WEBVTT - GQG Partners’ Sid Jain on Forward-Looking Quality 0:00:13.200 --> 0:00:16.479 Welcome to Inside Active, a podcast about active managers that 0:00:16.520 --> 0:00:19.360 goes beyond sound bites and headlines and looks deeper into 0:00:19.400 --> 0:00:24.320 their processes, challenges and philosophies and security selection. I'm David Cohne, 0:00:24.320 --> 0:00:27.960 i lead mutual fund and active Research at Bloomberg Intelligence. Today, 0:00:28.080 --> 0:00:32.880 my cost is Christopher Kine, us quantitative strategist at Bloomberg Intelligence. Chris, 0:00:32.920 --> 0:00:34.080 thank you for joining me today. 0:00:34.240 --> 0:00:35.720 Thank you so much for having me. David. 0:00:36.680 --> 0:00:39.760 So, you wrote interesting note last month on quality stocks 0:00:39.800 --> 0:00:42.600 trading near their most expensive levels over the past twenty 0:00:42.600 --> 0:00:44.320 five years. Is that still the case? 0:00:45.159 --> 0:00:47.360 Yes, it is still the case. I mean quality has 0:00:47.440 --> 0:00:51.760 been certainly the most expensive factor from a historical perspective. 0:00:51.800 --> 0:00:54.360 Now for a while. You know, our bi quality we 0:00:54.440 --> 0:00:57.760 keep it pretty simple and we just consider profitability metrics 0:00:57.800 --> 0:01:01.400 like r O E ro see as well as low leverage. 0:01:02.080 --> 0:01:03.880 So you know, when you look at the top Quintown 0:01:03.880 --> 0:01:05.880 on the Russell one thousand is trading over four and 0:01:05.920 --> 0:01:09.080 a half time sales versus just over one time sales 0:01:09.080 --> 0:01:12.960 for the lowest, lowest stock quality Quintal. So that's about 0:01:13.120 --> 0:01:15.319 over three and a half times more expensive, which is 0:01:15.360 --> 0:01:17.680 one of the most expensive readings we've seen. I will 0:01:17.680 --> 0:01:21.040 say also, though, that you know, the profitability of these stocks, 0:01:21.080 --> 0:01:24.640 of these high quality stocks are much elevated compared to history. 0:01:25.120 --> 0:01:28.440 Obviously high profitability will you know, high quality will always 0:01:28.480 --> 0:01:30.959 have higher profitability. But when you look at the spread 0:01:31.000 --> 0:01:33.640 between the probitability of low and high quality right now, 0:01:33.840 --> 0:01:36.280 it's very wide, So you would think there is some 0:01:36.360 --> 0:01:40.000 fundamental support though the valuations are very stretched. 0:01:40.959 --> 0:01:43.880 Great, well, I'm sure today's guest has a great take 0:01:43.959 --> 0:01:47.640 on valuations. And without further ado, i'd like to welcome 0:01:48.000 --> 0:01:52.120 Sid Jane to the podcast. Sid is deputy portfolio manager 0:01:52.200 --> 0:01:55.360 at GQG Partners. Sid, thank you for joining us today. 0:01:55.760 --> 0:01:57.360 Thanks for having me on. Guys. 0:01:58.080 --> 0:02:01.280 So I have to start with the research note your 0:02:01.400 --> 0:02:05.360 firm recently published. You know, I couldn't I really think 0:02:05.360 --> 0:02:07.560 that's the best way to start. So you put out 0:02:07.640 --> 0:02:12.080 a note called dot com on Steroids. In the note, 0:02:12.400 --> 0:02:14.880 you know, your firm says that today's market, you know, 0:02:14.960 --> 0:02:17.560 could actually be worse than the dot com bubble, and 0:02:17.639 --> 0:02:20.600 your firm argues that, you know, many of today's big 0:02:20.639 --> 0:02:25.639 tech names represent backward looking quality, not forward with looking quality. 0:02:25.800 --> 0:02:28.120 So you know, my question is, you know, what are 0:02:28.120 --> 0:02:32.800 the clearest quantifiable metrics, say canaries in the coal mine, 0:02:33.200 --> 0:02:35.799 that in your view, distinguished one from the other. 0:02:36.960 --> 0:02:37.120 Yeah. 0:02:37.120 --> 0:02:40.880 Absolutely, And I think to kick things off, it's important 0:02:40.880 --> 0:02:43.400 to understand some of our history with the technology sector 0:02:43.440 --> 0:02:46.800 where we're not perma bears by any means. We've been 0:02:46.800 --> 0:02:49.720 actually quite bullish and constructive on the sector for better 0:02:49.800 --> 0:02:51.000 part of our firm's history. 0:02:50.760 --> 0:02:51.640 Of the past decade. 0:02:52.120 --> 0:02:54.480 What has caused us to get nervous is this new 0:02:54.680 --> 0:02:59.800 investment cycle that you're seeing. And if you study again history, 0:03:00.440 --> 0:03:04.320 when you see major spikes in CAPEX and this is 0:03:04.400 --> 0:03:07.240 on present level of investment you're seeing right now, that 0:03:07.520 --> 0:03:12.120 usually tends put poorly for forward looking equity returns. And 0:03:12.200 --> 0:03:15.080 so that's one metric where it's spiking CAPEX. And you've 0:03:15.120 --> 0:03:17.400 seen this in the past, whether it's the railroad boom, 0:03:17.440 --> 0:03:21.640 electricity boom, internet boom twenty five years ago. That gives 0:03:21.680 --> 0:03:24.560 us pause, especially when there's really no clear evidence of 0:03:24.600 --> 0:03:27.600 an ROI on the trillions of dollars investment that are 0:03:27.639 --> 0:03:31.840 being debated today. The second thing that keeps us nervous 0:03:32.000 --> 0:03:36.480 is just decelerating revenue growth. These companies, big tech companies 0:03:36.520 --> 0:03:41.040 were growing twenty thirty percent like Clockwork pre COVID, whereas 0:03:41.080 --> 0:03:44.760 now we believe the growth runaway is significantly less than 0:03:44.760 --> 0:03:48.240 what existed before. I mean, digital ad penetration is now 0:03:48.320 --> 0:03:52.640 running at seventy percent of over advertising. The metas Googles 0:03:52.640 --> 0:03:55.280 of the world cannot go twenty thirty percent sustainably anymore. 0:03:55.600 --> 0:03:59.280 I mean, same with Amazon's Microsoft. They're all slowing down structurally. 0:04:00.160 --> 0:04:03.840 And so the combination of well of names, high multiples 0:04:03.880 --> 0:04:08.200 and growth decelerating has problems been all over it. And 0:04:08.280 --> 0:04:10.720 last thing I'll say is the accounting shenanigans. And this 0:04:10.760 --> 0:04:13.120 is a little bit less quantifiable, but it was a 0:04:13.160 --> 0:04:15.000 lot of press that I'm sure you guys have read about. 0:04:15.040 --> 0:04:17.680 I mean, the circular vendor financing that you're seeing between 0:04:17.760 --> 0:04:21.880 Nvidia and open Ai, or today's AMD deal that usually 0:04:21.920 --> 0:04:24.240 comes at the very end of a cycle. So these 0:04:24.240 --> 0:04:26.480 are some of the data points that causes to believe 0:04:26.520 --> 0:04:30.039 that the best years are over for vast majority the 0:04:30.080 --> 0:04:32.400 technology space. Part to be a large cap the AI winner, 0:04:32.440 --> 0:04:33.000 so to speak. 0:04:35.320 --> 0:04:39.120 Interesting, very interesting. So you're talking about slowing growth, you know, 0:04:39.400 --> 0:04:42.839 I was wondering, you know, quality of all the factors, 0:04:42.839 --> 0:04:45.440 you know, tends to have the highest variance if you will, 0:04:45.440 --> 0:04:48.800 of factor definitions, you know, because you know it's not 0:04:48.880 --> 0:04:52.880 maybe as straightforward as a value or momentum. So do 0:04:53.000 --> 0:04:58.480 you have explicit growth elements in your quality factor? I've 0:04:58.520 --> 0:05:02.000 seen some quants do that, some not. Do you have 0:05:02.040 --> 0:05:04.880 that component in your quality factor? Yeah? 0:05:04.920 --> 0:05:07.600 So growth, we like growing companies. 0:05:08.240 --> 0:05:11.840 We don't generally buy companies that are in secular decline. 0:05:12.200 --> 0:05:15.599 But growth in and of itself is not what we're 0:05:15.600 --> 0:05:19.040 looking for. That's the only variable that matters. And so 0:05:19.279 --> 0:05:22.640 the way we think about investing is we want to 0:05:22.760 --> 0:05:26.400 compound it roughly ten percent annually, and we get there 0:05:26.440 --> 0:05:30.719 through a function of earnings per share growth plus dividend yield. 0:05:31.360 --> 0:05:34.599 That combination gets you there. And so we're equally comfortable 0:05:34.640 --> 0:05:38.159 owning software companies that get you to that tot re 0:05:38.200 --> 0:05:42.120 turn predominantly from the growth side, as well as energy 0:05:42.120 --> 0:05:44.520 companies where there's a much growth but you're getting a 0:05:44.600 --> 0:05:48.800 massive buyback and dividend return, and we're equally comfortable flexing 0:05:48.880 --> 0:05:50.680 both sides of that lever So it doesn't just have 0:05:50.760 --> 0:05:51.000 to be. 0:05:50.960 --> 0:05:53.040 Growth awesome, thank you. 0:05:53.720 --> 0:05:55.520 So I know, I know you know with your firm, 0:05:55.640 --> 0:05:58.479 you know it's a big approach with durable earnings rather 0:05:58.560 --> 0:06:01.919 than you know, typical growth or value labels. How do you, 0:06:02.400 --> 0:06:08.640 I guess, distinguish between durable earnings from just optimistic growth assumptions. 0:06:08.680 --> 0:06:13.520 So I think one area where we'd have maybe have 0:06:13.560 --> 0:06:16.320 a bit of a differential view is truly appreciate long 0:06:16.400 --> 0:06:20.000 term capital cycles. And this goes back to our founder 0:06:20.040 --> 0:06:24.000 in Cio Rajiev having a thirty year track record investing 0:06:24.080 --> 0:06:27.800 in developed markets, emerging markets, and everything in between. And 0:06:27.880 --> 0:06:30.720 once you've seen enough cycle that forced you to appreciate 0:06:30.800 --> 0:06:34.120 that everything experience goes through this. I mean, have you 0:06:34.160 --> 0:06:36.200 wrote a white paper action on the semiconductor sector. I 0:06:36.240 --> 0:06:38.719 think it was back in twenty seventeen House saying this 0:06:38.760 --> 0:06:40.840 has become the new growth sector and we've got a 0:06:40.880 --> 0:06:42.760 lot of pushback saying, how can you say that semic 0:06:42.800 --> 0:06:43.599 corectors haven't. 0:06:43.440 --> 0:06:44.080 Grown in ages? 0:06:45.240 --> 0:06:47.719 And so you do see those and I think, for example, 0:06:47.720 --> 0:06:51.039 if you look at today, we believe a lot of 0:06:51.040 --> 0:06:54.479 the technology sectors are very late cycle. The growth is 0:06:54.560 --> 0:06:58.400 slowing down, and the addressable market is just a lot 0:06:58.480 --> 0:07:00.960 less than it used to be. Is on going from 0:07:00.960 --> 0:07:04.680 twenty thirty percent revenue growth to ten percent, that's problematic 0:07:05.520 --> 0:07:10.160 We're also very focused on the rate of change of growth. 0:07:10.360 --> 0:07:13.240 So it's not just is it growing twenty percent a year, 0:07:13.280 --> 0:07:15.920 but what direction is that heading? And that goes to 0:07:16.000 --> 0:07:21.040 our definition of forward looking quality, is accelerating or decelerating, 0:07:21.840 --> 0:07:24.280 and so that's a much bigger focus of our process. 0:07:24.360 --> 0:07:27.080 So if you look at the energy space, we are 0:07:27.120 --> 0:07:29.680 one of the few quality managers that made a large 0:07:29.720 --> 0:07:33.040 pivot into energy back in twenty twenty one. Where people 0:07:33.040 --> 0:07:36.280 have thought this was secular decline, our view was that's 0:07:36.320 --> 0:07:38.680 the top of a cycle where you've seen most of 0:07:38.680 --> 0:07:42.000 the industries underwater, not making much money, massive under investment, 0:07:42.360 --> 0:07:45.440 and that will normalize. And that's how we think about 0:07:45.440 --> 0:07:47.280 that in terms of the longer term cycle. That's a 0:07:47.320 --> 0:07:49.160 big portion of how we deploy capital. 0:07:50.800 --> 0:07:54.560 So, you know, you mentioned, you know quality. Obviously, one 0:07:54.560 --> 0:07:56.520 of the funds I really wanted to kind of focus 0:07:56.600 --> 0:08:01.360 in is the gqg US Quality Value Fund ticker gq 0:08:01.560 --> 0:08:04.040 ep X, And so you know, if you look at 0:08:04.040 --> 0:08:06.960 the description, you know, invest in high quality companies with 0:08:07.040 --> 0:08:11.360 attractively priced future growth products. How does this fund different 0:08:11.440 --> 0:08:15.320 process or constraints from you know, your broader quality durable 0:08:15.320 --> 0:08:16.800 earning philosophy. 0:08:17.360 --> 0:08:18.480 Yeah, sure. So there's. 0:08:20.080 --> 0:08:23.200 The investible The universe of names we choose from is 0:08:23.360 --> 0:08:27.400 actually the exact same. So every name that we will 0:08:27.440 --> 0:08:31.680 own on the value strategy has to meet our definition 0:08:31.760 --> 0:08:36.079 of forward looking quality. So story that's improving has barriers 0:08:36.120 --> 0:08:38.800 to enter, a strong cashoder, turner, equity and all of 0:08:38.840 --> 0:08:41.840 that large chat focused. So that's the same. What is 0:08:41.880 --> 0:08:46.240 different is where the returns are coming from. So, as 0:08:46.280 --> 0:08:49.200 I mentioned, we go we want to get high single 0:08:49.200 --> 0:08:52.439 digit load double edit total return with earnings, growth and 0:08:52.480 --> 0:08:56.800 dividend yield. The growth strategy can go anywhere in between. 0:08:57.800 --> 0:09:01.240 The value strategy will focus on the companies that pay 0:09:01.320 --> 0:09:05.360 the yield. It's so usually the lower multiple names within 0:09:05.400 --> 0:09:09.760 our investible universe, with a much greater focus on dividend yield. 0:09:10.320 --> 0:09:12.080 So if you think from a scale of one to ten, 0:09:13.080 --> 0:09:18.079 one being deep value, ten being super fast growth or 0:09:18.240 --> 0:09:21.520 growth strategy will usually grow go anywhere between a three 0:09:21.559 --> 0:09:25.440 to seven on that spectrum, the value strategy will be 0:09:25.440 --> 0:09:28.880 between a three to five. Such a smaller subsector over 0:09:29.000 --> 0:09:32.439 quality universe, and sometimes the strategy looked exactly the same 0:09:32.720 --> 0:09:34.880 because the growth strategy can go everywhere in between. 0:09:36.000 --> 0:09:40.439 I would love to hear about You kind of alluded 0:09:40.480 --> 0:09:42.640 to this a bit in your last answer, but you know, 0:09:42.640 --> 0:09:46.880 I would love to hear about what's systematic, what's discretionary, 0:09:47.080 --> 0:09:50.240 and how that process kind of weaves in together. You know, 0:09:50.320 --> 0:09:52.640 I talked to a lot of clients that want to 0:09:52.640 --> 0:09:54.840 do quant but maybe they don't want to do it 0:09:54.880 --> 0:09:58.040 in a completely systematic way, right, they want to use 0:09:58.080 --> 0:10:01.719 their own discretion. So is it like you have, you know, 0:10:02.600 --> 0:10:05.480 a universe that's filtered for you quantitatively and then you 0:10:05.520 --> 0:10:08.520 do more research on it, or how does that process work. 0:10:10.000 --> 0:10:10.839 It's a great question. 0:10:11.800 --> 0:10:13.920 At the end of the day, we will always be 0:10:13.960 --> 0:10:17.640 a discretionary shop. We are fundamental Bondo stock managers, but 0:10:17.720 --> 0:10:22.840 we believe heavily in using quant as almost like guardrails 0:10:23.040 --> 0:10:24.800 on the process. So we have a team of quant 0:10:24.800 --> 0:10:29.240 analysts and they help monitor things as factor exposures, what 0:10:29.360 --> 0:10:33.440 factors are working, whatnot, doing historical back testing, making sure 0:10:33.440 --> 0:10:36.319 we're not making any obvious mistakes. So, for example, one 0:10:36.320 --> 0:10:39.920 thing we look at is what factor works in each country, 0:10:40.360 --> 0:10:42.920 and it's not the same fact that it's work across 0:10:42.920 --> 0:10:45.720 the world. So for example, if you look at China, 0:10:46.200 --> 0:10:49.480 one factor that has proven pretty effective longer term is 0:10:49.640 --> 0:10:53.280 divid and yield, and so our viob is let's maximize 0:10:53.280 --> 0:10:55.520 the odds as much as we can and focus on 0:10:55.559 --> 0:10:58.600 companies that have a yield versus purely growth. Now we 0:10:58.600 --> 0:11:01.160 can buy growthy names, but the job is to just 0:11:01.240 --> 0:11:02.280 improve the odds. 0:11:02.040 --> 0:11:02.920 As much as you can. 0:11:04.000 --> 0:11:06.240 As I mentioned the capex, we back to sectors that 0:11:06.280 --> 0:11:10.680 are seeing significant CAPEX increases generally tend to underperform, and 0:11:10.720 --> 0:11:13.400 so we monitor as those factors. But at the end 0:11:13.440 --> 0:11:15.000 of the day, we are a bottom up shop. It's 0:11:15.000 --> 0:11:16.480 another tool in our toolkit. 0:11:17.880 --> 0:11:20.600 Awesome, thank you so much. I would guess it's a similar, 0:11:21.720 --> 0:11:26.040 you know answer, But as I kind of mentioned previously, 0:11:26.160 --> 0:11:30.120 like quality definitely has the biggest variance of any quant factor, 0:11:30.160 --> 0:11:34.920 and I've seen quants have wildly different definitions, and I 0:11:34.920 --> 0:11:37.920 always ask, like, how do you weight the components of 0:11:37.960 --> 0:11:41.320 your quality factor? Like, typically I see profitability as probably 0:11:41.320 --> 0:11:45.199 the main thing, but obviously other things like margins and 0:11:45.280 --> 0:11:48.040 stability of fundamentals and all this kind of stuff. So like, 0:11:48.520 --> 0:11:51.000 is the waiting that you give to each of those 0:11:51.120 --> 0:11:53.080 is that going to change kind of based on the 0:11:53.160 --> 0:11:55.440 environment we're in, or do you have some kind of 0:11:55.440 --> 0:11:59.280 structure in your mind of the weighting of the different components. 0:12:00.080 --> 0:12:02.760 So there's a couple of things that change. One is 0:12:02.800 --> 0:12:06.960 the market environment also does matter. So for example, the 0:12:07.000 --> 0:12:10.520 pre COVID era, we were much more focused on growth, 0:12:10.559 --> 0:12:13.000 revenue growth. When it's a zero interest rate world where 0:12:13.040 --> 0:12:16.320 you're struggling to get economic growth, earnings growth in most 0:12:16.360 --> 0:12:19.280 major sectors, we are willing to pay a premium for 0:12:19.320 --> 0:12:23.160 the fastest growing, best companies, whereas today it's a bit murkier. 0:12:23.200 --> 0:12:25.040 It's a much higher interest rate world. You have to 0:12:25.040 --> 0:12:27.800 be more valuation sensitive, and we do think there's a 0:12:27.800 --> 0:12:29.160 lot of earnings risks from. 0:12:29.000 --> 0:12:31.560 The higher revenue growth names. But that's number one. 0:12:31.640 --> 0:12:33.760 Number two, and this might be even more important, is 0:12:33.760 --> 0:12:36.280 that we look at all the same factors that you 0:12:36.320 --> 0:12:39.960 mentioned in profitability, margins, et cetera. But we are much 0:12:40.040 --> 0:12:43.320 more focused on rate of change, the second derivative of 0:12:43.360 --> 0:12:46.640 those factors. As you mentioned the beginning, some of these 0:12:46.720 --> 0:12:52.160 quality companies today have very strong profits, strong returns today, 0:12:52.600 --> 0:12:55.120 but the question is next five year do they mean revert, 0:12:55.320 --> 0:12:58.080 which is what we think that will start happening. That's 0:12:58.160 --> 0:13:00.520 much less attractive than a company or a sector that 0:13:00.679 --> 0:13:03.240 is at the trophy of a cycle. Maybe improving take 0:13:03.360 --> 0:13:06.040 energy a few years ago, utilities over the past twelve 0:13:06.080 --> 0:13:08.160 to twenty four months, which you're much more positive on. 0:13:09.000 --> 0:13:11.400 And so that rate of change is what I think 0:13:11.480 --> 0:13:15.920 is differentiates us versus many other quality oriented fundamental managers 0:13:15.960 --> 0:13:16.360 out there. 0:13:17.320 --> 0:13:21.920 Awesome. I guess my last question here is what about 0:13:21.960 --> 0:13:24.720 other factors, Like we talked about value, we talked about quality, 0:13:24.800 --> 0:13:27.600 like does price momentum matter at all, does low risk 0:13:27.720 --> 0:13:30.079 matter at all, or any other factors that kind of 0:13:30.080 --> 0:13:31.439 add into your process. 0:13:32.400 --> 0:13:34.960 So I think historically, if you go back, one of 0:13:34.960 --> 0:13:37.040 the factors, and this is an output not an input, 0:13:37.240 --> 0:13:39.200 is that we do tend to have a bit of 0:13:39.200 --> 0:13:43.240 a momentum overlay on our strategies. And the reason for 0:13:43.280 --> 0:13:45.360 that is a fundamental reason is we like to buy 0:13:45.480 --> 0:13:50.080 improving stories, not getcheries. So that typically correlates with strong 0:13:50.120 --> 0:13:53.200 price momentum as well, and so it's rare. We want 0:13:53.200 --> 0:13:56.520 to be aware which sectors are seeing strong price momentum 0:13:56.520 --> 0:13:59.760 and not and understanding what is a fundamental reason for that. 0:14:00.160 --> 0:14:02.880 We don't have to buy based on just great price action, 0:14:03.880 --> 0:14:07.360 but if a stock is clearly breaking down, we want 0:14:07.360 --> 0:14:10.640 to know why because we focus on the largest companies 0:14:10.640 --> 0:14:13.559 in the world. Is a hyper efficient market, and we 0:14:13.640 --> 0:14:16.360 have deep respect for price section and that it has 0:14:16.440 --> 0:14:20.200 been longer term guardrails to our process making sure we're 0:14:20.240 --> 0:14:22.080 not a stock goes down twenty you buy it looks 0:14:22.120 --> 0:14:24.840 cheap because another twenty buy it and the classic value 0:14:24.840 --> 0:14:27.800 trapped territory. So price pomentum does matter to us. 0:14:29.040 --> 0:14:33.480 So your research process integrates not just traditional analysis, but 0:14:34.000 --> 0:14:38.480 also incorporates, you know, journalists, domain experts, others. Can you 0:14:38.520 --> 0:14:41.480 share an example of, you know where a non traditional 0:14:41.520 --> 0:14:44.880 perspective may have shifted your investment view. 0:14:46.040 --> 0:14:49.200 Absolutely, and it's the non traditional team that truly has 0:14:49.200 --> 0:14:52.200 some of the most differentiated views on our investment team. 0:14:52.600 --> 0:14:59.240 Where these are folks who have previously worked as investigated journals, journalists. 0:15:00.000 --> 0:15:03.080 There's the Wall Street journal or Barons or so Reuters, 0:15:03.680 --> 0:15:06.120 and they approached the world very differently. They're not actually 0:15:06.120 --> 0:15:09.760 allowed to talk to the investment team the traditional side. 0:15:09.800 --> 0:15:12.960 They're working in a vacuum. They don't read seal side research. 0:15:13.040 --> 0:15:15.120 They actually go on the ground and talk to people, 0:15:15.440 --> 0:15:18.960 whether it's former employees, regulators and things of that sort. 0:15:19.040 --> 0:15:21.360 And they've been a couple of examples where it's helped 0:15:21.680 --> 0:15:25.520 avoid blow ups but also find incredibly attractive opportunities. 0:15:25.520 --> 0:15:26.440 So I'll give a few. 0:15:27.080 --> 0:15:30.440 One would have been the technology sector. Actually, back in 0:15:30.480 --> 0:15:33.360 twenty twenty one, as I mentioned earlier, we made a 0:15:33.440 --> 0:15:36.640 large pivot from IT tech to energy, which paid out 0:15:36.720 --> 0:15:39.400 well in twenty twenty two. One of the interesting data 0:15:39.440 --> 0:15:42.000 points we found was the non traditional team had been 0:15:42.040 --> 0:15:45.520 talking to a lot of recruiters in Silicon Valley and 0:15:45.560 --> 0:15:48.240 the feedback they started hearing by summer twenty twenty one, 0:15:48.320 --> 0:15:53.040 where job offers were getting yanked. You're seeing reduced hiring 0:15:53.080 --> 0:15:56.080 across the board. And that was surprising because at that 0:15:56.160 --> 0:15:59.840 point you might remember, the technology companies were talking about growth, 0:16:00.120 --> 0:16:04.040 very strong growth into perpetuity revenue, strong, business outlooks strong, 0:16:04.520 --> 0:16:05.760 but quietly. 0:16:05.480 --> 0:16:06.840 They weren't hiring people anymore. 0:16:07.600 --> 0:16:10.160 And so when you see in disconnects like that, that 0:16:10.320 --> 0:16:12.280 cast your attention. Now, that's not the only data point 0:16:12.360 --> 0:16:14.840 we looked at, but that helped fit this mosaic that 0:16:14.960 --> 0:16:17.560 maybe things aren't all hunky dory the way people thought 0:16:17.560 --> 0:16:20.960 they were back in twenty twenty one. Another example would 0:16:20.960 --> 0:16:23.520 be on the emerging market side. We did a lot 0:16:23.560 --> 0:16:26.240 of work a few years ago on a coffee company 0:16:26.240 --> 0:16:29.960 called luckin Coffee in China, which maybe I remember it 0:16:29.960 --> 0:16:32.280 was a very hot IPO, supposed to be the next 0:16:32.280 --> 0:16:35.680 star Books of China. Our non traditional team did a 0:16:35.680 --> 0:16:37.880 lot of work and they were able to find core 0:16:38.000 --> 0:16:41.280 filings that show the founder at a criminal track record, 0:16:41.600 --> 0:16:44.960 obviously was not being talked about on the prospectus, and 0:16:45.000 --> 0:16:47.360 we were able to avoid that company ended up becoming 0:16:47.360 --> 0:16:50.200 a fraud a few years later. And so we've seen 0:16:50.240 --> 0:16:52.760 it add a lot of value in terms of truly 0:16:52.800 --> 0:16:55.880 differentiated insights versus what you read from Wall Street, the 0:16:55.880 --> 0:16:57.080 echo chamber of Wall Street. 0:16:57.600 --> 0:17:00.320 That's interesting about Luck And I remember that IPO that 0:17:00.440 --> 0:17:03.960 was a hot IPO. I didn't realize it was a fraud. Wow, 0:17:04.040 --> 0:17:07.600 good good job avoiding that one. I would love to 0:17:07.640 --> 0:17:11.000 hear about like stock waiting schemes, you know, is it 0:17:11.119 --> 0:17:14.000 just like weight? Is there a discretion amount of waiting? 0:17:14.160 --> 0:17:17.560 Is there like a quant process like a Marcowitz type situation? 0:17:18.320 --> 0:17:21.600 How do you think about waiting your stocks? 0:17:22.400 --> 0:17:25.639 So we've the camp of hold all your eggs in 0:17:25.680 --> 0:17:28.800 one basket and watch it closely. So typically the top 0:17:28.960 --> 0:17:32.720 ten names can be roughly fifty percent of our strategy. 0:17:32.760 --> 0:17:35.720 Top twenty seventy percent and the biggest name will be 0:17:35.760 --> 0:17:38.840 ten percent for context, and so we do like to 0:17:38.920 --> 0:17:40.560 run a concentrated strategy, and. 0:17:40.480 --> 0:17:42.480 The way we think about it is almost from. 0:17:42.320 --> 0:17:47.399 A credit perspective or a credit mindset, where it's not 0:17:47.520 --> 0:17:50.520 about find the names that have the most raw upside, 0:17:51.000 --> 0:17:52.520 it's find the names where it can lose. 0:17:52.400 --> 0:17:53.399 The least amount of money in. 0:17:54.359 --> 0:17:57.040 And so a name could have three hundred percent upside, 0:17:57.400 --> 0:17:59.479 but if you're wrong, you lose fifty percent. That deserves 0:17:59.480 --> 0:18:01.680 a spat on the portfolio. But we wouldn't make it 0:18:01.760 --> 0:18:04.720 a ten percent position. So the quality of the business 0:18:04.760 --> 0:18:06.879 plays a huge role in terms of how we size 0:18:06.920 --> 0:18:10.840 these bets. The second thing is also we're focused on 0:18:11.040 --> 0:18:13.800 very large liquid names because we do change our minds 0:18:13.800 --> 0:18:15.760 a lot, and that's what's kept us in the game 0:18:15.800 --> 0:18:19.520 over the long run. Where the beauty about the process 0:18:19.600 --> 0:18:23.280 here is it's a super lean team, very fast decision making, 0:18:23.320 --> 0:18:26.000 and so the moment we see the earnings deteriorate, we 0:18:26.040 --> 0:18:29.359 can sell out a large position overnight. There's no investment committee, 0:18:29.440 --> 0:18:31.920 there's no deck you have to put together, and so 0:18:32.000 --> 0:18:34.960 that really is a risk management process is cutting back 0:18:35.040 --> 0:18:38.720 losses when the markets move against you materially, earnings are deteriorating, 0:18:38.960 --> 0:18:43.000 or there's a macro risk potentially looming. And I think 0:18:43.000 --> 0:18:45.159 the historical context for that is when you think of 0:18:45.240 --> 0:18:48.800 Ragie's early career, I mean, starting off in the nineties 0:18:48.800 --> 0:18:53.159 as an em manager, you're forced to risk management is 0:18:53.200 --> 0:18:56.160 deeply ingrained in the DNA, and so that's what still 0:18:56.200 --> 0:18:58.800 plays a role. So there's not a stop loss mechanism 0:18:58.880 --> 0:19:01.680 or anything like that, use of much faster, quick when 0:19:01.720 --> 0:19:04.000 you see fundamentals even marginally deteriorate. 0:19:05.640 --> 0:19:07.600 That's so interesting. Yeah, you kind of mentioned like using 0:19:07.640 --> 0:19:11.240 price momentum as a bit of a risk management to whenounce. 0:19:11.640 --> 0:19:14.680 You kind of got ahead of me on my next question, 0:19:14.760 --> 0:19:17.840 which was like about risk management. So basically, it's not 0:19:17.880 --> 0:19:20.959 a systematic process. It's not a stop loss in the market. 0:19:21.160 --> 0:19:24.040 You assess the market, you assess you know, your view 0:19:24.280 --> 0:19:27.000 of earnings or the price momentum or something, and then 0:19:27.000 --> 0:19:30.840 you can quickly make decision to pull the plug per se, 0:19:31.640 --> 0:19:34.800 with no investment meetings or investment committees or anything like 0:19:34.840 --> 0:19:36.200 that exactly. 0:19:36.240 --> 0:19:40.040 And in our first gut reaction, when a name moves 0:19:40.119 --> 0:19:44.080 maturely against the frankly, is that we're wrong until proven otherwise. 0:19:44.800 --> 0:19:46.880 A lot of managers like. 0:19:46.880 --> 0:19:49.480 To view the in terms of a stall goes down 0:19:49.560 --> 0:19:52.200 twenty percent, you should buy more and more attractively priced, 0:19:52.440 --> 0:19:55.399 which is true in theory, but that also assumes that 0:19:55.440 --> 0:19:58.680 the fundamentals haven't changed at all. The reality of large 0:19:58.720 --> 0:20:02.880 gap investing today, it's so efficient that generally speaking, when 0:20:02.880 --> 0:20:05.480 I stop gaps on twenty percent, don you something is 0:20:05.560 --> 0:20:08.120 fundamentally changed, And it could be the other way around 0:20:08.160 --> 0:20:11.360 as well. Sawcolls are twenty thirty percent large care well covered. 0:20:11.800 --> 0:20:14.040 Something's happened, and you better understand why. 0:20:15.520 --> 0:20:16.360 I totally agree. 0:20:17.440 --> 0:20:19.199 So I want to go back to valuation just a 0:20:19.240 --> 0:20:22.960 little bit. You know, if you have a situation where 0:20:22.960 --> 0:20:26.199 there's a very high quality company but it's trading at 0:20:26.200 --> 0:20:29.800 a less than ideal valuation, how do you look at it, 0:20:30.880 --> 0:20:33.560 you know, you know, in terms of you know, waiting, 0:20:34.960 --> 0:20:37.679 you know, risking the opportunity gets away, or kind of 0:20:37.680 --> 0:20:39.919 going into it at what you may not consider an 0:20:39.960 --> 0:20:40.800 ideal valuation. 0:20:42.480 --> 0:20:44.880 Yeah, So I think the a couple of things. One 0:20:45.080 --> 0:20:49.200 is that we actually urge all the. 0:20:49.160 --> 0:20:53.679 Investment team members to look at valuation last when it 0:20:53.760 --> 0:20:57.240 comes to the analysis. The reason for that is if 0:20:57.240 --> 0:20:59.480 you start, let's say I tell you to look at 0:20:59.720 --> 0:21:02.760 Into Surgical for example, it's a high quality robotics company. 0:21:03.200 --> 0:21:05.800 This name trad is that generally fifty to seventy times 0:21:05.800 --> 0:21:09.600 earning is always super expensive. If you start with valuation first, 0:21:10.320 --> 0:21:13.760 it makes it, it doesn't. You need to first understand 0:21:14.119 --> 0:21:18.440 the business, the long term growth runway, the barriers to entry, 0:21:18.520 --> 0:21:20.840 and then you can value it. So it's a timing 0:21:20.880 --> 0:21:24.040 thing we would urge everyone to do. Second is you 0:21:24.160 --> 0:21:27.239 need to have conviction in the long term runway and 0:21:27.280 --> 0:21:29.240 the barriers. And when we like to say that the 0:21:29.280 --> 0:21:31.359 air gets very thin at the top of the mountain, 0:21:31.760 --> 0:21:32.919 you can't have any misses. 0:21:32.920 --> 0:21:35.040 We're fine paying up and we paid. 0:21:35.400 --> 0:21:37.720