WEBVTT - Alger’s Crawford on Finding Durable Growth 0:00:14.760 --> 0:00:17.799 Welcome to Inside Active, a podcast about active managers that 0:00:17.840 --> 0:00:20.400 goes beyond sound bites and headlines and looks deeper into 0:00:20.480 --> 0:00:25.080 their processes, challenges and philosophies and security selection. I'm David Cohne, 0:00:25.120 --> 0:00:27.880 i lead mutual fund and Active Research at Bloomberg Intelligence. 0:00:28.280 --> 0:00:30.680 For the past few years, markets have been driven by 0:00:30.720 --> 0:00:34.280 a narrow set of companies benefiting from powerful structural trends, 0:00:34.640 --> 0:00:39.040 most notably AI. But as those trends become more widely recognized, 0:00:39.120 --> 0:00:42.160 the challenge for investors is no longer just identifying them. 0:00:42.479 --> 0:00:45.560 It's figuring out where the next layer of opportunity lies 0:00:45.600 --> 0:00:48.919 in what's already priced in. Today, I wanted to explore 0:00:48.960 --> 0:00:52.360 how an active manager navigates that, how you separate durable 0:00:52.400 --> 0:00:56.520 growth from how you build conviction and a concentrated portfolio, 0:00:56.760 --> 0:01:00.120 and where the market may still be underestimating change. One 0:01:00.160 --> 0:01:03.640 to me discuss this is doctor Acre Crawford, executive vice 0:01:03.680 --> 0:01:07.640 president and portfolio manager for Alger, including the Alger focused 0:01:07.640 --> 0:01:11.280 equity fund ticker alg r X and the Alger Concentrated 0:01:11.319 --> 0:01:14.880 Equity ETF ticker cn eq Encore. Thank you for joining 0:01:14.920 --> 0:01:15.280 me today. 0:01:16.200 --> 0:01:17.000 Thanks for having me. 0:01:17.120 --> 0:01:22.120 David so Alga is known for its positive dynamic change philosophy. 0:01:22.480 --> 0:01:24.360 How do you define that in practice? And you know, 0:01:24.400 --> 0:01:27.040 what does it look like in a portfolio today? 0:01:27.520 --> 0:01:30.280 Yeah, I think in order to understand what that positive 0:01:30.360 --> 0:01:34.280 dynamic change means, I you know, it's important to understand 0:01:34.280 --> 0:01:38.399 the pillars of how we get there. There's two fundamental 0:01:38.520 --> 0:01:42.440 kind of philosophies that feed into positive dynamic change. The 0:01:42.480 --> 0:01:46.720 first thing, looking for companies that are simply growing right 0:01:46.800 --> 0:01:51.240 their market disruptors. Their top line is growing at a 0:01:51.240 --> 0:01:56.080 at a rate that is impressive and significant. Generally, there's 0:01:56.280 --> 0:02:00.920 a product that is very compelling and they're market share gainers. 0:02:02.160 --> 0:02:06.320 So that's like a typical growth a company that we 0:02:06.360 --> 0:02:09.920 would we would classify as change because they are changing 0:02:09.960 --> 0:02:15.799 the market around them and challenging the current state of affairs. 0:02:16.919 --> 0:02:19.639 On the other side of the ledger, we have what 0:02:19.680 --> 0:02:23.360 we call life cycle change. And life cycle change is 0:02:23.400 --> 0:02:26.040 interesting because a lot of growth managers don't think of 0:02:26.080 --> 0:02:30.240 this as growth. It is companies that may have gone 0:02:30.280 --> 0:02:36.800 through their their their growth kind of period and have 0:02:36.960 --> 0:02:39.560 now saturated their markets and they have to decide who 0:02:39.560 --> 0:02:44.800 they are. So are they going to continue growth or 0:02:45.000 --> 0:02:47.799 are they going to you know, just milk what they 0:02:47.840 --> 0:02:51.280 have and go into kind of a harvesting phase where 0:02:51.280 --> 0:02:53.920 they have low growth. And what we're looking for is 0:02:54.000 --> 0:02:57.760 companies that are either going to take advantage of a 0:02:57.880 --> 0:03:02.480 changing market or they're going to restructure their business such 0:03:02.480 --> 0:03:06.000 that they become growth businesses again. And the benefit that 0:03:06.040 --> 0:03:07.919 you get on this side of the ledger of life 0:03:08.000 --> 0:03:12.840 cycle change is oftentimes these companies look like they're almost 0:03:12.919 --> 0:03:17.480 value companies, but we think they're just unrecognized growth and 0:03:18.960 --> 0:03:20.679 you know, you get the benefit of not only the 0:03:20.760 --> 0:03:23.920 multiple expanding, but the earnings start starting to surprise to 0:03:23.960 --> 0:03:29.840 the upside. So both of these are change factors. Whether 0:03:30.440 --> 0:03:33.120 that change is coming because the market is changing, the 0:03:33.280 --> 0:03:36.280 environment is changing, the company is changing, or the CEO 0:03:36.400 --> 0:03:40.960 is changing, right, And those change factors are often underestimated 0:03:40.960 --> 0:03:44.760 by the market, and that's that's really where their opportunity 0:03:44.800 --> 0:03:45.400 for us lies. 0:03:46.000 --> 0:03:48.440 So, I mean, when you're evaluating a company, what do 0:03:48.440 --> 0:03:52.040 you think actually separates you know, durable, compoundent growth from 0:03:52.440 --> 0:03:54.720 companies that may just be riding a hype cycle. 0:03:57.200 --> 0:04:00.240 You know, when we look at businesses, we actually look 0:04:00.280 --> 0:04:03.480 at them on a three to five year perview, and 0:04:03.760 --> 0:04:07.440 the reason we do that is because we don't want 0:04:07.480 --> 0:04:11.600 a company that has a hype cycle behind it that's 0:04:11.720 --> 0:04:16.680 a one year hype cycle. So by looking at companies 0:04:16.720 --> 0:04:21.000 over a longer period of time and understanding what they 0:04:21.080 --> 0:04:26.719 blossom into, it forces you to ask the question, is 0:04:26.760 --> 0:04:31.599 this hype or is this durable growth? So I think 0:04:31.640 --> 0:04:33.960 it's just a natural part of our process, Like we 0:04:34.000 --> 0:04:37.680 would never pay for a company that has a one 0:04:37.800 --> 0:04:40.839 year cycle, and we would never pay a high multiple. 0:04:40.880 --> 0:04:43.240 I remember when I started this business, people would be like, well, 0:04:43.480 --> 0:04:46.320 what are they growing next year? Let's put you know, 0:04:46.360 --> 0:04:48.960 whatever that growth rate is, let's put a thirty multiple 0:04:48.960 --> 0:04:51.000 on that. Like, if it's a thirty percent growth, let's 0:04:51.000 --> 0:04:54.320 put a thirty percent thirty multiple on that. It's kind 0:04:54.320 --> 0:04:57.680 of like a one peg and it would always be 0:04:57.720 --> 0:04:59.280 funnel me because I was like, well, what if the 0:04:59.320 --> 0:05:02.320 growth ghost is the next year? You know, at what 0:05:02.360 --> 0:05:04.520 point do you what point do you make that in? 0:05:04.560 --> 0:05:06.440 And that's that hype cycle. So if you think in 0:05:06.760 --> 0:05:11.279 in phrases over a three to five year period, I 0:05:11.279 --> 0:05:15.960 think it's much more powerful because you kind of separate 0:05:16.640 --> 0:05:20.480 the winners from from just the hype. 0:05:20.720 --> 0:05:23.240 So I guess if we go a little bit deeper, 0:05:23.279 --> 0:05:25.520 can you kind of walk us through your research process, 0:05:25.560 --> 0:05:27.960 you know, like from you know the start to you know, 0:05:28.040 --> 0:05:30.800 actually having high conviction. You know, what are these signals 0:05:30.839 --> 0:05:32.880 that really kind of move the company from you know, hey, 0:05:32.880 --> 0:05:35.080 this might be interesting to you, just could really be 0:05:35.120 --> 0:05:36.880 a high conviction pick for us. 0:05:38.200 --> 0:05:42.159 Yeah, I think it. You know that the process, whereas 0:05:42.000 --> 0:05:45.039 it's hard to say where exactly it starts, sometimes it 0:05:45.240 --> 0:05:48.719 is a kind of a top down point of view, 0:05:50.520 --> 0:05:53.120 in which case, like if you think about AI right, 0:05:53.440 --> 0:05:56.360 that that thinking really came from a more top down 0:05:56.480 --> 0:06:00.280 point of view. And we then identified the company needs 0:06:00.320 --> 0:06:04.640 that we're net beneficiaries, and then our team worked on 0:06:05.000 --> 0:06:08.560 understanding the nuances of each of those companies and identified 0:06:08.920 --> 0:06:14.000 where the bottlenecks or where the beneficiaries would lie. On 0:06:14.040 --> 0:06:18.560 the other hand, we identified who would get impacted negatively 0:06:19.440 --> 0:06:23.040 and position portfolios that way. But the but the research 0:06:23.080 --> 0:06:26.839 process is actually quite deep in that you know, not 0:06:26.960 --> 0:06:30.400 only do we understand and dig into the quality of 0:06:30.400 --> 0:06:36.560 the management team, but you know, the durability of the businesses, 0:06:37.839 --> 0:06:44.080 the competitive dynamic, the you know, the the kind of 0:06:44.160 --> 0:06:48.640 margin progression and the revenue progression ends up being incredibly 0:06:48.640 --> 0:06:53.479 important as we think about the durability, you know, the 0:06:53.560 --> 0:06:55.880 team like we What I would say about Alger is 0:06:55.920 --> 0:06:59.800 that we have a team that is probably outsized for 0:06:59.880 --> 0:07:03.120 the assets that we have, and in part because our 0:07:03.200 --> 0:07:07.120 research effort is so deep that you know, I think 0:07:07.160 --> 0:07:10.720 we're we're one of the biggest users of a guidepoint 0:07:11.320 --> 0:07:13.920 on on the street, and in part because we want 0:07:13.960 --> 0:07:18.640 to understandstand the fundamental dynamics that is driving the revenue growth, 0:07:19.000 --> 0:07:23.240 like what are the structural advantages that businesses have to 0:07:23.600 --> 0:07:30.320 outcompete others? You know, are they becoming a oligopoly? Are 0:07:30.360 --> 0:07:34.360 they do they have pricing power? Will the market allow 0:07:34.440 --> 0:07:37.080 them to have pricing power? Right? So, these are all 0:07:37.160 --> 0:07:41.000 the questions like what is the technology? You know, what 0:07:41.160 --> 0:07:45.000 is truly understanding the base level of that technology and 0:07:45.080 --> 0:07:48.840 what the base level of the product is key. The 0:07:48.960 --> 0:07:54.680 effort is actually kind of a very holistic effort that 0:07:54.680 --> 0:07:57.240 that we put forth in order to make decisions as 0:07:57.280 --> 0:07:58.760 to you know, where to invest. 0:07:59.640 --> 0:08:01.240 So I do want to get to the you know, 0:08:01.280 --> 0:08:03.320 pricing power just a second, but I kind of want 0:08:03.320 --> 0:08:05.800 to just have one more question. You mentioned both you know, 0:08:05.920 --> 0:08:09.120 top down themes like AI and you know, then you're 0:08:09.160 --> 0:08:12.080 combining that with bottom up stock picking. Is it one 0:08:12.120 --> 0:08:14.240 or the other that actually drives decisions or you'd say 0:08:14.240 --> 0:08:15.720 it's kind of like a combination of both. 0:08:17.400 --> 0:08:20.280 It's probably a combination of both. But what I would 0:08:20.320 --> 0:08:24.640 say is fundamentally we are stock pickers. You know, our 0:08:24.680 --> 0:08:32.680 philosophy lends us to pick great stocks, and if you 0:08:32.720 --> 0:08:36.720 look at our alpha, historically it has generally come from 0:08:37.080 --> 0:08:41.120 that stock picking versus you know, and look AI, I 0:08:41.160 --> 0:08:44.360 think is a very different theme that is so powerful 0:08:44.520 --> 0:08:47.839 that you know, it's kind of top down and bottoms up. 0:08:48.520 --> 0:08:51.839 But you know, I would say, historically we happen to 0:08:51.880 --> 0:08:53.920 be very good stock pickers, and I think that our 0:08:53.920 --> 0:08:57.880 philosophy lends itself to it because we're always looking for 0:08:57.960 --> 0:08:59.480 what's changing on the margins. 0:09:00.160 --> 0:09:01.720 So, you know, as I said, I wanted to talk 0:09:01.720 --> 0:09:04.160 a little about pricing power because c neck I'm not 0:09:04.160 --> 0:09:05.720 sure if you call it that or just as an 0:09:06.400 --> 0:09:12.000 EQ you know focus EQNQ, you know, focuses on companies 0:09:12.040 --> 0:09:16.000 you know, oligopies or you know, or companies with you know, 0:09:16.679 --> 0:09:20.199 monopolistic characteristics. If I'm saying that correctly, what are the 0:09:20.240 --> 0:09:23.040 specific traits it really signaled pricing power to you? 0:09:24.320 --> 0:09:26.400 Oh gosh, so you know, it could be it could 0:09:26.400 --> 0:09:30.080 be many things, right in but in part, when you 0:09:30.240 --> 0:09:36.000 have markets that have one to three players, that automatically 0:09:36.040 --> 0:09:39.480 tells you something about the market, right it tells you 0:09:39.520 --> 0:09:43.560 something about the margin structure. And when that market begins 0:09:43.600 --> 0:09:47.200 to grow, the net beneficiaries of that are only one 0:09:47.280 --> 0:09:50.200 to three players, and if the barriers to entry are 0:09:50.320 --> 0:09:54.600 very high, then they have pricing power. Right. So if 0:09:54.640 --> 0:09:59.880 I think through, for example, the competitive landscape, and I'll 0:10:00.480 --> 0:10:04.199 I'll make this super simple to think through. If you 0:10:04.360 --> 0:10:08.960 have a company that has an incredibly high margin but 0:10:09.080 --> 0:10:12.360 the barrier to entry is very low, it will naturally 0:10:12.600 --> 0:10:18.120 attract capital. Right. If it's if the technological mode is 0:10:18.160 --> 0:10:20.720 too low, then it will attract capital into that market 0:10:20.760 --> 0:10:24.560 and the margins will shrink to a point where it 0:10:24.600 --> 0:10:27.560 doesn't make more sense for other competitors to come into 0:10:27.600 --> 0:10:32.720 the market when the barrier to entries are high, whether 0:10:32.760 --> 0:10:36.719 it's a data mode, a technology in mote and there 0:10:36.760 --> 0:10:40.120 are only a few players, as what has happened in 0:10:40.120 --> 0:10:43.800 the semiconductor industry recently, where you know, over the last 0:10:43.880 --> 0:10:50.040 two decades, the market is consolidated because it was so 0:10:50.320 --> 0:10:56.400 difficult to kind of cross the chasm with every next node. 0:10:56.679 --> 0:10:59.840 So all of a sudden, we have these markets that 0:10:59.880 --> 0:11:05.000 are effectively duopolies with very high barriers to entry, and 0:11:05.040 --> 0:11:09.400 therefore they have pricing power. So as you go through 0:11:11.559 --> 0:11:17.400 looking at pricing power, it's imperative to understand the competitive dynamic, 0:11:18.040 --> 0:11:22.240 how that competitive dynamic is changing, and how the market 0:11:22.280 --> 0:11:27.480 is moving. So I would say, you know, in a nutshell, 0:11:28.360 --> 0:11:32.720 we're looking for businesses that you know, have high barriers 0:11:32.760 --> 0:11:35.640 to entry so that they can maintain pricing power. 0:11:36.400 --> 0:11:37.920 Yeah, I do want to ask, you know, especially if 0:11:37.960 --> 0:11:40.679 we're talking about AI tams. You know, there's thought that 0:11:40.720 --> 0:11:44.760 some of these companies are trading at pretty high premium multiples. 0:11:45.040 --> 0:11:47.640 How does valuation kind of play in your process? 0:11:49.559 --> 0:11:52.400 Yeah, so you know, I'd like to take contention with 0:11:52.480 --> 0:11:57.840 that that, like what everyone thinks that these these companies 0:11:57.840 --> 0:12:01.640 are trading at high multiples. And it was just this 0:12:01.720 --> 0:12:05.880 year that Nvidia was trading at something like a sixteen multiple, 0:12:07.000 --> 0:12:09.520 which is a sub market multiple, and even today I 0:12:09.559 --> 0:12:12.240 think it's trading in line with the market and people 0:12:12.960 --> 0:12:16.840 I think they have it's this misnomer of the stock 0:12:16.880 --> 0:12:21.640 has gone up a lot, therefore the multiple must be high. 0:12:21.720 --> 0:12:24.719 What I think has been largely missed in over the 0:12:24.840 --> 0:12:27.160 last two and a half years, is that the numbers 0:12:27.200 --> 0:12:31.320 have also come up significantly such that the multiples have 0:12:31.400 --> 0:12:35.240 actually contracted in some cases. So we look at you know, 0:12:35.360 --> 0:12:39.000 Taiwan Semiconductor for example, it trades at a mid teens multiple. 0:12:40.400 --> 0:12:42.640 You know, to me for one of the most strategic 0:12:42.679 --> 0:12:47.840 assets on this planet, that does not seem that egracious. 0:12:47.920 --> 0:12:50.280 You know, it is by far what I would call 0:12:50.320 --> 0:12:54.679 a one and a half player market with incredible margins. 0:12:55.200 --> 0:12:58.680 And you know, something ever happens to SMC we go 0:12:58.720 --> 0:13:01.960 into a global depression, yet it trades it a fit 0:13:01.960 --> 0:13:07.199 that a mid teams multiple. So I would take a 0:13:07.280 --> 0:13:10.680 little bit of issue with this like misnomer that we 0:13:10.800 --> 0:13:14.439 have these incredibly high multiples in the AI space. Now 0:13:14.800 --> 0:13:17.600 I think in some of the private markets maybe maybe 0:13:17.600 --> 0:13:20.680 that's true where the where the multiples are significantly higher 0:13:20.679 --> 0:13:23.520 and they're like revenue multiples. But that's like a different 0:13:23.679 --> 0:13:28.400 ball of wax. So, yes, valuation does play a role 0:13:29.040 --> 0:13:34.040 in how we think about growth, and you know, you 0:13:34.280 --> 0:13:38.040 always what we we are cash flow investors. We want 0:13:38.080 --> 0:13:41.320 to know that that growth will yield cash flow. That 0:13:41.480 --> 0:13:44.240 is a kind of every single model that we build 0:13:44.640 --> 0:13:48.400 or every single company that we look at is backed 0:13:48.440 --> 0:13:52.720 by a DCF or a discounted cash flow model that 0:13:53.240 --> 0:13:56.440 yields for us a price target. And it is one 0:13:56.480 --> 0:13:59.120 of the keys to our of how we get to 0:13:59.160 --> 0:14:03.880 the valuation. It's not simply PE or PEG or it 0:14:03.960 --> 0:14:09.000 is based on cash and you know, the terminal growth rates, 0:14:09.000 --> 0:14:11.800 the terminal values, like all of these things play into 0:14:11.800 --> 0:14:18.280 our thinking about the valuation. So it is imperative that 0:14:18.400 --> 0:14:23.480 whatever company we own will they may not be you know, 0:14:23.600 --> 0:14:26.320 generating a lot of cash today, but as they grow 0:14:26.360 --> 0:14:28.800 into the business that we expect them to grow into, 0:14:29.320 --> 0:14:32.120 that they really start to show us the leverage, especially 0:14:32.160 --> 0:14:33.200 on that free cash flow. 0:14:35.000 --> 0:14:38.680 Okay, and you also, you know, your portfolios are fairly 0:14:38.720 --> 0:14:41.600 ir relatively concentrated. You know, what gives you the conviction 0:14:41.720 --> 0:14:44.840 to hold say third to fifty names versus a more 0:14:44.880 --> 0:14:45.880 diversified approach. 0:14:47.800 --> 0:14:53.160 You know, I think that a having high conviction as 0:14:53.160 --> 0:14:56.040 a function of our research process. We have a team 0:14:56.120 --> 0:15:01.240 of incredible analysts that you know, that are digging up 0:15:01.880 --> 0:15:05.800 what is a differentiated viewpoint And once you can establish 0:15:05.840 --> 0:15:10.320 that that differentiated viewpoint, it's actually easy to understand who 0:15:10.320 --> 0:15:13.320 the winners are and how a stock will progress even 0:15:13.320 --> 0:15:16.760 if there's a little bit of volatility. And you know, 0:15:17.080 --> 0:15:19.200 let me give you an example of a stock that 0:15:19.440 --> 0:15:22.000 has been recently pretty volatile. It's a company called QXO. 0:15:23.000 --> 0:15:26.000 And just this morning I was having a discussion with 0:15:26.040 --> 0:15:29.680 our one of our analysts, and as we're going through 0:15:29.680 --> 0:15:33.960 the model, I was thinking, Okay, based on these numbers, 0:15:35.760 --> 0:15:40.000 we believe they'll earn x and twenty thirty and therefore 0:15:40.120 --> 0:15:44.280 this stock should more than double over the course of 0:15:44.880 --> 0:15:50.240 the next three years, right, And let's test our conviction 0:15:50.480 --> 0:15:54.520 level on that statement. And so we went through and 0:15:55.200 --> 0:15:59.760 kind of re underwrote the assumptions. And you know, they 0:15:59.840 --> 0:16:04.640 just did a new acquisition recently yesterday of Top Build, 0:16:05.040 --> 0:16:06.920 and it took the it took the market a little 0:16:06.920 --> 0:16:11.280 bit by surprise. But we want to re underwrite our assumptions, 0:16:12.440 --> 0:16:15.320 you know, stress test them and say what number do 0:16:15.360 --> 0:16:18.040 we get to. So if I look at this business 0:16:18.080 --> 0:16:21.920 over a three four year time period, what does it 0:16:21.960 --> 0:16:24.760 earn and how much do we think the market is 0:16:24.800 --> 0:16:28.280 willing to pay for that such that we compound the 0:16:28.320 --> 0:16:32.840 growth over many years. And let's hypothetically say, for example, 0:16:33.880 --> 0:16:36.080 QXO is going to earn. You know, I'll just give 0:16:36.120 --> 0:16:39.400 you kind of the street number, six billion dollars. We 0:16:39.480 --> 0:16:41.880 can then underwrite that and say, okay, well, if they're 0:16:41.880 --> 0:16:44.720 going to if there's if there ebit does going to 0:16:44.760 --> 0:16:47.160 be six billion, how much should we pay for that 0:16:47.520 --> 0:16:53.400 in three years? And what's interesting is that if you 0:16:53.400 --> 0:16:55.880 can underwrite a company that's going to double, if not 0:16:55.960 --> 0:16:59.680 more than double, then it's a matter of patience and 0:16:59.720 --> 0:17:03.920 watch execution and understanding your management team because they're at 0:17:03.920 --> 0:17:08.320 the stewards of your capital. So that's what that's what 0:17:08.480 --> 0:17:12.360 gives us the conviction to hold through periods of volatility, 0:17:12.760 --> 0:17:16.720 understanding where a business is going and having conviction in 0:17:16.800 --> 0:17:21.720 our underlying numbers over not just now, it's over a 0:17:21.760 --> 0:17:22.800 longer period of times. 0:17:24.359 --> 0:17:26.719 So you know, an extension of that, you know, if 0:17:26.720 --> 0:17:30.560 you have this conviction, how do you determine position sizes? 0:17:30.680 --> 0:17:33.280 Is there something that helps you determine what would make 0:17:33.320 --> 0:17:35.719 a smaller position versus the larger in the portfolio. 0:17:36.520 --> 0:17:39.439 Yeah, So when you have a twenty to thirty stock portfolio, 0:17:39.800 --> 0:17:43.520 like the tail end of your portfolio can't be filled 0:17:43.600 --> 0:17:47.960 with smaller positions. So every position really has to have 0:17:48.000 --> 0:17:52.120 a meaningful impact and Look, I'm as a you know, 0:17:52.240 --> 0:17:54.000 as being trained as an engineer. I like to do 0:17:54.040 --> 0:17:58.520 things like super mathematically. Right, if you have a thirty 0:17:58.520 --> 0:18:01.959 stock portfolio, you take a undred percent divided by thirty names. 0:18:02.000 --> 0:18:05.040 You know, a average position side should be three point 0:18:05.080 --> 0:18:08.760 three percent, right that that is just like the contribution 0:18:08.880 --> 0:18:11.720 of each The more conviction you have, the higher it 0:18:11.720 --> 0:18:14.600 gets above that's three point three percent. The lower conviction 0:18:14.720 --> 0:18:16.960 you have, the lower it gets on that three point 0:18:17.040 --> 0:18:19.760 three percent. And you know, there's a little bit of 0:18:19.760 --> 0:18:22.359 differentiation in the portfolio in part because the benchmark that 0:18:22.400 --> 0:18:24.440 we compete with, which is the Rustle one thousand growth, 0:18:24.760 --> 0:18:28.239 has incredibly weighty positions. So when you have nine to 0:18:28.280 --> 0:18:32.240 ten percent positions, it becomes more of an exercise on 0:18:32.359 --> 0:18:34.760 what is the active weight that I want to express 0:18:35.400 --> 0:18:38.800 in a business that is that we feel bullish about. 0:18:40.440 --> 0:18:45.399 So that's a little bit on the weighting. But and 0:18:45.440 --> 0:18:47.800 I would say that that the very top of the 0:18:47.840 --> 0:18:50.919 portfolio we have to think about the active weight contribution 0:18:51.840 --> 0:18:53.800 and for the rest of the portfolio you kind of 0:18:53.800 --> 0:18:55.480 divvy it out like I described. 0:18:56.960 --> 0:18:59.960 So, I mean, is there a you know with concentrate? 0:19:00.520 --> 0:19:03.720 You know, I always bring up you know, risk. How 0:19:03.720 --> 0:19:06.160 do you think about risk or is there risk management process? 0:19:06.320 --> 0:19:10.320 Is it kind of volatility, capital loss or something else 0:19:10.400 --> 0:19:12.639 that you know you're really keeping track of. 0:19:13.800 --> 0:19:18.640 Yeah, So it's interesting because as you run more concentrated portfolios, 0:19:18.680 --> 0:19:23.160 your risk becomes not sector risk, it becomes single name risk. 0:19:24.440 --> 0:19:28.679 And so the key for understanding the risk in your 0:19:28.720 --> 0:19:34.280 portfolio is actually understanding where each company sits and you 0:19:34.320 --> 0:19:37.720 know where, and understanding that the core of these businesses 0:19:38.400 --> 0:19:42.720 very well. Because again it's all like it's no, it's 0:19:42.720 --> 0:19:46.680 not necessarily the sector risk you're taking. It's the execution 0:19:47.560 --> 0:19:53.680 by the management of the company that you own becomes 0:19:53.880 --> 0:19:57.840 probably one of your biggest risk factors, and whether or 0:19:57.880 --> 0:20:01.800 not they can execute that's you know, it is a 0:20:02.119 --> 0:20:06.439 diversified portfolio. So what we're always trying to do is 0:20:06.480 --> 0:20:11.199 find the best companies inside of each the best companies 0:20:11.320 --> 0:20:14.760 on this planet, really a lot of which reside here 0:20:15.200 --> 0:20:20.240 here in the US. And you know, I think we 0:20:20.359 --> 0:20:24.199 have to be mindful of the volatility. I e. It 0:20:24.280 --> 0:20:29.600 can't be a full on AI type portfolio. It needs 0:20:29.640 --> 0:20:32.240 to be diversified because that is the mandate that our 0:20:32.240 --> 0:20:36.359 clients have requested of us. And so there is companies 0:20:36.400 --> 0:20:40.080 like GFL Waste, which is a waste company, but it 0:20:40.160 --> 0:20:43.240 has an interesting story behind it that we think that 0:20:44.400 --> 0:20:48.200 it can drive the position, you know to or drive 0:20:48.200 --> 0:20:52.280 the stockwatch higher in terms of value. Or Pico, which 0:20:52.359 --> 0:20:57.040 is a very unique company that has incredible pricing power 0:20:57.119 --> 0:20:59.920 that sells airplane parts. So you have to diversify a 0:21:00.119 --> 0:21:05.919 cross kind of end markets in order to create diversification 0:21:07.520 --> 0:21:12.040 and capture growth and and mitigate risk. 0:21:14.520 --> 0:21:19.560 What would typically cause you to sell stocks fundamental deterioration, valuation, 0:21:20.280 --> 0:21:21.520 or just better opportunities. 0:21:24.200 --> 0:21:28.400 It could be that we're just wrong, right, We could 0:21:28.480 --> 0:21:31.520 our thesis could be wrong. I would say one thing is, 0:21:32.240 --> 0:21:34.320 you know we are we are incredibly humble, like we 0:21:34.560 --> 0:21:37.240 don't stick to a viewpoint and say we cannot be 0:21:37.320 --> 0:21:40.879 wrong because we had this three five year view. If 0:21:41.080 --> 0:21:46.919 if something fundamentally changes, we we do we are. We 0:21:47.000 --> 0:21:53.640 have the socratic process where we're constantly asking questions and 0:21:53.640 --> 0:21:55.840 and if all of a sudden there's like thesis creep 0:21:55.920 --> 0:21:58.840 and we start noticing that there's thesis creep in the 0:21:58.840 --> 0:22:01.520 way we're viewing the company, I would say that that 0:22:01.560 --> 0:22:04.560 would be you know, a flag or a yellow flag. 0:22:04.600 --> 0:22:06.639 As to whether or not the company should be sold. 0:22:07.160 --> 0:22:09.719 Other times, it could be that the stock is appreciated 0:22:09.800 --> 0:22:15.560 much faster than we expected, so it's pulled forward the 0:22:15.680 --> 0:22:19.560 anticipated return that we expected and the risk reward is 0:22:19.600 --> 0:22:23.560 simply not the same anymore. You know, where we thought 0:22:23.640 --> 0:22:26.360 there could be one hundred and fifty percent upside over 0:22:26.400 --> 0:22:29.240 three years, all of a sudden it appreciates enough such 0:22:29.280 --> 0:22:33.560 that there's fifty percent upside over three years, which again 0:22:33.640 --> 0:22:37.600 is then not really a compelling return from them. So 0:22:37.640 --> 0:22:41.760 that would you know, that would inspire us to trim, 0:22:42.560 --> 0:22:46.680 if not sell the stock. Or there could very well 0:22:46.680 --> 0:22:49.960 be like what you mentioned last, that the opportunity set 0:22:50.080 --> 0:22:53.959 is changing, and you know, one stock might be up 0:22:54.000 --> 0:22:58.520 and the other one has gone down, and you just 0:22:59.200 --> 0:23:01.880 flip flop and to a different into something that has 0:23:01.920 --> 0:23:05.840 a better risk reward, you know. And we did this recently, well, 0:23:05.880 --> 0:23:09.080 not that recently, I guess it was a few months, 0:23:09.119 --> 0:23:11.959 four or five months ago from you know, we we 0:23:12.040 --> 0:23:18.479 owned Vertive, which is a cooling company in CNEQ sold 0:23:18.800 --> 0:23:21.680 Vertive because you know, all of a sudden, we thought 0:23:21.720 --> 0:23:27.280 the upside was still significant, but the upside in GeV 0:23:28.040 --> 0:23:32.639 was more immediate, and we we flipped into a different stock. 0:23:33.359 --> 0:23:36.720 Now both have done well, but you're counting on GeV 0:23:37.040 --> 0:23:43.160 to have just more immediate upside and and longer three 0:23:43.320 --> 0:23:46.160 or three year long upside, which which is which has happened? 0:23:47.240 --> 0:23:50.560 So then how do you handle being early versus being wrong, 0:23:50.680 --> 0:23:53.399 especially in you know, fast moving themes. 0:23:54.200 --> 0:23:58.919 Ah, that's a great question, you know. I think really 0:24:00.880 --> 0:24:09.240 understanding a business allows you to have the conviction to 0:24:09.359 --> 0:24:12.240 hold if you're early. And I'll give you an example. 0:24:13.119 --> 0:24:18.440 You know, we wrote this paper in three years ago. 0:24:18.720 --> 0:24:22.600 It's called AI and the Declining Cost to Create and 0:24:23.040 --> 0:24:28.439 it basically went through how artificial intelligence is going to 0:24:29.040 --> 0:24:33.879 recavioc in software. This was probably an effort that was 0:24:35.040 --> 0:24:39.560 a two to three month effort in researching and talking 0:24:39.560 --> 0:24:42.480 to experts in the industry, and a lot of the 0:24:42.520 --> 0:24:49.000 experts actually disagreed with this viewpoint, but it was very 0:24:49.080 --> 0:24:54.879 clear that one of the modes for software was starting 0:24:54.920 --> 0:24:59.840 to come unraveled. And once we saw it, it was 0:24:59.840 --> 0:25:03.640 all almost like you couldn't unsee it right, And that 0:25:03.800 --> 0:25:08.960 conviction allowed us to hold that thought over the last 0:25:08.960 --> 0:25:13.440 three years kind of get us out of long held 0:25:14.480 --> 0:25:17.960 beloved software positions that we had held in the portfolio. 0:25:18.040 --> 0:25:22.600 For many, many years, and it allowed us to hold 0:25:22.600 --> 0:25:27.199 our ground because we were early. The market didn't believe it, 0:25:28.040 --> 0:25:30.119 you know, a lot. We got a lot of pushback 0:25:30.160 --> 0:25:32.040 from like if we would ever just float this to 0:25:32.480 --> 0:25:36.320 to kind of industry insiders. There was a lot of 0:25:36.800 --> 0:25:41.440 a lot of pushback, but we ended up being right 0:25:42.800 --> 0:25:45.959 and you're seeing it today in the market. So we 0:25:45.960 --> 0:25:49.080 were early now, you know, to some extent, it didn't 0:25:49.160 --> 0:25:53.360 hurt us because you know, software didn't perform the way 0:25:53.960 --> 0:25:56.920 you know, semiconductors or the rest of the AI food 0:25:57.000 --> 0:26:02.199 chains performed, and where we put the capital. But really 0:26:02.240 --> 0:26:08.040 the crux of it is is truly understanding and having 0:26:08.280 --> 0:26:13.040 a well researched thesis so that you're not wrong and 0:26:13.119 --> 0:26:15.159 you know, but I will say, but also having a 0:26:15.320 --> 0:26:18.119