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 cone, I,
Speaker 1: lead mutual fund and active Research at Bloomberg Intelligence. Over
Speaker 1: the past decade, growth investing has gone through several very
Speaker 1: key different market environments. We've seen periods where a handful
Speaker 1: of megacap companies have dominated returns, dramatic shifts and interest rates,
Speaker 1: the rise of passive investing, and more recently, the emergence
Speaker 1: of artificial intelligence as a major investment theme. In an
Speaker 1: environment like this, generating returns as an active growth manager
Speaker 1: requires more than simply identifying growth companies. Requires a repeatable
Speaker 1: process for evaluating business quality, assessing valuation, managing risk, and
Speaker 1: maintaining conviction through changing market conditions. So today I wanted
Speaker 1: to explore how a discipline growth investor translates research into
Speaker 1: portfolio decisions. From sourcing ideas and building conviction to managing risk,
Speaker 1: testing assumptions I'm determining when to buy, hold or sell.
Speaker 1: Join me to discuss that is. Doug Rogers, Managing director
Speaker 1: of Morgan Stanley and a portfolio manager of the EAT
Speaker 1: Advanced Core Growth Team, including the EAT Advanced Growth Fund
Speaker 1: ticker el ci X and the Advanced Focus Growth Opportunities
Speaker 1: Fund ticker eif g X. Doug, thanks for joining me today.
Speaker 2: Thank you, David. It's excited to be here.
Speaker 1: So to start, how about at a high level, how
Speaker 1: would you describe your investment philosophy today? And you know
Speaker 1: what beliefs about the markets of businesses are most central
Speaker 1: to the way you invest.
Speaker 2: Sure At eaton Vance, we define growth maybe a little
Speaker 2: bit differently than a lot of other firms or other
Speaker 2: mutual funds may do. So one way that we look
Speaker 2: at growth is just the consistency of growth. So we're
Speaker 2: less concerned about the appst growth rate. There's plenty of
Speaker 2: companies out there that might do, you know, twenty thirty
Speaker 2: percent growth one year, negative five the next year, and
Speaker 2: you know over time average compound growth rate of five
Speaker 2: or ten percent. We're really looking for those growth companies
Speaker 2: that can deliver growth consistently year in year out, a
Speaker 2: little less concerned about the the overall growth rate. Although
Speaker 2: we do tend to focus on companies that can deliver
Speaker 2: you know, revenue growth in excess of five to ten percent.
Speaker 2: In fact, if you look at you if you look
Speaker 2: back historically at companies that have been able to do so,
Speaker 2: they tend to outperform the market. We looked at Russell
Speaker 2: one thousand index constituents that survived a decade in the index,
Speaker 2: and we looked at companies that I divide into three groups,
Speaker 2: the first being companies that failed to deliver a five
Speaker 2: percent cager over that decade, the second being companies that
Speaker 2: delivered a five percent cager, and then the third companies
Speaker 2: that delivered a five percent growth rate each and every
Speaker 2: year of those ten years, So ten consistent years of
Speaker 2: five percent growth. It turns out that forty five to
Speaker 2: fifty percent fall in each of the first two categories,
Speaker 2: only about five percent fall in that third category of
Speaker 2: five percent each and every year. And those those stocks
Speaker 2: on an annualized return basis have tended to outperform the
Speaker 2: others my seven, eight nine percent, depending on the year,
Speaker 2: fairly consistently. So that's really what we target is those
Speaker 2: sustainable compound growers, and I think it makes our job
Speaker 2: a little bit easier just you know, targeting that's there's
Speaker 2: less volatility in some of their returns. But also makes
Speaker 2: it a little bit more difficult. And it's really key
Speaker 2: to find those companies early on those in those growth rates,
Speaker 2: and there's key attributes that we look at to determine that.
Speaker 1: Look, can you walk us through what your investment process
Speaker 1: looks like, you know, the life cycle of an investment
Speaker 1: idea on your team, how ideas get sourced research and
Speaker 1: ultimately added to the portfolio.
Speaker 2: Sure, there's there's some great academic research on some of
Speaker 2: the things that I just just described. Others i'd encourage
Speaker 2: your listeners to look up Professor Rita McGrath. She's a
Speaker 2: former Columbia Business School professor. There's Professor Amy Eminson who
Speaker 2: I had the honor of studying under at Harvard Business
Speaker 2: School as well. They've done a lot of research in
Speaker 2: terms of, you know, what makes these companies good and
Speaker 2: and grow and find inflection points and organize themselves for growth.
Speaker 2: So two recommendations there, and we have done our own
Speaker 2: research too in terms of, you know, looking at the
Speaker 2: attributes of those those companies. So we're looking for companies
Speaker 2: the keyword that I draw out is innovation, and so
Speaker 2: that's really what our investment process centers around. We're looking
Speaker 2: for companies that continue to evolve over time, they catch
Speaker 2: those inflection points, they continue to develop their business model,
Speaker 2: change their business model and grow into into that next
Speaker 2: level of the of the curve, just additive curve after
Speaker 2: additive curve UH to to find their growth. We certainly
Speaker 2: do what I would consider table stakes investing, where we
Speaker 2: are table stakes research, where we look at the financial
Speaker 2: UH financials of the companies. We develop our own internal models,
Speaker 2: financial forecast. You know, I think that's the basics of
Speaker 2: investing needs to be done and you need to get
Speaker 2: that directionally accurate for sure. We also spend a lot
Speaker 2: of time just discussing the strategy of of the company
Speaker 2: and and the overall end market and the growth of
Speaker 2: that mark and how that company can can participate. But
Speaker 2: I think the real UH success of our of our
Speaker 2: team comes down to the debate that we have around
Speaker 2: different securities. So we've been able to construct our team
Speaker 2: where we have some very different personalities in our in
Speaker 2: our analysts team, which really work well together to generate
Speaker 2: a strong debate OFT from a lot of different backgrounds
Speaker 2: in the industry and outside of the industry as well.
Speaker 2: And really when it comes down to it, we we
Speaker 2: do all that background research, We interview company teams, we
Speaker 2: get a sense for the strength of the management team,
Speaker 2: the strength of the strategy, and then we UH we
Speaker 2: debate those ideas vigorously UH to include or exclude them
Speaker 2: from our portfolio. We have a system we use we
Speaker 2: call them portfolio exercises, that we use to combat inherent
Speaker 2: biases in the in the investment process. So sometimes you
Speaker 2: just get a little too comfortable owning as owning a stock,
Speaker 2: or you get complacent in owning a stock. So we'll
Speaker 2: generate ideas through these portfolio exercises. One might be a
Speaker 2: designated bull or bear, so we'll designate sometimes the individual
Speaker 2: it's most bullish on a company will will make him
Speaker 2: or her the bear and the opposite and h and
Speaker 2: then we'll just engage in debate over over the investment
Speaker 2: thesis and and explore and robe where we could be
Speaker 2: stronger or weaker on on either side. And so it's
Speaker 2: really that debate that leads to to inclusion or or
Speaker 2: removal of a stock from from our portfolio. And that's
Speaker 2: with every company, With every company that that we put
Speaker 2: in or out of the portfolio, we really we really debate,
Speaker 2: We try not to you know, just make make bets
Speaker 2: on on physicians for so called exposure to to an
Speaker 2: area or or or not. Really, you know, you only
Speaker 2: have limiteds base. Our our focus fund typically has twenty
Speaker 2: five to thirty names or diversified fund, we like to
Speaker 2: have around sixty names in that. So each and every uh,
Speaker 2: you know, basis point of capital that we deploy is
Speaker 2: precious in our eyes, and so we really like to
Speaker 2: make sure that each basis point is is really tested
Speaker 2: and and and put to its best use. So that
Speaker 2: kind of brings me in.
Speaker 1: My next question is, you know your background is unusually analytical,
Speaker 1: some engineering, the Navy, CFA, c MT. How has that
Speaker 1: kind of shaped your process in even your risk framework.
Speaker 2: Yes, so much of what I used today is rooted
Speaker 2: in those early years of my career. As you mentioned,
Speaker 2: I was an engineering major. Actually it's what we called
Speaker 2: robotics back in the day, So perhaps they should have
Speaker 2: stuck with that as a I was. I was early
Speaker 2: in that career. And then perhaps most impactful was my
Speaker 2: time in the Navy. I was graduated from the Naval Academy,
Speaker 2: went directly into the nuclear pipeline and then ended up
Speaker 2: on a on a submarine where I spent just over
Speaker 2: four years on that submarine, and so many things that
Speaker 2: I use today and investing, although it seems like it's unrelated,
Speaker 2: a lot of the behaviors, a lot of the UH,
Speaker 2: the analytical approach that I use or rooted in that
Speaker 2: in the in the in the Navy, there was I
Speaker 2: guess there's two big lessons that I that I would
Speaker 2: take away. One was I had a great cat and
Speaker 2: Catain Nustyed still a mentor to this day who really
Speaker 2: taught us don't take unnecessary risk, right, you need to
Speaker 2: take risks in this business, in in the Navy to
Speaker 2: h to be successful, to generate alpha, to generate a
Speaker 2: good outcome in your in your naval mission. But you
Speaker 2: just want to understand those risks. You want to understand
Speaker 2: what risks that you are that you're taking. And the
Speaker 2: other is you're never going to have complete information, especially
Speaker 2: on the submarine we were UH, we were limited to
Speaker 2: our sonar. It would been great sometimes to use active
Speaker 2: sonar to find out exactly what was ahead or exactly
Speaker 2: the range to to something that we're trying to find,
Speaker 2: but in order to do that we would have to
Speaker 2: sacrifice our position which of course we didn't want to
Speaker 2: let up, so so you always had incomplete information. And
Speaker 2: so the skill is knowing when you have enough to
Speaker 2: take action and and that's uh, there's no magic number.
Speaker 2: I can't say over eighty percent of the way there,
Speaker 2: let's uh, let's move. But but it's just a skill
Speaker 2: that you develop over time to understand. And Okay, I
Speaker 2: think we have enough here to have confidence to make
Speaker 2: this a position. Sometimes more information becomes available and its
Speaker 2: strengthens your conviction. Sometimes the opposite happens. You find out
Speaker 2: more and and it pokes a hole in your thesis
Speaker 2: and you may want to reevaluate your your your choices there.
Speaker 2: So you know, I think that background has really shaped
Speaker 2: a lot of the processes that we use today on
Speaker 2: our team. Uh and and really help over the long
Speaker 2: term as an investor.
Speaker 1: Okay, you know, if we go back to your process
Speaker 1: a little bit, how much would you say is fundamentally
Speaker 1: qualitative versus you know, quantitatively driven.
Speaker 2: Sure, we're definitely a fundamentally driven team. That's where where
Speaker 2: we're rooted. You know, I'd say the quantitative aspect comes
Speaker 2: in a little bit on risk management, and we can
Speaker 2: certainly discuss that you know, if you'd like. But we're
Speaker 2: really rooted in in in bottom up fundamental research. I
Speaker 2: think that's what we all enjoy doing. I think you know,
Speaker 2: when you talk to many so called stock pickers, I
Speaker 2: think that that's what they enjoy doing too. Learning about
Speaker 2: an industry, learning about a stock, learning about the company's
Speaker 2: position within that industry, the drivers, you know, things like that.
Speaker 2: So we really rely on on fundamentally. We do use
Speaker 2: risk management as it comes down to our position sizing.
Speaker 2: I as the portfolio manager, you ultimately make the call
Speaker 2: on the on the position size, with a lot of
Speaker 2: input from our analysts as well. You can you get
Speaker 2: a good sense from the analysts in terms of their
Speaker 2: conviction on ideas and as the team you know, debates it,
Speaker 2: you know the risk and reward that we're taking. We
Speaker 2: use something called weighted price potential where we look at
Speaker 2: the bowl, the bear and the base case on stocks.
Speaker 2: So that helps us to to measure our upside, our downside,
Speaker 2: our risk reward potential and h and and help judge
Speaker 2: just you know, how convicted we are in that in
Speaker 2: that idea. And then where the quantitative does come in.
Speaker 2: It's a bit more on the risk management side. We
Speaker 2: have an entire risk management team that we that we
Speaker 2: work with to help us judge where we're taking those risks.
Speaker 2: I mentioned earlier that you know, we need to take
Speaker 2: risks in the portfolio. We just want to make sure
Speaker 2: that we understand what risk we're taking. You know, are
Speaker 2: we are too tied to a factor, too untied to
Speaker 2: a factor? I know in prior podcast you've interviewed a colleague,
Speaker 2: guy Andrew Slimmon as well, who does a lot with
Speaker 2: with with factor work. We don't get as involved as
Speaker 2: Andrew does, but we uh uh we we we you know,
Speaker 2: definitely pay attention to those to make sure that we're
Speaker 2: not taking unnecessary risk by not having exposure to certain
Speaker 2: factors that we you know, believe may may have an input.
Speaker 2: And we really use that to help us determine position
Speaker 2: sizing more than more than anything.
Speaker 1: Else, you know, when you're making a new investment, what
Speaker 1: are the key assumptions you absolutely have to be right about.
Speaker 2: It's always always a great question, and it's really like
Speaker 2: we really try to stick to our knitting on this
Speaker 2: on this framework and trying to find you know, good
Speaker 2: companies that continue to grow and so we test those
Speaker 2: those assumptions sometimes a lot of people and you know,
Speaker 2: i'd say this is something I did certainly in my
Speaker 2: younger years. In the career, you really get involved in
Speaker 2: your model, in your financial model, and you have to
Speaker 2: do that because your model helps you to test different assumptions.
Speaker 2: You can go through, well, what if they add one
Speaker 2: hundred basis points to to to margins or one hundred
Speaker 2: one percent of margins. What if what if the tax
Speaker 2: rate goes up, or this revenue growth of this lower
Speaker 2: margin segment increases or decreases, mix shift. It really helps
Speaker 2: you to understand that. But at the same time, you
Speaker 2: know you have to be directionally right on a lot
Speaker 2: of different factors. Sometimes you're just in a good market.
Speaker 2: You know, look at look at the megacap stocks and
Speaker 2: the AI influence on a lot of different names in
Speaker 2: that space. There there is a such thing, I guess
Speaker 2: maybe my navy analogy, the rising tide. You know, analogy
Speaker 2: certainly can lift all boats there. And so you know,
Speaker 2: if you've done the work not just on the company,
Speaker 2: but on the industry and sector, then hopefully it can
Speaker 2: help you to identify certain key points. I'd say, one
Speaker 2: common thing that we really look for is potential inflection points.
Speaker 2: You know, the the impact of AI would certainly be
Speaker 2: one of one of those. I think it's something we
Speaker 2: were fortunate enough to identify early, the impact that could
Speaker 2: have not only on spending that it was going to take,
Speaker 2: but who would be the beneficiaries of that spending and
Speaker 2: also on the cost side, you know, where where companies
Speaker 2: could take out costs, you know from AI. So we're
Speaker 2: looking at it from a revenue driver, from a cost saver,
Speaker 2: and just from capital expenses and one firm's cap x
Speaker 2: is another firm's revenues, so you know, trying to identify
Speaker 2: the linkages there. So we're really looking for those I
Speaker 2: mentioned inflection points earlier. So are there are there any
Speaker 2: sort of wholesale shifts where where an entire industry or
Speaker 2: sector could really shift based on on a bigger picture
Speaker 2: or market driving theme. So we're keen to identify those.
Speaker 1: Are there any assumptions you can afford to be wrong about?
Speaker 1: We try to minimize those for I'm sorry question just kiddus.
Speaker 2: Yeah, no, you know, I think some of those as
Speaker 2: long as you get them, you know directionally right there
Speaker 2: there are some things that that you can be off
Speaker 2: by by a little bit, just because those errors are
Speaker 2: overwhelmed by the by the the broader strength. Right, So
Speaker 2: you might have somebody that's you know, very strong and
Speaker 2: nine out of ten events and the catalon and and
Speaker 2: and you hope that that the strength there overshadows maybe
Speaker 2: they're inability to uh uh, you know, to do the
Speaker 2: high jump, you know, in the into the caf on.
Speaker 2: So you know, we're we're we're hopeful that that focusing
Speaker 2: on the on the bigger drivers allows you to to
Speaker 2: maybe have a little bit of flexibility. I think some
Speaker 2: of the things that you can test with the and
Speaker 2: the our approach on those factors is just to do
Speaker 2: some sensitivity analysis around things that we're less certain about.
Speaker 2: So if you look at you know, if you if
Speaker 2: you look at something where you have the least amount
Speaker 2: of certainty, the least amount of conviction, maybe it's that
Speaker 2: data point that you just can't find, uh, you know,
Speaker 2: the answer to or you know you have you have
Speaker 2: three unknowns and and two two equations you know to
Speaker 2: to figure it out, so you just can't get the
Speaker 2: right answer. Uh, then what we'll do is we'll just
Speaker 2: do some sensitivity testing around that. So what if what
Speaker 2: if this bullish scenario comes to fruition, what if this
Speaker 2: barrier bearish scenario comes to fruition, and really test how
Speaker 2: impactful that can be. If it's something that that even
Speaker 2: in the most bearish case, it really doesn't add considered
Speaker 2: to the risk that you're taking in the stock, then
Speaker 2: we can approach that with higher conviction. If it's something
Speaker 2: where it's a bigger driver than perhaps we anticipated, then
Speaker 2: you know, I think that'll result in lower conviction. Uh
Speaker 2: you know, maybe that influences the position size, or maybe
Speaker 2: we just start looking for a different opportunity altogether.
Speaker 1: And you mentioned testing, I mean, what does that actually
Speaker 1: look like? You know, what exactly are you doing when
Speaker 1: you're testing something portfolio testing.
Speaker 2: Core just I mean on the on the stock level,
Speaker 2: we're taking that down to you're just looking at it
Speaker 2: at a certain thing. Maybe it's a revenue growth rate,
Speaker 2: maybe it's a new product, and how successful it can
Speaker 2: it can be, how much it can contribute to revenues.
Speaker 2: It might be a mix shift, so if a certain
Speaker 2: high margin product is growing faster than the lower margin product,
Speaker 2: you know what, we'll test that to see how high
Speaker 2: it can go, how successful does it have to be
Speaker 2: maybe it's a newly acquired product through M and A.
Speaker 2: You know, we'll look and we'll do sensitivity in terms
Speaker 2: of the cost savings that they might get through synergies
Speaker 2: or or you know, through just revenue enhancement from that
Speaker 2: new product, maybe running it through a more developed salesforce
Speaker 2: as well. So we'll look at a lot of different sensitivities.
Speaker 2: There's a lot of just financial modeling, scenario analysis to
Speaker 2: determine you know, the potential upside and downside on the
Speaker 2: portfolio level. You know, we'll we'll we'll look evill test.
Speaker 2: I mentioned risk management earlier, so we'll look just to
Speaker 2: see where we have different uh intended or unintended exposures.
Speaker 2: Maybe it's something it relates to the interest rates or
Speaker 2: the price of oil, or you know, something you know
Speaker 2: related to AI spend or things like that. We can
Speaker 2: we can do testing. We use a program called Bara
Speaker 2: to do to do a lot of testing, and we
Speaker 2: have our own our risk management software as well that
Speaker 2: we look and measure to see if one company owning
Speaker 2: it or not owning it, is contributing an outside an
Speaker 2: outsized level of risk to the portfolio. And so you know,
Speaker 2: if If that's the case, then we'll try to minimize
Speaker 2: that risk and we can test to see, Okay, well,
Speaker 2: what if we take that position size of fifty bits,
Speaker 2: what does that do to a certain risk factor or
Speaker 2: what does it do to you know, our exposure to
Speaker 2: interest rates things like that. So you're we're able to
Speaker 2: run different scenarios without actually trading the portfolio, generating gains,
Speaker 2: trading costs, etc. We're able to simulate that, of course,
Speaker 2: to see what the best move in the portfolio might be.
Speaker 1: Okay, you know, if you look back at your best
Speaker 1: long term investments, you know, I know you're obviously looking
Speaker 1: for consistent growth, but is there any patterns or characteristics
Speaker 1: that kind of show up again and again when you
Speaker 1: think of your best long term investments.
Speaker 2: Yes, so you know, we are long term investors. Our
Speaker 2: portfolio turnover is generally maybe a little bit on the
Speaker 2: lower side for a typical growth portfolio. We tend to
Speaker 2: be in the twenty to thirty percent growth range, so
Speaker 2: or turnover, so we're really looking you know, for that
Speaker 2: that that longer three to five year holding would would
Speaker 2: be great. I think it was Warren Buffett that said
Speaker 2: something along the lines of you know, the best stock
Speaker 2: is the one that you never have to sell something
Speaker 2: like that. So you know, we're looking for those long
Speaker 2: term things. And so one of the things that helps
Speaker 2: us identify is is something that I've alluded to before.
Speaker 2: It's just something where we're looking for inflection points and
Speaker 2: and there's minor inflection points and there's there's major inflection points,
Speaker 2: and so you know, maybe it's something I think back, boy,
Speaker 2: it must be ten plus years ago where you went
Speaker 2: with with social advertising, you know, on on that. And
Speaker 2: one of the big things when we initially bought bought
Speaker 2: Meta was they experienced a big transition from from not
Speaker 2: really being able to measure your advertise. Remember it was
Speaker 2: all in just likes. How many likes did you get
Speaker 2: for that ad budget? So it was a dollars per like,
Speaker 2: which is a great measure for for you know, some
Speaker 2: some consumer products, just to kind of get a sense
Speaker 2: for that. But you really couldn't get a return on
Speaker 2: that advertising spend, as the old one to maker quote
Speaker 2: where I know I waste half of my ad budget,
Speaker 2: I just don't know which half. So advertisers really didn't
Speaker 2: didn't understand what they were getting as a return for
Speaker 2: that platform. And then there was this big shift that
Speaker 2: happened about a decade ago where Meta was able to
Speaker 2: really more accurately measure that that advertising spend. And so
Speaker 2: you had this big inflection where you had a lot
Speaker 2: of big advertisers, big consumer products companies, etc. That were
Speaker 2: hesitant to put too much money on the platform, When
Speaker 2: all of a sudden they could measure their return on
Speaker 2: their advertising spend and as a result, we're getting incredible
Speaker 2: returns and you were able to allocate more of their
Speaker 2: budget to the then Facebook platform. So I think we're
Speaker 2: really happy to look for those those big inflection points
Speaker 2: and and and if you can identify those and identify
Speaker 2: not just where they might you know, help one or
Speaker 2: two specific companies, but entire industries, then I think that
Speaker 2: it really opens up the the available investment opportunities for you.
Speaker 2: And you know, these are companies that you can be
Speaker 2: a little less worried about quarterly fluctuations in their growth rate,
Speaker 2: get good confidence in management ability to identify opportunities and
Speaker 2: continue to exploit those opportunities, and and grow over a
Speaker 2: long period of time.
Speaker 1: Okay, and you know, I also want to talk about valuations.
Speaker 1: It's a little bit you know, especially in today's market,
Speaker 1: you know, how do you approach valuations for you know,
Speaker 1: for your your strategies.
Speaker 2: Yes, we are GARB investors, you know, growth that are
Speaker 2: reasonable prople price. I think one thing about that though,
Speaker 2: is the key word in that is the are the
Speaker 2: the reasonable and so what is reasonable they're reasonable? I
Speaker 2: mean the different different things. It's a relative measure. So
Speaker 2: there are certainly companies that that we have a really
Speaker 2: strong conviction in big extended growth opportunities over a long
Speaker 2: period of time, and so we will be willing to
Speaker 2: pay up for that. It's you know, it's significantly greater
Speaker 2: than a than a market multiple. There's also companies where
Speaker 2: there's that stability of earnings and if you have that visibility,
Speaker 2: if you have that confidence that is a good stable grower,
Speaker 2: you you might pay more than a more than a
Speaker 2: market multiple certainly for that growth, even if it's at
Speaker 2: let's robust you know, growth rate. So I think you
Speaker 2: really have to be careful in terms of how you
Speaker 2: identify expensive stocks and inexpensive stocks. The other thing is is,
Speaker 2: you know, we oftentimes will have significantly different estimates than
Speaker 2: the consensus estimates that are that are out there and
Speaker 2: so you know, you have to be careful not just
Speaker 2: to believe the street consensus number. If you have high
Speaker 2: conviction that a company can do an earnings or a
Speaker 2: revenue or cash flow number significantly higher than the street,
Speaker 2: then maybe the price the earnings or a cash flow
Speaker 2: or sales metric that you're seeing published on Bloomberg maybe
Speaker 2: completely different. You might have a valuation that's significantly lower
Speaker 2: than the consensus of valuation on the street. And so
Speaker 2: we really look for opportunities where we can identify, you know,
Speaker 2: those companies they're they're trading at valuation that there might
Speaker 2: be below where the consensus thinks it is. So always
Speaker 2: be mindful of valuation, but be careful that you don't
Speaker 2: let valuation dictate your your entire approach. Valuation is kind
Speaker 2: of an outcome. You know, we'll do the work on
Speaker 2: a stock, if you know, figure out what we think
Speaker 2: it's worth, and then we'll look at the valuation and
Speaker 2: compare it to where it's trading.
Speaker 1: Okay, I do want to go back to, you know,
Speaker 1: at the beginning we talked about you know, you you
Speaker 1: and your team kind of do an internal debate of
Speaker 1: you know, whether it's a biased off, but you also
Speaker 1: mention and you do that when you want to sell
Speaker 1: a stock. What is usually one of the biggest drivers
Speaker 1: or you know, the different drivers that would kind of
Speaker 1: lead you to sell. Is it mainly just a deterioration
Speaker 1: and the thesis or or something else?
Speaker 2: Yes, you know, I think there's a there's a couple
Speaker 2: of things. I think the biggest one, however, is always
Speaker 2: understand why you own a stock and and avoid that
Speaker 2: thesis creep, I'll call it. So it's always important to really,
Speaker 2: you know, write down the one, two, three reasons why
Speaker 2: you own the stock. We always you know, we'll do
Speaker 2: a presentation on a stock anytime we're going to invest,
Speaker 2: which leads into that that debate, you know, so we
Speaker 2: really understand the company, understand the key drivers, and part
Speaker 2: of that presentation is the investment thesis and and why
Speaker 2: we own the stock. So always do that. Always write
Speaker 2: it down, you know, don't don't just have it out there,
Speaker 2: you know where where you may or may not remember
Speaker 2: exactly why you did it. And then always test those
Speaker 2: assumptions that that you made. And so you know, oftentimes
Speaker 2: it will will own the stock for reasons A, B,
Speaker 2: and C. And then you know they'll report earnings and
Speaker 2: maybe it's thesis A has strengthened based on on some
Speaker 2: new data points that we gathered during the earnings report.
Speaker 2: Be no new information, but C is a little shaky,
Speaker 2: and so now we need we we know, like, hey,
Speaker 2: we need to really monitor that one assumption that we made.
Speaker 2: We're losing conviction in that assumption. So you can do
Speaker 2: one of two things. You can either just change your
Speaker 2: change your assumptions, change your you know, why you own
Speaker 2: the stock, and that's very dangerous. We try not to
Speaker 2: do that. And then the other thing is to really
Speaker 2: really focus in on those changes and and see if
Speaker 2: if your assumptions are wrong, maybe just a little misguided
Speaker 2: and just assumptions need to be tweaked just a little bit,
Speaker 2: you know, or if it's if it's just time to
Speaker 2: change your opinion on the stock. We have an adage
Speaker 2: where you know, if if the conditions changed, and maybe
Speaker 2: our opinion should should as well, And so it's really
Speaker 2: important to drive that. The other thing is we you know,
Speaker 2: we'll certainly we just talked about valuation a lot. There
Speaker 2: are stocks that just their valuation just can't be justified
Speaker 2: over time, and and there's there's a lot not to
Speaker 2: say that the company has changed at all, but you
Speaker 2: have to realize there's a difference between the company and
Speaker 2: the stock that represents that company, and so sometimes the
Speaker 2: valuation on that can just get you know, out of
Speaker 2: hand versus versus where you think they can they can grow.
Speaker 2: Whatever metric you choose to value it on, or the
Speaker 2: combination of metrics we choose to to value it on.
Speaker 2: You can always, you know, sell that stock and and
Speaker 2: keep an eye on it. We've done it many times
Speaker 2: where where you know, we'll look at the stock it
Speaker 2: just gets a little too pricey for what we think
Speaker 2: it's worth, and then you can always it'll it'll still
Speaker 2: be there. You can you can buy it back if
Speaker 2: it if it pulls, if it pulls back, you do
Speaker 2: have to watch not to not to get too crazy,
Speaker 2: you know with some of that. I think you look
Speaker 2: at look at Amazon over the past twenty years. There's
Speaker 2: there's always been some significant drawdowns of a stock like
Speaker 2: Amazon within any within any given year. If you if
Speaker 2: you think you could have picked those tops and bottoms
Speaker 2: accurately and bottom and sold them at the exact right time,
Speaker 2: then I think you're you're fooling yourself a little bit.
Speaker 2: It's very difficult to do that. And so you know,
Speaker 2: stocks where we think they continue to press through that
Speaker 2: you know will be more likely to hold on to.
Speaker 2: But you know, we'll keep an eye on that valuation.
Speaker 2: But really, when the thesis changes, likely so should our
Speaker 2: opinion on the stock and our ownership of the stock.
Speaker 1: Okay, you know, if we focus in on just you know,
Speaker 1: two of the funds, the Growth Fund and the Focus
Speaker 1: Growth Opportunities is the you know, the philosophy pretty much similar.
Speaker 1: You know, are there any differences aside from obviously one
Speaker 1: is more diversified versus one is more concentrated.
Speaker 2: Yes, both both funds are run on the same on
Speaker 2: the same philosophy. In most cases, the Focus Growth Fund
Speaker 2: will be a subset of the of the the more
Speaker 2: diversified UH Growth Fund. So we have the growth and
Speaker 2: then the Focused Growth Fund. So in most cases the
Speaker 2: Focus will be a subset of that. There is some
Speaker 2: leeway that just for different exposures, we may choose to
Speaker 2: have you know, one or two names that that differ
Speaker 2: from from fun to fun if you if you overlap
Speaker 2: the ven diagrams on on the two. But it's really
Speaker 2: a subset of that. It just the focus fund just
Speaker 2: offers you a little bit more concentration. I don't want
Speaker 2: to say a higher conviction ideas because that's not the
Speaker 2: that's not the case. I think every fund, every stock
Speaker 2: that works our way into a portfolio or high conviction
Speaker 2: uh names. But it just maybe gives you a little
Speaker 2: bit more active share in in the focus fund, you'll
Speaker 2: have a bit more volatility, uh, versus the diversified fund,
Speaker 2: which we'll have a slightly lower active share, and just
Speaker 2: like the lower tracking r as well.
Speaker 1: So you know, if we move a little bit towards
Speaker 1: the market, well not necessarily the market, but just the industry.
Speaker 1: You know, for a minute, you know one of the
Speaker 1: obviously the last few years, actives kind of had a
Speaker 1: comeback where you know, it's been talked about quite a bit,
Speaker 1: you know, but before that and still kind of happening
Speaker 1: is kind of you know, this big rise of passive investing,
Speaker 1: you know, massive flows in a passive products. Has that
Speaker 1: changed the way you operate as an active manager?
Speaker 2: Not really. I mean we're we're aware of the flows
Speaker 2: and there are some benchmark driven flows, you know, for sure,
Speaker 2: there's it's it's amazing the concentration that you see at
Speaker 2: a lot of the big the big benchmarks. I think
Speaker 2: the top ten stocks in the in the S and
Speaker 2: P five hundred right now are pushing forty five percent
Speaker 2: of that at hire for some Russell indices as well.
Speaker 2: So there's certainly flows related to the benchmark and the
Speaker 2: waitings of those benchmark that that we certainly have to
Speaker 2: be aware of. Russell is in the midst of quite
Speaker 2: a large rebalancing, uh you know now in terms of
Speaker 2: some of the waitings, especially in the in the tech sector,
Speaker 2: and so you know, we're we're aware of those and
Speaker 2: we're we're understanding how they might impact, you know, flows
Speaker 2: in or out of different names. So it's certainly something
Speaker 2: that we're aware of. You know, there's there's good bads
Speaker 2: of passing investing right one is just that it's just
Speaker 2: kind of said and forget to follow the follow the index.
Speaker 2: But you're not really making any any good active fundamental decisions.
Speaker 2: And so you're generally, you know, names that go up
Speaker 2: you have at at a larger position. Names that go
Speaker 2: down you're shrinking those position sizes. So it doesn't really
Speaker 2: afford you the opportunity to take advantage of of potential
Speaker 2: mispricings in that I'd love to find, you know, one
Speaker 2: of those names that didn't appreciate as much as as others,
Speaker 2: but you know, but is likely to play some ketchup.
Speaker 2: We've certainly seen that and uh in recent uh you
Speaker 2: know market action names that have been very small and
Speaker 2: uh in certain benchmarks that that that grew. If if
Speaker 2: you're in a in a passive vehicle, then you by
Speaker 2: definition did not own that smaller position size when it
Speaker 2: double triple quadrupled. You know, an active manager has the
Speaker 2: potential to to make a bigger weight in that position
Speaker 2: and generate alpha by owning some of those names. Uh. Contrarily,
Speaker 2: if you own in a benchmark, if you own those
Speaker 2: highly appreciated names there that are high because uh, you know,
Speaker 2: just multiple expansion, I'm really driving up the value of
Speaker 2: the of the company when those do shrink, you know,
Speaker 2: shrinking from a much bigger base, uh than if you're
Speaker 2: an active manager and you have the chance to reduce
Speaker 2: that position accordingly based on the on the fundamentals. So uh,
Speaker 2: I obviously am am a big proponent of of active
Speaker 2: uh management. It's how you know, we operate around here
Speaker 2: and so you know, we think there's just a much
Speaker 2: greater ability to add alpha and generate outside returns, obviously
Speaker 2: in in in active management versus passive.
Speaker 1: Yeah. Well, I think a lot of investors agree, just
Speaker 1: as you know, the last couple of years, active has
Speaker 1: been making quite a comeback. But I've got one more
Speaker 1: question before I let you go. What would you say
Speaker 1: has become harder about growth investing over the last five
Speaker 1: or ten years? And you know, does anything actually become easier?
Speaker 2: Yes, I think that the pace of information flow is
Speaker 2: definitely the thing that we've seen accelerate, not just over
Speaker 2: the past you know, five or ten years actually, but
Speaker 2: even just over the course of my career. I've been
Speaker 2: at this for over twenty five years. I remember when
Speaker 2: I first started at at four to oh one, the
Speaker 2: fax machines would start humming and start spitting out earnings
Speaker 2: releases right after the market closing. Tear them off the
Speaker 2: fax machine and get to work. Yeah. So the pace
Speaker 2: of information well has certainly UH increased, and so as
Speaker 2: a result, you've really had to do a much better
Speaker 2: job of UH with that single noise ratio. There's a
Speaker 2: lot of information out there that that is really just
Speaker 2: noise that it's easy to get caught up in that,
Speaker 2: you know, press release on this, a pers release on that,
Speaker 2: A data point here, a data point there. Sometimes you know,
Speaker 2: just just crazy data points in terms of you know,
Speaker 2: aerial images and and uh, you know, exciting stuff, which
Speaker 2: is uh, it's it just creates just a lot of
Speaker 2: extra information, some of the valuable, some less so. And
Speaker 2: so you know, sometimes I think, uh, investors in general
Speaker 2: can can lose sight of the forest for the trees
Speaker 2: and uh, and so I think it's just really important
Speaker 2: to to keep an eye on what's really important, what's
Speaker 2: really driving your thesis, uh on a on a stock,
Speaker 2: and really focus in on those elements, you know, and
Speaker 2: and and separate out all that noise from that from
Speaker 2: that that's signal, and I think that allows you to
Speaker 2: make better investment decisions over the long term.
Speaker 1: Okay, fair enough, we need to end here. But this
Speaker 1: is a lot of fun, Doug, thank you so much
Speaker 1: again for joining me.
Speaker 2: Great Thank you, Dave. I enjoyed it.
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 b I Fund, Go for
Speaker 1: fund and Active Research until our next episode. This is
Speaker 1: David Cohne with inside Active