WEBVTT - A Quant Takes on Microcaps 0:00:14.040 --> 0:00:17.240 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.320 --> 0:00:20.400 My name is Mike Reagan. I'm a senior editor at Bloomberg, 0:00:20.560 --> 0:00:23.959 and I'm aldowna higher across acid reporter with Bloomberg. This 0:00:24.000 --> 0:00:27.040 week on the show. While the headlines coming from the 0:00:27.080 --> 0:00:30.640 banking sector have been nothing short of terrifying this month, 0:00:31.160 --> 0:00:34.720 yet the stock market just keeps chugging along, especially the 0:00:34.760 --> 0:00:38.000 tech sector. In fact, the NASDAC one hundred index is 0:00:38.200 --> 0:00:41.440 about to snap a streak of four straight quarterly declines. 0:00:41.960 --> 0:00:44.840 That's its longest losing streak in more than twenty years. 0:00:45.360 --> 0:00:47.479 So what's going on? Is it just a return to 0:00:47.520 --> 0:00:51.440 the days when growth stocks would reliably outperform after value 0:00:51.479 --> 0:00:54.320 had its brief time in the sun, or is it 0:00:54.400 --> 0:00:57.000 something else going on. We're gonna get into it with 0:00:57.080 --> 0:01:00.120 a quant who also has some very interesting thoughts on 0:01:00.120 --> 0:01:03.920 a topic we hardly ever talk about around here, microcaps, 0:01:04.560 --> 0:01:07.280 which val Donna leads me to put you on the 0:01:07.319 --> 0:01:10.720 spot and ask what's your favorite microcap stock? My favorite 0:01:10.760 --> 0:01:12.240 micro Well, I was going to say, you missed an 0:01:12.240 --> 0:01:14.600 opportunity to make a great pun. You could have said, 0:01:14.640 --> 0:01:18.400 like a small topic, you know, good, Oh my gosh, 0:01:18.840 --> 0:01:23.640 what's my favorite microcap? Oh my gosh, you really are 0:01:23.680 --> 0:01:26.520 giving me on a spot I don't even know any 0:01:26.560 --> 0:01:28.160 I gotta admit I didn't know any I looked, I 0:01:28.200 --> 0:01:30.640 looked them up, and now I know what's your favorite? 0:01:30.680 --> 0:01:34.200 What's your favorite one? Well, I'm gonna not reveal that, 0:01:34.280 --> 0:01:36.920 but I will say it's it's a fascinating field and 0:01:36.959 --> 0:01:39.480 there's a bunch year to day that are up like 0:01:39.560 --> 0:01:42.800 two hundred percent if you look at the Russell microcap 0:01:42.880 --> 0:01:44.800 in next. So I'm glad we've got the perfect guest 0:01:44.840 --> 0:01:46.880 to break it down for us. Oh my gosh, is 0:01:46.880 --> 0:01:49.920 it a lot of like biotech? A lot of biotech? Yeah, 0:01:50.280 --> 0:01:52.720 a lot of biotech. Oh my gosh. Okay, well, then 0:01:52.800 --> 0:01:55.640 let's bring our guests in. It's Patrick McDonough Managing director 0:01:55.720 --> 0:01:59.320 at Pegum Quantitative Solutions. Thank you so much for joining us, 0:02:00.000 --> 0:02:01.680 Thanks for having me, glad to be here to talk. 0:02:02.160 --> 0:02:04.600 Before we got started with today's interview, you and I 0:02:04.640 --> 0:02:06.760 were chatting and you said you would keep equations to 0:02:06.840 --> 0:02:11.120 a minimum during our during our podcast recording, So I 0:02:11.160 --> 0:02:13.560 wanted to ask you to just lay out your role 0:02:13.639 --> 0:02:16.679 for us. Sure. Sure, I'm a portfolio manager on the 0:02:16.760 --> 0:02:21.600 Quantitative Equity Team, Impegium Quantitative Solutions. I know everybody loves 0:02:21.600 --> 0:02:25.519 to talk to to quant portfolio managers, those mats, all 0:02:25.520 --> 0:02:30.160 the all the regressions and interactions across factors, So I'll 0:02:30.160 --> 0:02:35.320 make sure to lay that awfully thick today. Absolutely well, Patrick, 0:02:35.440 --> 0:02:38.720 let's get started just with a sort of overview of 0:02:38.760 --> 0:02:41.040 what we've seen in the market so far this year. 0:02:41.120 --> 0:02:43.600 I mean, you know, I mentioned in the intro that 0:02:44.400 --> 0:02:46.920 strong rally and tech. I think the NAZAC one hundreds 0:02:46.960 --> 0:02:51.080 up like fourteen fifteen percent this year. What do you 0:02:51.120 --> 0:02:53.800 think's going on? Is it a growth value thing or 0:02:53.880 --> 0:02:57.520 is it you know, texts the best place to hide 0:02:57.520 --> 0:02:59.920 out from the troubles in the banking sector. How are 0:03:00.160 --> 0:03:03.120 you sort of explaining this action we've seen in the 0:03:03.120 --> 0:03:06.320 market this year. I think it looks like a value 0:03:06.400 --> 0:03:09.960 versus growth On the surface, you're seeing tech go do 0:03:10.080 --> 0:03:14.120 really well. You're seeing well, actually it almost happens inter 0:03:14.320 --> 0:03:17.520 day in some cases, but by and large, for the 0:03:17.919 --> 0:03:19.959 year to day period, we've seen tech do really well. 0:03:20.200 --> 0:03:22.880 We've seen a reversal of the cyclicals that drove value 0:03:23.000 --> 0:03:25.720 last year. So at first clients it's said nice simple 0:03:25.919 --> 0:03:29.320 value versus growth story with growth coming back. But I 0:03:29.320 --> 0:03:31.000 think if you peel that back a couple of layers, 0:03:31.000 --> 0:03:34.560 what you're actually seeing is fear or at least on certainty, 0:03:34.639 --> 0:03:37.920 driving the equity market, and that's being played out with 0:03:38.040 --> 0:03:43.240 these larger tech names that have done well in the past. 0:03:43.640 --> 0:03:45.160 But I don't necessarily think you're going to do all 0:03:45.200 --> 0:03:47.760 that well going forward in the space. So I actually 0:03:47.800 --> 0:03:50.280 think it's a little bit more of a size effect 0:03:50.480 --> 0:03:54.240 that we're seeing at this point rather than actual growth. 0:03:54.320 --> 0:03:56.240 And you believe the names that are doing it. You know, 0:03:56.280 --> 0:04:02.400 it's Apple, it's Microsoft, Salesforce, and these are really big companies. 0:04:02.880 --> 0:04:06.280 These are also really really expensive companies and videos more 0:04:06.320 --> 0:04:09.800 than fifty times forward earnings at this point. So it's 0:04:09.800 --> 0:04:11.680 hard to see how these are really growth companies. They've 0:04:11.680 --> 0:04:14.160 already come, they've already grown, they've been growing for you know. 0:04:14.280 --> 0:04:17.080 They you could argue that haven't really grown for half 0:04:17.080 --> 0:04:19.719 a decade at this point. They're just so big. If anything, 0:04:19.720 --> 0:04:23.240 they're very profitable companies at this point, but it's kind 0:04:23.240 --> 0:04:25.200 of hard to see them as actual growth companies. And 0:04:25.480 --> 0:04:28.279 from a factor, I can't help it. I'm a quanta. 0:04:28.279 --> 0:04:31.800 I have to From a factor perspective. These aren't really 0:04:31.839 --> 0:04:34.520 growth companies. If anything, they show up a size of 0:04:34.520 --> 0:04:37.640 course larger cap names even within say the SMP or 0:04:37.720 --> 0:04:40.200 the NASDAC or they show up as quality names. These 0:04:40.200 --> 0:04:43.680 are companies that are very, very consistent and persistent when 0:04:43.680 --> 0:04:46.600 it comes during an earnings perspective. Really not growth at 0:04:46.600 --> 0:04:48.840 this point. I think this is a place to hide 0:04:49.160 --> 0:04:52.880 for equity investors at this point. Yeah, just what we've 0:04:53.240 --> 0:04:56.359 forever considered growth have grown into becoming I guess the 0:04:56.360 --> 0:04:59.720 blue chip defensive stocks almost that you know, if you 0:04:59.760 --> 0:05:01.680 have to belong something, these are the names you go 0:05:01.720 --> 0:05:05.000 with exactly. In a lot of ways, this reminds me 0:05:05.040 --> 0:05:07.479 of sort of the two thousand and eight beginning of 0:05:07.480 --> 0:05:10.400 twenty nineteen period. So it's not two thousand and eight 0:05:10.440 --> 0:05:11.839 at least, which is a good thing. It's not a 0:05:11.839 --> 0:05:14.359 banking crisis. Governments around the world have really stepped up 0:05:14.400 --> 0:05:17.760 and put a floor under financials. But it is a 0:05:17.760 --> 0:05:19.800 little bit I think of the market hoping that the 0:05:19.839 --> 0:05:23.080 FED rising rates isn't going to last, and we're going 0:05:23.160 --> 0:05:25.280 to see a reversal of that in the short term. 0:05:25.720 --> 0:05:27.920 If you remember, going back to twenty eighteen, the FED 0:05:27.960 --> 0:05:30.360 started to raise rates, The market kind of freaked out 0:05:30.360 --> 0:05:32.920 a little bit. You saw sort of the re emergence 0:05:32.920 --> 0:05:35.080 of the fangs fangs two point zero at this point 0:05:35.839 --> 0:05:40.080 coming back, and everything else in the market maybe discovered 0:05:40.080 --> 0:05:42.920 there or rolled over a little bit. COVID put an 0:05:43.000 --> 0:05:45.400 end to that particular trade at this point, but it 0:05:45.440 --> 0:05:47.839 was a last gasp of what had been almost a 0:05:47.839 --> 0:05:50.520 ten year bull rally at that point. People looking for 0:05:50.640 --> 0:05:54.320 those those companies that would be economically insensitive or at 0:05:54.360 --> 0:05:58.160 least agnostic to any downturn in the markets. You compare 0:05:58.160 --> 0:06:00.320 that to the fixed income market, and wow, it's it's 0:06:00.360 --> 0:06:03.320 two very very different messages that we're seeing right now. 0:06:03.960 --> 0:06:06.040 The fix income market right now kind of looks like 0:06:06.600 --> 0:06:09.000 the six space mount in Disney World. Right You kind 0:06:09.000 --> 0:06:11.440 of ride up the curve a little bit going up 0:06:11.480 --> 0:06:13.599 to the to the sixth month, and then it rolls 0:06:13.640 --> 0:06:16.720 on down until the ten year, twenty year, get a 0:06:16.760 --> 0:06:20.200 little bit of a bump going into the thirty year. 0:06:21.080 --> 0:06:24.040 But that's not posed for sort of a growth market. 0:06:24.400 --> 0:06:28.039 That's not i think signaling happy landings or at least 0:06:28.400 --> 0:06:31.120 anything other than volatility going forward. Where the equity market 0:06:31.200 --> 0:06:33.000 right now, it's like it's fine we're whistling past this 0:06:33.080 --> 0:06:37.520 particular graveyard and hoping that continues forever. I guess at 0:06:37.520 --> 0:06:39.680 this point hard to see that with rates, you know, 0:06:40.080 --> 0:06:43.440 in the short term rifle of five percent. But maybe 0:06:43.600 --> 0:06:48.080 we'll have, you know, forever, forever, perpetual growth, but that 0:06:48.160 --> 0:06:51.200 seems unlikely. Mike. I don't know about you, but I 0:06:51.240 --> 0:06:58.039 love roller coaster rides, especially in the market. My kids 0:06:58.120 --> 0:07:03.599 get this season passes to six Flags. I can't even 0:07:03.640 --> 0:07:08.280 watch them go on is really fun. Yeah, so that's 0:07:08.320 --> 0:07:11.680 a new Jersey staple. Patrick. I have a follow up 0:07:11.720 --> 0:07:14.640 question about the what you were just saying about the 0:07:14.760 --> 0:07:17.320 fixed income market, because a couple of weeks ago, what 0:07:17.400 --> 0:07:18.880 a lot of people were saying was that there was 0:07:18.920 --> 0:07:21.200 a short squeeze in the fixed income market and that's 0:07:21.200 --> 0:07:24.240 why we were seeing all those moves. So I'm wondering if, like, 0:07:24.400 --> 0:07:27.400 can we even trust the signals that the treasury market 0:07:27.440 --> 0:07:31.360 is sending us if we did see some of those 0:07:31.400 --> 0:07:34.280 moves happening because of the short squeeze. That's a that's 0:07:34.280 --> 0:07:36.600 a tough question, right, It's it's it kind of depends 0:07:36.600 --> 0:07:39.440 on what As an acid owner, your your time horizon is. 0:07:40.000 --> 0:07:42.080 It's been a really nice trading signal if you've been 0:07:42.360 --> 0:07:44.320 sort of a high frequency quant and you've been moving 0:07:44.320 --> 0:07:47.560 in and out sort of middlesecond trading and uh and 0:07:47.560 --> 0:07:50.040 and taking advantage of the volatilities we saw up until 0:07:50.080 --> 0:07:52.760 the last week or so. I think at the very least, 0:07:52.760 --> 0:07:55.600 what it does give investors though, as an opportunity that 0:07:55.680 --> 0:07:57.920 we haven't had in a long time. People aren't really 0:07:57.960 --> 0:08:01.000 necessarily pulling out of this large cap tech trades that 0:08:01.040 --> 0:08:03.680 we were talking about. There hasn't been a rebalance and 0:08:03.720 --> 0:08:06.640 to say staples or something like that, which is more negative, 0:08:06.880 --> 0:08:08.760 but people are sitting on cash and you can actually 0:08:08.800 --> 0:08:10.840 get a yield for the first time, you know, in 0:08:11.200 --> 0:08:14.640 a decade decade plus, and that's really I think going 0:08:14.720 --> 0:08:18.800 to have an opportunity. Well, you have a rising opportunity 0:08:18.840 --> 0:08:20.440 set now, so that's going to have a big impact 0:08:20.720 --> 0:08:23.760 I think on more markets go that marginal dollar, that 0:08:23.920 --> 0:08:27.480 next investment dollar. You don't have to chase the current trends. 0:08:27.720 --> 0:08:30.360 You can actually sit there in a money market fund 0:08:30.360 --> 0:08:32.920 at close to five percent and kind of not panic 0:08:33.240 --> 0:08:34.920 and kind of maybe just kind of cool your jets 0:08:34.920 --> 0:08:37.800 and rest for a little bit. And that's a nice option. 0:08:37.840 --> 0:08:39.679 I think for people to have. So whether it's a 0:08:40.400 --> 0:08:44.000 pure signal of an impending recession or not, I will see. 0:08:44.040 --> 0:08:46.199 It's kind of hard, in my view, my personal view, 0:08:46.240 --> 0:08:49.520 to see where this goes. Have this not end and 0:08:49.559 --> 0:08:52.240 at least some sort of pull back. The consumer keeps 0:08:52.240 --> 0:08:54.600 proving me wrong. There seems to be this interesting fight 0:08:54.679 --> 0:08:57.559 going on now between the Fed and the American consumer. 0:08:58.559 --> 0:09:00.880 But it's it's rare, I think, to have to go 0:09:00.960 --> 0:09:04.520 from basically zero to what's called five percent interest rates 0:09:04.559 --> 0:09:08.400 and not just break a few relatively small, obscure banks. 0:09:09.080 --> 0:09:12.559 I would expect to see people start pulling back, And anecdotally, 0:09:12.800 --> 0:09:14.960 you know, I'm starting to see it, just just amongst 0:09:15.200 --> 0:09:18.680 my friends, my family. Things are getting awfully expensive out there, 0:09:19.080 --> 0:09:21.079 and it's hard to see how that doesn't have some 0:09:21.120 --> 0:09:24.520 sort of consequences for the economy going forward. You know, Patrick, 0:09:24.559 --> 0:09:27.280 the one thing you hear so often is, well, yes, 0:09:27.320 --> 0:09:32.480 the Fed is raising rates. Jerome Powell pretty much signaled 0:09:32.480 --> 0:09:35.880 that he does not see any environment in which they'd 0:09:35.920 --> 0:09:38.480 actually cut rates this year, regardless of what the short 0:09:38.559 --> 0:09:41.600 term interest rate market is saying. But on the other hand, 0:09:41.679 --> 0:09:44.280 that Fed balance sheet that everyone keeps a close eye 0:09:44.320 --> 0:09:49.840 on has really ramped up aggressively, and obviously, to me, 0:09:49.920 --> 0:09:54.120 there's a big difference between quantitative easing, where they are, 0:09:54.280 --> 0:09:58.520 you know, expanding the balance sheet by buying assets from banks, 0:09:58.520 --> 0:10:03.520 buying treasuries and mortgage back securities, and this version of 0:10:03.520 --> 0:10:06.800 it where they're just extending loans through the discount window 0:10:06.840 --> 0:10:09.920 and through this new term loan facility for for banks 0:10:09.920 --> 0:10:13.120 that are struggling. But yet there's this almost this knee 0:10:13.160 --> 0:10:17.280 jerk reaction that hey, the Fed's outing liquid liquidity, the 0:10:17.280 --> 0:10:22.320 bounce sheet is expanding, This is unabashedly uh good for 0:10:22.440 --> 0:10:24.880 risk assets. How do you think about that? I mean 0:10:24.880 --> 0:10:27.560 that that to me seems like kind of a risky 0:10:27.600 --> 0:10:31.520 interpretation of what the Fed's doing. Um, and I'm just 0:10:31.559 --> 0:10:34.760 curious how you how you view it. I think that's 0:10:35.200 --> 0:10:37.160 I would agree with your with your view that that's 0:10:37.200 --> 0:10:39.760 that's that's a bit of a risky way to view 0:10:39.760 --> 0:10:42.200 what's going on with the FED. And maybe we can 0:10:42.240 --> 0:10:44.480 kind of flip that and see what people have what 0:10:44.600 --> 0:10:48.080 the impact has been across the quote un risk free 0:10:48.200 --> 0:10:52.160 quote unquote risk free asset class over the last even 0:10:52.160 --> 0:10:54.599 just year to date, right, I mean, suddenly duration is 0:10:54.640 --> 0:10:57.040 really mattered and suddenly if you just looked at the 0:10:57.040 --> 0:10:59.720 whip sawing of the two year much less, you know, 0:10:59.760 --> 0:11:03.600 any thing longer dated duration matters. Again, so even risk 0:11:03.679 --> 0:11:07.920 free holding maturity government securities aren't exactly risk free if 0:11:07.920 --> 0:11:11.280 it doesn't if it doesn't line up properly with the 0:11:11.320 --> 0:11:14.240 liabilities on your balance sheet. So trying to kind of 0:11:14.320 --> 0:11:18.280 time this from from a risk asset perspective is I 0:11:18.280 --> 0:11:20.000 think a bit of a fools game at this point. 0:11:20.280 --> 0:11:22.480 Probably better to take advantage of that yield bring you 0:11:22.480 --> 0:11:25.120 can get it played the defenses at least a little bit. 0:11:25.320 --> 0:11:27.360 And again, even if you look at the tech names 0:11:27.360 --> 0:11:29.800 that are doing well in the equity market, they're not 0:11:29.920 --> 0:11:32.760 really the risky end of the spectrum. This isn't the 0:11:32.760 --> 0:11:37.640 startup end, This isn't sort of the aggressive well perhaps 0:11:37.720 --> 0:11:41.120 maybe fifty times and age we mentioned is a bit 0:11:41.120 --> 0:11:44.680 on the extreme end, but very big, very stable, very 0:11:44.720 --> 0:11:47.920 safe companies. I don't really think we're going to see 0:11:48.320 --> 0:11:51.440 much of a risk on market in the foreseeable future. 0:11:51.960 --> 0:11:54.439 And we started see some of those wobbles across more 0:11:54.520 --> 0:11:57.679 risky ends of that's called CPAs or hedge funds, people 0:11:57.720 --> 0:11:59.920 getting kind of wiped out a little bit in that 0:12:00.080 --> 0:12:03.280 space and even across private equity. Now, maybe I'm a 0:12:03.280 --> 0:12:06.160 little bitter as a public's guy and having a daily 0:12:06.320 --> 0:12:08.360 marked to mark rather than being able to kind of 0:12:08.640 --> 0:12:12.240 hide on my multi year contracts there. So maybe we 0:12:12.280 --> 0:12:13.960 should all take this with a grant of salt. But 0:12:14.040 --> 0:12:16.600 it is interesting to see some of the news breaking 0:12:16.640 --> 0:12:20.280 on some really big PE players having to finally again 0:12:20.360 --> 0:12:22.880 finally you can tell my bias there. But that's that 0:12:23.000 --> 0:12:25.520 marked to mark across some of these other asset class 0:12:25.520 --> 0:12:29.280 So I'm not really sure the market is digested all 0:12:29.320 --> 0:12:31.520 this free capital that we've had it from that's called 0:12:31.600 --> 0:12:34.520 the thread round one. If this is round two, I 0:12:34.520 --> 0:12:36.080 don't know where that goes in a safe in a 0:12:36.120 --> 0:12:38.520 safe manner, I'm wondering patch of what you think the 0:12:38.559 --> 0:12:41.480 market should be pricing in, or the stock market should 0:12:41.520 --> 0:12:44.199 be pricing in at this point. I've read this interesting 0:12:44.760 --> 0:12:48.280 note from City this week that said something like stock 0:12:48.480 --> 0:12:52.360 neither stucks nor bonds have priced in a recession, and 0:12:52.559 --> 0:12:55.360 as Mike just mentioned, you know the market is expecting 0:12:55.360 --> 0:12:57.480 some cuts later this year. What should the market be 0:12:57.520 --> 0:13:00.520 pricing in? I think what the market should be focusing 0:13:00.520 --> 0:13:03.440 on is actually earnings at this point, and I think 0:13:03.440 --> 0:13:05.080 that would be kind of the way to it to 0:13:05.120 --> 0:13:08.160 adjust the pricing going forward. We kind of had a 0:13:08.200 --> 0:13:10.880 little bit of a reset of of the pe ratio 0:13:10.960 --> 0:13:14.080 the last year or so as markets came down last year, 0:13:14.400 --> 0:13:17.840 but earnings haven't moved much and there hasn't been that 0:13:17.840 --> 0:13:21.480 that resetting of future expectations of what companies can be 0:13:21.520 --> 0:13:24.920 doing and what companies can be doing. I think, really realistically, 0:13:26.040 --> 0:13:28.240 I'll keep picking on the big tech names because they've 0:13:28.240 --> 0:13:31.720 been the winner's space. If you've got billions of hundreds 0:13:31.720 --> 0:13:34.079 of billions of earnings coming in a year, how can 0:13:34.120 --> 0:13:37.160 you really be priced at twenty or thirty or whatever 0:13:37.160 --> 0:13:40.480 the multiple is going forward. You're so big that seems 0:13:40.520 --> 0:13:44.520 really unrealistic unless there's some sort of new product or 0:13:44.600 --> 0:13:48.640 new area for growth. That's hard to see right. We're 0:13:48.640 --> 0:13:50.720 seeing it now. I guess if we want to pick 0:13:50.760 --> 0:13:56.600 on sort of the AI approach, where you're more consumer focused, 0:13:58.280 --> 0:14:00.840 big tech companies have been going hasn't exactly. I mean, 0:14:00.880 --> 0:14:03.040 it's been fun. We've been hearing all sorts of crazy 0:14:03.080 --> 0:14:05.800 news stories about people falling in love with chatbots or 0:14:06.040 --> 0:14:09.360 chat box suddenly becoming aware and threatening to destroy the world. 0:14:09.600 --> 0:14:11.360 I think that was an eighties movie I grew up on, 0:14:11.480 --> 0:14:15.240 but the actual impact of that from a revenue perspective 0:14:15.280 --> 0:14:18.560 seems premature at this point, I would say, so, I 0:14:18.600 --> 0:14:22.000 think we need to as as a market collectively start 0:14:22.040 --> 0:14:26.520 reevaluating what more reasonable growth expectations are and I think 0:14:26.560 --> 0:14:29.840 that will help reset the p that's going to be 0:14:29.880 --> 0:14:33.600 the prices down that's going to I think reawaken what 0:14:33.800 --> 0:14:37.560 more realistic upside or quite honestly downside would be in 0:14:37.600 --> 0:14:39.960 the market. And that's not to say that markets are 0:14:40.640 --> 0:14:44.960 miss identifying quote unquote good companies. I think what they're 0:14:44.960 --> 0:14:48.240 missing though, is where companies go from here. So where's 0:14:48.240 --> 0:14:52.880 the upside? If you think back to Microsoft, right, you know, 0:14:53.080 --> 0:14:57.080 good company has been a good company for decades, really 0:14:57.120 --> 0:15:01.960 got hammered at the end of the tech bubble, but 0:15:02.600 --> 0:15:04.640 wasn't going out of business. There was no there's no 0:15:05.160 --> 0:15:08.640 fear of Microsoft going out of season to exist. It 0:15:08.680 --> 0:15:11.480 was still a good company. The price just didn't move 0:15:11.600 --> 0:15:14.160 for well over a decade, so it wasn't necessarily a 0:15:14.160 --> 0:15:16.320 good investment at that point, and I think that's where 0:15:16.360 --> 0:15:19.920 we maybe need to start thinking about redistributing capital for 0:15:20.000 --> 0:15:23.320 that actual upside. Potential rather than just kind of seeing 0:15:23.320 --> 0:15:32.400 the companies to stay paved. Patrick, let's get into that 0:15:32.600 --> 0:15:36.480 notion about microcaps, because I know you've done. I've been 0:15:36.520 --> 0:15:39.680 looking into them a bit lately. Talk to us about, 0:15:39.840 --> 0:15:43.160 you know what you've researched, what you found, how we 0:15:43.160 --> 0:15:46.360 should think about microcaps. Part of this started out with 0:15:47.480 --> 0:15:52.280 trying to identify companies for that actual upside potential, right 0:15:52.280 --> 0:15:55.000 if you think about it, from pure economic growth, almost 0:15:55.000 --> 0:15:57.600 an academic study of getting back in to say like, hey, 0:15:57.720 --> 0:16:00.200 where where are these companies with new ideas that have 0:16:00.200 --> 0:16:02.680 been overlooked or can come in and disrupt markets and 0:16:02.880 --> 0:16:05.520 actually disrupt So we're not going to pay for the 0:16:05.520 --> 0:16:09.040 the Ugers and again the Microsoft, So for the apples 0:16:09.040 --> 0:16:11.520 who have already come and disrupted and are now the 0:16:11.960 --> 0:16:14.920 established players. Where can you find some of those new places? 0:16:15.600 --> 0:16:18.040 And it started with tech, It started with tech and biotech. 0:16:18.080 --> 0:16:20.480 It was kind of looking into, you know, what are 0:16:20.480 --> 0:16:23.480 the structures of those names and is there an opportunity 0:16:23.560 --> 0:16:27.160 outside of the VC or private equity space and really 0:16:27.200 --> 0:16:30.240 realizing that the microcaps have been very overlooked. Now there's 0:16:30.240 --> 0:16:31.920 a lot of choppiness down there, there's a lot of 0:16:31.960 --> 0:16:34.320 noise down there. You have to be very very careful. 0:16:34.360 --> 0:16:37.200 You have to be very systematic or structured. I of 0:16:37.200 --> 0:16:39.640 course think wants to invest in every it wants or 0:16:39.680 --> 0:16:41.480 the answer to every question. But but you really do 0:16:41.520 --> 0:16:44.360 have to be diversified and clean and structured in the 0:16:44.400 --> 0:16:47.320 way that you do it in a microcraft space. But 0:16:47.400 --> 0:16:49.960 you also have the opportunity for other segments of the 0:16:50.000 --> 0:16:55.440 economy that aren't really necessarily in vogue, so things like banks, right, 0:16:55.480 --> 0:16:58.840 you could actually diversify in financials. You can look at 0:16:59.800 --> 0:17:03.240 industrials that are actually down sort of the real end 0:17:03.240 --> 0:17:06.200 of the economic spectrum, if you will, and get into 0:17:06.240 --> 0:17:09.159 that space in a more diversified way through microcap And 0:17:09.200 --> 0:17:12.359 it's also something that is not really played in from 0:17:12.560 --> 0:17:17.480 a traditional institutional investor space. It's something that people have 0:17:17.600 --> 0:17:20.880 historically avoided. Whether that's governance you need to give another 0:17:20.920 --> 0:17:22.760 manager who gets into space or look at it. Or 0:17:22.800 --> 0:17:24.600 you could get your growth from other or at least 0:17:24.600 --> 0:17:26.520 you assume do you get your growth from other segments 0:17:26.520 --> 0:17:28.840 of the market, which means it's not crowded. So it's 0:17:28.880 --> 0:17:30.479 an area where you can go in and get a 0:17:30.520 --> 0:17:33.679 lot of upside even above just the pure beta in 0:17:33.720 --> 0:17:36.439 the microcap space, so so very exciting, I think from 0:17:36.480 --> 0:17:38.879 an opportunity to set, at least in the long term. 0:17:39.040 --> 0:17:43.760 I feel like individuals stock selection would be tough in 0:17:43.800 --> 0:17:47.120 that space though, I mean, is there a systematic way 0:17:47.160 --> 0:17:48.560 to do it? Is you know, would you buy an 0:17:48.560 --> 0:17:52.200 ETF just buy everything? You know, I'm thinking of PGM 0:17:52.240 --> 0:17:56.400 with what a trillion and a half dollars to work with, 0:17:56.600 --> 0:17:59.560 you know, and quants in general tend to have billions 0:17:59.600 --> 0:18:01.439 and billion dollars to put to work. Like, how do 0:18:01.480 --> 0:18:08.320 you how do you approach microcaps systematically? I think you 0:18:08.400 --> 0:18:09.800 hit one of the nails on the head right there 0:18:09.800 --> 0:18:13.080 with knowing your limitations. This isn't a space where you're 0:18:13.080 --> 0:18:14.879 going to have billions and billions of dollars to be 0:18:14.920 --> 0:18:16.919 able to play in. If you do so, you're just 0:18:16.960 --> 0:18:19.959 going to completely overwhelm the space. So to be very 0:18:20.040 --> 0:18:23.200 very tailored in what you're doing. So in the US 0:18:23.280 --> 0:18:26.159 microcap space, you know, we probably want to put in 0:18:26.760 --> 0:18:30.600 a billion or show at a maximum level at this point, 0:18:30.760 --> 0:18:32.959 So you're limiting the upside that you can from an 0:18:33.000 --> 0:18:35.880 AUM growth. But you're doing that so you can preserve 0:18:35.960 --> 0:18:38.080 the actual ability to do stock selection. The ability to 0:18:38.119 --> 0:18:41.440 actually add value in the space you have to come 0:18:41.480 --> 0:18:44.920 out of to a certain extent from a philosophical perspective 0:18:45.160 --> 0:18:48.400 of hey, we still want to harvest the same underlying 0:18:48.440 --> 0:18:51.760 economic principles that we do as quants in the larger 0:18:51.760 --> 0:18:54.200 cap space. But you can't just take the same old 0:18:54.240 --> 0:18:56.760 model and slap it down there and call it a solution. 0:18:57.160 --> 0:18:59.080 You have to look and see what actual works. So 0:18:59.119 --> 0:19:01.360 you have to understand that there's going to be more 0:19:01.400 --> 0:19:04.080 sentiment driven trades that go on there, a little bit 0:19:04.080 --> 0:19:06.440 more volatility, or in some cases a lot more volatility. 0:19:06.720 --> 0:19:08.520 You have to be really clean, you have to be 0:19:08.720 --> 0:19:11.760 very efficient, and you have to be really really experienced 0:19:11.760 --> 0:19:13.639 to trade in that space, particularly if you're doing it 0:19:13.680 --> 0:19:17.240 across multiple names. But the benefits of that or diversification 0:19:18.160 --> 0:19:20.560 a lot of upside potential, as I said, both in 0:19:20.600 --> 0:19:23.000 the space so you think the data, but also in 0:19:23.000 --> 0:19:25.000 the name selection that you're doing. But you have to 0:19:25.040 --> 0:19:27.560 be really really disciplined from a risk perspective as well. 0:19:27.720 --> 0:19:31.000 So this is where you have to have multiple, multiple holdings, 0:19:31.040 --> 0:19:32.760 so you're just not putting all of your eggs in 0:19:32.840 --> 0:19:36.520 one basket. So you go so far as to go 0:19:36.600 --> 0:19:40.000 to the OTC pink sheet type of markets, or they 0:19:40.080 --> 0:19:43.080 too risky to get involved with. It's a little risky. 0:19:43.119 --> 0:19:44.600 I think in that point, if you're going to start 0:19:44.600 --> 0:19:47.560 doing OTC, you would need some sort of information advantage 0:19:47.600 --> 0:19:49.680 to really want to play in that space. I don't 0:19:49.680 --> 0:19:51.639 think you need to. That's the fun part, though. You 0:19:51.640 --> 0:19:54.639 don't actually have to get in that space to add value. 0:19:55.160 --> 0:19:57.840 You can do it with the liquid names, and that's 0:19:57.880 --> 0:20:02.639 really where I think being systematic mic bias notwithstanding, but 0:20:02.840 --> 0:20:04.959 being systematic in the way that you're trading, right, So 0:20:05.000 --> 0:20:07.000 you have to be able to go out and make 0:20:07.040 --> 0:20:10.200 sure as you're picking the names you can actually harvest. 0:20:10.600 --> 0:20:12.800 We use the ADP measures for example, right we're looking 0:20:12.800 --> 0:20:15.960 at the average daily volume of certain names and making 0:20:15.960 --> 0:20:18.960 sure we don't get anywhere near max adv across any 0:20:19.000 --> 0:20:21.000 of these names, so that you actually have the space 0:20:21.080 --> 0:20:24.360 to come in and harvest the upside of that name 0:20:24.560 --> 0:20:26.879 without driving that name up on your own. If you 0:20:26.920 --> 0:20:28.639 come in, you drive the price up as you're buying it, 0:20:28.680 --> 0:20:30.439 there's no room for it to grow, so it's just 0:20:30.560 --> 0:20:32.760 bad business to do that. The other is you have 0:20:32.800 --> 0:20:35.399 to make sure you really have good relationships with your counterparts. 0:20:35.720 --> 0:20:38.719 It's not as liquid, although the adv and liquidity as 0:20:38.760 --> 0:20:41.840 a rule has been going up significantly microcaps, So this 0:20:41.920 --> 0:20:45.200 isn't twenty years ago, ten years ago. Even this is 0:20:45.320 --> 0:20:47.600 very very liquid markets. But you have to make sure 0:20:47.600 --> 0:20:50.520 you have good relationships with your counterparts. You might want 0:20:50.520 --> 0:20:53.199 to cancel trade halfway through if someone else is jumping 0:20:53.240 --> 0:20:55.480 up on that name. Be a little bit more comfortable 0:20:55.480 --> 0:20:58.080