1 00:00:02,200 --> 00:00:06,760 Speaker 1: This is Master's in Business with Barry Riddholts on Boomberg Radio. 2 00:00:07,240 --> 00:00:10,160 Speaker 1: This weekend on the podcast, I have an extra special guest. 3 00:00:10,320 --> 00:00:12,400 Speaker 1: Her name is Sarah Ketterer and she is the co 4 00:00:12,520 --> 00:00:17,400 Speaker 1: founder and CEO of Causeway Capital Management. They run about 5 00:00:17,560 --> 00:00:20,880 Speaker 1: fifty two billion dollars UH. She founded the company in 6 00:00:20,960 --> 00:00:23,720 Speaker 1: June two thousand and one and is a value and 7 00:00:23,840 --> 00:00:28,840 Speaker 1: international investor. If you were at all interested in understanding 8 00:00:29,320 --> 00:00:33,680 Speaker 1: how to use quantitative strategies as part of a value 9 00:00:34,200 --> 00:00:37,760 Speaker 1: portfolio build, or if you're just interested to hear about 10 00:00:37,760 --> 00:00:41,600 Speaker 1: how someone put a company together over twenty years and 11 00:00:41,880 --> 00:00:44,879 Speaker 1: grew it to over fifty billion dollars, then you're going 12 00:00:44,920 --> 00:00:49,080 Speaker 1: to find this conversation to be absolutely fascinating. So, with 13 00:00:49,120 --> 00:00:54,120 Speaker 1: no further ado, my interview of Sarah Kettra This is 14 00:00:54,280 --> 00:00:58,120 Speaker 1: Master's in Business with Barry Riddholts on boom Berg Radio. 15 00:00:58,600 --> 00:01:02,440 Speaker 1: My special guest today is Sarah Keta. She is the 16 00:01:02,480 --> 00:01:07,440 Speaker 1: CEO and co founder of Causeway, a fifty two billion 17 00:01:07,480 --> 00:01:11,280 Speaker 1: dollar asset manager. She's responsible for all of the investment 18 00:01:11,360 --> 00:01:14,720 Speaker 1: research across all sectors at the firm. She was named 19 00:01:14,959 --> 00:01:18,880 Speaker 1: morning Star International Manager of the Year in twenty seventeen. 20 00:01:19,319 --> 00:01:22,920 Speaker 1: She is also a member of the Stanford University Board 21 00:01:22,920 --> 00:01:25,480 Speaker 1: of Trustees. She is co chair of the l A 22 00:01:25,560 --> 00:01:28,839 Speaker 1: World Affairs Council and town Hall Director of the Los 23 00:01:28,840 --> 00:01:32,600 Speaker 1: Angeles Philharmonic Music Center Foundation, as well as chair of 24 00:01:32,640 --> 00:01:37,640 Speaker 1: the Investment Committee. Sarah Ketterer, Welcome to Bloomberg. Thank you, Marry. 25 00:01:37,720 --> 00:01:40,080 Speaker 1: Let's start a little bit with your background. You you 26 00:01:40,120 --> 00:01:43,839 Speaker 1: have an interesting work history. You come out of Stanford 27 00:01:43,920 --> 00:01:46,160 Speaker 1: and then talk where you got your m b a. 28 00:01:46,840 --> 00:01:50,880 Speaker 1: And eventually end up at Merrill Lynch where you were 29 00:01:50,960 --> 00:01:54,560 Speaker 1: running one of their international investment firms. Tell us a 30 00:01:54,560 --> 00:01:57,760 Speaker 1: little bit about that. I've finished graduate school thinking I 31 00:01:57,800 --> 00:02:00,320 Speaker 1: wanted to be an investment banker, which turns out I 32 00:02:00,360 --> 00:02:03,240 Speaker 1: didn't know it then is ideal training to be an 33 00:02:03,280 --> 00:02:07,960 Speaker 1: investment manager. And the distinction is one is a transactions business, banking, 34 00:02:08,000 --> 00:02:12,600 Speaker 1: and the other is very much a deep thinking, valuation 35 00:02:12,840 --> 00:02:18,400 Speaker 1: centric investing type business. And the banking didn't after a 36 00:02:18,400 --> 00:02:21,200 Speaker 1: few years inspire me, so I left to start a 37 00:02:21,280 --> 00:02:24,960 Speaker 1: database business, which if I could be I could have 38 00:02:25,000 --> 00:02:27,480 Speaker 1: an avatar. That's what the avatar would do, because that's 39 00:02:27,480 --> 00:02:30,800 Speaker 1: a wonderful business. Right now, I'm just a consumer of 40 00:02:30,919 --> 00:02:35,600 Speaker 1: data but that turned out to be as many startups 41 00:02:35,639 --> 00:02:38,440 Speaker 1: are money losing and I needed to work living. I 42 00:02:38,480 --> 00:02:40,519 Speaker 1: was living at the time in New York City, so 43 00:02:40,760 --> 00:02:43,920 Speaker 1: I got a job at hotch Kiss and Wiley. My 44 00:02:44,000 --> 00:02:46,400 Speaker 1: late father, John hotch Kiss was the hotch Kiss and 45 00:02:46,440 --> 00:02:50,079 Speaker 1: George Wiley his business partner, and they had a firm 46 00:02:50,200 --> 00:02:52,840 Speaker 1: that was thriving but had no international equity. So I 47 00:02:52,840 --> 00:02:56,800 Speaker 1: got hired to bring my data and help start international equity. 48 00:02:56,960 --> 00:02:58,880 Speaker 1: You alluded at what I was about to ask you, 49 00:02:59,000 --> 00:03:03,440 Speaker 1: how did working in a data startup impact your view 50 00:03:03,520 --> 00:03:07,360 Speaker 1: of investment? Well, I had a very good idea looking 51 00:03:07,400 --> 00:03:11,600 Speaker 1: at all that data, how much it needed to be 52 00:03:12,000 --> 00:03:17,240 Speaker 1: cleansed and categorized, and that was beyond my scope. This 53 00:03:17,320 --> 00:03:21,480 Speaker 1: was this was the nineteen nine when the tools we 54 00:03:21,520 --> 00:03:24,800 Speaker 1: have today did not exist. So I was delighted to 55 00:03:24,880 --> 00:03:28,760 Speaker 1: hand over the data and move on to the basics 56 00:03:28,880 --> 00:03:32,920 Speaker 1: of asset management. So how did Hodgkiss and Wiley eventually 57 00:03:33,320 --> 00:03:38,160 Speaker 1: become affiliated with Merrill Lynch. It's true of many investment managers, 58 00:03:38,160 --> 00:03:42,320 Speaker 1: particularly the time when they're run by aging founders. The 59 00:03:42,400 --> 00:03:45,040 Speaker 1: founders want to settle their estate, and this was true 60 00:03:45,040 --> 00:03:49,160 Speaker 1: of George Wiley. Both extraordinary investors, But he was in 61 00:03:49,200 --> 00:03:52,720 Speaker 1: his early seventies when I arrived, and it was time 62 00:03:52,760 --> 00:03:56,720 Speaker 1: to do something with what they'd built. So they sold 63 00:03:56,760 --> 00:04:00,839 Speaker 1: it to Merrill lynch In and therefore I became an 64 00:04:00,840 --> 00:04:04,400 Speaker 1: employee along with a person who became my business partner, 65 00:04:04,480 --> 00:04:07,960 Speaker 1: Harry Hartford. We met each other in and then by 66 00:04:08,920 --> 00:04:11,920 Speaker 1: we were working for a completely different firm, and they 67 00:04:12,000 --> 00:04:14,640 Speaker 1: ran it, it seems more or less from the outside 68 00:04:15,120 --> 00:04:19,240 Speaker 1: as an independent subsidiary. It didn't get subsumed into the 69 00:04:19,279 --> 00:04:22,520 Speaker 1: greater mother Meryl or how did that play out? Yeah, 70 00:04:22,680 --> 00:04:26,680 Speaker 1: it was rough, a bit rough, because Meryl had aspirations 71 00:04:26,720 --> 00:04:29,039 Speaker 1: for asset growth. And what I've learned over the last 72 00:04:29,040 --> 00:04:32,080 Speaker 1: couple of decades is asset growth should never be your 73 00:04:32,160 --> 00:04:36,960 Speaker 1: number one goal if you're an investment manager, even secret goal. 74 00:04:37,320 --> 00:04:40,719 Speaker 1: Your goal should always be satisfy your clients and the 75 00:04:40,760 --> 00:04:44,040 Speaker 1: assets will come. And Meryl found that Hotchkiss and Well 76 00:04:44,080 --> 00:04:47,560 Speaker 1: I didn't have the ability to grow fast enough and 77 00:04:47,680 --> 00:04:50,520 Speaker 1: ultimately decided to sell it. And so what happened then 78 00:04:51,080 --> 00:04:53,640 Speaker 1: I had a hard time. By that time, I couldn't 79 00:04:53,720 --> 00:04:57,520 Speaker 1: look my clients in the eye, nor could Harry and say, ah, 80 00:04:57,560 --> 00:04:59,320 Speaker 1: this is going to be good for you we're going 81 00:04:59,400 --> 00:05:01,640 Speaker 1: to now be part of this other firm that's known 82 00:05:02,200 --> 00:05:05,440 Speaker 1: for its growth investing. We we just couldn't do that. 83 00:05:05,520 --> 00:05:10,880 Speaker 1: It was beyond our abilities to to tell a lie. 84 00:05:11,200 --> 00:05:16,080 Speaker 1: So we concocted a to just be began to brainstorm 85 00:05:16,160 --> 00:05:19,400 Speaker 1: how would we want to see a great asset manager, 86 00:05:19,400 --> 00:05:21,560 Speaker 1: What would it look like, what would be the characteristics? 87 00:05:22,040 --> 00:05:24,719 Speaker 1: And we had an idea of best practices and worst 88 00:05:24,800 --> 00:05:29,120 Speaker 1: we'd seen them all and choosing the best. We put 89 00:05:29,120 --> 00:05:32,840 Speaker 1: together a business plan for a Causeway and left in 90 00:05:33,160 --> 00:05:36,279 Speaker 1: two thousand one and got some seed capital and spent 91 00:05:36,320 --> 00:05:39,679 Speaker 1: the first three years losing lots of money but hiring 92 00:05:39,720 --> 00:05:42,160 Speaker 1: some of the best people in the industry. Losing money 93 00:05:42,200 --> 00:05:46,640 Speaker 1: as an operational firm, not necessarily, it was good. Two 94 00:05:46,640 --> 00:05:51,640 Speaker 1: thousand one post the technology, media and telecommunications bubble was 95 00:05:51,680 --> 00:05:55,919 Speaker 1: an excellent time to start a value oriented manager. We 96 00:05:55,960 --> 00:05:58,240 Speaker 1: had the wind at our back and value stocks did 97 00:05:58,360 --> 00:06:01,480 Speaker 1: very well. We owned a lot of what are It's 98 00:06:01,520 --> 00:06:04,520 Speaker 1: interesting because back then value with low beta intended to 99 00:06:04,560 --> 00:06:09,039 Speaker 1: be consumer staples and other industries that today are untouchable 100 00:06:09,120 --> 00:06:12,920 Speaker 1: valuation wise, they're too expensive. And those stocks stayed extremely well, 101 00:06:13,320 --> 00:06:16,240 Speaker 1: and we grew very quickly and we also had the 102 00:06:16,400 --> 00:06:20,039 Speaker 1: benefit of being unique in that. Causeway even from two 103 00:06:20,040 --> 00:06:24,359 Speaker 1: thousand one has been a convergence of fundamental investing along 104 00:06:24,400 --> 00:06:27,479 Speaker 1: with quantitative research. So tell us a little bit about that. 105 00:06:27,560 --> 00:06:32,160 Speaker 1: How do you emerge quant research with fundamental really bottoms 106 00:06:32,240 --> 00:06:35,520 Speaker 1: up your stock picker? Essentially, how do you merge quantitative 107 00:06:35,600 --> 00:06:39,560 Speaker 1: with bottoms up stock picking? What we do fundamentally is 108 00:06:39,720 --> 00:06:43,120 Speaker 1: very bottom up in its orientation. But I learned this 109 00:06:43,240 --> 00:06:48,440 Speaker 1: was back in the late nineties before forming Causeway, that 110 00:06:48,720 --> 00:06:51,480 Speaker 1: many of our competitors had no idea what kind of 111 00:06:51,560 --> 00:06:54,400 Speaker 1: risk they were taking. And that's where quant is so 112 00:06:54,680 --> 00:06:59,640 Speaker 1: incredibly precise and effective, because our quant colleagues showed us 113 00:06:59,760 --> 00:07:02,919 Speaker 1: right from the start they could disaggregate the risk. They 114 00:07:02,960 --> 00:07:04,920 Speaker 1: could show us what sort of risk factors we had 115 00:07:04,960 --> 00:07:09,000 Speaker 1: in the portfolio systematic risk factors. We knew all about 116 00:07:09,040 --> 00:07:12,600 Speaker 1: the idiosyncratic the company specific, but when it came to 117 00:07:12,960 --> 00:07:16,920 Speaker 1: how much cyclicality we were taking, or volatility risk, or 118 00:07:17,360 --> 00:07:20,960 Speaker 1: value risk, or or any other of these major market 119 00:07:21,040 --> 00:07:24,560 Speaker 1: risk size risk for example, that was illuminating. Now today 120 00:07:24,560 --> 00:07:28,360 Speaker 1: it's sort of whole hum humdrum, But in the late 121 00:07:28,480 --> 00:07:32,080 Speaker 1: nineties that was a revolutionary and so our bottom up 122 00:07:32,080 --> 00:07:36,160 Speaker 1: process is very much fundamental stock selection combined with quant 123 00:07:36,280 --> 00:07:40,800 Speaker 1: risk control, and therefore the portfolio is inherently diversified, so 124 00:07:40,840 --> 00:07:45,000 Speaker 1: it's less risky, less volatile than a portfolio assembled without 125 00:07:45,080 --> 00:07:48,440 Speaker 1: using a quant overla comment, that's the case, and then 126 00:07:48,520 --> 00:07:52,200 Speaker 1: quantitatively we use fundamental to make the quant decisions more 127 00:07:52,240 --> 00:07:56,560 Speaker 1: accurate because our quant approach in emerging markets, these are 128 00:07:56,640 --> 00:08:00,960 Speaker 1: very broad portfolios that are the stocks are effectively assemble 129 00:08:01,040 --> 00:08:05,520 Speaker 1: statistically and fundamentally, we're actually meeting with the companies that 130 00:08:05,560 --> 00:08:08,480 Speaker 1: are in that portfolio, not all, but many, making eye 131 00:08:08,480 --> 00:08:12,280 Speaker 1: contact with management, probing them on their corporate governance efficacy. 132 00:08:12,360 --> 00:08:16,160 Speaker 1: And this makes our quant we believe, over the long term, 133 00:08:16,240 --> 00:08:19,440 Speaker 1: much more effective than just a pure computer driven process. 134 00:08:20,080 --> 00:08:23,760 Speaker 1: Quite quite interesting. Let's talk a little bit about the 135 00:08:23,800 --> 00:08:26,720 Speaker 1: company you founded in two thousand and one. What's it 136 00:08:26,880 --> 00:08:31,240 Speaker 1: like being a woman co founder and CEO in finance 137 00:08:31,680 --> 00:08:35,360 Speaker 1: that just seems to have an awful lot of dudes 138 00:08:35,600 --> 00:08:39,800 Speaker 1: running everything. And I use that word especially because it 139 00:08:39,920 --> 00:08:43,719 Speaker 1: seems to be just rampant and there aren't a lot 140 00:08:43,760 --> 00:08:46,959 Speaker 1: of people like you running fifty billion dollar farms. Yes, 141 00:08:47,440 --> 00:08:51,640 Speaker 1: that's true, and not only do we recognize it a causeway. 142 00:08:51,920 --> 00:08:54,680 Speaker 1: It does help having a female CEO, no doubt, because 143 00:08:55,280 --> 00:08:58,040 Speaker 1: it shows the other women in our organization there is 144 00:08:58,640 --> 00:09:01,040 Speaker 1: there's no limit, there's no last ceiling. Then go all 145 00:09:01,040 --> 00:09:03,040 Speaker 1: the way to the top. But we do find that 146 00:09:03,080 --> 00:09:06,640 Speaker 1: the pool of women to choose from is pretty small, 147 00:09:06,720 --> 00:09:09,480 Speaker 1: even in graduate schools of business, that there are fewer 148 00:09:09,520 --> 00:09:13,160 Speaker 1: women than men almost universally, and have those have those 149 00:09:13,240 --> 00:09:16,320 Speaker 1: numbers kind of a little bit, but not a whole 150 00:09:16,320 --> 00:09:19,679 Speaker 1: lot of nowhere near fifty as much as the graduate 151 00:09:19,679 --> 00:09:22,920 Speaker 1: schools would like to think otherwise. And that means the 152 00:09:22,960 --> 00:09:26,199 Speaker 1: pools already smaller from a recruiting perspective. And of those 153 00:09:26,679 --> 00:09:30,719 Speaker 1: many are interested in other careers. They're enchanted by technology, 154 00:09:30,760 --> 00:09:33,160 Speaker 1: and finance seems to have lost some of its luster. 155 00:09:33,800 --> 00:09:35,679 Speaker 1: But there are groups of these women out there and 156 00:09:35,679 --> 00:09:37,640 Speaker 1: it is up to us to find them. So for 157 00:09:37,679 --> 00:09:39,400 Speaker 1: a while we thought of it like an ocean of 158 00:09:39,480 --> 00:09:42,120 Speaker 1: graphic experiment. We would tag them in like the whales, 159 00:09:42,160 --> 00:09:45,960 Speaker 1: and where did they go? Exactly where did they go? 160 00:09:46,559 --> 00:09:49,520 Speaker 1: And uh, that didn't turn out to be very successful. 161 00:09:49,760 --> 00:09:53,199 Speaker 1: But a former client of mine absolutely brilliant idea. This 162 00:09:53,320 --> 00:09:55,720 Speaker 1: is Seema Hangarani. If she ran the city of New 163 00:09:55,800 --> 00:09:59,480 Speaker 1: York's equities for years. Their pension fund started something called 164 00:09:59,480 --> 00:10:02,439 Speaker 1: Girls Who in Vest, and then we Causeway got behind that. 165 00:10:03,040 --> 00:10:05,839 Speaker 1: So we not only have been an early supporter financially, 166 00:10:05,880 --> 00:10:08,920 Speaker 1: but we're also we can take these interns. Is the 167 00:10:08,960 --> 00:10:12,360 Speaker 1: fourth year we've had an internet usually arising sophomore junior 168 00:10:12,400 --> 00:10:15,200 Speaker 1: in college, a young woman brilliant. They have to get 169 00:10:15,200 --> 00:10:18,240 Speaker 1: through a tough application process, so Barry, in effect, we 170 00:10:18,280 --> 00:10:21,360 Speaker 1: are seating the pipeline. What's your involvement with Girls Who Invest? 171 00:10:21,440 --> 00:10:24,520 Speaker 1: You're on one of the advisory boards. I'm on their 172 00:10:24,720 --> 00:10:27,680 Speaker 1: advisory board and it's an honor to be a part 173 00:10:27,679 --> 00:10:30,280 Speaker 1: of that organization. It's very inspiring for the women in 174 00:10:30,320 --> 00:10:33,760 Speaker 1: my organization because they can see that Causeway is actively 175 00:10:33,800 --> 00:10:37,320 Speaker 1: involved in something that's quasi philanthropic for us in that 176 00:10:37,600 --> 00:10:40,319 Speaker 1: these young women are so young, they're nineteen or twenty 177 00:10:40,400 --> 00:10:42,840 Speaker 1: years old. We can't hire them for years. They need 178 00:10:42,840 --> 00:10:45,600 Speaker 1: to finish college and then typically we expect them to 179 00:10:45,600 --> 00:10:49,760 Speaker 1: get their cf A and or an NBA before they're 180 00:10:49,920 --> 00:10:54,920 Speaker 1: hirable as Causeway analysts. So that's years and years from now. 181 00:10:55,360 --> 00:10:57,959 Speaker 1: But you guys are long term investors. We are. This 182 00:10:58,000 --> 00:11:01,680 Speaker 1: sounds like another long term investment where you're thinking in 183 00:11:01,760 --> 00:11:04,679 Speaker 1: terms of decades, not quarters. Well, this is again if 184 00:11:04,679 --> 00:11:06,360 Speaker 1: you're going to go, if you have to think about 185 00:11:06,520 --> 00:11:10,200 Speaker 1: the problem and in a long term perspective, this is 186 00:11:10,200 --> 00:11:13,080 Speaker 1: how to deal with it is get women in college 187 00:11:13,080 --> 00:11:15,679 Speaker 1: who are connected through social media to let each other 188 00:11:15,760 --> 00:11:18,440 Speaker 1: know how exciting this is. And after our interns the 189 00:11:18,480 --> 00:11:20,840 Speaker 1: next year they get another job and investment management and 190 00:11:20,880 --> 00:11:23,920 Speaker 1: so forth, and best of all for us, so of 191 00:11:23,960 --> 00:11:25,840 Speaker 1: course there's something in it for us other than having 192 00:11:25,840 --> 00:11:30,160 Speaker 1: more women. It's a brand building exercise. It's reputation enhancing. 193 00:11:30,240 --> 00:11:33,000 Speaker 1: So they tell their friends, who tell their friends how 194 00:11:33,040 --> 00:11:35,640 Speaker 1: great it is to work a causeway, and that in 195 00:11:35,679 --> 00:11:38,480 Speaker 1: turn gets back to the employees. So it's a virtuous 196 00:11:38,480 --> 00:11:41,439 Speaker 1: cycle in terms of culture and reputation. And girls who 197 00:11:41,480 --> 00:11:44,800 Speaker 1: invest is four years or five years old for four 198 00:11:44,800 --> 00:11:48,320 Speaker 1: and a half, so you're five years away from seeing 199 00:11:48,360 --> 00:11:52,160 Speaker 1: the first um harvest, so to speak. Of women who 200 00:11:52,360 --> 00:11:55,600 Speaker 1: entered this as this group, as as interns, made their 201 00:11:55,600 --> 00:11:58,160 Speaker 1: way through the process and eventually will be getting hired. 202 00:11:59,280 --> 00:12:01,880 Speaker 1: And apparently the retention in the industry is very high. 203 00:12:01,920 --> 00:12:04,480 Speaker 1: They're not deciding to go to something else, which to 204 00:12:04,559 --> 00:12:06,640 Speaker 1: me is a testament to what they were, what they 205 00:12:06,720 --> 00:12:09,640 Speaker 1: learned in their four weeks on one of these university 206 00:12:09,679 --> 00:12:12,280 Speaker 1: campuses over the summer and their first internship, and how 207 00:12:12,360 --> 00:12:15,120 Speaker 1: much they enjoyed the industry. So it'll take some time, 208 00:12:15,160 --> 00:12:17,600 Speaker 1: but we started with thirty interns and this last summer 209 00:12:17,679 --> 00:12:22,040 Speaker 1: was a hundred fifty interns and rising quite quite interesting. 210 00:12:22,320 --> 00:12:25,600 Speaker 1: Let's talk a little bit about the Causeway portfolio. Um 211 00:12:25,679 --> 00:12:30,600 Speaker 1: your global value portfolio has about fifty one holdings, average 212 00:12:30,600 --> 00:12:33,920 Speaker 1: size about seventy billion dollars. What do you do with 213 00:12:34,360 --> 00:12:37,080 Speaker 1: that sort of portfolio, what do you use for a 214 00:12:37,120 --> 00:12:42,199 Speaker 1: benchmark and how do you expect clients to judge your performance, 215 00:12:42,559 --> 00:12:47,040 Speaker 1: because that's not the most typical international portfolio. Yes, are 216 00:12:47,080 --> 00:12:50,280 Speaker 1: both our international our global portfolios are fairly concentrated Global, 217 00:12:50,320 --> 00:12:53,080 Speaker 1: more soil international because it has the enormous US market 218 00:12:53,120 --> 00:12:56,320 Speaker 1: to choose from. As well. A number of value stocks 219 00:12:56,320 --> 00:13:00,200 Speaker 1: out there has gotten larger over the last few years 220 00:13:00,240 --> 00:13:04,400 Speaker 1: and especially true in twenty nineteen year to date, meaning 221 00:13:04,440 --> 00:13:07,840 Speaker 1: investors have abandoned these stocks. They don't want chemicals, they 222 00:13:07,880 --> 00:13:11,080 Speaker 1: don't want autos, they don't want banks, and especially don't 223 00:13:11,120 --> 00:13:14,560 Speaker 1: want them outside of the US market. And for a 224 00:13:14,679 --> 00:13:19,400 Speaker 1: value manager, this is the time. I haven't seen anything 225 00:13:19,440 --> 00:13:22,960 Speaker 1: like this, nor have my colleagues since the two thousand 226 00:13:22,960 --> 00:13:26,079 Speaker 1: when these stocks were all Dialue stocks were abandoned, or 227 00:13:26,240 --> 00:13:28,199 Speaker 1: the end of two thousand and eight when they were 228 00:13:28,240 --> 00:13:32,000 Speaker 1: they were left for dead. So that's one of the 229 00:13:32,000 --> 00:13:34,040 Speaker 1: reasons why we have such a large market average market 230 00:13:34,120 --> 00:13:36,360 Speaker 1: cap you mentioned seventy billion dollars. These are some of 231 00:13:36,360 --> 00:13:38,400 Speaker 1: these are very large companies. You've heard of them. You've 232 00:13:38,920 --> 00:13:42,599 Speaker 1: German giants like b A, S f Or or Volkswagen 233 00:13:43,080 --> 00:13:46,000 Speaker 1: the parent company, if not only Volkswagen Brown but portion 234 00:13:46,040 --> 00:13:51,040 Speaker 1: Audi at the forefront of electric vehicles at Barclay's Bank 235 00:13:51,240 --> 00:13:54,880 Speaker 1: or Lloyd's in the UK now downtrodden due to Brexit, 236 00:13:54,960 --> 00:13:59,199 Speaker 1: but sound financial institutions. The market is treating them as 237 00:13:59,240 --> 00:14:02,000 Speaker 1: if they are all going to shrink and just as 238 00:14:02,040 --> 00:14:04,400 Speaker 1: if their growth rates are negative, which is true of 239 00:14:04,480 --> 00:14:07,920 Speaker 1: the entire value index. So let's use a couple of 240 00:14:07,920 --> 00:14:11,040 Speaker 1: those examples because I want to dig into your thought process. 241 00:14:11,400 --> 00:14:16,440 Speaker 1: Volkswagen has their big diesel scandal, the emissions rigging scandal, 242 00:14:16,640 --> 00:14:20,040 Speaker 1: the stock gets clawbered. You immediately look at that as 243 00:14:20,080 --> 00:14:24,920 Speaker 1: an opportunity. What is the internal process like when your 244 00:14:24,960 --> 00:14:28,280 Speaker 1: investment committee sits down and says, let's talk about Volkswagen 245 00:14:28,320 --> 00:14:30,480 Speaker 1: and do we want to step into this mess. We 246 00:14:30,720 --> 00:14:35,320 Speaker 1: divide fundamental research into six clusters. Their sector oriented and 247 00:14:35,400 --> 00:14:39,680 Speaker 1: our industrials cluster looks after automobile, so the it also 248 00:14:39,720 --> 00:14:42,640 Speaker 1: covers consumer discretionary and the head of that as a 249 00:14:43,760 --> 00:14:48,560 Speaker 1: excellent portfolio manager named Jonathan Ang, and he saw this problem. 250 00:14:48,720 --> 00:14:51,120 Speaker 1: We didn't know the company was committing fraud in September 251 00:14:51,160 --> 00:14:54,880 Speaker 1: off when diesel Gate was announced, but it took us 252 00:14:54,920 --> 00:14:57,640 Speaker 1: a couple of weeks and with Jonathan leadership, to do 253 00:14:57,760 --> 00:15:02,360 Speaker 1: the research to determine based on prior recalls of vehicles 254 00:15:02,400 --> 00:15:07,280 Speaker 1: that the sticky accelerators at Toyota. Remember Whens Congress had 255 00:15:07,360 --> 00:15:10,240 Speaker 1: keep those cards in the garage. They're dangerous. They were. 256 00:15:10,280 --> 00:15:12,360 Speaker 1: They turned out the drivers couldn't tell the break from 257 00:15:12,360 --> 00:15:17,600 Speaker 1: the accelerator. But that is similar yeah, GM, the sticky 258 00:15:17,640 --> 00:15:22,400 Speaker 1: the ignition switches, and some of those incidents caused deaths. 259 00:15:22,400 --> 00:15:25,600 Speaker 1: In this case, it's a pollution problem. So we were 260 00:15:25,640 --> 00:15:29,000 Speaker 1: able to make an assessment of both the monetary damages 261 00:15:29,040 --> 00:15:34,600 Speaker 1: associated with the fines and regulatory problem fees, as well 262 00:15:34,640 --> 00:15:38,280 Speaker 1: as the recall costs, the marketing spend but the reason 263 00:15:38,320 --> 00:15:40,440 Speaker 1: why we went into that stock is emblematic of what 264 00:15:40,520 --> 00:15:43,880 Speaker 1: we do would causeway. Fundamentally, we find companies with great 265 00:15:43,920 --> 00:15:50,160 Speaker 1: assets with tremendous financial strength. So that company, Volkswagen, had 266 00:15:50,760 --> 00:15:54,440 Speaker 1: twenty four billion euros of net cash on the balance 267 00:15:54,440 --> 00:15:56,440 Speaker 1: sheet before they went in net cash, so that means 268 00:15:56,720 --> 00:15:59,640 Speaker 1: they had no net debt when they went into this scandal, 269 00:16:00,320 --> 00:16:02,920 Speaker 1: and they had operating margins a third of that of 270 00:16:02,960 --> 00:16:06,240 Speaker 1: their best competitors. That to us is a it's a 271 00:16:06,280 --> 00:16:11,960 Speaker 1: flashing red light of wow, this company is really poorly managed. 272 00:16:12,000 --> 00:16:13,960 Speaker 1: And if we can be there at the time when 273 00:16:14,040 --> 00:16:17,600 Speaker 1: new management steps in and runs the business more efficiently, 274 00:16:17,640 --> 00:16:22,240 Speaker 1: if we can influence them as soft activists making not 275 00:16:22,320 --> 00:16:25,560 Speaker 1: talking about next quarter, but talking about the long term 276 00:16:25,600 --> 00:16:28,560 Speaker 1: investors multiple years exactly. We have a two year price 277 00:16:28,640 --> 00:16:31,360 Speaker 1: target on all two hundred stocks we follow closely, of 278 00:16:31,440 --> 00:16:33,920 Speaker 1: which that you mentioned the fifty one in the portfolio, 279 00:16:34,120 --> 00:16:37,400 Speaker 1: they are a subset of that. And we went to 280 00:16:37,520 --> 00:16:39,560 Speaker 1: management and said, you have a crisis on your hands. 281 00:16:39,560 --> 00:16:42,400 Speaker 1: What are you going to do about it? And they 282 00:16:42,400 --> 00:16:44,920 Speaker 1: had to replace all their senior people and then some 283 00:16:45,560 --> 00:16:48,440 Speaker 1: But this this company, if it weren't for the fact 284 00:16:48,440 --> 00:16:50,760 Speaker 1: we were in a trade war, and the and the 285 00:16:50,800 --> 00:16:54,440 Speaker 1: global investment community seems to be worried deeply about recession. 286 00:16:55,000 --> 00:16:57,760 Speaker 1: This stock would be much higher than it is today, 287 00:16:57,920 --> 00:16:59,600 Speaker 1: are you? Are you guys still well? First of all, 288 00:17:01,440 --> 00:17:04,320 Speaker 1: VW has done pretty well, hasn't it. It's put on 289 00:17:04,400 --> 00:17:07,840 Speaker 1: from its lows about fifty in local currency terms. Not 290 00:17:07,920 --> 00:17:10,399 Speaker 1: too shabby. It isn't too shabby, but it could be 291 00:17:10,560 --> 00:17:13,160 Speaker 1: much better. So I assume you're still along the position. 292 00:17:13,280 --> 00:17:16,400 Speaker 1: Still along the position, let's talk a little bit about 293 00:17:16,440 --> 00:17:20,520 Speaker 1: the state of the world, um, both here and in Europe. 294 00:17:21,040 --> 00:17:25,119 Speaker 1: Um you mentioned earlier, the trade war and tariffs is 295 00:17:25,160 --> 00:17:28,600 Speaker 1: having a problem a lot of Europeans who are fearful 296 00:17:28,800 --> 00:17:33,399 Speaker 1: of recession. UH Germany is either in recession or about 297 00:17:33,440 --> 00:17:36,040 Speaker 1: to be. And who knows what the UK is going 298 00:17:36,080 --> 00:17:39,359 Speaker 1: to do to themselves with their Brexit, whether it's a 299 00:17:39,359 --> 00:17:41,680 Speaker 1: hard Brexit or or a heart of Breaxit it looks 300 00:17:41,720 --> 00:17:45,280 Speaker 1: like as the choices, how do you deal with this 301 00:17:45,400 --> 00:17:50,720 Speaker 1: sort of global mayhem and distractions when you're investing internationally? Well, 302 00:17:50,760 --> 00:17:52,920 Speaker 1: to some degree, the more mayhem the better if you're 303 00:17:52,920 --> 00:17:57,720 Speaker 1: a value investor, because that's when invest other investors discard 304 00:17:57,880 --> 00:18:02,840 Speaker 1: great companies and our mantra as value investors is there's 305 00:18:03,040 --> 00:18:06,320 Speaker 1: always a price. There's a price for everything, no matter 306 00:18:06,440 --> 00:18:08,320 Speaker 1: what it is. At some point in time you say 307 00:18:08,400 --> 00:18:11,320 Speaker 1: that's just too cheap. I think the biggest problem for 308 00:18:11,359 --> 00:18:15,960 Speaker 1: Europe is that investors appeared to have become despondent, and 309 00:18:16,040 --> 00:18:20,000 Speaker 1: the quintupling of central bank balance sheets from early two 310 00:18:20,000 --> 00:18:24,000 Speaker 1: thousand nine has led to this wave of money washing 311 00:18:24,080 --> 00:18:28,679 Speaker 1: over the globe. And as rates have fallen, savers in 312 00:18:28,720 --> 00:18:32,679 Speaker 1: Europe and an aging population have panicked and decided they 313 00:18:32,680 --> 00:18:35,399 Speaker 1: need to save more. So now there's this glut of savings, 314 00:18:35,440 --> 00:18:38,840 Speaker 1: and that's a lot of people looking for low risk 315 00:18:38,960 --> 00:18:42,320 Speaker 1: investments that they can retire on, and there just isn't 316 00:18:42,440 --> 00:18:44,760 Speaker 1: enough low risk investments. Hence the price goes up, and 317 00:18:44,760 --> 00:18:46,639 Speaker 1: guess what falls the yield. And that's one of the 318 00:18:46,680 --> 00:18:50,960 Speaker 1: reasons why bond yields, not just sovereign bonds, but corporate bonds, 319 00:18:51,000 --> 00:18:55,640 Speaker 1: mortgage bonds all over Europe and in Japan are negative yielding, 320 00:18:56,400 --> 00:19:00,120 Speaker 1: and that scares equity investors and then they panic more 321 00:19:00,640 --> 00:19:04,880 Speaker 1: and they sell off the cyclical stocks. And we think 322 00:19:04,880 --> 00:19:08,120 Speaker 1: this is a tremendous opportunity to own some of these 323 00:19:08,200 --> 00:19:12,760 Speaker 1: great companies, whether they be financial institutions or or manufacturers 324 00:19:13,320 --> 00:19:17,680 Speaker 1: at crisis level valuations, and yet looking at the businesses, 325 00:19:17,760 --> 00:19:20,199 Speaker 1: how much better managements have become over the years. How 326 00:19:20,320 --> 00:19:25,840 Speaker 1: much more impressive is their financial strength? They're not even comfortable. 327 00:19:25,880 --> 00:19:28,479 Speaker 1: The banks have three to four times as much capital 328 00:19:28,520 --> 00:19:32,800 Speaker 1: as they did in the Eurozone crisis in and there's 329 00:19:32,880 --> 00:19:35,080 Speaker 1: nothing wrong with the Brits, thank god, they have the 330 00:19:35,400 --> 00:19:37,760 Speaker 1: I think the best economy in all of Europe. Whether 331 00:19:37,800 --> 00:19:40,880 Speaker 1: they're alone or together, it doesn't matter. So when we 332 00:19:41,000 --> 00:19:44,480 Speaker 1: when we look at Europe, how do those valuations and 333 00:19:44,600 --> 00:19:47,600 Speaker 1: yields compared to what we see in the United States? 334 00:19:47,640 --> 00:19:51,919 Speaker 1: The SMP just sore. It's yield notch a little above 335 00:19:52,040 --> 00:19:55,159 Speaker 1: the ten years the tenure yield is falling this past summer. 336 00:19:55,520 --> 00:19:59,399 Speaker 1: What do yields look like on quality value companies in Europe? 337 00:19:59,760 --> 00:20:02,480 Speaker 1: The banks have a very high yield and likely to 338 00:20:02,520 --> 00:20:06,680 Speaker 1: be higher as they continue to improve their asset quality 339 00:20:06,840 --> 00:20:09,560 Speaker 1: and cut costs further, which is one of the few 340 00:20:09,640 --> 00:20:12,320 Speaker 1: areas of control they have. They can't control rates, but 341 00:20:12,359 --> 00:20:14,920 Speaker 1: they can definitely control their costs, and as they generate 342 00:20:14,920 --> 00:20:17,480 Speaker 1: more cash, we expect them too. As the US banks 343 00:20:17,480 --> 00:20:20,480 Speaker 1: have already done, returned that to shareholders, so their yields 344 00:20:20,480 --> 00:20:24,119 Speaker 1: are taking higher. What's the average yield of a decent 345 00:20:24,160 --> 00:20:27,199 Speaker 1: sized bankst somewhere around three to four percent, so not 346 00:20:27,720 --> 00:20:30,560 Speaker 1: Sometimes yields get too high. It's almost a warning sign 347 00:20:30,600 --> 00:20:32,680 Speaker 1: either the dividend is going to get cut or there's 348 00:20:32,720 --> 00:20:36,280 Speaker 1: some of the problem. This is rational within the realm 349 00:20:36,280 --> 00:20:39,800 Speaker 1: of what makes sense. Well, I don't know how rational 350 00:20:39,880 --> 00:20:43,600 Speaker 1: it is. If the tenure German government bond is negative 351 00:20:43,680 --> 00:20:49,200 Speaker 1: seventy basis boids, that's a tremendous amount, but it looks 352 00:20:49,240 --> 00:20:51,240 Speaker 1: at the industrial is. One of my favorites to mention 353 00:20:51,440 --> 00:20:55,120 Speaker 1: is the German Chemical Company b A s F. They are, 354 00:20:55,119 --> 00:20:57,440 Speaker 1: They're a giant across the whole panapoly different kinds of 355 00:20:57,480 --> 00:21:04,040 Speaker 1: chemicals from from organic to agricultural, healthcare related. They're phenomenal 356 00:21:04,160 --> 00:21:07,320 Speaker 1: integrated business. And that davidend deal is over five percent 357 00:21:07,800 --> 00:21:10,960 Speaker 1: and nobody seems to be at all interested. What's the fear? 358 00:21:11,000 --> 00:21:16,879 Speaker 1: Why are people afraid of buying an internationally diversified industrial 359 00:21:16,920 --> 00:21:20,120 Speaker 1: life that it's there's the crowding effect isn't just within 360 00:21:20,200 --> 00:21:23,000 Speaker 1: the US market globally, it is the US market, the 361 00:21:23,080 --> 00:21:26,040 Speaker 1: US market and the US dollar have attracted a huge 362 00:21:26,040 --> 00:21:28,960 Speaker 1: amount of buying attention, and part of this has to 363 00:21:29,000 --> 00:21:32,880 Speaker 1: do with what's happened to the composition of investors. You're 364 00:21:33,000 --> 00:21:36,760 Speaker 1: talking to me as if we make saying decisions. I 365 00:21:36,800 --> 00:21:40,320 Speaker 1: certainly believe we do. But we're making these discretionary type 366 00:21:40,359 --> 00:21:44,280 Speaker 1: decisions fundamentally in our quants are doing so, they're creating 367 00:21:44,320 --> 00:21:49,359 Speaker 1: a portfolio systematically with also fundamental risk control. So in 368 00:21:49,400 --> 00:21:53,639 Speaker 1: every way, shape or form, there's some type of valuation 369 00:21:53,680 --> 00:21:57,200 Speaker 1: effort underpinning our portfolios. That's not true with a lot 370 00:21:57,240 --> 00:22:00,760 Speaker 1: of what's happening in markets today. We see not just 371 00:22:00,880 --> 00:22:05,840 Speaker 1: the advent of or the massive increase in indexation, which, 372 00:22:05,840 --> 00:22:08,000 Speaker 1: as you know, as stocks get larger and index they 373 00:22:08,040 --> 00:22:12,040 Speaker 1: just attract more money and more buying, and conversely, as 374 00:22:12,080 --> 00:22:15,160 Speaker 1: they fall, they fall further. But the the momentum trend 375 00:22:15,280 --> 00:22:23,440 Speaker 1: following has been extraordinarily active, So more momentum trend falling 376 00:22:23,560 --> 00:22:27,720 Speaker 1: and then money behind that. And as these European stocks 377 00:22:27,760 --> 00:22:31,480 Speaker 1: to the point sell off, then they tend to sell 378 00:22:31,520 --> 00:22:34,879 Speaker 1: off further. So if value, if if fair value is 379 00:22:34,920 --> 00:22:38,400 Speaker 1: some sort of line that continuum, these stocks have been 380 00:22:38,400 --> 00:22:41,960 Speaker 1: trading so far below and they continue to fall versus 381 00:22:41,960 --> 00:22:47,159 Speaker 1: fair value because because they're falling already. So momentum is 382 00:22:47,160 --> 00:22:51,440 Speaker 1: a strange beast. And as there are more algorithmic, more 383 00:22:52,359 --> 00:22:57,160 Speaker 1: computer driven trading globally, we've noticed more market much more 384 00:22:57,200 --> 00:23:00,200 Speaker 1: the way of market inefficiency. So we're willing to take 385 00:23:00,240 --> 00:23:06,320 Speaker 1: positions in these securities and we expect that, saying investors 386 00:23:06,320 --> 00:23:09,600 Speaker 1: will prevail. But it's really tough to see this happen. 387 00:23:10,000 --> 00:23:14,119 Speaker 1: So investors like Michael Burry have said indexing is a 388 00:23:14,200 --> 00:23:17,000 Speaker 1: bubble and it's going to blow up. You seem to 389 00:23:17,040 --> 00:23:21,120 Speaker 1: be eluding that the more we index, the more opportunities 390 00:23:21,119 --> 00:23:24,320 Speaker 1: are created for active management, if there are that many 391 00:23:24,359 --> 00:23:28,960 Speaker 1: more identifiable inefficiencies. I get asked at every single client 392 00:23:29,119 --> 00:23:33,359 Speaker 1: meeting these days, what's the catalyst for value to outperform? Well, frankly, 393 00:23:33,400 --> 00:23:36,680 Speaker 1: I wish I knew, but there are many possible catalysts, 394 00:23:37,040 --> 00:23:40,080 Speaker 1: and one is simply that the very expectsive growth stocks 395 00:23:40,119 --> 00:23:43,400 Speaker 1: disappointed earn these terms and then they become the victims 396 00:23:43,440 --> 00:23:47,320 Speaker 1: of momentum selling. He doesn't take much in order to 397 00:23:47,359 --> 00:23:51,479 Speaker 1: get that gap, massive gap to close between value and growth, 398 00:23:51,560 --> 00:23:53,560 Speaker 1: and we just you could drive a truck through it now. 399 00:23:54,080 --> 00:23:56,879 Speaker 1: But but I do think that as value turns up 400 00:23:56,880 --> 00:23:59,320 Speaker 1: and it attracts more money. This could end up being 401 00:23:59,320 --> 00:24:03,000 Speaker 1: a sort of change reaction, and we saw this from 402 00:24:03,200 --> 00:24:06,080 Speaker 1: the end of February of two thousand nine. Is value 403 00:24:06,080 --> 00:24:10,040 Speaker 1: stocks just took off, and the more cyclicality back then 404 00:24:10,080 --> 00:24:15,920 Speaker 1: the better. Just remember markets are tremendous discounting mechanisms, so 405 00:24:16,000 --> 00:24:19,600 Speaker 1: in advance of whatever the event, typically that event is 406 00:24:19,640 --> 00:24:22,879 Speaker 1: already priced into the markets. And that event now is recession. 407 00:24:23,560 --> 00:24:28,440 Speaker 1: You hinted at the concern of recession in Europe. Let's 408 00:24:28,480 --> 00:24:31,000 Speaker 1: talk a little bit about that. Is this a distinctly 409 00:24:31,240 --> 00:24:35,680 Speaker 1: European concern? China and the US should we be concerned 410 00:24:35,680 --> 00:24:38,880 Speaker 1: about recession? We've we've had the yield curve inverted now 411 00:24:38,920 --> 00:24:41,639 Speaker 1: for depending on which pair of bonds you look at 412 00:24:41,680 --> 00:24:43,720 Speaker 1: for a couple of months. What do we think about 413 00:24:43,720 --> 00:24:48,000 Speaker 1: the possibility of recession? Recession could easily happen in the US. 414 00:24:48,160 --> 00:24:50,320 Speaker 1: I don't see why not. In fact, it's so funny 415 00:24:50,359 --> 00:24:54,560 Speaker 1: everyone is so panicked about recession. It strikes me that 416 00:24:54,680 --> 00:24:59,960 Speaker 1: they've forgotten history because recessions are there's simply what happen. 417 00:25:00,040 --> 00:25:03,320 Speaker 1: And in healthy economies, healthy economies expanded, then they contract, 418 00:25:03,359 --> 00:25:07,800 Speaker 1: and then they expand again, ideally the expansions overwhelmed the contractions. 419 00:25:07,800 --> 00:25:10,840 Speaker 1: But the as for China, if they have a recession, 420 00:25:10,880 --> 00:25:12,720 Speaker 1: we may never know about it. I'm not sure those 421 00:25:12,720 --> 00:25:15,919 Speaker 1: statistics will be revealed. And that you don't buy the 422 00:25:16,000 --> 00:25:19,800 Speaker 1: Bernie made Off school of statistical analysis. The Chinese seems 423 00:25:19,840 --> 00:25:22,440 Speaker 1: to try to stay far away from that as possible, 424 00:25:22,880 --> 00:25:24,320 Speaker 1: but they we do a lot of on the ground 425 00:25:24,320 --> 00:25:28,840 Speaker 1: research and so well. Were already see the concern small 426 00:25:28,880 --> 00:25:30,879 Speaker 1: to meaum sized businesses have, and that's one of the 427 00:25:30,920 --> 00:25:33,680 Speaker 1: reasons why they're, for example, advertising less. There are lots 428 00:25:33,680 --> 00:25:37,640 Speaker 1: of different ways of measuring the health, but one way 429 00:25:37,720 --> 00:25:41,240 Speaker 1: or another, recessions are just a transient effect, and out 430 00:25:41,240 --> 00:25:44,960 Speaker 1: of that comes recovery, and the recovery gets discounted by markets, 431 00:25:45,000 --> 00:25:49,160 Speaker 1: typically four quarters at least in advance. If you want 432 00:25:49,200 --> 00:25:52,720 Speaker 1: to own the beneficiaries of recovery, you need to buy 433 00:25:52,760 --> 00:25:57,560 Speaker 1: them during the dark, gloomy periods. So that's interesting. Look, 434 00:25:57,560 --> 00:26:00,320 Speaker 1: it's been over a decade since we've had a recept question. 435 00:26:00,720 --> 00:26:03,159 Speaker 1: As you point out their cyclical they're they're not to 436 00:26:03,200 --> 00:26:06,480 Speaker 1: be feared, and yet it seems like the US Federal 437 00:26:06,560 --> 00:26:10,200 Speaker 1: Reserve and the White House are horrified by the thought 438 00:26:10,280 --> 00:26:14,440 Speaker 1: of recession. Is that just concerns about re election or 439 00:26:14,520 --> 00:26:17,520 Speaker 1: is there a real fundamental reason to be concerned about 440 00:26:18,080 --> 00:26:21,840 Speaker 1: the first recession following the Great Financial Crisis. My colleagues 441 00:26:21,880 --> 00:26:25,600 Speaker 1: and I don't see the same type of financial leverage 442 00:26:25,800 --> 00:26:29,399 Speaker 1: that unwound the global economy in two thousand and eight, 443 00:26:29,960 --> 00:26:33,000 Speaker 1: But there are other risks out there, and there is 444 00:26:33,200 --> 00:26:38,440 Speaker 1: plenty of debt, certainly in the corporate sector. The way 445 00:26:38,480 --> 00:26:41,280 Speaker 1: we look at this cycle is, let's just say there's 446 00:26:41,320 --> 00:26:45,199 Speaker 1: a slow down. It may just be something psychological that 447 00:26:45,480 --> 00:26:48,040 Speaker 1: all you have to have is purchasing managers and those 448 00:26:48,080 --> 00:26:51,200 Speaker 1: in charge of Catholic expenditures to decide to pull back. 449 00:26:51,920 --> 00:26:56,480 Speaker 1: So investment slows, and consumers may be concerned about the 450 00:26:56,520 --> 00:26:59,200 Speaker 1: price of goods, they may slow their purchases. It doesn't 451 00:26:59,240 --> 00:27:02,639 Speaker 1: take much um in this country. And as for Europe, 452 00:27:02,680 --> 00:27:05,480 Speaker 1: I mean Italy has sort of gone going through a recession. 453 00:27:05,960 --> 00:27:09,199 Speaker 1: Germany maybe in one now. Whether they can spend their 454 00:27:09,200 --> 00:27:11,320 Speaker 1: way out of it, this is sort of the hundred 455 00:27:11,320 --> 00:27:14,360 Speaker 1: million dollar question. Will the government's there decide that says 456 00:27:14,400 --> 00:27:17,360 Speaker 1: it doesn't cost them anything to borrow, In fact, they 457 00:27:17,400 --> 00:27:20,959 Speaker 1: get paid to borrow, which is again the bizarreness of this. 458 00:27:21,480 --> 00:27:24,520 Speaker 1: Will they take advantage of that and engage in enough 459 00:27:24,560 --> 00:27:28,560 Speaker 1: fiscal stimulus to revitalize their economies. Just a little fiscal 460 00:27:28,600 --> 00:27:34,160 Speaker 1: stimus would be phenomenal for investor excitement because there's been 461 00:27:34,160 --> 00:27:37,159 Speaker 1: so much bunker mentality. Let's let's talk about that. Because 462 00:27:37,240 --> 00:27:42,280 Speaker 1: following the financial crisis, look, we know the kinges playbook 463 00:27:42,320 --> 00:27:45,920 Speaker 1: what you're supposed to do after a crisis. Europe, especially 464 00:27:45,960 --> 00:27:48,840 Speaker 1: the UK, seemed to have forgotten about that and they 465 00:27:48,840 --> 00:27:52,080 Speaker 1: went on austerity instead of saying, oh, the private sector 466 00:27:52,119 --> 00:27:55,160 Speaker 1: is pulled back, we will temporarily step in to fill 467 00:27:55,200 --> 00:27:58,680 Speaker 1: the gap. What what happened there? Why was the psychology 468 00:27:58,760 --> 00:28:03,159 Speaker 1: so backwards and how much of that is still lingering 469 00:28:03,520 --> 00:28:06,119 Speaker 1: or how much of that is fixable? As the other question, 470 00:28:06,680 --> 00:28:09,760 Speaker 1: these are aging populations. But my colleagues and I draw 471 00:28:09,800 --> 00:28:14,359 Speaker 1: a very deliberate distinction between Europe and Japan. Japan a 472 00:28:14,480 --> 00:28:19,040 Speaker 1: closed economy no significant immigration versus Europe with three million 473 00:28:19,040 --> 00:28:23,879 Speaker 1: immigrants in the last five years. Europe has still the 474 00:28:23,920 --> 00:28:28,000 Speaker 1: potential not to stagnate as Japan has, and it hasn't 475 00:28:28,040 --> 00:28:30,440 Speaker 1: been that awful in Japan. It just hasn't been great 476 00:28:30,480 --> 00:28:32,600 Speaker 1: in terms of growth, they sort of tip on the 477 00:28:32,720 --> 00:28:35,639 Speaker 1: edge of deflation continuously, which again is it both a 478 00:28:35,640 --> 00:28:40,000 Speaker 1: monetary phenomenon and a psychological one. But Europe doesn't have 479 00:28:40,080 --> 00:28:45,040 Speaker 1: to grow very quickly. For European listed stocks some of 480 00:28:45,080 --> 00:28:47,959 Speaker 1: them to do very well. When you say not very quickly, 481 00:28:49,320 --> 00:28:52,040 Speaker 1: I think two percent would be nominal, would be more 482 00:28:52,080 --> 00:28:55,479 Speaker 1: than enough, I think. And there's no inflation really in 483 00:28:55,520 --> 00:28:59,080 Speaker 1: the in Europe now, very nothing that's really measurable. There's 484 00:28:59,080 --> 00:29:03,520 Speaker 1: some background, but inflation we're pressed to find it anywhere 485 00:29:03,520 --> 00:29:06,520 Speaker 1: in the developed world. So is deflation the bigger concern 486 00:29:06,560 --> 00:29:10,960 Speaker 1: than inflation? Deflation? Are we or Europe going to turn Japanese? 487 00:29:11,240 --> 00:29:13,880 Speaker 1: Is that unique? And I don't think so. And there's 488 00:29:13,880 --> 00:29:17,120 Speaker 1: a sufficiently there's an influx of immigrants and a younger 489 00:29:17,240 --> 00:29:21,120 Speaker 1: population and the companies in Europe. And here's where I 490 00:29:21,160 --> 00:29:24,120 Speaker 1: draw the distinction with Japan all those If I think 491 00:29:24,160 --> 00:29:25,920 Speaker 1: back to the early part of my career and that 492 00:29:26,040 --> 00:29:28,600 Speaker 1: of my more senior colleagues from the early nineties, we 493 00:29:28,640 --> 00:29:31,120 Speaker 1: worried so much about Japan and why didn't we have 494 00:29:31,160 --> 00:29:33,760 Speaker 1: an index weight in the Japanese market? Our clients would 495 00:29:33,800 --> 00:29:36,640 Speaker 1: ask us. And you may remember Japan from the late 496 00:29:36,720 --> 00:29:41,960 Speaker 1: eighties early nine and taking it all back to Japan 497 00:29:42,000 --> 00:29:46,240 Speaker 1: with them. They there was no need to worry because 498 00:29:46,720 --> 00:29:50,480 Speaker 1: by capping, by putting a floor under the any kind 499 00:29:50,520 --> 00:29:52,880 Speaker 1: of downside in that economy, they capped the upside. Or 500 00:29:52,920 --> 00:29:55,680 Speaker 1: think of it this way. Too much capacity and no 501 00:29:55,800 --> 00:29:59,560 Speaker 1: willingness to really consolidate. And will the Europeans follow that path? 502 00:30:00,040 --> 00:30:03,480 Speaker 1: We think less likely. They will allow some bank consolidation, 503 00:30:03,520 --> 00:30:06,840 Speaker 1: they will have to have the job cuts necessary, And 504 00:30:06,880 --> 00:30:10,440 Speaker 1: the Brits, the UK in particular, has been good about that. 505 00:30:10,480 --> 00:30:13,400 Speaker 1: They have more labor flexibility and mobility than anywhere else 506 00:30:13,400 --> 00:30:17,240 Speaker 1: in Europe and less regulation. And as they pull out 507 00:30:17,280 --> 00:30:19,720 Speaker 1: of the rest of the EU, that will be one 508 00:30:19,840 --> 00:30:24,320 Speaker 1: less market that has the chokehold of EU regulation. So 509 00:30:24,520 --> 00:30:27,720 Speaker 1: what does that mean in terms of the growth in 510 00:30:27,720 --> 00:30:31,320 Speaker 1: in the UK? Will they still be able to export 511 00:30:31,520 --> 00:30:35,800 Speaker 1: on a competitive basis to the rest of Europe? What's 512 00:30:36,280 --> 00:30:39,520 Speaker 1: to to someone on this side of the Atlantic. It 513 00:30:39,640 --> 00:30:43,479 Speaker 1: looks like the UK, second only to Germany, has been 514 00:30:43,480 --> 00:30:47,280 Speaker 1: a huge beneficiary of the EU and they managed to 515 00:30:47,400 --> 00:30:50,240 Speaker 1: maintain their own currency in central bank. They seem to 516 00:30:50,320 --> 00:30:53,920 Speaker 1: have had the best of both worlds. What why Brexit? 517 00:30:54,000 --> 00:31:00,560 Speaker 1: Why get out that? Like so many different possible economic scenarios. 518 00:31:00,560 --> 00:31:03,160 Speaker 1: This one has a lot of politics behind it, but 519 00:31:03,240 --> 00:31:06,000 Speaker 1: the idea of blaming globalization or immigrants seems to be 520 00:31:06,040 --> 00:31:09,720 Speaker 1: a very popular way for politicians to get ahead. And 521 00:31:09,880 --> 00:31:13,840 Speaker 1: it's a lazy demo, but it's effective. It's very you know, 522 00:31:13,880 --> 00:31:16,280 Speaker 1: it's it's part of the greatest hits because it's worked 523 00:31:16,320 --> 00:31:18,480 Speaker 1: so well over the very fact, we couldn't have anticipated 524 00:31:18,480 --> 00:31:22,000 Speaker 1: it would take the it's three years plus post their 525 00:31:22,000 --> 00:31:26,640 Speaker 1: referendum in June to make a decision. That was a 526 00:31:26,800 --> 00:31:29,000 Speaker 1: tough one, but the UK were that we have the 527 00:31:29,080 --> 00:31:32,080 Speaker 1: largest in our international fund, the largest active weight, which 528 00:31:32,120 --> 00:31:35,080 Speaker 1: is our which is the weight versus the benchmark, So 529 00:31:35,160 --> 00:31:38,719 Speaker 1: the greatest overweight is in UK listed stocks. They're not 530 00:31:38,760 --> 00:31:43,560 Speaker 1: all indigenous UK company In other words, these companies operate multinationally. 531 00:31:43,680 --> 00:31:48,400 Speaker 1: They're like yeah, yeah, many of them are global in scope, 532 00:31:48,400 --> 00:31:51,880 Speaker 1: and their revenues are either tied to or somehow related 533 00:31:51,920 --> 00:31:54,080 Speaker 1: to the US dollar and maybe oil and gas businesses 534 00:31:54,160 --> 00:31:58,560 Speaker 1: or pharmaceutical businesses. So there's the pounds sterling weekends, all 535 00:31:58,640 --> 00:32:01,720 Speaker 1: other things being equal. Sadly they never are. These companies 536 00:32:01,760 --> 00:32:05,160 Speaker 1: are even more profitable. But we've also liked there are 537 00:32:05,160 --> 00:32:08,160 Speaker 1: companies in the UK where the specter Brexit hangs over 538 00:32:08,200 --> 00:32:11,680 Speaker 1: them and that's made them especially undervalued. But one way 539 00:32:11,720 --> 00:32:15,080 Speaker 1: or another, what we do know about the vast majority 540 00:32:15,120 --> 00:32:18,240 Speaker 1: of politicians elected democratically is that they'd like to stay 541 00:32:18,320 --> 00:32:21,640 Speaker 1: in office, and cratering an economy is not typically a 542 00:32:21,640 --> 00:32:24,520 Speaker 1: way of staying in office. So there we are going 543 00:32:24,560 --> 00:32:27,040 Speaker 1: to be negotiating. I assume the Brits will be negotiating 544 00:32:27,120 --> 00:32:30,280 Speaker 1: right up until the eleventh hour i end of October, 545 00:32:30,880 --> 00:32:34,280 Speaker 1: if not before then, and then they will strike a 546 00:32:34,360 --> 00:32:36,440 Speaker 1: deal and the deal will be to spend the next 547 00:32:36,440 --> 00:32:40,240 Speaker 1: two years working out a trade arrangement with Europe. So 548 00:32:40,600 --> 00:32:44,960 Speaker 1: when many investors look at things like trade wars or 549 00:32:45,000 --> 00:32:48,640 Speaker 1: Brexit and they see confusion and uncertainty and we don't 550 00:32:48,640 --> 00:32:50,840 Speaker 1: know what's going to happen, I get the sense you 551 00:32:50,840 --> 00:32:54,360 Speaker 1: look at these sort of disruptive events as saying, hey, 552 00:32:54,360 --> 00:32:59,400 Speaker 1: creating all sorts of opportunities to buy otherwise great companies 553 00:32:59,680 --> 00:33:03,240 Speaker 1: at a great discount. It is a huge opportunity and 554 00:33:03,360 --> 00:33:06,720 Speaker 1: is long. What's crucial is the financial strength is there 555 00:33:06,760 --> 00:33:09,360 Speaker 1: because we have no way of knowing how long we'll 556 00:33:09,360 --> 00:33:11,960 Speaker 1: have to wait client meetings, clients will look a little 557 00:33:12,120 --> 00:33:15,240 Speaker 1: limp and broken, like what's wrong with your value managers? 558 00:33:15,280 --> 00:33:17,280 Speaker 1: And and this is true what we do quantitatively in 559 00:33:17,320 --> 00:33:19,920 Speaker 1: emerging markets, we have more of a value emphasis, and 560 00:33:19,960 --> 00:33:24,520 Speaker 1: it has been like swimming upstream. But that's okay because 561 00:33:24,520 --> 00:33:27,160 Speaker 1: when value snaps back we see this historically, it does 562 00:33:27,240 --> 00:33:31,440 Speaker 1: so very quickly and the rewards are significant, so it 563 00:33:31,480 --> 00:33:34,360 Speaker 1: does pay to wait. And those that income that from 564 00:33:34,400 --> 00:33:38,120 Speaker 1: dividends is very important to assure a certain level of patients. 565 00:33:38,160 --> 00:33:42,680 Speaker 1: So value is underperforming growth for what ten years now? 566 00:33:42,760 --> 00:33:46,760 Speaker 1: Is that about right? And the US has just about 567 00:33:46,760 --> 00:33:50,720 Speaker 1: outperformed everything internationally, So you're in two of the most 568 00:33:50,800 --> 00:33:55,600 Speaker 1: challenging sectors there are. International has been battling up hill. 569 00:33:55,720 --> 00:34:00,400 Speaker 1: Values battling up hill. You mentioned clients look broken. How 570 00:34:00,480 --> 00:34:03,360 Speaker 1: much time do you have to spend explaining mean reversion? 571 00:34:03,440 --> 00:34:07,480 Speaker 1: And this too, shall pass to to your clients. The 572 00:34:07,560 --> 00:34:11,600 Speaker 1: vast majority of our large institutional clients. I'm paraphrasing, but 573 00:34:11,680 --> 00:34:13,960 Speaker 1: I think they've said something to the effect of they 574 00:34:13,960 --> 00:34:16,040 Speaker 1: look at values, they have to have it right. They 575 00:34:16,080 --> 00:34:19,120 Speaker 1: know that they it's painful for now, but eventually, like 576 00:34:19,160 --> 00:34:22,120 Speaker 1: an insurance policy, Okay, we don't really know when you're 577 00:34:22,120 --> 00:34:24,160 Speaker 1: going to have the hurricane, but you want to make 578 00:34:24,200 --> 00:34:26,920 Speaker 1: sure you're covered in terms of property insurance, and you'll 579 00:34:26,920 --> 00:34:30,880 Speaker 1: pay the premium, which is some underperformance for some period 580 00:34:30,880 --> 00:34:34,000 Speaker 1: of time that you're looking at that as an insurance premium. Yes, 581 00:34:34,160 --> 00:34:38,640 Speaker 1: and I suppose I value went through consecutive years about performance. 582 00:34:38,640 --> 00:34:41,080 Speaker 1: They look at their growth exposure in that very light. 583 00:34:42,080 --> 00:34:45,720 Speaker 1: I recall back in the late nineties hearing the sky 584 00:34:46,000 --> 00:34:49,400 Speaker 1: Warren Buffett was all washed up, and that was whenever 585 00:34:49,440 --> 00:34:51,360 Speaker 1: you start to hear that, you know you're late in 586 00:34:51,480 --> 00:34:55,080 Speaker 1: the value under performing growth cycle. And it's a matter 587 00:34:55,160 --> 00:34:58,480 Speaker 1: of time. And and for the decade plus since then, 588 00:34:58,560 --> 00:35:01,719 Speaker 1: value did really well. Um, and now we're on the 589 00:35:01,719 --> 00:35:04,560 Speaker 1: other end of that. Are you expecting this to turn 590 00:35:05,160 --> 00:35:08,680 Speaker 1: anytime soon or we have no idea when value will 591 00:35:08,840 --> 00:35:12,960 Speaker 1: reassert itself. Yeah, well, we don't know, but every quarter 592 00:35:13,000 --> 00:35:16,400 Speaker 1: that goes by. And this is particularly true of this summer, 593 00:35:16,600 --> 00:35:22,640 Speaker 1: the July August period nineteen, where value just seemed to 594 00:35:22,680 --> 00:35:26,760 Speaker 1: take another sharp leg down and the risk aversion levels 595 00:35:26,760 --> 00:35:29,560 Speaker 1: in markets spiked up. In other words, investors would buy 596 00:35:29,600 --> 00:35:34,160 Speaker 1: negative yielding bonds because that was the supposed risk free asset. 597 00:35:34,200 --> 00:35:39,200 Speaker 1: They're they're buying consumer staples and healthcare and of course 598 00:35:39,280 --> 00:35:43,040 Speaker 1: real estate they can't get enough, and then dumping everything else. 599 00:35:43,320 --> 00:35:45,880 Speaker 1: And again I'm not sure this is a this is 600 00:35:46,400 --> 00:35:48,920 Speaker 1: a group of people sitting in a room making decisions. 601 00:35:48,960 --> 00:35:52,560 Speaker 1: But rather some of this is very momentum tread following 602 00:35:53,920 --> 00:35:58,319 Speaker 1: software that just does what it's told. But that opportunity 603 00:35:58,360 --> 00:36:00,840 Speaker 1: now has become so long arch we think of it 604 00:36:00,840 --> 00:36:04,120 Speaker 1: in terms of statistically, in terms of valuation gaps and 605 00:36:04,120 --> 00:36:06,680 Speaker 1: how many standard deviations from the long term mean is it? 606 00:36:06,760 --> 00:36:09,480 Speaker 1: And we're now getting to the point where extreme levels 607 00:36:09,719 --> 00:36:13,560 Speaker 1: and the more extreme the valuation gap becomes between growth 608 00:36:13,600 --> 00:36:16,279 Speaker 1: and value, the more likely it is that that big 609 00:36:16,320 --> 00:36:19,200 Speaker 1: premium for growth will shrink. I have a bunch of 610 00:36:19,320 --> 00:36:22,120 Speaker 1: questions we didn't get to, but there were two in 611 00:36:22,200 --> 00:36:26,319 Speaker 1: particular I wanted to ask you about. Let's talk a 612 00:36:26,320 --> 00:36:30,800 Speaker 1: little bit about corporate culture. So you have an ensemble approach, 613 00:36:31,400 --> 00:36:35,480 Speaker 1: how does that affect your corporate culture and how does 614 00:36:35,480 --> 00:36:40,080 Speaker 1: the culture affect the way you invest? I've then I 615 00:36:40,200 --> 00:36:43,839 Speaker 1: believed in teamwork ever since grad school. That's what they 616 00:36:43,920 --> 00:36:46,480 Speaker 1: specialize in at the Touch School at Dart mess is 617 00:36:46,920 --> 00:36:50,040 Speaker 1: doing everything in teams. But it wasn't until I got 618 00:36:50,080 --> 00:36:53,239 Speaker 1: to the world of investment management and saw the other 619 00:36:53,320 --> 00:36:55,760 Speaker 1: side of the coin, which is, if it's not team, 620 00:36:55,800 --> 00:36:58,200 Speaker 1: it's star system. It's one or two people making all 621 00:36:58,200 --> 00:37:01,080 Speaker 1: the investment decisions. And what I didn't like. There are 622 00:37:01,080 --> 00:37:03,040 Speaker 1: two reasons I don't like that and didn't want to 623 00:37:03,040 --> 00:37:05,680 Speaker 1: build a nord in my business partner Harry Hartford want 624 00:37:05,680 --> 00:37:09,439 Speaker 1: to build a business around that is because one, it's 625 00:37:09,440 --> 00:37:12,640 Speaker 1: too risky for clients anyone. If the star gets up 626 00:37:12,640 --> 00:37:15,839 Speaker 1: and leaves, your business is over. So that's no good 627 00:37:15,880 --> 00:37:18,480 Speaker 1: in the star also, and this is the second reason, 628 00:37:19,080 --> 00:37:21,640 Speaker 1: he or she or maybe it's a couple of stars. 629 00:37:22,280 --> 00:37:25,279 Speaker 1: As humans, we have biases. We have investment biases. Some 630 00:37:25,360 --> 00:37:27,839 Speaker 1: people are are very short term and how they think, 631 00:37:27,880 --> 00:37:30,640 Speaker 1: Some are long term. Some are maybe a little gullible 632 00:37:30,680 --> 00:37:34,720 Speaker 1: and believe management too often, and and others are maybe 633 00:37:34,760 --> 00:37:38,080 Speaker 1: too skeptical to the point of cynical. Whatever the biases are, 634 00:37:38,160 --> 00:37:42,000 Speaker 1: you don't want to have any one person's biases or 635 00:37:42,080 --> 00:37:45,279 Speaker 1: one or two people embedded in your client portfolios all 636 00:37:45,320 --> 00:37:47,440 Speaker 1: the time. So that's one of the reasons why we 637 00:37:47,600 --> 00:37:52,240 Speaker 1: dispersed the responsibility for portfolio management amongst in our fundamental 638 00:37:52,239 --> 00:37:57,399 Speaker 1: portfolios amongst six different heads of these research clusters. And 639 00:37:57,600 --> 00:38:00,320 Speaker 1: it's not as if people have a sleeve. There's stocks 640 00:38:00,400 --> 00:38:03,600 Speaker 1: have to compete with everyone else's stocks in the group. 641 00:38:04,160 --> 00:38:07,640 Speaker 1: So and everybody is subject to the scrutiny and the 642 00:38:07,960 --> 00:38:12,040 Speaker 1: and the professional criticism of other colleagues. But for example, 643 00:38:13,280 --> 00:38:16,200 Speaker 1: when financial institutions are extremely cheap and we think they 644 00:38:16,239 --> 00:38:19,400 Speaker 1: have a promising future, Connor Muldoon, who runs our Financials 645 00:38:19,400 --> 00:38:21,680 Speaker 1: and Materials cluster, he will have more stocks in the 646 00:38:21,680 --> 00:38:26,480 Speaker 1: portfolio than say, maybe Ellen Lee, who's looking after consumer staples, 647 00:38:26,480 --> 00:38:29,919 Speaker 1: because staples generally across the globe are very expensive right now. 648 00:38:30,440 --> 00:38:32,919 Speaker 1: But as if the tables turn and it turns out 649 00:38:32,960 --> 00:38:37,360 Speaker 1: that people realize that Diageo isn't worth twenty five times 650 00:38:37,360 --> 00:38:41,640 Speaker 1: earnings and they'd rather uh sell that and own something else, 651 00:38:41,680 --> 00:38:43,160 Speaker 1: we'll have a chance. Ellen will have a chance to 652 00:38:43,160 --> 00:38:45,560 Speaker 1: get more of her stocks in the portfolio. So that's 653 00:38:45,560 --> 00:38:47,879 Speaker 1: why we work in a ranking system the highest risk 654 00:38:47,880 --> 00:38:51,160 Speaker 1: adjusted return stocks down to the lowest, and the returns 655 00:38:51,200 --> 00:38:53,920 Speaker 1: come from the work that each one of these six 656 00:38:54,000 --> 00:38:59,440 Speaker 1: cluster groups are doing. With the oversight and the critique 657 00:38:59,520 --> 00:39:01,880 Speaker 1: of all all of my other colleagues in research and 658 00:39:02,120 --> 00:39:06,000 Speaker 1: quant colleagues, as well participate. So when you mentioned portfolio 659 00:39:06,080 --> 00:39:09,799 Speaker 1: construction from these six sleeves, it's not like I have 660 00:39:09,880 --> 00:39:13,040 Speaker 1: to have five from each sleeve. You this is done 661 00:39:13,160 --> 00:39:16,200 Speaker 1: very soon. That would be a disaster there, but that's 662 00:39:16,239 --> 00:39:19,000 Speaker 1: how some funds run. We're gonna have X of each. 663 00:39:19,120 --> 00:39:21,359 Speaker 1: So then there's a wizard on top who decides how 664 00:39:21,440 --> 00:39:23,560 Speaker 1: much sleeve should be at any point. Is that the 665 00:39:24,840 --> 00:39:28,600 Speaker 1: so we don't have. Thankfully, there are no wizards there. 666 00:39:28,600 --> 00:39:31,359 Speaker 1: We're not born equal, but we're definitely then there's no 667 00:39:31,400 --> 00:39:35,600 Speaker 1: one making an allocation decision. The allocation and our international 668 00:39:36,000 --> 00:39:39,640 Speaker 1: fund and on our global fund is entirely a byproduct 669 00:39:39,640 --> 00:39:43,080 Speaker 1: of that bottom up stock selection process. So stocks compete 670 00:39:43,080 --> 00:39:46,160 Speaker 1: with each other. If we have a we talked earlier 671 00:39:46,200 --> 00:39:50,320 Speaker 1: today about Volkswagen. If Volkswagen's return is has a certain 672 00:39:50,680 --> 00:39:53,160 Speaker 1: let's say it's a double digit percentage return per year, 673 00:39:53,200 --> 00:39:54,960 Speaker 1: and we know what the risk is. We know it's 674 00:39:55,080 --> 00:39:57,480 Speaker 1: risk of just a return. It has to compete with 675 00:39:57,520 --> 00:40:00,319 Speaker 1: the next stock on the list. Maybe it's Barkley Bank 676 00:40:00,360 --> 00:40:04,439 Speaker 1: in the UK as another large return but even more risk. 677 00:40:04,960 --> 00:40:07,240 Speaker 1: So when a risk adjust a return basis the stocks, 678 00:40:07,280 --> 00:40:11,400 Speaker 1: this ranking gives us as a portfolio management team the roadmap, 679 00:40:11,480 --> 00:40:14,319 Speaker 1: we now know that we should have larger weights in 680 00:40:14,360 --> 00:40:17,160 Speaker 1: the stocks that are higher ranking and less weights in 681 00:40:17,200 --> 00:40:19,720 Speaker 1: those that are lower ranking. And as the stocks ranking 682 00:40:19,800 --> 00:40:23,600 Speaker 1: changes over time because their share prices typically rise and 683 00:40:23,640 --> 00:40:26,680 Speaker 1: converge with their price targets, that means the return diminishes 684 00:40:26,719 --> 00:40:28,759 Speaker 1: and the stocks naturally fall on the ranking, So we 685 00:40:28,800 --> 00:40:31,520 Speaker 1: have to sell them and then recycle proceeds back in 686 00:40:31,560 --> 00:40:35,360 Speaker 1: the higher ranking stocks. So so that's by sector. What 687 00:40:35,440 --> 00:40:39,399 Speaker 1: about by that's a national region. That's the same process 688 00:40:39,400 --> 00:40:43,600 Speaker 1: that the process So when the stocks are researched by sector, 689 00:40:44,000 --> 00:40:47,400 Speaker 1: then they get put together into a long list or 690 00:40:47,520 --> 00:40:50,120 Speaker 1: this ranking, and then it's from that we select the 691 00:40:50,280 --> 00:40:53,319 Speaker 1: fifty stocks ago in the portfolio. How does how does 692 00:40:53,360 --> 00:40:56,759 Speaker 1: the regional aspect of that play out? Is it? So, 693 00:40:56,840 --> 00:41:00,239 Speaker 1: for example, you mentioned you were overweight the UK. I'm 694 00:41:00,280 --> 00:41:03,359 Speaker 1: assuming it's not a macro. There is no there's no 695 00:41:03,560 --> 00:41:07,239 Speaker 1: regional allocation. The only region of the world where we 696 00:41:07,320 --> 00:41:10,720 Speaker 1: have a specialized team, and you could guess this is China, 697 00:41:11,400 --> 00:41:13,640 Speaker 1: and that is largely that's that is a function of 698 00:41:13,640 --> 00:41:16,160 Speaker 1: the fact that there are so many stocks there and 699 00:41:16,360 --> 00:41:19,600 Speaker 1: it requires a lot of local knowledge to get through 700 00:41:19,640 --> 00:41:22,360 Speaker 1: the mall. I mean three thousand new stocks for investors 701 00:41:22,400 --> 00:41:25,600 Speaker 1: to cover, and the and the indices are including larger 702 00:41:25,640 --> 00:41:27,839 Speaker 1: and larger percentages of them. And it used to be 703 00:41:28,320 --> 00:41:31,719 Speaker 1: foreign investors were a huge disadvantage with A shares and 704 00:41:31,800 --> 00:41:35,439 Speaker 1: B shares. How has that changed in China? A couple 705 00:41:35,480 --> 00:41:39,440 Speaker 1: of years ago, the Hong Kong Shanghai Connect program allows 706 00:41:40,000 --> 00:41:43,719 Speaker 1: investors to invest northbound as well as a southbound into 707 00:41:43,719 --> 00:41:46,600 Speaker 1: Hong Kong, So we can from Hong Kong invest directly 708 00:41:46,840 --> 00:41:49,880 Speaker 1: into those A shares on behalf of our clients. And 709 00:41:49,960 --> 00:41:54,640 Speaker 1: that opens up a whole new investing panorama because formally 710 00:41:54,680 --> 00:41:57,160 Speaker 1: you had to get a specific license to buy those 711 00:41:57,200 --> 00:41:59,600 Speaker 1: if you were a foreigner. And this is all part 712 00:41:59,680 --> 00:42:02,800 Speaker 1: of the actual opening up of the financial services sector 713 00:42:02,840 --> 00:42:06,719 Speaker 1: in China. It's a two steps forward a step back. 714 00:42:06,880 --> 00:42:10,799 Speaker 1: But how is China valuation wise compared to places like 715 00:42:11,239 --> 00:42:14,080 Speaker 1: you mentioned Italy and the UK. Well, if you would 716 00:42:14,120 --> 00:42:17,200 Speaker 1: ask me what I considered to be the next great 717 00:42:17,200 --> 00:42:21,960 Speaker 1: frontier in terms of of undervalued stocks that are misunderstood. 718 00:42:22,440 --> 00:42:25,680 Speaker 1: As much as we like all the developed world, the 719 00:42:25,760 --> 00:42:28,719 Speaker 1: greatest number of them reside in the Chinese market. They're 720 00:42:29,040 --> 00:42:34,080 Speaker 1: they're literally hundreds of phenomenally well managed businesses, often with 721 00:42:34,160 --> 00:42:38,240 Speaker 1: a family or family members owning large percentages of the business, 722 00:42:38,280 --> 00:42:45,880 Speaker 1: so private sector, not state controlled, and completely misunderstood or 723 00:42:45,920 --> 00:42:49,560 Speaker 1: not well followed. That will correct itself over time. There'll 724 00:42:49,560 --> 00:42:52,960 Speaker 1: be more and more investors focusing in on the Chinese market, 725 00:42:53,360 --> 00:42:58,160 Speaker 1: but for now, the alpha opportunity is enormous, really, so 726 00:42:58,320 --> 00:43:00,759 Speaker 1: that's that's quite interesting about China. The another area of 727 00:43:00,760 --> 00:43:03,400 Speaker 1: the world I want to ask you about um that 728 00:43:03,560 --> 00:43:07,560 Speaker 1: also tends to be neglected by US investors is India. 729 00:43:07,640 --> 00:43:10,120 Speaker 1: What do you think about what's been going on over there, 730 00:43:10,160 --> 00:43:14,719 Speaker 1: both politically and economically, as well as their valuation situation 731 00:43:16,560 --> 00:43:20,960 Speaker 1: the Indian market we it's represented in our Emerging market portfolio, 732 00:43:21,160 --> 00:43:24,520 Speaker 1: and the last election turned out to put Prime Minister 733 00:43:24,600 --> 00:43:27,279 Speaker 1: Motive back in place, which is good. Has done a 734 00:43:27,360 --> 00:43:30,520 Speaker 1: good job. The demonetization are taking some of the cash 735 00:43:30,560 --> 00:43:33,719 Speaker 1: out of the economy. Has been helpful. But it's in 736 00:43:33,719 --> 00:43:36,719 Speaker 1: India we see a distinction. They're just more stocks in 737 00:43:36,880 --> 00:43:41,080 Speaker 1: China and the and the enterprising and ambitious nature of 738 00:43:41,160 --> 00:43:44,719 Speaker 1: management makes them the Many of these Chinese companies, and 739 00:43:44,719 --> 00:43:47,640 Speaker 1: I'm generalizing broadly, but they're in a huge hurry to 740 00:43:47,719 --> 00:43:53,400 Speaker 1: be to China. Yes, China to deliver profits for investors, 741 00:43:53,480 --> 00:43:57,359 Speaker 1: and we see that less so in India. Just just 742 00:43:57,600 --> 00:44:00,520 Speaker 1: it's just the size of the Chinese market is parallel 743 00:44:00,560 --> 00:44:02,960 Speaker 1: to it will be, we think, like the US. It 744 00:44:02,960 --> 00:44:05,279 Speaker 1: will be. There'll be two large stock markets in the 745 00:44:05,280 --> 00:44:07,520 Speaker 1: world in ten years, and we may not be talking 746 00:44:07,520 --> 00:44:10,600 Speaker 1: about India in that light. Really, is that there's that 747 00:44:10,719 --> 00:44:13,120 Speaker 1: much of a there's that much of a difference between 748 00:44:13,600 --> 00:44:15,560 Speaker 1: China and The pushback I get on that is Oh, 749 00:44:15,760 --> 00:44:18,239 Speaker 1: but Sarah, there will be a recession. China will slow it. 750 00:44:19,080 --> 00:44:22,120 Speaker 1: So what I mean you come out of recessions, and 751 00:44:22,160 --> 00:44:24,440 Speaker 1: what they do is they tend to clean out any 752 00:44:24,480 --> 00:44:30,320 Speaker 1: misinvestment where their money has gone into poor return projects 753 00:44:30,440 --> 00:44:35,320 Speaker 1: or businesses. Those will fizzle and the in the Darwinian process, 754 00:44:35,360 --> 00:44:37,719 Speaker 1: the better ones will come out of that. I don't 755 00:44:37,760 --> 00:44:40,359 Speaker 1: remember whose quote I'm about to steal, but I love 756 00:44:40,560 --> 00:44:44,239 Speaker 1: love the expression recessions or where capital returns to its 757 00:44:44,320 --> 00:44:47,640 Speaker 1: rightful owners. And there's some some degree of truth in that. 758 00:44:48,160 --> 00:44:51,799 Speaker 1: Um So, So, we've seen the US outperform the rest 759 00:44:51,840 --> 00:44:56,120 Speaker 1: of the world for a long time. Um how long 760 00:44:56,160 --> 00:45:00,600 Speaker 1: can this continue? It? It's been a solid decade. Are 761 00:45:00,640 --> 00:45:03,040 Speaker 1: we almost done, or we halfway through, or do we 762 00:45:03,120 --> 00:45:07,000 Speaker 1: have no idea whatsoever. Were given the extreme valuation gap 763 00:45:08,400 --> 00:45:12,440 Speaker 1: to the degree of ur want a bargain, it definitely um. 764 00:45:12,480 --> 00:45:14,600 Speaker 1: They're more of them outside the US. It's one of 765 00:45:14,600 --> 00:45:17,200 Speaker 1: the reasons why in our global portfolios we are such 766 00:45:17,200 --> 00:45:20,880 Speaker 1: a large underweight. I think we're at least fifteen percentage 767 00:45:20,920 --> 00:45:24,960 Speaker 1: points underweight the US market, and that also seems to 768 00:45:24,960 --> 00:45:28,560 Speaker 1: make clients a little nervous. But we have to go 769 00:45:28,719 --> 00:45:33,319 Speaker 1: where the most undervaluation resides. As for when the US 770 00:45:33,440 --> 00:45:37,160 Speaker 1: market is the laggard, not the winner, it could happen 771 00:45:37,200 --> 00:45:40,439 Speaker 1: at any time. It's certainly a recession wouldn't be taken well. 772 00:45:40,480 --> 00:45:42,600 Speaker 1: And if it's if you think about some of the 773 00:45:42,680 --> 00:45:45,560 Speaker 1: leaders in the US, especially in the technology area, this 774 00:45:45,640 --> 00:45:48,040 Speaker 1: was one of the misperceptions that gripped investors in the 775 00:45:48,120 --> 00:45:52,120 Speaker 1: late nineties. They really thought technology stocks were we're defensive 776 00:45:52,360 --> 00:45:56,560 Speaker 1: what some they didn't weren't. Just because they grow year 777 00:45:56,600 --> 00:45:58,960 Speaker 1: of a year, it doesn't mean they're speculative it's a defense. Well, 778 00:45:59,000 --> 00:46:00,719 Speaker 1: it's not just it's just that many of them are 779 00:46:00,719 --> 00:46:04,480 Speaker 1: cylical there they depend on advertising, or they depend on 780 00:46:04,560 --> 00:46:07,760 Speaker 1: some levels of consumers. Simmer demands that that may wane, 781 00:46:08,120 --> 00:46:11,600 Speaker 1: doesn't mean it's gone forever, but at at lofty valuations, 782 00:46:11,600 --> 00:46:14,120 Speaker 1: there's a level of vulnerability in those stocks that we 783 00:46:14,200 --> 00:46:16,840 Speaker 1: haven't tested in years. So when I speak to value 784 00:46:16,880 --> 00:46:20,160 Speaker 1: investors about the US, they sort of fall into two camps. 785 00:46:20,880 --> 00:46:24,160 Speaker 1: One is the oh, the US is wildly overvalued, We've 786 00:46:24,200 --> 00:46:27,400 Speaker 1: never seen anything like this, And the others are the 787 00:46:27,520 --> 00:46:30,960 Speaker 1: US is at the upper end of of fair. It's pricey, 788 00:46:31,040 --> 00:46:37,880 Speaker 1: but it's not Where do you fall? The answer this 789 00:46:38,000 --> 00:46:41,839 Speaker 1: question somewhat depends on where interest rates go, and if 790 00:46:41,840 --> 00:46:45,279 Speaker 1: they continue to fall, investors may get more and more 791 00:46:45,640 --> 00:46:48,400 Speaker 1: nervous and defensive, and they will want to hide in 792 00:46:48,440 --> 00:46:51,680 Speaker 1: what they consider to be the current both the currency 793 00:46:51,719 --> 00:46:54,240 Speaker 1: and the market, where they can be the greatest shelter. 794 00:46:55,040 --> 00:46:57,719 Speaker 1: On the other hand, if we just have an economic 795 00:46:57,800 --> 00:47:00,680 Speaker 1: slowdown and then come out of it, it's all bets 796 00:47:00,680 --> 00:47:02,600 Speaker 1: are off on the US market, it could end up 797 00:47:02,840 --> 00:47:07,480 Speaker 1: not looking like it deserves its valuation. But I'm not 798 00:47:07,520 --> 00:47:10,600 Speaker 1: sure it really, frankly, really matters as long as there 799 00:47:10,600 --> 00:47:14,400 Speaker 1: are value opportunities globally, and there's there are plenty of 800 00:47:14,440 --> 00:47:18,600 Speaker 1: them today. We see it in our I talked about 801 00:47:18,600 --> 00:47:21,400 Speaker 1: that ranking we have the two year price target, and 802 00:47:21,440 --> 00:47:23,840 Speaker 1: all the stocks we follow we're following two globally at 803 00:47:23,840 --> 00:47:28,520 Speaker 1: any point in time, including US companies, and the returns 804 00:47:28,719 --> 00:47:32,120 Speaker 1: are huge for for the value segment. It doesn't matter 805 00:47:32,120 --> 00:47:34,279 Speaker 1: whether they're in the U S or out of the US. 806 00:47:34,960 --> 00:47:37,359 Speaker 1: If investors don't like them, they also don't like them 807 00:47:37,360 --> 00:47:41,319 Speaker 1: in the US. The sites are set very narrowly on 808 00:47:41,920 --> 00:47:47,080 Speaker 1: economically defensive and or growth oriented, so not not value, 809 00:47:47,239 --> 00:47:50,680 Speaker 1: even even though we've seen value really be a good 810 00:47:50,719 --> 00:47:54,040 Speaker 1: place to hide during recessions, be it uh, the dot 811 00:47:54,080 --> 00:47:57,880 Speaker 1: Com crash or the Great Financial Crash. Value now directly 812 00:47:57,920 --> 00:48:01,800 Speaker 1: linked with cyclicality, and because those have been the cheapest 813 00:48:01,800 --> 00:48:04,279 Speaker 1: stocks and the cynical stocks are considered to be very 814 00:48:04,400 --> 00:48:09,040 Speaker 1: vulnerable to economic slowing. But again, I'm convinced that that 815 00:48:09,160 --> 00:48:12,800 Speaker 1: slowing is already discounting the price, and I would expect 816 00:48:12,800 --> 00:48:16,560 Speaker 1: nothing less from markets. Quite quite interesting. Let's get to 817 00:48:16,920 --> 00:48:20,360 Speaker 1: our favorite questions that we ask all of our guests. 818 00:48:21,000 --> 00:48:24,200 Speaker 1: Um hopefully these will be a bit revealing about you 819 00:48:24,719 --> 00:48:27,520 Speaker 1: tell us the first car you've ever owned, your making model. 820 00:48:29,239 --> 00:48:32,000 Speaker 1: I laugh at that question because it's the security question 821 00:48:32,160 --> 00:48:34,920 Speaker 1: for a lot of my password recreaval somebody else said that, 822 00:48:35,160 --> 00:48:38,920 Speaker 1: and I I'm fascinated because I'm waiting for the first 823 00:48:38,920 --> 00:48:41,520 Speaker 1: guest to say I've never owned a car, so it's 824 00:48:41,560 --> 00:48:43,840 Speaker 1: sort of like my canary in the cold line. But 825 00:48:43,920 --> 00:48:46,880 Speaker 1: you're the second part up. I can't tell you, Barry, 826 00:48:47,000 --> 00:48:49,920 Speaker 1: is that car. I brought it to college and in 827 00:48:50,000 --> 00:48:54,440 Speaker 1: my great independent period. Well, you know, I'm not going 828 00:48:54,520 --> 00:48:57,279 Speaker 1: to take this to JF. Loup. I'll just change the 829 00:48:57,320 --> 00:49:01,440 Speaker 1: oil myself. So I crawled underneath and unscrewed a plug 830 00:49:01,520 --> 00:49:04,879 Speaker 1: and that was the transmission fluid. There you go. So 831 00:49:05,719 --> 00:49:08,359 Speaker 1: I learned a lot about cars very quickly. That's that's 832 00:49:08,400 --> 00:49:11,719 Speaker 1: pretty funny. You um, you know the secret to doing 833 00:49:11,760 --> 00:49:15,200 Speaker 1: an oil changes. The oil is in the the engine block, 834 00:49:15,440 --> 00:49:20,680 Speaker 1: not in the fans for casing, right, um tell us 835 00:49:20,680 --> 00:49:25,520 Speaker 1: the most important thing that people don't know about Sarah Keta. Well, 836 00:49:25,520 --> 00:49:27,400 Speaker 1: I don't like to sit I think this is the 837 00:49:27,400 --> 00:49:31,279 Speaker 1: longest period I've been in it. You I'm fidgety. You 838 00:49:31,320 --> 00:49:33,360 Speaker 1: make me look like an amateur. Yeah. I have a 839 00:49:33,400 --> 00:49:35,600 Speaker 1: stand up desk at so do we? So do I 840 00:49:35,640 --> 00:49:37,720 Speaker 1: in the office. It's funny. First one in my office 841 00:49:37,719 --> 00:49:39,880 Speaker 1: and I there was a certain amount of skepticism of 842 00:49:39,920 --> 00:49:41,919 Speaker 1: scoffing at me, and then it then it took off 843 00:49:41,960 --> 00:49:46,480 Speaker 1: and everybody has one. They're they're pretty much everywhere. And 844 00:49:47,080 --> 00:49:49,400 Speaker 1: as long as it's not the treadmill desk, that's the 845 00:49:49,440 --> 00:49:52,640 Speaker 1: treadmill desk is terrifies me. When eye contact of their 846 00:49:52,640 --> 00:49:55,600 Speaker 1: in motion, that doesn't work for me. Um, who are 847 00:49:55,640 --> 00:49:59,160 Speaker 1: some of your early mentors? I assume your father a 848 00:49:59,239 --> 00:50:03,040 Speaker 1: hot kiss. Well parents I had. My parents were brilliant 849 00:50:03,200 --> 00:50:07,480 Speaker 1: and inspirational and worked very hard. They they sent all 850 00:50:07,480 --> 00:50:10,400 Speaker 1: the right messages to their kids, so I was really 851 00:50:10,560 --> 00:50:14,040 Speaker 1: really lucky. And in terms of investing, my father had 852 00:50:14,080 --> 00:50:17,759 Speaker 1: this curious hobby. He was an amateur race car driver, 853 00:50:17,880 --> 00:50:21,320 Speaker 1: and he drove on all the tracks around the United States, 854 00:50:21,320 --> 00:50:24,680 Speaker 1: and a couple of times he drove at Lament and 855 00:50:24,760 --> 00:50:27,640 Speaker 1: his driving partner for a number of years was the 856 00:50:27,760 --> 00:50:30,560 Speaker 1: late Bob Kirby, who was one of the co founders 857 00:50:30,600 --> 00:50:33,600 Speaker 1: of Capital Guardian Trust Company, the Capital Group, and one 858 00:50:33,600 --> 00:50:37,880 Speaker 1: of the most extraordinary and greatest longevity investors ever. And 859 00:50:38,000 --> 00:50:40,759 Speaker 1: I had lots of time with Bob sitting around sort 860 00:50:40,760 --> 00:50:42,879 Speaker 1: of sitting on a couple of stack of tires and 861 00:50:43,000 --> 00:50:46,600 Speaker 1: we talked about investing, and he he was the he's 862 00:50:46,640 --> 00:50:49,400 Speaker 1: known for his coffee can portfolio. He just put it 863 00:50:49,440 --> 00:50:51,439 Speaker 1: in there and seal it up and it'll be fine 864 00:50:51,520 --> 00:50:54,239 Speaker 1: ten years later because of transaction costs, which we know 865 00:50:54,320 --> 00:50:57,200 Speaker 1: today of course have come way down. But this idea 866 00:50:57,200 --> 00:50:59,959 Speaker 1: of being long term and owning thinking about the company 867 00:51:00,080 --> 00:51:02,200 Speaker 1: is if you owned it all, you didn't just own 868 00:51:02,200 --> 00:51:06,400 Speaker 1: a few shares. They're not names their stocks. That is 869 00:51:06,480 --> 00:51:08,920 Speaker 1: stuck with me for years. Did you spend a lot 870 00:51:08,960 --> 00:51:12,560 Speaker 1: of time traveling with your dad while he was going 871 00:51:13,400 --> 00:51:15,799 Speaker 1: so other kids took vacations to fun places. I went 872 00:51:15,800 --> 00:51:18,680 Speaker 1: to tracks? Really do have you spent any time on 873 00:51:18,760 --> 00:51:23,080 Speaker 1: trash yourself? Not driving, just sitting and walking walking around? 874 00:51:23,800 --> 00:51:26,200 Speaker 1: I am I'm surprised. I don't have a hearing problem. 875 00:51:26,239 --> 00:51:30,759 Speaker 1: So you mentioned your mentors. What investors influenced the way 876 00:51:30,800 --> 00:51:34,600 Speaker 1: you think about putting together a portfolio? Every investor I've 877 00:51:34,640 --> 00:51:37,480 Speaker 1: worked with, including my current colleagues, I worked with the 878 00:51:37,520 --> 00:51:41,480 Speaker 1: most remarkable team of people, and they're all a little different. 879 00:51:41,520 --> 00:51:45,279 Speaker 1: We deliberately chose them because they fit together nicely, and 880 00:51:45,320 --> 00:51:49,279 Speaker 1: they there It's a very diversified group, but they inspire 881 00:51:49,320 --> 00:51:52,640 Speaker 1: me to this day, along with our rising core of analysts. 882 00:51:52,680 --> 00:51:58,000 Speaker 1: There the remarkably clear thinkers, and they're innovative, and they 883 00:51:58,000 --> 00:52:01,239 Speaker 1: can look at a problem from a variety of angles. 884 00:52:01,280 --> 00:52:04,880 Speaker 1: So I I'm convinced, and I tell this to clients. 885 00:52:04,920 --> 00:52:07,600 Speaker 1: This team isn't the same team it was five years ago. Yes, 886 00:52:07,640 --> 00:52:09,400 Speaker 1: we've added a few more people. They look like the 887 00:52:09,480 --> 00:52:12,680 Speaker 1: same people, but they're so much more experienced. Some of 888 00:52:12,719 --> 00:52:16,919 Speaker 1: my most amazing colleagues started in the late nineties, which, 889 00:52:16,920 --> 00:52:20,680 Speaker 1: as you can recall, was the Asia financial crisis where 890 00:52:20,680 --> 00:52:24,399 Speaker 1: stocks were just coming a part of the seams where yeah, yeah, 891 00:52:24,400 --> 00:52:27,960 Speaker 1: there was no started with Thailand, there was investors sold 892 00:52:28,120 --> 00:52:32,799 Speaker 1: indiscriminately and to see both indiscriminate selling where evaluation doesn't 893 00:52:32,840 --> 00:52:38,320 Speaker 1: matter and its cousin indiscriminated buying just complete an investor. 894 00:52:38,840 --> 00:52:42,160 Speaker 1: Right that that that was an interesting era. UM let's 895 00:52:42,200 --> 00:52:45,520 Speaker 1: talk about everybody's favorite question, Uh, tell us about the 896 00:52:45,520 --> 00:52:52,200 Speaker 1: books you enjoy reading, fiction, nonfiction, investing related or otherwise nonfiction. 897 00:52:53,280 --> 00:52:57,880 Speaker 1: Perhaps the most helpful to me was Daniel Kahneman's The 898 00:52:57,920 --> 00:53:02,120 Speaker 1: Signal in the Noise. The it not the signaling noise. 899 00:53:02,160 --> 00:53:04,920 Speaker 1: It's thinking fast and fast and slow. I'm not thinking 900 00:53:05,280 --> 00:53:11,160 Speaker 1: so economons thinking fast and slow. I didn't really understand 901 00:53:11,239 --> 00:53:14,480 Speaker 1: behavioral economics, and he got a Nobel Prize for his 902 00:53:14,560 --> 00:53:19,600 Speaker 1: work in behavioral economics and social sciences and economic sciences. 903 00:53:19,680 --> 00:53:23,720 Speaker 1: And this idea of loss of version never really occurred 904 00:53:23,719 --> 00:53:25,919 Speaker 1: to me, that people were asymmetric and how they think. 905 00:53:25,960 --> 00:53:28,680 Speaker 1: And I found that really useful, not only thinking about 906 00:53:28,680 --> 00:53:32,280 Speaker 1: investor mentality, but also in managing a team of people. 907 00:53:33,120 --> 00:53:37,600 Speaker 1: How does loss of version or risk aversion impact managing 908 00:53:38,000 --> 00:53:43,640 Speaker 1: a team, especially when it comes to decision making and 909 00:53:43,840 --> 00:53:47,960 Speaker 1: the concern about making about any type of loss or mistake. 910 00:53:48,040 --> 00:53:51,800 Speaker 1: And this is true in a group setting, the hesitancy 911 00:53:51,840 --> 00:53:54,160 Speaker 1: of someone bright to make a comment because it could 912 00:53:54,200 --> 00:54:01,040 Speaker 1: be wrong, which seems to overwhelm there. They're to participate. 913 00:54:02,120 --> 00:54:05,359 Speaker 1: We want them to my colleagues, and I want everyone there, 914 00:54:05,520 --> 00:54:08,279 Speaker 1: no matter how junior, to know that their comments are 915 00:54:08,400 --> 00:54:12,879 Speaker 1: valued and whether they're wrong or right, it's their participation 916 00:54:12,960 --> 00:54:17,040 Speaker 1: is crucial because everybody else thinking interesting? What other so 917 00:54:17,120 --> 00:54:19,160 Speaker 1: thinking fast and slow is one? Yeah? And then I 918 00:54:19,200 --> 00:54:21,719 Speaker 1: was Nate's silver. That kind of got jumbled in my head. 919 00:54:21,760 --> 00:54:25,400 Speaker 1: But Nate Silver, the signal and noise. Yeah, some predictions 920 00:54:25,400 --> 00:54:32,120 Speaker 1: are right and others aren't. But understanding how statistics can 921 00:54:32,160 --> 00:54:38,640 Speaker 1: manipulated and investors can use data very erroneously. That couldn't 922 00:54:38,640 --> 00:54:41,080 Speaker 1: be more relevant than today. We at Causeway, we hired 923 00:54:41,080 --> 00:54:45,600 Speaker 1: a data scientists and and data experts software engineers to 924 00:54:45,800 --> 00:54:47,719 Speaker 1: back him up to make sure that as a team, 925 00:54:47,760 --> 00:54:50,279 Speaker 1: both fundamentally and quantitable, we have the data we need. 926 00:54:50,640 --> 00:54:52,800 Speaker 1: But if we work with it incorrectly and we find 927 00:54:52,840 --> 00:54:56,760 Speaker 1: false what we think our signals, which are actually noise, 928 00:54:56,880 --> 00:55:00,880 Speaker 1: will be misled. It's using that data is so important 929 00:55:01,360 --> 00:55:05,120 Speaker 1: and not to be misled by it. And that book 930 00:55:05,160 --> 00:55:09,759 Speaker 1: was revolutionary for me, quite quite interesting. Any others, Oh, 931 00:55:09,800 --> 00:55:12,319 Speaker 1: I have a like a million books like everything that 932 00:55:13,320 --> 00:55:16,320 Speaker 1: the fiction wise that Robert Galbreth a K. J. K 933 00:55:16,640 --> 00:55:19,760 Speaker 1: Rowling ever wrote a wonderful those are so you're Harry 934 00:55:19,760 --> 00:55:22,760 Speaker 1: Potter fan. No, no, no, this is all her mysteries 935 00:55:22,760 --> 00:55:26,560 Speaker 1: are Cormer and strikes my goodness. This was the one 936 00:55:26,640 --> 00:55:28,680 Speaker 1: she did underpen name, and people figured out it was 937 00:55:28,920 --> 00:55:33,479 Speaker 1: Robert Galeah why she chose a man's very interesting. You'll 938 00:55:33,520 --> 00:55:34,839 Speaker 1: have to have her on your show and ask her 939 00:55:34,920 --> 00:55:38,239 Speaker 1: if please make an interest, um, tell us about a 940 00:55:38,280 --> 00:55:41,040 Speaker 1: time you failed and what you learned from the experience. 941 00:55:42,080 --> 00:55:44,960 Speaker 1: That I get most upset with myself as a portfolio 942 00:55:45,000 --> 00:55:49,360 Speaker 1: manager when I don't have enough confidence in the decision, 943 00:55:49,480 --> 00:55:54,359 Speaker 1: so not owning enough of the some great companies when 944 00:55:54,360 --> 00:55:57,800 Speaker 1: it's when you look backwards you think, oh, it's so obvious, 945 00:55:57,880 --> 00:56:01,000 Speaker 1: but at the time struggling with should we should be not? 946 00:56:01,200 --> 00:56:03,920 Speaker 1: And especially in areas where you can keep these in 947 00:56:03,960 --> 00:56:06,000 Speaker 1: the portfolio for a long time, like some of these 948 00:56:06,040 --> 00:56:12,560 Speaker 1: healthcare stocks. That's the frustrating hindsight biases. Always, Um, what 949 00:56:12,600 --> 00:56:13,799 Speaker 1: do you do for fun? What do you do when 950 00:56:13,800 --> 00:56:19,000 Speaker 1: you're not picking value stocks? I enjoyed being with my 951 00:56:19,120 --> 00:56:24,760 Speaker 1: family and then when they kick me out, then I'm hiking. Okay, Um, 952 00:56:24,960 --> 00:56:28,239 Speaker 1: tell us about what your most optimistic today within the 953 00:56:28,320 --> 00:56:33,800 Speaker 1: finance industry and what are you most pessimistic about. I'm 954 00:56:34,160 --> 00:56:38,120 Speaker 1: most optimistic about my team. I mentioned them earlier. But 955 00:56:38,320 --> 00:56:41,440 Speaker 1: to have such talent and such dedicated talent. We have 956 00:56:41,480 --> 00:56:43,839 Speaker 1: twenty one partners at our firm, and that's deliberate rather 957 00:56:43,880 --> 00:56:46,719 Speaker 1: than keep it narrow out of over a hundred employees, 958 00:56:46,719 --> 00:56:50,799 Speaker 1: now over a hundred employees, thirty six investment professionals, and 959 00:56:50,880 --> 00:56:53,359 Speaker 1: not all the partners are investment professionals. Some lead very 960 00:56:53,440 --> 00:56:58,040 Speaker 1: key areas, illegal and operate our our CEO is an 961 00:56:58,160 --> 00:57:02,720 Speaker 1: important partner of our for the that team is everything 962 00:57:02,760 --> 00:57:05,439 Speaker 1: that those people up and down the elevator every day 963 00:57:05,640 --> 00:57:08,160 Speaker 1: and in the human capital business are really all we 964 00:57:08,200 --> 00:57:10,480 Speaker 1: have for our clients. And I'm so proud of them, 965 00:57:10,480 --> 00:57:13,360 Speaker 1: and I'm so excited to work with them again. They've 966 00:57:13,560 --> 00:57:17,240 Speaker 1: because we've been through such torture as value managers in 967 00:57:17,320 --> 00:57:22,479 Speaker 1: the last few years, they're more. Their quality and their 968 00:57:22,600 --> 00:57:26,200 Speaker 1: depth and their experience level I think now is unmatched. 969 00:57:26,640 --> 00:57:31,360 Speaker 1: And as for pessimistic finance wise, not really, not really anything. 970 00:57:31,400 --> 00:57:35,080 Speaker 1: I'm so I'm so optimistic about being a value manager now, 971 00:57:35,440 --> 00:57:37,960 Speaker 1: but I think about my life and my eight year 972 00:57:37,960 --> 00:57:40,360 Speaker 1: old loves baseball, the one sport I didn't want them 973 00:57:40,400 --> 00:57:42,520 Speaker 1: to play. I had to be sitting through so many games. 974 00:57:44,960 --> 00:57:47,920 Speaker 1: Let's talk about advice you would give to a millennial. 975 00:57:48,080 --> 00:57:50,000 Speaker 1: Someone comes to you and says they're interested in the 976 00:57:50,080 --> 00:57:54,840 Speaker 1: career and finance. What sort of advice might you give them? 977 00:57:54,240 --> 00:57:56,520 Speaker 1: M I give them too much advice, but I had 978 00:57:56,560 --> 00:57:58,920 Speaker 1: to distill it to one piece of information. It would 979 00:57:58,920 --> 00:58:02,720 Speaker 1: be read read more. Read everything you can get, not 980 00:58:02,880 --> 00:58:05,520 Speaker 1: just the Wall Street Journal in the Financial Times and 981 00:58:05,960 --> 00:58:10,440 Speaker 1: the Economist every week, but go and read the books 982 00:58:10,480 --> 00:58:15,720 Speaker 1: written by famous investors, read the biographies, read tomes that 983 00:58:15,800 --> 00:58:18,480 Speaker 1: deal with different segments of market history, so that you 984 00:58:18,520 --> 00:58:21,240 Speaker 1: can fill in the gaps. If you're in your twenties, 985 00:58:21,360 --> 00:58:23,960 Speaker 1: you don't know much yet. In fact, you really only 986 00:58:24,000 --> 00:58:27,120 Speaker 1: know a period generally of falling interest rates and rising markets. 987 00:58:27,960 --> 00:58:31,360 Speaker 1: Not not the norm. In other words, well not not 988 00:58:31,520 --> 00:58:35,040 Speaker 1: my norm and um our final question, what is it 989 00:58:35,120 --> 00:58:37,960 Speaker 1: that you know about the world of investing today you 990 00:58:38,040 --> 00:58:44,520 Speaker 1: wish you knew thirty years ago. I wished I've taken Chinese. 991 00:58:44,880 --> 00:58:47,880 Speaker 1: I would love to be a fluent Mandarin speaker. Uh, 992 00:58:48,000 --> 00:58:50,320 Speaker 1: it's not just that's a huge population, not just as 993 00:58:50,360 --> 00:58:53,520 Speaker 1: an important markets. Much of the talent. Many of the 994 00:58:53,560 --> 00:58:57,760 Speaker 1: talented people we hire were born there. So and I 995 00:58:57,800 --> 00:59:01,000 Speaker 1: took French and German, which is beauty of full languages both, 996 00:59:01,040 --> 00:59:05,000 Speaker 1: but they're not nearly as helpful and it's tough for 997 00:59:05,040 --> 00:59:08,000 Speaker 1: a tonal language to grasp as an adult. It takes 998 00:59:08,040 --> 00:59:10,160 Speaker 1: a lot of time that I don't have. So I'm 999 00:59:10,200 --> 00:59:15,200 Speaker 1: listening in my commute and when I'm walking anywhere. I have, 1000 00:59:15,680 --> 00:59:17,919 Speaker 1: but it's gonna take me at this rate, it's gonna 1001 00:59:17,920 --> 00:59:20,680 Speaker 1: take me time. I also wished I don't not to 1002 00:59:20,720 --> 00:59:23,600 Speaker 1: fret about Japan because I didn't need to. It took 1003 00:59:23,600 --> 00:59:26,600 Speaker 1: care of itself. We were chronically underweight as an international manager, 1004 00:59:26,640 --> 00:59:29,560 Speaker 1: took tremendous criticism, and but we did the right thing. 1005 00:59:30,280 --> 00:59:33,920 Speaker 1: Quite quite interesting. We have been speaking with Sarah Kettera. 1006 00:59:34,040 --> 00:59:38,080 Speaker 1: She is the co founder and CEO of Causeway Capital Management. 1007 00:59:38,560 --> 00:59:41,360 Speaker 1: If you enjoy this conversation, well, be sure to look 1008 00:59:41,440 --> 00:59:43,840 Speaker 1: up an Inch or down an inch on Apple iTunes 1009 00:59:43,880 --> 00:59:46,680 Speaker 1: and you could see any of the previous two hundred 1010 00:59:46,720 --> 00:59:50,600 Speaker 1: and fifty or so conversations we've recorded over the past 1011 00:59:50,720 --> 00:59:54,000 Speaker 1: five years. You could see that pretty much wherever Finer 1012 00:59:54,040 --> 00:59:59,960 Speaker 1: podcasts are sold Bloomberg, SoundCloud, iTunes, Spotify, Overcast, Stitcher, etcetera. 1013 01:00:00,360 --> 01:00:03,800 Speaker 1: We love your comments, feedback, in suggestions. Write to us 1014 01:00:03,840 --> 01:00:07,439 Speaker 1: at m I be podcast at Bloomberg dot net. Check 1015 01:00:07,440 --> 01:00:10,200 Speaker 1: out my weekly column on Bloomberg dot com. Check out 1016 01:00:10,240 --> 01:00:13,480 Speaker 1: my daily reads at Ridholts dot com. You could follow 1017 01:00:13,520 --> 01:00:16,240 Speaker 1: me on Twitter at rid Halts. I would be remiss 1018 01:00:16,280 --> 01:00:18,840 Speaker 1: if I did not thank the crack staff that helps 1019 01:00:18,880 --> 01:00:21,800 Speaker 1: put this together each week. We would not be able 1020 01:00:21,840 --> 01:00:24,520 Speaker 1: to do this without the help of Attica val Bron, 1021 01:00:24,720 --> 01:00:29,760 Speaker 1: who is our project manager. UH Michael Boyle is my producer. 1022 01:00:29,920 --> 01:00:33,800 Speaker 1: Michael bat Nick is my head of research. I'm Barry Ritolts. 1023 01:00:34,000 --> 01:00:37,280 Speaker 1: You've been listening to Masters in Business on Bloomberg Radio.