:09:19.679 a lot of smart beta that you know, some consider active, 0:09:19.800 --> 0:09:21.320 some don't. 0:09:21.920 --> 0:09:24.960 I think about this question in various forms a lot 0:09:25.080 --> 0:09:27.640 because I talk to a lot of allocators who are 0:09:27.679 --> 0:09:32.280 building portfolios, and they're building portfolios using all of these 0:09:32.320 --> 0:09:36.559 different types of tools and approaches together in a strategy. Right, 0:09:36.679 --> 0:09:41.080 So they're using things that are index cores or index lead, 0:09:41.160 --> 0:09:44.600 they're using smart beta factor base, they're using what would 0:09:44.600 --> 0:09:47.520 be considered maybe a more concentrated active strategy. They're using 0:09:47.559 --> 0:09:51.200 all these different things inside of a portfolio. And so 0:09:51.320 --> 0:09:54.440 where I come back to is that idea of so 0:09:54.720 --> 0:09:58.480 around active, right if we because I think there's a 0:09:59.440 --> 0:10:01.720 there's a really big piece as we think about around 0:10:01.760 --> 0:10:05.960 active is unless you are holding every stock in the 0:10:06.000 --> 0:10:09.480 market at its market cap weight, there is some level 0:10:09.480 --> 0:10:12.920 of active in your portfolio, and so you get into 0:10:12.960 --> 0:10:15.760 a matter of well who is making those decisions? Are 0:10:15.800 --> 0:10:19.600 you making them as an allocator? Is there an index 0:10:19.679 --> 0:10:24.560 house or another asset manager who's making them on your behalf? 0:10:25.160 --> 0:10:28.600 And as you think about the idea of well what 0:10:28.640 --> 0:10:32.079 am I trying to achieve with that allocation? What kind 0:10:32.080 --> 0:10:34.679 of risk am I setting myself up for as I'm 0:10:34.720 --> 0:10:36.880 taking that? Am I doing it in the most cost 0:10:36.920 --> 0:10:41.199 effective way possible? Those start to become really important questions 0:10:41.240 --> 0:10:46.480 to answer because the concept of like repackaged factor exposure 0:10:46.800 --> 0:10:49.880 being passive, right, I think the idea is like, well, 0:10:49.880 --> 0:10:52.640 if it's if it's just factor exposure, that's kind of 0:10:52.640 --> 0:10:55.600 a passive exposure. I say, that's really still quite active. 0:10:55.920 --> 0:10:58.120 All of those things are really active decisions. It's a 0:10:58.120 --> 0:11:01.480 matter of who's making them and then how cost effectively 0:11:01.520 --> 0:11:03.760 are they able to do it? So where I come 0:11:03.800 --> 0:11:06.400 back to you know, I think if you think about 0:11:06.440 --> 0:11:10.480 from an attribution framework, right, you can always do an 0:11:10.480 --> 0:11:13.760 attribution on a portfolio and see how much of it 0:11:13.920 --> 0:11:18.000 was an allocation effect versus a selection effect. But even 0:11:18.000 --> 0:11:20.760 once you're into that kind of attribution world, well, the 0:11:21.120 --> 0:11:23.360 attribution lens that I'm looking at it through. If I'm 0:11:23.400 --> 0:11:26.320 looking at it through a sector or through a specific 0:11:26.360 --> 0:11:28.320 set of factors or whatever else, I'm going to have 0:11:28.360 --> 0:11:30.840 different betas in different kind of alpha terms. Right, So, 0:11:30.920 --> 0:11:34.079 even all the models have their own biases that can 0:11:34.120 --> 0:11:37.559 be built into them. What I think about I think 0:11:37.600 --> 0:11:41.520 about the allocator, who is really on the hook for 0:11:41.559 --> 0:11:43.840 this decision at the end of the day. They have 0:11:43.920 --> 0:11:47.240 to think about, well, do I have a goal? Do 0:11:47.280 --> 0:11:49.720 I have a goal that I'm trying to outperform my 0:11:49.840 --> 0:11:53.160 benchmark by? And we could have probably an hour long 0:11:53.200 --> 0:11:55.599 conversation just on benchmarking, David. So I'm not going to 0:11:55.880 --> 0:11:58.520 subject everybody to that today. But if I have a 0:11:58.840 --> 0:12:03.200 policy benchmark that we agree is reasonable, and then it's 0:12:03.240 --> 0:12:06.800 what's my goal in outperforming that portfolio benchmark and how 0:12:06.840 --> 0:12:09.280 am I going to get there? I can do it 0:12:09.400 --> 0:12:14.319 by me the allocator, trying to tactically overweight and underweight 0:12:14.440 --> 0:12:19.240 regions or sectors or styles or market cap segments that 0:12:19.360 --> 0:12:21.679 I think are more attractive or less attractive at different 0:12:21.720 --> 0:12:25.360 points in time. That's one option. I can put factors 0:12:25.559 --> 0:12:27.439 on top of it, right, I can lean towards value. 0:12:27.480 --> 0:12:30.640 I can lean towards quality or profitability if you have 0:12:30.960 --> 0:12:33.160 folks who do it that way, or I can outsource 0:12:33.240 --> 0:12:35.679 a lot of the stock selection to folks who are 0:12:35.679 --> 0:12:37.600 going and trying to find what they believe are the 0:12:37.600 --> 0:12:41.720 best companies. So build a portfolio of many concentrated active 0:12:41.760 --> 0:12:44.680 strategies and then look at my factor exposure and maybe 0:12:44.679 --> 0:12:46.520 try to offset some of if I don't like it. Right, 0:12:46.640 --> 0:12:48.600 there's so many different choices, But if you don't have 0:12:48.640 --> 0:12:51.200 a goal for what you're trying to achieve above and 0:12:51.240 --> 0:12:53.840 beyond that benchmark, then it's really hard to talk about 0:12:53.840 --> 0:12:56.600 what risk is and what risk looks like because that 0:12:56.720 --> 0:12:58.680 concept of it. If I want to outperform by a 0:12:58.760 --> 0:13:01.160 percent and a half, well, how much active risk do 0:13:01.200 --> 0:13:04.600 I have to take to make that a reasonable achievable goal? 0:13:05.080 --> 0:13:07.079 And how much of that am I outsourcing the decision 0:13:07.160 --> 0:13:10.360 versus I'm keeping it I have control. The more you 0:13:10.600 --> 0:13:14.120 have active managers in that camp, the more you're outsourcing it, 0:13:14.200 --> 0:13:16.480 and they may decide to do something differently right. They 0:13:16.480 --> 0:13:19.200 may change the stocks versus what they add last quarter, 0:13:19.320 --> 0:13:21.400 last year, and that might change the way they look 0:13:21.400 --> 0:13:24.920 in the portfolio relative to what else you have. So 0:13:25.040 --> 0:13:28.240 at avontis. One thing that's really important for us is 0:13:28.720 --> 0:13:31.640 we know anytime we're being hired, there's this trade off 0:13:31.679 --> 0:13:35.360 between we're being hired to deliver that underlying asset class, 0:13:35.400 --> 0:13:37.320 but they're choosing us because they think we can do 0:13:37.400 --> 0:13:40.319 better than just market cap weighting within that universe. So 0:13:40.360 --> 0:13:42.959 we have to think about managing that trade off effectively, 0:13:42.960 --> 0:13:44.600 and I would argue that we're as good as anybody 0:13:44.640 --> 0:13:47.079 out there doing that of making sure that sort of 0:13:47.160 --> 0:13:50.319 jobs one and two are designed. The portfolio is what 0:13:50.480 --> 0:13:53.439 does a good job of delivering that underlying intended asset class, 0:13:53.440 --> 0:13:55.280 and we do our job. We'd play that role in 0:13:55.280 --> 0:13:58.240 the allocation, but we have more information about differences than 0:13:58.280 --> 0:14:01.080 expector returns across stocks, and we can use that to 0:14:01.160 --> 0:14:04.280 not really meaningfully change the risk profile of the strategy. 0:14:04.320 --> 0:14:07.160 We might have some tracking her to a small value 0:14:07.160 --> 0:14:09.719 benchmark and our small value strategy, but it's not going 0:14:09.760 --> 0:14:12.719 to meaningfully contribute to an active risk or tracking error 0:14:13.720 --> 0:14:16.200 to the overall market level versus just using a small 0:14:16.240 --> 0:14:18.440 value index fund. So we think it can be a 0:14:18.520 --> 0:14:21.480 really effective tool for folks to use in those allocations, 0:14:22.040 --> 0:14:24.640 But the differentiation has to come through in that net 0:14:24.640 --> 0:14:26.120 a fee result at the end of the day. 0:14:27.160 --> 0:14:29.640 So, you know, if we think about what has to 0:14:29.680 --> 0:14:32.320 be true for an active strategy to have some sort 0:14:32.320 --> 0:14:35.440 of durable edge after costs. You know, you mentioned, you know, 0:14:35.520 --> 0:14:38.280 having a research process, and you know, is there things 0:14:38.320 --> 0:14:40.320 that you know just have you know, they kind of 0:14:40.360 --> 0:14:43.560 contribute to being able to outperform over a longer period 0:14:43.600 --> 0:14:46.240 of time. You know, I know that some managers might 0:14:46.240 --> 0:14:48.360 get lucky in some periods, but you know, like. 0:14:48.440 --> 0:14:50.800 To have that durable edge. What else do you think 0:14:50.800 --> 0:14:54.320 goes into it? I think I think there's two elements 0:14:54.360 --> 0:14:56.560 to it. I would say, there's let's let's talk about 0:14:56.640 --> 0:15:00.080 process and then let's talk about costs. So on the 0:15:00.120 --> 0:15:04.120 process side, this probably isn't so well defined. So I'm 0:15:04.160 --> 0:15:07.120 gonna I'm gonna do my best to define it, and 0:15:07.240 --> 0:15:09.640 you'll have to judge, or I guess the audience will 0:15:09.680 --> 0:15:14.320 judge while I define it. So I tend to differentiate 0:15:14.400 --> 0:15:17.400 between a manager or a process that's really focusing on 0:15:17.520 --> 0:15:21.280 signals versus one that's that's focused on valuations. So if 0:15:21.280 --> 0:15:24.560 one is really really focused on signals, of I've identified 0:15:24.560 --> 0:15:28.200 something that I think the market is is mispricing and 0:15:28.360 --> 0:15:30.720 there's a there's the signal that gives me that information, 0:15:31.240 --> 0:15:36.240 and so I'm gonna hammer that and and extract a 0:15:36.280 --> 0:15:40.200 premium because of it. Right, And they're constantly having to 0:15:40.800 --> 0:15:44.280 sort of rotate through what those signals are because they're 0:15:44.320 --> 0:15:46.960 being arbitrage away because other people are identifying those same 0:15:47.000 --> 0:15:51.240 signals and kind of crowding into those traits. That requires 0:15:51.360 --> 0:15:53.880 a lot of signals, and it requires a pretty high 0:15:53.960 --> 0:15:57.120 rate of frequency in terms of the turnover among those signals. 0:15:57.400 --> 0:15:59.880 So that process is one that I would say as 0:15:59.880 --> 0:16:03.040 a really high bar in terms of constantly having to 0:16:03.440 --> 0:16:07.400 refresh and find those new sort of areas of mispricing. 0:16:07.960 --> 0:16:10.760 What we do is much more grounded in valuations, and 0:16:10.800 --> 0:16:13.640 I would argue that that's a lot more stable and persistent. Right, 0:16:13.720 --> 0:16:17.640 The chances of a relationship between a lower price company 0:16:17.640 --> 0:16:20.280 relative to fundamentals and a higher price company relative to 0:16:20.320 --> 0:16:25.320 fundamentals of that premium over time flipping and going negative 0:16:25.360 --> 0:16:27.280 for long periods is not something that makes a lot 0:16:27.320 --> 0:16:30.560 of sense to me. Right. The magnitude of those premiums 0:16:30.600 --> 0:16:33.560 may change, but the concept of if I'm paying a 0:16:33.560 --> 0:16:35.640 lower price to get the same level of equity and 0:16:35.680 --> 0:16:38.360 profits in a business, and over time, I expect that 0:16:38.440 --> 0:16:40.840 to compound at a higher rate I get better returns. 0:16:41.200 --> 0:16:43.280 I don't, you know, I'm very comfortable with the long 0:16:43.400 --> 0:16:46.200 term nature of that and conviction that. So that's really 0:16:46.240 --> 0:16:49.920 the process piece. On the cost piece, there's a large 0:16:49.920 --> 0:16:52.840 asset consultant that throughout sort of a two thirds one 0:16:52.880 --> 0:16:56.440 third they believe that a manager should eat no more 0:16:56.480 --> 0:17:00.520 than a third of their excess return. So I don't 0:17:00.520 --> 0:17:04.240 think that's an unreasonable kind of a bogie if you 0:17:04.240 --> 0:17:06.040 think about a two thirds one third split of the 0:17:06.040 --> 0:17:09.160 client keeps two thirds and the manager keeps a third. 0:17:10.760 --> 0:17:13.680 At Avontas, So we've had strategies up since since September 0:17:13.720 --> 0:17:16.280 twenty nineteen. If I look at the strategies that have 0:17:16.359 --> 0:17:18.840 been around, you know since that time, the split that 0:17:18.880 --> 0:17:21.320 we've given to investors is closer to ninety ten, right, 0:17:21.400 --> 0:17:23.720 as far as ninety percent of the access return going 0:17:23.960 --> 0:17:26.639 the investors ten percent for Avantas. So I feel like 0:17:26.680 --> 0:17:29.760 we've done a really good job for investors or investors 0:17:29.800 --> 0:17:33.200 have gotten some really good value add from our strategies. 0:17:34.080 --> 0:17:35.920 Do you think I kind of want to just talk 0:17:35.920 --> 0:17:38.119 on the process a little bit more, you know, if 0:17:38.160 --> 0:17:40.240 we talk about the edge is do you see that 0:17:40.280 --> 0:17:42.920 coming from a different place in twenty nineteen versus today 0:17:43.000 --> 0:17:45.399 or is it kind of still just valuations kind of 0:17:45.520 --> 0:17:46.040 driving that. 0:17:46.680 --> 0:17:51.040 Yeah, Son, running these portfolios right this, there's a lot 0:17:51.080 --> 0:17:53.840 that goes into it. So you know, you think about 0:17:53.920 --> 0:17:56.480 the way we look at equity markets and you know 0:17:56.640 --> 0:17:59.560 we've got I think about it. There's different ways to 0:17:59.560 --> 0:18:02.320 describe it, but it's really a singular kind of foundation 0:18:02.920 --> 0:18:06.760 or view of being able to map or differentiate expector 0:18:06.760 --> 0:18:10.280 returns across stocks. We point that capability at different areas 0:18:10.280 --> 0:18:12.800 of the market. We've got large cap only portfolios, mid 0:18:12.800 --> 0:18:16.560 cap only portfolios, small cap only portfolios. We've got portfolios 0:18:16.600 --> 0:18:18.000 that just do it in the US or do it 0:18:18.000 --> 0:18:21.040 in non yes developed markets or emerging markets. So there's 0:18:21.080 --> 0:18:25.840 a lot of different sort of fishing ponds right where 0:18:25.840 --> 0:18:28.680 we're applying this, but we have one way of fishing. 0:18:29.000 --> 0:18:32.240 DA said, we're doing this across more than fourteen thousand 0:18:32.240 --> 0:18:37.600 companies across more fifty some odd countries every single day, right, 0:18:37.680 --> 0:18:41.200 So that's a lot of data that requires some really 0:18:41.240 --> 0:18:43.880 really good systems and checks in place to make sure 0:18:43.920 --> 0:18:47.000 you've got clean data that you're organizing it effectively, and 0:18:47.080 --> 0:18:51.280 that you're serving it up to really informed portfolio managers 0:18:51.280 --> 0:18:53.720 investment people who can interpret the outputs of that and 0:18:53.800 --> 0:18:56.680 use it to make good decisions. Right, So I would 0:18:56.720 --> 0:19:00.720 contend that you need to have expertise in all those areas. 0:19:00.760 --> 0:19:02.520 I would contend that you need to be paying attention 0:19:02.920 --> 0:19:05.159 to all those areas because you don't know where the 0:19:05.200 --> 0:19:07.040 next edge is actually going to come from. It can 0:19:07.080 --> 0:19:10.200 come from many different aspects within that, but it takes 0:19:10.320 --> 0:19:12.760 all of it together working in concert to create a 0:19:12.760 --> 0:19:15.720 good portfolio. Right. If we said, well we've got really 0:19:15.760 --> 0:19:19.240 strong portfolio managers, but our systems are crap, that's not 0:19:19.280 --> 0:19:21.920 going to lead to a good outcome. Right, You need 0:19:21.960 --> 0:19:24.639 all of it together. Sometimes people ask us that of 0:19:24.680 --> 0:19:27.400 what's more important is that the systems of the portfolio managers, 0:19:27.400 --> 0:19:29.320 And tongue in cheek, I say, well, what do you 0:19:29.359 --> 0:19:31.879 like most about pizza? Right? Do you like the sauce? 0:19:31.880 --> 0:19:33.760 Do you like the cheat? It tastes good because it 0:19:33.760 --> 0:19:37.160 all works together. And our portfolios we think they work 0:19:37.200 --> 0:19:38.560 well because everything works well together. 0:19:39.680 --> 0:19:41.080 So would you say, I mean, is there anything you 0:19:41.119 --> 0:19:45.320 think that investors underestimate about how these portfolios are implemented, 0:19:45.520 --> 0:19:50.120 you know, like whether it's trading rebalancing our costs. 0:19:49.920 --> 0:19:52.480 It probably depends on the lens at which they're viewing 0:19:52.520 --> 0:19:54.520 it through, because I think they could underestimate a lot. 0:19:54.760 --> 0:19:57.760 I think the biggest one, back to the earlier comment, 0:19:58.200 --> 0:20:01.280 is it's not a self driving process, right. These portfolios 0:20:01.280 --> 0:20:04.800 aren't way most so we've got somebody who's at the 0:20:04.840 --> 0:20:07.520 helm who is making sure like it's never going to 0:20:07.560 --> 0:20:10.760 be a computer model that's sending orders to market. It's 0:20:10.760 --> 0:20:13.919 a portfolio manager who's looking at things and saying, is 0:20:13.960 --> 0:20:17.280 this reasonable? Does this make sense? Right? We talked about 0:20:17.320 --> 0:20:20.600 wanting to systematize anything that we're doing with a very 0:20:20.640 --> 0:20:22.760 high rate of frequency so that you can do it 0:20:22.800 --> 0:20:25.239 more efficiently and do it more cost effectively. But there 0:20:25.280 --> 0:20:27.520 will be exceptions. There will be new things that pop up, 0:20:27.520 --> 0:20:30.200 and you need portfolio managers to be able to interpret 0:20:30.240 --> 0:20:33.280 those and make decisions and surface them to the team. 0:20:33.400 --> 0:20:37.239 So I feel like that's one piece for sure. You 0:20:37.280 --> 0:20:40.119 can't just set it and forget it. Not not even close. 0:20:41.040 --> 0:20:43.760 But the other thing that I think is it relates 0:20:43.480 --> 0:20:47.760 to systematic strategies and maybe even more broadly, the communication 0:20:48.240 --> 0:20:50.600 around them, I think is really really important setting and 0:20:50.640 --> 0:20:54.600 managing expectations effectively for investors, because it doesn't matter what 0:20:54.680 --> 0:20:57.280