Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: His name is Adam Carr, and he is head of
Speaker 1: Orbis US and portfolio manager at the company's global equity strategy.
Speaker 1: The firm manages over thirty seven billion dollars in assets.
Speaker 1: Orbis has just an absolutely fascinating history. Their founder was
Speaker 1: a portfolio manager at Fidelity for a while. His name
Speaker 1: is Alan Gray, and he went out and launched Alan
Speaker 1: Gray Limited in three eventually becoming South Africa's biggest private
Speaker 1: investment manager. They expanded in in nineteen nine to be
Speaker 1: more international, and that's when Orbis was created. The firm
Speaker 1: is really quite fascinating for so many reasons. Their track
Speaker 1: record has been outstanding. Their fee structure is fairly unique
Speaker 1: in the industry, very much aligning client's interests with the
Speaker 1: firm and the employees of the firm's interest I know
Speaker 1: everybody sort of pays lip service to that. These guys
Speaker 1: really do that. You pay for alpha and nothing else,
Speaker 1: and if the firm underperforms its benchmark, you get refunds
Speaker 1: on your fees and then some It's really very very
Speaker 1: unique and very interesting. In addition, their their structure. What
Speaker 1: Alan Gray did with his original shares is quite fascinating.
Speaker 1: All told, this is really quite an intriguing conversation. I
Speaker 1: think you're gonna find it quite interesting and unique in
Speaker 1: the world of investing. So, with no further ado, my
Speaker 1: conversation with Adam Carr of Orbits Investments. This is Masters
Speaker 1: in Business with very Ridholts on Bloomberg Radio. My special
Speaker 1: guest this week is Adam Carr. He is the head
Speaker 1: of Orbis US and portfolio manager for Orbis Investments, a
Speaker 1: firm which runs about thirty two billion dollars in assets.
Speaker 1: The firm's flagship global equity strategy has outperformed its benchmark
Speaker 1: m s c I World Index. Since it'sption, Orbits brings
Speaker 1: a unique fee structure to clients who only pay when
Speaker 1: the firm out performs. Adam Carr, Welcome to Bloomberg. Very
Speaker 1: thank you, Thank you for having me. I'm looking forward
Speaker 1: to it same here. So so let's let's start with
Speaker 1: your background before we work our way to Orbis. How
Speaker 1: did you first get interested investing? I read something that
Speaker 1: used to help your grandfather clean up banks at night,
Speaker 1: and you started reading docs that were lying around that
Speaker 1: led to an interest in finance. Give us a little
Speaker 1: background on that. I wish I was that precocious, UM.
Speaker 1: So taking it back, I first became captivated with the
Speaker 1: investing in middle school. I guess it was the late
Speaker 1: seventies early eighties. I grew up in Illinois, the South
Speaker 1: suburbs of Chicago, and I spent a lot of time
Speaker 1: with my grandfather. He was a janitor and a caretaker
Speaker 1: for our local savings and loan and I used to
Speaker 1: go with him every night to help clean the bank
Speaker 1: UM and I would mot florid and dump out waste
Speaker 1: paper baskets. And there was this really interesting newspaper in
Speaker 1: the garbage UM that looked different than anything that we
Speaker 1: had at home, or school or anywhere else. And I
Speaker 1: had these odd looking dot matrix photos on the cover. UM,
Speaker 1: and of course I was the Wall Street Journal, and
Speaker 1: I just was fascinated by looking at the paper trying
Speaker 1: to follow the stories. I can't say that I really
Speaker 1: understood it. I certainly wasn't reading bank documents, UM. But
Speaker 1: it was it was that that really started me and
Speaker 1: the journey of getting really interested in the market. On
Speaker 1: on Friday night, Um, we didn't have to go to
Speaker 1: the bank because we could go on Saturday. And we
Speaker 1: used to watch Louis Rukaiser's Wall Street Week every Friday night.
Speaker 1: In the beginning, you know, I would just I did
Speaker 1: it because it was a way to spend time with
Speaker 1: my grandfather. But over time I really came to enjoy it, um.
Speaker 1: And I think that was really just the genesis for
Speaker 1: me getting quite interested in markets and companies. The fascinating
Speaker 1: thing about that period is the pace of Wall Street
Speaker 1: Week and the pace of Rukaiser was so different than
Speaker 1: what we experienced today. Do you look back at that
Speaker 1: period as sort of a kindler, gentler era or was
Speaker 1: that just part of the inevitable evolution of finance? I mean,
Speaker 1: to be Ernest Perrea, I was nine or ten years old,
Speaker 1: so I can't say that I I could credit in
Speaker 1: contacts in full construct um, But it was just for
Speaker 1: whatever reason, it was just fascinating to me. Um. And
Speaker 1: UH really planted the seeds earnly. So so let's fast
Speaker 1: forward a little bit to your current philosophy. Not that
Speaker 1: when you were nine years old you talk about having
Speaker 1: four core pillars of your beliefs, thinking like a business owner, contrarian, thinking,
Speaker 1: long term perspective, and being unconstrained. Tell us about those
Speaker 1: four and and how that belief system developed. Yeah, so, um,
Speaker 1: it's probably helpful. And I'll dive in on the pillars
Speaker 1: just to give a little bit of context on Orbits.
Speaker 1: So Orbius is in its thirtieth year. We founded by
Speaker 1: a gentleman by the name of Alan Gray, South African.
Speaker 1: Um so what is Orbits were global equity specialists. Today
Speaker 1: we manage about thirty seven billion in a u M
Speaker 1: across the globe through a handful of long only, absolute
Speaker 1: return and multi asset strategies. Um Or of his Global
Speaker 1: Equity is our flagship strategy and it represents our total
Speaker 1: a UM. We're mostly institutional, with the exception of some
Speaker 1: retail and Australia in the UK. Our investment approach is
Speaker 1: pretty simple. At the end of the day, UM we
Speaker 1: stribed to by assets at a meaningful discount to intrinsic value. UM.
Speaker 1: I think the key term there is intrinsic value. We're
Speaker 1: not deep value managers who simply buy didactically based on
Speaker 1: low price to book UM. We try to think much
Speaker 1: more holistically about the true value of each business as
Speaker 1: an owner UM, and we try to go after it
Speaker 1: when there's some kind of dislocation. UM. We've got a
Speaker 1: deep team of analysts about thirty five all around the
Speaker 1: world in local markets. UM, and we're really of the
Speaker 1: mind that if you if you want to generate an outfit,
Speaker 1: you've got to go against the crowd and thinking act differently.
Speaker 1: Our strategies are equity strategies are all unconstrained, so they're
Speaker 1: gonna look very different to the benchmark, and we tend
Speaker 1: to run pretty concentrated. Our global strategy has got about
Speaker 1: sixty positions with our active share running over UM. Now,
Speaker 1: there's a couple of aspects about orbits that are pretty unique,
Speaker 1: one of which is how we think about fees. All
Speaker 1: of our structures are performance based. UM. We can dive
Speaker 1: into that more deeply, but in a in a nutshell,
Speaker 1: we're contrary and intrinsic value equity managers now in terms
Speaker 1: of the pillars and how they interact. I think it's
Speaker 1: it's worthwhile to say, you know, sort of our d
Speaker 1: n A of who we are is deeply rooted in
Speaker 1: our founder UM and his view. This is going all
Speaker 1: the way back to South Africa when he first launched
Speaker 1: our sister firm is that if you want to generate
Speaker 1: an alpha, you have to go against the crowd. UM.
Speaker 1: And I can still hear Allen to this day say,
Speaker 1: you know, if you want to be good, work hard,
Speaker 1: but if you want to be exceptional, you have to
Speaker 1: come at the problem completely differently. You got to you
Speaker 1: got to turn it on its head. UM. And so
Speaker 1: this really kind of informs the pillars, and I think
Speaker 1: of it kind of the way that Jim Collins talks
Speaker 1: about Flywheel, like there's no one silver bullet, it's the
Speaker 1: way that they interact together. UM. And so the first
Speaker 1: is this concept of independent thinking. UM. You have to
Speaker 1: attract and retain highly independent minded people, people that love
Speaker 1: and relish having a view that's different to others. That's
Speaker 1: the heart and soul I think of of how we
Speaker 1: try to construct our model UM. And then two, you
Speaker 1: have to structure the firm and the values and the
Speaker 1: culture that rewards independent minded people like to do things
Speaker 1: that are different. You have to create a structure that
Speaker 1: allows them to do that. One of the things that
Speaker 1: we do, all of our analysts manage their own paper portfolios,
Speaker 1: and so that it's quite different than a lot of shops.
Speaker 1: And I not picking on any shop, but in many
Speaker 1: places the analysts will, you know, in air quotes, pitch
Speaker 1: names to pms um for us. The analysts are putting
Speaker 1: forward what they would buy themselves and be accountable for objectively. UM.
Speaker 1: And it's interesting because when I talk about this in
Speaker 1: recruiting to prospective analysts, you can see some of some
Speaker 1: some analysts are really drawn to that. You can see
Speaker 1: them lean in, they're excited about it, and some lean
Speaker 1: back and like oh um, and you can tell that
Speaker 1: it it kind of intimidates them. And the point there
Speaker 1: is that it's it's it's a self reinforcing system that
Speaker 1: attracts people to us and helps us retain the individuals
Speaker 1: that are most aligned with that. And then is let's
Speaker 1: let me jump in right over here U before we
Speaker 1: get to the other pillars. I recall reading an article
Speaker 1: about you and the firm some time ago, um maybe
Speaker 1: it was and Barons, where one of the analysts was
Speaker 1: pitching Nike, which was rolling out this new fangled direct
Speaker 1: to consumer Nike dot Com idea and pitched to everybody
Speaker 1: in the firm, all called in from around the world,
Speaker 1: and was fairly savaged in in various critiques and counter
Speaker 1: arguments and pushback, but ultimately the firm ends up buying
Speaker 1: half a billion dollars worth worth of Nike, which has
Speaker 1: been a giant home run ever since. Um. Is that
Speaker 1: typical for the process? Is that how that usually runs? Yes,
Speaker 1: So that's a I mean, that's a great example there
Speaker 1: in the sense that you know any firms and again
Speaker 1: not a critique, but many firms will manage their portfolios
Speaker 1: on a committee basis, UM. And our beliefs is that
Speaker 1: the best decision, particularly contrarian decisions, are not made by committees.
Speaker 1: They're made by individuals have done the work and have
Speaker 1: a conviction and they're willing to be accountable for those decisions. UM. Now,
Speaker 1: we obviously don't put people in positions to move capital
Speaker 1: for clients right away. It's based on a demonstrative track record.
Speaker 1: But our capital allocators have demonstrated those track records. UM.
Speaker 1: And it's not a committee decision. And so in the
Speaker 1: Nike situation, it was a very contentious investment committee. UM.
Speaker 1: And in fact, you know myself and the analyst, UM,
Speaker 1: I would say we're on one side relative to the
Speaker 1: rest of the investment team. And the core issue there.
Speaker 1: I mean, nobody would would dispute that Nike is a
Speaker 1: great company and has great content and it's very creative
Speaker 1: and great athletes. But they were making a big pivot
Speaker 1: to go online and go direct, and the key question,
Speaker 1: the burning question, was will that be better and more
Speaker 1: profitable for Nike going forward. In our thesis was that
Speaker 1: in cutting out wholesale, you eliminate that margin and they'll
Speaker 1: be able to retain it. And there's a lot of
Speaker 1: other reasons why we think it's going to be better.
Speaker 1: I thought it was going to be better, but it
Speaker 1: was a very contentious issue. Um. We had the investment
Speaker 1: committee great discussion and debate. I mean, there were points
Speaker 1: raised that we step back and spend time on. But
Speaker 1: at the end of the day, as a portfolio manager,
Speaker 1: that I made a decision to take a position, UM,
Speaker 1: And that's the core premise of how we invest, of
Speaker 1: allowing individuals to express themselves where they have conviction. So
Speaker 1: that raises a second, somewhat related issue as to the
Speaker 1: difference between traditional value. You you very disdainily mentioned price
Speaker 1: to book, which has done quite poorly the past I
Speaker 1: don't know twenty years. Um, certainly the past that cade.
Speaker 1: But you keep bringing up intrinsic value, and I'm wondering
Speaker 1: how much of that intrinsic value allows that definition allows
Speaker 1: you to embrace more of a posture that includes some
Speaker 1: out of favor growth stocks for sure. So, UM, I
Speaker 1: think we we've got a thirty year track record. If
Speaker 1: you look across those thirty years, it's across many different
Speaker 1: cycles and market environments growth value UM. And we by
Speaker 1: far we tend to do best in you know, classic
Speaker 1: value markets. UM. I think where we differ from our peers, however,
Speaker 1: is that we we do okay in growth markets. UM.
Speaker 1: And why is that? We're not didactic? Um? First of all,
Speaker 1: what is value? We're not didactic around what value is
Speaker 1: in the sense that it's a it's a hard parameter
Speaker 1: around price to book or a specific pe metric above
Speaker 1: which we won't buy. What we really think about holistically
Speaker 1: is the business, the quality of the business, the durability
Speaker 1: of the cash flows, the ability of those cash flows
Speaker 1: to grow over time, the mode UM. And then we
Speaker 1: look at the price and we go after situations when
Speaker 1: we see a meaningful gap excuse me between those two UM,
Speaker 1: that's what we are as a manager, and I think
Speaker 1: you know, everybody likes to put you in a box, um,
Speaker 1: Morning Star, others. And the way we like to say
Speaker 1: it is our dot moves around, you know, don't put
Speaker 1: us in any one box. The dot moves around. And
Speaker 1: I think it's because the areas of the market that
Speaker 1: are offering the most value move around over time, UM.
Speaker 1: And that's something that we've always lived to UM and
Speaker 1: hopefully has been beneficial for our clients over time. So
Speaker 1: so you get to run the US segment of what
Speaker 1: what is a global portfolio. Obviously, the US market has
Speaker 1: been pretty dramatically out performing the rest of the world,
Speaker 1: not just in but pretty much since the end of
Speaker 1: the financial crisis and in oh nine. How long do
Speaker 1: you think this relative outperformance of US versus overseas is
Speaker 1: going to last? Are we ever going to see any
Speaker 1: form of mean reversion or have things aligned in such
Speaker 1: a way that hey, this could go on for who
Speaker 1: knows how long? Yeah? Um, sixty four thousand. Another question,
Speaker 1: I mean, to your point, Beer, I think you know,
Speaker 1: the returns in the US, which is where I live
Speaker 1: and breathe, have been sensational relative and historic context into
Speaker 1: SMP since two thousand nine is compounded at the nasdas
Speaker 1: compounded at two to three x the long term and
Speaker 1: seven to average UM. In some ways, it's surprising, in
Speaker 1: some ways not UM, and I'm not studied it empirically,
Speaker 1: so ticket with a grain of stalt, but you know,
Speaker 1: in speculating some of the drivers. I mean, I think
Speaker 1: the most dominant force in the market globally and in
Speaker 1: the US over the past decades been monetary intervention. UM
Speaker 1: has truly been unprecedented and by and large, and I'm
Speaker 1: sure others would would disagree, but I would say leadership
Speaker 1: for Nankee Yell and now pow UM has been pretty constructive.
Speaker 1: So I think that's been the context within which this
Speaker 1: has been enabled UM. But there's really been an insatiable
Speaker 1: appetite for growth, non cyclical growth, secular growth UM. And
Speaker 1: if you look at the market structure today, what do
Speaker 1: you see. I mean, the top five companies now six
Speaker 1: if you include Testla in there, in SMP, or of
Speaker 1: the of the SMP, which by historical standards is now
Speaker 1: quite concentrated, there's now over fifty stocks that traded more
Speaker 1: than ten times revenues UM. And that's just in the
Speaker 1: SMP and there's all kinds of stocks outside of it,
Speaker 1: like Snowflake and Door to Ash and Zoom that traded
Speaker 1: pretty heavy multiples UM. And so it's been underpinned by
Speaker 1: exceptional revenue and earnings growth and exceptional UM multiple expansion UM.
Speaker 1: And it's been that mix that's created this this cocktail
Speaker 1: combined with lower taxes and lower regulation and following wage
Speaker 1: burden UM, that's created a pretty powerful cocktail UM. So
Speaker 1: the most important question is where too from there? UM?
Speaker 1: Where to from here? And UM. You know, by historical constructs,
Speaker 1: spreads are quite wide, UM, quite wide. And you know,
Speaker 1: we don't make forecast and there's not a prediction as
Speaker 1: to when it will turn or why it'll turn UM,
Speaker 1: but we're of the beliefs that that will and should
Speaker 1: normalize in time UM. And I think sympatistically that's around
Speaker 1: the fact that it's unsustainable for the market to compound
Speaker 1: at that rate UM. And when you look back, looked
Speaker 1: at orbits is history go all the way back to you.
Speaker 1: I think Japan was something like of the World Index,
Speaker 1: and we had zero exposure to Japan on the view
Speaker 1: that that was extreme and grossly over valued. You go
Speaker 1: to two thousand Um. You know, there was an area
Speaker 1: of the market technology and we were on the other
Speaker 1: side of that and Tobaccos whatnot. Um. And and you
Speaker 1: look at today and those spreads are just as wide,
Speaker 1: if not wider. And we do, as we said today
Speaker 1: we have a pretty meanful underway to the US. I
Speaker 1: think the US is now sixty five sixty six of
Speaker 1: the World index and we are about half that in
Speaker 1: our global strategy. UM. So we're on the other side
Speaker 1: of that. UM. And it's interesting because, UM, you know,
Speaker 1: when you look at it, when you look at the
Speaker 1: data and you think about it, it seems like, you know,
Speaker 1: it's clear what one should think about doing. But when
Speaker 1: you're in the moment and it's been painful in getting there,
Speaker 1: it's hard to do. And I think that really speaks
Speaker 1: to the behavioral side of investing, which is one of
Speaker 1: the aspects of investing that it's always attracted me the most,
Speaker 1: is that it's most difficult when you're in those moments.
Speaker 1: And I think now it is one of those times. Huh,
Speaker 1: quite quite intriguing. Last s and about these topics. So
Speaker 1: you run the US segment of what is a global
Speaker 1: investment company? What is your day to day job, like,
Speaker 1: what what is your actual title? What are you responsible for?
Speaker 1: Are you running the team? Are you running the portfolio?
Speaker 1: Tell us exactly, UM, what what your job entails? Sure?
Speaker 1: So UM, I've been investing for about five years of
Speaker 1: public and private markets, last eighteen years at ORBITS. I
Speaker 1: joined Orvice in two thousand and two, and so today
Speaker 1: I'm responsible for the US efforts of the firm UM in.
Speaker 1: Our US team is is based in San Francisco. I'm
Speaker 1: one of the five capital allocators UM or PMS for
Speaker 1: the flagship global strategy. So I'm the PM for the
Speaker 1: U S strategy. That's my day to day, which is
Speaker 1: a lot of reading and a lot of interacting with
Speaker 1: my investment team UM in terms of sourcing and thinking
Speaker 1: about ideas. I also sit on our global Management Committee,
Speaker 1: which i've done for it's about fifteen years UM. But
Speaker 1: I think at the core, you know, I started as
Speaker 1: an analyst as a generalist in Bermuda, which is where
Speaker 1: the firm's headquartered UM and today I do the same thing.
Speaker 1: I picked up a lot of other responsibilities along the way,
Speaker 1: but first and foremost, you know, we're bottoms of fundamental
Speaker 1: stock pickers. As analysts understanding businesses. And that's what I've
Speaker 1: been the majority of my time doing. Huh, quite fascinating.
Speaker 1: You only take a fee when your funds outperform your benchmark,
Speaker 1: and not only that, you return fees when you underperform.
Speaker 1: Explain the genesis of this and how it works in
Speaker 1: the real world. So genesis, UM, And to do that,
Speaker 1: I'm just going to tie you back quickly buried to
Speaker 1: the kind of the four pillars to round that out.
Speaker 1: So pillar one people independent minded, to structure give them
Speaker 1: a space to be independent minded and express themselves. And
Speaker 1: the third pillar is around alignment UM. Is to seek
Speaker 1: aligned clients in a way that our incentives are truly aligned. UM.
Speaker 1: And then the forest pillar is to structure the firm's
Speaker 1: ownership to promote putting us in a position to take
Speaker 1: a long term view and differentiated actions. And just on
Speaker 1: that last point, you know, the firm is privately held,
Speaker 1: our founder vested interest into a charitable trust, so that
Speaker 1: charitable trust uniquely will own orbits in perpetuity UM. And
Speaker 1: significant to that is it allows us to take actions
Speaker 1: that are longer term and they're differentiated. And that that
Speaker 1: relates to the fees and I'll tie it so specifically
Speaker 1: on the fees UM. The genesis goes all the way
Speaker 1: back to the beginning in the core value around alignment. UM,
Speaker 1: we've only had performance fees in the history of the firm.
Speaker 1: Our original fee, if you go back to was a
Speaker 1: base fee of a hundred and fifty basis points, with
Speaker 1: a hundred basis points fulcrumkee up and down fully symmetrical. UM.
Speaker 1: There are structures evolved UM as the markets evolved and
Speaker 1: I think improved. So let me let me touch on
Speaker 1: the principles of any and I'll talk specifically. So in
Speaker 1: the perfect world, the client wouldn't pay any fees until
Speaker 1: they redeemed, at which time they would just pay based
Speaker 1: on the value that you added. UM. Obviously that's impractical
Speaker 1: because managers need to pay bills. But the principle of
Speaker 1: alignment around that is the key to our approach UM,
Speaker 1: and so we try to do that in two ways.
Speaker 1: The first is just management staff co invest in the
Speaker 1: same vehicles with the same fees and were the largest investor.
Speaker 1: And the second is that all of our fees of
Speaker 1: performance based fully metrical and we refund the fees when
Speaker 1: we underperform, so they only pay a fee if we're
Speaker 1: add anxiety and to the best example is what we
Speaker 1: call our zero based THEE option, which is for institutional
Speaker 1: clients of size and so they pay no base fee
Speaker 1: and they only pay a performance fee if we deliver
Speaker 1: alpha UM, and on that alpha the sharing ratios two
Speaker 1: thirds to the clients and one third to us as
Speaker 1: the manager UM. If we subsequently underperform, then those fees
Speaker 1: are refunded UM and they go into a trust account
Speaker 1: which fits there for the client in future. UM. It's
Speaker 1: important to think about the incentives there, because we you know,
Speaker 1: our incentives or not to grow a u M. We
Speaker 1: don't survive unless we generate alpha and add value UM.
Speaker 1: Which isn't to say that we can guarantee that we
Speaker 1: will do such. We can say that we'll fully align
Speaker 1: and we feel the pain when we don't deliver UM.
Speaker 1: What's interesting about this is we first introduced this respundable
Speaker 1: fee structure in two thousand and four UM, and I
Speaker 1: think you care to say that clients were pretty skeptical
Speaker 1: UM of the structure. I think there was a lot
Speaker 1: of questions around, you know, well, why would you do this?
Speaker 1: There must be some kind of got you in here. UM,
Speaker 1: this just has to be better for you and UM.
Speaker 1: But I think now we've had well over a decade
Speaker 1: of of history with the structure thing viewers speak to clients. UM,
Speaker 1: it's been it's been a wonderful alignment vehicle. UM. What
Speaker 1: we've seen in practices that when we go through periods
Speaker 1: of underperformance, which we inevitably do, UM, clients are reluctant
Speaker 1: to redeem because they've got fees sitting in that UM
Speaker 1: reserve account. And number one, it dampens that relative underperformance
Speaker 1: because you have those fees being credited back into You
Speaker 1: see an asset there and you're reluctant to crystallize it
Speaker 1: because you know it's there. Now for us as a manager,
Speaker 1: that ideal, because it means that we don't have lock
Speaker 1: ups or any restrictions that the clients are speaking with
Speaker 1: us is exactly the time when it's most critical for
Speaker 1: us as a manager, such that we're not fighting redemptions
Speaker 1: at that time when we have a draw down and
Speaker 1: allows us to lean into those positions UM when potentially
Speaker 1: it's most attractive to do so. And so that's UH,
Speaker 1: it's been a very powerful alignment between us and our clients.
Speaker 1: And one of the things that we we measure ourselves on,
Speaker 1: which I think doesn't get talked about enough in the
Speaker 1: industry is the behavioral penalty UM. And you can look
Speaker 1: at a manager with phenomenal track record UM, but what
Speaker 1: did the clients actually realized? And oftentimes that gap is
Speaker 1: quite why we obsess over fees and the lowest cost fees.
Speaker 1: But if you look at the actual data, the behavioral
Speaker 1: penalty blows away. In many cases the relative difference that
Speaker 1: you see UM in terms of wear manager strike fees,
Speaker 1: and what we've seen in practice over the past decade
Speaker 1: plus is that that behavioral gap has to come down considerably,
Speaker 1: which is act is directly tied to what we're trying
Speaker 1: to do in terms of our premise UM. So it's
Speaker 1: something that we've we've been very pleased with. Now I
Speaker 1: guess the other side of it is, you know, why
Speaker 1: why don't more people do it? But before we get
Speaker 1: to why more people don't do that, I want to
Speaker 1: make sure I fully get the details of the fault
Speaker 1: on fee. So institutional account I'm gonna assume a hundred
Speaker 1: million and up no base fee meaning no annual fee,
Speaker 1: so you outperform in a given year, and you take
Speaker 1: some of your fee, which is based on the alpha
Speaker 1: that's generated, and that goes into a trust that sits
Speaker 1: and waits for the eventual under performance and is then
Speaker 1: used to reimburse some of clients losses or or at
Speaker 1: least client under performance. Am I getting that more or
Speaker 1: less right? Yeah? Directionally, so UM two fees. So our
Speaker 1: ourdo base which is for institutional accounts above a hundred million,
Speaker 1: no base fee, a two thirds one third sharing ratio,
Speaker 1: and then we have our core which is for clients
Speaker 1: less than that institutional clients UM base fee, management fee
Speaker 1: with sharing ratio UM. Now use that as an example
Speaker 1: going forward. So we we generate alpha, it goes into
Speaker 1: what we call our reserve account. From that reserve account,
Speaker 1: it doesn't flow out to us as a manager until
Speaker 1: we accrue more than three of N a V in
Speaker 1: the reserve account, and once it goes above that threshold,
Speaker 1: it can flow out to us at a ratio at
Speaker 1: at a rate of one per annum um. So we're
Speaker 1: building up the reserve account before anything goes to us
Speaker 1: as the manager. That reserve account is actually invested reinvested
Speaker 1: in the funds, and so that that's what it shits
Speaker 1: in in the reserve account, and then in periods of underperformance,
Speaker 1: that underperformance at the same sharing ratio in this case
Speaker 1: is credited back to the nav of the client. The
Speaker 1: other thing that's important to mention here is that the
Speaker 1: client fee is the sorry. The fee is bespoke to
Speaker 1: the individual client and their experienced from inception, so they're
Speaker 1: not taking on the characteristics of the pool. It's specific
Speaker 1: to their individual experience. Makes sense. It's set up as
Speaker 1: an SMA, not as a fund. Is that what you're saying.
Speaker 1: It's a pooled vehicle, but the fee is got individual
Speaker 1: to them. I got it. It's very specific. So my
Speaker 1: firm we build quarterly and it's like a big deal.
Speaker 1: We're recording this the first week of the new year.
Speaker 1: Sometime this week. We're running uh different billings at Fidelity
Speaker 1: tuab A TD on clients and and it's a whole
Speaker 1: process to do you guys assess performance fees twice a month.
Speaker 1: How complicated is that? And what's the thinking behind that
Speaker 1: sort of performance fee assessment? What are the advantages and
Speaker 1: disadvantages of that? So we strike twice a month or
Speaker 1: when the client transacts um so it's an either or,
Speaker 1: and the reasoning and benefit is the see is is
Speaker 1: individual and to bespoke to the client, that's that's what
Speaker 1: it brings them UM. And you can imagine from a
Speaker 1: client perspective, there's you know, there's a lot of value
Speaker 1: in that UM. I think the disadvantage from a firm
Speaker 1: perspective is I think what you are alluding to is
Speaker 1: there's a there's an operational burden and complexity behind that UM.
Speaker 1: And when we launched this, going back to two thousand
Speaker 1: and four, you know, it was a meaningful investment operationally
Speaker 1: in capital to build out the infrastructure to to be
Speaker 1: able to support it. Quite interesting. So I first learned
Speaker 1: of you guys, and you in particular via a Wall
Speaker 1: Street Journal article written by Jason's Wage that was one
Speaker 1: of the first UM mainstream pieces really delving into the
Speaker 1: details of the fault room fee. And we're in our
Speaker 1: i A so we can't really do the same sort
Speaker 1: of UM symmetrical fee sharing that you guys do. The
Speaker 1: complications make it all about impossible. But but we were
Speaker 1: very much inspired by what you do it and created
Speaker 1: UM what we call milestone rewards, which is simply if
Speaker 1: you're an individual investor and you exhibit good behavior, meaning
Speaker 1: you complete your financial planning, you do an annual update,
Speaker 1: and you don't dabble with I don't like emerging market,
Speaker 1: so I'm gonna jettison that from my portfolio. UM, unbeknownst
Speaker 1: us to us on a random sort of thing, will
Speaker 1: end up dropping people's fees. After three years of good behavior, Hey,
Speaker 1: you've learned. We've helped to teach you the right way
Speaker 1: to do this, and now you're you're exhibiting better behavior.
Speaker 1: And besides, most of the heavy lifting is really in
Speaker 1: the first couple of years, so we'll we'll reduce UM
Speaker 1: your fees. So that was our response to your media coverage.
Speaker 1: What sort of response did you get to that media coverage?
Speaker 1: What did clients say, and what did press effective clients
Speaker 1: have to say. It's interesting from a client perspective because
Speaker 1: it's UM. You know, it's complex. So I think if
Speaker 1: you are an agent and you have to go and
Speaker 1: represent it to the board, it's it's viewed as complex
Speaker 1: and different UM. And you know, we know the appetite
Speaker 1: for those UM. The the clients that have been with
Speaker 1: us and have experienced it, I think tend to be
Speaker 1: our greatest advocates UM. And in a way this speaks
Speaker 1: a little bit to one of the points I mentioned
Speaker 1: earlier around the pillars is that it creates a bit
Speaker 1: of a self reinforcing mechanism. UM. What I mean by
Speaker 1: that is that clients that sort of intuitive intuitively understand
Speaker 1: this UM and can appreciate the bend if it's are
Speaker 1: drawn to us UM, whereas others aren't UM. And so
Speaker 1: we're not being shopped for the lowest fee, but for
Speaker 1: the best alignment UM, and and that works for us.
Speaker 1: We're not trying to be everything to everybody. And that
Speaker 1: sort of self selection aspect, I think is something that
Speaker 1: we've seen play out in practice. And then if you
Speaker 1: just look at the numbers in terms of the behavioral
Speaker 1: penalty over time, UM, I think you know that speaking
Speaker 1: to it objectively, be curious Berry, since you mentioned you
Speaker 1: know your own actions, what have you seen from your
Speaker 1: clients and what kind of have you seen a difference?
Speaker 1: Do you look at the behavioral penalty side, what has
Speaker 1: it done in your business? So it's done a couple
Speaker 1: of things. UM. One is, Hey, the whole industry is
Speaker 1: under fee pressure. UM. And like you, I'm a student
Speaker 1: of behavioral finance, and so rather than nearly lower fee
Speaker 1: is and get no behavioral result out of it, we
Speaker 1: try to craft a fee reduction program that you know,
Speaker 1: we make a big deal about telling prospective clients about
Speaker 1: it and reminding clients regularly, Hey, you have to you
Speaker 1: have to do your annual review, you have to you know,
Speaker 1: do your financial plan. We want to cut your fees
Speaker 1: fift but you got to check these boxes. And so
Speaker 1: it's more than just competing on price, because you know,
Speaker 1: I'm not I don't want to compete with Vanguard who's
Speaker 1: gonna or black Rock who's gonna. Who's going to compete
Speaker 1: with their four BIP funds. We use both of their
Speaker 1: funds because they're so inexpensive. But instead we want to
Speaker 1: do what we can to create I mean, I I'm
Speaker 1: not a fan of all the cutesy versions of Alpha tax,
Speaker 1: Alpha Advisor, Alpha Behavioral Alpha, but but there is something
Speaker 1: to the accept that if you can get people to
Speaker 1: think about their investments in a way that helps lead
Speaker 1: to better behavior, ultimately that's going to have as big
Speaker 1: an impact as anything else you can possibly do. So
Speaker 1: net net, it's been a giant positive even though it's
Speaker 1: it's definitely like you, it's an administrative UM project. There's
Speaker 1: a whole lot of organizational alpha that goes behind this.
Speaker 1: There's just a lot of moving parts, and it took
Speaker 1: us a couple of years to really polish that up
Speaker 1: and and get it well. We've only been doing it
Speaker 1: for I don't know, I want to say four or
Speaker 1: five years. You guys are a decade and a half
Speaker 1: into it, so I have to think that you have
Speaker 1: pretty much worked all the bugs out that that might
Speaker 1: have appeared in the early days. What what sort of
Speaker 1: issues arose when you first rolled this out. I mean,
Speaker 1: when we first rolled it out, you know, it's sort
Speaker 1: of I'm a graduating a little bit, but it was
Speaker 1: on a cricket UM. What's interesting, as you said, is
Speaker 1: you know, the industries evolved quite a bit, and it's
Speaker 1: going to need to continue to evolve, and so I
Speaker 1: think the the appetite for this kind of discussion UM
Speaker 1: has changed pretty meaningfully. UM. And you know, we feel
Speaker 1: good about it because this is something we've done for
Speaker 1: a decade plus and we've done all the operational stuff.
Speaker 1: But there's another side of this too, which is think
Speaker 1: about it from the firm's perspective and from the partnership
Speaker 1: in that, you know, it makes for a much more
Speaker 1: volatile earning strength UM and we had to go through,
Speaker 1: you know, a multi year period where we were reserving
Speaker 1: on our own balance sheet by distributing less than we
Speaker 1: would otherwise do so that we could build up reserves
Speaker 1: to manage the volatility that would come to the firm
Speaker 1: because of this structure UM and many years to do
Speaker 1: that another form of investment outside of just the operational side.
Speaker 1: We have that in place now, but you know that's
Speaker 1: that's not for every firm is going to want to
Speaker 1: do that, UM and so it'll be interesting to see
Speaker 1: how the industry evolves over time, because it even if
Speaker 1: you want to do it as a firm, I think
Speaker 1: doing it in practice is a non trivial initiative, to
Speaker 1: say the very least. So you describe yourself as a
Speaker 1: contrarian value investment manager. Was certainly a outlier of a
Speaker 1: year in so many ways. How do you describe where
Speaker 1: we are in the market cycle? What do you think
Speaker 1: is going on in that battle between value and growth?
Speaker 1: So I'm I'm reminded of the Jesse Livermore quote UM
Speaker 1: in reminiscence of the stock operator where one of his
Speaker 1: customers asked, you know, what should I do and he
Speaker 1: looks at him, He's like, well, you know, it's a
Speaker 1: bowl market. UM, and I feel like, you know, kind
Speaker 1: of like the music is playing for sure. UM, it's uh,
Speaker 1: it's it's been quite robust, surprisingly so I mean I UM.
Speaker 1: I think also of the Templeton line, where you know,
Speaker 1: boat markets start on pessimism, go to skepticism, mature on optimism,
Speaker 1: and diere in euphoria. I wouldn't say that we're in
Speaker 1: euphoria right now, but we're approaching UM and they're they're
Speaker 1: definitely some speculative signs. UM. I think if you look
Speaker 1: at what's happening in this back market, if you look
Speaker 1: at the I p O market, because it's a cover
Speaker 1: story and Barons a couple of weeks ago around the
Speaker 1: I p O frenzy, if you look at the level
Speaker 1: of retail engagement, UM margin, debt levels, the robin Hood
Speaker 1: tribe UM. I mentioned earlier the number of stocks that
Speaker 1: are trading in the SMP above ten times revenue, and
Speaker 1: then look at some of the company's recently Snowflake and
Speaker 1: Zoom and Pelican. Um. There's definitely some speculative elements UM
Speaker 1: today that I see relative to my time as an investor.
Speaker 1: While it being said, I think you know, now is
Speaker 1: a incredibly exciting time to be a fundamental active investor. UM.
Speaker 1: You know, we as an active investor, you you live
Speaker 1: for dispersion, UM, and the dispersion in the market is
Speaker 1: is pretty wide by all accounts. UM. I I hate
Speaker 1: getting drawn into the value versus growth because I think
Speaker 1: it it oversimplifies a lot. But kind of any way
Speaker 1: you go at it, UM, you know, the gap between
Speaker 1: kind of one side of the market that the you know,
Speaker 1: the growth of secular growth winners, the defensive growth names
Speaker 1: story stocks like tesla UM, and then everything else on
Speaker 1: the other side, any any company that's got some perceived
Speaker 1: degree of uncertainty or cyclicality. There hasn't been a real
Speaker 1: bit or appetite for until recently. And if you look
Speaker 1: at the gap between those two sides of the market,
Speaker 1: you know, it's just it's is wide as it's been
Speaker 1: in some time, UM, perhaps ever. And UM, you know
Speaker 1: that creates interesting opportunities. UM. It's not a call. You know,
Speaker 1: evaluations are horrible timing mechanisms, UM, but they are very
Speaker 1: telling with regard to future returns. UM. And I think
Speaker 1: the side of the market, the winners that have really
Speaker 1: been bit up, I think the expectations in those stocks
Speaker 1: are are pretty full. UM. And I think there's an
Speaker 1: opportunity for them too to disappoint. And when they turn.
Speaker 1: If you look back historically, when it turns, it tends
Speaker 1: to be reasonably sharp. UM. And I mentioned, you know,
Speaker 1: going back to thirty year track record of orbists Japan
Speaker 1: and the nineties UM, early two thousand's UM. And now
Speaker 1: is another of those times. UM. The opportunity to lean
Speaker 1: in on the other side looks looks pretty compelling. Now
Speaker 1: it's difficult to do because you you're underperforming and you're lagging,
Speaker 1: and what he wants to tell you that you've missed
Speaker 1: the boat and when you're crazy and the world's changed. UM.
Speaker 1: But that's exactly why those opportunities exist UM. Over time,
Speaker 1: UM And I think we're starting to see, you know,
Speaker 1: there's some interesting signs recently. UM. You know, if you
Speaker 1: look at saying them relative to the S and p UM,
Speaker 1: it's not rolled over, but it's started to tow plateau.
Speaker 1: It's not leading you know, our our founder used to
Speaker 1: always say, look at the lead steers, the market bulls.
Speaker 1: The bulls are losing steam. Um, they're not demonstrating the
Speaker 1: leadership they have in the past. You look at the
Speaker 1: Russell two thousands of broader based index well tip, the
Speaker 1: s and p UM. You're seeing the same thing on
Speaker 1: a relative basis. So there's some interesting signs recently. All
Speaker 1: that's just it's not a forecast that we're going to
Speaker 1: roll over. Um. But you know, these things don't UM
Speaker 1: go forever. I'm of the belief that there are cycles
Speaker 1: to markets. All the things that you're seeing now, like
Speaker 1: value is dead, um. These are the characteristics UH and
Speaker 1: elements that you see at these late stages in the cycle. UM.
Speaker 1: And I think they're on the other side. You know,
Speaker 1: the move the most crowded trade the last ten twenty
Speaker 1: years has been the move to passive investing indexation. UM.
Speaker 1: These industries have gotten very concentrated. There's you know, there's
Speaker 1: risk embedded in them. UM. You look at the concentration
Speaker 1: in those stocks, you look at the cross holdings UM
Speaker 1: of individual stocks across those indusices and ets. You have
Speaker 1: a turn there. UM. It could be quite powerful UM,
Speaker 1: and so as an investor, when you look forward, and
Speaker 1: most importantly is looking forward, I think having some exposure
Speaker 1: on the other side is is is warranted makes a
Speaker 1: lot of sense. You mentioned the Russell two thousand, which,
Speaker 1: for I don't know, the first three quarters of dramatically
Speaker 1: under performed all of the momentum and big cap growth.
Speaker 1: But the last couple of months of SO are a
Speaker 1: pretty robust catchup, especially for small cap value. What does
Speaker 1: that tell you, I think it's a bit to the point.
Speaker 1: I mean you just let's go back. Let's backtrack for
Speaker 1: two thousands. I mean, coming into the year January early February, UM,
Speaker 1: you know, there was a view of accelerating growth UM,
Speaker 1: and you you were seeing that in the small caps UM,
Speaker 1: and then COVID hit UH, and we had a very
Speaker 1: meaningful draw down UM. And then more recently the last
Speaker 1: three months and certainly most recently with news of the
Speaker 1: vaccine UM, you you started to see that recovery. And
Speaker 1: I think it's there's an expectation looking forward of UM,
Speaker 1: you know, cyclical recovery UH, and in particular those names
Speaker 1: that were disproportionately hit, just the smaller companies UM through
Speaker 1: the COVID drawdowns. So I think you're you're seeing that
Speaker 1: manifestation if you look at you know, the existing positioning um,
Speaker 1: you know, it's so lopsided that you know it could
Speaker 1: have We'll see where things go from here. Obviously they've
Speaker 1: actually news more recently it's not been that encouraging, but
Speaker 1: we try to take a longer term view. We'll see
Speaker 1: where it goes from here. But it could, you know,
Speaker 1: it could have a decent way to go. I mean,
Speaker 1: that's certainly what the data would tell you. Quite interesting.
Speaker 1: So let's talk about the ORBITS Global Equity Funds. Since
Speaker 1: that has crushed its benchmark. How have you guys managed
Speaker 1: to accomplish this in an era of relative underperformance by value?
Speaker 1: And what is your role at ORBITS Global Equity Funds? So,
Speaker 1: I mean, going back to inception, it's been across many
Speaker 1: cycles and we are proud of that track record, but
Speaker 1: it's been I mean, let's be clear, Berrier, it's been
Speaker 1: a difficult decade the last ten years for us, and
Speaker 1: you know we haven't performed the level of expectations that
Speaker 1: we that we hold out for ourselves. I think if
Speaker 1: you look back in history, and that's across you know,
Speaker 1: a number of different mark and environments. You know, we
Speaker 1: tend to do best in what would be our quotes
Speaker 1: value market and we kind of hang in there in
Speaker 1: the growth market. So that's exactly what you've seen kind
Speaker 1: of this last three five seven years, certainly relative to
Speaker 1: our value peers, I mean our value peers, peer value peers.
Speaker 1: Have you gotten really punished during this? And I think
Speaker 1: the difference there for us is that when I touched
Speaker 1: on this a little bit earlier, is we're intrinsic value,
Speaker 1: So we're not we're not didactically going after just a
Speaker 1: little price to book. We have a more much more
Speaker 1: holistic view of what we think value is and we
Speaker 1: go after those gaps and that can be you know,
Speaker 1: a dirty industrial company, or it can be it could
Speaker 1: be a technology or internet based company. UM. And that's
Speaker 1: allowed us to be more flexible over time, but they're
Speaker 1: also tend to be bigger periods. And I mentioned this
Speaker 1: if you go back to Japan in the index, it's
Speaker 1: just important is what you don't own. We did known
Speaker 1: anything in Japan and then in two thousand's and I
Speaker 1: think today would be similar UM in that you know,
Speaker 1: it's been painful getting here. We have a pretty meaningful
Speaker 1: underway to the US as we sit today, and we'll
Speaker 1: see where it goes from here. But you know, when
Speaker 1: those when those pockets turn, when they get to those
Speaker 1: extremities like we see now, they tend to be pretty fruitful.
Speaker 1: And that's one of the reasons that you know, I'm
Speaker 1: pretty constructive as we look forward again, not not calling
Speaker 1: the timing, you know, because it's not what we do,
Speaker 1: but you know, based on where we're at now and
Speaker 1: how our position, I think, you know it could be
Speaker 1: could be meaningful. So you you hit upon something that
Speaker 1: I want to address because I'm intrigued by the concept
Speaker 1: you mentioned. As a contrarian, You're you're constantly looking for
Speaker 1: things the crowd has overlooked. But one of the things
Speaker 1: we tend to notice over longer market cycles is that
Speaker 1: the crowd tends to be right much of the time.
Speaker 1: It's at those major turning points with a crowd completely
Speaker 1: loses their minds and gets it totally wrong. But what
Speaker 1: are the challenges of being a contrarian When you're leaning
Speaker 1: into the winds and you know it's an uphill battle
Speaker 1: most of the time, how do you manage around that? Yeah,
Speaker 1: so I think you're exactly right, and I would just
Speaker 1: observe that now is one of those times that all
Speaker 1: of those behavioral characteristics are in play. You know, the
Speaker 1: the chorus is calling for it's dead, it's over. UM.
Speaker 1: I still believe in cycles. UM. The price evaluations don't matter.
Speaker 1: I still believe in price evaluations, not as a timing mechanism,
Speaker 1: but fundamentally. UM. I believe it's unlikely and unsustainable that
Speaker 1: returns will continue to compound it. I don't see any
Speaker 1: reason why structurally it should have changed or shift from
Speaker 1: kind of the long term cross that goal returns and seven.
Speaker 1: Yet the popular chorus is on the other side of that. UM.
Speaker 1: And so all of the behavioral elements are in play today. UM.
Speaker 1: In terms of how you manage it, I think it
Speaker 1: it starts with yourself as an individual, as a decision maker. UM.
Speaker 1: I think one of the most difficult things in this
Speaker 1: business is knowing yourself and managing yourself, particularly in those
Speaker 1: situations when you know you're underperforming in a position or
Speaker 1: in a portfolio, and you look wrong and other people
Speaker 1: are telling you you're wrong. UM. Clients might be hackling
Speaker 1: you and telling you are wrong. UM. And how do
Speaker 1: you make decisions in that situation is one of the
Speaker 1: most important characteristics so of what we do UM. And
Speaker 1: then the other side of it is, you know, you
Speaker 1: want to try to put in place things that allow
Speaker 1: you to stay true to your process UM. And that
Speaker 1: gets to the elements that I was touching on a
Speaker 1: little bit in terms of the kind of people you
Speaker 1: put in your team, the kind of culture that you create, UM,
Speaker 1: how you manage your day to day, what do you
Speaker 1: look at and importantly the kind of clients that you have,
Speaker 1: what what expectations do they have for you? And then
Speaker 1: lastly your own ownership structure, and I touched on that
Speaker 1: a little bit. Those are all things that you can
Speaker 1: try to put in place structurally to allow you to
Speaker 1: be in a position to make the best decisions when
Speaker 1: behaviorally it's most difficult. And to clarify, are you guys
Speaker 1: long only or long short Our main strategy, Our flagship
Speaker 1: is long only because it's one thing to be long
Speaker 1: and wrong as the market goes up, or to be
Speaker 1: long and underperformed. But I can't imagine what sort of
Speaker 1: agony it would be to be short Tesla as it
Speaker 1: goes up. Six there's contrain is UM. And and then
Speaker 1: there's just that that that's a type of pain that
Speaker 1: that it's hard, hard to imagine. UM. But let's stick
Speaker 1: with the bottoms up stock picking because a lot of
Speaker 1: what we're discussing is very much the macro environment. You
Speaker 1: mentioned monetary policy, we talked about COVID. There are so
Speaker 1: many broad macro issues. How do you, guys, UM think
Speaker 1: about the macro situation? It seems unavoidable at least in
Speaker 1: is macro part of your process if you're bottoms up
Speaker 1: stock picker or do you have to try not to
Speaker 1: think about what's going on in the broader sense? Yeah?
Speaker 1: I think. I mean the short answer is you have
Speaker 1: to write, are you we're not we're bottoms up fundamental
Speaker 1: stock pickers were owning businesses in their cash flows. That
Speaker 1: being said, UM, you have to have an eye to
Speaker 1: the context that you're in. I think one of the
Speaker 1: things very clear going back to two thousand seven, two
Speaker 1: and eight, UM, you know, the value tribe got crushed
Speaker 1: buying financials at increasingly lower price to book multiples into
Speaker 1: a macro environment that was not conducive. UM. And I
Speaker 1: think if you were only looking at the company and
Speaker 1: didn't have construct for the context. Um, you got punished. Um.
Speaker 1: And we were not immune to that to be clear. Um.
Speaker 1: But there's an important lesson in there and that you
Speaker 1: you have to have an eye to the context. Um.
Speaker 1: You know, we don't have strategists in the house, we
Speaker 1: don't have economists. We're not making forecasts on GDP or
Speaker 1: anything of that nature, which we don't believe in. But
Speaker 1: you do have to have a construct of the environment
Speaker 1: which you're in. What I what I say to the
Speaker 1: team is, you know, you could have a great house
Speaker 1: in a bad neighborhood and it doesn't matter how good
Speaker 1: that house is. Sharre in a bad neighborhood, and so
Speaker 1: you have to understand what neighborhood you're in. And a
Speaker 1: specific example for me where I've gotten really you know, penalized,
Speaker 1: is you know, had a very stock specific pieces in
Speaker 1: an oil and gas company, US oil and gas company
Speaker 1: and called Apache. It was stock specific and idiots and
Speaker 1: credit that I really believed in. And a number of
Speaker 1: those elements have played out. But it's in the context
Speaker 1: of an energy space and a w T I is
Speaker 1: at ninety versus thirty, It doesn't matter what the company's
Speaker 1: specific videos and credit factors are you have to have
Speaker 1: a view to the context. That's a that's a very
Speaker 1: specific example, but I think it it covers across the board,
Speaker 1: and I think that's how we as teams, how we
Speaker 1: interrogate and think UM to make sure that we have
Speaker 1: an eye to the context. We were just discussing the
Speaker 1: exact same thing with despite for the past four years
Speaker 1: having the most pro coal presidents in history, it didn't
Speaker 1: matter which coal company you own, UM, The question was
Speaker 1: was it ugly or uglier? So I totally get the
Speaker 1: even a good house in a bad neighborhood isn't isn't
Speaker 1: going to help you. But sticking with the macro issue,
Speaker 1: you mentioned monetary policy and you also mentioned valuation. Let's
Speaker 1: let's tie all three of those together. How responsible is
Speaker 1: today's effectively zero interest rate lower for longer policy affecting
Speaker 1: today's relatively high historical valuations. I mean it's you can't.
Speaker 1: I can't quantify it empirically, verybody you. I mean, when
Speaker 1: you're your history rate of zero UM and arguably your
Speaker 1: real rate is negative, that will influence UM in a
Speaker 1: non trivial way. How you price cash flow streams UM
Speaker 1: and we've seen that UM and to the point on context,
Speaker 1: I think one of the things I've been more critical
Speaker 1: of myself is not being more fully cognizant of that
Speaker 1: at the environment to my analogy before the neighborhood over
Speaker 1: the past decade and so it's it's been a meaningful driver.
Speaker 1: The more interesting question as investors is where are we
Speaker 1: today and what does the future look like from where
Speaker 1: we sit today? And I try to spend more time
Speaker 1: thinking about about that. But quite interesting, and we talked
Speaker 1: about ownership and thinking like an owner. I want to
Speaker 1: have you clarify something about Alan um Gray. So when
Speaker 1: when he launched Alan Gray Limited in he was a
Speaker 1: former Fidelity manager and Alan Gray became South Africa's biggest
Speaker 1: private investment manager. You mentioned he put his equity stake
Speaker 1: in orbits and a trust and that's now perpetual. What
Speaker 1: is the is that the entire ownership structure or our
Speaker 1: employees also owners of the firm. UM employees are owners
Speaker 1: of the firm UM and so Allan uh put his
Speaker 1: in his family, UM put his entire interest into a
Speaker 1: charitable trust which will be held is the controlling shareholder
Speaker 1: in perpetuity UM. I think there are a couple of
Speaker 1: elements to this. One is just I mean, it's a
Speaker 1: phenomenal thing what he's done, and I think it gives
Speaker 1: a degree of purpose to what I do in my
Speaker 1: own work, knowing UM that there's a set of beneficiaries
Speaker 1: behind that in terms of what we do. But from
Speaker 1: a business standpoint, I think it's interesting on a couple
Speaker 1: of levels. First is, you know, the issue of succession
Speaker 1: investment firms is a pretty storied track record, UM if
Speaker 1: you look at how investment firms managed continuity over time,
Speaker 1: and he did it in a way that was really
Speaker 1: it was very thoughtful but quite seamless UM to manage
Speaker 1: the long term continuity of the firm and the leadership
Speaker 1: UM employees are owners of the firm UM and have
Speaker 1: a meaningful stake and the combination of the family and
Speaker 1: executives and and staff with the largest investors in the fund,
Speaker 1: which gets back to thinking investing like an owner UM.
Speaker 1: But it also allows us to make decisions that are
Speaker 1: driven by what we believe in for the long term.
Speaker 1: You know, I couldn't imagine running an investment firm that
Speaker 1: was publicly traded that had quarterly subjectives UM, and so
Speaker 1: you take something like our fee structure and refundable fee reserves. UM.
Speaker 1: You know that that's a difficult decision. It's not without
Speaker 1: consequence for the firm, the partnership. But having a structure
Speaker 1: like ours allows you to take those kind of long
Speaker 1: term decisions, UM, which allows you and reinforces you to
Speaker 1: take those decisions that are contrary in to what most
Speaker 1: other people might be doing, and at times that the
Speaker 1: most difficult. UM. And so it's uh, it's a it's
Speaker 1: a powerful reinforcing mechanism, if that makes sense. Totally does
Speaker 1: quite interesting. I know I only have you for a
Speaker 1: finite amount of time, so let me jump to our
Speaker 1: five favorite questions that we ask all of our guests,
Speaker 1: starting with what are you streaming these days? Give us
Speaker 1: your favorite Netflix or Amazon Prime shows or or podcasts.
Speaker 1: What what's keeping you entertained during lockdown? You show we
Speaker 1: have more time during COVID times. UM. So when I
Speaker 1: mentioned uh, Matflix is unorthodox um the story of a
Speaker 1: young girl at the civic routs in Brooklyn, and just
Speaker 1: I just really love the story. I thought the lead
Speaker 1: characters just terrifically well portrayed. UM. Guilty Pleasure, um, the
Speaker 1: Jinx the life and death of David Durstum just as
Speaker 1: the one who loves to study human behavior, what motivates people.
Speaker 1: Just a fascinating character study. And I'm not giving anything away,
Speaker 1: but the last kind of seconds of the series is
Speaker 1: just priceless. UM. Just wait for it. It's really good. UM.
Speaker 1: I love documentaries. UM American Factory. I'll mentioning which one
Speaker 1: the oscar Um story of Chinese billionaire open Factory GM
Speaker 1: abandoned GM Factory in Ohio. UM. Pretty thought provoking, UM
Speaker 1: documentary by Eva du Verney. UM. I think you know,
Speaker 1: really zeroing in on the history of racial inequity in
Speaker 1: the US and specific remination's prison system. UM. I think
Speaker 1: you know in our times and what's been going on
Speaker 1: in this country. There's a real message there. UM. And
Speaker 1: then from podcast present Company included included Verry. UM. I
Speaker 1: enjoy Shane Parish and the Knowledge Project quite a bit. Yeah,
Speaker 1: that's that's a great part. I'm a fan. Tell us
Speaker 1: about some of your early mentors who helped guide your
Speaker 1: career and bring you to where you are today. So
Speaker 1: I have to just start with my grandfather. UM, it's
Speaker 1: really my hero. UM. He you know, just the value
Speaker 1: of hard work and generosity. Um. You talked about growing
Speaker 1: up under his wing, and a lot of who I
Speaker 1: am today is cultivated by him. UM. I also mentioned
Speaker 1: to other UM individuals there's a program called Sponsors for
Speaker 1: Educational Opportunity, which focuses on UM first generation, low income
Speaker 1: kids of color, gets them to Wall Street. And so
Speaker 1: when I was nineteen, when I was in college, I
Speaker 1: got an opportunity to go work at d l J
Speaker 1: UM Bill Donaldson, Mufkin and Jenrette. And it was because
Speaker 1: of his program, Sponsors for Educational Opportunity. And one of
Speaker 1: the individuals there's a general named Saban Street who ran
Speaker 1: their venture capital group which is called Sprout UM. And
Speaker 1: at the time, SEO was just starting to build out
Speaker 1: with kids outside of the Ivy League. And Saban came
Speaker 1: to Chicago when he met me, and not only did
Speaker 1: he check me to the program, but he said, you know,
Speaker 1: I want you to work at my firm at d
Speaker 1: l J. And just he was just a great mentor
Speaker 1: to me then big believer in me. UM when I
Speaker 1: questioned myself, UM, just a phenomenal individuals whom a junct
Speaker 1: professor at Colombia, and not just me, but so many
Speaker 1: people he's influenced. Um have been uh, phenomenal inspiration for me.
Speaker 1: Quite interesting. Let's talk about everybody's favorite question books, what
Speaker 1: are you reading now? Or tell us about some of
Speaker 1: your favorites. So one thing I mentioned before going specifically
Speaker 1: to books, just on the question of mentors. This flungs
Speaker 1: in the category of something that I believe that maybe
Speaker 1: a lot of other people don't, is that I feel
Speaker 1: like I have a lot of mentors who are individuals
Speaker 1: that I've never met. What I mean by that is
Speaker 1: books like books have always been mentors to me. I
Speaker 1: think you can you can read about somebody and really
Speaker 1: come to understand them, um and actually never have met them,
Speaker 1: and you understand how they think. And you when you
Speaker 1: understand how they think, you can ask yourself in the
Speaker 1: same way that you will go see a mentor and say,
Speaker 1: you know, I'm having a challenge with this, or how
Speaker 1: would you think about this? But just ask yourself, well,
Speaker 1: what would they say? And oftentimes you can answer the
Speaker 1: question for yourself. Uh. And So there's been so many
Speaker 1: individuals that I consider mentors who I've never met, um,
Speaker 1: but have been cultivated through books. UM. And so I
Speaker 1: say that just to say, the universe of potential mentors,
Speaker 1: I think is so much bigger than a lot of
Speaker 1: people acknowledge. And when I give credit to now to
Speaker 1: the concept of books, the actual physical book that I've
Speaker 1: probably gifted more than any other is The Art of
Speaker 1: Learning UM by Josh Waitskin UM. He Josh chess prodigy.
Speaker 1: I think he was the UM. He is the character
Speaker 1: for searching for Bobby Fisher. And the thing that I
Speaker 1: really strikes me I love about it is just he
Speaker 1: Josh is all about pursuing excellence UM. And he's done
Speaker 1: it in chess and push hands and boiling, which is
Speaker 1: he obsesses on the craft and process of becoming world
Speaker 1: class at something UM. And I personally a geek out
Speaker 1: on process UM and trying to, you know, just push
Speaker 1: and beat on your craft. And Josh articulates that he's
Speaker 1: so thoughtful and how you think about that and break
Speaker 1: it down UM, And just many many lessons in there.
Speaker 1: The other book I would mention UM that I really
Speaker 1: enjoyed I read this summer UM is Maria kina Kova
Speaker 1: The biggest bluff How I learned to pay attention and
Speaker 1: master myself. So Marie is very interesting UM. True story.
Speaker 1: She got her PhD in behavioral psychology at Colombia, studying
Speaker 1: under Walter Michelle Um. I think it's for the Marshmallow test.
Speaker 1: And she'd never played poker before, and the book is
Speaker 1: about her learning to play poker um and actually doing
Speaker 1: it quite well. And you know, there's the aspect of
Speaker 1: playing the cards the probabilities, which I think is a
Speaker 1: lot like investing. Is just playing the probabilities and minutes
Speaker 1: playing the players playing the cards, which is all so
Speaker 1: like investing the behavioral side um. And there's just a
Speaker 1: lot of takeaways in her book, which is focused on poker,
Speaker 1: but for me, around investing and managing yourself and the
Speaker 1: power of paying attention. What sort of advice would you
Speaker 1: give to a recent college grad who was interested in
Speaker 1: a career in finance as a portfolio manager or an analyst.
Speaker 1: There's a there's a book I read a couple of
Speaker 1: years ago called Excellent Sheep The miss Education of American
Speaker 1: Elite by William Dershowitz, professor at Yale UM. And what
Speaker 1: he really draws on is, as just belied a little
Speaker 1: bit in the title, is like, you know, as a
Speaker 1: professor at Yale, seeing these incredible young people, the brightest minds, UM,
Speaker 1: but they've just been on this treadmill. UM. You know
Speaker 1: that perfect test scores and great grades and were just
Speaker 1: on this treadmill of continuing it in air quotes demonstrate excellence,
Speaker 1: but maybe lost a little bit in terms of how
Speaker 1: to think creatively and critically and the real purpose behind
Speaker 1: what they're doing. And in some ways that resonates with
Speaker 1: me in terms of what you're seeing UM in young
Speaker 1: people like these phenomenal people, but they haven't had a
Speaker 1: ton of adversity and UM really thinking deeply about what
Speaker 1: it is they want to do and why they want
Speaker 1: to do it UM, and less about the treadmill and
Speaker 1: the brand UM and the external affirmation, but for what
Speaker 1: they want to do UM. And so my advice to
Speaker 1: a young person would be around that UM and specifically
Speaker 1: if they're looking to go and invest in management and
Speaker 1: be pretty similar to the same thing that I would
Speaker 1: take somebody you know in college or high school. It's like,
Speaker 1: don't go for UM. You know what you want to
Speaker 1: go for is the best professor. It doesn't matter what
Speaker 1: the name of the course is, but you know, find
Speaker 1: an exceptional professor. UM. There's magic in that and the
Speaker 1: same thing when thinking about you know, taking your first
Speaker 1: step is find a phenomenal individual that you connect with
Speaker 1: and work for them. It doesn't matter what the brand is.
Speaker 1: Everybody's drawn to the best brand UM or what they
Speaker 1: think is most coveted. But find a phenomenal individual. Forget
Speaker 1: about the brand and all of the treatments around it. UM.
Speaker 1: Work for that individual, and I think what you'll take
Speaker 1: away from that will be so much deeper than UM
Speaker 1: just going for that that external validation good advice UM.
Speaker 1: And our final question, what do you know about the
Speaker 1: world of investing today? You wish you knew years ago
Speaker 1: when you were first ramping up. So you know, I
Speaker 1: started my investment career in the private I saw doing
Speaker 1: distress turnaround investing UM, and when I started my public
Speaker 1: market investing career, I was all about that, you know,
Speaker 1: hard assets, downside cash flow. And I think what I
Speaker 1: have learned over time and you've seen this revolution and
Speaker 1: other investors, is really the importance of human capital and
Speaker 1: culture than people UM. And you know, I think the
Speaker 1: phenomenal companies that really compound over time have something about
Speaker 1: their human capital and their culture UM that is unique,
Speaker 1: distinctive enduring, not always, but enduring and allows them to
Speaker 1: compound in a way that is much more meaningful than
Speaker 1: buying that cigar butt. And so I think what I
Speaker 1: wish I would have focused on earlier was was that
Speaker 1: element um rather than just looking for the cigar butts?
Speaker 1: Quite quite interesting. Thanks Adam for being so generous with
Speaker 1: your time. We have been speaking with Adam Carr. He
Speaker 1: is the head of Orbis US and portfolio manager at
Speaker 1: the thirty seven billion dollar Orbits Investment International firm. If
Speaker 1: you enjoy this conversation, well, be sure and check out
Speaker 1: any of our previous three and ninety or so such
Speaker 1: interviews that we've had over the past. Is it six years?
Speaker 1: Oh my goodness, that's a long time. You can find
Speaker 1: that at iTunes, Spotify, wherever you feed your podcast fixed.
Speaker 1: We love your comments, feedback and suggestions right to us
Speaker 1: at M I B Podcast at Bloomberg dot net. Give
Speaker 1: us a review at Apple iTunes. You can sign up
Speaker 1: for my Daily Reads at rid Holtz dot com. They're free.
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Speaker 1: Check out my weekly column at Bloomberg dot com Slash Opinion.
Speaker 1: Follow me on Twitter at rit Holts. I would be
Speaker 1: remiss if I did not thank the craft staff that
Speaker 1: helps put these converse stations together each week. Maroufal is
Speaker 1: my audio engineer. Michael Boyle is my producer. A tick
Speaker 1: of Valbron is our project manager. Michael Batnick is my
Speaker 1: head of research. I'm Barry Results. You've been listening to
Speaker 1: Master's in Business on Bloomberg Radio