WEBVTT - Causeway’s Ketterer on Estimating Intrinsic Value 0:00:13.360 --> 0:00:16.639 Welcome to Inside Active, a podcast about active managers that 0:00:16.680 --> 0:00:19.680 goes beyond sound bites and headlines and looks deeper into 0:00:19.720 --> 0:00:25.200 their processes, challenges and philosophies and security selection. I'm David Cohne, 0:00:25.239 --> 0:00:28.240 I lead mutual fund and active research at Bloomberg Intelligence. 0:00:28.840 --> 0:00:33.440 Today my co host is Laurent Duier, senior equity strategist 0:00:33.440 --> 0:00:36.440 at Bloomberg Intelligence. Laurent, thank you for joining me today. 0:00:37.159 --> 0:00:38.159 Thank you foroving me. 0:00:38.440 --> 0:00:40.839 I wanted to ask you about a recent note you 0:00:40.880 --> 0:00:45.080 wrote about industrial valuations in Europe. Can you tell our 0:00:45.120 --> 0:00:50.239 audience how current valuations compare historically and how potential showdown 0:00:50.280 --> 0:00:53.040 in the US could affect those valuations. 0:00:53.560 --> 0:00:56.920 Yes. In fact, the industry lay is a very interesting 0:00:57.000 --> 0:01:01.279 sector in Europe because it offers many growth opportunities, but 0:01:01.360 --> 0:01:06.400 also it is the most the second most expensive after technology. 0:01:07.120 --> 0:01:11.679 Currently trades on a forward peer of about nineteen times, 0:01:12.200 --> 0:01:16.600 which is the thirty seven percent premium to European equities, 0:01:16.920 --> 0:01:20.240 and historically it has always treaded at a premium between 0:01:20.520 --> 0:01:24.720 fifteen to twenty percent. So I mean today, what explain 0:01:24.840 --> 0:01:29.560 a higher premium for European industrials compared to the market. 0:01:29.680 --> 0:01:33.600 It's all the clean energy investment. Also you have the 0:01:33.720 --> 0:01:37.479 rearmament in Europe, and also you have the massive US 0:01:37.480 --> 0:01:41.120 fiscal programs, which I think are major gross drivers for 0:01:41.319 --> 0:01:46.200 companies in arrow space, defense and also capital goods. And 0:01:46.319 --> 0:01:50.080 I think these growth opportunities for many of those companies 0:01:50.120 --> 0:01:52.720 are not just for the next twelve or eighteen months. 0:01:52.760 --> 0:01:55.640 It may be for several years to come, so I 0:01:55.680 --> 0:01:59.520 think it puts them on your growth trajectory, which justifies 0:01:59.520 --> 0:02:05.320 the higher valuation ratios. Regarding your question about what could 0:02:05.400 --> 0:02:09.440 happen to European industrials if there is a wobble in 0:02:09.560 --> 0:02:12.440 the US economy, I think definitely it will be a 0:02:12.480 --> 0:02:18.160 problem because US is about thirty percent of the sector 0:02:18.240 --> 0:02:21.360 cells and I think the US market is also quite 0:02:21.440 --> 0:02:26.280 profitable for European companies, So any wble in the in 0:02:26.400 --> 0:02:30.160 the US economy will create a problem with earnings, but 0:02:30.280 --> 0:02:34.720 also potentially are durating on many of those companies given 0:02:34.800 --> 0:02:38.200 the rich multiple. And the last point I would like 0:02:38.280 --> 0:02:40.080 to make as well is that if you look at 0:02:40.120 --> 0:02:44.960 the valuation of industrial companies which are challenged either by 0:02:45.040 --> 0:02:48.720 the green transition or the adoption of AI, they are 0:02:48.760 --> 0:02:52.520 currently trading at very low multiples compared to their own history. 0:02:52.919 --> 0:02:55.400 And I think it's suggests that some of the venues 0:02:55.440 --> 0:02:59.200 that started to be discounted in the share price. For sure, 0:02:59.320 --> 0:03:02.680 some of them will be value trap along the line, 0:03:02.800 --> 0:03:05.320 but I think that potentially some of them could offer 0:03:05.400 --> 0:03:09.680 some good investment opportunities. So lacking many sectors in Europe 0:03:09.720 --> 0:03:10.880 stockpicking is key. 0:03:11.080 --> 0:03:13.359 Great. Well, let's bring in our guests who can talk 0:03:13.400 --> 0:03:16.640 about Europe and other international markets. I'd like to welcome 0:03:16.760 --> 0:03:20.960 Sarah Ketterer, who is chief exggative officer and a fundamental 0:03:21.000 --> 0:03:24.440 portfolio manager at Causeway Capital Management. Sarah, thank you so 0:03:24.520 --> 0:03:25.320 much for joining us. 0:03:25.520 --> 0:03:26.520 Thank you for inviting me. 0:03:26.919 --> 0:03:29.559 Well, I want to start by asking you how you 0:03:29.560 --> 0:03:31.280 got your start in the investment industry. 0:03:31.600 --> 0:03:34.160 Well, the short answer was a long long time ago. 0:03:34.600 --> 0:03:37.680 But I rose up through the ranks, went to the 0:03:37.720 --> 0:03:40.720 school of hard knocks in investment banking, and was in 0:03:40.760 --> 0:03:44.480 business school and more investment banking. And that turns out 0:03:44.480 --> 0:03:47.800 and it still is today, a resonably good background for 0:03:48.040 --> 0:03:53.520 fundamental research, and then it instills valuation techniques and skills. 0:03:53.960 --> 0:03:57.040 The only thing I couldn't get a job at Causeway today, however, 0:03:57.120 --> 0:03:59.520 because we need so much more than that the next 0:03:59.600 --> 0:04:03.920 several decades are going to require an ability with data 0:04:04.000 --> 0:04:07.680 that just didn't exist when I started. Nonetheless, I had 0:04:07.720 --> 0:04:11.680 an opportunity with my co founder Harry Hartford in two 0:04:11.720 --> 0:04:15.360 thousand and one to start Causeway, and we've had a 0:04:15.440 --> 0:04:21.680 twenty three year record of managing predominantly international equity fundamentally, 0:04:22.080 --> 0:04:25.720 but we also have global equity and we manage quantitative 0:04:25.720 --> 0:04:28.600 strategies including emerging markets and small cap. 0:04:29.960 --> 0:04:32.520 Well, actually, you mentioned Causeway, so you know I like 0:04:32.600 --> 0:04:34.480 to talk a little bit about it. What would you 0:04:34.520 --> 0:04:37.080 consider the overall investment philosophy of the company. 0:04:37.839 --> 0:04:42.039 We are very much steeked in a value investment philosophy, 0:04:42.560 --> 0:04:47.160 particularly in the work we do fundamentally to identify companies 0:04:47.200 --> 0:04:50.640 we believe our training at levels below their intrinsic value. 0:04:51.000 --> 0:04:55.760 And this is both a combination of very intensive understanding 0:04:55.760 --> 0:04:59.400 evaluation tools and the assumptions we make about the business 0:05:00.360 --> 0:05:04.680 layer of subjectivity that comes with experience. So our portfolio 0:05:04.720 --> 0:05:11.080 managers we have six cluster heads, individuals responsible for in 0:05:11.160 --> 0:05:14.440 depth work in sectors. They have to make the final 0:05:14.480 --> 0:05:18.440 decision on stocks and they rely heavily on value and 0:05:18.480 --> 0:05:23.080 then quantitatively we use value amongst other factors. Albeit, value 0:05:23.120 --> 0:05:26.720 has a very large weight, So overall, Causeway is very 0:05:26.800 --> 0:05:31.680 focused on the price we pay in our analysis of 0:05:31.839 --> 0:05:34.279 the likely return we'll see for our clients. 0:05:34.640 --> 0:05:37.239 Great well, I do want to ask you specifically about 0:05:37.279 --> 0:05:42.120 the International Value Fund, the ticker symbols civv X. Is 0:05:42.160 --> 0:05:45.480 there a specific process, you know, investment process for that 0:05:45.520 --> 0:05:46.680 particular fund. 0:05:47.560 --> 0:05:50.400 Yes, there is, and it's the same process we've used 0:05:50.440 --> 0:05:53.080 since our inception. In fact, parts of a date back 0:05:53.160 --> 0:05:58.800 to antiquity. But the whole idea here is that we 0:05:58.839 --> 0:06:03.520 sift through thousands of companies outside the US market to 0:06:03.640 --> 0:06:07.080 identify and nes Laran noted there's plenty of under evaluation. 0:06:07.520 --> 0:06:10.200 The US market is the most expensive and has been 0:06:10.800 --> 0:06:13.400 amongst the developed world for a number of years. And 0:06:13.440 --> 0:06:16.920 you might say rightly so, because of its emphasis more 0:06:16.960 --> 0:06:20.840 on growth, a greater exposure to technology, and less what 0:06:20.880 --> 0:06:25.800 we call old world businesses, But that we're indifferent to 0:06:26.240 --> 0:06:29.640 the types of businesses. We're looking through these thousands of 0:06:29.680 --> 0:06:34.599 stocks for certain criteria we need looking for income companies 0:06:34.600 --> 0:06:37.520 that are predisposed of returning capital to shareholders. At the 0:06:37.520 --> 0:06:42.159 same time, those stocks are generally trading on a price 0:06:42.240 --> 0:06:45.480 to cash flow basis below their industry average, so they 0:06:45.520 --> 0:06:49.400 tend to look in expensive. There's capital coming back to shareholders, 0:06:49.960 --> 0:06:54.200 which in all interest rate environments except zero, is very important. 0:06:55.040 --> 0:06:57.560 And then from there we narrow the group and do 0:06:57.720 --> 0:07:01.200 quite a bit of intense research on under standing in 0:07:01.240 --> 0:07:05.680 this fund where the opportunities are bi sector. And then 0:07:05.720 --> 0:07:10.800 as we present these incredibly interesting companies that have had 0:07:10.880 --> 0:07:13.200 some sort of setback and that's why the share price 0:07:13.840 --> 0:07:18.840 is nowhere near its ultimate valuation, or we call a 0:07:18.840 --> 0:07:22.800 two year price target, we then decide as a team 0:07:22.840 --> 0:07:25.920 if that price target is the one that we have 0:07:26.040 --> 0:07:29.000 arrived at is reasonable, and then we know what we 0:07:29.040 --> 0:07:33.440 expect the company's return should be including income, and then 0:07:33.440 --> 0:07:36.840 we risk adjustment using our quantitative risk model, so we 0:07:36.880 --> 0:07:39.880 can get a risk adjusted return. And all the stocks 0:07:40.360 --> 0:07:45.160 that we are considering for this fund, we rank them 0:07:45.280 --> 0:07:49.440 daily on risk adjusted return and it's the highest risk 0:07:49.440 --> 0:07:52.560 adjuster return stocks they'd end up in our fund with 0:07:52.680 --> 0:07:53.960 the largest weights. 0:07:54.240 --> 0:07:56.720 Given the large amount of data which have to be 0:07:56.760 --> 0:08:01.720 processed by your equity pms at least, I mean, are 0:08:01.760 --> 0:08:04.800 you already using or do you intend to use AI 0:08:05.480 --> 0:08:08.800 to potentially improve your investment process? 0:08:09.760 --> 0:08:15.760 Yes, definitely, I have great admiration for our Digital services 0:08:15.840 --> 0:08:20.000 area and run by my colleague Pete Peterson. He's made 0:08:20.040 --> 0:08:22.640 a huge effort to ensure that not only do we 0:08:22.680 --> 0:08:27.320 have access to tools already embedding AI in them, such 0:08:27.320 --> 0:08:33.200 as Facts or Bloomberg, but we are also developing our 0:08:33.280 --> 0:08:35.600 own tools so that we can be more productive as 0:08:35.640 --> 0:08:39.679 a research team. And this is true quantitatively as well 0:08:39.679 --> 0:08:42.600 as it is fundamentally. We've been working with large language 0:08:42.600 --> 0:08:46.560 models quantitatively for some time, but that research, some of 0:08:46.600 --> 0:08:49.200 that translates into what we can do in the rest 0:08:49.240 --> 0:08:54.120 of the organization. But specifically for fundamental research, we use 0:08:54.800 --> 0:08:57.520 a chat function that's embedded in a system we have 0:08:57.679 --> 0:08:59.920 that's connected with facts that that allows us to do 0:09:00.120 --> 0:09:05.120 queries because if you think about it, we have twenty 0:09:05.200 --> 0:09:10.160 six fundamental research channels scouring the globe constantly taking notes, 0:09:10.520 --> 0:09:13.480 meeting with companies that information. We need to be able 0:09:13.520 --> 0:09:18.960 to access it, assimilate it, distill it, understand better what 0:09:19.040 --> 0:09:21.280 the management said the last time we met with them, 0:09:21.360 --> 0:09:24.360 so that we can ask even better questions going forward. 0:09:24.600 --> 0:09:29.079 So from a productivity perspective, we're at the early stages 0:09:29.160 --> 0:09:32.880 of implementing AI. What would be more interesting in what 0:09:32.960 --> 0:09:36.200 we're working on, i'd say next horizon type project is 0:09:36.480 --> 0:09:40.280 how we can use AI to generate investment ideas, and 0:09:40.400 --> 0:09:46.160 part of that will come from having our IT experts 0:09:46.160 --> 0:09:49.920 spend more time with our research channels, understanding better what 0:09:50.080 --> 0:09:53.600 they go through and how they think about their areas 0:09:53.640 --> 0:09:56.800 of coverage in order to be able to automate some 0:09:56.920 --> 0:09:57.160 of that. 0:09:57.720 --> 0:10:01.760 Maybe a flow of question on AI as an investment opportunity, 0:10:02.559 --> 0:10:07.720 which Checter do you think would allow the greatest investment 0:10:08.880 --> 0:10:10.800 over the next three to five years. 0:10:11.280 --> 0:10:16.040 We think about AI in stages and how it's impacting 0:10:17.400 --> 0:10:20.720 the companies that we could buy. And again I'm speaking 0:10:20.720 --> 0:10:23.520 to you from the lens of a value investor, so 0:10:23.559 --> 0:10:27.000 we're not going to pay large multiples that embed growth 0:10:27.040 --> 0:10:31.719 that we are concerned might not occur, might be vulnerable. 0:10:32.679 --> 0:10:35.920 But some of the most interesting stocks right now are 0:10:35.920 --> 0:10:40.560 in the building phase. That's the phase that's focused on 0:10:40.800 --> 0:10:45.920 getting the infrastructure needed, all the computing infrastructure, and a 0:10:46.000 --> 0:10:48.760 lot of that are semiconductor firms and they've been pretty 0:10:48.760 --> 0:10:54.240 awful lately. So the opportunities are considerable. Companies in the 0:10:54.280 --> 0:10:58.280 microcontroller and power semic inductor area that have an industrial focus, 0:10:58.440 --> 0:11:04.880 like infinion firm or Renaissance in Japan or We also 0:11:04.880 --> 0:11:08.880 are very interested in the two big memory non US 0:11:08.920 --> 0:11:13.800 memory companies, Memory semiconductors, Samsung Electronics and sk Heinex. So 0:11:13.880 --> 0:11:19.600 they we think they that given the the increasing need 0:11:19.640 --> 0:11:23.559 for semiconductor content, whether it be in automotive applications or 0:11:23.600 --> 0:11:27.880 other industrial applications, not to mention in the devices that 0:11:27.920 --> 0:11:32.679 we all use smartphones, PCs, and then of course there's 0:11:32.800 --> 0:11:37.400 data centers that the demand will pick up quite significantly 0:11:37.600 --> 0:11:42.600 in these areas of what we call building, which is 0:11:42.640 --> 0:11:47.880 predominantly again semiconductors. And then in AI delivery that would 0:11:47.920 --> 0:11:51.320 be phase two. That would be companies that are involved 0:11:51.320 --> 0:11:56.160 in network infrastructure and end devices, so we like Marauder 0:11:56.280 --> 0:11:59.520 manufacturing for example, and then Samsung and Heinex are involved 0:11:59.520 --> 0:12:02.640 there too. And then I say you said three to 0:12:02.720 --> 0:12:06.760 five years. At the five year mark, that could be deployment. 0:12:07.040 --> 0:12:13.679 And so enterprises now Causeway as an example, we're deploying AI, 0:12:13.760 --> 0:12:16.800 but we know we're early, and we're looking for all 0:12:17.360 --> 0:12:20.000 we're asking our peers what they're doing, any type of 0:12:20.040 --> 0:12:23.120 consulting help, if we need it, we get it. We 0:12:23.160 --> 0:12:26.560 think enterprises globally are at the early stage, particularly those 0:12:26.559 --> 0:12:30.800 that are already just engaged in digital transformation, they need 0:12:31.600 --> 0:12:34.880 quite a bit of help. And that's where it services. 0:12:34.880 --> 0:12:39.960 Companies like Fujitsu in Japan or SAP in Germany, where 0:12:40.640 --> 0:12:43.720 enterprise software is their main line of business, they should 0:12:43.760 --> 0:12:47.880 do quite well. And then companies that are just going 0:12:47.920 --> 0:12:51.840 to imbue AI in their products or embed I would 0:12:51.880 --> 0:12:54.959 say ten Cent and China is an example of that. 0:12:55.360 --> 0:12:57.480 So I've just rottled off a whole lot of stocks, 0:12:57.760 --> 0:12:59.040 and none of them are Nvidia. 0:13:00.640 --> 0:13:02.360 Well, I actually do you know you mentioned a video. 0:13:02.559 --> 0:13:05.880 You know that's obviously you know, trading at a much 0:13:05.960 --> 0:13:08.840 higher valuation. You know, no one would consider that a 0:13:08.920 --> 0:13:10.280 value stock. But I do want to ask you a 0:13:10.320 --> 0:13:13.120 follow up on valuations. You know you mentioned it in 0:13:13.160 --> 0:13:16.720 your process, and you know you alluded to a few metrics. 0:13:17.760 --> 0:13:20.320 I guess you know, when you're looking at companies, is 0:13:20.320 --> 0:13:23.720 there kind of like a cutoff of certain metrics that 0:13:23.800 --> 0:13:25.959 you would consider? You know, like, how does that fit 0:13:26.000 --> 0:13:28.440 into the entire process of evaluating companies? 0:13:29.840 --> 0:13:32.920 There are we don't have strict multiples where we walk away, 0:13:33.200 --> 0:13:37.040 but we are we get very uncomfortable when we see 0:13:37.240 --> 0:13:41.240 that there are high multiples in a stock where we're 0:13:41.640 --> 0:13:46.000 already observing record levels of earnings or what we call 0:13:46.160 --> 0:13:50.680 cyclical peaks in earnings. And this is where value investing 0:13:50.800 --> 0:13:55.120 can be a little bit confusing because it simplistically and 0:13:55.320 --> 0:13:59.960 per the indices, value investing consists of low pe multi 0:14:00.080 --> 0:14:03.400 full low price to book, low price to cash flow stocks. 0:14:04.160 --> 0:14:07.320 But that could be for a deep cyclical stock when 0:14:07.360 --> 0:14:10.400 earnings are at its zenith, just the absolute long time 0:14:10.440 --> 0:14:13.360 to own them. In fact, you might be much better off. 0:14:13.400 --> 0:14:16.320 And we know this and so do our quantitative colleagues 0:14:16.320 --> 0:14:21.720 through their research that some cyclical companies and Laurent referred 0:14:21.720 --> 0:14:24.040 earlier to some of the European industrials that they'd make 0:14:24.120 --> 0:14:28.800 great examples of. We invested in is about two years ago. 0:14:28.840 --> 0:14:34.680 A French rail operator, rail equipment manufacturer, signaling manufacturer Alstom 0:14:35.520 --> 0:14:38.960 and Alstam was made a poor acquisition in Bombard det 0:14:39.040 --> 0:14:43.440 Transport in Canada, so they ended up with an integration problem, 0:14:43.840 --> 0:14:46.320 They ended up with a cost problem through COVID, and 0:14:46.360 --> 0:14:48.560 they also ended up with a pricing problem with contracts, 0:14:48.560 --> 0:14:52.480 so they the earnings were collapsing, so the multiple began 0:14:52.520 --> 0:14:55.000 to expand, but it wasn't because this was a growth stock, 0:14:55.160 --> 0:14:59.880 was because it was broken cyclical, and that was precisely 0:15:00.200 --> 0:15:02.400 time to own it. They had to show up their 0:15:02.400 --> 0:15:06.920 balance sheet and that gave us an opportunity. So we're 0:15:07.240 --> 0:15:13.560 very opportunistic. That core of our strategy international is to 0:15:13.640 --> 0:15:17.120 make sure we own companies that are well positioned as 0:15:17.160 --> 0:15:19.520 long as we have that, And another example would be 0:15:19.600 --> 0:15:24.920 in aerospace with the wide body aircraft engine manufacturer Rolls Royce. 0:15:25.320 --> 0:15:31.240 The pandemic was devastating for them and they bled cash 0:15:31.280 --> 0:15:35.280 flow and they too had to shore up their balance sheet. 0:15:35.880 --> 0:15:39.960 But what a phenomenal market position with two competitors Pratt 0:15:39.960 --> 0:15:43.600 and Whitney and ge and a great business that needed 0:15:43.640 --> 0:15:46.480 to be better managed. But as long as we have that, 0:15:47.680 --> 0:15:51.360 and or the companies in fine financial shape, they've just gone. 0:15:51.480 --> 0:15:56.520 They've just had some mix miss execution by management that 0:15:56.640 --> 0:16:00.000 makes a huge difference. We're again this is a long 0:16:00.080 --> 0:16:02.520 with an answer, but there are no specific multiples that 0:16:02.560 --> 0:16:06.200 are appropriate. There's more a question of what are normalized 0:16:06.240 --> 0:16:09.280 learnings when can the company get Can they do that 0:16:09.360 --> 0:16:11.560 in our two year window? How long will it take? 0:16:12.040 --> 0:16:16.120 Yeah? I have a question on another important aspect of 0:16:16.200 --> 0:16:20.520 the investment process, which is ESG. ESG has been a 0:16:20.600 --> 0:16:23.640 big investment theme in Europe for the past few years, 0:16:23.640 --> 0:16:26.560 but we have seen a bit of pushback. So how 0:16:26.880 --> 0:16:32.560 ESG criteria impacting your investment decisions? And as a stock picker, 0:16:32.600 --> 0:16:34.720 do you think it makes a difference, because there is 0:16:34.760 --> 0:16:38.120 a lot of debate about the value add of ESG 0:16:38.280 --> 0:16:41.640 data in an investment process. So what is your view 0:16:41.720 --> 0:16:42.440 on this topic. 0:16:43.320 --> 0:16:48.880 Well, we are convinced that material sustainability factors have the 0:16:48.920 --> 0:16:53.560 potential to impact investment performance. We've seen it and it 0:16:53.680 --> 0:16:57.440 wasn't until we hired our colleague in our con area 0:16:57.680 --> 0:17:05.159 more over five years ago, who helped us create a 0:17:05.280 --> 0:17:09.320 systematic way to understand ESG within the companies that we 0:17:09.320 --> 0:17:13.280 were analyzing. And this is important. It's one thing just 0:17:13.320 --> 0:17:16.119 to ask a few questions about governance. It's another to 0:17:16.119 --> 0:17:21.120 ask specific questions that we know lead to that when 0:17:21.160 --> 0:17:23.560 we score them, we can compair all companies on a 0:17:23.600 --> 0:17:30.240 level playing field within the country of their listing and 0:17:30.320 --> 0:17:33.280 that's been very helpful. So governance the G. If you 0:17:33.320 --> 0:17:36.840 were to put ESG together, the G is the one 0:17:36.960 --> 0:17:40.080 that has we think of the greatest potency, but E 0:17:40.240 --> 0:17:44.119 isn't very far behind and neither is s and the 0:17:44.160 --> 0:17:48.639 way we think about ease in terms of companies carbon 0:17:48.640 --> 0:17:52.520 emissions and water usage, and we get that information from 0:17:52.640 --> 0:17:58.440 databases and then we supplement within company conversations. But polluters 0:17:58.520 --> 0:18:02.720 and companies that misused sources are typically badly managed. So 0:18:02.880 --> 0:18:06.520 there's a perfect or an excellent alignment between what we're 0:18:06.560 --> 0:18:09.520 looking for, which are which are underlying good businesses that 0:18:09.600 --> 0:18:13.560 have great potential but something is going awry, and the 0:18:13.600 --> 0:18:19.800 way they treat the resources they have, So everything about 0:18:20.000 --> 0:18:22.439 that is aligned with what we do. And as for 0:18:22.560 --> 0:18:26.800 social our understanding of how they how companies treat their 0:18:26.880 --> 0:18:31.520 labor and what is what may be occurring in their 0:18:31.520 --> 0:18:37.760 supply chain such concerns, for example, with modern slavery. The 0:18:37.800 --> 0:18:40.840 more companies can tell us about that, the more transparency 0:18:40.880 --> 0:18:43.160 we have into how they run their operations. And again 0:18:43.240 --> 0:18:48.359 that's totally aligned. So our process involves quantifying through a 0:18:48.400 --> 0:18:53.840 series of questions and companies ESG, positioning, scoring, and then 0:18:54.280 --> 0:18:59.360 comparing the scores over time, and we talk about ESG 0:18:59.760 --> 0:19:02.800 and sustainability at the time we present a new stock, 0:19:03.560 --> 0:19:06.560 we'll review it if there are significant changes, which there 0:19:06.600 --> 0:19:10.240 often are. Albeit most of our information comes in annually, 0:19:10.840 --> 0:19:14.160 and we have discussions with companies about how they are 0:19:14.200 --> 0:19:16.720 going to reach the goals they've set. And this is 0:19:16.760 --> 0:19:20.600 true across the ESG spectrum as well as financial and 0:19:20.640 --> 0:19:24.640 they're often interlinked because that's our job as investors. It's 0:19:24.640 --> 0:19:28.200 an active approach we take to hold the companies accountable 0:19:28.520 --> 0:19:30.080 for the goals they have established. 0:19:30.920 --> 0:19:35.240 So now moving on more to investment opportunities in different 0:19:35.320 --> 0:19:38.400 parts of the world. At this stage, I mean, where 0:19:38.400 --> 0:19:42.320 do you think are the best opportunities globally in terms 0:19:42.359 --> 0:19:46.880 of Europe or emerging markets? Emerging markets? What are your 0:19:47.000 --> 0:19:50.520 use potentially on China evens that they are I would 0:19:50.520 --> 0:19:55.760 say many issues there. And also are you view on 0:19:56.320 --> 0:20:00.720 geography acquisition depending on what is going going to oppen 0:20:00.840 --> 0:20:02.840 to the US economy as well. 0:20:03.560 --> 0:20:09.199 The opportunities are widespread, and our geographic exposure in the 0:20:09.480 --> 0:20:13.560 International Fund is entirely a byproduct of our bottom up 0:20:13.560 --> 0:20:18.440 stock selection process. Okay, but I did mention risk model, 0:20:18.440 --> 0:20:21.800 and I mentioned it very briefly. If it turns out 0:20:21.880 --> 0:20:26.439 that we become as portfolio managers too enthusiastic about a 0:20:26.480 --> 0:20:29.240 certain geography, we will start to see the risk scores 0:20:29.760 --> 0:20:33.320 begin to increase on those stocks because we will have 0:20:33.440 --> 0:20:38.800 concentrated risks in one particular area. So it's our quantitative 0:20:38.880 --> 0:20:43.800 risk model that keeps us diversified when a portfolio that 0:20:44.240 --> 0:20:48.879 averages about sixty stocks, and that's really important across the 0:20:48.920 --> 0:20:55.000 whole spectrum of factors, but region is certainly one of them. 0:20:55.440 --> 0:20:57.679 We've had clients ask us why do you have so 0:20:57.800 --> 0:21:01.800 much in the UK, and it is a large overweight 0:21:02.160 --> 0:21:05.199 for our fund, and one of the reasons why is 0:21:05.240 --> 0:21:09.159 because the companies listed there don't do very much business 0:21:09.160 --> 0:21:14.760 in the UK, so it's not really UK risk we're taking. 0:21:15.560 --> 0:21:23.600 An example would be the UK beverages company Dago Dago, 0:21:23.760 --> 0:21:29.159 known for world class spirits, and they have six percent 0:21:29.200 --> 0:21:31.840 of their revenues in the UK market, so they're listed 0:21:31.880 --> 0:21:34.159 in the UK, their headquarters are there, but that is 0:21:34.200 --> 0:21:37.800 really not where their economic exposure resides. Or maybe more 0:21:37.840 --> 0:21:41.760 extreme and one of the stocks that we think has 0:21:41.920 --> 0:21:47.119 considerable upside is the Life in Asia life insurance company Prudential, 0:21:47.720 --> 0:21:51.240 listed in the UK for historic reasons, and yet they 0:21:51.240 --> 0:21:55.679 have no revenue in the UK. So the country of 0:21:55.720 --> 0:21:58.560 listing can be a little deceptive, and we spend time 0:21:58.600 --> 0:22:02.560 with our clients showing them where the economic exposure resides 0:22:02.600 --> 0:22:08.040 from a revenue perspective versus the benchmark, typically the EFA 0:22:08.280 --> 0:22:14.040 or world XUS Index. But our risk model does an 0:22:14.080 --> 0:22:18.200 even better job of discerning where our risks are geographically 0:22:18.240 --> 0:22:21.679 and making sure we don't concentrate where the opportunities are. 0:22:21.720 --> 0:22:24.919 I was going to get to that, which is just 0:22:24.960 --> 0:22:28.720 about everywhere. I'd say some of these UK companies I mentioned, 0:22:28.840 --> 0:22:37.199 like Rolls Royce still significant upside, or the financials company Barclays, 0:22:38.160 --> 0:22:41.879 or in energy we're very much like VP, the integrated 0:22:41.880 --> 0:22:45.679 oil company. I'm just rattling off a few UK but 0:22:45.800 --> 0:22:47.960 there are plenty in Europe too, and quite a few 0:22:47.960 --> 0:22:51.840 listed in France I'd mentioned earlier Alstom, and then the 0:22:51.920 --> 0:22:57.240 luxury goods company Caring, the owner of Gucci, amongst other brands. 0:22:58.320 --> 0:23:04.200 Sangobin and Materials are airly keyed in industrial gases, Sanathee 0:23:04.240 --> 0:23:09.760 in healthcare. All of these companies have a reason they're 0:23:09.760 --> 0:23:13.280 in the portfolio, and it's it's because their risk adjuster 0:23:13.400 --> 0:23:20.360 return is very attractive versus the other alternatives. We're not hesitant, however, 0:23:20.480 --> 0:23:23.480 if their share prices rise, we will be reducing the 0:23:23.520 --> 0:23:27.000 weight in the portfolio and then recycling those sales proceeds 0:23:27.040 --> 0:23:31.760 back into higher ranking stocks. But I again would reiterate 0:23:32.760 --> 0:23:36.680 Europe looks very attractive from a yield perspective, dividends and 0:23:38.040 --> 0:23:42.040 buybacks versus rescue the world. But there's no there's no 0:23:42.200 --> 0:23:45.920 one part that we favor over another. They're just where 0:23:45.960 --> 0:23:47.240 we can find the stocks. 0:23:47.520 --> 0:23:51.840 Okay. And so given you your US based investors, given 0:23:51.920 --> 0:23:54.840 the large positions that you're have in the UK and Europe, 0:23:55.359 --> 0:23:58.560 all the countries, how do you manage the currency risks? 0:23:59.800 --> 0:24:03.240 I mean, is it integrated in your risk EDUSM model 0:24:03.400 --> 0:24:06.639 because some of the currencies could be very volatile. We 0:24:06.720 --> 0:24:09.760 saw it very recently with the yen. So how do 0:24:09.880 --> 0:24:12.480 you manage I mean this type of risk as a 0:24:12.640 --> 0:24:15.120 US based investor in. 0:24:15.119 --> 0:24:20.600 Two ways That primarily through as you noted, our risk model, 0:24:20.760 --> 0:24:24.080 because our risk model does include currency, and our risk 0:24:24.119 --> 0:24:27.600 model is very because we review it once a week 0:24:27.640 --> 0:24:31.199 in our portfolio manager meeting with one of our quantitative 0:24:31.200 --> 0:24:35.680 portfolio managers, it becomes very clear where we are taking 0:24:35.800 --> 0:24:39.480 large active bets, where our weights in the portfolio either 0:24:39.560 --> 0:24:45.160 greatly exceed or maybe maybe we are very underweight versus 0:24:45.240 --> 0:24:47.840 benchmarking currencies. And the end it has been one of 0:24:47.880 --> 0:24:50.960 them where we've been underweight because our allocation to Japanese 0:24:51.000 --> 0:24:56.680 stocks has been less than that a benchmark. But as 0:24:56.760 --> 0:24:59.439 for what the vault of the currency actually does to 0:24:59.480 --> 0:25:02.960 the portfolio, that we think about at the stock level, 0:25:03.160 --> 0:25:05.840 So in order to arrive at a two year price target, 0:25:05.920 --> 0:25:11.200 we have to be very confident in how sensitive earnings 0:25:11.240 --> 0:25:14.639 are of the particular company to fluctuations, and it's in 0:25:14.680 --> 0:25:18.560 the currencies that are meaningful to it. Then for a 0:25:18.560 --> 0:25:24.440 big exporter in Japan, dollar yen or dollar or yen 0:25:24.560 --> 0:25:28.320 euro can be very important. So we'll look at that 0:25:28.440 --> 0:25:30.719 and then if it turns out we think the stock 0:25:31.080 --> 0:25:34.560 is too vulnerable to currency fluctuations, we may that we 0:25:34.640 --> 0:25:39.800 may hesitate or certainly create a greater hurdle so that 0:25:39.880 --> 0:25:44.280 we buy the stock even cheaper. The beauty of having 0:25:44.320 --> 0:25:48.120 a great proprietary multi factor risk models and we blend 0:25:48.160 --> 0:25:52.679 all the currencies in the portfolio, they tend to negate 0:25:52.720 --> 0:25:56.200 some of the risks of having too much of any 0:25:56.240 --> 0:25:58.480 one of them. So there's a there's an element of 0:25:58.560 --> 0:26:03.920 duristfication that is fair useful in ensuring the portfolio doesn't 0:26:04.000 --> 0:26:07.840 end up, for example, being taken for a ride by 0:26:07.920 --> 0:26:09.120 the yen volatility. 0:26:09.960 --> 0:26:13.680 You know, we've talked about your selection criteria, what you 0:26:13.720 --> 0:26:16.320 look for. You know, if we talk kind of about 0:26:16.359 --> 0:26:18.639 on the opposite side, what triggers or sell. Is it 0:26:18.680 --> 0:26:21.320 when a company hits its price target or you know 0:26:21.400 --> 0:26:24.040 the fundamental you know, could a company still be undervalued, 0:26:24.040 --> 0:26:26.520 but it's fundamentals changed that that could lead you to 0:26:27.119 --> 0:26:27.920 selling a position. 0:26:29.320 --> 0:26:34.040 Yes, so well, we typically sell because stocks drift down 0:26:34.240 --> 0:26:37.880