Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and looks deeper into
Speaker 1: the processes, challenges, and philosophies and security selection. I'm David Cohne,
Speaker 1: I lead mutual fund and active Research at Bloomberg Intelligence.
Speaker 1: Today my coast is Brian Darty, head of Thematic Strategy
Speaker 1: at Bloomberg Intelligence. Brie, thank you for joining me today.
Speaker 2: Always a pleasure, David, one of my favorite places to.
Speaker 1: Be So in a recent note, you wrote that US
Speaker 1: exceptionalism still matters, but it's no longer the whole story.
Speaker 1: As we've seen concentration risk re emerge with the tech
Speaker 1: sell off in AI back at the center of debate,
Speaker 1: How should investors be thinking about where the next phase
Speaker 1: of AI leadership actually comes from.
Speaker 2: Yeah, I think that the last year has been a
Speaker 2: really telling one, and what we've been saying is we
Speaker 2: think twenty twenty five set the signals, and then in
Speaker 2: twenty twenty six we're going to see some broadening of
Speaker 2: that opportunity. So again we're not at all saying that
Speaker 2: US exceptionalism is dead. The US naturally has an extremely
Speaker 2: important role to be playing in what we see happening
Speaker 2: in AI the hyperscalers, you know, first and foremost specifically
Speaker 2: as we look at this you know, capex driven cycle
Speaker 2: that we're that we're entering into or just starting to
Speaker 2: enter into. But what we really want to highlight is
Speaker 2: that I would say the deep seek of January twenty
Speaker 2: twenty five, so think back a year ago, was a
Speaker 2: bit of an eye opener that this isn't a one
Speaker 2: horse race, right, and that this is very much a
Speaker 2: global AI continuum that we're all on and we think
Speaker 2: that we're going to see more and more investors. We've
Speaker 2: seen it in the back half of twenty twenty five,
Speaker 2: we continue to expect that this will continue to take
Speaker 2: hold in twenty twenty six. That investors are looking globally right.
Speaker 2: They understand the opportunity of the United States, but they
Speaker 2: also understand that you're going to see a lot of
Speaker 2: great innovation coming out of Asia, coming out of Europe,
Speaker 2: and that a really good way to look at the
Speaker 2: portfolios to make sure that you have a balanced exposure there.
Speaker 2: The other thing that we're highlighting is naturally we tend
Speaker 2: to be lovers of equal weight, and particularly a lover
Speaker 2: of eical weight. In twenty twenty six, and just highlighting
Speaker 2: again that especially as we look to themes such as AI,
Speaker 2: but also across all of our innovation themes. We think
Speaker 2: that sometimes investors can get really hung up on the
Speaker 2: most well known names, right, and that's typically those big megacaps,
Speaker 2: and there tends to be a lot of US tech
Speaker 2: tunnel vision when people think of innovation, and we actually
Speaker 2: see a lot of opportunity in lesser nor names. And
Speaker 2: that's one of the work that the matics, I think
Speaker 2: really brings to the forefront is just how much opportunity
Speaker 2: is sitting outside benchmarks. And we really expect the broad
Speaker 2: name to continue through twenty twenty six.
Speaker 1: Great and so we all know AI is definitely considered
Speaker 1: a mega theme, and it just so happens today we
Speaker 1: have a mega theme portfolio manager as our guests today,
Speaker 1: So I'd like to welcome Sarji Nahal to the podcast.
Speaker 1: Saraje is a portfolio manager in list with the Global
Speaker 1: Thematic Equity team at Lizard Asset Management SAGE. Thank you
Speaker 1: for joining us today.
Speaker 3: Thank you for having me. It's a pleasure to be
Speaker 3: here this morning.
Speaker 1: So we're going to be discussing the Lizard Equity Mega
Speaker 1: Trends ETF tickerh MZ. Can you walk us through the
Speaker 1: core investment philosophy behind the fund in what mega trend
Speaker 1: investing means in practice?
Speaker 3: Happy to say a few words, and you know, the
Speaker 3: core philosophy behind themes is rooted in the belief that
Speaker 3: we're living in an era of unprecedented transformation and disruption,
Speaker 3: whether it be structural chips, in terms of demographics with
Speaker 3: Asian populations, geopolitics with the emergence of a multipolar world,
Speaker 3: or in terms of technology and AI diffusion. And if
Speaker 3: I were to quote eighteen time All Star and thirteen
Speaker 3: time World Series champion Yogi Berra, the future aint what
Speaker 3: it used to be and investors need to prepare their
Speaker 3: clients for a future that is no longer predictable, no
Speaker 3: longer stable, or no longer a simple extent of the past.
Speaker 3: And these transformative and disruptive forces are no longer peripheral trends,
Speaker 3: but they've become central drivers of everything from dispersion to
Speaker 3: volatility to disruption and ultimately long term value creation. And
Speaker 3: we can see this with the lifespan of companies in
Speaker 3: the s and P five hundred. I was just falling
Speaker 3: from sixty years in the nineteen fifties to thirty years
Speaker 3: in the nineteen eighties to an estimated twelve to fifteen
Speaker 3: years by twenty thirty at the end of this decade,
Speaker 3: and the growth and so called Kodak moments of companies,
Speaker 3: we're simply failing to foresee and adapt to the pace
Speaker 3: of disruptive transformation, and we really see mega trends investing
Speaker 3: as offered an invaluable north star for investors looking to
Speaker 3: adapt for the future and navigate these structural shifts. And
Speaker 3: in practice this means leveraging a bottoms up fundamental, fundamental
Speaker 3: research and valuation discipline focused approach when it comes to investment,
Speaker 3: and we believe the software is it's two things. Firstly,
Speaker 3: it's an opportunity to invest in high quality, growing companies
Speaker 3: benefiting from structural change at a reasonable price what will
Speaker 3: refer to as themes or mega trends as a reasonable
Speaker 3: price along the lines of gart But secondly, longer term
Speaker 3: optionality from ten to twenty year themes that are currently
Speaker 3: on the investment frontier but rapidly becoming reality, so things
Speaker 3: like autonomous vehicles, humanoid robots, quantum computing, SMRs as well
Speaker 3: as space.
Speaker 1: So if we take a step back, how do you
Speaker 1: define and identify these mega trends? Is there a certain
Speaker 1: criteria that your team uses decide if a trend is
Speaker 1: structural enough to be included in the funds investment universe?
Speaker 3: Yeah, of course, you know. As our starting point, we
Speaker 3: really see mega trends as long term, large scale global
Speaker 3: structural shifts with the potential to reshape global industry, economics
Speaker 3: and profit pools. And we also believe that the evaluate
Speaker 3: a selection of mega trends requires robust fundamental grounding needs
Speaker 3: to be validated by both company level insights as well
Speaker 3: as the Lazarts Global research platform. A forward looking approach
Speaker 3: is critical to timing theme selection, as you generally don't
Speaker 3: want to be buying when the theme has reached page
Speaker 3: one of the newspapers or is all across your social media,
Speaker 3: or for that matter, your parents or your grandparents.
Speaker 1: Are asking you about it.
Speaker 3: You want to be focused on the ideas that are
Speaker 3: on section see page thirty two of the newspapers but
Speaker 3: slowly moving their way towards page one, and our investment
Speaker 3: edge in this regard lies in the four and a
Speaker 3: half thousand company meetings that we, together with our fundamental
Speaker 3: analyst colleagues, have with companies every single years. These meetings
Speaker 3: account for about fifty percent of our times as PMS
Speaker 3: and allow us to build a picture of our transforming world.
Speaker 3: And during this meetings we ask the CEOs and senior
Speaker 3: management strategic questions about things like structural changes over the
Speaker 3: next three to ten years, the evolution of both demand
Speaker 3: and supply, capex investments which are being underestimated or ignored
Speaker 3: by the market, and future sources of revenues and profit pools.
Speaker 3: And in essence, these collected data points allow us to
Speaker 3: both identify emerging mega trends and to focus on idiosyncratic
Speaker 3: stock factors, while also tying our mega trends to three
Speaker 3: to five year valuations for companies. And practically speaking, each
Speaker 3: mega trend must also be able to offer durability, scale
Speaker 3: and investability across a diversified set of companies, and at
Speaker 3: present we run a concentrated portfolio of sixty names across
Speaker 3: six themes or mega trends, so that includes smart campex,
Speaker 3: smarter industry, and a new era for capital investment, bits
Speaker 3: of chips, key selective components capturing value from digitalization powered
Speaker 3: consumer the winners in a whole new world of consumerism.
Speaker 3: Software agents, the next major evolution of software, data and
Speaker 3: AI competitive advantage from the plied AI. And then finally
Speaker 3: future health, which is focused on solutions to the societal
Speaker 3: challenges in and around healthcare.
Speaker 1: Can you describe how your proprietary multi theme process works
Speaker 1: in terms of how themes evolve over time in the portfolio?
Speaker 3: Yeah, of course, of course. Well as thematic investors, we
Speaker 3: anchor our portfolio to multiple themes or mega trends rather
Speaker 3: than benchmarks, which we believe don't tell you very much
Speaker 3: about the future and lead to a framing bias. And
Speaker 3: as a Canadian, I'll make an ice hockey analogy. We
Speaker 3: need to be skating to where the puck is going,
Speaker 3: not where it currently is.
Speaker 2: Now.
Speaker 3: As mentioned, we have six themes in our strategy, with
Speaker 3: our belief being that firstly, each theme captures a different
Speaker 3: subset of structural factors, Secondly, that different themes pay off
Speaker 3: at different times and in different ways, and that thirdly
Speaker 3: themes evolve over time. We also believe that a multi
Speaker 3: thematic approach reduces risk and smooth's return patterns over time.
Speaker 3: In escence, it affects competition for capital between themes as
Speaker 3: opposed to a single theme approach where no one tells
Speaker 3: you when to evolve or sell. And obviously we run
Speaker 3: an active ETF and our themes are dynamic and evolve
Speaker 3: off the back of our bottoms up research and the
Speaker 3: data points we're collecting from our meetings with companies and
Speaker 3: as evidence, as economics, as competitive dynamics, As policy directions change,
Speaker 3: new themes emerge, and existing themes can shrink, expand, or
Speaker 3: be retired based on our conviction. But to put things
Speaker 3: in perspective, we are true long term investors. Of the
Speaker 3: average lifespan of our themes average is about five years,
Speaker 3: and portfolio turnover is about twenty percent per year.
Speaker 1: So I'm gvite you mentioned bottom up research because that
Speaker 1: was kind of the next part I wanted to talk about.
Speaker 1: Is there specific approach to selecting you know, once you
Speaker 1: have your themes, to selecting the specific companies you know,
Speaker 1: you know certain fundamental metrics you like to use, or
Speaker 1: even you know, any biases towards geographic regions or even
Speaker 1: market caps.
Speaker 3: Yeah, perfect, well. In terms of investment process, we've got
Speaker 3: a robust and long standing four step process you know. Firstly,
Speaker 3: we're looking for thematic fits, with companies needing to clearly
Speaker 3: benefit from the structural drivers behind a theme and supportant stress.
Speaker 3: We're not looking at simplistic quant or revenue exposure screens
Speaker 3: and stock lists, but rather at the evolution of business models,
Speaker 3: exposure to exogeness factors, and how stocks will benefit from
Speaker 3: the return opportunity over time. Secondly, we're looking at stock
Speaker 3: specific factors. The reality is that no stock will ever
Speaker 3: be a perfect fit for a theme, and there are
Speaker 3: many idiosyncratic factors at play, from the quality of management
Speaker 3: to worry some legacy businesses is to sustainability concerns, and
Speaker 3: these are often swept under the carpet by top down investors,
Speaker 3: but we choose to choose to go deeper, working closely
Speaker 3: with Lazard's fundamental research team and their insights. Thirdly is valuation,
Speaker 3: where we place an overarching focus on year three so
Speaker 3: twenty twenty nine and year five twenty thirty one, and
Speaker 3: on whether the valuation is reasonable, whether there's a possibility
Speaker 3: of upside if the theme plays out, and ultimately on
Speaker 3: capturing asymmetries. And then fourth and finally is diversification. We
Speaker 3: have multiple themes and multiple stocks per theme, and layers
Speaker 3: of diversification across market segments geographies, products, services, as well
Speaker 3: as sectors. It's very much our belief that diversification allows
Speaker 3: us to access different return profiles. And generally speaking, we
Speaker 3: equally wake themes and stocks and we regularly take profits
Speaker 3: and recycle them into strong suctual stories experiencing moments of weakness.
Speaker 1: So I do have a follow up to that, you
Speaker 1: know you touched upon valuations. Are there specific valuation metrics
Speaker 1: you consider or does it kind of differ from stock
Speaker 1: to stock.
Speaker 3: Yeah, happy to say.
Speaker 1: A word there.
Speaker 3: And firstly I would just stress that, you know, so
Speaker 3: much of the focus in terms of thematic and mega
Speaker 3: trends is on narrative heavy areas and support of stress.
Speaker 3: There's certainly some great narratives or stories associated around mega trends,
Speaker 3: but we really pride ourselves on our valuation discipline. You know,
Speaker 3: Our emphasis again is on that bottoms up long term
Speaker 3: valuation years three and years five in particular, but also
Speaker 3: the thematic optionality playing out over longer period so five
Speaker 3: to ten years. And it's our belief that these are
Speaker 3: timeframes where markets tend to be less efficient and structural
Speaker 3: change is generally underappreciated, but in terms of valuation, rather
Speaker 3: than fixing target our team we work extremely closely with
Speaker 3: Thozard seventy fundamental analysts to compare with the market is
Speaker 3: discounting the consensus and price with what our differentiated long
Speaker 3: term judgments say. Valuation approaches can be flexible by company type.
Speaker 3: We're recognizing everything from annuity like elements through to optionality.
Speaker 3: We're leveraging scenario based analysis, which helps us to calibrate
Speaker 3: materiality and avoid overpaying for popular or narrative German themes,
Speaker 3: and our valuation discipline also means that we can help
Speaker 3: our clients access the best themes and the best companies
Speaker 3: tomorrow early and at a reasonable price. Because themes at
Speaker 3: a reasonable price, Mega trends at a reasonable price is
Speaker 3: have the heart of everything that we are trying to do.
Speaker 3: Is there any type of top down research as part
Speaker 3: of the process. Do you kind of incorporate any type
Speaker 3: of macroeconomic or geopolitical insights into your framework? Yeah? Of course,
Speaker 3: you know, as you can imagine, macro geopolitical insights are
Speaker 3: critical for us as a Mega trens team, especially in
Speaker 3: light of the new realities of the fragmented, the transactional,
Speaker 3: the intensely competitive, multi polar world that we're living in,
Speaker 3: and we really see these inputs as key to shaping
Speaker 3: long term foundations and construction of our themes, as opposed
Speaker 3: to those who would use them for tactical positioning or
Speaker 3: short term timing. So just to give you an example,
Speaker 3: you know, we see strategic investment in US manufacturing and
Speaker 3: industry as accelerating due to macro on geopolitical challenges. We
Speaker 3: see the scales tilting away from chasing low cost labor
Speaker 3: back towards domestic production, and we believe capital and proximity
Speaker 3: to the end user is going to dictate the national
Speaker 3: and regional allocation of capex parameters to which the US
Speaker 3: have no equal. We also see the US as in
Speaker 3: the very early innings of a massive reindustrialization wave which
Speaker 3: could become a multi decade opportunity which we size at
Speaker 3: a minimum of ten trillion dollars in the coming years.
Speaker 3: And as the US aims to regain the twenty to
Speaker 3: twenty five percent of global manufacturing share that it commanded
Speaker 3: in the nineties, we see an increasing focus on reshoring
Speaker 3: high value strategic supply chains and critical infrastructure, and in
Speaker 3: terms of example semis or chips, that industry is clearly
Speaker 3: becoming one of the biggest focus areas. And if you
Speaker 3: take a look at twenty twenty five, as of July,
Speaker 3: Semi companies had announced over five hundred billion of private
Speaker 3: sector investments across twenty eight states to revitalize the US
Speaker 3: leading edge cheap chip ecosystem and move towards this whole
Speaker 3: idea of solvereign AI and US pharma manufacturing is another
Speaker 3: reshoring beneficiary with three hundred and seventy billion of investments
Speaker 3: in two thousan twenty five. So we're looking at the macro,
Speaker 3: we're looking at the geopolitical, but we're trying to see
Speaker 3: what sort of bottom up impacts that is having in
Speaker 3: terms of our in terms of our portfolio.
Speaker 1: So I know BRI has some really great questions digging
Speaker 1: deeper into the themes themselves, but I just have one
Speaker 1: more question on investment process before we move on. You
Speaker 1: work alongside a few different co managers on this strategy.
Speaker 1: How does collaboration work in terms of theme selection, sizing
Speaker 1: and portfolio reviews?
Speaker 3: Of course, well, just in terms of the team itself,
Speaker 3: Mozon's Thematic and Mega Trends team comprises six members, four pms,
Speaker 3: a portfolio analyst, and a client portfolio manager. We're based
Speaker 3: in both New York and London, and we are one
Speaker 3: of the world's most experienced thematic teams, with an average
Speaker 3: of twenty four years of industry experience, including an average
Speaker 3: of eleven years at Lazard. We have complementary backgrounds that
Speaker 3: spanned the buy and sell side, geographies, areas of study
Speaker 3: and interest, and one member was actually a former member
Speaker 3: of a national chess team. But it's important to stress
Speaker 3: that beyond the core team is that we're collaborating throughout
Speaker 3: the day with an emphasis on cognitive diversity and collective
Speaker 3: decision making, with everything from theme and stock selections, sizing decisions,
Speaker 3: and portfolio reviews made jointly by the pms, supported by
Speaker 3: ongoing debate and shared research ownership. But it's critical to
Speaker 3: stress the importance of the inter connected insights that we
Speaker 3: derive from the investment investment network. At Lazard, we have
Speaker 3: access to and regularly leverage a world class network of
Speaker 3: seventy sector specialists across continents who help us to construct
Speaker 3: our bottoms up vision of the world and we're an
Speaker 3: incredibly interconnected platform. We're in constant touch with the fundamental analysts,
Speaker 3: with dedicated chat groups with each of them, as well
Speaker 3: as a firm wide big Big Picture weekly Leal Thematic meeting,
Speaker 3: which has been running at the firm for well over
Speaker 3: for well over two decades now.
Speaker 2: A lot of what you were saying that echoes with also,
Speaker 2: you know the low approach we take, and it's you've
Speaker 2: said some of my favorite words asymmetric right here, right, idiosyncratic,
Speaker 2: all those really good ones. When you start talking about thematic,
Speaker 2: I was I was looking at the current membership and
Speaker 2: interested to hear your perspective, you know, thinking back to
Speaker 2: the question I answered David at the very beginning here,
Speaker 2: when we think about going global versus focusing on opportunity
Speaker 2: potentially being unlocked in the US, you've got a decently
Speaker 2: high waiting to us, interested to hear on if there
Speaker 2: are certain of the mega trends that you're focused on
Speaker 2: where you are looking more global versus other ones that
Speaker 2: you're more focused on being US driven.
Speaker 3: Yep, yep, perfect, Happy to say a word there, and
Speaker 3: I think I would take things one step back, and
Speaker 3: what I would really stress is it's r you that
Speaker 3: investors need to look beyond the horizon the capture tomorrow's
Speaker 3: ELpH and future wealth. And basically this reals a fourfold
Speaker 3: shift in investing wavelength. And the first is just clearly
Speaker 3: moving from short term to long term. All of the
Speaker 3: market volatility that we're seeing on a daily basis presents
Speaker 3: opportunities for long term investors. Its Secondly, exactly in line
Speaker 3: with what you're saying, we believe that we need to
Speaker 3: move away from the US to becoming more global allocation
Speaker 3: can help us navigate a shifting market performance in what
Speaker 3: really is a new regime. And Thirdly, we need to
Speaker 3: diversify from that sometimes obsessive focus on data centers and
Speaker 3: ais to more diversity across sectors, market segments as well
Speaker 3: as companies. And then finally, as we discussed, we need
Speaker 3: to shift away from those backward looking benchmarks to being
Speaker 3: forward looking. Now, if to take a look at the
Speaker 3: portfolio itself, you know what you end up with is
Speaker 3: a portfolio which truly is global, right about sixty three
Speaker 3: percent North America and thirty seven percent rest of world,
Speaker 3: and this reflects global profit pool distribution and where many
Speaker 3: leaders in structural change reside. So I was talking about
Speaker 3: the changes that we're seeing, for instance, in the manufacturing
Speaker 3: and renaissance space in the United States. Massive opportunity. But
Speaker 3: this is a space where we need to look towards
Speaker 3: some of the European as well as the Japanese actors
Speaker 3: as we look to instill everything from automation, digitalization software
Speaker 3: and AI based operating systems for factories through to industrial
Speaker 3: robots as well as the emergence of humanoid robots. But
Speaker 3: if you look at the portfolio, the way that we
Speaker 3: think and the way that we act, it also results
Speaker 3: in a portfolio which is very well diversified. We've got
Speaker 3: about forty percent technology, but we have material exposure to healthcare,
Speaker 3: to industrials, to financials as well as consumer companies. And
Speaker 3: our global approach as well as our equal weighting based
Speaker 3: philosophy basically means under exposure to megacaps even when based
Speaker 3: in the US, providing broad participations across global trends.
Speaker 2: I think that's really interesting, and you mentioned in there
Speaker 2: specifically as it comes to AI. Let's be honest, can't
Speaker 2: help almost every conversation I have clients, even when we
Speaker 2: go in with a different topic of conversation. I feel
Speaker 2: like we always come back to AI. I think it's
Speaker 2: interesting what you said, they're looking beyond AI, looking beyond
Speaker 2: the data centers, and I know you mentioned also this
Speaker 2: really keen focus that your team has on the three
Speaker 2: to five year right and where the opportunity is going
Speaker 2: to sit there. Naturally, though, we've got this volatility and
Speaker 2: this tension, great opportunities to lean in when you get
Speaker 2: when you get some of this volatility, where in the
Speaker 2: AI ecosystem or which aspects of AI are you watching
Speaker 2: most closely right now, understanding that you're prioritizing where things
Speaker 2: are going to be in a three to five year window.
Speaker 3: Yeah, happy to share some insights there. And I think firstly,
Speaker 3: it's there's no getting away from the fact that AI
Speaker 3: has and will continue to dominate the investment landscape. You know,
Speaker 3: we're anticipating about three to four trillion dollars in AI
Speaker 3: infrastructure spend by the end of this decade, and what
Speaker 3: companies are telling us is that they likely need to
Speaker 3: double compute every six months, which obviously means a three
Speaker 3: hundred to one thousand time increase over the next four
Speaker 3: to five years as they strive towards AGI or artificial
Speaker 3: general intelligence. And if we want to put things in perspective,
Speaker 3: it's really most comparable to the nineteenth century railway boom
Speaker 3: with both of these both of these representing massive transformative
Speaker 3: and potentially speculative investment cycles. And to put things in perspective,
Speaker 3: Gilded Age railroad investment peaked at about six percent of GDP,
Speaker 3: But if we look at AI hyperscaler Capex alone in
Speaker 3: twenty twenty five, it was about two percent of GDP,
Speaker 3: And obviously it's been increasing by the day, and a
Speaker 3: lot of people will always ask us, you know, why
Speaker 3: are we engaging in one of the costs theiest buildings
Speaker 3: freeze in human history. You take a over the last
Speaker 3: three years of AI spend and it's greater than when
Speaker 3: it costs to build the US Interstate highway network over
Speaker 3: forty years. You know why are we seeing multi billion
Speaker 3: dollar AI factories bigger than ten home depots being built
Speaker 3: in windswept towns like Ellendale, North Dakota, which has eleven
Speaker 3: hundred people, two motels, one dollar general, and a Pentecostal
Speaker 3: Bible college. The reality is that AI compute demand continues
Speaker 3: to exceed supply it's the fastest growing technology in history,
Speaker 3: faster than the TVs, the Internet, smartphones, or previous computing revolutions.
Speaker 3: You look at the consumer space, Chat GBT cheap one
Speaker 3: hundred million users in two months and is now close
Speaker 3: to nine hundred million. You know, that's a record for
Speaker 3: a consumer app. We now have seventy to eighty eight
Speaker 3: percent of businesses and ninety nine percent of the Fortune
Speaker 3: five hundred who are actively deploying or exploring deploying GENAI.
Speaker 3: That compares to only ten percent two years ago, and
Speaker 3: seventy five percent of companies say that they are now
Speaker 3: completing tasks that they were never able to do before.
Speaker 3: The reality is this is unlikely to change any time soon,
Speaker 3: given that we're only three to four years into what
Speaker 3: is likely a twenty five year investment supercycle, and that
Speaker 3: the street is consistently underestimated the cappex in this space.
Speaker 3: But that said, you know, if we bring this to
Speaker 3: an investment and a portfolio in terms of perspectives, the
Speaker 3: long term opportunity is really going to be rooted in
Speaker 3: sentiment on ROI and return on investment, and that balance
Speaker 3: that exists between AI capabilities long term incremental revenues and
Speaker 3: productivity and efficiency upside. And obviously we're seeing growing revenue
Speaker 3: opportunities if you look at what's happening in terms of
Speaker 3: the cloud with enterprise adoption of AI workloads, what's happening
Speaker 3: in terms of digital advertising with improved targeting an AI subscriptions,
Speaker 3: so people paying for tools and agentic services. These three
Speaker 3: areas alone represent a trillion dollars of incremental revenues over
Speaker 3: the next few years, with AI driven opex and capex
Speaker 3: efficiencies further pushing up company offerating profit margins. But what
Speaker 3: we are really excited about is that shift from data
Speaker 3: center build out toward broader implementation and applications. So this
Speaker 3: includes AI agents across industries. AI at the edge for
Speaker 3: example with smart glasses and new form factors, and physical
Speaker 3: AI in spaces like autonomous vehicles and humanoid robots with
Speaker 3: up to fifty trillion dollars of industry set to become autonomous.
Speaker 3: And from a macro perspective, if you go back to
Speaker 3: the macro, what I would stress is that AI could
Speaker 3: contribute up to fourteen percent of global GDP by twenty
Speaker 3: thirty and put some perspective, we're talking about fifteen point
Speaker 3: seven trillion dollar worth of GDP as AI enables automation products,
Speaker 3: decision making scale across sectors, and this is key they
Speaker 3: boost global productivity after twenty years of stagnation or decline.
Speaker 3: You know, we're talking about nine hundred billion plus and
Speaker 3: benefits for the SMP five hundred and this translates into
Speaker 3: about sixteen trillion dollars in potential long term market value
Speaker 3: creation potential. And what companies are telling us quarter after quarter,
Speaker 3: the reporting is improving in this regard. They're telling us
Speaker 3: about the profound productivity shifts that are coming from AI,
Speaker 3: you know, improving the efficiency of coding by eighty percent,
Speaker 3: AI speeding up drug development by eight to twelve times.
Speaker 3: AI accounting for seventy five percent of claims adjustment and
Speaker 3: underwriting in the insurance sector, all the way through to
Speaker 3: total cost of ownership savings versus humans of up to
Speaker 3: eighty five percent in the manufacturing sector. So massive opportunities
Speaker 3: beyond the data center. Also some areas for caution, which
Speaker 3: I'm happy to get into if that might be of interest.
Speaker 2: Well, I think what is really refreshing to hear is naturally,
Speaker 2: over the last eighteen months in particular, it's been so
Speaker 2: focused and I don't mean to say that it shouldn't be.
Speaker 2: We know that these bottlenecks are very much what need
Speaker 2: to be salved for the next three years. It's where
Speaker 2: the capex is having to be allocated. It is the
Speaker 2: upstream bottlenecks and that real infrastructure component of enabling AI.
Speaker 2: It is a little bit refreshing, actually a hy bit
Speaker 2: of a conversation that sometimes has been very much put
Speaker 2: on the back burner because you're not necessarily seen into
Speaker 2: the stock performance about those downstreams. So like if you
Speaker 2: know upstream AI versus downstream MAYI. It really has been
Speaker 2: a bit of the forgotten spot, I would say over
Speaker 2: the last eighteen months, if anything, maybe getting hit a
Speaker 2: little bit harder versus all that focus on the upstream
Speaker 2: and it is refreshing, just a hard thing to have
Speaker 2: the conversations about. Is patience is a virtue in this
Speaker 2: type of situation, right totally? And I do think I
Speaker 2: do think that's something especially as you say that you
Speaker 2: guys are so focused on three to five years, is
Speaker 2: that's where you're going to start to really see those
Speaker 2: downstream acceleration of the work that got put in now
Speaker 2: and it actually paying off into some of those downstream
Speaker 2: applications and their growth. There that being said, I did
Speaker 2: notice now a couple of things. One, I'm also Canadian,
Speaker 2: really appreciated the puck reference. Two, I will always take
Speaker 2: one of those two. I did notice that in your
Speaker 2: in your Mega trans breakdown, you also flagged something else
Speaker 2: that I'm deeply passionate about power and power being back
Speaker 2: on the agenda. I think those are the words that
Speaker 2: were maybe in something I've seen come across from your team.
Speaker 3: Sure, let's talk.
Speaker 2: One of the things that I find so interesting about
Speaker 2: power is it's almost like every single time I have
Speaker 2: to enter the conversation saying, guys, deep bottlenecking power and
Speaker 2: improving the power grid has been a priority for a decade,
Speaker 2: more than a decade now, AI just we already had
Speaker 2: a problem, we already needed an investment. AI has just
Speaker 2: now quadrupled you know, this situation and brought it mainstream
Speaker 2: and brought a whole new set of eyes to the situation,
Speaker 2: which I think is really really compelling. I often break
Speaker 2: this down between two things grid tech or centralized power versus.
Speaker 2: I'm loving seeing actually the increased focus, particularly from the
Speaker 2: tech investors towards decentralized power. So I'm interested to hear
Speaker 2: your take on how your team is addressing this power
Speaker 2: being back on the agenda and how you're working that
Speaker 2: into your current ethos. Yeah.
Speaker 3: Perfect, happy to share some thoughts there. We're we're in
Speaker 3: total agreement with you. And you know, if you take
Speaker 3: a look at the US, if you look at many
Speaker 3: developed markets, you know we're seeing power demand is increasing
Speaker 3: after two decades of relative stagnation. It's being driven by
Speaker 3: the growth in AI and data centers, as well as
Speaker 3: industrial activity from reshoring and then increasing electrification across industry
Speaker 3: sectors and across end markets. And just to put things
Speaker 3: in perspective, if we look at US data centers alone,
Speaker 3: you know, monthly and annual capacity editions reached record highs,
Speaker 3: record monthly eyes at one point four gigawatts in December,
Speaker 3: record annual highs in the US at ten gigawatts in
Speaker 3: twenty twenty five. Now this matters because a one gigawatt
Speaker 3: data center consumes the equivalent electricity of seven hundred and
Speaker 3: fifty to eight hundred thousand homes. Data centers have boosted
Speaker 3: US power demand growth to the highest level in twenty years,
Speaker 3: leading to more than half of regional power markets reaching
Speaker 3: critical tightness last year. And if we look forward, we're
Speaker 3: in total agreement with you. You know, data centers could be
Speaker 3: consuming twelve percent of total electricity in the US now
Speaker 3: at gatesst Backdob. We really see investment opportunities as being
Speaker 3: driven by for key dynamics. The first thing is going
Speaker 3: to be a focus on low cost energy to support
Speaker 3: rapid AI infrastructure growth and reshoring of industrial capabilities. This
Speaker 3: is going to include natural gas. It's also going to
Speaker 3: include decentralized power. Secondly, there needs to be an increasing
Speaker 3: focus on innovative technologies. We've seen a lot of excitement
Speaker 3: and take up with regards to nuclear and particular SMRs,
Speaker 3: but also things like carbon capture batteries and energy storage. Thirdly,
Speaker 3: we're probably looking at a situation of global energy deflation
Speaker 3: as the US exports cheap natural gas to key global markets.
Speaker 3: And then finally, this is an area where we need
Speaker 3: to need to engage in a.
Speaker 1: Certainly re of caution.
Speaker 3: We think that the political dynamics are going to become
Speaker 3: increasingly important. There's a heightened focus on energy build impacts
Speaker 3: for consumers and voters, and this is one of the
Speaker 3: biggest areas of stakeholder backlash to AI. You know, we
Speaker 3: saw one hundred billion dollars worth of data center project
Speaker 3: being canceled. Last year. We saw close to thirty states
Speaker 3: passing regulation in this regard. So definitely something that needs
Speaker 3: to be on our agenda.
Speaker 2: Yeah, and I think it's a good thing to flag
Speaker 2: is nimis ever obviously not new to the energy industry.
Speaker 2: I do think it's new newer to the tech industry.
Speaker 2: They've never really had to navigate that type of dynamic.
Speaker 2: But you're right, it's a It is the stakeholder management
Speaker 2: and stakeholder engagement that goes alongside this type of build
Speaker 2: cycle is not to be underestimated and not to best
Speaker 2: to assume it's not going to be linear and smooth sale. Right.
Speaker 2: I feel like we learned those lessons, or we should
Speaker 2: have learned those lessons.
Speaker 1: Really.
Speaker 3: Also, one of the advantages of a global diversifying the multi.
Speaker 2: Thematic approach of the end absolutely right, and every region
Speaker 2: is going to have it. And naturally, as you said,
Speaker 2: this is a global buildout, right, you can't just be
Speaker 2: building out. Every nation has prioritized it on their national
Speaker 2: security prioritization from an AI perspective. As you mentioned earlier,
Speaker 2: space is also getting recognized for that as well, really
Speaker 2: dovetailing with a national defense for capitalization. So I think
Speaker 2: that's also a really beautiful intersection, is that it's obviously
Speaker 2: been prioritized in the US, but we're seeing it prioritized
Speaker 2: throughout APEC and also through Europe, everybody not wanting to
Speaker 2: be left behind. I think this is maybe a tricky question,
Speaker 2: and to be honest, I don't know how I would answer,
Speaker 2: which is probably why I'm asking, because I'd love to.
Speaker 1: Have an answer.
Speaker 3: I'll give you my best.
Speaker 2: When you think about what you guys are looking at
Speaker 2: right now, or how you're positioned, and where you see
Speaker 2: the opportunity. Is there something that could happen in the
Speaker 2: next twelve months that would pivot you aggressively. You mentioned
Speaker 2: something like a twenty percent average churn there will use
Speaker 2: the term black swan. Is there this potential black swan
Speaker 2: that low probability, but if it happens, you would absolutely
Speaker 2: be looking to make a more dynamic shift within your
Speaker 2: current structuring.
Speaker 3: I wouldn't see there one black subpan, and to be
Speaker 3: quite honest, you know it isn't great for our sleep patterns,
Speaker 3: but we're in a constant process of addressing development that
Speaker 3: could challenge our thematic priorities. We'll get everything from shifts
Speaker 3: in global policy direction in a multipolar world, slowing economic
Speaker 3: activity that can impact CAPEX, competitive intensity, or technological disruption,
Speaker 3: and then valuation compression if expectations run ahead of fundamentals,
Speaker 3: and if I try to bring that in perspective of
Speaker 3: some of the shorter term things that we've been seeing
Speaker 3: in the market. As you can probably imagine, a lot
Speaker 3: of recent emphasis has been on the impact of AI
Speaker 3: on software companies, and this is an area where we've
Speaker 3: been shifting our focus away from slowing set as grows
Speaker 3: over the course of the last few years towards towards
Speaker 3: a variety of new drivers. So we're placing an increasing
Speaker 3: emphasis on outcomes rather than seats on tapping into booming
Speaker 3: AI budgets. These continued to increase, while overall IT budgets
Speaker 3: are flat or stagnating. The rethinking of interfaces and the
Speaker 3: monetization of AI agents on top systems of record, and
Speaker 3: from a valuation perspective, you know, we're also looking at
Speaker 3: valuations which have sometimes fallen into their routines, but in
Speaker 3: light of free cash flow multiples which are even better
Speaker 3: than that, and with net cash balance sheets. But ultimately,
Speaker 3: you know, we consider ourselves experts on structural change. That
Speaker 3: is our bread and butter, and what we're obsessively focused
Speaker 3: on is many of the emerging challenges that are ignored
Speaker 3: by shorter term investors. Just to give you a flavor,
Speaker 3: you know, we're seeing significant negative shifts in public sentiment
Speaker 3: on AI. One of the major service is on twenty
Speaker 3: twenty five is that fifty percent of Americans are now
Speaker 3: more concerned than excited about AI. You know, we're looking
Speaker 3: at the macro impacts. AI is currently able to automate
Speaker 3: twenty five percent of all working hours. What is this
Speaker 3: going to mean in terms of the need for rescaling
Speaker 3: and upscaling. And then we're looking at things like electricity
Speaker 3: and power, which we talked about. You know, one hundred
Speaker 3: regulations in thirty states passed in the US in twenty
Speaker 3: twenty five alone, and we're now talking about things like
Speaker 3: whole set electricity auctions to fund long term contracts for
Speaker 3: power generation capacity. All of these things are potentially on
Speaker 3: the horizon and obviously could impact the composition of the
Speaker 3: underlying portfolio.
Speaker 2: I mean, I don't know if you guys saw it,
Speaker 2: but the Chris Hemsworth Super Bowl ad yesterday fear of AI, right,
Speaker 2: it is true or pell great at one other And
Speaker 2: maybe this will be my final question and I'll leave
Speaker 2: it to David. The thing that I think twenty twenty
Speaker 2: five was most under the radar takeaway for thematic investing
Speaker 2: from my perspective was I think we're seeing institutional investors
Speaker 2: finally understand this is where you are to be front
Speaker 2: footed right, just the drag and the leg that you're
Speaker 2: inherently exposed to with some of the more traditional constructs.
Speaker 2: I think we saw it. We saw it specifically track
Speaker 2: a lot of the global thematic ETF flows naturally, and
Speaker 2: we were seeing just based off the behavior, it was
Speaker 2: a record year for thematic etfmflow through twenty twenty five,
Speaker 2: really strong start to twenty twenty six as well. Interestingly,
Speaker 2: where we saw the biggest allocations were going to these big,
Speaker 2: heavy structural demand type areas AI, defense, infrastructure, nuclear. I'd
Speaker 2: love to hear your opinion on the fact that we
Speaker 2: have hopefully hit that inflection point thematic investing where once
Speaker 2: upon a time it was purely thought to be a
Speaker 2: retail investor type of focus and the potential for us
Speaker 2: to be gaining some real traction amongst institutional investors.
Speaker 3: Sure, I'm in total agreement with you in that regard,
Speaker 3: and if anything, we would argue that thematics and mega
Speaker 3: trends are increasingly relevant for all investors' retail as well
Speaker 3: as institutional. You know, I talked about our Yogi Bara
Speaker 3: quote at the future ain't what it used to be,
Speaker 3: but it's very much our view that, you know, thematics
Speaker 3: and mega trends are increasingly key to capturing alpha from
Speaker 3: the combination of investing in high quality growth companies benefiting
Speaker 3: from structural change put at a reasonable price, as well
Speaker 3: as longer term thematic optionality. So the alpha story is
Speaker 3: key here, but the relevance for investors goes well beyond this.
Speaker 3: It really lies at the heart of investor's ability to
Speaker 3: retain and grow their books at business and as you
Speaker 3: alluded to, investors need to follow the follow the money,
Speaker 3: and follow the dollars. Thematic assets reach a three year
Speaker 3: high last year of seven hundred and seventy nine billion
Speaker 3: dollars globally, and this is no longer a European phenomenon.
Speaker 3: The US has been seeing the fastest growth worldwide. USAUM
Speaker 3: has grown fifty percent over the last three years, helped
Speaker 3: again by the rise of active btfs. But secondly, we
Speaker 3: need to pay attention to the changing demographics. Forty percent
Speaker 3: of American millennials and forty percent of American gen z
Speaker 3: or gen z as we woul say in Canada, investors
Speaker 3: those aged thirty to forty five and fourteen to twenty nine, respectively,
Speaker 3: already use thematic mega trends investment. And then finally, you know,
Speaker 3: we're in the midst of the largest ever generational wealth
Speaker 3: transfer in human history. You know, we're looking at one
Speaker 3: hundred and twenty four trillion dollars which is set to
Speaker 3: shift to younger generations in the US alone by twenty
Speaker 3: forty eight. But in an extremely worrying sign, only thirteen
Speaker 3: percent of investors retain their parents, grand parents, fa their
Speaker 3: financial advisor when the money passes hands. You know, I
Speaker 3: talked about those Code Act moments earlier, but the reality
Speaker 3: is that younger investors think and act differently than previous cohorts.
Speaker 3: And ultimately, you know what This comes down to is
Speaker 3: that the logic and the expectations of yesteryear are becoming
Speaker 3: obsolete in a transforming world, and mega trends investing is
Speaker 3: going to be critical to reduce the looming risk of disintermediation. So,
Speaker 3: in a nutshell, what we continue to do, what we've
Speaker 3: always done, is to urge investors, whether they're institutional or retail,
Speaker 3: as well as their end clients, to look beyond the horizon,
Speaker 3: to focus on the long term, to go global, to
Speaker 3: diversify or cross opportunities, to be forward looking, and ultimately
Speaker 3: to capture future wealth for multiple generations to come. And
Speaker 3: at the end of the day, you know, that's what
Speaker 3: we're trying to do with Bizarred equity, mega trends or themes.
Speaker 1: That's a great way to end it. This was a
Speaker 1: fantastic discussion, Sars. Thank you again for joining us.
Speaker 3: Pleasure was mine. Thank you for having me and.
Speaker 1: Bri as always, thank you for being my co host.
Speaker 2: I never say no. David always one of my favorites,
Speaker 2: and this was a particularly engaged conversation, so thank you
Speaker 2: so much.
Speaker 3: This is good.
Speaker 1: I also want to thank our listeners. If you liked
Speaker 1: the episode, please share it, subscribe and leave a review,
Speaker 1: and if you'd like to see more of our research
Speaker 1: on the terminal, go to bi fund, go for fund
Speaker 1: and Active Research and BiH EM go for thematic research.
Speaker 1: Until our next episode, This is David Combe with Inside
Speaker 1: Active