1
00:00:02,360 --> 00:00:07,240
Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Join us now?

2
00:00:07,280 --> 00:00:10,119
Speaker 2: Is David Sowerby and Core portfolio manager here with us

3
00:00:10,160 --> 00:00:12,480
Speaker 2: on this Boxing day. I guess not in the US

4
00:00:12,520 --> 00:00:15,480
Speaker 2: but around the world sales you're celebrating, I know, but

5
00:00:15,480 --> 00:00:16,759
Speaker 2: we're supposed to celebrate.

6
00:00:16,400 --> 00:00:18,680
Speaker 1: With the Dale Canada too. It's Canada as well.

7
00:00:18,840 --> 00:00:22,080
Speaker 3: Well, said CommonWell, my neighbor to the south.

8
00:00:22,200 --> 00:00:25,000
Speaker 2: Yes, right, David, great to speak with you, and I

9
00:00:25,079 --> 00:00:27,240
Speaker 2: want to start just by before we look ahead, looking

10
00:00:27,280 --> 00:00:29,800
Speaker 2: back on this last year. What lessons will you carry

11
00:00:29,840 --> 00:00:32,199
Speaker 2: over from the way the market performed this year? And

12
00:00:32,200 --> 00:00:33,640
Speaker 2: if you kind of think of this as chapters, how

13
00:00:33,720 --> 00:00:35,680
Speaker 2: much is the story of the same here going into

14
00:00:35,680 --> 00:00:36,680
Speaker 2: twenty twenty five for you?

15
00:00:37,880 --> 00:00:41,159
Speaker 3: Enough of the same, But one very good same is

16
00:00:41,479 --> 00:00:46,400
Speaker 3: never underestimate the ability of solid US companies to deliver

17
00:00:47,040 --> 00:00:52,400
Speaker 3: superior capital allocation shareholder value creation in the face of

18
00:00:53,440 --> 00:00:58,920
Speaker 3: higher interest rates, questionable fiscal policy, time and time again,

19
00:00:59,240 --> 00:01:01,880
Speaker 3: bet on US companies. That's been the rule of thumb

20
00:01:01,920 --> 00:01:03,400
Speaker 3: for thirty plus years.

21
00:01:04,200 --> 00:01:07,280
Speaker 4: David, you know, am I gonna be lazy in twenty

22
00:01:07,319 --> 00:01:09,880
Speaker 4: twenty five and just hang on to my mag seven?

23
00:01:09,959 --> 00:01:12,360
Speaker 1: Or should I take a little bit of a roll

24
00:01:12,400 --> 00:01:13,320
Speaker 1: up my sleeves a little bit.

25
00:01:13,319 --> 00:01:15,679
Speaker 4: Maybe take a look at some small caps, some mid caps,

26
00:01:15,720 --> 00:01:18,960
Speaker 4: maybe some sectors or factors that haven't really performed over

27
00:01:19,000 --> 00:01:19,759
Speaker 4: the past two years.

28
00:01:20,560 --> 00:01:23,120
Speaker 3: Well, Paul, I don't root against the MAG seven, but

29
00:01:23,200 --> 00:01:26,560
Speaker 3: I think you have to think broader, more participation in

30
00:01:26,600 --> 00:01:31,119
Speaker 3: the markets. We saw this rotation since July eleventh, where

31
00:01:31,240 --> 00:01:36,040
Speaker 3: small caps outperformed quite well, value outperform growth, the MAG

32
00:01:36,120 --> 00:01:39,320
Speaker 3: seven lied or lagged excuse me, And here we go

33
00:01:39,360 --> 00:01:43,319
Speaker 3: into December Mag seven right back on the treadmill. Small

34
00:01:43,360 --> 00:01:46,920
Speaker 3: caps have still modestly beat large caps since July eleventh,

35
00:01:47,160 --> 00:01:50,440
Speaker 3: ten percent for small caps up seven percent.

36
00:01:50,120 --> 00:01:51,480
Speaker 1: For the S and P five hundred.

37
00:01:52,400 --> 00:01:55,200
Speaker 3: It's that two steps forward, one step back, one step

38
00:01:55,240 --> 00:01:58,440
Speaker 3: back in December, but I think we're back to small

39
00:01:58,480 --> 00:02:02,760
Speaker 3: caps having very good turns in twenty twenty five relative

40
00:02:02,840 --> 00:02:04,160
Speaker 3: to some of the megacaps.

41
00:02:04,400 --> 00:02:06,920
Speaker 2: David count me among those who hears that watchword are

42
00:02:06,920 --> 00:02:09,360
Speaker 2: those watchwords small caps and just sort of wonders what

43
00:02:09,400 --> 00:02:12,240
Speaker 2: to do with it. Where are you looking when we

44
00:02:12,280 --> 00:02:14,679
Speaker 2: talk about small caps? Where is there opportunities you see?

45
00:02:14,760 --> 00:02:17,720
Speaker 2: What's your counsel to your clients about what sectors, what

46
00:02:17,760 --> 00:02:22,200
Speaker 2: types of companies? Are are of interest in that world, A.

47
00:02:22,280 --> 00:02:26,600
Speaker 3: Proven process for twenty plus years. Two buckets to look

48
00:02:26,639 --> 00:02:31,320
Speaker 3: into first spinoffs small company spins out of a larger

49
00:02:31,360 --> 00:02:33,400
Speaker 3: company on lock shareholder value.

50
00:02:33,720 --> 00:02:36,320
Speaker 1: Look at the Bloomberg Spinoff.

51
00:02:35,800 --> 00:02:38,880
Speaker 3: Index in twenty twenty four, it's up better than sixty

52
00:02:39,320 --> 00:02:40,240
Speaker 3: sixty percent.

53
00:02:40,639 --> 00:02:41,760
Speaker 1: That's the first bucket.

54
00:02:42,000 --> 00:02:45,720
Speaker 3: The second bucket is under followed companies where there's only

55
00:02:45,840 --> 00:02:49,840
Speaker 3: two or fewer Wall Street analysts following the company compared

56
00:02:49,880 --> 00:02:52,960
Speaker 3: to the previous story on Apple. So an example is

57
00:02:53,080 --> 00:02:58,960
Speaker 3: National Cinemedia ticker symbol NCMI. Only two analysts follow the company.

58
00:02:59,240 --> 00:03:01,760
Speaker 3: They do that advertising when you go to the movies

59
00:03:01,840 --> 00:03:04,079
Speaker 3: hate it and you get there early, and you see

60
00:03:04,080 --> 00:03:08,840
Speaker 3: that active audience for advertising at National Cinemedia over one

61
00:03:08,880 --> 00:03:12,360
Speaker 3: thousand theaters they're in. There's an idea for an underfollowed

62
00:03:12,400 --> 00:03:13,520
Speaker 3: small cap stock.

63
00:03:13,480 --> 00:03:14,800
Speaker 1: And that stock's just ripped.

64
00:03:14,800 --> 00:03:17,040
Speaker 4: It's up a sixty percent year to day with a

65
00:03:17,040 --> 00:03:19,119
Speaker 4: market cap of about just six hundred and twenty five

66
00:03:19,440 --> 00:03:23,480
Speaker 4: million dollars. So that thing has worked here. David, how

67
00:03:23,520 --> 00:03:25,440
Speaker 4: do you think about valuation here? Because I've got a

68
00:03:25,440 --> 00:03:27,880
Speaker 4: fed that I think maybe they're going to cut a

69
00:03:27,880 --> 00:03:29,560
Speaker 4: couple of times in twenty twenty five.

70
00:03:29,560 --> 00:03:30,880
Speaker 1: But I think that's it.

71
00:03:30,880 --> 00:03:34,120
Speaker 4: It feels like earnings have to be a real driver

72
00:03:34,240 --> 00:03:35,920
Speaker 4: of this market going forward. How do you feel about

73
00:03:35,920 --> 00:03:37,240
Speaker 4: earnings visa the evaluation?

74
00:03:37,360 --> 00:03:37,800
Speaker 1: These days?

75
00:03:38,560 --> 00:03:42,120
Speaker 3: All valuation rich, no other way to describe it. If

76
00:03:42,160 --> 00:03:45,120
Speaker 3: you go on a free cash flow basis and value

77
00:03:45,160 --> 00:03:48,640
Speaker 3: the market that way, not as rich, still opportunities for

78
00:03:49,080 --> 00:03:52,040
Speaker 3: the investor, but you nailed it.

79
00:03:51,520 --> 00:03:52,920
Speaker 1: It's a tug of war.

80
00:03:53,120 --> 00:03:57,200
Speaker 3: In twenty twenty five, earnings, pre cash flow dividends will

81
00:03:57,200 --> 00:03:59,800
Speaker 3: all be up ten percent or better. That's pulling on

82
00:03:59,880 --> 00:04:03,880
Speaker 3: the upside. But valuation is stretched. And I looked back

83
00:04:03,920 --> 00:04:07,480
Speaker 3: to nineteen ninety there have been nine years in a

84
00:04:07,560 --> 00:04:11,360
Speaker 3: calendar year where valuation went lower, and in those nine

85
00:04:11,440 --> 00:04:14,200
Speaker 3: years the market only finished positive four on in nine

86
00:04:14,280 --> 00:04:17,360
Speaker 3: years when valuation slipped a bit. So that's the tug

87
00:04:17,480 --> 00:04:20,760
Speaker 3: of war for twenty twenty five rich valuations. I hope

88
00:04:21,080 --> 00:04:24,559
Speaker 3: they don't go lower. With earnings and free cash flow

89
00:04:24,800 --> 00:04:25,800
Speaker 3: up double digits.

90
00:04:26,200 --> 00:04:28,240
Speaker 2: I could detect what my friend Paul Swiney was saying,

91
00:04:28,240 --> 00:04:30,640
Speaker 2: some disdain or eagerness to stop talking about the Fed

92
00:04:30,680 --> 00:04:32,280
Speaker 2: Reserve as much as we have been over the course

93
00:04:32,320 --> 00:04:35,160
Speaker 2: of this last year. What's the role that it's going

94
00:04:35,200 --> 00:04:37,080
Speaker 2: to play in twenty twenty five as you see it.

95
00:04:37,080 --> 00:04:39,000
Speaker 2: I know you were listening closely to that press conference

96
00:04:39,040 --> 00:04:41,040
Speaker 2: just a couple of days ago. How much is it

97
00:04:41,080 --> 00:04:43,000
Speaker 2: going to be continuing to drive things going forward here

98
00:04:43,040 --> 00:04:46,560
Speaker 2: as you look at valuations, as Paul suggests, other facets

99
00:04:46,560 --> 00:04:49,520
Speaker 2: of investing beyond what the oracles down in the Echos

100
00:04:49,520 --> 00:04:50,760
Speaker 2: building are telling the market.

101
00:04:51,400 --> 00:04:54,000
Speaker 3: Well, you're in New York, so let's borrow from a

102
00:04:54,040 --> 00:04:58,320
Speaker 3: famous New York investor, Reggie Jackson. The FED is a

103
00:04:58,360 --> 00:05:02,640
Speaker 3: straw that stirs the So if the market only gets

104
00:05:02,680 --> 00:05:05,640
Speaker 3: two interest straight cuts next year, I don't think the

105
00:05:05,640 --> 00:05:08,440
Speaker 3: Fed should do anymore. Their number one mission should always

106
00:05:08,480 --> 00:05:11,359
Speaker 3: be price stability, and if the market doesn't like it

107
00:05:11,400 --> 00:05:14,640
Speaker 3: in the near term, you have to grind through it.

108
00:05:14,680 --> 00:05:17,960
Speaker 3: But at the same time, if inflation is not brought

109
00:05:18,200 --> 00:05:20,839
Speaker 3: even a bit lower, just look at what the market

110
00:05:20,839 --> 00:05:23,880
Speaker 3: did from nineteen sixty five to nineteen eighty one. It

111
00:05:23,920 --> 00:05:28,360
Speaker 3: was flat on an inflation adjusted basis, it dropped forty

112
00:05:28,400 --> 00:05:31,520
Speaker 3: to fifty percent. So we have to be encouraging that

113
00:05:31,560 --> 00:05:34,760
Speaker 3: the Fed States committed to inflation, and that's going to

114
00:05:34,760 --> 00:05:37,320
Speaker 3: be a story in twenty twenty five. In that Tuga

115
00:05:37,400 --> 00:05:41,880
Speaker 3: war relative to the I think favorable earnings, free cash flow,

116
00:05:41,880 --> 00:05:45,000
Speaker 3: and free cash flow margins that'll still exist.

117
00:05:45,480 --> 00:05:47,680
Speaker 4: David, I've been doing this Wall Street thing since nineteen

118
00:05:47,720 --> 00:05:52,599
Speaker 4: eighty six. One of the really interesting markets to watch

119
00:05:52,640 --> 00:05:57,239
Speaker 4: develop has been private credit. Talk to us about Ares

120
00:05:57,480 --> 00:05:59,839
Speaker 4: Ares Management Corporation.

121
00:06:01,480 --> 00:06:06,359
Speaker 3: Areas is one of the largest private credit publicly traded companies,

122
00:06:06,360 --> 00:06:10,520
Speaker 3: so bank loans in particular, and that has been an

123
00:06:10,800 --> 00:06:15,280
Speaker 3: insatiable appetite for pension funds. I sit on the City

124
00:06:15,320 --> 00:06:18,479
Speaker 3: of Detroit's Investment Committee. My alma mater, Wayne State, I

125
00:06:18,560 --> 00:06:20,920
Speaker 3: chair the State of Michigan Pension Fund for a number

126
00:06:20,960 --> 00:06:24,920
Speaker 3: of years. The demand for private credit continues to grow

127
00:06:25,400 --> 00:06:29,000
Speaker 3: because the expectations are you can get near like public

128
00:06:29,000 --> 00:06:33,159
Speaker 3: equity returns without the same volatility, and that plays into

129
00:06:33,480 --> 00:06:36,640
Speaker 3: a name like Ares, which is one of the largest

130
00:06:36,720 --> 00:06:38,880
Speaker 3: private credit publicly traded companies.

131
00:06:39,640 --> 00:06:41,280
Speaker 2: You know, let's take advantage of the fact that you're

132
00:06:41,279 --> 00:06:43,240
Speaker 2: there in Michigan. I'd love to get your sense of

133
00:06:43,360 --> 00:06:45,440
Speaker 2: sort of not not the politics of the election per se,

134
00:06:45,480 --> 00:06:48,000
Speaker 2: but what issues were front and center, particularly in your

135
00:06:48,080 --> 00:06:50,159
Speaker 2: home state, and what that tells you about what to

136
00:06:50,160 --> 00:06:52,200
Speaker 2: focus on here in the years to come.

137
00:06:53,279 --> 00:06:59,320
Speaker 3: The economy first and foremost, that cumulative inflation was up

138
00:06:59,400 --> 00:07:02,960
Speaker 3: better than two twenty percent since early two thousand and

139
00:07:03,320 --> 00:07:07,680
Speaker 3: twenty twenty one, and I think that's why Michigan, perennial

140
00:07:07,680 --> 00:07:14,080
Speaker 3: swing state, swung back for incoming President Trump relative to

141
00:07:14,120 --> 00:07:16,120
Speaker 3: twenty twenty twenty sixteen.

142
00:07:16,760 --> 00:07:18,480
Speaker 1: We end up voting with our pocketbook.

143
00:07:18,520 --> 00:07:21,360
Speaker 3: The other matters, the other factors matter, But I think

144
00:07:21,400 --> 00:07:24,880
Speaker 3: that was the key reason for Michigan going back to

145
00:07:24,960 --> 00:07:27,120
Speaker 3: Trump the way they did in twenty sixteen.

146
00:07:28,320 --> 00:07:30,360
Speaker 4: David, when you and your team woke up the day

147
00:07:30,360 --> 00:07:33,560
Speaker 4: after election day, did you change your investment outlook for

148
00:07:34,320 --> 00:07:36,080
Speaker 4: twenty twenty five at all?

149
00:07:36,320 --> 00:07:40,440
Speaker 3: Generally no, because I can't predict politics, Paul, But my

150
00:07:40,600 --> 00:07:44,760
Speaker 3: axiom in predicting politics is never never expect.

151
00:07:44,560 --> 00:07:46,760
Speaker 1: Washington to do the right thing. They do the least

152
00:07:46,760 --> 00:07:48,240
Speaker 1: amount to fix a problem.

153
00:07:48,640 --> 00:07:52,880
Speaker 3: That said, after the election, you saw small cap stocks

154
00:07:52,960 --> 00:07:55,880
Speaker 3: the day after pop three to four percent. That was

155
00:07:55,960 --> 00:07:59,760
Speaker 3: validation at animal spirits, we're going to be resurrected. And

156
00:08:00,000 --> 00:08:04,840
Speaker 3: we saw that November NFIB Optimism index take a decided

157
00:08:04,920 --> 00:08:07,960
Speaker 3: spike higher. That can be a factor that bodes well

158
00:08:07,960 --> 00:08:11,800
Speaker 3: for the market next year and in particular animal spirits

159
00:08:11,800 --> 00:08:14,440
Speaker 3: and small cap cyclically sensitive stocks.

160
00:08:14,800 --> 00:08:15,800
Speaker 1: You can't predict politics.

161
00:08:15,880 --> 00:08:18,400
Speaker 2: Let me just ask you about geopolitics in terms of

162
00:08:18,440 --> 00:08:22,320
Speaker 2: what you're watching and how that maybe colors your appetite for, say,

163
00:08:22,360 --> 00:08:26,600
Speaker 2: assets outside the United States, equities overseas, other opportunities are

164
00:08:26,720 --> 00:08:29,120
Speaker 2: Are you staying pretty closely focused on the US or

165
00:08:29,160 --> 00:08:31,800
Speaker 2: do you see opportunity across the Atlantic.

166
00:08:33,040 --> 00:08:34,000
Speaker 1: Outside the US.

167
00:08:34,120 --> 00:08:39,880
Speaker 3: It's interesting, but the bias is still in US domestic portfolios.

168
00:08:40,360 --> 00:08:43,920
Speaker 3: And since the end of nineteen eighty seven, US stocks

169
00:08:43,920 --> 00:08:49,200
Speaker 3: have compounded five five percentage points better compound analyzed return

170
00:08:49,520 --> 00:08:54,560
Speaker 3: superior than the MSCIEFA. That goes back to the superiority

171
00:08:54,600 --> 00:08:58,320
Speaker 3: of US companies delivering shareholder value. The bar is high

172
00:08:59,000 --> 00:09:02,040
Speaker 3: to have meaningful assets oute of the US. You get

173
00:09:02,120 --> 00:09:05,480
Speaker 3: enough diversification here given our indexes.

174
00:09:06,360 --> 00:09:09,319
Speaker 4: So, David, what's your message to your clients? You have

175
00:09:09,400 --> 00:09:12,840
Speaker 4: a thematic message to your clients for twenty twenty five.

176
00:09:14,080 --> 00:09:19,040
Speaker 3: I'm generally not that creative other than keep your head

177
00:09:19,080 --> 00:09:22,880
Speaker 3: down buying good companies that are generating capital and free

178
00:09:22,880 --> 00:09:25,480
Speaker 3: cash flow to the investor. And at the end of

179
00:09:25,520 --> 00:09:29,000
Speaker 3: the day, I'll have the same five risks that every

180
00:09:29,040 --> 00:09:32,880
Speaker 3: wall street analyst has on the street, but ultimately it's

181
00:09:32,920 --> 00:09:34,720
Speaker 3: always going to be the risk you don't know that

182
00:09:34,840 --> 00:09:36,320
Speaker 3: bites you the hardest.

183
00:09:36,559 --> 00:09:38,560
Speaker 2: David, Do you still have clients who are on the

184
00:09:38,559 --> 00:09:40,480
Speaker 2: more conservative side of things, who are part of that

185
00:09:40,559 --> 00:09:43,160
Speaker 2: six trillion dollars cash pile, who are reluctant to get

186
00:09:43,160 --> 00:09:46,000
Speaker 2: back into this market? And if you do, what's the

187
00:09:46,040 --> 00:09:48,040
Speaker 2: council you're giving them to jump in?

188
00:09:49,320 --> 00:09:52,360
Speaker 3: Generally, no, but if there are some you just want

189
00:09:52,440 --> 00:09:55,640
Speaker 3: to take a look at the potential for the S

190
00:09:55,720 --> 00:09:57,520
Speaker 3: and P five hundred, or the average stock and the

191
00:09:57,640 --> 00:10:01,280
Speaker 3: S and P five hundred to compound seven to eight.

192
00:10:01,120 --> 00:10:04,200
Speaker 1: Percent over the next three years. You're not going to get.

193
00:10:04,160 --> 00:10:08,720
Speaker 3: That in treasury bills or treasury notes, and the probability

194
00:10:08,760 --> 00:10:12,080
Speaker 3: is probably better than eighty percent that the US and

195
00:10:12,160 --> 00:10:14,079
Speaker 3: the S and P five hundred, the average stock will

196
00:10:14,120 --> 00:10:15,440
Speaker 3: compound better than cash.

197
00:10:15,880 --> 00:10:20,359
Speaker 1: I like those odds. The next calendar year flip a coin.

198
00:10:21,440 --> 00:10:23,360
Speaker 3: But the next two or three years you feel like

199
00:10:24,080 --> 00:10:27,040
Speaker 3: equities will still meaningfully outperform cash.

200
00:10:27,400 --> 00:10:29,000
Speaker 4: All right, David, thank you so much for you Always

201
00:10:29,040 --> 00:10:31,680
Speaker 4: appreciate getting a few minutes of your time. David Sowerby

202
00:10:32,040 --> 00:10:35,520
Speaker 4: and Core Portfolio Manager from the Great Midwest,