WEBVTT - Sarah Ketterer Discusses Investment Management 0:00:02.200 --> 0:00:06.760 This is Master's in Business with Barry Riddholts on Boomberg Radio. 0:00:07.240 --> 0:00:10.160 This weekend on the podcast, I have an extra special guest. 0:00:10.320 --> 0:00:12.400 Her name is Sarah Ketterer and she is the co 0:00:12.520 --> 0:00:17.400 founder and CEO of Causeway Capital Management. They run about 0:00:17.560 --> 0:00:20.880 fifty two billion dollars UH. She founded the company in 0:00:20.960 --> 0:00:23.720 June two thousand and one and is a value and 0:00:23.840 --> 0:00:28.840 international investor. If you were at all interested in understanding 0:00:29.320 --> 0:00:33.680 how to use quantitative strategies as part of a value 0:00:34.200 --> 0:00:37.760 portfolio build, or if you're just interested to hear about 0:00:37.760 --> 0:00:41.600 how someone put a company together over twenty years and 0:00:41.880 --> 0:00:44.879 grew it to over fifty billion dollars, then you're going 0:00:44.920 --> 0:00:49.080 to find this conversation to be absolutely fascinating. So, with 0:00:49.120 --> 0:00:54.120 no further ado, my interview of Sarah Kettra This is 0:00:54.280 --> 0:00:58.120 Master's in Business with Barry Riddholts on boom Berg Radio. 0:00:58.600 --> 0:01:02.440 My special guest today is Sarah Keta. She is the 0:01:02.480 --> 0:01:07.440 CEO and co founder of Causeway, a fifty two billion 0:01:07.480 --> 0:01:11.280 dollar asset manager. She's responsible for all of the investment 0:01:11.360 --> 0:01:14.720 research across all sectors at the firm. She was named 0:01:14.959 --> 0:01:18.880 morning Star International Manager of the Year in twenty seventeen. 0:01:19.319 --> 0:01:22.920 She is also a member of the Stanford University Board 0:01:22.920 --> 0:01:25.480 of Trustees. She is co chair of the l A 0:01:25.560 --> 0:01:28.839 World Affairs Council and town Hall Director of the Los 0:01:28.840 --> 0:01:32.600 Angeles Philharmonic Music Center Foundation, as well as chair of 0:01:32.640 --> 0:01:37.640 the Investment Committee. Sarah Ketterer, Welcome to Bloomberg. Thank you, Marry. 0:01:37.720 --> 0:01:40.080 Let's start a little bit with your background. You you 0:01:40.120 --> 0:01:43.839 have an interesting work history. You come out of Stanford 0:01:43.920 --> 0:01:46.160 and then talk where you got your m b a. 0:01:46.840 --> 0:01:50.880 And eventually end up at Merrill Lynch where you were 0:01:50.960 --> 0:01:54.560 running one of their international investment firms. Tell us a 0:01:54.560 --> 0:01:57.760 little bit about that. I've finished graduate school thinking I 0:01:57.800 --> 0:02:00.320 wanted to be an investment banker, which turns out I 0:02:00.360 --> 0:02:03.240 didn't know it then is ideal training to be an 0:02:03.280 --> 0:02:07.960 investment manager. And the distinction is one is a transactions business, banking, 0:02:08.000 --> 0:02:12.600 and the other is very much a deep thinking, valuation 0:02:12.840 --> 0:02:18.400 centric investing type business. And the banking didn't after a 0:02:18.400 --> 0:02:21.200 few years inspire me, so I left to start a 0:02:21.280 --> 0:02:24.960 database business, which if I could be I could have 0:02:25.000 --> 0:02:27.480 an avatar. That's what the avatar would do, because that's 0:02:27.480 --> 0:02:30.800 a wonderful business. Right now, I'm just a consumer of 0:02:30.919 --> 0:02:35.600 data but that turned out to be as many startups 0:02:35.639 --> 0:02:38.440 are money losing and I needed to work living. I 0:02:38.480 --> 0:02:40.519 was living at the time in New York City, so 0:02:40.760 --> 0:02:43.920 I got a job at hotch Kiss and Wiley. My 0:02:44.000 --> 0:02:46.400 late father, John hotch Kiss was the hotch Kiss and 0:02:46.440 --> 0:02:50.079 George Wiley his business partner, and they had a firm 0:02:50.200 --> 0:02:52.840 that was thriving but had no international equity. So I 0:02:52.840 --> 0:02:56.800 got hired to bring my data and help start international equity. 0:02:56.960 --> 0:02:58.880 You alluded at what I was about to ask you, 0:02:59.000 --> 0:03:03.440 how did working in a data startup impact your view 0:03:03.520 --> 0:03:07.360 of investment? Well, I had a very good idea looking 0:03:07.400 --> 0:03:11.600 at all that data, how much it needed to be 0:03:12.000 --> 0:03:17.240 cleansed and categorized, and that was beyond my scope. This 0:03:17.320 --> 0:03:21.480 was this was the nineteen nine when the tools we 0:03:21.520 --> 0:03:24.800 have today did not exist. So I was delighted to 0:03:24.880 --> 0:03:28.760 hand over the data and move on to the basics 0:03:28.880 --> 0:03:32.920 of asset management. So how did Hodgkiss and Wiley eventually 0:03:33.320 --> 0:03:38.160 become affiliated with Merrill Lynch. It's true of many investment managers, 0:03:38.160 --> 0:03:42.320 particularly the time when they're run by aging founders. The 0:03:42.400 --> 0:03:45.040 founders want to settle their estate, and this was true 0:03:45.040 --> 0:03:49.160 of George Wiley. Both extraordinary investors, But he was in 0:03:49.200 --> 0:03:52.720 his early seventies when I arrived, and it was time 0:03:52.760 --> 0:03:56.720 to do something with what they'd built. So they sold 0:03:56.760 --> 0:04:00.839 it to Merrill lynch In and therefore I became an 0:04:00.840 --> 0:04:04.400 employee along with a person who became my business partner, 0:04:04.480 --> 0:04:07.960 Harry Hartford. We met each other in and then by 0:04:08.920 --> 0:04:11.920 we were working for a completely different firm, and they 0:04:12.000 --> 0:04:14.640 ran it, it seems more or less from the outside 0:04:15.120 --> 0:04:19.240 as an independent subsidiary. It didn't get subsumed into the 0:04:19.279 --> 0:04:22.520 greater mother Meryl or how did that play out? Yeah, 0:04:22.680 --> 0:04:26.680 it was rough, a bit rough, because Meryl had aspirations 0:04:26.720 --> 0:04:29.039 for asset growth. And what I've learned over the last 0:04:29.040 --> 0:04:32.080 couple of decades is asset growth should never be your 0:04:32.160 --> 0:04:36.960 number one goal if you're an investment manager, even secret goal. 0:04:37.320 --> 0:04:40.719 Your goal should always be satisfy your clients and the 0:04:40.760 --> 0:04:44.040 assets will come. And Meryl found that Hotchkiss and Well 0:04:44.080 --> 0:04:47.560 I didn't have the ability to grow fast enough and 0:04:47.680 --> 0:04:50.520 ultimately decided to sell it. And so what happened then 0:04:51.080 --> 0:04:53.640 I had a hard time. By that time, I couldn't 0:04:53.720 --> 0:04:57.520 look my clients in the eye, nor could Harry and say, ah, 0:04:57.560 --> 0:04:59.320 this is going to be good for you we're going 0:04:59.400 --> 0:05:01.640 to now be part of this other firm that's known 0:05:02.200 --> 0:05:05.440 for its growth investing. We we just couldn't do that. 0:05:05.520 --> 0:05:10.880 It was beyond our abilities to to tell a lie. 0:05:11.200 --> 0:05:16.080 So we concocted a to just be began to brainstorm 0:05:16.160 --> 0:05:19.400 how would we want to see a great asset manager, 0:05:19.400 --> 0:05:21.560 What would it look like, what would be the characteristics? 0:05:22.040 --> 0:05:24.719 And we had an idea of best practices and worst 0:05:24.800 --> 0:05:29.120 we'd seen them all and choosing the best. We put 0:05:29.120 --> 0:05:32.840 together a business plan for a Causeway and left in 0:05:33.160 --> 0:05:36.279 two thousand one and got some seed capital and spent 0:05:36.320 --> 0:05:39.679 the first three years losing lots of money but hiring 0:05:39.720 --> 0:05:42.160 some of the best people in the industry. Losing money 0:05:42.200 --> 0:05:46.640 as an operational firm, not necessarily, it was good. Two 0:05:46.640 --> 0:05:51.640 thousand one post the technology, media and telecommunications bubble was 0:05:51.680 --> 0:05:55.919 an excellent time to start a value oriented manager. We 0:05:55.960 --> 0:05:58.240 had the wind at our back and value stocks did 0:05:58.360 --> 0:06:01.480 very well. We owned a lot of what are It's 0:06:01.520 --> 0:06:04.520 interesting because back then value with low beta intended to 0:06:04.560 --> 0:06:09.039 be consumer staples and other industries that today are untouchable 0:06:09.120 --> 0:06:12.920 valuation wise, they're too expensive. And those stocks stayed extremely well, 0:06:13.320 --> 0:06:16.240 and we grew very quickly and we also had the 0:06:16.400 --> 0:06:20.039 benefit of being unique in that. Causeway even from two 0:06:20.040 --> 0:06:24.359 thousand one has been a convergence of fundamental investing along 0:06:24.400 --> 0:06:27.479 with quantitative research. So tell us a little bit about that. 0:06:27.560 --> 0:06:32.160 How do you emerge quant research with fundamental really bottoms 0:06:32.240 --> 0:06:35.520 up your stock picker? Essentially, how do you merge quantitative 0:06:35.600 --> 0:06:39.560 with bottoms up stock picking? What we do fundamentally is 0:06:39.720 --> 0:06:43.120 very bottom up in its orientation. But I learned this 0:06:43.240 --> 0:06:48.440 was back in the late nineties before forming Causeway, that 0:06:48.720 --> 0:06:51.480 many of our competitors had no idea what kind of 0:06:51.560 --> 0:06:54.400 risk they were taking. And that's where quant is so 0:06:54.680 --> 0:06:59.640 incredibly precise and effective, because our quant colleagues showed us 0:06:59.760 --> 0:07:02.919 right from the start they could disaggregate the risk. They 0:07:02.960 --> 0:07:04.920 could show us what sort of risk factors we had 0:07:04.960 --> 0:07:09.000 in the portfolio systematic risk factors. We knew all about 0:07:09.040 --> 0:07:12.600 the idiosyncratic the company specific, but when it came to 0:07:12.960 --> 0:07:16.920 how much cyclicality we were taking, or volatility risk, or 0:07:17.360 --> 0:07:20.960 value risk, or or any other of these major market 0:07:21.040 --> 0:07:24.560 risk size risk for example, that was illuminating. Now today 0:07:24.560 --> 0:07:28.360 it's sort of whole hum humdrum, But in the late 0:07:28.480 --> 0:07:32.080 nineties that was a revolutionary and so our bottom up 0:07:32.080 --> 0:07:36.160 process is very much fundamental stock selection combined with quant 0:07:36.280 --> 0:07:40.800 risk control, and therefore the portfolio is inherently diversified, so 0:07:40.840 --> 0:07:45.000 it's less risky, less volatile than a portfolio assembled without 0:07:45.080 --> 0:07:48.440 using a quant overla comment, that's the case, and then 0:07:48.520 --> 0:07:52.200 quantitatively we use fundamental to make the quant decisions more 0:07:52.240 --> 0:07:56.560 accurate because our quant approach in emerging markets, these are 0:07:56.640 --> 0:08:00.960 very broad portfolios that are the stocks are effectively assemble 0:08:01.040 --> 0:08:05.520 statistically and fundamentally, we're actually meeting with the companies that 0:08:05.560 --> 0:08:08.480 are in that portfolio, not all, but many, making eye 0:08:08.480 --> 0:08:12.280 contact with management, probing them on their corporate governance efficacy. 0:08:12.360 --> 0:08:16.160 And this makes our quant we believe, over the long term, 0:08:16.240 --> 0:08:19.440 much more effective than just a pure computer driven process. 0:08:20.080 --> 0:08:23.760 Quite quite interesting. Let's talk a little bit about the 0:08:23.800 --> 0:08:26.720 company you founded in two thousand and one. What's it 0:08:26.880 --> 0:08:31.240 like being a woman co founder and CEO in finance 0:08:31.680 --> 0:08:35.360 that just seems to have an awful lot of dudes 0:08:35.600 --> 0:08:39.800 running everything. And I use that word especially because it 0:08:39.920 --> 0:08:43.719 seems to be just rampant and there aren't a lot 0:08:43.760 --> 0:08:46.959 of people like you running fifty billion dollar farms. Yes, 0:08:47.440 --> 0:08:51.640 that's true, and not only do we recognize it a causeway. 0:08:51.920 --> 0:08:54.680 It does help having a female CEO, no doubt, because 0:08:55.280 --> 0:08:58.040 it shows the other women in our organization there is 0:08:58.640 --> 0:09:01.040 there's no limit, there's no last ceiling. Then go all 0:09:01.040 --> 0:09:03.040 the way to the top. But we do find that 0:09:03.080 --> 0:09:06.640 the pool of women to choose from is pretty small, 0:09:06.720 --> 0:09:09.480 even in graduate schools of business, that there are fewer 0:09:09.520 --> 0:09:13.160 women than men almost universally, and have those have those 0:09:13.240 --> 0:09:16.320 numbers kind of a little bit, but not a whole 0:09:16.320 --> 0:09:19.679 lot of nowhere near fifty as much as the graduate 0:09:19.679 --> 0:09:22.920 schools would like to think otherwise. And that means the 0:09:22.960 --> 0:09:26.199 pools already smaller from a recruiting perspective. And of those 0:09:26.679 --> 0:09:30.719 many are interested in other careers. They're enchanted by technology, 0:09:30.760 --> 0:09:33.160 and finance seems to have lost some of its luster. 0:09:33.800 --> 0:09:35.679 But there are groups of these women out there and 0:09:35.679 --> 0:09:37.640 it is up to us to find them. So for 0:09:37.679 --> 0:09:39.400 a while we thought of it like an ocean of 0:09:39.480 --> 0:09:42.120 graphic experiment. We would tag them in like the whales, 0:09:42.160 --> 0:09:45.960 and where did they go? Exactly where did they go? 0:09:46.559 --> 0:09:49.520 And uh, that didn't turn out to be very successful. 0:09:49.760 --> 0:09:53.199 But a former client of mine absolutely brilliant idea. This 0:09:53.320 --> 0:09:55.720 is Seema Hangarani. If she ran the city of New 0:09:55.800 --> 0:09:59.480 York's equities for years. Their pension fund started something called 0:09:59.480 --> 0:10:02.439 Girls Who in Vest, and then we Causeway got behind that. 0:10:03.040 --> 0:10:05.839 So we not only have been an early supporter financially, 0:10:05.880 --> 0:10:08.920 but we're also we can take these interns. Is the 0:10:08.960 --> 0:10:12.360 fourth year we've had an internet usually arising sophomore junior 0:10:12.400 --> 0:10:15.200 in college, a young woman brilliant. They have to get 0:10:15.200 --> 0:10:18.240 through a tough application process, so Barry, in effect, we 0:10:18.280 --> 0:10:21.360 are seating the pipeline. What's your involvement with Girls Who Invest? 0:10:21.440 --> 0:10:24.520 You're on one of the advisory boards. I'm on their 0:10:24.720 --> 0:10:27.680 advisory board and it's an honor to be a part 0:10:27.679 --> 0:10:30.280 of that organization. It's very inspiring for the women in 0:10:30.320 --> 0:10:33.760 my organization because they can see that Causeway is actively 0:10:33.800 --> 0:10:37.320 involved in something that's quasi philanthropic for us in that 0:10:37.600 --> 0:10:40.319 these young women are so young, they're nineteen or twenty 0:10:40.400 --> 0:10:42.840 years old. We can't hire them for years. They need 0:10:42.840 --> 0:10:45.600 to finish college and then typically we expect them to 0:10:45.600 --> 0:10:49.760 get their cf A and or an NBA before they're 0:10:49.920 --> 0:10:54.920 hirable as Causeway analysts. So that's years and years from now. 0:10:55.360 --> 0:10:57.959 But you guys are long term investors. We are. This 0:10:58.000 --> 0:11:01.680 sounds like another long term investment where you're thinking in 0:11:01.760 --> 0:11:04.679 terms of decades, not quarters. Well, this is again if 0:11:04.679 --> 0:11:06.360 you're going to go, if you have to think about 0:11:06.520 --> 0:11:10.200 the problem and in a long term perspective, this is 0:11:10.200 --> 0:11:13.080 how to deal with it is get women in college 0:11:13.080 --> 0:11:15.679 who are connected through social media to let each other 0:11:15.760 --> 0:11:18.440 know how exciting this is. And after our interns the 0:11:18.480 --> 0:11:20.840 next year they get another job and investment management and 0:11:20.880 --> 0:11:23.920 so forth, and best of all for us, so of 0:11:23.960 --> 0:11:25.840 course there's something in it for us other than having 0:11:25.840 --> 0:11:30.160 more women. It's a brand building exercise. It's reputation enhancing. 0:11:30.240 --> 0:11:33.000 So they tell their friends, who tell their friends how 0:11:33.040 --> 0:11:35.640 great it is to work a causeway, and that in 0:11:35.679 --> 0:11:38.480 turn gets back to the employees. So it's a virtuous 0:11:38.480 --> 0:11:41.439 cycle in terms of culture and reputation. And girls who 0:11:41.480 --> 0:11:44.800 invest is four years or five years old for four 0:11:44.800 --> 0:11:48.320 and a half, so you're five years away from seeing 0:11:48.360 --> 0:11:52.160 the first um harvest, so to speak. Of women who 0:11:52.360 --> 0:11:55.600 entered this as this group, as as interns, made their 0:11:55.600 --> 0:11:58.160 way through the process and eventually will be getting hired. 0:11:59.280 --> 0:12:01.880 And apparently the retention in the industry is very high. 0:12:01.920 --> 0:12:04.480 They're not deciding to go to something else, which to 0:12:04.559 --> 0:12:06.640 me is a testament to what they were, what they 0:12:06.720 --> 0:12:09.640 learned in their four weeks on one of these university 0:12:09.679 --> 0:12:12.280 campuses over the summer and their first internship, and how 0:12:12.360 --> 0:12:15.120 much they enjoyed the industry. So it'll take some time, 0:12:15.160 --> 0:12:17.600 but we started with thirty interns and this last summer 0:12:17.679 --> 0:12:22.040 was a hundred fifty interns and rising quite quite interesting. 0:12:22.320 --> 0:12:25.600 Let's talk a little bit about the Causeway portfolio. Um 0:12:25.679 --> 0:12:30.600 your global value portfolio has about fifty one holdings, average 0:12:30.600 --> 0:12:33.920 size about seventy billion dollars. What do you do with 0:12:34.360 --> 0:12:37.080 that sort of portfolio, what do you use for a 0:12:37.120 --> 0:12:42.199 benchmark and how do you expect clients to judge your performance, 0:12:42.559 --> 0:12:47.040 because that's not the most typical international portfolio. Yes, are 0:12:47.080 --> 0:12:50.280 both our international our global portfolios are fairly concentrated Global, 0:12:50.320 --> 0:12:53.080 more soil international because it has the enormous US market 0:12:53.120 --> 0:12:56.320 to choose from. As well. A number of value stocks 0:12:56.320 --> 0:13:00.200 out there has gotten larger over the last few years 0:13:00.240 --> 0:13:04.400 and especially true in twenty nineteen year to date, meaning 0:13:04.440 --> 0:13:07.840 investors have abandoned these stocks. They don't want chemicals, they 0:13:07.880 --> 0:13:11.080 don't want autos, they don't want banks, and especially don't 0:13:11.120 --> 0:13:14.560 want them outside of the US market. And for a 0:13:14.679 --> 0:13:19.400 value manager, this is the time. I haven't seen anything 0:13:19.440 --> 0:13:22.960 like this, nor have my colleagues since the two thousand 0:13:22.960 --> 0:13:26.079 when these stocks were all Dialue stocks were abandoned, or 0:13:26.240 --> 0:13:28.199 the end of two thousand and eight when they were 0:13:28.240 --> 0:13:32.000 they were left for dead. So that's one of the 0:13:32.000 --> 0:13:34.040 reasons why we have such a large market average market 0:13:34.120 --> 0:13:36.360 cap you mentioned seventy billion dollars. These are some of 0:13:36.360 --> 0:13:38.400 these are very large companies. You've heard of them. You've 0:13:38.920 --> 0:13:42.599 German giants like b A, S f Or or Volkswagen 0:13:43.080 --> 0:13:46.000 the parent company, if not only Volkswagen Brown but portion 0:13:46.040 --> 0:13:51.040 Audi at the forefront of electric vehicles at Barclay's Bank 0:13:51.240 --> 0:13:54.880 or Lloyd's in the UK now downtrodden due to Brexit, 0:13:54.960 --> 0:13:59.199 but sound financial institutions. The market is treating them as 0:13:59.240 --> 0:14:02.000 if they are all going to shrink and just as 0:14:02.040 --> 0:14:04.400 if their growth rates are negative, which is true of 0:14:04.480 --> 0:14:07.920 the entire value index. So let's use a couple of 0:14:07.920 --> 0:14:11.040 those examples because I want to dig into your thought process. 0:14:11.400 --> 0:14:16.440 Volkswagen has their big diesel scandal, the emissions rigging scandal, 0:14:16.640 --> 0:14:20.040 the stock gets clawbered. You immediately look at that as 0:14:20.080 --> 0:14:24.920 an opportunity. What is the internal process like when your 0:14:24.960 --> 0:14:28.280 investment committee sits down and says, let's talk about Volkswagen 0:14:28.320 --> 0:14:30.480 and do we want to step into this mess. We 0:14:30.720 --> 0:14:35.320 divide fundamental research into six clusters. Their sector oriented and 0:14:35.400 --> 0:14:39.680 our industrials cluster looks after automobile, so the it also 0:14:39.720 --> 0:14:42.640 covers consumer discretionary and the head of that as a 0:14:43.760 --> 0:14:48.560 excellent portfolio manager named Jonathan Ang, and he saw this problem. 0:14:48.720 --> 0:14:51.120 We didn't know the company was committing fraud in September 0:14:51.160 --> 0:14:54.880 off when diesel Gate was announced, but it took us 0:14:54.920 --> 0:14:57.640 a couple of weeks and with Jonathan leadership, to do 0:14:57.760 --> 0:15:02.360 the research to determine based on prior recalls of vehicles 0:15:02.400 --> 0:15:07.280 that the sticky accelerators at Toyota. Remember Whens Congress had 0:15:07.360 --> 0:15:10.240 keep those cards in the garage. They're dangerous. They were. 0:15:10.280 --> 0:15:12.360 They turned out the drivers couldn't tell the break from 0:15:12.360 --> 0:15:17.600 the accelerator. But that is similar yeah, GM, the sticky 0:15:17.640 --> 0:15:22.400 the ignition switches, and some of those incidents caused deaths. 0:15:22.400 --> 0:15:25.600 In this case, it's a pollution problem. So we were 0:15:25.640 --> 0:15:29.000 able to make an assessment of both the monetary damages 0:15:29.040 --> 0:15:34.600 associated with the fines and regulatory problem fees, as well 0:15:34.640 --> 0:15:38.280 as the recall costs, the marketing spend but the reason 0:15:38.320 --> 0:15:40.440 why we went into that stock is emblematic of what 0:15:40.520 --> 0:15:43.880 we do would causeway. Fundamentally, we find companies with great 0:15:43.920 --> 0:15:50.160 assets with tremendous financial strength. So that company, Volkswagen, had 0:15:50.760 --> 0:15:54.440 twenty four billion euros of net cash on the balance 0:15:54.440 --> 0:15:56.440 sheet before they went in net cash, so that means 0:15:56.720 --> 0:15:59.640 they had no net debt when they went into this scandal, 0:16:00.320 --> 0:16:02.920 and they had operating margins a third of that of 0:16:02.960 --> 0:16:06.240 their best competitors. That to us is a it's a 0:16:06.280 --> 0:16:11.960 flashing red light of wow, this company is really poorly managed. 0:16:12.000 --> 0:16:13.960 And if we can be there at the time when 0:16:14.040 --> 0:16:17.600 new management steps in and runs the business more efficiently, 0:16:17.640 --> 0:16:22.240 if we can influence them as soft activists making not 0:16:22.320 --> 0:16:25.560 talking about next quarter, but talking about the long term 0:16:25.600 --> 0:16:28.560 investors multiple years exactly. We have a two year price 0:16:28.640 --> 0:16:31.360 target on all two hundred stocks we follow closely, of 0:16:31.440 --> 0:16:33.920 which that you mentioned the fifty one in the portfolio, 0:16:34.120 --> 0:16:37.400 they are a subset of that. And we went to 0:16:37.520 --> 0:16:39.560 management and said, you have a crisis on your hands. 0:16:39.560 --> 0:16:42.400 What are you going to do about it? And they 0:16:42.400 --> 0:16:44.920 had to replace all their senior people and then some 0:16:45.560 --> 0:16:48.440 But this this company, if it weren't for the fact 0:16:48.440 --> 0:16:50.760 we were in a trade war, and the and the 0:16:50.800 --> 0:16:54.440 global investment community seems to be worried deeply about recession. 0:16:55.000 --> 0:16:57.760 This stock would be much higher than it is today, 0:16:57.920 --> 0:16:59.600 are you? Are you guys still well? First of all, 0:17:01.440 --> 0:17:04.320 VW has done pretty well, hasn't it. It's put on 0:17:04.400 --> 0:17:07.840 from its lows about fifty in local currency terms. Not 0:17:07.920 --> 0:17:10.399 too shabby. It isn't too shabby, but it could be 0:17:10.560 --> 0:17:13.160 much better. So I assume you're still along the position. 0:17:13.280 --> 0:17:16.400 Still along the position, let's talk a little bit about 0:17:16.440 --> 0:17:20.520 the state of the world, um, both here and in Europe. 0:17:21.040 --> 0:17:25.119 Um you mentioned earlier, the trade war and tariffs is 0:17:25.160 --> 0:17:28.600 having a problem a lot of Europeans who are fearful 0:17:28.800 --> 0:17:33.399 of recession. UH Germany is either in recession or about 0:17:33.440 --> 0:17:36.040 to be. And who knows what the UK is going 0:17:36.080 --> 0:17:39.359 to do to themselves with their Brexit, whether it's a 0:17:39.359 --> 0:17:41.680 hard Brexit or or a heart of Breaxit it looks 0:17:41.720 --> 0:17:45.280 like as the choices, how do you deal with this 0:17:45.400 --> 0:17:50.720 sort of global mayhem and distractions when you're investing internationally? Well, 0:17:50.760 --> 0:17:52.920 to some degree, the more mayhem the better if you're 0:17:52.920 --> 0:17:57.720 a value investor, because that's when invest other investors discard 0:17:57.880 --> 0:18:02.840 great companies and our mantra as value investors is there's 0:18:03.040 --> 0:18:06.320 always a price. There's a price for everything, no matter 0:18:06.440 --> 0:18:08.320 what it is. At some point in time you say 0:18:08.400 --> 0:18:11.320 that's just too cheap. I think the biggest problem for 0:18:11.359 --> 0:18:15.960 Europe is that investors appeared to have become despondent, and 0:18:16.040 --> 0:18:20.000 the quintupling of central bank balance sheets from early two 0:18:20.000 --> 0:18:24.000 thousand nine has led to this wave of money washing 0:18:24.080 --> 0:18:28.679 over the globe. And as rates have fallen, savers in 0:18:28.720 --> 0:18:32.679 Europe and an aging population have panicked and decided they 0:18:32.680 --> 0:18:35.399 need to save more. So now there's this glut of savings, 0:18:35.440 --> 0:18:38.840 and that's a lot of people looking for low risk 0:18:38.960 --> 0:18:42.320 investments that they can retire on, and there just isn't 0:18:42.440 --> 0:18:44.760 enough low risk investments. Hence the price goes up, and 0:18:44.760 --> 0:18:46.639 guess what falls the yield. And that's one of the 0:18:46.680 --> 0:18:50.960 reasons why bond yields, not just sovereign bonds, but corporate bonds, 0:18:51.000 --> 0:18:55.640 mortgage bonds all over Europe and in Japan are negative yielding, 0:18:56.400 --> 0:19:00.120 and that scares equity investors and then they panic more 0:19:00.640 --> 0:19:04.880 and they sell off the cyclical stocks. And we think 0:19:04.880 --> 0:19:08.120 this is a tremendous opportunity to own some of these 0:19:08.200 --> 0:19:12.760 great companies, whether they be financial institutions or or manufacturers 0:19:13.320 --> 0:19:17.680 at crisis level valuations, and yet looking at the businesses, 0:19:17.760 --> 0:19:20.199 how much better managements have become over the years. How 0:19:20.320 --> 0:19:25.840 much more impressive is their financial strength? They're not even comfortable. 0:19:25.880 --> 0:19:28.479 The banks have three to four times as much capital 0:19:28.520 --> 0:19:32.800 as they did in the Eurozone crisis in and there's 0:19:32.880 --> 0:19:35.080 nothing wrong with the Brits, thank god, they have the 0:19:35.400 --> 0:19:37.760 I think the best economy in all of Europe. Whether 0:19:37.800 --> 0:19:40.880 they're alone or together, it doesn't matter. So when we 0:19:41.000 --> 0:19:44.480 when we look at Europe, how do those valuations and 0:19:44.600 --> 0:19:47.600 yields compared to what we see in the United States? 0:19:47.640 --> 0:19:51.919 The SMP just sore. It's yield notch a little above 0:19:52.040 --> 0:19:55.159 the ten years the tenure yield is falling this past summer. 0:19:55.520 --> 0:19:59.399 What do yields look like on quality value companies in Europe? 0:19:59.760 --> 0:20:02.480 The banks have a very high yield and likely to 0:20:02.520 --> 0:20:06.680 be higher as they continue to improve their asset quality 0:20:06.840 --> 0:20:09.560 and cut costs further, which is one of the few 0:20:09.640 --> 0:20:12.320 areas of control they have. They can't control rates, but 0:20:12.359 --> 0:20:14.920 they can definitely control their costs, and as they generate 0:20:14.920 --> 0:20:17.480 more cash, we expect them too. As the US banks 0:20:17.480 --> 0:20:20.480 have already done, returned that to shareholders, so their yields 0:20:20.480 --> 0:20:24.119 are taking higher. What's the average yield of a decent 0:20:24.160 --> 0:20:27.199 sized bankst somewhere around three to four percent, so not 0:20:27.720 --> 0:20:30.560 Sometimes yields get too high. It's almost a warning sign 0:20:30.600 --> 0:20:32.680 either the dividend is going to get cut or there's 0:20:32.720 --> 0:20:36.280 some of the problem. This is rational within the realm 0:20:36.280 --> 0:20:39.800 of what makes sense. Well, I don't know how rational 0:20:39.880 --> 0:20:43.600 it is. If the tenure German government bond is negative 0:20:43.680 --> 0:20:49.200 seventy basis boids, that's a tremendous amount, but it looks 0:20:49.240 --> 0:20:51.240 at the industrial is. One of my favorites to mention 0:20:51.440 --> 0:20:55.120 is the German Chemical Company b A s F. They are, 0:20:55.119 --> 0:20:57.440 They're a giant across the whole panapoly different kinds of 0:20:57.480 --> 0:21:04.040 chemicals from from organic to agricultural, healthcare related. They're phenomenal 0:21:04.160 --> 0:21:07.320 integrated business. And that davidend deal is over five percent 0:21:07.800 --> 0:21:10.960 and nobody seems to be at all interested. What's the fear? 0:21:11.000 --> 0:21:16.879 Why are people afraid of buying an internationally diversified industrial 0:21:16.920 --> 0:21:20.120 life that it's there's the crowding effect isn't just within 0:21:20.200 --> 0:21:23.000 the US market globally, it is the US market, the 0:21:23.080 --> 0:21:26.040 US market and the US dollar have attracted a huge 0:21:26.040 --> 0:21:28.960 amount of buying attention, and part of this has to 0:21:29.000 --> 0:21:32.880 do with what's happened to the composition of investors. You're 0:21:33.000 --> 0:21:36.760 talking to me as if we make saying decisions. I 0:21:36.800 --> 0:21:40.320 certainly believe we do. But we're making these discretionary type 0:21:40.359 --> 0:21:44.280 decisions fundamentally in our quants are doing so, they're creating 0:21:44.320 --> 0:21:49.359 a portfolio systematically with also fundamental risk control. So in 0:21:49.400 --> 0:21:53.639 every way, shape or form, there's some type of valuation 0:21:53.680 --> 0:21:57.200 effort underpinning our portfolios. That's not true with a lot 0:21:57.240 --> 0:22:00.760 of what's happening in markets today. We see not just 0:22:00.880 --> 0:22:05.840 the advent of or the massive increase in indexation, which, 0:22:05.840 --> 0:22:08.000 as you know, as stocks get larger and index they 0:22:08.040 --> 0:22:12.040 just attract more money and more buying, and conversely, as 0:22:12.080 --> 0:22:15.160 they fall, they fall further. But the the momentum trend 0:22:15.280 --> 0:22:23.440 following has been extraordinarily active, So more momentum trend falling 0:22:23.560 --> 0:22:27.720 and then money behind that. And as these European stocks 0:22:27.760 --> 0:22:31.480 to the point sell off, then they tend to sell 0:22:31.520 --> 0:22:34.879 off further. So if value, if if fair value is 0:22:34.920 --> 0:22:38.400 some sort of line that continuum, these stocks have been 0:22:38.400 --> 0:22:41.960 trading so far below and they continue to fall versus 0:22:41.960 --> 0:22:47.159 fair value because because they're falling already. So momentum is 0:22:47.160 --> 0:22:51.440 a strange beast. And as there are more algorithmic, more 0:22:52.359 --> 0:22:57.160 computer driven trading globally, we've noticed more market much more 0:22:57.200 --> 0:23:00.200 the way of market inefficiency. So we're willing to take 0:23:00.240 --> 0:23:06.320 positions in these securities and we expect that, saying investors 0:23:06.320 --> 0:23:09.600 will prevail. But it's really tough to see this happen. 0:23:10.000 --> 0:23:14.119 So investors like Michael Burry have said indexing is a 0:23:14.200 --> 0:23:17.000 bubble and it's going to blow up. You seem to 0:23:17.040 --> 0:23:21.120 be eluding that the more we index, the more opportunities 0:23:21.119 --> 0:23:24.320 are created for active management, if there are that many 0:23:24.359 --> 0:23:28.960 more identifiable inefficiencies. I get asked at every single client 0:23:29.119 --> 0:23:33.359 meeting these days, what's the catalyst for value to outperform? Well, frankly, 0:23:33.400 --> 0:23:36.680 I wish I knew, but there are many possible catalysts, 0:23:37.040 --> 0:23:40.080 and one is simply that the very expectsive growth stocks 0:23:40.119 --> 0:23:43.400 disappointed earn these terms and then they become the victims 0:23:43.440 --> 0:23:47.320 of momentum selling. He doesn't take much in order to 0:23:47.359 --> 0:23:51.479 get that gap, massive gap to close between value and growth, 0:23:51.560 --> 0:23:53.560 and we just you could drive a truck through it now. 0:23:54.080 --> 0:23:56.879 But but I do think that as value turns up 0:23:56.880 --> 0:23:59.320 and it attracts more money. This could end up being 0:23:59.320 --> 0:24:03.000