1 00:00:11,920 --> 00:00:15,440 Speaker 1: Hello, and welcome to another edition of The Bots Podcast. 2 00:00:15,520 --> 00:00:21,000 Speaker 1: I'm Tracy Alloway and I'm Joe. Joe. Do you remember 3 00:00:21,320 --> 00:00:25,720 Speaker 1: what was happening in nineteen sixty two? I mean from 4 00:00:25,720 --> 00:00:28,880 Speaker 1: a financial markets perspective. I thought I thought you were 5 00:00:28,920 --> 00:00:32,960 Speaker 1: asking me, like what my personal recollection was from nineteen 6 00:00:33,880 --> 00:00:36,440 Speaker 1: But no, not only do I not personally remember what 7 00:00:36,479 --> 00:00:40,159 Speaker 1: happened in nineteen sixty two, probably couldn't actually tell you 8 00:00:40,240 --> 00:00:44,040 Speaker 1: anything that I know about financial markets in nine sixty two. 9 00:00:44,080 --> 00:00:46,960 Speaker 1: So I'm I'm drawing a blank here. Okay, well you're 10 00:00:46,960 --> 00:00:49,440 Speaker 1: going to enjoy this, then I find this really interesting. 11 00:00:49,479 --> 00:00:51,880 Speaker 1: I think you will too. But in nineteen sixty two, 12 00:00:51,920 --> 00:00:55,680 Speaker 1: there was a little stock market crash and it became 13 00:00:55,760 --> 00:00:59,360 Speaker 1: known as the Kennedy Slide. Not many people remember it now, 14 00:01:00,080 --> 00:01:02,360 Speaker 1: but it was really interesting because it was basically the 15 00:01:02,400 --> 00:01:06,160 Speaker 1: first crash that happened in a stock market that had 16 00:01:06,480 --> 00:01:10,080 Speaker 1: mutual funds in it, because mutual funds hadn't really been 17 00:01:10,120 --> 00:01:15,720 Speaker 1: around in nine or in the Great Depression, So it's interesting. 18 00:01:15,800 --> 00:01:19,959 Speaker 1: So it was the crash associated with something mechanically with 19 00:01:20,040 --> 00:01:22,360 Speaker 1: the funds or is it was it just sort of 20 00:01:22,360 --> 00:01:24,880 Speaker 1: like a coincidence that there are these new vehicles at 21 00:01:24,880 --> 00:01:28,000 Speaker 1: the time. Ah okay, So this is where it gets 22 00:01:28,040 --> 00:01:32,479 Speaker 1: really interesting because as stocks started to fall on this 23 00:01:32,600 --> 00:01:36,520 Speaker 1: one particular week in nineteen sixty two, there was this 24 00:01:36,640 --> 00:01:41,119 Speaker 1: real concern that all these new fangled mutual funds we're 25 00:01:41,120 --> 00:01:45,000 Speaker 1: going to end up making the crash worse. Basically, people 26 00:01:45,040 --> 00:01:47,520 Speaker 1: thought that investors would be able to sell their holdings 27 00:01:47,640 --> 00:01:51,440 Speaker 1: much more easily because they were in they were wrapped 28 00:01:51,480 --> 00:01:54,680 Speaker 1: up in these mutual funds. Now, in the end that 29 00:01:54,720 --> 00:01:57,840 Speaker 1: didn't actually happen. The mutual funds actually came in and 30 00:01:57,960 --> 00:02:00,760 Speaker 1: bought a bunch of stocks, so they ended up supporting 31 00:02:00,800 --> 00:02:04,160 Speaker 1: the market and everyone was kind of saved thanks to 32 00:02:04,240 --> 00:02:07,840 Speaker 1: mutual funds. But it's clearly interesting because it gets to 33 00:02:07,920 --> 00:02:11,839 Speaker 1: this big question of how open ended funds behave when 34 00:02:11,880 --> 00:02:14,520 Speaker 1: there's trouble. And you and I both like to talk 35 00:02:14,520 --> 00:02:17,760 Speaker 1: about market structure. We talk a lot about the rise 36 00:02:17,760 --> 00:02:21,679 Speaker 1: of passive investing, but we also talk about e t 37 00:02:21,919 --> 00:02:25,480 Speaker 1: f s and sometimes mutual funds, right exactly, and you 38 00:02:25,560 --> 00:02:29,560 Speaker 1: hear it a lot these days, people warning about e 39 00:02:29,720 --> 00:02:32,200 Speaker 1: t f s are getting so big and so enormous, 40 00:02:32,200 --> 00:02:35,160 Speaker 1: and there's so many, they're so liquid, and people are 41 00:02:35,160 --> 00:02:38,320 Speaker 1: concerned about the underlying assets in them, and we haven't 42 00:02:38,360 --> 00:02:42,920 Speaker 1: really seen any big structural systematic problems yet. But if 43 00:02:42,960 --> 00:02:44,920 Speaker 1: you ask people like, oh, what are you most worried 44 00:02:44,960 --> 00:02:48,079 Speaker 1: about or what could bring on another financial crisis, even 45 00:02:48,120 --> 00:02:50,040 Speaker 1: if people are sort of vague and hazy about how 46 00:02:50,080 --> 00:02:54,960 Speaker 1: it would work, there's like this suspicion that modern rappers 47 00:02:55,000 --> 00:02:59,920 Speaker 1: of assets or modern vehicles are somehow going to be involved. Right, 48 00:03:00,120 --> 00:03:03,680 Speaker 1: that's exactly right. And of course there's an overwriting discussion 49 00:03:03,680 --> 00:03:06,520 Speaker 1: as well about how mutual funds are constructed and how 50 00:03:06,560 --> 00:03:10,040 Speaker 1: the benchmarks that they follow are actually defined and constructed. 51 00:03:10,080 --> 00:03:13,919 Speaker 1: And that's something that we've spoken about before in terms 52 00:03:13,960 --> 00:03:17,840 Speaker 1: of these worries over mutual funds or e t F 53 00:03:18,080 --> 00:03:21,600 Speaker 1: basically open ended vehicles wrapped around certain assets. There was 54 00:03:21,680 --> 00:03:26,600 Speaker 1: one moment in time that happened relatively recently, certainly much 55 00:03:26,600 --> 00:03:30,160 Speaker 1: more recently than in nineteen sixty two. Do you remember 56 00:03:30,200 --> 00:03:33,480 Speaker 1: that one, Joe, Yeah, I think it was was that 57 00:03:33,560 --> 00:03:38,840 Speaker 1: late and everyone started reading white papers about the connection 58 00:03:38,960 --> 00:03:42,240 Speaker 1: between junk bond ETFs and junk bonds and whether that 59 00:03:42,360 --> 00:03:46,080 Speaker 1: was going to create a problem. Yeah, that's exactly right. 60 00:03:46,160 --> 00:03:49,840 Speaker 1: And we also had a credit fund. Uh, you know. 61 00:03:50,200 --> 00:03:52,240 Speaker 1: I think at one point this credit fund was worth 62 00:03:52,240 --> 00:03:56,400 Speaker 1: about three point five billion dollars, the Third Avenue Credit Fund, 63 00:03:56,520 --> 00:04:00,680 Speaker 1: and it experienced about of redemptions that base sickly spooked 64 00:04:00,720 --> 00:04:03,800 Speaker 1: the entire market. Yeah, I remember that. And in the end, 65 00:04:04,080 --> 00:04:06,960 Speaker 1: the market overall was fine and we didn't have many 66 00:04:07,000 --> 00:04:10,160 Speaker 1: sort of big systemic problems. But people sort of thought 67 00:04:10,160 --> 00:04:12,040 Speaker 1: it was like, Okay, this could be like a harbinger. 68 00:04:12,120 --> 00:04:14,680 Speaker 1: I mean, hey, I think people were relieved that it didn't, 69 00:04:14,720 --> 00:04:17,480 Speaker 1: but it seemed like the type of thing that spoke 70 00:04:17,560 --> 00:04:20,719 Speaker 1: to a lot of these anxieties which we've been talking 71 00:04:20,720 --> 00:04:25,640 Speaker 1: about for a while. Yeah, exactly. So today I'm I'm 72 00:04:25,760 --> 00:04:29,479 Speaker 1: quite excited about our guest because our guest is actually 73 00:04:29,560 --> 00:04:33,920 Speaker 1: the former CEO of Third Avenue. It's David Bars and 74 00:04:34,160 --> 00:04:36,920 Speaker 1: he's not only going to be talking about his experience 75 00:04:37,279 --> 00:04:40,680 Speaker 1: at the fund and his opinions about general liquidity and 76 00:04:41,160 --> 00:04:43,600 Speaker 1: mutual funds and e t f s, but we're also 77 00:04:43,640 --> 00:04:48,760 Speaker 1: going to go into a really interesting discussion about indexes specifically, 78 00:04:48,839 --> 00:04:51,480 Speaker 1: and also his new venture, which is kind of an 79 00:04:51,560 --> 00:05:04,680 Speaker 1: interesting tweak on existing index investing. I can't wait. Alright, So, 80 00:05:04,800 --> 00:05:08,720 Speaker 1: without further ado, David Clarks welcome to the show. So 81 00:05:08,920 --> 00:05:10,560 Speaker 1: it's great to be here. I thought when you mentioned 82 00:05:10,680 --> 00:05:12,640 Speaker 1: nineteen sixty two you were going to talk about that 83 00:05:12,720 --> 00:05:15,040 Speaker 1: was the year I was born, and this was the 84 00:05:15,160 --> 00:05:18,000 Speaker 1: significance of that, And you came up with this very 85 00:05:18,080 --> 00:05:20,800 Speaker 1: interesting story that I didn't know about myself. So so 86 00:05:21,000 --> 00:05:23,720 Speaker 1: you as your your barn you like me, You don't 87 00:05:23,720 --> 00:05:28,599 Speaker 1: have any recognition now I do not, but I do 88 00:05:28,680 --> 00:05:31,000 Speaker 1: have a pretty good recollection of what happened in two 89 00:05:31,000 --> 00:05:35,839 Speaker 1: thousand fifteen. Shall we start with that then, um, and 90 00:05:36,200 --> 00:05:38,960 Speaker 1: I wish that I could claim the nineteen sixty two 91 00:05:39,000 --> 00:05:41,839 Speaker 1: thing is the result of my um deep research ahead 92 00:05:41,880 --> 00:05:44,839 Speaker 1: of this podcast, but unfortunately it's just a happy coincidence. 93 00:05:45,400 --> 00:05:48,320 Speaker 1: Let's start with late two thousand fifteen. David, do you 94 00:05:48,320 --> 00:05:51,160 Speaker 1: want to maybe just explain what was going on at 95 00:05:51,200 --> 00:05:53,880 Speaker 1: that time? Yeah, I mean, look, the name of the 96 00:05:53,920 --> 00:05:58,600 Speaker 1: fund was the third Avenue Focused Credit Fund. Focused being 97 00:05:59,080 --> 00:06:03,520 Speaker 1: emphasized here for making the point that we were a 98 00:06:03,600 --> 00:06:11,760 Speaker 1: concentrated portfolio of highled and distressed securities that you could 99 00:06:11,760 --> 00:06:15,280 Speaker 1: not get in that format in a liquid mutual fund 100 00:06:15,320 --> 00:06:19,400 Speaker 1: format pretty much anywhere else. We were unique in what 101 00:06:19,480 --> 00:06:25,080 Speaker 1: we had created for the marketplace. But the The fact 102 00:06:25,200 --> 00:06:29,400 Speaker 1: that people thought of that fund as some representation for 103 00:06:29,440 --> 00:06:32,680 Speaker 1: an overall market is sort of a misnomer because if 104 00:06:32,680 --> 00:06:35,880 Speaker 1: you think back to the financial crisis, where you had 105 00:06:35,920 --> 00:06:40,880 Speaker 1: many many funds git themselves in effect right put up 106 00:06:40,880 --> 00:06:44,600 Speaker 1: the gates which there were permitted to do, you really 107 00:06:44,600 --> 00:06:47,479 Speaker 1: didn't have much of a different story here. This was 108 00:06:47,520 --> 00:06:51,280 Speaker 1: a fund that was the focused credit fund was set 109 00:06:51,360 --> 00:06:55,159 Speaker 1: up to offer investors really an alternative to to a 110 00:06:55,200 --> 00:06:57,960 Speaker 1: hedge fund, to a private vehicle. Uh and we were 111 00:06:57,960 --> 00:07:01,479 Speaker 1: doing it in a in a public format. So what 112 00:07:01,560 --> 00:07:05,800 Speaker 1: happened with that one fund really was not representative representative 113 00:07:05,800 --> 00:07:07,520 Speaker 1: what was going on the markets. That weren't any other 114 00:07:07,560 --> 00:07:11,360 Speaker 1: funds like that fund. So how did you have the 115 00:07:11,440 --> 00:07:14,440 Speaker 1: idea originally before we get to even the events of 116 00:07:14,520 --> 00:07:18,320 Speaker 1: late tell us a little bit about the evolution of 117 00:07:18,360 --> 00:07:22,600 Speaker 1: the fund itself and how you saw an opportunity to 118 00:07:22,760 --> 00:07:27,920 Speaker 1: offer access to a concentrated portfolio of these assets in 119 00:07:27,960 --> 00:07:32,680 Speaker 1: that liquid vehicle. Okay, so two thousand eight, the financial 120 00:07:32,720 --> 00:07:37,960 Speaker 1: crisis is is coming upon us. We were deep value investors. 121 00:07:38,680 --> 00:07:42,960 Speaker 1: Pretty much most of our assets under management were in 122 00:07:43,600 --> 00:07:49,600 Speaker 1: publicly listed equity securities. We had had a historical participation 123 00:07:49,720 --> 00:07:54,280 Speaker 1: in debt and distress debt, both in public and private vehicles, 124 00:07:54,320 --> 00:07:57,960 Speaker 1: but had really not had much exposure to that asset 125 00:07:58,040 --> 00:08:01,000 Speaker 1: class leading up until the financial crisis. But as the 126 00:08:01,000 --> 00:08:04,600 Speaker 1: financial crisis came upon us, obviously being higher up in 127 00:08:04,640 --> 00:08:07,400 Speaker 1: the capital structure of a business is a safer way 128 00:08:07,400 --> 00:08:12,520 Speaker 1: to invest. And our idea was to try and gather 129 00:08:12,640 --> 00:08:17,680 Speaker 1: assets into that wave, if you will, and and do 130 00:08:17,720 --> 00:08:19,960 Speaker 1: that in a in a way in which we can participate, 131 00:08:20,000 --> 00:08:22,920 Speaker 1: cause we were like any other opportunistic value investor. That's 132 00:08:22,960 --> 00:08:26,280 Speaker 1: where we saw the value really and really were excited 133 00:08:26,280 --> 00:08:29,360 Speaker 1: about the opportunity. The problem is, how do you raise 134 00:08:29,440 --> 00:08:32,199 Speaker 1: money going into a financial crisis when most people are 135 00:08:32,200 --> 00:08:35,040 Speaker 1: taking money off the table, and we were experiencing that 136 00:08:35,120 --> 00:08:39,280 Speaker 1: with our open and mutual funds, the equity funds. So 137 00:08:39,360 --> 00:08:42,079 Speaker 1: the only solution that I could come up with at 138 00:08:42,080 --> 00:08:46,000 Speaker 1: the time, because I was out pitching investors literally the 139 00:08:46,040 --> 00:08:50,440 Speaker 1: week before and after Lehman Brothers went into bankruptcy, was 140 00:08:50,520 --> 00:08:53,880 Speaker 1: to launch an open and mutual fund because that's what 141 00:08:53,920 --> 00:08:59,040 Speaker 1: we had successfully done historically. And it took about nine 142 00:08:59,040 --> 00:09:01,360 Speaker 1: months to get that done. So it's August two thousand 143 00:09:01,480 --> 00:09:05,880 Speaker 1: nine and we read we file our third Avenue focused 144 00:09:05,920 --> 00:09:08,920 Speaker 1: credit fund, and the opportunity was pretty clear, right. You 145 00:09:09,000 --> 00:09:15,480 Speaker 1: had high yield trading at twelve hundred over as a spread, 146 00:09:15,520 --> 00:09:18,000 Speaker 1: and and so you could pretty much pick your litter. 147 00:09:18,120 --> 00:09:20,080 Speaker 1: It was like shooting fish in a barrel, quite frankly, 148 00:09:20,880 --> 00:09:24,839 Speaker 1: because you could buy very plentiful supply of securities out 149 00:09:24,840 --> 00:09:27,480 Speaker 1: there that you could buy and diversify the portfolio even 150 00:09:27,480 --> 00:09:29,600 Speaker 1: though it's a focus fund, but diverse by the portfolio 151 00:09:29,600 --> 00:09:33,760 Speaker 1: across industry, and that was an easy opportunity for us. 152 00:09:33,960 --> 00:09:37,960 Speaker 1: The challenge was there weren't many funds being launched in 153 00:09:38,000 --> 00:09:41,000 Speaker 1: that format. In fact, I believe we were the only one, 154 00:09:41,640 --> 00:09:45,440 Speaker 1: and most people, if they were trying to access these securities, 155 00:09:45,440 --> 00:09:48,439 Speaker 1: were doing it in private funds and hedge funds, So 156 00:09:48,559 --> 00:09:51,320 Speaker 1: we were very unique. And in fact, I remember going 157 00:09:51,400 --> 00:09:56,520 Speaker 1: on CNBC to announce the launch of the fund and 158 00:09:56,840 --> 00:09:59,480 Speaker 1: a lot of folks took interest in what we were 159 00:09:59,760 --> 00:10:01,520 Speaker 1: try iring to do at that time. So that was 160 00:10:01,559 --> 00:10:05,120 Speaker 1: the that was the spirit for the launch. The idea 161 00:10:05,440 --> 00:10:09,880 Speaker 1: and the opportunity was clearly there. Did it ever cross 162 00:10:09,920 --> 00:10:13,680 Speaker 1: your mind to start a hedge fund or a private 163 00:10:13,720 --> 00:10:16,120 Speaker 1: fund like other people were doing. I mean, you mentioned 164 00:10:16,160 --> 00:10:19,240 Speaker 1: that you you've had success in other open ended mutual funds, 165 00:10:19,240 --> 00:10:22,679 Speaker 1: so that was your expertise. But did you ever even 166 00:10:22,960 --> 00:10:26,360 Speaker 1: think about it? Not just thought about it, attempted it 167 00:10:26,559 --> 00:10:33,040 Speaker 1: in different derivations, especially since we had going into the 168 00:10:33,040 --> 00:10:36,040 Speaker 1: financial I think two thousand seven rssets under management peaked 169 00:10:36,040 --> 00:10:38,240 Speaker 1: at close to thirty one billion dollars, so we had 170 00:10:38,240 --> 00:10:43,040 Speaker 1: a pretty broad client base. But those clients in two 171 00:10:43,040 --> 00:10:45,720 Speaker 1: thousand eight were more interested in getting their money back 172 00:10:46,200 --> 00:10:50,720 Speaker 1: than allocating capital, and so raising funds in a private format. 173 00:10:51,120 --> 00:10:54,760 Speaker 1: And even though we had that kind of a u M, 174 00:10:54,800 --> 00:10:58,320 Speaker 1: we were in a private fund what you call a 175 00:10:58,400 --> 00:11:03,640 Speaker 1: first time fund man GERM, right, because most of our funds, 176 00:11:03,640 --> 00:11:06,319 Speaker 1: in fact, all of our funds were in public format, right, 177 00:11:06,360 --> 00:11:09,000 Speaker 1: and mutual funds or separately managed accounts. So when you 178 00:11:09,080 --> 00:11:13,720 Speaker 1: launch a private fund, private fund investors like to see 179 00:11:13,760 --> 00:11:16,680 Speaker 1: track records, and this is why you have many of 180 00:11:16,679 --> 00:11:19,480 Speaker 1: the successful private equy firms out there launching Fund seventeen 181 00:11:19,600 --> 00:11:22,599 Speaker 1: right now, because there they've got track records for the 182 00:11:22,640 --> 00:11:26,959 Speaker 1: sixteen prior funds that investors make their decisions on. Unfortually, 183 00:11:26,960 --> 00:11:30,439 Speaker 1: we are backward looking industry, right, So that was the 184 00:11:30,520 --> 00:11:35,640 Speaker 1: challenge for us, and and it became really uh almost 185 00:11:36,360 --> 00:11:38,320 Speaker 1: the only way we could get the money was to 186 00:11:38,360 --> 00:11:42,720 Speaker 1: do it through this public format. Now, one of the 187 00:11:42,800 --> 00:11:46,080 Speaker 1: concerns that was that we were already talking about and 188 00:11:46,120 --> 00:11:50,360 Speaker 1: that was really spotlight in late is this idea of 189 00:11:50,400 --> 00:11:53,679 Speaker 1: a sort of liquidity mismatch. People want daily liquidity, or 190 00:11:53,720 --> 00:11:55,880 Speaker 1: if it's in an e t F form, they want 191 00:11:56,040 --> 00:12:02,200 Speaker 1: a minute by minute liquidity, but just dressed assets, junk bonds, 192 00:12:02,280 --> 00:12:04,439 Speaker 1: they don't just trade. You know, a minute by minute 193 00:12:04,520 --> 00:12:06,600 Speaker 1: is easily is the same the same way as a 194 00:12:06,640 --> 00:12:09,920 Speaker 1: stocks do. When you launched the fund, was this something 195 00:12:09,960 --> 00:12:12,560 Speaker 1: that was on your mind as a concern, Yeah, of course, 196 00:12:12,600 --> 00:12:14,160 Speaker 1: and and so the goal was to get to a 197 00:12:14,200 --> 00:12:20,200 Speaker 1: critical mass so that you could have size and enable 198 00:12:20,280 --> 00:12:23,600 Speaker 1: yourself to have a diversified portfolio, not have any heavily 199 00:12:23,640 --> 00:12:29,240 Speaker 1: concentrated positions where liquidity constraints would mismatch investors needs or desires. 200 00:12:29,240 --> 00:12:33,000 Speaker 1: Because investors in mutual funds have the right to redeem daily. 201 00:12:33,600 --> 00:12:36,280 Speaker 1: Uh you know, there are certain redemption fee features that 202 00:12:36,280 --> 00:12:38,120 Speaker 1: you can put on funds, but that's that's the nature 203 00:12:38,120 --> 00:12:40,439 Speaker 1: of the vehicle. So of course we were very conscious 204 00:12:40,440 --> 00:12:41,719 Speaker 1: of that, and we wanted to get the size that 205 00:12:41,840 --> 00:12:45,640 Speaker 1: we did quite. I think my recollection is that the 206 00:12:45,679 --> 00:12:48,559 Speaker 1: fund got to about seven million in a u M 207 00:12:48,640 --> 00:12:51,480 Speaker 1: and within three or four months, which was sort of 208 00:12:51,520 --> 00:12:55,520 Speaker 1: an unprecedented at the time raise, especially given the time 209 00:12:55,520 --> 00:13:00,920 Speaker 1: framework in right, it's the fall winter of two thousand nine, right, 210 00:13:01,040 --> 00:13:04,680 Speaker 1: still anount of time when people were thinking about getting 211 00:13:04,720 --> 00:13:06,840 Speaker 1: back into the market. Right, we hadn't even had the 212 00:13:06,880 --> 00:13:11,160 Speaker 1: green shoots conversations yet. So it was it was a 213 00:13:11,240 --> 00:13:14,319 Speaker 1: very successful launch, if you will, and that helped create 214 00:13:15,120 --> 00:13:17,959 Speaker 1: liquidity for investors if they chose. And there were points 215 00:13:17,960 --> 00:13:20,040 Speaker 1: of time, especially as you think about what happened in 216 00:13:20,040 --> 00:13:24,360 Speaker 1: two thousand eleven with the downgrade of US treasuries, right, 217 00:13:25,040 --> 00:13:27,880 Speaker 1: you know, you had issues over time where markets were 218 00:13:28,000 --> 00:13:31,199 Speaker 1: volatile and people wanted to take look, take capital off 219 00:13:31,200 --> 00:13:33,040 Speaker 1: the table. So we have to be able to manage 220 00:13:33,040 --> 00:13:37,280 Speaker 1: that through that period. The ultimate demise here was the 221 00:13:37,320 --> 00:13:40,960 Speaker 1: fact that you know, you have I had a portfolio 222 00:13:41,000 --> 00:13:43,760 Speaker 1: manager in charge of the fund who who made some 223 00:13:43,840 --> 00:13:46,680 Speaker 1: bad investments. And at the end of the day, in 224 00:13:46,880 --> 00:13:51,000 Speaker 1: any construct, whether it's a mutual fund or or a 225 00:13:51,000 --> 00:13:55,240 Speaker 1: private fund, you have to be making good investments. That's 226 00:13:55,280 --> 00:13:58,240 Speaker 1: what you're charged with doing. And and when you have 227 00:13:58,520 --> 00:14:02,920 Speaker 1: investments that turn out to be non performers. That's what 228 00:14:03,160 --> 00:14:06,920 Speaker 1: ultimately lead to the challenges with the fund. It wasn't 229 00:14:06,920 --> 00:14:10,880 Speaker 1: the market issue as much as it was individual investments. 230 00:14:12,000 --> 00:14:15,040 Speaker 1: So can I ask, if you were doing it all again, 231 00:14:15,640 --> 00:14:18,559 Speaker 1: is there something that you would do differently or what's 232 00:14:18,600 --> 00:14:21,880 Speaker 1: your biggest takeaway from that experience? Well? Yeah, I think 233 00:14:21,920 --> 00:14:26,200 Speaker 1: if you're that the learning is twofold. Work harder to 234 00:14:26,200 --> 00:14:28,760 Speaker 1: try and raise a private fund. That's a that's an 235 00:14:28,760 --> 00:14:31,720 Speaker 1: easy one. And secondarily, if you're going to do something 236 00:14:31,800 --> 00:14:35,840 Speaker 1: in a in a public format where investors can can 237 00:14:35,840 --> 00:14:39,640 Speaker 1: access you daily and redeem you daily, then the only 238 00:14:39,640 --> 00:14:44,880 Speaker 1: way to properly manage risk is to massively diversify the portfolio. 239 00:14:45,320 --> 00:14:48,680 Speaker 1: So it's it's sort of what has ended up really 240 00:14:48,720 --> 00:14:53,120 Speaker 1: transforming into the high yeld marketplace. You have. Most hield 241 00:14:53,120 --> 00:14:57,680 Speaker 1: funds are basically benchmark trackers, right They own wildly diversified 242 00:14:57,720 --> 00:15:04,160 Speaker 1: portfolios of securities that track the high heeled index. So basically, 243 00:15:04,400 --> 00:15:08,240 Speaker 1: if you're going to have a daily vehicle or liquid 244 00:15:08,320 --> 00:15:12,520 Speaker 1: vehicle for the public, your lesson now is there's almost 245 00:15:12,600 --> 00:15:16,120 Speaker 1: no way to do it on a concentrated basis. It 246 00:15:16,240 --> 00:15:20,160 Speaker 1: just has to roughly more or less everything. That's correct 247 00:15:20,880 --> 00:15:24,800 Speaker 1: if investors are going to demand daily liquidity. Right when 248 00:15:24,880 --> 00:15:28,680 Speaker 1: it comes to credit market liquidity in general, we hear 249 00:15:29,520 --> 00:15:33,760 Speaker 1: so much noise about, you know, trading having become more difficult, 250 00:15:33,920 --> 00:15:36,680 Speaker 1: the market any more liquid, more e t f s, 251 00:15:36,720 --> 00:15:39,960 Speaker 1: more open ended funds that are investing in you know, 252 00:15:40,080 --> 00:15:43,200 Speaker 1: high old bonds and things like that. Are those valid 253 00:15:43,240 --> 00:15:46,920 Speaker 1: concerns in your opinion? Well, I haven't seen it manifest 254 00:15:46,960 --> 00:15:50,680 Speaker 1: itself in any way that that would cause me to 255 00:15:50,720 --> 00:15:52,800 Speaker 1: be concerned about it. I think you had a point 256 00:15:53,040 --> 00:15:55,120 Speaker 1: a little less than a year ago, maybe in January 257 00:15:55,120 --> 00:15:58,239 Speaker 1: of this year, where HYLD was almost trading at perfection, 258 00:15:58,960 --> 00:16:02,560 Speaker 1: probably maybe unprecedented in terms of where it was from 259 00:16:02,560 --> 00:16:07,440 Speaker 1: a from a yield basis, and and the spread as 260 00:16:07,760 --> 00:16:10,080 Speaker 1: as thin as I think it's ever been, and you 261 00:16:10,120 --> 00:16:14,360 Speaker 1: didn't really have any any issues, and we weathered through 262 00:16:14,800 --> 00:16:17,880 Speaker 1: what was a pretty challenging energy market a couple of 263 00:16:17,960 --> 00:16:20,720 Speaker 1: years ago that we're now seeing. I think there were 264 00:16:20,880 --> 00:16:24,040 Speaker 1: articles about it today that energy is now maybe the 265 00:16:24,120 --> 00:16:27,840 Speaker 1: largest percentage of the High Heeled index right now, and 266 00:16:27,880 --> 00:16:32,000 Speaker 1: you're seeing a sort of a robust demand for securities 267 00:16:32,000 --> 00:16:34,960 Speaker 1: in that sector. So the market has seemed to evolve 268 00:16:35,040 --> 00:16:40,480 Speaker 1: itself into a pretty stable place, notwithstanding all of these 269 00:16:40,840 --> 00:16:44,720 Speaker 1: traditional metrics that might cause concern for folks, But it 270 00:16:44,760 --> 00:16:48,840 Speaker 1: hasn't done anything to um to spook the market from 271 00:16:48,840 --> 00:16:52,480 Speaker 1: what I can see. So the going back to a 272 00:16:52,520 --> 00:16:55,040 Speaker 1: couple of years ago when we had the energy crash 273 00:16:55,080 --> 00:16:57,520 Speaker 1: and a lot of high old dead tied to energy, 274 00:16:57,640 --> 00:17:00,560 Speaker 1: that was obviously when people were most worried. In your view, 275 00:17:01,080 --> 00:17:03,640 Speaker 1: the fact that we got through that period that it 276 00:17:03,680 --> 00:17:06,760 Speaker 1: was pretty smooth, that none of the concerns really turned 277 00:17:06,800 --> 00:17:10,119 Speaker 1: out too much, it's pretty good evidence that the market 278 00:17:10,160 --> 00:17:12,720 Speaker 1: structure roughly works. Yeah, And if you had asked how 279 00:17:12,840 --> 00:17:15,160 Speaker 1: old investors what their biggest concerns where maybe a year 280 00:17:15,200 --> 00:17:17,320 Speaker 1: ago that's a healthcare was going to be the next 281 00:17:17,600 --> 00:17:21,440 Speaker 1: energy sector and where what happened? Right, We haven't read 282 00:17:21,480 --> 00:17:24,600 Speaker 1: or heard much about that sector getting disrupted in a 283 00:17:25,200 --> 00:17:27,359 Speaker 1: in any kind of material way. So I I just 284 00:17:27,400 --> 00:17:30,840 Speaker 1: think people keep trying to look for problems. It's just 285 00:17:31,000 --> 00:17:33,280 Speaker 1: for the sake of looking for problems, and and the 286 00:17:33,320 --> 00:17:36,560 Speaker 1: market seems to have worked itself out pretty efficiently, which 287 00:17:36,920 --> 00:17:40,640 Speaker 1: tends to happen. So David, let's talk about your new venture. 288 00:17:41,280 --> 00:17:43,760 Speaker 1: I alluded to it in the intro. But it's kind 289 00:17:43,800 --> 00:17:47,040 Speaker 1: of an interesting take on investing. And I guess the 290 00:17:47,080 --> 00:17:50,160 Speaker 1: clue is in the name. You know, you're now principal 291 00:17:50,280 --> 00:17:54,320 Speaker 1: and co founder at outvest Capital. Can you tell us 292 00:17:54,400 --> 00:17:59,560 Speaker 1: quickly what exactly it does, what the what the mandate is? Yeah? 293 00:17:59,600 --> 00:18:06,120 Speaker 1: So out test is is really an intuitive, simple, scalable 294 00:18:06,280 --> 00:18:13,080 Speaker 1: idea for how to do two things. One take advantage 295 00:18:13,080 --> 00:18:15,680 Speaker 1: of what we think is the most forward facing risk 296 00:18:16,760 --> 00:18:20,159 Speaker 1: for all investors, which is the rate of technological change 297 00:18:20,680 --> 00:18:26,520 Speaker 1: and how tech is disrupting all industries. And secondarily, the 298 00:18:26,720 --> 00:18:32,480 Speaker 1: wave of flows into the passive index investing marketplace, which 299 00:18:32,480 --> 00:18:36,040 Speaker 1: I personally witnessed in my prior role, and as something 300 00:18:36,080 --> 00:18:40,959 Speaker 1: that I think is going to continue infinitum. And so 301 00:18:41,760 --> 00:18:45,600 Speaker 1: what simply one should think about is it may be important, 302 00:18:45,600 --> 00:18:48,160 Speaker 1: more important what you leave out of your portfolio than 303 00:18:48,200 --> 00:18:50,479 Speaker 1: what you put in. And thus the name and branding 304 00:18:50,520 --> 00:18:55,359 Speaker 1: of our enterprise called outvest Capital. So this is really interesting. 305 00:18:55,560 --> 00:18:59,560 Speaker 1: We typically think of funds as trying to select the 306 00:18:59,640 --> 00:19:03,440 Speaker 1: very best assets within some sort of broader family, whether 307 00:19:03,440 --> 00:19:07,840 Speaker 1: it's large caps or small caps, whatever. Your view is 308 00:19:08,000 --> 00:19:11,040 Speaker 1: that perhaps the best way to go is to more 309 00:19:11,119 --> 00:19:14,000 Speaker 1: or less by the index, but try to avoid the 310 00:19:14,000 --> 00:19:16,000 Speaker 1: losers of the index so that you can gain from that. 311 00:19:16,359 --> 00:19:20,320 Speaker 1: What is the Is there an academic research or backward 312 00:19:20,320 --> 00:19:22,960 Speaker 1: looking data that suggests that that may be a better approach, 313 00:19:23,359 --> 00:19:26,560 Speaker 1: So there isn't that we could identify. We wrote our 314 00:19:26,600 --> 00:19:30,120 Speaker 1: own white paper which talks to this concept because if 315 00:19:30,119 --> 00:19:32,320 Speaker 1: you really think about what you when you go to 316 00:19:32,359 --> 00:19:37,200 Speaker 1: business school, you're given Harry Markowitz's book on modern portfolio theory, 317 00:19:37,320 --> 00:19:42,679 Speaker 1: and it is pick concentrated portfolios of best ideas and 318 00:19:42,760 --> 00:19:46,720 Speaker 1: over time you will beat the market. Right, that's the 319 00:19:47,280 --> 00:19:50,080 Speaker 1: basis for the way most people are educated today, and 320 00:19:50,119 --> 00:19:54,120 Speaker 1: still today we take issue with that and actually say 321 00:19:54,160 --> 00:19:59,080 Speaker 1: that really flip the investment process and it's more important 322 00:19:59,119 --> 00:20:01,040 Speaker 1: what you leave out than with you put in. Because 323 00:20:01,440 --> 00:20:05,280 Speaker 1: the market has evolved, index funds are the market today. 324 00:20:05,320 --> 00:20:08,520 Speaker 1: They are continuing to grasp more and more of what's 325 00:20:08,520 --> 00:20:13,280 Speaker 1: happening where flows are going. And we decided to launch 326 00:20:13,359 --> 00:20:16,600 Speaker 1: this concept after simulating back testing it for a little while. 327 00:20:17,080 --> 00:20:20,320 Speaker 1: But we have chosen the SMP five hundred, the most 328 00:20:20,359 --> 00:20:25,480 Speaker 1: broadest based domestic US market where more flows are going 329 00:20:25,560 --> 00:20:30,360 Speaker 1: than in any other index, and simply by excluding as 330 00:20:30,400 --> 00:20:33,120 Speaker 1: you call them the losers. We look at it as 331 00:20:34,000 --> 00:20:38,119 Speaker 1: we're trying to eliminate from the portfolio those companies that 332 00:20:38,240 --> 00:20:42,720 Speaker 1: are or likely will be disrupted by technology. And again 333 00:20:42,800 --> 00:20:48,959 Speaker 1: technology disruption being a forward facing risk. And there's no 334 00:20:49,040 --> 00:20:52,040 Speaker 1: better example for me to to share, and I think 335 00:20:52,080 --> 00:20:54,320 Speaker 1: you you guys have talked about this in the past, 336 00:20:54,400 --> 00:21:00,200 Speaker 1: is General Electric. General Electric was the top five i've 337 00:21:00,560 --> 00:21:04,040 Speaker 1: company in the SMP from a market cap weighted basis, 338 00:21:05,119 --> 00:21:09,760 Speaker 1: and now it's market cap is close to a hundred billions, 339 00:21:10,640 --> 00:21:13,280 Speaker 1: and now I'll blow a hundred billions, Okay, So look, 340 00:21:13,320 --> 00:21:15,960 Speaker 1: and that's happened in such a short period of time. 341 00:21:16,600 --> 00:21:18,399 Speaker 1: And I think in May of two thousand seventeen, the 342 00:21:18,440 --> 00:21:21,080 Speaker 1: Wall Street Journal wrote an article about how Jeff Emo 343 00:21:21,240 --> 00:21:26,120 Speaker 1: was one of the great technology innovators in the way 344 00:21:26,160 --> 00:21:30,760 Speaker 1: in which he'd you know, taken and transformed g GE. Well, 345 00:21:30,760 --> 00:21:34,480 Speaker 1: that clearly hasn't happened. So it's it's think about that 346 00:21:34,520 --> 00:21:36,480 Speaker 1: if you own the SMP, you were buying that stock 347 00:21:36,640 --> 00:21:39,600 Speaker 1: at its weight, and if you've simply eliminated what kind 348 00:21:39,600 --> 00:21:42,080 Speaker 1: of outperformance just from one security? Now we do this. 349 00:21:42,680 --> 00:21:45,440 Speaker 1: We ended up out vesting through our process about a 350 00:21:45,520 --> 00:21:51,040 Speaker 1: hundred and fifty close to of the market cap, and 351 00:21:51,080 --> 00:21:54,040 Speaker 1: we have been able in eighteen months of live performance 352 00:21:54,800 --> 00:21:57,560 Speaker 1: outperform the SMP by clist of five hundred basis points. 353 00:21:58,680 --> 00:22:00,840 Speaker 1: So we're just trying to prove move this out. But 354 00:22:00,960 --> 00:22:04,159 Speaker 1: that's where we're that's what we're doing. So how do 355 00:22:04,200 --> 00:22:08,280 Speaker 1: you go about identifying those hundred fifty companies or how 356 00:22:08,280 --> 00:22:11,560 Speaker 1: do you identify the next g e? And is the 357 00:22:11,600 --> 00:22:14,639 Speaker 1: process for identifying something that you want to take out 358 00:22:14,720 --> 00:22:19,879 Speaker 1: of your portfolio any different to identifying something you know 359 00:22:19,960 --> 00:22:22,960 Speaker 1: under a traditional investment strategy that you would want to 360 00:22:23,000 --> 00:22:27,680 Speaker 1: put in. So yes it is. And and the number 361 00:22:27,680 --> 00:22:29,280 Speaker 1: of folks who we've talked about to say, why aren't 362 00:22:29,280 --> 00:22:32,480 Speaker 1: you just doing a long short portfolio, because really the 363 00:22:32,680 --> 00:22:36,560 Speaker 1: short selling mentality is to is to do that, to 364 00:22:36,720 --> 00:22:40,679 Speaker 1: fundamentally select a security you think is going to not 365 00:22:40,840 --> 00:22:45,439 Speaker 1: perform or under perform. But we're we're really trying to 366 00:22:45,440 --> 00:22:49,639 Speaker 1: make this a scalable business, and short selling by definition 367 00:22:49,720 --> 00:22:52,680 Speaker 1: has been non scalable. You have I think only one 368 00:22:52,720 --> 00:22:54,920 Speaker 1: fund in the marketplace that's over a billion and a 369 00:22:55,080 --> 00:22:58,840 Speaker 1: u M. So what our process entails is it's really 370 00:22:58,920 --> 00:23:03,680 Speaker 1: two prong The for is simply dividing the index into 371 00:23:03,720 --> 00:23:08,520 Speaker 1: industry groups through a technology taxonomy. In other words, we're 372 00:23:08,560 --> 00:23:13,479 Speaker 1: not using the global industry classification codes to divide the index. 373 00:23:13,520 --> 00:23:18,200 Speaker 1: We're using our own industry group determinations. And we we've 374 00:23:18,200 --> 00:23:20,760 Speaker 1: divided the SMP into thirty four industry groups, and that 375 00:23:20,800 --> 00:23:24,720 Speaker 1: may change depending upon how the SMP evolves over time, 376 00:23:24,760 --> 00:23:27,919 Speaker 1: because there are new entrants and companies that leave the 377 00:23:28,000 --> 00:23:32,160 Speaker 1: SMP from time to time. So we look at industry 378 00:23:32,160 --> 00:23:34,560 Speaker 1: groups through our own lens and then we make a 379 00:23:34,640 --> 00:23:40,280 Speaker 1: simple determination as that industry advantaged or disadvantaged by technology, 380 00:23:40,520 --> 00:23:43,520 Speaker 1: and if it's advantaged, by default, that industry group and 381 00:23:43,520 --> 00:23:46,919 Speaker 1: the securities in it will be in the portfolio. And 382 00:23:46,960 --> 00:23:50,520 Speaker 1: if it's disadvantaged, that secure those securities and industry groups 383 00:23:50,520 --> 00:23:54,439 Speaker 1: will be out vested from the portfolio or eliminated. So 384 00:23:54,480 --> 00:23:58,320 Speaker 1: that's step one. It's a qualitative determination. It's an active approach, 385 00:23:58,680 --> 00:24:03,879 Speaker 1: but it's merely making industry decisions, not company specific decisions. 386 00:24:04,640 --> 00:24:08,600 Speaker 1: We then apply a quantitative model that we built to 387 00:24:08,760 --> 00:24:12,879 Speaker 1: take that advantage group and make a decision whether to 388 00:24:12,880 --> 00:24:15,160 Speaker 1: own it or not own it. So if it meets 389 00:24:15,200 --> 00:24:17,959 Speaker 1: the quant screens, and the quant screens are are a 390 00:24:18,000 --> 00:24:22,040 Speaker 1: lower bar for advantaged industries than they are for disadvantage. 391 00:24:22,040 --> 00:24:24,719 Speaker 1: And similarly, if a company is in a disadvantaged industry, 392 00:24:24,720 --> 00:24:28,000 Speaker 1: the quant screen will either keep it out or kick 393 00:24:28,080 --> 00:24:31,639 Speaker 1: it back into the portfolio. So you can avoid situations 394 00:24:31,640 --> 00:24:34,840 Speaker 1: where there are certain companies within an industry group. And 395 00:24:34,880 --> 00:24:37,760 Speaker 1: I'll give you an example of that. Retail would clearly 396 00:24:37,800 --> 00:24:41,600 Speaker 1: be a industry group that is likely to be disadvantaged 397 00:24:41,640 --> 00:24:44,199 Speaker 1: by technology. I don't think many people would debate me 398 00:24:44,240 --> 00:24:47,440 Speaker 1: on that, but there are companies within that industry group, 399 00:24:48,600 --> 00:24:52,800 Speaker 1: like home depot, that we view as through our quant 400 00:24:52,880 --> 00:24:55,800 Speaker 1: screen as having certain advantages and therefore it got kicked 401 00:24:55,880 --> 00:24:59,520 Speaker 1: back in. And this is a fundamental quantz quant screen fund. 402 00:24:59,760 --> 00:25:03,560 Speaker 1: This is looking at financial data of the company and 403 00:25:03,720 --> 00:25:07,240 Speaker 1: something in that suggests that it's different than other retail. 404 00:25:07,480 --> 00:25:11,280 Speaker 1: That's right now. You mentioned the advantage and investor could 405 00:25:11,280 --> 00:25:15,680 Speaker 1: have by say, investing in the sp and not being 406 00:25:15,720 --> 00:25:18,399 Speaker 1: exposed to G like even that would have been pretty good. 407 00:25:19,119 --> 00:25:22,480 Speaker 1: Is there something that your screening would have picked up 408 00:25:22,880 --> 00:25:25,480 Speaker 1: three years ago or two years ago or five years 409 00:25:25,480 --> 00:25:27,720 Speaker 1: ago and never g E started to enter a tail 410 00:25:27,760 --> 00:25:32,040 Speaker 1: spin that would have prevented that from getting into the portfolio. 411 00:25:32,119 --> 00:25:34,000 Speaker 1: And can you identify what that is. Yeah, And indeed, 412 00:25:34,320 --> 00:25:36,639 Speaker 1: in the case of G was our model that kicked 413 00:25:36,680 --> 00:25:39,520 Speaker 1: the company out because we actually view industrials, which is 414 00:25:39,560 --> 00:25:42,520 Speaker 1: this the industry group that G falls into, as an 415 00:25:42,560 --> 00:25:48,520 Speaker 1: advantage sector. I mean that's industrials are clearly looking to technology, 416 00:25:48,560 --> 00:25:51,800 Speaker 1: whether it's through robotics or otherwise to improve efficiencies and 417 00:25:51,920 --> 00:25:54,760 Speaker 1: what they do. So long term, we we see that 418 00:25:54,800 --> 00:25:58,840 Speaker 1: as an advantaged industry group. But the model kick G out, 419 00:25:59,240 --> 00:26:03,359 Speaker 1: and primarily the the one particular signal for for for 420 00:26:03,440 --> 00:26:07,480 Speaker 1: that company was was revenue growth rate. And so you 421 00:26:07,600 --> 00:26:11,320 Speaker 1: had a situation where it's declining revenue growth and it's 422 00:26:11,400 --> 00:26:15,640 Speaker 1: very hard for companies and publicly reported financials to fudge revenue. 423 00:26:16,400 --> 00:26:20,240 Speaker 1: They can make all kinds of adjustments to EBITDA and 424 00:26:20,359 --> 00:26:24,160 Speaker 1: other earnings metrics, but in the case of revenue, it's 425 00:26:24,160 --> 00:26:30,520 Speaker 1: pretty tough two the fudget. So they triggered the model 426 00:26:30,840 --> 00:26:34,080 Speaker 1: and got kicked out of the portfolio. Not long after 427 00:26:34,160 --> 00:26:37,280 Speaker 1: we launched our fund, you mentioned that you had thought 428 00:26:37,280 --> 00:26:41,160 Speaker 1: a lot about passive investing, the rise of passive investing. 429 00:26:41,680 --> 00:26:43,760 Speaker 1: I assume that means that you've also thought a lot 430 00:26:43,800 --> 00:26:47,760 Speaker 1: about the benchmark in disease and how those are constructed, 431 00:26:47,920 --> 00:26:49,760 Speaker 1: and in fact, you know what you're talking about. It 432 00:26:49,840 --> 00:26:54,840 Speaker 1: outvest is basically tweaking the SMP five hundred, which is 433 00:26:54,920 --> 00:27:00,119 Speaker 1: itself a benchmark index. What do you think about the 434 00:27:00,160 --> 00:27:03,080 Speaker 1: decisions that go into making the indusseries as as they 435 00:27:03,119 --> 00:27:07,800 Speaker 1: currently stand. Yeah, look, we were having we're in the 436 00:27:07,880 --> 00:27:10,520 Speaker 1: moment right now right where you have probably the most 437 00:27:10,560 --> 00:27:15,480 Speaker 1: significant change to the SMP in terms of get classification. Right. 438 00:27:15,560 --> 00:27:20,399 Speaker 1: You have a single person, David Blitzer, CEO of the SMP, 439 00:27:20,640 --> 00:27:24,280 Speaker 1: who has the ability to make these changes in and 440 00:27:24,320 --> 00:27:26,680 Speaker 1: now all of a sudden, we have something called communication 441 00:27:26,800 --> 00:27:32,040 Speaker 1: services because Telecom had only two of the index when 442 00:27:32,840 --> 00:27:35,680 Speaker 1: in two as we started this thing, I think Telecom 443 00:27:35,720 --> 00:27:39,720 Speaker 1: was a significant percentage of the SMP, right so certainly 444 00:27:39,920 --> 00:27:43,040 Speaker 1: was even ten years ago as compared to today. So 445 00:27:43,560 --> 00:27:49,360 Speaker 1: they had to make adjustments two maintain the broad diversification 446 00:27:50,480 --> 00:27:54,960 Speaker 1: of the index from a sector standpoint. That to us 447 00:27:55,680 --> 00:27:58,320 Speaker 1: is sort of a statement of support for what we're 448 00:27:58,440 --> 00:28:01,760 Speaker 1: trying to do because we we look at the SMP 449 00:28:02,560 --> 00:28:06,080 Speaker 1: as a diversified portfolio where people if they want to 450 00:28:06,080 --> 00:28:10,480 Speaker 1: diversified exposure the market, and we think all investors they've 451 00:28:10,480 --> 00:28:12,960 Speaker 1: shown us that they want to have a diversified exposure 452 00:28:13,000 --> 00:28:16,919 Speaker 1: to the general market, and in fact, institutional investors really 453 00:28:17,119 --> 00:28:19,920 Speaker 1: need to have it, as most of their investment policy 454 00:28:19,920 --> 00:28:23,280 Speaker 1: statements require them to have exposure. If if they can 455 00:28:23,359 --> 00:28:26,840 Speaker 1: get that exposure in the same diversified way like our 456 00:28:26,920 --> 00:28:30,280 Speaker 1: beta is is is almost one point oh even though 457 00:28:30,320 --> 00:28:33,919 Speaker 1: we we excluded a hundred and fifty names, if they 458 00:28:33,920 --> 00:28:37,520 Speaker 1: can get that and outperformed by the kind of margin 459 00:28:37,600 --> 00:28:39,480 Speaker 1: that we've been able to generate in a very short 460 00:28:39,520 --> 00:28:41,840 Speaker 1: period of time, and we think we can consistently do 461 00:28:41,920 --> 00:28:45,680 Speaker 1: that over time, and consistency is a is a keyword 462 00:28:45,720 --> 00:28:49,880 Speaker 1: in the asset management industry. Uh, they have to pay 463 00:28:49,880 --> 00:28:53,920 Speaker 1: attention to that. So how the the indices change and 464 00:28:54,000 --> 00:28:57,360 Speaker 1: evolve over time is going to be a significant impact, 465 00:28:57,480 --> 00:28:59,840 Speaker 1: I think on the overall market. But there is no 466 00:29:00,040 --> 00:29:03,840 Speaker 1: one that we've seen who's approached it as we have 467 00:29:04,240 --> 00:29:07,200 Speaker 1: that is flipping this process to think about what to 468 00:29:07,280 --> 00:29:09,360 Speaker 1: leave out as opposed to what to put in. Can 469 00:29:09,440 --> 00:29:12,320 Speaker 1: you tell us sort of what if, if in what 470 00:29:12,440 --> 00:29:16,480 Speaker 1: anything in your experience at Third Avenue or even with 471 00:29:16,680 --> 00:29:21,160 Speaker 1: the collapse of the concentrated credit fund sort of led 472 00:29:21,240 --> 00:29:24,880 Speaker 1: to you seeing this opportunity. Yeah, look, I I was 473 00:29:24,960 --> 00:29:28,840 Speaker 1: a a student for a long period of time of 474 00:29:28,880 --> 00:29:32,360 Speaker 1: my mentor and the founder off Third Have and being 475 00:29:32,400 --> 00:29:37,520 Speaker 1: taught about concepts like diversification as a surrogate and a 476 00:29:37,600 --> 00:29:43,080 Speaker 1: very poor surrogate for knowledge and and investing right, because 477 00:29:43,840 --> 00:29:46,280 Speaker 1: you should know more about research, what you can fundamentally 478 00:29:46,600 --> 00:29:49,400 Speaker 1: learn about a business, invest in that business, and over 479 00:29:49,440 --> 00:29:53,320 Speaker 1: long time you'll be rewarded for that patience and and 480 00:29:53,480 --> 00:29:58,560 Speaker 1: work right research. Yet consistently from the financial crisis forward, 481 00:29:59,480 --> 00:30:04,080 Speaker 1: we were able to outperform indices. And so what asset 482 00:30:04,120 --> 00:30:07,520 Speaker 1: managers like us did was we change the benchmark that 483 00:30:07,560 --> 00:30:11,160 Speaker 1: we ended up getting compared to because we looked better 484 00:30:11,160 --> 00:30:14,479 Speaker 1: against another benchmark than the original benchmark. We chose right. 485 00:30:14,520 --> 00:30:18,760 Speaker 1: We were a SMP five hundred originally measured fund and 486 00:30:18,800 --> 00:30:22,360 Speaker 1: we changed right. So what I was informed about there 487 00:30:22,400 --> 00:30:25,120 Speaker 1: is you cannot I think you cannot beat the market. 488 00:30:25,160 --> 00:30:28,640 Speaker 1: And if you can, then you're going to be in 489 00:30:28,680 --> 00:30:31,800 Speaker 1: a hedge fund charging two percent management fees and the 490 00:30:31,840 --> 00:30:35,080 Speaker 1: profits because you're a special individual who has skills that 491 00:30:35,120 --> 00:30:41,320 Speaker 1: are more extraordinary, or you're a quantitative, purely quantitative manager 492 00:30:41,360 --> 00:30:45,080 Speaker 1: who has come up with some concept that can beat 493 00:30:45,120 --> 00:30:47,520 Speaker 1: the market. And we're seeing more and more asset flows 494 00:30:47,520 --> 00:30:50,440 Speaker 1: into those types of vehicles as well. So the the 495 00:30:50,520 --> 00:30:56,160 Speaker 1: informed judgment that I made was I now believe fully 496 00:30:56,200 --> 00:31:00,240 Speaker 1: that these the market is going to evolve with more 497 00:31:00,280 --> 00:31:04,600 Speaker 1: and more flows going into these types of entities, if 498 00:31:04,680 --> 00:31:07,400 Speaker 1: just for fees, right, just just because fees are are 499 00:31:07,480 --> 00:31:11,320 Speaker 1: much less, So if we can, if we can participate 500 00:31:11,440 --> 00:31:15,440 Speaker 1: in capturing some of that flow, because we've come up 501 00:31:15,480 --> 00:31:18,400 Speaker 1: with this intuitive concept and we're thinking about a forward risk. 502 00:31:18,560 --> 00:31:23,560 Speaker 1: This is about technology disruption, which nobody's talking about. You 503 00:31:23,560 --> 00:31:26,600 Speaker 1: guys will spend all day talking yesterday about what what's 504 00:31:26,600 --> 00:31:29,720 Speaker 1: going to happen with the FED, and people study it 505 00:31:29,800 --> 00:31:32,720 Speaker 1: up upwards and downwards. But how much time do you 506 00:31:32,760 --> 00:31:39,120 Speaker 1: spend focusing on Moore's law and how that's impacting decision 507 00:31:39,160 --> 00:31:43,080 Speaker 1: making and people's rate of change? Right? I was just 508 00:31:43,240 --> 00:31:44,880 Speaker 1: I'll push back a little bit. I mean, I would say, 509 00:31:44,880 --> 00:31:47,480 Speaker 1: we we do talk about this stuff, and we talk 510 00:31:47,520 --> 00:31:51,320 Speaker 1: about vulnerable industries, and we talk about, say the clash 511 00:31:51,400 --> 00:31:56,400 Speaker 1: between Amazon and physical retail. The thing that intrigues me 512 00:31:56,600 --> 00:31:59,800 Speaker 1: most as a theory here is the idea of being 513 00:32:00,000 --> 00:32:05,120 Speaker 1: able to quantify the disruption risk and the you know, 514 00:32:05,200 --> 00:32:07,400 Speaker 1: we could talk you know one of the best performing 515 00:32:07,480 --> 00:32:10,640 Speaker 1: sectors this year has been the department stores. And so 516 00:32:10,680 --> 00:32:13,520 Speaker 1: this idea of actually being able to identify in a 517 00:32:13,560 --> 00:32:16,840 Speaker 1: systematic manner and not just sort of your gut feel 518 00:32:17,080 --> 00:32:19,760 Speaker 1: of these guys are in trouble is the part that 519 00:32:19,840 --> 00:32:24,600 Speaker 1: I find to be I'm most interested in trying to understand. Yeah, 520 00:32:24,640 --> 00:32:27,640 Speaker 1: and I would tell you that the fund and the 521 00:32:27,680 --> 00:32:32,640 Speaker 1: concept is really about long term secular decline, but it 522 00:32:32,720 --> 00:32:37,280 Speaker 1: will be technology that will be the the triggering for 523 00:32:37,400 --> 00:32:40,440 Speaker 1: that long term secular decline. So maybe department stores are 524 00:32:40,440 --> 00:32:42,960 Speaker 1: out performing because they were so under performing, but that's 525 00:32:43,000 --> 00:32:46,920 Speaker 1: a I'd argue that that's a temporary a temporary blip, 526 00:32:47,240 --> 00:32:50,120 Speaker 1: and that over time you'll continue to see deterioration in 527 00:32:50,160 --> 00:32:53,800 Speaker 1: cycular decline unless they're able to transform themselves. And there 528 00:32:53,840 --> 00:32:57,560 Speaker 1: are businesses that have been able to adjust, and it's 529 00:32:57,640 --> 00:32:59,640 Speaker 1: those companies that adjust that I think will be the 530 00:32:59,680 --> 00:33:04,560 Speaker 1: long term all Right, Well, David Bars, co founder and 531 00:33:04,680 --> 00:33:07,720 Speaker 1: principle at Outvest, thank you so much for joining us. 532 00:33:08,360 --> 00:33:25,600 Speaker 1: Thank you, Joe, Tracy really appreciate thank you. That was great. So, Joe, 533 00:33:25,720 --> 00:33:28,840 Speaker 1: I found that conversation really fascinating, not just to hear 534 00:33:28,920 --> 00:33:31,960 Speaker 1: the thoughts about what happened at Third Avenue, but also 535 00:33:32,040 --> 00:33:35,440 Speaker 1: to hear his thoughts about diversification and the rise and 536 00:33:35,520 --> 00:33:38,040 Speaker 1: passive investing, which is something that you and I have 537 00:33:38,160 --> 00:33:41,560 Speaker 1: talked about quite a bit at this point. Yeah. Absolutely. 538 00:33:41,600 --> 00:33:47,080 Speaker 1: I was going into the conversation thinking, oh, definitely the 539 00:33:47,200 --> 00:33:50,320 Speaker 1: sort of Third Avenue fun collapse would be the most 540 00:33:50,360 --> 00:33:54,000 Speaker 1: interesting part. But now I'm really intrigued sort of by 541 00:33:54,040 --> 00:33:58,800 Speaker 1: the second half. And Okay, accepting this reality that we 542 00:33:58,880 --> 00:34:02,160 Speaker 1: have now of mass of flows into passive or passive 543 00:34:02,280 --> 00:34:06,840 Speaker 1: issue vehicles, what are the approaches that makes sense for now? 544 00:34:06,880 --> 00:34:09,719 Speaker 1: Because as David said, it's pretty obvious it's just the 545 00:34:09,880 --> 00:34:14,879 Speaker 1: sort of concentrated fund management strategy, particularly on the equity side. 546 00:34:14,960 --> 00:34:17,759 Speaker 1: It's just not working for anyone. It looks like, right, 547 00:34:17,840 --> 00:34:20,279 Speaker 1: and there's actually a link with um, you know what 548 00:34:20,360 --> 00:34:23,319 Speaker 1: you said about Third Avenue, this notion that you know, 549 00:34:23,400 --> 00:34:26,799 Speaker 1: if you're going to have a public facing fund, and 550 00:34:26,960 --> 00:34:29,640 Speaker 1: especially an open ended one, you better make sure that 551 00:34:29,680 --> 00:34:33,960 Speaker 1: it's diversified because otherwise people tend to get angry very 552 00:34:34,040 --> 00:34:36,480 Speaker 1: quickly and tend to pull their money out very quickly, 553 00:34:36,640 --> 00:34:40,040 Speaker 1: Whereas if you're investing, you know, in a broad index, 554 00:34:41,040 --> 00:34:44,000 Speaker 1: it's kind of like that old maxim, that business maximum. 555 00:34:44,040 --> 00:34:46,920 Speaker 1: You know, no one ever got fired for buying IBM, 556 00:34:47,000 --> 00:34:49,799 Speaker 1: No one ever got fired for buying the SMP five 557 00:34:49,880 --> 00:34:53,680 Speaker 1: hundred and making you know, little tweaks to it right absolutely, 558 00:34:53,680 --> 00:34:56,600 Speaker 1: And this idea that maybe you could basically get the 559 00:34:56,600 --> 00:35:00,719 Speaker 1: exact same beta, the exact same diversification with three fifty 560 00:35:00,800 --> 00:35:05,360 Speaker 1: or four hundred of the SP stocks is pretty interesting. 561 00:35:05,840 --> 00:35:09,040 Speaker 1: And you're probably not going to get fired for missing 562 00:35:09,080 --> 00:35:12,200 Speaker 1: out on one of those hundred stocks they've got kicked out. 563 00:35:12,560 --> 00:35:14,160 Speaker 1: And I like the idea that if they did turn 564 00:35:14,200 --> 00:35:17,319 Speaker 1: themselves around, so maybe like some department store really does 565 00:35:18,080 --> 00:35:20,920 Speaker 1: figure out the magic sauce to save retail, then maybe 566 00:35:21,239 --> 00:35:24,200 Speaker 1: you could get back into the fund. On fundamental reasons, 567 00:35:25,560 --> 00:35:28,440 Speaker 1: I am rooting for Sears. I have a soft spot 568 00:35:28,480 --> 00:35:30,840 Speaker 1: for Sears. I hope they they are one of the 569 00:35:30,880 --> 00:35:33,759 Speaker 1: ones that can redeem themselves. Who knows, I'm rooting for 570 00:35:33,800 --> 00:35:37,879 Speaker 1: them to it. Okay, all right, Well this has been 571 00:35:38,160 --> 00:35:41,600 Speaker 1: another episode of the Odd Lots podcast. I'm Tracy Alloway. 572 00:35:41,680 --> 00:35:44,480 Speaker 1: You can follow me on Twitter at Tracy Alloway, and 573 00:35:44,480 --> 00:35:47,080 Speaker 1: I'm Joe Wisa though. You can follow me on Twitter 574 00:35:47,360 --> 00:35:50,640 Speaker 1: at the Stalwart and you should follow our producer on 575 00:35:50,680 --> 00:35:53,480 Speaker 1: Twitter He's told for Foreheads. His handle is at for 576 00:35:53,719 --> 00:35:57,680 Speaker 1: headst and followed the Bloomberg head of podcast Francesco leaving 577 00:35:57,880 --> 00:36:08,320 Speaker 1: at Francesca Today. Thanks for listening.