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Speaker 1: This is Master's in Business with Barry rid Holds on

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Speaker 1: Bloomberg Radio.

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Speaker 2: This week on the podcast, I have an extra special guest.

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Speaker 2: I love finding these people who are just absolute rock

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Speaker 2: stars within their space that most of the investing public

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Speaker 2: probably is not familiar with, haven't heard about them. Maybe

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Speaker 2: they're a little below the radar or institutionally facing, and

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Speaker 2: so the average investor is unaware of them. You certainly

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Speaker 2: are familiar with GMO. Jeremy Grantham shop with Mayo and

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Speaker 2: Ottolou his partners. That shot was founded in nineteen seventy seven.

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Speaker 2: The person who heads their focus and quality strategies this

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Speaker 2: gentleman named Tom Hancock. He also helps run some of

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Speaker 2: their mutual funds and helped put together their first ETF

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Speaker 2: and he as really quite an astonishing track record. The

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Speaker 2: Quality Fund mutual fund that GMO runs, that symbol gq

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Speaker 2: et X, it's just crushed it over the past decade,

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Speaker 2: thirteen point six percent a year, way over both its

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Speaker 2: index and its benchmark. It's in the top one percent

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Speaker 2: of its peers Morning Star, five star, gold rated, just

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Speaker 2: really really interesting. And Tom has helped with the introduction

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Speaker 2: of GMO's first retail product the Quality ETF stock symbol QLTY.

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Speaker 2: GMO has been institutionals since they launched in nineteen seventy seven.

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Speaker 2: This is the first time they're putting out a product

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Speaker 2: for retail, and Tom explains what goes into quality stock selection,

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Speaker 2: why they went to the ETF. You wouldn't be surprised

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Speaker 2: to learn the tax consequences of owning a mutual fund

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Speaker 2: is a part of it. Really fascinating guy, tremendous track record,

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Speaker 2: unusual background comes from computer science and software and pivoted

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Speaker 2: into quantitative investing. I found this conversation to be really

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Speaker 2: fascinating if you're at all interested in focused portfolios, the

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Speaker 2: concept of quality as a sub sector, undervalue, and just

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Speaker 2: how you build a portfolio, and a track record that's

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Speaker 2: tough to be. I think you'll find this conversation as

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Speaker 2: fascinating as I did. With no further ado my discussion

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Speaker 2: with GMOs. Tom Hancock, Thanks, Perry, it's great to be here.

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Speaker 2: So you have a really interesting and unusual background. Let's

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Speaker 2: start there. Computer science bachelors from RPI in eighty five,

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Speaker 2: PhD in computer science from Harvard in ninety two. What

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Speaker 2: was the career plan?

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Speaker 1: Yeah, well it wasn't doing investing quality stocks in the

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Speaker 1: early days, that's for sure. I actually come from a

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Speaker 1: very academic family. My father was a university professor. My

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Speaker 1: mother worked as an editor. Her father had been a

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Speaker 1: university professor. You have doctors in the family. I actually

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Speaker 1: don't know that anyone in my family actually had a

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Speaker 1: job at a private, for profit, traditional company. Ever, I'm

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Speaker 1: the first, so I'm kind of the black sheep, So

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Speaker 1: that's where I started from. In fact, the fact that

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Speaker 1: I actually went into computer science rather the more liberal

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Speaker 1: arts discipline, was a little bit non traditional, let's say.

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Speaker 1: And I think that was kind of an early wise

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Speaker 1: decision that I give myself credit for. Is back in

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Speaker 1: high school, I was really interested in history and stuff,

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Speaker 1: but I didn't really want to be a historian, So

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Speaker 1: it's like, what do I actually like to do as

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Speaker 1: opposed to think was interesting? And that's where at the

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Speaker 1: time your computer programming was becoming a thing. I really

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Speaker 1: loved it. That led me down that track, and really,

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Speaker 1: while I had a software engineering job, I was always

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Speaker 1: sort of pointing toward a research career. And then at

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Speaker 1: some point after my PhD school studies, we could get

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Speaker 1: into that if you like, but I kind of decided

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Speaker 1: to switch, and finance was kind of what was available

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Speaker 1: for me at that point.

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Speaker 2: Yeah, let's lead up to that transition. Software engineer at IBM,

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Speaker 2: then you get your PhD. Then research at SEMENS, which

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Speaker 2: seems to be more of a technological position than a

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Speaker 2: finance position. What was your focus within tech?

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Speaker 1: I worked the area in which I studied in graduate school,

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Speaker 1: and then worked at SEMENS, which, as you say, it's

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Speaker 1: a research lab, think like Bell Labs, IBM, Watson, that

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Speaker 1: kind of think tank environment. I worked on machine learning,

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Speaker 1: which is a sub field of of course, artificial intelligence.

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Speaker 1: So the nineties, Yeah, that was a nineties So artificial

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Speaker 1: intelligence is a it's an area that's been around for

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Speaker 1: a long time. I think the term was coined in

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Speaker 1: the nineteen fifties. But I was doing it, at least,

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Speaker 1: I should say, working on a small part of it

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Speaker 1: back in the nineties in graduate school is at a

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Speaker 1: fairly theoretical way. A Semens who was with more applications

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Speaker 1: in mind.

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Speaker 2: So, so how does the transition to finance take place? It

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Speaker 2: seems like maybe you're going to tack into researcher academia.

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Speaker 2: How did you find your way to both finance and GMO.

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Speaker 1: Yeah, so there's two parts of that. One is just

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Speaker 1: sort of why not the academic track, and then by

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Speaker 1: the finance part. So the why not the academic track

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Speaker 1: was in academia, I was doing very theoretical stuff that

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Speaker 1: was very maybe intellectually interesting, but understood by increasingly few

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Speaker 1: people in the world. So I just sort of wanted

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Speaker 1: to be something that was a little more relevant, and

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Speaker 1: I thought maybe the research lab would provide that, and

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Speaker 1: for various reasons, it still didn't feel like that. So

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Speaker 1: it was I was basically looking for something that was relevant.

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Speaker 1: You know, I want to be loved like everyone white,

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Speaker 1: So I want to do something that I can talk

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Speaker 1: to people about and they don't want to be loved.

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Speaker 2: Do you want to go into finance? That's one or

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Speaker 2: the other.

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Speaker 1: Well, so, at least the other with finance, which wasn't

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Speaker 1: certainly an opportunistic element to that, Like what kind of

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Speaker 1: industry he hires people that values fancy academic degrees that

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Speaker 1: don't have necessary a lot of developed specific skills and finance,

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Speaker 1: I said, management consulting is any of the other thing,

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Speaker 1: at least at that time, was the other career trajectory.

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Speaker 1: Just my personality more of an math oriented introvert. Finance

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Speaker 1: was the natural fit for GMO particularly. I got really

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Speaker 1: lucky when I was in graduate school, so I was

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Speaker 1: at Harvard. Harvard has a smaller computer science department. We

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Speaker 1: do a lot down the river at MIT, and I

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Speaker 1: went to a research group there. I was headed by

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Speaker 1: Ron Revest, who's perhaps known to some as you are

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Speaker 1: behind RSA cryptography, but he also worked in machine learning

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Speaker 1: in this area. And he ran this research group of

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Speaker 1: scruffy grad students and postdocs that I would go to.

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Speaker 1: But there was this one guy who came from downtown

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Speaker 1: who wore a suit, and no one quite knew who

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Speaker 1: he was. I asked, so, who's that guy? You think

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Speaker 1: he's a banker, And he was a very smart guy.

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Speaker 1: My mental image was that he worked in the back

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Speaker 1: of a bank approving mortgage applications. He was really frushtra

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Speaker 1: and this was his intellectual outlook. It turns out that

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Speaker 1: was not what he was. He was a guy named

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Speaker 1: Chris Darnell who was the start of the quantitative research

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Speaker 1: effort at GMO. He was Jeremy Grantham's right hand man

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Speaker 1: in the early eighties, but he was just he also

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Speaker 1: came for an academic family. He had broad interests. He

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Speaker 1: came to this group. I'm not even quite sure how

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Speaker 1: he found it, honestly, but in any case, when I

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Speaker 1: was sort of casting around at places to look, that

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Speaker 1: connection was rekindled and that was my entree into GMO.

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Speaker 2: Really really interesting. And you joined GMO in nineteen ninety five,

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Speaker 2: you've been there ever since. That's kind of unusual these

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Speaker 2: days in finance to stay with one firm, for Gee,

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Speaker 2: it's almost thirty years. What makes GMO so special? What's

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Speaker 2: kept you there for three decades?

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Speaker 1: It's been a great place to work, obviously, I've thought so.

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Speaker 1: I think GMO felt very familiar to me when I

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Speaker 1: joined as a smaller firm I think maybe sixty people

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Speaker 1: at the time. It's very much of a intellectual debate,

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Speaker 1: academic kind of vibe. It felt very comfortable to me,

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Speaker 1: and the firm's grown. I've kind of grown with it.

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Speaker 1: I think one of the things that kept me engaged

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Speaker 1: is I've actually done different things, so kind of as

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Speaker 1: we're alluding to, and as you'd think, my background is

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Speaker 1: very much on the quantitative side. Now I do fundamental

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Speaker 1: side research portfolio management.

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Speaker 2: So you joined GMO, there's sixty people. Thirty years, they've

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Speaker 2: grown tremendously. How big is GMO today versus when you joined,

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Speaker 2: and what was that process like to experience all that growth?

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Speaker 1: Yeah, I think it's about five hundred people today. The

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Speaker 1: book are in Boston, which is where I sit, but

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Speaker 1: we have investment offices in San Francisco, in London, in

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Speaker 1: Singapore and Sydney, Australia, so it's a global firm of

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Speaker 1: the One of the things, these are things. When I

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Speaker 1: started at GMO, it was really just investment people almost

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Speaker 1: and all the sort of compliance, clients, service, legal kind

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Speaker 1: of everything was done sort of on the side by

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Speaker 1: investment people. And gradually we hired we professionalized.

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Speaker 2: Over time, you've become an enterprise. It's ten x what

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Speaker 2: it once was in terms of headcount, it's much bigger

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Speaker 2: in terms of assets. And I can tell you from

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Speaker 2: personal experience US finance people, we're not great at accounting, legal, compliance,

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Speaker 2: all the detailer and stuff that keeps a firm running.

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Speaker 1: The trick is we're not great, but we think we are.

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Speaker 1: So that's where we get into trouble.

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Speaker 2: That's that's a lot that's really true. We hear a

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Speaker 2: lot about Jeremy grantham thoughts on markets, but much less

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Speaker 2: on how the firm is managed, how this growth came about,

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Speaker 2: and the culture as a business. Tell us a little

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Speaker 2: bit about GMO as a cultural enclave up in Boston.

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Speaker 1: Yeah. Well, one thing to start with there is the

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Speaker 1: name GM and O and it's three people, and people

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Speaker 1: know Jeremy Grantham, I think very well, but that Dick

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Speaker 1: Mayo and Ike van Ottolou are the other two. And

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Speaker 1: that's relevant to your question because from the very early

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Speaker 1: days before I was there, they kind of operated separate

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Speaker 1: investment teams. Dick Mayo was a traditional, i'd say, portfolio

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Speaker 1: strong portfolio manager focused on US stocks. Ike was similarly

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Speaker 1: international stocks, and Jeremy is kind of the go everywhere,

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Speaker 1: top down, big ideas guy, and that a bit of

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Speaker 1: that culture. Dick and ike An both retire now, but

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Speaker 1: a lot of that culture of different investment teams that

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Speaker 1: do things a little bit differently is very much part

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Speaker 1: of GMO. There is not one central view to the firm.

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Speaker 1: Jeremy is a very strong, powerful persona and very deep thinker.

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Speaker 1: Jeremy's never really been a portfolio manager, his role has

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Speaker 1: always been, in my experience, at least, it has always been

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Speaker 1: much more of a gadflaw. He makes you think about things,

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Speaker 1: he makes suggestions, he pushes you to come to your

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Speaker 1: own conclusion. He leads you to watch. But he's not

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Speaker 1: a hands on the portfolio person.

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Speaker 2: Huh. Really interesting. We had him down sometime last year,

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Speaker 2: came by our offices and spoke, and I very much

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Speaker 2: get the sense he has no interest in retiring. He

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Speaker 2: loves what he does. He is very plugged into everything

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Speaker 2: that's going on. He's gonna do this forever, isn't he?

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Speaker 1: That would be my guess. Yeah, I think he probably

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Speaker 1: will outlast me in the industry. He is one of

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Speaker 1: the smartest people I've ever met and one of the

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Speaker 1: most driven people I've ever met. He has a I

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Speaker 1: think and hope along professional life span ahead of him.

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Speaker 1: I would say he is a little bit less focused

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Speaker 1: on what you might call the day to day of

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Speaker 1: investing at GMO, and he does a lot of stuff outside.

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Speaker 1: He's very involved with the Grantham Foundation, his charitable organization,

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Speaker 1: both on their mission but also on the investing side

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Speaker 1: of managing their portfolio.

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Speaker 2: So that raised a really interesting question. He's a big

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Speaker 2: picture guy. He's always looking for what risks and what

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Speaker 2: black swans might be coming at us that the investment

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Speaker 2: community either hasn't found yet or isn't paying attention to.

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Speaker 2: How do you translate that thirty thousand foot view as

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Speaker 2: to what's going on in the world to something like

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Speaker 2: quality and focused investing or is it really just there

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Speaker 2: to sort of help you create a framework for looking

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Speaker 2: at the universe.

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Speaker 1: Well, when I say he's a big picture guy, don't

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Speaker 1: necessarily mean just that he's investing is to make macro calls.

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Speaker 1: I mean more than he steps back from the fray

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Speaker 1: a bit and thinks about the big ideas and what

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Speaker 1: really matters, and that whole idea around quality investing. That's

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Speaker 1: kind of Jeremy from the nineteen eighties early eighties and

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Speaker 1: saying bangs say, hey, you know, I cut my teeth

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Speaker 1: as he and Digmeo did on that traditional deep value investing.

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Speaker 1: But we're missing something here with these higher quality companies.

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Speaker 1: How should we think about that? How can you invest

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Speaker 1: about that? How can we improve our process? So that

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Speaker 1: sort of philosopha call outside and around the box thinking

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Speaker 1: is kind of what really led to us having a

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Speaker 1: quality oriented strategy.

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Speaker 2: And quality is really a sub section of value. Is

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Speaker 2: that is that what you're suggesting, it's.

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Speaker 1: An improvement of value or refinement on the definition of value.

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Speaker 1: And people use these terms loosely, of course, and these

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Speaker 1: all fall under the rubric of fundamental investing and buying

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Speaker 1: companies that are great over long term at great prices.

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Speaker 1: But the idea that companies that can compound at high

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Speaker 1: rates of return and deserve premium multiples you should be

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Speaker 1: willing to pay for them is the root of it.

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Speaker 2: The quality funds ticker gq ETX has returned thirteen point

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Speaker 2: six percent a year over the past decade, putting it

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Speaker 2: in the top one percent of its peers. So let's

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Speaker 2: talk a little bit about what goes into that sort

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Speaker 2: of performance. What are the core themes at GMO around

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Speaker 2: focus and quality? Tell us a little bit about what

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Speaker 2: differentiates GMO from the way other value investors invest.

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Speaker 1: If you're think about value investors, value investors traditionally are

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Speaker 1: people who kind of know the price of everything and

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Speaker 1: the value of nothing right. They're much too focused on

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Speaker 1: ratios around trailing fundamentals and not on the plus side

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Speaker 1: future growth opportunities. On the negative side, maybe competitive threat.

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Speaker 1: So bringing the quality idea into that, thinking about what

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Speaker 1: companies have a long trajectory to grow and to grow

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Speaker 1: at high return on capital, that's the key thing. Also

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Speaker 1: differentiating between growth that's just sort of throwing money at

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Speaker 1: the wall and seeing a little bit come back to

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Speaker 1: you versus very efficient growth. That's the key to quality investing.

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Speaker 1: I could maybe flip that around a little bit since

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Speaker 1: I think, particular post two thousand and two thousand and nine,

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Speaker 1: the quality style of investing has become a lot more popular,

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Speaker 1: certainly sending people talk a lot about the difference between

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Speaker 1: our approach and a lot of quality managers is they're

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Speaker 1: really quality growth managers. So the quality but at a

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Speaker 1: reasonable price, or you could interpret that is not just

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Speaker 1: chasing the companies everybody knows are high quality, but finding

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Speaker 1: a few maybe more neglected names That quality to reasonable

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Speaker 1: price is a little bit of a different style than

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Speaker 1: I see most people practicing out there.

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Speaker 2: So let's get into some of the definitions of this.

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Speaker 2: How does GMO define quality?

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Speaker 1: Yeah, so we think about quality first off, the ability

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Speaker 1: to deliver high returns on investment going forward. Then what

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Speaker 1: enables that you have to have some asset ability, capability

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Speaker 1: that competitors can't equally duplicate. I mean traditionally could have

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Speaker 1: been like a physical asset or brand. Of course, these

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Speaker 1: days in an IT world as much more about network

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Speaker 1: effects of platform companies and such. But you have to

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Speaker 1: have that special sauce that's not reproducible. It has to

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Speaker 1: be doing something that's relevant, Like you want to avoid

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Speaker 1: the trap of companies that do one thing well and

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Speaker 1: that thing's not growing, so they just try to do

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Speaker 1: other stuff. And then management does also come into play.

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Speaker 1: I do keep a strong balance sheet? Are you prudent?

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Speaker 1: Do you invest when you should? Return capital when you should?

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Speaker 1: And so as those assets, the relevance and then capital

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Speaker 1: discipline are the key components for us.

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Speaker 2: Given that definition of quality, has that evolved or changed

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Speaker 2: over time or has that been pretty much the definition

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Speaker 2: going back to the eighties or nineties.

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Speaker 1: That's been pretty much the definition going back to the

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Speaker 1: eighties and nineties. And I told you kind of the

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Speaker 1: fundamental definition. There's also quantitative metrics that we look at.

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Speaker 1: Those have evolved, but always within that capabilit cluster of

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Speaker 1: high returns on investment stability across the economic cycle. Or

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Speaker 1: consistent and strong balance sheets. What has changed over that period, too,

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Speaker 1: is what kinds of companies best meet that threshold. So

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Speaker 1: if you go back to the eighties and nineties, we're

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Speaker 1: talking about like the Cokes and Procter and Gambles and

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Speaker 1: Johnson Johnson, right, and big consumer and healthcare and now

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Speaker 1: those are still there, but a lot more of the

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Speaker 1: big tech companies, the fang companies, more growth companies.

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Speaker 2: So for a long time it looked like Apple was

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Speaker 2: a value stock, even as it became big and bigger

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Speaker 2: than giants. But when we look at what people call

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Speaker 2: the Magnificent seven, are you seeing any real value there?

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Speaker 2: Companies like Microsoft and Nvidia and Netflix, I assume are

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Speaker 2: quality companies by your definition, but are they quality at

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Speaker 2: a reasonable price?

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Speaker 1: All the names you mentioned are quality companies, we believe,

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Speaker 1: we don't all We don't hold all of them. It's

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Speaker 1: the prices vary. If you think about Meta and Alphabet,

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Speaker 1: those are kind of the value stocks.

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Speaker 2: And the band right there, well they got you laughed

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Speaker 2: over the past couple of years before last year's recovery.

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Speaker 1: Yeah, and we also hold Microsoft and Apple. Apple is

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Speaker 1: actually an interesting case study because we used them as

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Speaker 1: an example of our investment at our investment conference fifteen

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Speaker 1: years ago about what a high quality company isn't and

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Speaker 1: then Steve Jobs turned the round in the iPhone and

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Speaker 1: so forth with as the rest is history. The point

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Speaker 1: is we were very wrong about them, and we were

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Speaker 1: late to the party. But the party had such long

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Speaker 1: it's such a long party that it's okay to be

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Speaker 1: late to it. You see. We still had a really

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Speaker 1: good time with that company, which I think is a

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Speaker 1: little bit of a lesson for quality investing. You don't

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Speaker 1: have to be the first one in the door. There.

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Speaker 1: These themes run for a long time, and if you're

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Speaker 1: willing to admit your wrong and change your stripes is

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Speaker 1: you can still make money.

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Speaker 2: So there were a few come at GMO, Warren Buffett

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Speaker 2: were quote unquote late to Apple, but did exceedingly well

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Speaker 2: with that. So you don't have to be at the

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Speaker 2: there at the IPO, you don't have to be there

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Speaker 2: when they crash in the dot com implosion. As long

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Speaker 2: as the growth rate is there and the value is reasonable,

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Speaker 2: there's an opportunity.

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Speaker 1: Yep. And speaking of the dot com employes like Microsoft,

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Speaker 1: via a case study where we in previous strategies. We'd

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Speaker 1: held Microsoft for a very long time. That's where the

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Speaker 1: valuation could help us in the dot com bos So

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Speaker 1: Microsoft now is thirty times earn it was over fifty

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Speaker 1: in two thousand and I don't think it was a

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Speaker 1: much better company than it's a pretty good company now.

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Speaker 1: Rh there's great company. You have to at some point

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Speaker 1: be willing not to hold the stock. And yes, actually

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Speaker 1: Microsoft by this point is outperformed since the peak of

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Speaker 1: the cycle, but took a long long time for that

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Speaker 1: to happen.

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Speaker 2: Well, the Boomer era was not where they really shined.

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Speaker 2: New ceo seems to have done a great job over

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Speaker 2: the past what is it five years the doll you's

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Speaker 2: been there for.

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Speaker 1: Yeah, at least that I think at this point we

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Speaker 1: held through the but and actually added in the Ballber era,

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Speaker 1: So that would be our taking the view that at

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Speaker 1: least in this case turned out to be right. That

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Speaker 1: is something companies can fix if the core assets there,

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Speaker 1: you know, the core network effects of everybody using their products,

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Speaker 1: they're being so entrenched in IT systems departments around the world.

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Speaker 1: That was still there. The easiest thing almost to fix.

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Speaker 1: As a CEO, So if his stock's training at thirteen

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Speaker 1: times earnings and has all these great characteristics, and you

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Speaker 1: think the CEO can change, that can be a great time.

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Speaker 2: To roll the bum out, bring someone else in, and

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Speaker 2: the rest is history. So I love this quote of

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Speaker 2: yours on the backwardization of risk. Quote. The expectation is

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Speaker 2: that achieving higher returns requires taking more risk. But higher

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Speaker 2: quality stocks have outperformed lower quality stocks by a considerable

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Speaker 2: margin despite being less risky.

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Speaker 1: Explain, yeah, and that's that's a point that Jeremy Grantham

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Speaker 1: kind of observed very long time ago and is emphasizing

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Speaker 1: for a long time. And actually pen Inkers ahead of

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Speaker 1: our a s allocation group, just wrote a very interesting

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Speaker 1: piece on that too. This idea that at the big

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Speaker 1: picture level, stocks versus bonds things kind of behave what

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Speaker 1: you'd expect. You get more return, but there's more risk

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Speaker 1: associated with it. But if you look within asset classes,

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Speaker 1: that hasn't been true just empirically, Like why is it?

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Speaker 1: It's perplexing really that high quality companies which have been safer, right,

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Speaker 1: they do better in recessions and such have you've not

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Speaker 1: had to pay for that with lower return. And that's

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Speaker 1: that was really the core of Jeremy's observation about quality

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Speaker 1: stocks and why it's not just that quality is this

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Speaker 1: silver bullet just beats the market all the time. I'm

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Speaker 1: sure we necessarily believe that's true. But it does improve

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Speaker 1: your portfolio with lower risk without having to give up return.

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Speaker 2: So the obvious answer is value makes a big difference

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Speaker 2: within quality stocks. Is that what leads to the lower

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Speaker 2: downside in a market dislocation? If you're buying it right,

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Speaker 2: there's less room to fall.

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Speaker 1: Right in isolation, Quality on average gives you downside protection.

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Speaker 1: Certainly did in two thousand and seven eight, for example,

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Speaker 1: but then it didn't in when the tech bubble burst.

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Speaker 1: It didn't last year in twenty twenty two, right. Then.

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Speaker 1: The reason for that is a lot of the quality

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Speaker 1: stocks are really expensive. So the trade off, compromise or

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Speaker 1: combination of value in quality is what we think gives

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Speaker 1: you that best downside protection, but without having to give

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Speaker 1: up too much on the upside too.

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Speaker 2: Huh. So let's dive into the details of GMO's quality strategies.

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Speaker 2: In twenty twenty two, core quality and quality value outperformed

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Speaker 2: the S and P five hundred by a wide margin.

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Speaker 2: Twenty twenty two was a down nineteen percent. I think

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Speaker 2: in the S and P five hundred. But last year

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Speaker 2: twenty twenty three, core quality and quality value slowed, but

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Speaker 2: quality growth boomed somewhat different environment, and quality growth was

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Speaker 2: where all the games were had. Is this a purposeful

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Speaker 2: style diversification within quality? How do you think about core quality,

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Speaker 2: quality value and quality growth.

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Speaker 1: Yeah, when we think about the opportunity set for us

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Speaker 1: of high quality companies, there are, as you say, really

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Speaker 1: different kinds of companies within that quality is neither growth

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Speaker 1: nor value, can find both within it. And so when

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Speaker 1: we talk about quality growth, I think tech stocks, core quality,

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Speaker 1: think defensive coke, consumer staples, value, think some of the

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Speaker 1: more cyclical names. We like the fact that there are

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Speaker 1: high quality companies in all these areas, and generally we

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Speaker 1: find them attractive, and we like the fact, as you

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Speaker 1: point out, they tend to work at different parts of

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Speaker 1: the market cycle. And so, yes, it is deliberate that

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Speaker 1: we have exposure across these not that you know, if

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Speaker 1: it's nineteen ninety nine, we're probably not going to have

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Speaker 1: much quality growth. So it's not a fixed allocation, but

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Speaker 1: it does gives us diversification, and because we're familiar with

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Speaker 1: stocks across this spectrum. It also gives us the ability

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Speaker 1: to rebalance, and that's one of the things that we've

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Speaker 1: been quite successful with over the last few years. Is

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Speaker 1: not just that we hold both these kind of companies,

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Speaker 1: but we've been leaning against the wind to buy the

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Speaker 1: growth stocks. At the end of twenty twenty two, the

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Speaker 1: value stocks. More recently, just rebalancing has had a lot

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Speaker 1: of value.

435
00:23:38,640 --> 00:23:42,240
Speaker 2: Really interesting. You mentioned Ben Anker, who I know publishes

436
00:23:42,280 --> 00:23:47,359
Speaker 2: pretty regularly. You publish on a regular basis. Also, not

437
00:23:47,440 --> 00:23:50,520
Speaker 2: too long ago, you put something out Quality for the

438
00:23:50,600 --> 00:23:53,280
Speaker 2: Long Run, a little play on Professor Siegel's Stocks for

439
00:23:53,320 --> 00:23:55,280
Speaker 2: the Long Run. Tell us a little bit about the

440
00:23:55,359 --> 00:24:00,879
Speaker 2: valuation discipline quality investing offers and why that's so important

441
00:24:01,240 --> 00:24:03,280
Speaker 2: when so many stocks have had such a great run

442
00:24:03,359 --> 00:24:05,280
Speaker 2: up over the past couple of quarters.

443
00:24:05,480 --> 00:24:08,760
Speaker 1: Yeah, I think that's maybe a mistake I've made in

444
00:24:08,800 --> 00:24:11,800
Speaker 1: my career has been too rooted in looking at what

445
00:24:12,040 --> 00:24:13,680
Speaker 1: did well over the last few quarters, and if a

446
00:24:13,720 --> 00:24:16,240
Speaker 1: stock did really well, thinking oh, it must be expensive.

447
00:24:16,280 --> 00:24:19,760
Speaker 1: Whereas the reality of it, markets are efficient enough that

448
00:24:19,840 --> 00:24:22,800
Speaker 1: the vast majority of our performance is driven by truly

449
00:24:22,840 --> 00:24:27,000
Speaker 1: improved fundamental results. So we have to be with that

450
00:24:27,119 --> 00:24:29,480
Speaker 1: level of humility. I think the other thing to think

451
00:24:29,520 --> 00:24:34,159
Speaker 1: about is that if you're a long term investor, getting

452
00:24:34,160 --> 00:24:38,520
Speaker 1: the valuation exactly right matters less you know, they've beenessing.

453
00:24:38,560 --> 00:24:40,879
Speaker 1: The entry exit point is less important if you're going

454
00:24:40,920 --> 00:24:42,960
Speaker 1: to hold for five plus years, which is kind of

455
00:24:42,960 --> 00:24:45,960
Speaker 1: what our ambition is to do with our stocks, But

456
00:24:46,400 --> 00:24:49,920
Speaker 1: in extremists, which is the Microsoft in the two thousand example,

457
00:24:50,680 --> 00:24:54,399
Speaker 1: and maybe some other AI related stocks today, it really

458
00:24:54,440 --> 00:24:56,600
Speaker 1: does matter. You really, like the long time where you

459
00:24:56,640 --> 00:24:59,720
Speaker 1: have to hold to make up that valuation whole is

460
00:24:59,760 --> 00:25:02,040
Speaker 1: so long that you just really shouldn't be involved. It's

461
00:25:02,080 --> 00:25:03,320
Speaker 1: kind of basical philosophy.

462
00:25:03,440 --> 00:25:05,840
Speaker 2: Another research piece you put out I found kind of

463
00:25:05,840 --> 00:25:10,280
Speaker 2: intriguing Quality investing for greed and fear. Explain that.

464
00:25:10,720 --> 00:25:12,240
Speaker 1: I mean, the fear part is kind of what we've

465
00:25:12,240 --> 00:25:15,800
Speaker 1: been talking about, like if you're worried about market downturns,

466
00:25:16,040 --> 00:25:18,760
Speaker 1: quality is a good sleep at night investment. And I

467
00:25:18,840 --> 00:25:20,960
Speaker 1: think I laugh about is every time we think about

468
00:25:20,960 --> 00:25:23,720
Speaker 1: writing an annual letter or something like that someone wants

469
00:25:23,760 --> 00:25:26,800
Speaker 1: to write and these uncertain times that we're now in today,

470
00:25:26,880 --> 00:25:30,240
Speaker 1: it's like, yeah, when is that not ever been the case? Right?

471
00:25:30,359 --> 00:25:33,760
Speaker 1: The people are always worried, and so quality is always

472
00:25:33,800 --> 00:25:36,320
Speaker 1: good for that constituency. The only thing I'd say is

473
00:25:36,680 --> 00:25:39,160
Speaker 1: if when those worries come to pass, if you hold

474
00:25:39,240 --> 00:25:41,520
Speaker 1: quality stocks that you really believe in, you're less likely

475
00:25:41,600 --> 00:25:44,720
Speaker 1: to sell at the wrong moment. So there's that psychological

476
00:25:44,760 --> 00:25:48,399
Speaker 1: advantage to them that goes beyond just statistical analysis of

477
00:25:48,480 --> 00:25:52,600
Speaker 1: return periods over time. And the greed is the quality

478
00:25:52,640 --> 00:25:54,560
Speaker 1: is not just a defensive portfolio. If then, of the

479
00:25:54,560 --> 00:25:56,440
Speaker 1: market's going down, you hold cash, right, you don't hold

480
00:25:56,520 --> 00:26:00,240
Speaker 1: high quality stocks. So the greed part is that high

481
00:26:00,280 --> 00:26:04,360
Speaker 1: quality companies do participate in the upmarket. And so if

482
00:26:04,400 --> 00:26:06,479
Speaker 1: you think, you know, AI is a great thing, if

483
00:26:06,520 --> 00:26:08,800
Speaker 1: you think GLP ones are fantastic, if you think there's

484
00:26:08,840 --> 00:26:10,879
Speaker 1: innovation going on all around the world and you want

485
00:26:10,920 --> 00:26:13,439
Speaker 1: to participate in it, we think high quality companies are

486
00:26:13,440 --> 00:26:14,320
Speaker 1: a great way to do that.

487
00:26:14,600 --> 00:26:17,199
Speaker 2: I have a recollection, and I think it was the

488
00:26:17,200 --> 00:26:20,919
Speaker 2: onion Our long national nightmare of peace and prosperity is

489
00:26:20,960 --> 00:26:25,000
Speaker 2: finally over was a two thousand headline, and it's true,

490
00:26:25,000 --> 00:26:28,720
Speaker 2: how often can you say, well, thank goodness, we live

491
00:26:28,720 --> 00:26:33,280
Speaker 2: in times where there's no uncertainty and everything is rational.

492
00:26:33,320 --> 00:26:35,120
Speaker 1: When we say that run for the hills.

493
00:26:34,880 --> 00:26:40,040
Speaker 2: That's exactly right. GMO has released last quarter their first

494
00:26:40,200 --> 00:26:45,240
Speaker 2: retail product, an ETF. I love the symbol qlt y.

495
00:26:46,000 --> 00:26:49,600
Speaker 2: Let's talk a little bit about the ETF and the

496
00:26:49,720 --> 00:26:56,520
Speaker 2: thinking behind it. GMO has almost exclusively had institutional investors,

497
00:26:57,520 --> 00:27:02,760
Speaker 2: very high networth family offices. I mentioned the quality mutual funds.

498
00:27:02,960 --> 00:27:06,800
Speaker 2: That's a five million dollar minimum. What was the thinking behind, Hey,

499
00:27:06,880 --> 00:27:09,080
Speaker 2: let's do an ETF that anyone could buy for fifty

500
00:27:09,119 --> 00:27:10,600
Speaker 2: BIPs no minimum.

501
00:27:10,840 --> 00:27:14,680
Speaker 1: Yeah, you're exactly right. GMO has been an institutional manager.

502
00:27:14,680 --> 00:27:17,119
Speaker 1: We started in the endowments and foundation space and have

503
00:27:17,160 --> 00:27:21,600
Speaker 1: gone from then. But as you also said, institutional includes

504
00:27:21,640 --> 00:27:27,560
Speaker 1: increasingly family offices and wealthy individuals who pay taxes, and

505
00:27:27,640 --> 00:27:32,120
Speaker 1: so just structurally, the ETF is such a better vehicle

506
00:27:32,320 --> 00:27:34,920
Speaker 1: to pool clients, and GMO has always been an advocate

507
00:27:34,920 --> 00:27:37,440
Speaker 1: of pooled investing. You get that, We think is that

508
00:27:37,640 --> 00:27:40,720
Speaker 1: good a solution, and it allows more portfolio manager focus,

509
00:27:41,000 --> 00:27:44,200
Speaker 1: not to have separate accounts, and so really the launch,

510
00:27:44,440 --> 00:27:46,840
Speaker 1: the genesis of having an ETF for us was less

511
00:27:46,880 --> 00:27:50,520
Speaker 1: about entering the retail market or accessing different clients, and

512
00:27:50,560 --> 00:27:55,879
Speaker 1: more about better servicing the institutional tax paying clients. That said,

513
00:27:56,080 --> 00:27:58,359
Speaker 1: we have a lot of respect for individual investors. I

514
00:27:58,359 --> 00:28:02,720
Speaker 1: think they get a bum wrap among institutional managers. Individual

515
00:28:02,760 --> 00:28:08,080
Speaker 1: investors can be very sophisticated, discerning, thoughtful, and it's not

516
00:28:08,160 --> 00:28:10,360
Speaker 1: a segment of the market we want to shy away from,

517
00:28:10,400 --> 00:28:13,240
Speaker 1: other than just the operational complexity of having lots of

518
00:28:13,280 --> 00:28:16,720
Speaker 1: small clients, and there the ETF market is matured to

519
00:28:16,760 --> 00:28:19,040
Speaker 1: a point where we don't really face that complexity, and

520
00:28:19,080 --> 00:28:21,400
Speaker 1: so we're glad to be able to be a lot

521
00:28:21,480 --> 00:28:24,880
Speaker 1: more accessible. The other thing i'd say about ETFs, and

522
00:28:24,920 --> 00:28:27,040
Speaker 1: they've been on our radar screen for a while, of course,

523
00:28:27,119 --> 00:28:31,680
Speaker 1: but originally they were for no particular reason, but kind

524
00:28:31,680 --> 00:28:36,080
Speaker 1: of associated with passive or more commoditized quantitative factor strategies.

525
00:28:36,160 --> 00:28:38,560
Speaker 1: It's really over the last few years that an active

526
00:28:38,640 --> 00:28:42,480
Speaker 1: strategy in an ETF has been something people would pay

527
00:28:42,520 --> 00:28:43,320
Speaker 1: any attention to.

528
00:28:43,960 --> 00:28:48,560
Speaker 2: So I mentioned previously the GMO quality mutual funds top

529
00:28:48,600 --> 00:28:51,160
Speaker 2: one percent of its peers thirteen point six percent a

530
00:28:51,200 --> 00:28:54,560
Speaker 2: year for the past decade. How does the quality ETF

531
00:28:54,680 --> 00:28:57,600
Speaker 2: strategy differ from the mutual fund strategy.

532
00:28:57,800 --> 00:29:01,200
Speaker 1: Not very much. It's the same investment process, philosophy, team

533
00:29:01,320 --> 00:29:05,480
Speaker 1: and everything. The one simplification we've made for the ETF

534
00:29:05,600 --> 00:29:08,280
Speaker 1: is it only we only invest in US companies. So

535
00:29:08,320 --> 00:29:12,640
Speaker 1: the quality fund is global's opportunity set has had up

536
00:29:12,640 --> 00:29:16,400
Speaker 1: to twenty percent in non US domicile multinationals, think like

537
00:29:16,600 --> 00:29:19,280
Speaker 1: the nesls of the world, that kind of company. Whereas

538
00:29:19,520 --> 00:29:23,440
Speaker 1: the ETF is designed to be a more straightforward S

539
00:29:23,480 --> 00:29:26,800
Speaker 1: and P five hundred US only equity strategy.

540
00:29:26,480 --> 00:29:29,880
Speaker 2: And it's concentrated thirty five large cap stocks. Is it

541
00:29:30,000 --> 00:29:32,000
Speaker 2: limited to what's in the S and P five hundred

542
00:29:32,280 --> 00:29:34,280
Speaker 2: or is it any US stock?

543
00:29:34,960 --> 00:29:36,880
Speaker 1: It's not limited to the S and P five hundred.

544
00:29:37,120 --> 00:29:39,640
Speaker 1: What we'd like tends to be large cap to established,

545
00:29:39,720 --> 00:29:42,800
Speaker 1: great businesses. So I think it is in fact all

546
00:29:42,800 --> 00:29:44,200
Speaker 1: stocks are in the S and P five.

547
00:29:44,120 --> 00:29:48,720
Speaker 2: Hundred and fifty BIPs is not an unreasonable fee structure

548
00:29:48,840 --> 00:29:52,320
Speaker 2: for an actively managed fund. Tell us the thinking behind

549
00:29:52,360 --> 00:29:55,640
Speaker 2: this why go? I wouldn't call it a low cost,

550
00:29:56,040 --> 00:29:58,160
Speaker 2: but it's not a high cost ETF. Some of the

551
00:29:58,200 --> 00:30:01,400
Speaker 2: other active ETFs are a one hundred BIPs or more.

552
00:30:01,720 --> 00:30:03,400
Speaker 2: What was the thinking that, Well.

553
00:30:03,280 --> 00:30:07,080
Speaker 1: We're pricing it similar to how we price our institutional accounts.

554
00:30:07,120 --> 00:30:09,640
Speaker 1: As I mentioned a lot of our I think initial

555
00:30:10,000 --> 00:30:14,120
Speaker 1: funds have come from tax paying investment advisors and such.

556
00:30:14,200 --> 00:30:16,160
Speaker 1: You might have a choice which to use. We wanted

557
00:30:16,160 --> 00:30:18,920
Speaker 1: to make that a not feed driven choice, but is

558
00:30:18,960 --> 00:30:22,480
Speaker 1: picking the right vehicle. Another reason why we can keep

559
00:30:22,520 --> 00:30:25,600
Speaker 1: the costs low is these are very liquid stocks. It's

560
00:30:25,640 --> 00:30:29,320
Speaker 1: not really capacity constraint around these, so it's not like

561
00:30:29,400 --> 00:30:32,560
Speaker 1: we have to charge an exceedingly high rate to be

562
00:30:32,600 --> 00:30:33,760
Speaker 1: a profitable business.

563
00:30:33,760 --> 00:30:37,080
Speaker 2: And how often do those thirty five stocks turnover? Is

564
00:30:37,080 --> 00:30:40,040
Speaker 2: there any Hey, we're going to rebalance this once a

565
00:30:40,160 --> 00:30:42,640
Speaker 2: year or once a quarter, or is it driven on

566
00:30:42,760 --> 00:30:48,000
Speaker 2: whatever opportunities the quality stock team you work with decides

567
00:30:48,040 --> 00:30:48,920
Speaker 2: we're gonna get.

568
00:30:48,840 --> 00:30:50,440
Speaker 1: Rid of X and replace it with Yeah, there's no

569
00:30:50,520 --> 00:30:53,640
Speaker 1: calendar to it. It's driven by the opportunities as we

570
00:30:53,680 --> 00:30:55,800
Speaker 1: see them. If we think about the mutual fund, and

571
00:30:55,800 --> 00:30:58,480
Speaker 1: I don't think there would be any different here. We've

572
00:30:58,680 --> 00:31:01,920
Speaker 1: been running turnover about twenty percent a year for the

573
00:31:02,000 --> 00:31:04,719
Speaker 1: last few years, which consistent with my remarks earlier. When

574
00:31:04,760 --> 00:31:06,880
Speaker 1: we buy a company, we're thinking about holding it for

575
00:31:06,960 --> 00:31:10,200
Speaker 1: quite some time. In fact, probably about half that turnover.

576
00:31:10,240 --> 00:31:13,360
Speaker 1: It's not so much new stocks entering or stocks exiting,

577
00:31:13,440 --> 00:31:16,720
Speaker 1: is more rebalancing around valuation moves in the portfolio.

578
00:31:16,880 --> 00:31:19,600
Speaker 2: I love the tick of qlty. It's amazing that was

579
00:31:19,680 --> 00:31:24,240
Speaker 2: even available this late in the ETF world. How did

580
00:31:24,240 --> 00:31:27,760
Speaker 2: you guys start first thinking about we have clients paying

581
00:31:27,800 --> 00:31:31,800
Speaker 2: all this phantom tax on the mutual fund side. ETFs

582
00:31:31,880 --> 00:31:35,800
Speaker 2: really seem to be much more efficient from a tax perspective.

583
00:31:36,200 --> 00:31:38,960
Speaker 2: Tell us a little bit about the discussions that led

584
00:31:39,040 --> 00:31:41,920
Speaker 2: up to let's create an ETF.

585
00:31:42,120 --> 00:31:45,400
Speaker 1: I'm acutely aware of the tax issues as I put

586
00:31:45,400 --> 00:31:48,160
Speaker 1: the bulk of my investing in our own strategies too,

587
00:31:48,160 --> 00:31:51,280
Speaker 1: including the mutual fund. Now I'm invested in the ETF.

588
00:31:51,520 --> 00:31:53,480
Speaker 1: I think it would go back over a decade. Like

589
00:31:53,520 --> 00:31:56,360
Speaker 1: we were well aware of ETFs for a very very

590
00:31:56,400 --> 00:31:59,240
Speaker 1: long time, and while we got the best ticker out there,

591
00:31:59,240 --> 00:32:01,840
Speaker 1: there are there qual the ETFs out there, which your

592
00:32:01,920 --> 00:32:04,800
Speaker 1: advisors were talking to us as competitors. So we're kind

593
00:32:04,840 --> 00:32:07,240
Speaker 1: of looking at the competitive landscape and seeing, Hey, what

594
00:32:07,280 --> 00:32:09,840
Speaker 1: do they do that's different from what we do? Why

595
00:32:09,840 --> 00:32:13,360
Speaker 1: do we think our approach is better and we're more fundamental,

596
00:32:13,440 --> 00:32:15,680
Speaker 1: we have the valuation, et cetera. There are a lot of differences.

597
00:32:15,880 --> 00:32:18,520
Speaker 1: Felt like now was the time, I think largely because

598
00:32:18,520 --> 00:32:21,440
Speaker 1: of the rise of active ETFs versus pure passive ones.

599
00:32:21,600 --> 00:32:24,840
Speaker 2: Now, this obviously isn't the exact same holdings as the

600
00:32:24,920 --> 00:32:29,160
Speaker 2: Quality Funds mutual fund, but I'm going to assume they'll

601
00:32:29,200 --> 00:32:32,880
Speaker 2: track pretty closely over time. It's the same process. It's

602
00:32:32,880 --> 00:32:36,440
Speaker 2: some of the favorite ideas from quality go into the ETF.

603
00:32:36,600 --> 00:32:39,400
Speaker 2: Can we expect similar performance from this?

604
00:32:39,800 --> 00:32:43,080
Speaker 1: Yeah? My expectations they won't differ is that we've never

605
00:32:43,120 --> 00:32:46,480
Speaker 1: held more than twenty percent in non US stocks, and

606
00:32:46,560 --> 00:32:48,960
Speaker 1: all the all the US stocks we hold in the

607
00:32:48,960 --> 00:32:51,600
Speaker 1: fund we also hold in the ETF at similar weights.

608
00:32:52,080 --> 00:32:53,720
Speaker 1: They are a couple of new names, so it's not

609
00:32:53,880 --> 00:32:56,920
Speaker 1: just a carve out, but it's very, very similar in characteristics.

610
00:32:57,120 --> 00:33:00,520
Speaker 2: So, I know GMO has a variety of offers. You

611
00:33:00,560 --> 00:33:05,040
Speaker 2: do equities, alts, fixed income. How does the quality screen

612
00:33:05,880 --> 00:33:10,560
Speaker 2: work with other asset classes besides equities? Can you do

613
00:33:10,600 --> 00:33:12,760
Speaker 2: that with alts? Can you do that with fixed income?

614
00:33:12,960 --> 00:33:16,480
Speaker 2: Or is it just specific to value stock investing?

615
00:33:16,800 --> 00:33:21,720
Speaker 1: Focusing on quality characteristics as well as valuation and sort

616
00:33:21,720 --> 00:33:24,120
Speaker 1: of quality at a reasonable price sort of big picture

617
00:33:24,520 --> 00:33:27,920
Speaker 1: is an idea that cuts pretty much across all of

618
00:33:28,040 --> 00:33:31,440
Speaker 1: GMO's strategies and the different asset classes in which we

619
00:33:31,480 --> 00:33:34,040
Speaker 1: invest Of course, it means different things. If you're running

620
00:33:34,040 --> 00:33:37,880
Speaker 1: a merger arms strategy with a short horizon, then long

621
00:33:37,960 --> 00:33:41,160
Speaker 1: term buy and hold investing like quote we do. But

622
00:33:41,200 --> 00:33:44,239
Speaker 1: that's there another thing to think about that sort of

623
00:33:44,320 --> 00:33:49,000
Speaker 1: unite GMO is a firm, is that a lot of

624
00:33:49,040 --> 00:33:52,800
Speaker 1: our clients come through the door, if you will, in

625
00:33:52,840 --> 00:33:56,520
Speaker 1: our multi asset class solutions we call ass allocation at GMO.

626
00:33:56,640 --> 00:33:58,920
Speaker 1: So a lot of the strategies that we've developed over

627
00:33:58,960 --> 00:34:03,360
Speaker 1: the years at GMO, originally the quality strategy derived from

628
00:34:04,040 --> 00:34:06,920
Speaker 1: us Jeremy and team Ben Anker and others seeing a

629
00:34:06,960 --> 00:34:10,960
Speaker 1: top down opportunity in the market US forming a strategy

630
00:34:11,000 --> 00:34:12,960
Speaker 1: if that's a conventional asset class or at the time

631
00:34:12,960 --> 00:34:16,160
Speaker 1: a new asset or subasset class like quality investing. That's

632
00:34:16,200 --> 00:34:18,640
Speaker 1: how a lot of what we do get started. It's

633
00:34:18,640 --> 00:34:21,239
Speaker 1: why we kind of have a complicated lineup for firm

634
00:34:21,320 --> 00:34:24,080
Speaker 1: our size, But that does impose a certain i think,

635
00:34:24,120 --> 00:34:26,680
Speaker 1: intellectual consistency on how we think about the world.

636
00:34:27,000 --> 00:34:31,040
Speaker 2: So given the success of this first ETF, and given

637
00:34:31,080 --> 00:34:34,960
Speaker 2: this expertise in all these different areas, the obvious question

638
00:34:35,120 --> 00:34:38,239
Speaker 2: is what's the next ETF that's going to come out

639
00:34:38,280 --> 00:34:41,400
Speaker 2: of GMO, or are you guys good with quality and

640
00:34:41,560 --> 00:34:44,480
Speaker 2: you're not looking for any other retail products.

641
00:34:45,120 --> 00:34:47,520
Speaker 1: Well, I'm not going to break news on your podcast,

642
00:34:47,680 --> 00:34:50,160
Speaker 1: but I think, yeah, we do one with the idea

643
00:34:50,239 --> 00:34:52,840
Speaker 1: certainly that we might do more.

644
00:34:52,800 --> 00:34:56,320
Speaker 2: If this continues to be successful. All these other asset

645
00:34:56,360 --> 00:35:00,120
Speaker 2: classes that GMO plays in, some of them are really.

646
00:35:00,080 --> 00:35:02,000
Speaker 1: Ripe for any Yes, some more ripe than others. But

647
00:35:02,040 --> 00:35:04,160
Speaker 1: I think there's a lot of opportunity out there. Maybe

648
00:35:04,160 --> 00:35:05,719
Speaker 1: another way of asking that question is why did we

649
00:35:05,760 --> 00:35:08,560
Speaker 1: start with this one? And there are a couple obvious reasons.

650
00:35:08,560 --> 00:35:11,680
Speaker 1: One it is our largest strategy, but another it is

651
00:35:12,200 --> 00:35:15,200
Speaker 1: US equities, which are kind of the simplest, most liquid

652
00:35:15,239 --> 00:35:17,640
Speaker 1: asset class. They fit well for the transparency you have

653
00:35:17,680 --> 00:35:20,160
Speaker 1: an ETF structure, it's the easiest to do the market

654
00:35:20,200 --> 00:35:22,600
Speaker 1: making around them. So it was a very obvious place

655
00:35:22,600 --> 00:35:23,320
Speaker 1: for us to start.

656
00:35:23,640 --> 00:35:26,640
Speaker 2: So the mutual fund is about eight billion dollars or so.

657
00:35:27,320 --> 00:35:30,839
Speaker 2: Is there any limitation on how big the CTF can get?

658
00:35:30,920 --> 00:35:35,640
Speaker 2: I'm assuming it's all large cap US stocks. Doesn't seem

659
00:35:35,680 --> 00:35:37,480
Speaker 2: like there are a lot of constraints on how large

660
00:35:37,520 --> 00:35:38,120
Speaker 2: this can scale.

661
00:35:38,400 --> 00:35:41,840
Speaker 1: Yeah, not practical constraints, of course, there's a constraint for everything,

662
00:35:41,880 --> 00:35:44,600
Speaker 1: but we'd be talking about tens of billions of dollars

663
00:35:44,840 --> 00:35:46,120
Speaker 1: where capacity would be.

664
00:35:46,200 --> 00:35:48,799
Speaker 2: Huh, really interesting. So let's talk a little bit about

665
00:35:48,840 --> 00:35:52,920
Speaker 2: what's going on in value today. I'm impressed by this

666
00:35:53,040 --> 00:35:56,160
Speaker 2: quote of yours and really curious if it's still true.

667
00:35:57,000 --> 00:36:01,920
Speaker 2: US deep value stocks are unusually cheap in the US market.

668
00:36:02,000 --> 00:36:07,440
Speaker 2: In particular, the cheapest twenty percent look cheaper than they

669
00:36:07,640 --> 00:36:11,400
Speaker 2: ever have in ninety eight percent of the time through history.

670
00:36:11,880 --> 00:36:14,400
Speaker 2: That's really surprising. And I keep hearing about how expensive

671
00:36:14,440 --> 00:36:18,120
Speaker 2: stocks are. The bottom quintile of value is as cheap

672
00:36:18,200 --> 00:36:19,480
Speaker 2: essentially as it ever gets.

673
00:36:20,200 --> 00:36:21,960
Speaker 1: Yeah, that's a quote that's coming out from our asked

674
00:36:22,000 --> 00:36:25,680
Speaker 1: allocation team about how they think about positioning equity portfolios.

675
00:36:25,960 --> 00:36:29,960
Speaker 1: To be maybe nuanced about that we're talking about is

676
00:36:30,000 --> 00:36:33,160
Speaker 1: the valuation of that relative to the overall market. So

677
00:36:33,200 --> 00:36:35,200
Speaker 1: it's kind of two sides of the same point. It's

678
00:36:35,200 --> 00:36:37,440
Speaker 1: not so much that cheap stocks are really really cheap.

679
00:36:37,480 --> 00:36:41,759
Speaker 1: It's that the spread of valuation ratios is very wide, So.

680
00:36:41,680 --> 00:36:44,440
Speaker 2: The non value stocks are very expensive.

681
00:36:44,040 --> 00:36:45,719
Speaker 1: And frankly, I think that is where most of the

682
00:36:45,760 --> 00:36:48,560
Speaker 1: action is. It's the non value stocks are trading it

683
00:36:48,680 --> 00:36:51,960
Speaker 1: much higher multiples than they normally have. And when we

684
00:36:52,000 --> 00:36:54,640
Speaker 1: say deep value, it's almost like to people talk about

685
00:36:54,640 --> 00:36:57,200
Speaker 1: indus because they divide the world fifty to fifty. There's

686
00:36:57,200 --> 00:37:00,600
Speaker 1: no magic to that. I think right now, market cap

687
00:37:00,680 --> 00:37:03,120
Speaker 1: sense market concentration. There are a lot more growth stocks.

688
00:37:03,120 --> 00:37:06,160
Speaker 1: So to find the true value stocks and making air quotes,

689
00:37:06,280 --> 00:37:07,920
Speaker 1: you kind of have to go a little bit deeper

690
00:37:08,280 --> 00:37:11,000
Speaker 1: into the percentiles of market cap than you would typically.

691
00:37:11,160 --> 00:37:14,799
Speaker 2: And when we're talking about value, you're still discussing with

692
00:37:15,000 --> 00:37:17,960
Speaker 2: the quality overlay. So you could have quality stocks and

693
00:37:18,440 --> 00:37:24,360
Speaker 2: the least expensive quality stocks on a valuation basis relatively attractive,

694
00:37:24,400 --> 00:37:27,239
Speaker 2: but maybe not absolutely attractive. I don't want to put

695
00:37:27,239 --> 00:37:28,040
Speaker 2: words in your mouth.

696
00:37:28,120 --> 00:37:31,600
Speaker 1: Yeah, may you apologize for confusing terminology on our part,

697
00:37:31,600 --> 00:37:33,640
Speaker 1: because when we say deep value any people often think

698
00:37:33,719 --> 00:37:35,960
Speaker 1: just the lowest price to book stocks out there. In

699
00:37:36,000 --> 00:37:40,320
Speaker 1: the GMO terminology, that's deep value on a measure of

700
00:37:40,360 --> 00:37:43,600
Speaker 1: what we call intrinsic value that blends a hefty version

701
00:37:43,640 --> 00:37:46,640
Speaker 1: of quality into that. So that will include some stocks

702
00:37:46,640 --> 00:37:48,440
Speaker 1: you hold in the quality and think metas of the

703
00:37:48,440 --> 00:37:49,520
Speaker 1: world companies like that.

704
00:37:49,800 --> 00:37:52,920
Speaker 2: Gotcha? So I get the sense you guys don't pay

705
00:37:52,920 --> 00:37:57,080
Speaker 2: a whole lot of attention to the macro economy or

706
00:37:57,200 --> 00:38:02,200
Speaker 2: geopolitics or what the Fed's doing. How important are these

707
00:38:02,480 --> 00:38:05,640
Speaker 2: other aspects to the way you manage assets?

708
00:38:05,920 --> 00:38:08,480
Speaker 1: Not that important. I think the thought experient for us

709
00:38:08,520 --> 00:38:11,879
Speaker 1: is if this is something that feels cyclical, that isn't

710
00:38:11,920 --> 00:38:13,719
Speaker 1: going to affect where the world's going to be five

711
00:38:13,800 --> 00:38:17,640
Speaker 1: years from now, then we're only going to pay attention

712
00:38:17,719 --> 00:38:20,000
Speaker 1: to it to the extent that if something happens, we

713
00:38:20,080 --> 00:38:22,920
Speaker 1: react to it like it can create a dislocation. Right,

714
00:38:22,920 --> 00:38:25,520
Speaker 1: people might overreact to an interest rate move in our opinion,

715
00:38:25,719 --> 00:38:27,560
Speaker 1: but we're not going to try to forecast it or

716
00:38:27,560 --> 00:38:31,239
Speaker 1: pick stocks based on that. You did mention geopolitics in

717
00:38:31,280 --> 00:38:34,240
Speaker 1: that list. Politics is in my mind a little bit different.

718
00:38:34,280 --> 00:38:36,200
Speaker 1: And the reason that's a little bit different is I'm

719
00:38:36,200 --> 00:38:38,640
Speaker 1: not sure that's going to be solved five years from now, right,

720
00:38:39,080 --> 00:38:41,920
Speaker 1: that could get worse, or the trends that we're on

721
00:38:42,640 --> 00:38:45,120
Speaker 1: are different from where we've been in the last twenty

722
00:38:45,160 --> 00:38:47,799
Speaker 1: or thirty years. So that is say, of those things,

723
00:38:47,800 --> 00:38:49,560
Speaker 1: the one for a scratch our head a little bit more.

724
00:38:49,640 --> 00:38:51,359
Speaker 1: Not that I'm going to claim we have the answers there,

725
00:38:51,400 --> 00:38:52,680
Speaker 1: but it is front of mine for us.

726
00:38:53,120 --> 00:38:55,920
Speaker 2: How do you think about interest rate risk or inflation

727
00:38:56,719 --> 00:39:01,920
Speaker 2: or the whole transitory versus sticky debate. Does that become

728
00:39:01,960 --> 00:39:06,799
Speaker 2: a key part of the asset allocation discussion or is

729
00:39:06,840 --> 00:39:09,319
Speaker 2: it just kind of background noise that everybody else to

730
00:39:09,360 --> 00:39:09,920
Speaker 2: deal with.

731
00:39:10,440 --> 00:39:13,200
Speaker 1: More background noise. Jim O is kind of famous for

732
00:39:13,239 --> 00:39:15,719
Speaker 1: doing seven year forecasts, right, And the reasons we do

733
00:39:15,800 --> 00:39:18,680
Speaker 1: seven year forecasts is that's sort of the horizon where

734
00:39:18,719 --> 00:39:20,960
Speaker 1: we feel like, whatever the noise is that's going on now,

735
00:39:21,000 --> 00:39:24,480
Speaker 1: that'll kind of all be gone. So the philosophy behind

736
00:39:24,520 --> 00:39:26,719
Speaker 1: those is, eah, seven years from now, things will be

737
00:39:26,760 --> 00:39:28,640
Speaker 1: kind of normal, and I'm not sure what the path

738
00:39:28,800 --> 00:39:31,080
Speaker 1: is to get there, but if that's where they're going,

739
00:39:31,520 --> 00:39:34,080
Speaker 1: this is what that would imply about returns over that horizon.

740
00:39:34,520 --> 00:39:37,640
Speaker 2: And one of your recent notes you mentioned Jeremy Grantham's

741
00:39:37,680 --> 00:39:42,040
Speaker 2: super bubble thesis. How do you work in quality as

742
00:39:42,080 --> 00:39:46,279
Speaker 2: a core equity allocation within the concept that, hey, maybe

743
00:39:46,280 --> 00:39:49,480
Speaker 2: there's a super bubble going on out there? Is that consistent?

744
00:39:49,800 --> 00:39:53,279
Speaker 1: Yeah, I'm a humble portfolio manager works from the bottom up,

745
00:39:53,360 --> 00:39:56,680
Speaker 1: so I'm not really thinking about super bubbles very much. Honestly,

746
00:39:56,719 --> 00:39:59,879
Speaker 1: I'm thinking about. Are these stocks that we're investing in

747
00:40:00,160 --> 00:40:02,960
Speaker 1: good quality business price to deliver a good return, and

748
00:40:03,040 --> 00:40:05,160
Speaker 1: good I mean sort of double digit type return over

749
00:40:05,200 --> 00:40:08,759
Speaker 1: the next five ish years. So if it turns out

750
00:40:08,800 --> 00:40:11,000
Speaker 1: this is a super bubble, and I think Jeremy's technical

751
00:40:11,040 --> 00:40:14,080
Speaker 1: definition of that is a very very big bubble, then

752
00:40:15,320 --> 00:40:17,440
Speaker 1: quality stocks are going to go down. We'll have been

753
00:40:17,480 --> 00:40:20,319
Speaker 1: wrong to invest in them. The silver lining is, at

754
00:40:20,400 --> 00:40:22,319
Speaker 1: least we'll have done better than pretty much anything else

755
00:40:22,360 --> 00:40:22,680
Speaker 1: out there.

756
00:40:23,000 --> 00:40:25,879
Speaker 2: Quality will go down less than the rest of the.

757
00:40:26,440 --> 00:40:29,719
Speaker 1: Indices, particularly quality with a sense of valuation.

758
00:40:30,560 --> 00:40:33,880
Speaker 2: All right, so let me jump to my favorite questions

759
00:40:34,000 --> 00:40:38,239
Speaker 2: that I ask all of my guests, starting with what

760
00:40:38,320 --> 00:40:41,280
Speaker 2: have you been streaming these days? What's been keeping you entertained,

761
00:40:41,320 --> 00:40:42,880
Speaker 2: either video or audio.

762
00:40:43,760 --> 00:40:45,400
Speaker 1: I have a twelve year old daughter, and she runs

763
00:40:45,400 --> 00:40:48,000
Speaker 1: the family with an iron fist, and she likes to

764
00:40:48,040 --> 00:40:50,000
Speaker 1: still watch TV together. So I've been watching a lot

765
00:40:50,080 --> 00:40:53,560
Speaker 1: of Survivor episodes. Though unfortunately I actually like those, She's

766
00:40:53,600 --> 00:40:55,440
Speaker 1: moving on to something else now that I like less. Well,

767
00:40:55,520 --> 00:40:59,319
Speaker 1: I won't call it out in terms of I listened

768
00:40:59,360 --> 00:41:01,080
Speaker 1: to a lot of pod cast too. That's where I

769
00:41:01,120 --> 00:41:04,920
Speaker 1: get a little more sort of I'm sort of embarrassed

770
00:41:04,920 --> 00:41:06,640
Speaker 1: to say it, but professionally takes a little bit of

771
00:41:06,680 --> 00:41:10,360
Speaker 1: the place of reading. I love econ Talk, which is

772
00:41:10,400 --> 00:41:15,440
Speaker 1: sort of theoretical economics debate podcast for fun. I love

773
00:41:15,520 --> 00:41:18,960
Speaker 1: Judge John Hodgman. There's all kinds of things out there.

774
00:41:19,000 --> 00:41:19,720
Speaker 1: It's a great world.

775
00:41:19,960 --> 00:41:22,120
Speaker 2: Yeah, no, it really is. So let's talk a little

776
00:41:22,160 --> 00:41:25,160
Speaker 2: bit about your career. Who were your early mentors who

777
00:41:25,280 --> 00:41:28,319
Speaker 2: helped shape the path you've taken professionally.

778
00:41:30,040 --> 00:41:32,239
Speaker 1: I think in my case, law of the mentors come

779
00:41:32,400 --> 00:41:36,319
Speaker 1: through kind of my academic career and teachers and professors

780
00:41:36,320 --> 00:41:40,120
Speaker 1: going back and my high school math teacher, mister Hyde.

781
00:41:40,200 --> 00:41:42,719
Speaker 1: He was the one who taught the computer programming course.

782
00:41:42,719 --> 00:41:44,319
Speaker 1: He's the one who sort of encouraged me to take

783
00:41:44,360 --> 00:41:47,040
Speaker 1: college courses when I was in high school. He also

784
00:41:47,080 --> 00:41:49,160
Speaker 1: taught me Bridge, which is I don't really play that

785
00:41:49,239 --> 00:41:51,319
Speaker 1: much anymore, but it is a great game, and let

786
00:41:51,400 --> 00:41:53,520
Speaker 1: you think a lot of that things in a great way.

787
00:41:54,480 --> 00:41:59,359
Speaker 1: My PhD advisor at Harvard less Valiant, i'd also pick out.

788
00:41:59,440 --> 00:42:02,360
Speaker 1: I mentioned Chris Darnell at GM. Rob Soussi was the

789
00:42:02,440 --> 00:42:05,240
Speaker 1: name of my first manager there. He was a very wise,

790
00:42:05,840 --> 00:42:08,959
Speaker 1: wise man. If I think about one of the things

791
00:42:08,960 --> 00:42:12,760
Speaker 1: I gained from these people, to particular the professional ones.

792
00:42:12,800 --> 00:42:15,160
Speaker 1: It's kind of when to be willing to say no

793
00:42:15,280 --> 00:42:18,520
Speaker 1: to stuff too. My colleagues now wouldn't believe it, but

794
00:42:18,560 --> 00:42:21,480
Speaker 1: I used to be probably over accommodating, and maybe I've

795
00:42:21,560 --> 00:42:23,440
Speaker 1: learned that lesson a bit over learned it.

796
00:42:23,640 --> 00:42:25,600
Speaker 2: What are some of your favorite books? What are you

797
00:42:25,640 --> 00:42:26,520
Speaker 2: reading currently?

798
00:42:27,760 --> 00:42:30,879
Speaker 1: Well, this is the holiday time. I just came back

799
00:42:30,920 --> 00:42:34,040
Speaker 1: from a long playing flight and I read this really

800
00:42:34,080 --> 00:42:37,480
Speaker 1: fun detective book that my wife gave me for Christmas.

801
00:42:37,520 --> 00:42:39,920
Speaker 1: But then I was reading a biography of Samuel Sewell,

802
00:42:39,960 --> 00:42:43,640
Speaker 1: who's one of the judges at the Salem witch Trials.

803
00:42:43,640 --> 00:42:46,520
Speaker 1: Actually saw a colonial era figure. It's an interesting book

804
00:42:46,520 --> 00:42:49,760
Speaker 1: to learn about that era. My favorite book of all time,

805
00:42:49,960 --> 00:42:52,279
Speaker 1: and it is not even close, is a children's book

806
00:42:52,320 --> 00:42:55,440
Speaker 1: called The Land of Green Ginger, which is written by

807
00:42:55,719 --> 00:42:59,120
Speaker 1: the screenwriter the original Wizard of Oz movies. It is

808
00:42:59,160 --> 00:43:03,880
Speaker 1: a heirical, clever take on the kind of the PostScript

809
00:43:03,880 --> 00:43:07,840
Speaker 1: to the Aladdin myth from the Arabian Nights, and I

810
00:43:07,880 --> 00:43:10,000
Speaker 1: recommend all of your listeners if they can find it,

811
00:43:10,040 --> 00:43:11,480
Speaker 1: which is easy read that book.

812
00:43:11,640 --> 00:43:14,640
Speaker 2: Huh, really interesting? What sort of advice would you give

813
00:43:14,680 --> 00:43:18,719
Speaker 2: to a recent college grad interested in a career in

814
00:43:18,719 --> 00:43:20,280
Speaker 2: investment and finance.

815
00:43:20,480 --> 00:43:23,080
Speaker 1: So investment finance is actually a very broad area. So

816
00:43:23,120 --> 00:43:26,840
Speaker 1: the first advice is kind of narrow that down. And

817
00:43:26,920 --> 00:43:29,680
Speaker 1: the west way to narrow it down is to get

818
00:43:29,680 --> 00:43:33,239
Speaker 1: exposure to lots of different things. And I think the

819
00:43:33,280 --> 00:43:37,280
Speaker 1: best way to enable yourself to get exposure is don't

820
00:43:37,360 --> 00:43:39,719
Speaker 1: focus so much on finance and investment. Just figure out

821
00:43:39,760 --> 00:43:44,200
Speaker 1: about learning. Learn all sorts of things. Learn math, learn history.

822
00:43:44,600 --> 00:43:47,799
Speaker 1: You can always learn a trade after that. Don't think, oh,

823
00:43:47,920 --> 00:43:49,879
Speaker 1: I'm interested in finance, so I'm just going to spend

824
00:43:49,880 --> 00:43:52,640
Speaker 1: all my time listening to investment podcasts and I'll answer

825
00:43:53,239 --> 00:43:55,280
Speaker 1: or non tecular ten ks.

826
00:43:56,200 --> 00:43:58,279
Speaker 2: I don't imagine that anyone's going to listen to a

827
00:43:58,280 --> 00:44:01,839
Speaker 2: couple of dozen podcasts and so only begin to outperform

828
00:44:02,239 --> 00:44:04,880
Speaker 2: the benchmarkt It's a little more nuanced than that, isn't it.

829
00:44:05,440 --> 00:44:08,160
Speaker 1: I think all the great investors talk about reading and

830
00:44:08,200 --> 00:44:11,160
Speaker 1: how much of their time they spend reading and just learning,

831
00:44:11,200 --> 00:44:12,799
Speaker 1: and I think that is one of the things I

832
00:44:12,880 --> 00:44:15,680
Speaker 1: like about the investment industry is you just spend so

833
00:44:15,719 --> 00:44:18,160
Speaker 1: much of your time just learning about how businesses work.

834
00:44:18,200 --> 00:44:20,960
Speaker 1: How the world works. You're kind of an observer. You're

835
00:44:21,040 --> 00:44:24,040
Speaker 1: kind of a miserable critic rather an actual creator of value,

836
00:44:24,080 --> 00:44:25,879
Speaker 1: but an analyzer of others work.

837
00:44:26,800 --> 00:44:29,960
Speaker 2: It's almost academic adjacent, given how much reading there is.

838
00:44:30,000 --> 00:44:32,400
Speaker 2: And our final question, what do you know about the

839
00:44:32,440 --> 00:44:35,799
Speaker 2: world of investing today? You wish you knew thirty years

840
00:44:35,920 --> 00:44:38,760
Speaker 2: or so ago when you were first getting started.

841
00:44:38,680 --> 00:44:41,640
Speaker 1: That appreciation of quality businesses and the value to pay

842
00:44:41,640 --> 00:44:43,960
Speaker 1: for them. I come my mindset is a little bit

843
00:44:44,040 --> 00:44:47,560
Speaker 1: more contrarian, and I think from an investing perspective that

844
00:44:47,600 --> 00:44:51,520
Speaker 1: manifests itself much more in a value orientation or value

845
00:44:51,520 --> 00:44:56,799
Speaker 1: meaning low multiple underperforming socks cigar butt of philosophy, and

846
00:44:56,840 --> 00:45:00,080
Speaker 1: I think realizing the value of time and compounding and

847
00:45:01,080 --> 00:45:03,920
Speaker 1: it's just worth paying up for a higher quality business.

848
00:45:03,960 --> 00:45:06,399
Speaker 2: To say the very least, thank you Tom for being

849
00:45:06,400 --> 00:45:09,279
Speaker 2: so generous with your time. We have been speaking with

850
00:45:09,320 --> 00:45:13,040
Speaker 2: Tom Hancock, head of the Focused Equity team at GMO.

851
00:45:13,440 --> 00:45:16,239
Speaker 2: If you enjoy this conversation, well check out any of

852
00:45:16,239 --> 00:45:20,479
Speaker 2: the previous five hundred interviews we've conducted over the past

853
00:45:20,600 --> 00:45:26,040
Speaker 2: nine years. You can find those at iTunes, Spotify, YouTube,

854
00:45:26,400 --> 00:45:30,560
Speaker 2: wherever you find your favorite podcasts. Sign up from my

855
00:45:30,640 --> 00:45:33,719
Speaker 2: daily reading list at ridults dot com. Follow me on

856
00:45:33,760 --> 00:45:36,520
Speaker 2: Twitter at rid Halts. I would be remiss if I

857
00:45:36,560 --> 00:45:39,000
Speaker 2: do not thank the crack team who helps us put

858
00:45:39,040 --> 00:45:43,840
Speaker 2: these conversations together each week. My audio engineer is Kaylie Laparo.

859
00:45:44,160 --> 00:45:47,920
Speaker 2: Attika of albrun is my project manager. Sean Russo is

860
00:45:47,960 --> 00:45:51,720
Speaker 2: my head of research. Anna Luke is our producer. I'm

861
00:45:51,719 --> 00:45:56,040
Speaker 2: Barry Ridholts. You've been listening to Masters in Business on

862
00:45:56,160 --> 00:46:01,000
Speaker 2: Bloomberg Radio.